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CISG CASE PRESENTATION

China 2000 CIETAC Arbitration proceeding (Souvenir coins case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/000000c1.html]

Primary source(s) of information for case presentation: Case text

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Case identification

DATE OF DECISION: 20000000 (2000)

JURISDICTION: Arbitration ; China

TRIBUNAL: China International Economic and Trade Arbitration Commission [CIETAC] (PRC)

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2000/17

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Hong Kong (respondent)

BUYER'S COUNTRY: People's Republic of China (claimant)

GOODS INVOLVED: Souvenir coins


UNCITRAL case abstract

PEOPLE'S REPUBLIC OF CHINA: China International Economic & Trade
Arbitration Commission (CIETAC) 2000 [case not dated] (Souvenir coins case)

Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/99],
CLOUT abstract no. 988

Reproduced with permission of UNCITRAL

Abstract prepared by Boris Pupko

This case deals primarily with fundamental breach of contract and limitation of liability under the CISG.

The parties entered into a contract for the sale of souvenir coins in several [installments]. The seller delivered a sample. The contract contained a clause limiting the seller's liability to a certain sum, and requiring the buyer to file any claim in writing within forty days after the goods arrived. The seller delivered the coins. Later the buyer's customers complained that the coins were not as described in the certificates and they doubted of their authenticity. The buyer requested the arbitral tribunal to order the seller to take back the unsold goods, i.e. approximately one-quarter of the total volume, to refund the price already paid and to compensate for the buyer's other losses.

The CISG was applied because the contract between the parties so stipulated. Despite the provision in article 2(d) CISG, the arbitral tribunal applied the CISG to the sale of coins although such items may be qualified as currency.

The tribunal held that the coins conformed to the samples. The tribunal held that the goods had to conform to the description and the certificates as well, even though the contract did not include a relating provision. Therefore, the seller breached the contract but the breach was not fundamental because the buyer was able to sell three-quarters of the goods, therefore, the seller did not substantially deprive the buyer of what it was entitled to expect under the contract. In lack of a fundamental breach, the buyer was not entitled to return the goods under article 46 CISG.

The tribunal held that the limitation of liability clause was a voluntary stipulation of the parties that did not violate the applicable law and was reasonable and valid. The sales contract stipulated a time for inspection and filing claims, which superseded the provisions of the CISG. Because the parties agreed that the goods would be delivered in [installments], the tribunal ruled that the times for reasonable inspection and filing claims should be calculated separately for each [installment], and held that the buyer was entitled to file claims regarding the last three [installments] only.

In lack of a fundamental breach by the seller, the tribunal rejected the buyer's claim for refunding the price and returning the goods to the seller. Instead, in accordance with the limitation of liability clause in the contract, the tribunal ordered the seller to pay damages.

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Classification of issues present

APPLICATION OF CISG: Yes, agreement of the parties

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 2 ; 4 ; 6 ; 25 ; 35 ; 38 ; 39 [Also cited: Article 46 ]

Classification of issues using UNCITRAL classification code numbers:

2D [Exclusions from the Convention: shares, securities, money paper, money];

4A [Scope of Convention (issues covered): exculpatory clauses];

6A [Modification of Convention by contract];

25B [Definition of fundamental breach: substantial deprivation of expectation, etc.];

35B [Conformity of goods to contract: requirements implied by law];

38A [Buyer's obligation to examine goods: time for examining goods];

39A [Requirement to notify seller of lack of conformity: buyer must notify seller within reasonable time];

Unavailable

Descriptors: Negotiable instruments or money ; Autonomy of parties ; Scope of Convention ; Exculpatory clauses ; Avoidance ; Fundamental breach Conformity of goods ; Examination of goods ; Lack of conformity notice, timeliness

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Editorial remarks

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Available online at http://translaw.whu.edu.cn/cn/caseanalyse/20031104/035107.php

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Comments by Jiang Qiuju provided at conclusion of presentation of English translation of text of case

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Case text (English translation)

Queen Mary Case Translation Programme

China International Economic & Trade Arbitration Commission
CIETAC (PRC) Arbitration Award

[case not dated: date of 2000 selected]

Translation [*] by Zheng Xie [**]

Edited by John W. Zhu [***]

FACTS

In 1999 when Macao returned to China, Macao's government decided to issue circulating coin sets to celebrate the return. Each set consists of seven metal coins which were minted by Canada Royal Minting Bureau with the authorization of Macao's government. After minting the coins, Macao's government and the Canada Royal Minting Bureau signed a description and authentication certificate in Chinese, English and Portuguese for the circulating coin sets. The Claimant, International Coins (HK) Ltd. [Seller] was authorized by Macao's government as an exclusive agent in Asia to sell the coins. Because of the special meaning of the celebration, the coins would earn a commercial profit. Therefore, many companies intended to sign contracts with the [Seller] for resale of the coins. Guang Da Yi Bo Jewelry Co. in Mainland China was one of these companies. On 27 July 1999, Guang Da Yi Bo Jewelry Co. entrusted Yunnan Livestock Products Ltd., the Respondent [Buyer], to sign a sales contract in Kunming, Yunnan. This contract included the following terms:

1. The [Buyer] agreed to purchase 250,000 sets of coins issued by Macao's government to celebrate its return to China, for the unit price of US $16.20 per set CIF Kunming and the total price of US $4,050,000. The price included the attached description in Chinese, English and Portuguese and the numbered certificate (Article 1 and Article 2).

2. The loading port was Chicago airport, the U.S.A., and the destination port was Kunming airport, China. The [Seller] agreed to deliver the 250,000 sets of coins, which the [Buyer] ordered, by installments and at least 45,000 sets of coins per week from 6 November 1999 to or before 3 December 1999 (Article 4).

3. The [Seller] promised that:

      (1) Before 30 October 1999, the [Seller] would deliver fifty sets of sample coins to the [Buyer] so that the [Buyer] could launch its advertisement and promotion in the market, and that four sets of the samples should be signed and sealed by the parties, one of which should be unsealed by an inspection agency agreed by the parties in its inspection of the goods when the goods arrive at Kunming; two of which should be held by the parties, respectively, and the last one should be used for re-inspection if disputes arose in the future.

      (2) If [Buyer] finds that the quality of the goods does not comply with the samples after the inspection showed that the goods were qualified, the [Buyer] should notify the [Seller] in writing with an inspection certificate issued by China Commodities Inspection Bureau and return the coins within fourteen days after the goods arrived at Kunming airport; the [Seller] should deliver the same quantity of coins to the [Buyer] after the goods were returned.

4. The [Seller]'s total compensation to the [Buyer] based on any provision in the contract, regardless number of claims and basis, shall not exceed US $400,000. Any claim of the [Buyer] based on any reasons, such as quality, quantity, etc., should be filed in writing within forty days after the goods arrived at Kunming airport; otherwise, the [Seller] will not accept any claims, and should not bear any liability (Article 6).

5. Any dispute or claims arising out of the contract should be settled by the parties' friendly negotiation first. If the dispute cannot be resolved by negotiation within thirty days after either party sent a written notice to the other party, the dispute should be submitted for arbitration. The arbitration application should be filed with China International Economic and Trade Arbitration Commission (CIETAC), and the Arbitration Rules of CIETAC shall apply. The arbitration place shall be in Shenzhen; the arbitration language shall be Chinese and English; the Arbitration Tribunal shall consist of three arbitrators according to the Arbitration Rules; the third arbitrator, the Presiding Arbitrator, shall be a person with the nationality of a third country; the arbitration award shall be final and binding (Article 15).

6. The United Nations Convention on Contracts for the International Sales of Goods (CISG) shall apply to this contract. If the CISG lacks relevant stipulations, the laws of Hong Kong SAR shall apply. If the CISG does not stipulate the applicable law, the laws of Hong Kong SAR shall apply (Article 16).

After signing the sales contract, the [Seller] asked to deliver the descriptions and certificates and the goods separately. The [Buyer] accepted this request but required the [Seller] to deliver the goods ten days earlier at the [Seller]'s cost. After the delivery terms were changed, the parties performed their obligations.

   -    In November 1999, the [Buyer] made the payment according to the contract, and the [Seller] delivered the goods and the descriptions and certificates separately;
 
   -    The [Seller] mailed the certificates to Beijing Guang Da Co. on 14 and 15 October 1999, respectively, after the certificates were printed in China; the coin sets were delivered to Kunming in seven installments from 19 October 1999 to 3 December 1999;
 
      The [Buyer] completed the customs procedures in Kunming, and the goods were legitimately imported.

Thereafter, the coins were delivered to different markets in China for sale. However, during the sales, the [Buyer] received customers' complaints. They stated that:

   -    The design in the back of the coins was not consistent with that of the certificates;
 
   -    The back of the coins in the certificates had stars, but the coins sold had no stars;
 
   -    The customers were suspicious of the authenticity of the coins.

After investigation, the [Buyer] found that the problems raised in the customers' complaints were true; the one dollar coins had no stars in the back, but the coins in the certificates had. Although the [Buyer] stopped selling the coins, and filed a claim for compensation with the [Seller] in writing on 30 December 1999, the [Seller] alleged that it was not liable, and rejected the [Buyer]'s claim. The [Buyer] filed the arbitration application with the Shenzhen Sub-Commission and asked the Arbitration Tribunal to rule that:

      (1) The 72,000 sets of coins, 27% of the goods, unsold should be returned to the [Seller], and the [Seller] should refund the above contract price, totaling US $1,166,400 (import price, according to the foreign exchange rate of 1:8.29, equal to RMB 9,669,456);

      (2) The [Seller] should compensate the [Buyer] for other loss of US $400,000 (including cost, loss of interest and anticipated profits, based on the foreign exchange rate of 1:8.29, equal to RMB 3,316.00);

      (3) The [Seller] should bear the arbitration fee.

ISSUES

In the court session, the parties focused on the following issues:

1. Whether the [Seller] breached the contract

The [Seller] alleged that it did not breach the contract because:

   -    The sales contract did not stipulate that the goods should be in compliance with the certificates. Article 2 of the sales contract stipulates, "The unit price shall include the attached description in Chinese, English and Portuguese, and the numbered certificate," and this was the only stipulation on descriptions and certificates in the contract. Except for this, there were no other stipulations on design, size and color. Therefore, the sales contract does not require the [Seller] to provide goods consistent with the certificates.
 
   -    In addition, the descriptions and certificates were provided by the official action of the Macao government; the circulation, design and wording in the descriptions and certificates were approved by Macao's government, and were legitimate and authentic, so the [Seller] was not at fault with respect to the inconsistence between the goods and the descriptions and certificates. With respect to this, the [Buyer] did not object.

Therefore, the [Seller]'s performance was consistent with the contract, and [Seller] did not breach the contract.

The [Buyer], however, alleged that:

   -    Because the [Seller] delivered coins that were inconsistent with the certificates, the [Seller] breached the sales contract. Although the sales contract does not stipulate that the goods should comply with the certificates, the coins should be consistent with the descriptions and certificates, which functioned as proof of the authenticity of the coins; otherwise, the descriptions and certificates were useless.
 
   -    This means that it was the [Seller]'s implied obligation to provide goods that are consistent with the certificates. The goods which the [Seller] delivered did not conform to the certificates, so the [Seller] breached this implied duty and thereby breached the contract. Because the inconsistence between the goods and the certificates breached the basic requirements of the contract, the [Seller] breached its basic contractual duty.
 
   -    The [Seller]'s breach caused the [Buyer] to suffer severe loss, and deprived the [Buyer] of its anticipated profits, so the [Seller] fundamentally breached the contract.

2. Whether the [Buyer] lost the right to raise objection regarding the inconsistence between the goods and the certificates

The [Seller] alleged the goods delivered were in compliance with the samples, so the [Buyer]'s claim on the inconsistence between the coin sets and the descriptions and certificates should be deemed as an objection to the quality of the certificates. The contract did not stipulate the time when the [Buyer] could file claims based on the certificates. According to Article 38 and Article 39 of CISG, the buyer should examine or authorize others to examine the goods at the earliest practical time, and should notify the seller of the any lack of conformity within a reasonable time after it found or should have found the lack of conformity, and inform the seller of the nature of the lack of conformity; otherwise, the buyer loses the right to claim lack of conformity of the goods. In this case, the [Buyer] received the samples of coin sets on 30 September 1999, and received the descriptions and certificates on 14 and 15 October 1999, and received the first installment on 19 October 1999, and received the last installment on 3 December 1999. During the above period, the [Buyer] had not raised any objection to the inconsistence between the goods and the certificates. The [Buyer] did not claim that the goods were inconsistent with the certificates until 30 December 1999 when most of the coins were sold, and the market demand was decreasing. Obviously, it was not within the reasonable time stipulated in the CISG. Therefore, according to the applicable law, the [Buyer]'s claim that the goods were inconsistent with the certificates was not filed within a reasonable time, so the [Buyer] lost the right to raise the objection.

The [Buyer] alleged that according to Article 1 and Article 2 of the sales contract, the subject of the contract between the parties included not only the coins, but also the descriptions and certificates, and the descriptions and certificates were not independent subjects, but were attached to the coins. Therefore, as to an objection to the inconsistence between the coins and certificates, it was not the objection to the certificates only as the [Seller] alleged, but an objection to the quality of the coins as a whole. According to Article 6 of the sales contract, the [Buyer]'s claims or objections to the quality, quantity or any other problems with the coins should be raised to the [Seller] in writing within forty days after the goods arrived at Kunming airport; otherwise, the [Buyer] loses the right to raise objection. After finding the defects of the coins, the [Buyer] notified the [Seller] in writing on 30 December 1999. According to the contract and accounting back 40 days, the [Buyer] at least had the right to raise objection and claims to the coin sets delivered on or after 20 November 1999.

3. Whether the indemnity limit under Article 6 of the contract is legal and valid

The [Buyer] alleged that the indemnity limit stipulated in the contract violated the applicable law. According to the CISG, the amount which the breaching party should compensate the non-breaching party should be equal to the loss including profits which the non-breaching party suffers. According to the law of Hong Kong SAR, the disclaimer clause should not apply to the breaching party who fundamentally breached the contract. Therefore, the indemnity limit stipulated in Article 6 of the contract violated basic provisions of law and was void.

The [Seller] alleged that the indemnity limit clause was agreed by the parties, and was the parties' true manifestation of intent, and did not violate any mandatory provisions of the applicable law, and was a valid provision.

4. The applicable law

The [Buyer] alleged that in addition to the CISG, the Law of the PRC on the Protection of Rights and Interests of Consumers and the Products Quality Law of the PRC should also apply as mandatory regulations. The [Seller] objected to this.

OPINION OF THE ARBITRATION TRIBUNAL

Based on the above facts and the material submitted by the parties, the Arbitration Tribunal identified the following facts and issues:

1. The applicable law

The Arbitration Tribunal held that Article 16 of the contract stipulates that the CISG is the applicable law, and that if the CISG lacks relevant stipulations, the laws of Hong Kong SAR apply. The parties' rights and obligations should be determined by the applicable laws.

Regarding the [Buyer]'s opinion that the Law of the PRC on the Protection of Rights and Interests of Consumers and the Product Quality Law of the PRC should also apply to this case, the Arbitration Tribunal held that the contract was concluded in China, and according to the general principle of conflicts of law, the formation and performance of the contract should not violate the mandatory requirements in the laws of the PRC; this was not in dispute. However, it did not mean that all laws of the PRC should apply to this case. Except for the laws related to public policy, when the applicable law stipulated in the contract is a foreign law, the seller need not comply with all laws of the place of formation and performance of the contract. Because this case was not related to public policy, the applicable law stipulated in the contract should apply to the performance of the contract. The Law of the PRC on the Protection of Rights and Interests of Consumers and the Product Quality Law of the PRC are domestic laws of the PRC; except to the extent that the contract stipulated otherwise, these laws should not apply to this case. The parties' disputes on quality of the goods should be determined based on the sales contract and the applicable law stipulated in the contract. In sum, the Arbitration Tribunal did not sustain the [Buyer]'s allegation that the Law of the PRC on the Protection of Rights and Interests of Consumers and the Product Quality Law of the PRC should also apply to this case.

2. Whether the [Seller] breached the contract

The Arbitration Tribunal held that the applicable law does not stipulate whether the goods should comply with the descriptions and certificates; the law does not get into this subject in detail; this issue should be determined by the contract. The [Seller] alleged that according to the sales contract, the coins which the [Seller] delivered were in compliance with the samples, so the [Seller] did not breach the contract. The Arbitration Tribunal held that the coins delivered complied with the samples, but this does not necessarily mean that the [Seller] did not breach the contract. Although the definition of "Circulating Coin sets" under the contract, Article 2.1 "Purchase and Sale" and Article 6.1 "Fifty Sets of Sample Coins" did not include the descriptions and certificates, they were still part of the subject matter of the contract, because:

First, Article 2.2 of the contract stipulates that the subject matter and price includes coin sets, the descriptions and certificates, and the delivery should comply with this article;

Second, the parties agreed that it was the [Seller]'s duty to deliver the descriptions and certificates.

In any event, the descriptions and certificates should comply with the contract. What are the quality requirements under the contract? Based on its wording, the contract does not stipulate that the goods should be consistent with the certificates. However, as an implied duty, the [Seller] should make the goods consistent with the descriptions and certificates; otherwise, the descriptions and certificates were meaningless. Therefore, because the one dollar coins delivered by the [Seller] did not comply with the descriptions, the [Seller] breached the contract.

The [Seller] alleged that the descriptions and certificates were official documents signed by Macao's government, and that the coins complied with the contract, and that the [Seller] did not breach the contract. The Arbitration Tribunal did not sustain this allegation, because whether the descriptions and certificates were official documents, or whether the [Seller] participated in designing the descriptions and certificates could not change the fact that the goods were inconsistent with the certificates, nor could it change the fact that the [Seller] breached the contract.

As to whether the [Seller] fundamentally breached the contract, the Arbitration Tribunal pointed out that Article 25 of CISG states:

"A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract ... "

Based on the facts in this case, the actual sale of the goods was essential, which was not disputed; the Arbitration Tribunal held that the [Buyer] had sold 178,000 out of 250,000 souvenir coins for more than one month, and obtained the anticipated profits from 71% of the sales; that the sales started from 7 November 1999, and the [Buyer] did not receive any customers' complaints until 13 December 1999, and only received a few complaints at that time. Thus, the [Seller] did not substantially deprive the [Buyer] of what it was entitled to expect under the contract, and the [Seller] did not fundamentally breach the contract. The [Buyer] was therefore not entitled to request to return the goods according to Article 46 CISG or to compensation for price differences.

3. Whether the indemnity limit under Article 6.6 of the contract was valid

The Arbitration Tribunal held that because the [Seller] did not fundamentally breach the contract, Article 6.6 was agreed by the parties on a voluntary basis, the liability exemption was mutual and a necessary part of the bargain (the damages may be a huge amount) and this article did not violate the applicable law, this article was reasonable and valid.

4. Whether the [Buyer] lost the right to raise objection to the goods

The Arbitration Tribunal held that Article 6 of CISG permits the parties to exclude the application of this Convention or derogate from or vary the effect of any of its provisions. The sales contract stipulates time of inspection (Article 6.5), the difference between return of the goods and other remedial measures (Article 6.7), and the period for filing claims (Article 6.7); these stipulations were not consistent with Article 38 and Article 39 of CISG. This means that the parties' stipulation on right of claim was different from that stipulated in the CISG.

The [Seller]'s obligation was not only to provide goods in compliance with the samples; but also to deliver goods conforming to the contract according to Article 2.2 and Article 6.7. The [Buyer] should raise any objection and claim as to the quality, quantity or other problems within forty days of the arrival of the goods. Therefore, the claim period is not determined by Article 39 of CISG, but by Article 6.7 of the sales contract. Because the parties agreed that the goods should be delivered in installments and the coins and the descriptions and certificates should be delivered separately, the coins were delivered in Kunming on 19 October, 3 and 7 December, 1999, respectively and the descriptions and certificates were delivered in Beijing on 14 and 15 October 1999, respectively. Thus, the reasonable inspection and claim times should be calculated by installments and separately. Since the [Buyer] received the first installment of the goods after receiving the descriptions and certificates, the period for the [Buyer] to file claim should be calculated from the time when it received each installment. The proof proved that the [Buyer] filed the written claim on 30 December 1999. Counting back 40 days according to Article 6.7 of the sales contract, it was 20 November 1999; as compared with the time when the [Buyer] received the goods, the [Buyer] was still entitled to raise claim and objection to the fifth, sixth and seventh installments, but lost the right as to the installments before the fifth.

Based on the above, the Arbitration Tribunal held that because the [Seller] did not fundamentally breach the contract, the tribunal did not sustain the [Buyer]'s first claim, that is to return the remaining 72,000 sets of coins and have the contract price of US $1,666,400 refunded. For the same reason, the Arbitration Tribunal did not sustain the [Buyer]'s request that if the goods were not returned, the [Seller] should compensate the [Buyer] for the price difference between the notional value of the 72,000 sets of coins and the sales price, totaling RMB 8,315,900. However, the Arbitration Tribunal sustains the [Buyer]'s second claim.

AWARD

The Arbitration Tribunal handed down the following award:

      (1) The [Seller] should pay the [Buyer] US $400,000 (equal to RMB 3,316,000) within 30 days of this award; otherwise, interest should be added at the annual rate of 6% (7% for RMB);

      (2) The [Buyer]'s first claim was dismissed;

      (3) Each party should pay half of the arbitration fee.


COMMENTS OF COMMENTATOR JIANG QIUJU

This case was not a typical sales contract dispute. The basic issues were not very complicated. However, because the subject matter of the dispute was souvenir coins issued to celebrate the return of Macao to China and also to be circulated, and there were special issues regarding whether it was a contractual duty to provide coins that were in compliance with certificates that were issued with the coins.

Because the subject matter of the contract was special, it was hard for the Arbitration Tribunal to find help from former cases related to sales contract disputes; therefore, to certain extent, it was difficult for the Arbitration Tribunal to hear and decide this case. The Tribunal's opinions and final award showed that the Arbitration Tribunal almost correctly handled the issues, and decided the parties' rights and obligations according to the contract and the applicable law stipulated in the contract. Based on its analysis of the issues, the Arbitration Tribunal presented its opinion and handed down the award. The award had no severe problems from the perspective of the Tribunal's overall analysis and the results of the case. However, as noted above, the subject matter of this contract was special; superficially, the subject matter was the coin sets issued by Macao's government to celebrate its return, but the nature of the subject matter was the same as money, because it had face value and could be circulated. Because the subject matter was special, the issue on the application of law was not as simple as the Arbitration Tribunal decided.

Article 2 of CISG defines the Convention's sphere of application by listing circumstances in which the Convention is not applicable. This Article states that:

"This Convention does not apply to sales: (a) of goods bought for personal, family or household use, unless the seller, at any time before or at the conclusion of the contract, neither knew nor ought to have known that the goods were bought for any such use; (b) by auction; (c) on execution or otherwise by authority of law; (d) of stocks, shares, investment securities, negotiable instruments or money; (e) of ships, vessels, hovercraft or aircraft; (f) of electricity."

The CISG excludes the Convention's application to the above items because Contracting States have different opinions on the ability of some of the items to be sold as goods, and also because although some of the items can be sold as goods, Contracting States have restrictions on transactions involving these items, and it is hard to unify their regulations on these subjects. For the above reasons, the CISG expressly excludes its applicability to these items. It should be noted that Item (d) of Article 2 CISG excludes its application to money. The subject matter of the contract disputed in the instant case was in nature, a kind of money. Therefore, the following issue arose:

When the parties chose an applicable law by agreement, but such law expressly excludes its application to the parties' transaction, whether the choice of law provision agreed by the parties was valid?

Thus, to determine the applicable law was not as easy as the Arbitration Tribunal's decision to apply the CISG because the parties selected the CISG as the applicable law, and this selection was true and valid. Because of the stipulation of CISG and the specialty of the subject matter, some issues need to be analyzed further.

To those familiar with the CISG, it is well known that the CISG is not a mandatory convention: it is a convention that provides for party autonomy which is reflected in Article 6 as follows:

"The parties may exclude the application of this Convention or, subject to article 12, derogate from or vary the effect of any of its provisions."

[Article 12 is not related to the issues in this case, so it can be ignored for this purpose: note by the commentator]. Because the CISG is not mandatory, it attracts more Contracting States, and functions as a unification of substantive law in international sales of goods to the proximate extent. However, it is disputed on how to understand Article 6 CISG.

   -    Do "any of [the] provisions" that parties may "derogate from or vary the effect of" include provisions governing the sphere of application of the CISG?
 
   -    Do the parties' rights to derogate from or vary the effect of any of the provisions of the CISG include varying the scope of application stipulated in the CISG?
 
   -    Can the parties, according to Article 6, stipulate the application of the CISG to disputes which are excluded by the CISG?

As to the above questions, different persons would have different opinions, and it is hard to draw a convincing conclusion. Therefore, it is helpful to consider the legislative history of the CISG and the context of its provisions.

      Before CISG was signed, to unify laws governing international sales of goods, the International Institute for the Unification of Private Law drafted two Hague Conventions in 1964. However, because these two conventions mainly adopted principles on contracts of civil law systems and were regarded as Eurocentric, they were not widely adopted. The drafters of CISG learned from this, and comprehensively considered the laws on contract in common law systems and civil law systems as well as those in communist countries in order to attract Contracting States of different social and economic systems. On the one hand, as to the issues in disputes, the CISG did not provide mandatory provisions for total unification; on the other hand, when applying the CISG, the parties are permitted to exclude some stipulations of the CISG or vary its stipulations. This practice proved to be very successful. Such a non-mandatory application attracted many Contracting States. According to this background, the purpose of Article 6 is to admit or acknowledge the parties' right to exclude the application of the CISG, but not to grant to the parties the right to apply the CISG to issues which the CISG excludes. In other words, based on the background and analysis of Article 6, it is concluded that Article 6 is not a basis for the parties to apply the CISG to issues outside of its scope of application. The drafters of the CISG did not give Article 6 such a function. As noted above, most of the items excluded by the CISG are specially regulated by the law of the Contracting States, and many of these domestic laws are mandatory, such as special regulations on consumer contracts. Because the Contracting States could not reach agreement on these special regulations, the CISG excludes these items. If Article 6 were explained so that the parties have the right to apply the CISG to the items which are excluded by CISG, in nature, the primary intentions of Contracting States could easily be changed by the contracting parties. This is obviously not the intent of the drafters of CISG as to the purpose of Article 6.

      In addition, from the entire provisions of CISG, even if the parties were permitted to apply CISG to items which are excluded by CISG, such a situation rarely occurs in practice since after the application to special items is excluded by CISG, the entire CISG framework is based on rules governing sales of common tangible movables. Therefore, the provisions of the CISG governing sales of common tangible movables may not be appropriate to govern the sale of special items, for example, the CISG's stipulations on goods inspection, repair, return of the goods. Therefore, from this practical perspective, the term "any provision" in Article 6 should not include scope of application stipulated in Article 2. In practice, it is rare for the parties to select CISG as the applicable law for sales of special items.

      Based on this background and the relationship between the articles of the CISG, it can be concluded that Article 6 grants to the parties the right to exclude the application of the CISG, but does not grant to the parties the right to vary the scope of its application; therefore, Article 6 of the contract does not prevail over the sphere of application stipulated under Article 2 of the CISG. The parties cannot apply the CISG to items which are excluded by the CISG. In the above case, based on this conclusion, it seems that the parties' selection to apply the CISG should be void because the subject matter of the sales contract was money, which was expressly excluded by the CISG. Does this mean that the Arbitration Tribunal mistakenly affirmed the parties' choice of the applicable law?

To determine this issue, the facts of this case should be considered. Although the coins under the sales contract were money in nature, the coins were the subject matter under the sales contract between the parties because the coins had a special memorial function. From this perspective, the value of the coins was not for circulation, but as souvenirs, so the coins with special memorial function were different from those in circulation. From the actual effects of the Tribunal's application of the law, the Arbitration Tribunal did not have difficulty in applying the law in this case, and it could apply the CISG to determine the parties' rights and obligations. The subject matter in this case had an important difference from those excluded by the CISG, so the coins could be deemed as common goods in terms of the memorial function. The application of the CISG, which governs sales of common goods, to circulating coins in this case did not encounter any problems. Thus, the parties' selection of CISG as the applicable law could be sustained. However, the Arbitration Tribunal affirmed the parties' choice of the CISG as the applicable law without interpreting and analyzing the stipulation of the CISG; this was inappropriate. Although the parties did not dispute over the applicable law at the hearing, the Arbitration Tribunal should first confirm the validity of the parties' agreement on choice of law so as to proceed to determine the parties' rights and obligations. When determining the applicable law, the Arbitration Tribunal only stated that because the parties stipulated that the CISG should apply to this case, the CISG applied, but did not provide any opinion on the validity of the parties' choice of law. This was a defect.

COMMENTS ON ARBITRATION PRACTICE

In this case, because the subject matter of the contract was special -- souvenir coins that also had the character of money -- an issue was present on the validity of the parties' selection of the applicable law. Finally, because the subject matter was special -- special souvenir function -- the selection of law was properly explained and sustained. However, this could have become a more valuable case on the application of the CISG. If the Arbitration Tribunal had noted the specialty of the subject matter and attached more importance to the issue on the application of the CISG, it would have reflected a deeper understanding of the application of the CISG based on the background and the relevant provisions of the CISG, and would have contributed to similar cases in the future.

In fact, the reason why the Arbitration Tribunal did not provide a thorough evaluation of the application of the CISG can be either the Arbitration Tribunal had not noted the application of CISG, or the arbitrators intentionally avoided this issue. Because the parties did not dispute this issue, the Tribunal had no problem applying the CISG. Therefore, the Arbitration Tribunal expressed no further opinion on this issue. In practice, such a situation often occurs, which means when the parties do not dispute an issue, the Arbitration Tribunal would not voluntarily provide an opinion on the issue, even if in some situations, the parties' ignorance would adversely affect hearing of the case. This situation occurs for many reasons, some of which are justifiable, such as considering the freedom of the parties, the origin of the arbitration tribunal's authority arising from the parties' authorization, following the principle of "no claim, no hearing," etc.; however, some justifications are unreasonable in practice, such as avoiding mistake, expediting the hearing, etc.

The arbitration tribunal should focus on the parties' disputes when hearing a case; as to the issues which the parties do not dispute over, the arbitration tribunal should decide whether to provide opinions with care according to the facts and the authorization scope of the parties. However, such prudence should be appropriate; if such issue is within the scope of the parties' authorization, and is necessary for correctly determining the case, the arbitration tribunal should hear the issue, even if the parties do not raise this issue, in order to guarantee that the award is correct. However, it is inappropriate for the arbitration tribunal to ignore the issue in order to avoid mistake or expedite the hearing. As an alternative dispute resolution to litigation, arbitration tribunals should make the best use of their advantage, which means, on the one hand, the tribunals should respect the parties' intent and, on the other hand, they as scholars should explain the possible legal issues to the parties in order to increase their understanding on the final award. In this manner, arbitration tribunals could also accumulate experience for future cases.

CONCLUSION

The disputes in this case were not complicated. The disputes arisen between the parties mainly because the subject matter of the contract was special. The Arbitration Tribunal's award showed that the parties' rights and obligations were clearly determined based on the applicable law stipulated in the contract. Thus, the award itself did not have any problem.

A problem was that the Arbitration Tribunal did not provide a further opinion on the application of law because the subject matter in this case had a character of money in nature, and Article 2 of the CISG expressly excludes the application of the CISG to money. In addition, the legislative history of the CISG and the relevant provisions show that the CISG does not grant to parties the right to apply the CISG to items which the CISG excludes, so an issue was present on the effect of the parties' selection of the applicable law. However, because of the specialty of the subject matter and the specific situation of application, the coins were substantially different from those excluded by CISG, so the parties' selection of the applicable law can still be sustained. However, the parties did not dispute over this, and the Arbitration Tribunal did not provide a further opinion on this issue, so an opportunity to improve understanding of the relevant provisions and the scope of application of CISG was missed. Because this situation often occurs in practice, it should be noted. As to issues essentially affecting to the hearing and award, despite the parties' failure to raise the issue, the arbitration tribunal should identify them in order to hand down a correct award.

(Jiang Qiuju)


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of the People's Republic of China is referred to as [Buyer]; Respondent of Hong Kong is referred to as [Seller]. Amounts in the currency of the United States (dollars) are indicated as [US $]; amounts in the currency of the People's Republic of China (renminbi) are indicated as [RMB].

** Zheng Xie, LL.M. Washington University in St. Louis, LL.M., BA in Economics, University of International Business and Economics, Beijing.

*** John W. Zhu, LL.M. China University of Political Science and Law (National Graduate Scholarship); Bachelor of Law, Southwest University of Political Science and Law; Double Degree, English Literature, Sichuan International Studies University, Chongqing, China. Focus: International Economic Law.

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Pace Law School Institute of International Commercial Law - Last updated October 22, 2010
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