Sanctity of the contract upheld in Swedish arbitration

In a recent award rendered under the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce, the Arbitration Panel held that “the wording of the contract must be complied with”, if it “does not include any exceptions”.

The Panel also drew a line in determining the basis for calculation of limitation period according to the UN Convention on the Limitation Period in the International Sale of Goods 1974.

Summary

The dispute arose out of a contract for supply of licensed goods between Russian and Bulgarian companies. The Bulgarian company (seller) agreed to supply the licensed goods to the Russian company (buyer). The parties agreed upon an advance payment. The buyer undertook to provide an end-user certificate for the goods.

The buyer made the advance payment and provided a substitute for the certificate. The seller rejected this certificate and demanded that a proper certificate should be tendered. The buyer, realizing that he would not be able to obtain proper certificate, ordered the goods from third parties.

After receiving the goods, the buyer demanded that the seller refunds the advance payment, but the seller refused. The seller argued that the advance payment was used to cover expenses related to the manufacture of the goods and if the buyer presents the proper certificate, the seller is still ready to supply goods.

Realizing that the seller would not refund the advance payment, the buyer brought the claim to the Arbitration Institute of the SCC. Particularly, the buyer demanded that the seller: (i) refunds the advance payment; (ii) pays a penalty in the amount equal to 10 percent of the principal amount; (iii) pays the arbitration expenses, including administrative fees, arbitrator’s fees and other expenses; (iv) pays interest on the 4 percent per annum; and (v) pays the legal fees.

In response, the seller demanded that: (i) the buyer’s claims to be rejected in their entirety; (ii) to dismiss the buyer’s claims since the arbitral proceedings were commenced after the expiry of the four years of limitation period; and (iii) the buyer pays the legal fees.

The Arbitration Panel held the following: (i) the seller is ordered to refund the advance payment to the buyer; (ii) the seller is ordered to compensate the buyer for its legal costs incurred in connection with the arbitration; (iii) the parties are jointly and severally liable to pay the arbitration costs and as between the parties, the seller is liable to pay the entire costs of the arbitration.

Contract interpretation

During the arbitral proceedings the seller argued that it could not return the advance payment since it has been transferred to its supplier. Moreover, the seller also argued that the buyer’s failure to comply with the contractual duty to provide the certificate would bar the buyer to rely on the non-performance of the seller in its respect.

In turn, the buyer argued that pursuant to the contract the seller had a right to cancel the contract in case the seller cannot obtain an export license on basis of the substitute certificate tendered by the buyer. This, in the opinion of the buyer, bound the seller to refund the advance payment to the buyer.

Having considered the arguments of both Parties, the Arbitration Panel held that the wording of the contract must be complied with and that the buyer is entitled to the return of the advance payment, irrespective of which of the parties being liable for failure to receive the export license.

Moreover, the Arbitration Panel found that: (i) the contract did not include any exceptions or clarifications with respect to situations where seller fails to deliver the goods because of the buyer; and (ii) the exception for force majeure does not apply to the current situation.

Limitation period

The seller also argued that the claim was time-barred because the parties concluded the contract in May 2012, whereas the claim was brought in November 2016. Thus, in the opinion of the seller the claim was time-barred since four years in accordance with the UN Convention on the Limitation Period in the International Sale of Goods 1974 (“Limitation Convention”) expired. In response, the buyer argued that the limitation period shall start to run only from the date when the breach of contract occurred.

The Arbitration Panel found that the four-years limitation period under Article 8 of the Limitation Convention shall run from the date when the claim commences. The seller argued that the buyer breached the contract since it failed to submit the documents necessary for its performance until a long time after the expiry of 30-days term set out in the contract.

The Panel believed that the breach of contract alleged by the seller differs from the breach of contract alleged by the Buyer. The non-delivery of the goods formed the basis of the Buyer’s claims in these arbitral proceedings. The Panel therefore found that only the latter alleged breach of contract became relevant to the four-years limitation period under Article 8 of the Limitation Convention.

In conclusion the Panel held that the alleged breach of contract relied upon by the buyer could not and did not occur before November 2012, therefore the buyer’s claims are not time-barred under Article 8 of the Limitation Convention.

Choice of law

The buyer argued that either English or Swedish law applied to the substance of dispute because English law was accessible to the parties whereas Swedish law was neutral in comparison with Bulgarian law. The seller argued that, obligations being mostly performed in Bulgaria, Bulgarian law should apply. In response, the buyer argued that Bulgarian law, due to its inaccessibility to the parties, should not apply to the dispute.

The Arbitral Panel agreed with the seller and held that Bulgarian law should apply to the issues not covered by the Vienna Convention on Contracts for International Sale of Goods 1980. Particularly, the Panel took into account that the seat of arbitration has not explicitly been chosen by the parties, but fixed by SCC, and considered most appropriate to apply Bulgarian law, rather than Swedish law, to other issues not covered by the CISG or the parties’ agreement.

Comments

This award is remarkable for a number of reasons. The first and chief reason is that the Panel highlighted the importance of the contract wording in the dealings between parties.

A leading contract expert once noted that in order “to decide whether certain language in a contract is ambiguous and to determine its meaning, courts may consult a number of resources, the most obvious of which is the contract itself” (Burnham S.J. & Kraynak J., Contract law for Dummies, John Wiley & Sons, Inc., 2012, p. 158). It appears that the Panel also followed this advice in rendering the award and made the wording of the contract paramount in interpreting the intentions of the parties.

The Panel also correctly resolved the limitation issue because under Bulgarian law in most cases the limitation period starts from the date of the contract’s conclusion, and not when a breach occurred. By referring to limitation period, it was obvious that the seller was intentionally postponing its duty to refund the advance payment in order to have the claim time-barred.

In construing its position toward the choice-of-law issue, the buyer relied on the doctrine of dépeçage, meaning that different parts of the contract shall be governed by different laws. The ground for such assertion rests on the fact that this contract does not expressly provide for any particular system of law. But the Panel apparently restricted itself to choosing an applicable law to performance of obligations.

Having disagreed with many points that Panel raised, nevertheless I would like to highlight the importance of this decision and its implications for contract drafting. I would advise lawyers and practitioners involved in contract drafting to be careful on payment provisions and liability of parties for failure to refund the advance payment. I would also recommend identifying proper applicable law to the contract in order to prevent this kinds of dispute in future.

Aybek Ahmedov

LL.M. (UEA), Counsel at Europe Marine Group (Latvia), Arbitrator (RAA), Arbitrator (KLRCA), Member of the Working Group on Reforming Lex Mercatoria at CMI