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CISG CASE PRESENTATION

China 7 January 2000 CIETAC Arbitration proceeding (Cysteine case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/000107c1.html]

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

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Case identification

DATE OF DECISION: 20000107 (7 January 2000)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2000/06

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: People's Republic of China (respondent)

BUYER'S COUNTRY: Germany (claimant)

GOODS INVOLVED: Cysteine


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 7 ; 8 ; 35 ; 38 ; 74 ; 77 ; 78

Classification of issues using UNCITRAL classification code numbers:

7C ; 7C232 [Gap-filling (problems governed by Convention but not expressly settled): contra proferentem rule (analogous application to areas not expressly regulated / recourse to general principles on which Convention based); Consensus on rules for international transactions];

8A [Intent of party making statements or engaging in conduct]

35A [Conformity of goods to contract: quality, quantity and description required by contract];

38A [Buyer's obligation to examine goods];

74A [General rules for measuring damages: loss suffered as consequence of breach];

77A [Obligation to take reasonable measures to mitigate damages]

78A [Interest on delay in receiving price or any other sum in arrears]

Descriptors: Intent ; Conformity of goods ; Examination of goods ; Damages ; Cover transactions ; Mitigation of loss ; Interest

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Editorial remarks

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Zhong Guo Guo Ji Jing Mao Yi Zhong Cai Wei Yuan Hui Cai Jue Shu Hui Bian [Compilation of CIETAC Arbitration Awards] (May 2004) 2000 vol., pp. 1177-1183

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at nn.42, 79, 138, 147, 178, 215, Nordic Journal of Commercial Law (2/2005)

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Case text (English translation)

Queen Mary Case Translation Programme

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

Cysteine case (7 January 2000)

Translation [*] by Alison Ng, Hoi-Yan [**]

Edited by Howard Yinghao Yang [***]

  1. Facts of the case
  2. Position of the parties
  3. Opinion of the Arbitration Tribunal
  4. The Award

1. FACTS OF THE CASE

On 4 March 1997, the Claimant [Buyer] and the Respondent [Seller] signed Contract XX, a "Sales of Goods Agreement" for Cysteine (Japanese Ajinomoto) by means of facsimile.

[Translator's note: Webster's dictionary describes Cysteine as "a crystalline sulfur-containing amino acid readily oxidizable to cystine", pointing out that "cystine is widespread in proteins (as keratins) and is a major metabolic sulfur source."]

The Contract stated that the [Seller] was to provide five tons of AJI88 Cysteine (Japanese Ajinomoto), for US $152,500, with [Buyer] to pay for the Cysteine by Letter of Credit [L/C]. After signing the Contract, the [Buyer] issued the L/C through a bank and the [Seller] delivered the goods and collected the purchase price through L/C. Thereafter, there was a dispute as to the quality of the goods.

2. POSITION OF THE PARTIES

[Buyer]'s position

The [Buyer] alleged that when the goods were delivered to the arrival port, there was a "blocking" problem with them and so notified the [Seller]. The [Seller] responded that this might be due to insufficient waiting time between the manufacturing and packing and suggested that the [Buyer] grind the Cysteine on the spot. The [Buyer] feared that grinding might affect the quality of the Cysteine and therefore sought an alternative solution. In the meantime, SGS Controll-Co. GmbH [hereafter, SGS] and the Dr Fintelmann and Dr. Meyer Laboratory [hereafter, F & M Lab], a German chemistry expert, was appointed by the [Buyer]'s customer to inspect the goods. Both SGS and the F & M Lab found that the goods were not in conformity with the terms of the contract.

The [Buyer] refused to accept the goods. The [Buyer] asked the [Seller] to send a member of its staff to Germany to inspect the goods, with the cost paid by the [Seller] in advance. In the alternative, the [Buyer] offered to send back a sample of the goods to the [Seller] so the [Seller] could itself inspect the goods for quality. However, the [Seller] disregarded the [Buyer]'s suggestions and did not institute any procedures to so resolve the dispute.

Since the quality of the goods was not consistent with the contractual terms, and the customer to whom [Buyer] was reselling the goods refused to accept the goods, the [Buyer] was forced to reduce the price and resell the goods to another party and therefore suffered a loss of more than US $60,000, which was mainly due to the reduced selling price.

The [Buyer] alleged that this loss was due to [Seller]'s unsatisfactory performance of the Contract. Therefore, so as to protect the [Buyer]'s rights, the [Buyer] requested the Arbitration Tribunal to rule, in accordance with the Contract conditions, that the [Seller] should bear the loss.

[Seller]'s response

The [Seller] responded:

   -    First, the inspection report and the analysis certificate, which were provided by the [Buyer], cannot be regarded as valid evidence, as the inspection report does not show that the specimens were taken from the goods packed in the carrier involved in the case.
 
   -    Second, the two inspection reports submitted by the [Buyer] showed inconsistent results.
 
   -    Third, the [Buyer] did not raise the quality issues on transmissibility and gradation during the dispute period set forth in the Contract.
 
   -    Fourth, there were no blocking issues with the goods. Blocking and crystallization are different concepts. The goods were merely crystallized, as permitted under the AJI88 standards.
 
   -    Lastly, the reduction of the resale price was mainly due a substantial decline in the price of the goods in the international market after delivery.

During the arbitration, the representatives of the parties mainly focused on the issues including the dispute period, quality inspections and whether the reduction in price of goods was the result of market fluctuations. The representatives presented opposing opinions.

The [Buyer]'s opinions

   -    The Contract did not require that all quality issues be raised during the dispute period and did not require that the inspection report be provided within 30 days after the arrival of goods.
 
   -    After the [Buyer] had raised the issue on blocking and thus a dispute as to the quality of the goods, it was valid to raise further disputes on transmissibility and gradation.
 
   -    About the issue on inspection, the [Buyer] had a second inspection, and the inspection by SGS is more reliable in the present case.
 
   -    About the issue on loss of profit, the [Buyer] suggested that the Chinese and German markets are different markets, that the prices of goods are not comparable. Moreover, had the goods complied with the quality requirements, the goods would have been sold at the contract price; as a result, there would have been no loss.

The [Seller]'s opinions

   -    The external and internal qualities of the goods should be treated separately. Lodging complaints about the blocking problem in a timely manner does not mean that all other quality issues were raised in a timely manner. Every issue on quality should be raised within the dispute period specified. Therefore, the disputes on transmissibility and gradation should not be accepted.
 
   -    Moreover, the Tribunal should conclude that there is no quality problem with the goods. The manufacturer was picked by the [Buyer]. After manufacturing the goods, the manufacturer provided an inspection certificate stating that the goods comply with the quality requirements and this certificate was forwarded to the [Buyer], who did not raise any objection to the certificate. So this certificate should be regarded as a conclusive determination of the quality of the goods.
 
   -    About the [Buyer] reducing the price to sell the goods, this was mainly due to the continuous decline of the price of that type of goods in the international market. The market price of the goods at the time the Contract was signed was more than US $30/ kg and it dropped to US $7-8/ kg at the time of dispute.

The parties then provided supplementary opinions and evidence materials in regard to the matters in dispute and each adversary's earlier evidence.

   -    The [Seller] suggested that the [Buyer]'s acceptance documents for the Letter of Credit indicated that the [Buyer] had approved the analysis certificate of the manufacturer -- Factory A. The [Seller] further alleged that the trademark descriptions of the goods on the SGS inspection certificate is inconsistent with those on the invoice and the faxed documents, hence the inspected goods may not have been the goods involved in the present case. In addition, the [Seller] provided its own opinions on the quality disputes, blocking of the goods, [Buyer]'s purpose in bring up the arbitration, and on issues of import expenses
 
   -    The [Buyer] emphasized the authoritative nature of the SGS inspection report and the [Seller]'s attitude in dealing with the quality matter. The [Buyer] also alleged that the trademark descriptions of the goods on the SGS inspection certificate and on the invoice and the faxed documents are basically consistent. Therefore, the discrepancy was immaterial.

Results sought by the parties

The [Buyer] applied for the following arbitration ruling:

  1. The [Seller] shall bear the loss of profit, import expenses; and
  2. The [Seller] shall bear the cost of the arbitration.

The [Seller] asked the Arbitration Tribunal to reject all of the arbitration claims brought by the [Buyer].

3. OPINION OF THE ARBITRATION TRIBUNAL

(1) Applicable law

During the arbitration, the Arbitration Tribunal sought the opinion of the parties on the applicable law. The [Buyer] stated that the principles set forth in 1980 United Nations Convention on Contracts for the International Sales of Goods (hereafter, CISG) should apply as both China and Germany are Contracting States of the Convention. The [Seller] agreed. In accordance with rules of private international law at the place of arbitration, the Arbitration Tribunal respects the parties' choice of law and applies the CISG.

Article 7 of the CISG sets forth the rule for determining the principles and law applicable as supplementary legal rules. In accordance with the applicable rules of private international law, the Arbitration Tribunal holds that the supplementary legal rules shall be the rules of national law at the [Seller]'s place of business. And for procedural issues, the Arbitration Tribunal will primarily rely on the arbitration rules set by CIETAC, with the arbitration procedural rules at the place of arbitration as supplementary references.

(2) The Contract

The [Buyer] and the [Seller] signed "Sales of Goods Agreement" Contract XX on 4 March 1997. The parties submitted to this Tribunal identical copies of the Contract documents. Furthermore, the parties have no dispute about the signing of the Contract and its validity. The Tribunal therefore rules the Contract valid and that the parties are bound by it. The Tribunal uses this Contract as the basis for resolving this dispute.

(3) Facts not in dispute

In addition to agreeing on the validity of the contract, the parties have no dispute about the following facts:

  1. The [Buyer] was named "German P... Company" when it signed and performed the Contract. Its name was changed "German S... Company" on 5 May 1998.
  2. The AJI88 standards, as submitted by [Buyer], should be the quality standards for the goods.
  3. The [Buyer] issued a Letter of Credit and paid for the goods.
  4. The [Seller] delivered the goods in the agreed quantity and within the agreed time, in two separate shipments. Before delivering the goods, the [Seller] sent to the [Buyer] the inspection certificate of the producer about the quality of the goods.
  5. The [Buyer] notified the [Seller] on the issue of blocking within 30 days after the arrival of the goods, while the issues on transmissibility and gradation were notified after that 30 days period expired.
  6. The [Buyer]'s claim based on the quality of the goods was not related to the insurance company, the shipping company or any other carrier companies.

According to the applicable procedural rules, the aforesaid facts were established by the Tribunal, and need not be further proved by the parties.

(4) Further facts resolved by the Arbitration Tribunal

Based on the Tribunal's investigation, the following facts are found:

  1. On 4 March 1997, the [Buyer] and [Buyer]'s customer, Company B, signed a contract for the resale and purchase of five tons of Cysteine. The [Buyer] resold the goods, which it bought from the [Seller] under Contract XX, to Company B, at the price of US $31,750 per ton.
  2. On 7 June 1997, Company B appointed an inspection organization, SGS, to inspect the goods thoroughly. On 7 July 1997, an inspection report on the external part of the goods was released; this proved the goods had a blocking problem. Further, in August 1997, Company B released an inspection result on Batch 970302 stating that the transmissibility and the gradation of the goods did not comply with the AJI88 standards.
  3. On 26 August 1997, the F & M Lab was appointed by Company B to inspect a sample of the goods. The laboratory released an analysis certificate indicating that the sampled materials did not comply with the AJI88 standards.
  4. In November 1997, the [Buyer] signed a replacement resale and purchase contract for five tons Cysteine, this time with Company C. The [Buyer] resold the goods involved in this case to Company C at a price of US $20 per kg;
  5. On 6 January 1999, Company D released proof stating that, as an agent, Company D assisted the [Buyer] in finalizing the contract with Company C, and that Company C had bought the goods involved in this case.

The aforesaid facts were supported by written documents presented by the parties. The Tribunal also accepted the facsimiles and other written materials related to the communications between the [Buyer] and the [Seller] submitted by the parties.

(5) The [Buyer]'s right to r request compensation: whether the quality issues were raised in a timely manner

Clause 5 of the Contract provides that "if the buyer requests compensation regarding the quality of the goods, it must be raised within 30 days after arrival of the goods ..." The Tribunal ruled that this period for requesting compensation was agreed upon by both parties and therefore is held valid. Hence, if the [Buyer] had any disputes on the quality of the goods, the [Buyer] would have had to raise the issues within 30 days after the goods had arrived, or else lose the right to request compensation.

The parties agreed that the [Buyer] had raised the issue over blocking within 30 days after the second batch of the goods had arrived, while the issues on transmissibility and gradation were raised after that 30-day period.

The [Seller] alleged that external quality and the internal quality are different, that the blocking issue is classified as the former, while transmissibility and gradation are of the latter. Therefore, if the [Buyer] had disputes on the external quality and the internal quality, both issues should have been raised within 30 days after arrival of the goods. In the present case, the [Buyer] only raised the issue on the external quality of the goods within the 30 days period. Therefore, the [Buyer] lost the right to raise any dispute on the internal quality of the goods.

The [Buyer] responded that the two types of quality issues cannot be separated.

   -    First, the Contract did not mandate that disputes on the external quality and the internal quality must be raised separately. Therefore, by raising a dispute on the blocking problems, the [Buyer] already indicated a dispute on the quality of the goods. Moreover, the Contract did not mandate that the inspection certificate must be submitted within that 30 days, and the issues on the transmissibility and the gradation of the goods can only be assured after inspection of the goods.
 
   -    Furthermore, according to principles of contract law, if contract terms drafted by one party are unclear, an interpretation against that party shall be adopted.

Both parties' interpretations of Clause 5 of the Contract make sense to a certain extent. The Tribunal cannot locate a guide from the CISG -- which both parties agreed to have as the governing law -- to solve the problem. However, the Tribunal notes that Clause 5 is from the standard contract drafted by the [Seller]. According to the basic principle of contract interpretation -- contra proferentem -- if contract terms supplied by one party are unclear, an interpretation against that party shall be adopted.

(6) The quality of the goods

       1. [Seller]'s responsibilities: the relevant standard

According to Article 35 CISG, the goods delivered by the seller must meet the contract terms on quality and specifications. Since the parties agreed in the Contract to use AJ188 quality standards, whether the goods are conforming depends on whether the goods are up to AJI88 standards.

       2. Reliance on Factory A's analysis certificate to determine the quality of the goods

The Tribunal noted that the [Seller] advocated relying on the analysis certificate released by Factory A as the basis of the quality of the goods. The Tribunal does not agree with the [Seller]'s position on this.

   -    First, the Contract does not mandate that that Factory A's analysis certificate was to be the basis for determining quality assurance. Besides, Clause 5 of the Contract clearly states that the [Buyer] was given the right to raise any dispute regarding quality issues after the arrival of the goods. This indicates that the Contract has given the [Buyer] the opportunity to inspect the goods.
 
   -    If Factory A's analysis certificate were to be conclusive of the quality determination, the [Buyer] would have lost the right to compensation when the analysis certificate was released; the [Buyer]'s right and opportunity to re-examine the goods would have therefore been redundant. Hence, the [Seller]'s theory directly contradicts Clause 5 of the Contract.
 
   -    Moreover, in accordance with customary practice of Letters of Credit, having an analysis certificate as one of the required document for payment does not mean that analysis certificate would be conclusive of the quality of the goods. Therefore, the Tribunal does not support the [Seller]'s position that the Letter of Credit requirement of an analysis certificate meant that both parties had agreed to rely on analysis certificate as conclusive proof of quality.

Nevertheless, these arguments do not mean that the analysis certificate was meaningless. It is still an important piece of evidence for the quality of the goods in the present case.

       3. The [Buyer]'s right to inspect the goods

According to Article 38 CISG and the customary practice of international trade, the Tribunal noted that unless both parties to the contract had clearly agreed to do away with the buyer's right to inspect the goods, the buyer has the right to inspect the goods delivered by the seller.

The Tribunal rules that Clause 5 of the Contract means that the [Buyer] was granted a unilateral right and opportunity to inspect the goods. The possibility of the [Buyer] being able to request compensation for quality reasons before the [Seller] had delivered the goods would seem to be extremely low: since it would be against the [Seller]'s interest to provide a certificate stating the goods it delivered were not up to standard, proving that itself had breached the contract.

As a result of the above analysis, the Tribunal does not support the [Seller]'s argument that the [Buyer] did not have a unilateral right of inspection after the arrival of the goods.

Moreover, according to Article 38 CISG, the goods can be inspected by others; the buyer need not inspect the goods itself. In this present case, it is acceptable to have Company B inspect the goods.

       4. Choice of inspection organization

The Contract did not set any restrictions on the choice of an inspection organization. Therefore, the Tribunal accepts having SGS and the F & M Lab chosen by Company B to conduct inspections. However, affirming the eligibility of SGS and the F & M Lab as inspection organizations does not mean acceptance of their inspection results. That would require independent investigation.

       5. The SGS inspection report

The Tribunal noted the [Seller]'s comment that the trademark found on the SGS inspection report is not identical to that on the invoice and the facsimile. The [Seller] questioned whether the specimen examined was taken from the goods packed in the carrier. However, after examining the evidentiary materials provided for the case, including related parties, time, location, products' name, batch number of the goods as provided by the [Seller] and the batch number of the inspected goods, the Tribunal had good reason to conclude that the goods which Company B sent to SGS for inspection were those delivered by the [Seller].

The SGS inspection report stated that the transmissibility and the gradation of the goods did not comply with the AJI88 standards.

       6. The F & M Lab inspection report

The goods inspected by the F & M Lab were specimens of Cysteine sent by Company B. The trademark had a substantial discrepancy with that of the goods involved in the present case. Although the possibility that the specimens were taken from the goods involved in the present case still existed, the Tribunal cannot be convinced that the specimens were taken from the goods involved in the present case based on the aforesaid evidence. Therefore, the Tribunal holds that the inspection report of the F & M Lab does not have the effect to prove the quality of the goods of the present case.

       7. The quality of the goods involved in the present case

There is a conflict between the Factory A analysis certificate and the SGS inspection report. The Tribunal accepted both documents as evidence in the case. The Tribunal noted that the two issues here are:

   -    [Seller] has had no objection to the SGS inspection report other than the suspicion whether the goods inspected were the same as the goods involved in the case.
 
   -    Furthermore, the [Buyer] suggested that the Factory A analysis certificate was released by the manufacturer of the goods and that, due to conflict of interests, the probative value of Factory A's analysis certificate would be relatively weaker and its credibility relatively low.

With respect to the latter issue, since the Contract did not provide for a quality re-inspection if there was a dispute and since the parties were not able to reach any agreement on the dispute, the Tribunal had to rely on the two available inspection certificates to determine the matter. The Tribunal does not suggest that SGS's inspection report would be of a higher probative value than another inspection organization's report in a normal situation. Nonetheless, in this situation, where there is a self-serving interest on the part of the manufacturer of the goods, the Tribunal chooses to rely on the SGS's inspection report.

(7) Liability for breach of contract

Based on the above, since the goods delivered by the [Seller] did not conform to the quality standard as set by the Contract, the performance of the [Seller] was a breach of contract. The [Seller] should bear the liability for the breach of contract.

(8) Damages

According to Article 74 of CISG, the party in breach should bear the damages of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach.

On 4 March 1997, the [Buyer] had signed a contract with Company B to resell the goods at a price of US $31,750 per ton. Due to the quality issue, Company B refused to accept the goods. On 11 November 1997, the [Buyer] accepted the order of Company C and resold the goods to this company. The resale price was US $20 per kg. The [Buyer] therefore suffered a loss of US $58,750 as a result of the resale.

The Tribunal holds that:

   -    If the goods delivered by the [Seller] had complied with the quality requirements of the Contract, there would have been no reason for Company B to reject the goods and the [Buyer] would have sold the goods at US $31,750 per ton.
 
   -    Nevertheless, since the [Seller] had breached the Contract in terms of quality of the goods, the [Buyer] could only resell the goods at the current price of that time. The [Buyer] should not bear the loss of the price difference, but the [Buyer] had the responsibility to take measures to mitigate the loss. Therefore, the key question here is whether that (current) price was reasonable.
 
   -    According to the information provided by the [Seller], the market price of the goods had been declining after signing of the Contract; US $20 per kg was already on the high side. The [Seller] even suggested that only conforming goods deserved that price to support its argument that there were no quality issues of the goods. Hence, the Tribunal determined the resale price was not too low and was therefore reasonable.

The difference in price between the two contracts took account of the loss of profit suffered by the [Buyer]. Therefore, the Tribunal supports [Buyer]'s claim for the difference in price between the two contracts as damages.

The [Buyer] alleged that its loss also included a storage fee for the goods, amounting to US $556, till the date of 2 June 1997. This fee was supposed to have been borne by Company B. Due to the [Seller]'s breach of the Contract, this fee was borne by the [Buyer]. Hence, this fee was the actual loss of the [Buyer]. The Tribunal supports the [Buyer]'s claim for this fee.

About the custom fee of US $1,396.87, the Tribunal noted that the [Seller] suggested that this fee was related to the storage fee, should not be double counted. After examining the invoices, the Tribunal found that the custom fee actually included all the fees incurred when the goods involved in the present case were passing customs at the port of destination. In accordance with the price provisions mandated on the contract between the [Buyer] and Company B - "CIF Hamburg, duties and taxes unpaid" - that fee should have been borne by Company B. However, since the [Seller] breached the Contract, the [Buyer] could only resell the goods. For the resale to Company C, the contract term was changed to "Ex Stock Hamburg, without customs clearance, including packing". Referring to the amended trade term, the Tribunal noted that this fee was to be borne by the [Buyer], and thus became the [Buyer]'s actual loss. Therefore, the Tribunal supports the [Buyer]'s claim for that fee.

The [Buyer]'s claim for interest was also reasonable. However, since the [Buyer]'s total claim was US $60,240, while the total of the above three items amounts to US $60,703.69, which exceeds the claimed amount, the Tribunal can only support the [Buyer] to the extent of its claim.

(9) Arbitration fee

Since the breach of the Contract by the [Seller] had led to the [Buyer] filing for arbitration, in addition to the fact that the [Buyer]'s claims are supported by the Tribunal, the arbitration fee should be borne by the [Seller].

4. THE AWARD

The Tribunal rules:

  1. The [Seller] shall bear the [Buyer]'s loss, amounting to US $60,240; and
  2. The [Seller] shall bear the arbitration fee.
  3. For the above two items, the [Seller] should finalize the payment within 60 days starting from the date of this decision. If payment has not been made or has not been completely made by the due date, an overdue penalty at a 2% annual rate should apply on the amount exceeding the time limit.

This is the final decision.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of Germany is referred to as [Buyer]; Respondent of the People's Republic of China 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].

** Alison Hoi-Yan, Ng. Research Student of the University of New South Wales (Australia, Sydney), Chief Editor and Rearher on legal texts - Principles of Business Law (General Press Pty Limited t/a Law Press Asia) and Tourism Law (CCH Australia Ltd).

*** Howard Yinghao Yang is an associate with New York office of Debevoise & Plimpton LLP.

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Pace Law School Institute of International Commercial Law - Last updated November 28, 2005
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