The parties entered into contracts for sale of goods by Claimant to Respondent, and various additions thereto. As the US import licences held for the goods were due to expire, Respondent urged for rapid shipment. Some of the goods were delivered prior to expiry of the licences and some afterwards. Respondent paid the full price of goods delivered prior to expiry of the licences and approximately one third of the price of the goods shipped thereafter. Respondent refused to make any further payments, claiming the sums withheld would be set off against damages allegedly due to it. Respondent alleges it had an exclusive right to import the goods, which Claimant had violated, and that Claimant had also defaulted on timely shipment. The Arbitral Tribunal finds no proof of Respondent's claim to exclusivity, no legally binding requirement for the deliveries to be timed so as to come within the term of the US import licences, nor any lack of good faith by Claimant in its choice of time of delivery. In so determining, it refers to Articles 2.17 (merger clause), 2.18 (written modification clause) and 4.3 (prior commercial practices) of the <b>Unidroit Principles</b>. 85% of arbitration costs are to be borne by Respondent and 15% by Claimant, reflecting the success rate of the various claims and the proportion of the proceedings devoted to each of them.

<i>With respect to determination of the applicable law:</i>

'Article 8 of the Contract . . . contained the following provision on arbitration:

"8.1. The Parties shall use all efforts to settle all disagreements and disputes which arise in connection with or as a result of the performance of this Contract, by means of negotiations. If a disagreement or dispute cannot be resolved amicably, this disagreement or dispute shall be resolved by arbitration in accordance with section 8.2.

8.2. All disagreements, disputes or claims, arising out of or relating to this Contract shall be referred to, settled and finally resolved by the Arbitration Institute of the International Chamber of Commerce in accordance with the Rules for Reconciliation and Arbitration. The arbitral tribunal shall be composed of 3 (three) arbitrators, one be appointed by the Seller, the other by the Buyer, and the third one be appointed by the two Arbitrators.

8.3. The place of arbitration shall be Zurich, Switzerland. The decision of the arbitral tribunal shall be conclusive and binding on each of the Parties."

The Parties, however, did not provide for a choice of law clause to govern their contractual relationship.

. . . Claimant asserts that, in the absence of a choice of law made by the Parties, the Arbitral Tribunal should apply Article 7 of the 1961 European Convention and determine the applicable law in accordance with the rule of conflicts of law deemed appropriate. Further, Claimant refers to an, as it says, unwritten rule pursuant to which a court investigating disputes on foreign economic transactions would make use of its own national rules of conflict of laws for determining the applicable law. In Claimant's opinion, the case presented to the Arbitral Tribunal is, therefore, governed by the Swiss Federal Statute on Private International Law (PIL) . . .

According to Claimant, Article 118 PIL refers to the Convention on the Law Applicable to the International Sale of Goods (The Hague Convention, of 15 June 1955). Claimant quotes Article 3 of The Hague Convention pursuant to which the sale of goods "shall be governed by the national law of the country which is the place of permanent residence of the seller at the time when he received the order [...]". Claimant derives from that provision the conclusion that Russian law should be applied

Claimant further pleads that the Russian Federation is a member state to the United Nations Convention on Contracts for the International Sale of Goods (CISG). Consequently, the CISG constitutes the main source of law governing the business transactions between Claimant and Respondent. Finally, Claimant argues that any issues not covered by the CISG should be determined in accordance with the law of the Russian Federation . . .

Considering the above principles, Claimant reasons that the matter in dispute should be settled as follows:

- in accordance with the terms and conditions of the Contract . . .;

- in accordance with the provisions of CISG; and

- in accordance with the Russian law on matters not covered by the CISG.

. . . Respondent argues that all jurisdiction areas relevant to the present dispute, i.e. that of the Russian Federation, Canada and Switzerland, are signatory States of the United Nations Convention on Contracts for International Sale of Goods (CISG). Thus, Respondent agrees with Claimant that the Contract . . . is primarily governed by and to be construed in accordance with the CISG . . .

Contractual issues and disputes that cannot be resolved by reference to CISG are, in Respondent's view, to be settled in conformity with the Swiss substantive law. In support of this theory, Respondent refers to the Swiss Federal Statute on Private International Law (PIL) and stresses especially the principle of the burden of establishing foreign law (Article 16 PIL). It argues that the Russian law was unclear at the time the Contract was executed, and the law as applied often deviated substantially from the law as promulgated in the published Codes. Although the Russian Federation adopted recently a modified Civil Code, a relevant jurisprudence had not as yet been developed thereunder. According to Respondent, it does not seem feasible to establish the content of the applicable Russian law . . .

Respondent further asserts that, in the event that Russian law was deemed applicable, Claimant had not fulfilled its burden of establishing the content of such Russian law in respect of the disputed issues. Thus, if the content of Russian law cannot be established, the Arbitral Tribunal should apply the substantive law of Switzerland . . .

Respondent also bases its theory of application of the substantive law of Switzerland on Article 17 PIL. Respondent notes that Article 17 PIL precludes the application of foreign law if it would produce a result that it is incompatible with the Swiss public policy. The principle of public policy of any modern, international trading nation should support the orderly and good faith fulfilment of international contractual obligations pursuant to established principles of international trade and commerce and the application of readily ascertainable laws. Taking into account that argument, the readily accessible Swiss law would provide for an equitable result of the contractual disputes, based on law that is wellknown and understood by all Parties . . .

For the Tribunal it is clear that, in the first instance, the contractual terms as agreed by the Parties in the framework of their contractual relationship shall be looked at and applied to determine the disputed issues. In case of ambiguity and to the extent necessary, contractual terms may have to be interpreted by the Tribunal.

In addition to the foregoing, the Tribunal has to have regard to the relevant usages of the trade, for two reasons: First, the Parties had specifically referred to the Incoterms 1990 . . . Second, trade usages are to be observed on the basis of Article 13(5) ICC Rules (which Rules had been chosen by the Parties).

Matters or issues which had not been contractually agreed among the Parties and which cannot be determined by having regard to trade usage (including the Incoterms), will have to be determined on the basis of the 1980 Vienna Sales Convention ("CISG"), as correctly pleaded by both Parties.

Regarding any further issues which might come up and which are not governed by any of the foregoing, the Tribunal will have to determine the proper law of contract according to the socalled "objective approach". For this task, the Tribunal does not have to apply the European Convention 1961 (which was particularly referred to by Claimant), but indeed the ICC Rules, as the set of rules which the Parties had specifically agreed upon and chosen to govern their arbitration. The relevant provision is Article 13.3 ICC Rules 1975/1988, which provision had been inspired by Article VII of the European Convention of 1961 . . .

Accordingly, the Tribunal, shall apply the law (or rules of law) designated as the proper law by the rule of conflict deemed "appropriate". The Tribunal thus benefits from a wide freedom when determining such "appropriate" conflict rule. In particular, the Tribunal does not have to apply any particular or national system of conflict of laws, nor the conflict of laws system at the place of arbitration. The concept to which Claimant made reference (in the sense that, under an unwritten rule, a court or tribunal should be guided by the system of private international law (conflicts of laws rules) as prevailing at the forum or place of arbitration[)] is, in fact, a solution which had attracted very strong and justified criticism already since the 1950s. In fact, this concept had been abandoned by the 1961 Geneva Convention (Article VII) . . . A tribunal should, accordingly, no longer be expected to apply a conflict of law system (in its entirety, such as the one prevailing at the forum), but should be free to only determine the appropriate conflict rule (which is a notion significantly different from a "system"), and such rule can form part of any national or anational rules of private international law.

The most appropriate conflict rule, in the instant case, is to determine the preponderant connecting factor(s) to one or another legal system. In a sales transaction, such closest connecting factor will, as a rule, be established by the domicile or place of business of the seller. There is also a general consensus, prevailing in most modern legal systems, that the seller (and not the buyer) has to perform the more characteristic performance of either manufacturing or procuring the goods to be sold, whereas the buyer will typically "only" have the monetary obligation to pay (and certain ancillary duties of a lesser relevance).

The "centre of gravity", therefore, is in the instant case located in the seller's country, i.e. in the Russian Federation, irrespective of the fact that the Parties had agreed on CIF delivery terms, for delivery in Canada or the United States. Thus, the objective approach clearly leads to the conclusion that the present contractual relationship is most closely related to the seller's legal system, i.e. to the laws of the Russian Federation. These laws will, therefore, be applied by this Tribunal where necessary, i.e. where a particular issue cannot be solved by having regard to the contractual terms, or an interpretation thereof, or the relevant trade usages, and where no answer can be found in or derived from the CISG.

Obviously, the Swiss substantive laws, as the law governing at the place of arbitration, cannot claim any applicability. The mere fact that an arbitration takes place in a particular country does not constitute a sufficiently strong connecting factor. As a footnote it may be remarked that, in the past, arbitral tribunals that occasionally applied the substantive law of the forum (which frequently coincides with the law with which the arbitrators, or some of them, are most familiar) instead of a possibly less known "foreign" law . . . had been vigorously criticized, for good reasons!

Furthermore, the Tribunal might - even ex officio - have to take into consideration certain mandatory rules of law, such as the relevant competition laws, in particular the Russian Competition Laws enacted in 1991 and 1995, and the U.S. antitrust laws.'

<i>With respect to exclusivity:</i>

'. . . Respondent maintains that . . . Claimant orally represented to Respondent the right of exclusivity from the beginning of their negotiations . . .

Respondent also maintains that the right of exclusivity was not only represented to it orally but was moreover subsequently confirmed in writing . . .

In the first instance, the relevant Contract has to be looked at. It is clear that le contrat fait loi entre les parties. Respecting the unambiguous contractual terms agreed upon by both parties is, beyond any doubt, the basis of any international business and trade. The notion of pacta sunt servanda is reflected in any national law known to the present Arbitrators and is certainly reflected in the Vienna Convention, in Russian law, as well as in Canadian, US or Swiss law. The obligation of each party to honour the contractual terms has its limits only in very exceptional circumstances, for instance where the freedom of the parties to themselves regulate the affairs is restricted through mandatory rules of law, or where an agreement violates public policy, or in the extremely rare situations where the contractual equilibrium became so seriously affected that the agreement has to be considered frustrated on the basis of clausula rebus sic stantibus (or similar notions as laid down in national legislations of civil law and common law countries). None of these exceptional situations is relevant in the present context.

In the instant case, two provisions are of paramount importance: first, the so-called merger clause (sometimes called integration clause) and, second, the written modification clause. Both of them may be characterized as typical clauses, and there can be no doubt for any party engaged in international trade that the clauses mean, and must mean, what they say.

The merger clause makes sure that only the terms as reflected in the signed agreement will form part of the contractual obligations, thus excluding any extrinsic understandings, oral explanations, assurances or representations during prior negotiations which are not as such reflected in the written contract. Thus, by agreeing to a merger clause as part of a contract, the contractual parties clearly acknowledge, confirm and warrant for the benefit of each other that any and all prior discussions, negotiations, representations will be of no legal effect, unless they are directly reflected in the signed Contract. Prior discussions could thus only be relevant for interpretation purposes; however, this is not an issue in the present case.

[Reference to Article 8 CISG] . . . it may be noted that the effects and the significance of a merger clause are also reflected in Article 2.[1]7 of the 1994 Unidroit Principles of International Commercial Contracts. Although this Tribunal did not determine that the Unidroit Principles shall directly be applied, it is nevertheless informative to refer to them because they are said to reflect a world-wide consensus in most of the basic matters of contract law (and certainly in the areas which are discussed in the framework of this Award). Article 2.17 of the Unidroit Principles reads as follows: "(Merger clauses). A contract in writing which contains a clause indicating that the writing completely embodies the terms on which the parties have agreed cannot be contradicted or supplemented by evidence of prior statements or agreements. However, such statements or agreements may be used to interpret the writing." The comments to this Article explain that a merger clause, of course ". . . covers only prior statements or agreements between the parties and does not preclude subsequent informal agreements between them. The parties are, however, free to extend an agreed form even to future amendments; see Article 2.18". Article 2.18 of the 1994 Unidroit Principles is the Article on the written modification clause to which reference will be made in the following paragraphs.

The written modification clause to which the present Parties have also explicitly agreed in the framework of the Contract . . . has the same effects as the merger clause with regard to any future negotiations, promises and any other extrinsic evidence which otherwise might be adduced for supplementing, altering or contradicting the written contract. The significance of the written modification clause is explained in Article 29(2) CISG which reads as follows: "A contract in writing which contains a provision requiring any modification or termination by agreement to be in writing may not be otherwise modified or terminated by agreement. However, a party may be precluded by his conduct from asserting such a provision to the extent that the other party has relied on that conduct."

. . . In the instant case, however, it is the Tribunal's opinion that there is no room whatsoever for applying the exception clause. The present Parties have agreed to the written requirement for any kind of modifications, and there is no evidence of a conduct which could be of a nature as to do away with that specific requirement.

Again, it is useful to realize that a written modification clause is another typical element in international contracts. The comparison [with] the 1994 Unidroit Principles again seems appropriate. Article 2.18 states the following: "(Written modification clause). A contract in writing which contains a clause requiring any modification or termination by agreement to be in writing may not be otherwise modified or terminated. However, a party may be precluded by its conduct from asserting such a clause to the extent that the other party has acted in reliance on that conduct." As can be seen, Article 2.18 of the 1994 Unidroit Principles is quite close to Article 29(2) CISG.

The combination of the two discussed clauses, i.e. the merger clause reflected in Article 9.5 of the Contract and the written modification clause as per Article 9.3 of the Contract, make it almost impossible that, in the instant case, Respondent could rely on any kind of verbal promises or assurances, or any kind of written references which are not at the same time also reflected in an Amendment or Supplement to the Contract.

The evidentiary proceedings conducted in the present case have corroborated the above analysis, leading to the clear conclusion that a legally binding exclusivity had not been promised by Claimant . . .'

<i>With respect to timely delivery:</i>

'The Majority Arbitrators further considered whether under the general duty to act in good faith Claimant would have been under an obligation to accelerate the shipment . . . so as to allow a customs clearing prior to the expiry of the US import licence. For instance, parties to a contract might be or become bound by a particular course of dealing which they have established as between themselves, by virtue of their previous commercial practices and conduct, and which can fairly be regarded as a common basis of understanding for interpreting their expression and other conduct. This notion, for instance, is also reflected in Article 4.3 of the 1994 Unidroit Principles (which are not directly applicable in the instant case, but nevertheless express a communis opinio and consensus).

The question thus arises whether such a particular course of dealing (which might have to be considered or applied by this Tribunal) had been established between the Parties. The answer to this question is, however, negative, for three reasons. First, it is from the outset hardly conceivable that a conclusive (and in the end legally binding) commercial practice can be established overriding the terms of a straightforward sales contract; typically, such practices emerge in the framework of long-term contracts such as those in the construction industry. Second, the explicit integration clause and the written modification clause, as contained in the Contract, operate as a bar against the assumption that a certain behaviour or practice could reach the level of becoming legally binding between the Parties. Third, the contractual relationship, as it had been examined by this Tribunal, did not reveal any particular commercial practices between the Parties, and there is no evidence before the Tribunal that the Parties had established a particular conduct which could have become legally binding on them.'