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CISG CASE PRESENTATION

China 1 February 2000 CIETAC Arbitration proceeding (Silicon and manganese alloy case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/000201c1.html]

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

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Case identification

DATE OF DECISION: 20000201 (1 February 2000)

JURISDICTION: Arbitration ; P.R. China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2000/01

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: China (Claimant)

BUYER'S COUNTRY: Luxemburg (Respondent)

GOODS INVOLVED: Alloy of Silicon and Manganese


Classification of issues present

APPLICATION OF CISG: Yes [Article 1(1)(a)]

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 25 ; 26 ; 49(1) ; 64(1) ; 74 ; 76 [Also cited: Articles 63(1) ; 75 ]

Classification of issues using UNCITRAL classification code numbers:

25A [Definition of a fundamental breach of contract: substantial deprivation of expectation];

26A [Notification of avoidance: effective declaration of avoidance];

49A [Buyer's right to avoid contract: grounds for avoidance];

64A [Seller's right to avoid contract: grounds for avoidance]

74A ; 74B [Damages (general rules for measuring): losses suffered as consequence of breach; Outer limits of damages: foreseeability of loss];

76A ; 76B1 ; 76C ; 76D [Avoidance without purchase or resale under article 75; Damages recoverable base on current price at time of avoidance; Reference-point as to place; Other damages under article 74: loss of profit]

Descriptors: Fundamental breach ; Avoidance ; Damages ; Profits, loss of ; Foreseeability of damages ; Proof of damages ; Cover transactions

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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

English: Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=1115&step=Abstract>

CITATIONS TO TEXT OF DECISION

Original language (Chinese): [2001.5] Guoji Shangfa Luncong [International Commercial Law Review], Vol. 3, Beijing: Falv chubanshe [Law Press]

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Chinese: WAN Jun, Shiyong lianheguo guoji huowu xiaoshou hetong gongyue de zhongcai anli liangze shuping [Comments on Two Arbitral Cases Applying the CISG], in Guoji Shangfa Luncong (cited above) at pp. 161-200

English: Dong WU, CIETAC's Practice on the CISG, at nn.37, 57, 96, 154, 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

Silicon and manganese alloy case (1 February 2000)

Translation [*] by YUAN Xiaotong [**]

Reviewed by LIU Ping [***]

I.  Details of the case
II. Positions of the parties
     -   [Seller]'s position
     -   [Buyer]'s position
III. Opinion of the Arbitration Tribunal

1. Applicable law
2. Liability for the failure to deliver the goods
3. [Seller]'s claims
4. [Buyer]'s claims
    (1) The price difference
    (2) The penalty as a damages claim
    (3) Interest
    (4) Attorneys' fees
IV. The award

In accordance with the arbitration clause contained in the contract between [Buyer] and [Seller], the China International Economic & Trade Arbitration Commission (formerly China Council for the Promotion of International Trade Foreign Economic and Trade Arbitration Commission) (hereinafter: "CIETAC") accepts this arbitration case concerning the sale of silicon and manganese alloy under the aforesaid contract. The arbitration procedure shall observe the Arbitration Rules of CIETAC in effect since 10 May 1998 (hereinafter: the Arbitration Rules).

The amount of the claim in this case totals no more than Renminbi [RMB] 500,000; therefore, Summary Procedure will be applicable to this case and one sole arbitrator will hear the case according to Article 64 of the Arbitration Rules. Because the two parties neither jointly appointed the sole arbitrator nor entrusted the Chairman of CIETAC to appoint the sole arbitrator, the Chairman of CIETAC finally appointed one sole arbitrator to form an Arbitration Tribunal to hear the case.

I. DETAILS OF THE CASE

In September 1998, [Seller] and [Buyer] concluded a contract via facsimile (hereinafter: the Contract). [Seller] and [Buyer] agreed that [Seller] would sell 500 tons of silicon and manganese alloy to [Buyer] at the price of US $380 / mt [*], CFR ROTTERDAM, and [Seller] should deliver the goods in September and October of 1998.

Later, a dispute arose over performance of the Contract. [Seller] filed an application for arbitration, alleging that [Buyer]'s failure to open the letter of credit [L/C] as required by the Contract equaled to its failure to take delivery of the goods. [Seller] claimed damages against [Buyer]. [Buyer] contended in its answer that the goods' not being taken over was caused by [Seller]'s refusal to deliver, rather than [Buyer]'s refusal to accept. [Buyer] filed counterclaims.

The Arbitration Tribunal reviewed the written Statement of Claim and Statement of Defense (including Counterclaim) and the evidence submitted by [Buyer] and [Seller], and heard this case on 2 November 1999 in Beijing, People's Republic of China (PRC). The Arbitration Tribunal issued this award, which is dated 1 February 2000.

II. POSITIONS OF THE PARTIES

- [Seller]'s position

Claimant [Seller] filed this arbitration, alleging that [Buyer] did not properly issue the L/C required by the Contract and did not fulfill its obligation to take delivery of the goods. [Seller]'s claims included:

     1. Compensation for the losses of US $27,554.33 to the supplier of [Seller] caused by [Buyer]'s failure to perform the Contract;

     2. [Seller]'s loss of expected profits of US $15,000 under the Contract.

- [Buyer]'s position

Respondent [Buyer] protested that the goods' not being taken over was caused by [Seller]'s refusal to deliver, rather than [Buyer]'s refusal to accept. [Buyer] raised the following counterclaims against [Seller]:

     1. [Buyer]'s purpose in buying the goods from [Seller] at the price of US $380/ton was to resell the goods to its downstream customer at the price of US $420/ton. Because [Seller] did not make delivery, [Buyer] lost the price difference between the purchase price and resale price, in total US $20,000.

     2. According to the contract between [Buyer] and its downstream customer, if [Buyer] failed to deliver goods to the customer, [Buyer] shall pay a penalty of 15% of the contract price, which was US $31,500. [Buyer] has paid such penalty to its customer. Therefore, [Buyer] also claimed compensation against [Seller] for the penalty that it had paid.

III. OPINION OF THE ARBITRATION TRIBUNAL

     1. Applicable law

The places of business of the two parties were located in the People's Republic of China and Luxemburg, both of which are Contracting States of the United Nations Convention on Contracts for the International Sale of Goods (hereinafter: the CISG). The CISG should be applied.

     2. Liability for the non-transfer of the goods

To determine which party should be liable for the failure to deliver the goods, it is necessary to make a summary of the facts. In accordance with the Contract in question, the faxes between the parties and other documents submitted by [Seller] and [Buyer] during the arbitration proceeding, the facts of this case are as follows:

          1. The Contract was concluded on 10 September 1998.

          2. On 21 September 1998, [Buyer] informed [Seller] that the L/C had been issued.

          3. From 23 September to 24 September 1998, the parties negotiated about the disparity between the L/C and the provisions of the Contract.

          4. On 8 October 1998, [Buyer] sent a fax to [Seller], stating that "because of current financial difficulties of our company, we wish to cancel the contract with your company".

          5. On 8 October 1998, [Seller] replied to [Buyer] by fax, stating that [Seller] did not agree to cancel the contract.

          6. On 8 October 1998, [Seller] informed [Buyer] that it was negotiating with the producers of the goods.

          7. On 21 October 1998, [Buyer] informed [Seller] that [Buyer] still needed to supply the goods to its downstream customer, but a change should be made to the L/C so that the goods shall be examined at the place of loading by A.H. Knight instead of CCIB.

          8. On 22 October 1998, [Seller] sent a fax to [Buyer], stating that because [Buyer] expressed its intention to cancel the Contract in [Buyer]'s fax of 8 October [Seller] could not hand over the goods to its carrier. As a result, the goods were still stored in a warehouse and this had caused serious economic losses to [Seller].

          9. On 22 October 1998, [Buyer] replied to [Seller] that [Seller] misunderstood [Buyer] as to the goods under the Contract, the L/C was still within its valid period, and [Buyer] would fully support [Seller] with respect to the goods.

          10. On 23 October 1998, [Seller] notified [Buyer] that [Seller] was not able to hand over the goods within the valid period of the L/C. [Seller] asked [Buyer] to extend the loading time provided on the L/C to 15 November and the expiration time to 30 November accordingly.

          11. On 23 October 1998, [Buyer] replied that it would discuss with its bank about the extension of the L/C on the next Monday.

          12. On 26 October 1998, [Buyer] sent a fax to [Seller] to ask for the place of storage for A.H. Knight to take samples of the goods.

          13. On 30 October 1998, [Seller] sent a fax to [Buyer], stating that [Buyer] had cancelled the Contract in its fax on 8 October. [Seller] also declared that it would not hand over the goods before "the present dispute" got resolved. Judging from this fax and other documents, "the present dispute" referred to both parties' dispute arising out of another batch of goods under another contract between them, rather than this Contract in dispute, and the goods that [Seller] was unwilling to deliver in this fax on 30 October were the goods under this Contract.

          14. On 2 November 1998, [Buyer] announced to [Seller] in a fax that [Buyer] had never cancelled the Contract in this arbitration. [Buyer] suggested to settle the dispute between the parties by friendly consultation.

          15. On 3 November 1998, [Seller] informed [Buyer]: "As for this Contract, though your company ([Buyer]) once wanted to cancel it, we still hope to cooperate with you. We will make appropriate decisions when our disputes on the detainment of the goods and the claim for damage are solved." In this fax, the goods detained, as mentioned by [Seller], are not goods under the Contract in dispute.

The reasons for the failure to transfer the goods can be summarized by the Arbitration Tribunal as follows:

          1. Before 30 October 1998, [Seller] expressed its willingness to deliver the goods and [Buyer] showed its need for the goods. At that time, the Contract was still regarded by both parties as binding on both parties.

          2. On 30 October 1998, the L/C had expired. Because the Contract was still binding on both parties, it was [Buyer]'s obligation to extend the L/C, and [Seller] had no obligation to deliver the goods before the L/C was extended. However, on 30 October, [Seller] explicitly declined to hand over the goods under this Contract unless the dispute related to another contract between the parties was settled. Under these circumstances, [Buyer] did not bear the obligation to extend the L/C instantly.

          3. The fax sent by [Seller] on 30 October constituted a barrier for the goods under the Contract to be delivered. Later on, [Seller] did not take necessary measures to continue the transfer of the goods.

This Arbitration Tribunal holds that [Seller] has no justifiable reason to refuse to hand over the goods, and [Seller] should be responsible for the non-transfer of the goods.

[Seller] argued that [Buyer] did not issue the L/C within the period required by the Contract, and that although the L/C was issued later it did not conform to the Contract in several aspects. When [Seller] asked [Buyer] to modify these disparities, [Buyer] gave no clear response, and this caused [Seller] not to be able to hand over the goods.

The Arbitration Tribunal holds that [Seller] has the right to declare the Contract avoided if the aforesaid facts are true and if the acts of [Buyer] were sufficient to constitute a fundamental breach of the Contract under Article 25 of the CISG. In such a scenario, the liability for failure of delivery of the goods should be imposed on [Buyer]. However, [Seller] had never declared the Contract avoided. As mentioned above, till 23 October 1998, [Seller] still required [Buyer] to extend the L/C, and this clearly indicated [Seller]'s desire to perform its obligation to deliver the goods according to the Contract. Since the Contract was not avoided before 30 October, [Buyer] could correct its mistakes on the L/C. Since the failure to perform the Contract after 30 October 1998 was caused by [Seller]'s inappropriate action, [Seller] has no reason to attribute the non-delivery of the goods to [Buyer].

[Seller] further claims that [Buyer]'s declaration to cancel the Contract in its fax of 8 October 1998 caused serious economic loss to [Seller]. However, in accordance with reasons stated below, such allegation of [Seller] is groundless:

First, the words used in [Buyer]'s fax of 8 October 1998 are "wish to cancel", but not a declaration that [Buyer] would not perform the Contract or the Contract would not be binding upon [Buyer]. That is to say, at that time [Buyer] only made a suggestion to [Seller] to cancel the Contract.

Second, from faxes between both parties thereafter, [Seller] itself did not take [Buyer]'s fax of 8 October as a cancellation of the Contract. For example, as mentioned above, [Seller] informed [Buyer] on 8 October 1998 that [Seller] was negotiating with its supplier on whether to cancel the Contract. If the Contract had been canceled then, there was no need for [Seller] to negotiate.

Thirdly and more importantly, as stated above, by 30 October 1998, both parties still intended that the Contract be binding upon them. This means that even if the deal under the Contract was cancelled on 8 October 1998 it was later resumed by both parties expressly or implicitly. After 30 October 1998, [Seller]'s refusal to deliver the goods had no reasonable excuse and constituted a breach of the Contract. Therefore, the liability for the failure of delivery should be attributed to [Seller].

     3. [Seller]'s claims

[Seller] requests [Buyer] to compensate for its direct economic losses and interest, loss of expected profits and interest, and the arbitration fees and attorneys' fees.

Except for the arbitration fees, the Arbitration Tribunal rejects all of [Seller]'s claims. Because the non-performance of the Contract cannot be attributed to the faults of [Buyer], [Seller]'s claims lack a reasonable basis.

     4. [Buyer]'s counterclaims

          (1) Concerning the price difference

[Buyer] claims that, due to [Seller]'s non-performance of its obligation to make delivery, [Buyer] lost the price margin between the price under the Contract and its resale price to its customer. The price difference is US $40 per ton (US $420 / ton for resale minus US $380 / ton of the contract price); and the total loss for 500 tons of goods is US $20,000.

For the following reasons, the Arbitration Tribunal does not support [Buyer]'s claim:

               A. Foreseeability

Article 74 CISG limits the compensation for breach of contract to a sum that "may not exceed the loss that the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract".

The Arbitration Tribunal finds that [Buyer] has not proved that [Seller] knew or ought to have known the resale price for the goods when [Seller] and [Buyer] concluded the Contract. Therefore, the difference between the contract price and the resale price was not foreseeable by [Seller] at the time of the conclusion of the Contract.

[Buyer]'s claim for its loss of the price difference due to [Seller]'s refusal to make delivery may possibly rely on Articles 75 and 76 CISG.

Article 75 provides that [Buyer] can claim damages which may constitute the difference between the contract price and the price in the substitute transaction if the preconditions of Article 75 are met. However, this article does not apply in this case, because [Buyer] did not make a substitute transaction under Article 75.

Under Article 76, when the seller refuses to deliver the goods, the buyer is entitled to the price difference between the contract price and the current price. Therefore, Article 76 may become a valid basis for [Buyer] to recover the difference between the contract price and the current price.

               B. Calculate of the current price

According to paragraph (1) of Article 76, the "current price" refers to the price "at the time of avoidance" of the contract. Neither party explicitly declared the Contract avoided. But, in its fax of 30 October 1998, [Seller] informed [Buyer] that it would not hand over the goods. Without [Seller]'s making actual delivery or expressing its desire to deliver, the Contract became de facto avoided since 30 October 1998. The day of 30 October 1998 should be regarded as the "time of avoidance" of the Contract.

According to paragraph (2) of Article 76, "the current price is the price prevailing at the place where delivery of the goods should have been made." In the present case, this refers to the price in China.

According to the price records submitted by [Buyer] to the Arbitration Tribunal, on 30 October 1998, the FOB main port in China price for an alloy which contains silicon above 17% and manganese above 65% was US $380-390 / ton, and the average price should be US $385 / ton. Furthermore, as claimed by [Buyer], the freight from China to Rotterdam (the destination port under the Contract) was US $35. ([Seller] did not object to the freight.) Therefore, the CFR price in China (comparable to the price under the Contract) on 30 October 1998 was US $420 / ton [385+35].

However, [Seller] contended the goods involved in this case contained only 60% manganese and 14% silicon and its price could only reach 80-85% of the price for an alloy containing silicon above 17% and manganese above 65% ([Buyer] did not provide its evidence in this regard). Calculated at 85% of the price for the superior alloy (US $420), the CFR price for the goods involved in this case in China on 30 October 1998 is US $357 / ton (420 85%). It is clear that this price is lower than the contract price in this case US $380 / ton.

The Arbitration Tribunal concludes that [Buyer] cannot claim the price difference when the "current price" is lower than the price fixed by the contract. The reason is that when the current price becomes lower than the contract price, if [Buyer] still accepts the goods in accordance with the Contract, it will suffer loss, but not make any profit. In such a case, the fact that [Seller] did not deliver the goods has actually prevented possible losses for [Buyer].

               C. [Buyer]'s objection

[Buyer] argued that the price difference should be calculated based on the CFR price in Rotterdam in the middle of November 1998, i.e., US $503.95 / ton. The contract between [Buyer] and its downstream customer provided that the goods under the Contract, which would be resold to the customer, must be delivered to Rotterdam before 15 December 1998. It took two months for the goods to reach Rotterdam from China. Therefore, it was impossible for [Buyer] to purchase substitute goods at the time [Seller] declared that it would not to deliver the goods [i.e., 30 October 1998]. Therefore, the comparable price should be the CFR price in Rotterdam in the middle of November.

The Arbitration Tribunal finds [Buyer]'s statement that it must deliver the goods to its customer before 15 December 1998 unreliable. If [Buyer]'s statement was true, [Buyer] must deliver the goods from China to its customer before 15 October 1998. However, as shown by the facts summarized above, [Buyer] took a passive attitude towards immediate taking delivery of the goods:

   -    On 8 October, [Buyer] suggested to cancel the Contract;
 
   -    On 21 October, although claiming that it still needed the goods, [Buyer] made an unreasonable request to change the inspector at the loading port;
 
   -    On 22 October, [Buyer] stated that it would fully support [Seller], but it did not show its intent to take delivery immediately;
 
   -    On 23 October, when the L/C under the Contract had expired, [Buyer] stated that it would discuss with its bank on the next Monday about the extension of the L/C, rather than gave instruction to its bank directly to extend the L/C;
 
   -    On 26 October, in the situation that [Buyer] did not extend the L/C, [Buyer] raised again its unreasonable request for A. H. Knight to take sample of the goods.

From these facts, the Arbitration Tribunal has reason to believe that [Buyer] had no anxiety to take delivery of the goods at that time.

          (2) Concerning the penalty as a damages claim

According to Article 74 CISG, damages for breach of contract consist of a sum equal to the loss. It restricts the damages to the actual losses resulting from breach of contract, and denies any punitive damages.

Therefore, even if [Buyer] has paid such punitive damages to its downstream customer, [Buyer] has no claim for such penalty against [Seller].

Firstly, such "loss" [i.e., the penalty] is not foreseeable by [Seller] at the time of the conclusion of the contract. Therefore, in accordance with Article 74 CISG, [Seller] should not be liable for such loss.

Secondly, if such a claim by the [Buyer] is upheld, [Seller] would pay a penalty in disguised form.

          (3) Concerning interest

Since the claims for the price difference and the penalty shall be dismissed, [Buyer] has no claim for interest thereon.

          (4) Concerning attorneys' fees

In accordance with the above facts, the Arbitration Tribunal finds that before 30 October 1998 [Buyer] did not take positive measures to take delivery of the goods under [Seller]'s urging and this constitutes a de facto breach of contract. Although [Seller]'s unjustified refusal to hand over the goods on 30 October 1998 makes [Seller] lose its claims against [Buyer], the Arbitration Tribunal finds that [Buyer]'s passive delay in taking the goods is not in good faith. Therefore, the Arbitration Tribunal finds no reasonable and fair justification to impose [Buyer]'s attorneys' fees on [Seller].

IV. THE AWARD

The Arbitration Tribunal holds:

All claims raised by [Buyer] and [Seller] are denied.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of People's Republic of China is referred to as [Seller]; Respondent of Luxemburg is referred to as [Buyer]. 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]. Weight unit appears as mt. (metric ton) or ton.

** YUAN Xiaotong, LL.M. candidate, Faculty of Law McGill University, Montreal Canada, 2001 to present; LL.B. Renmin University of China Law School, 2001.

*** LIU Ping, Lawyer, Baker & McKenzie, Beijing, People's Republic of China; LL.M., Harvard Law School (2003-2004); Master of Civil and Commercial Law, Tsinghua University Law School (2000-2003).

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