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CISG CASE PRESENTATION

China 31 March 2000 CIETAC Arbitration proceeding (Methyl methacrylate monomer case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/000331c1.html]

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

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Case identification

DATE OF DECISION: 20000331 (31 March 2000)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2000/16

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Japan (respondent)

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

GOODS INVOLVED: Methyl methacrylate monomer


Classification of issues present

APPLICATION OF CISG: No. Case contains a reference to Article 8 CISG as a principle of good faith in international trade, in an effort by seller to have the tribunal construe Chinese domestic law in a similar manner.

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Article 8

Classification of issues using UNCITRAL classification code numbers:

Unavailable

Descriptors: Unavailable

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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): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

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

Methyl methacrylate monomer case (31 March 2000)

Translation [*] by Zheng Xie [**]

Edited by Meihua Xu [***]

-   Particulars of the proceeding
-   Facts
-   Position of the parties
-   Opinion of the Arbitration Tribunal
-   Award

PARTICULARS OF THE PROCEEDING

The China International Economic and Trade Arbitration Commission (hereafter, the "Arbitration Commission") accepted the case (Case no: Rů) on 6 December 2002 according to:

   -    The arbitration clause in Contract No. 98SAYJ/76208CN (hereafter, the "Contract") signed by Claimant [Buyer], Jiangsu __ Company [of China], and Respondent [Seller], Japan __ Company on 16 February 1998; and
 
   -    The written arbitration application submitted by the [Buyer] dated 14 March 1999.

The Arbitration Rules of the Arbitration Commission (hereafter, the Arbitration Rules), which took effect on 10 May 1998, apply to this case.

The [Buyer] appointed Mr. XW as its arbitrator, and the [Seller] appointed Mr. CS as its arbitrator. Because the parties neither jointly appointed nor entrusted the Chairman of the Arbitration Commission to appoint the Presiding Arbitrator within the stipulated time, the Chairman appointed Mr. SQ as the Presiding Arbitrator according to the Arbitration Rules. The aforesaid three arbitrators formed the Arbitration Tribunal on 2 July 1999. However, during the arbitration process, it turned out that Mr. SQ could not serve as the Presiding Arbitrator. The Chairman therefore appointed Mr. MK as the replacement Presiding Arbitrator on 31 August 1999. The replacement Presiding Arbitrator, Mr. MK, and arbitrators Mr. XW and Mr. CS heard this case.

The Arbitration Tribunal reviewed the Arbitration Application, the response, and the supplementary statements and evidence submitted by the parties. On 1 September and 25 November 1999, the Arbitration Tribunal conducted court sessions in Beijing. Both parties sent their arbitration agents to attend the court sessions. The parties presented facts, legal opinions and arguments, and answered the Arbitration Tribunal's questions.

Based on the material and the situation presented in the court sessions, the Arbitration Tribunal discussed this case, but did not reach a unanimous agreement. According to Article 54 of the Arbitration Rules, the Arbitration Tribunal handed down its award by majority. The following are the facts, the Arbitration Tribunal's opinion and the award.

FACTS

On 16 February 1998, the [Buyer] and the [Seller] signed Contract No. 98SAYJ/76208CN, which includes the following terms:

Goods: Methyl methacrylate monomer (MMA);
Quantity: 500 tons;
Unit price: US $1,300/ton CFR Shantou;
Total price: US $650,000;
Packaging: Separate package;
Place of origin of goods: Japan;
Payment: 90 days irrevocable L/C against B/L with [Seller] as beneficiary;
Shipping time: Before 10 March 1998;
Loading port: Kobe, Japan;
Destination port: Shantou, China;
Delivery term: CFR;
Shipping notice: The [Seller] shall inform the [Buyer] via telegram or fax of the contract number, commodity name, quantity, value of invoice, name of ship, loading port, shipping time, and destination port. The [Seller] shall be liable for any loss, if it fails to notify the [Buyer] of the aforesaid information or fails to buy insurance on time.

On 20 February 1998, the [Buyer], through Bank of China Jiangsu Branch, opened L/C No. 94LC80208.

On 9 March 1998, SHOKUYU Tanker Company Limited issued B/L No. SCKS39 for the goods under the Contract.

On 13 March 1998, the [Seller] issued a Letter of Indemnity to the shipping company requesting the shipping company to release the goods under the Contract to Shantou Company without presence of B/L, and promising to compensate the shipping company for any loss due to such release.

On 17 March 1998, the ship Sun CROWN which carried the goods under the Contract arrived at Shantou port, China.

On 18 March, the goods under the Contract were released without presence of B/L. Meanwhile, Bank of China Jiangsu Branch received the full set of documents under the L/C.

On 24 March 1998, the [Buyer] made the payment against documents and obtained the full documents including the original B/L from Bank of China Jiangsu Branch.

On 10 April 1998, Shenzhen Company sent a letter to the [Buyer] stating:

"Further to your inquiry by telephone on 28 March about the arrival time of the goods under B/L No. SCKS39, we went to Shantou port and were informed that the ship arrived at the port on 17 March, and that the delivery was taken on 18 March, but the specific facts are not clear. In order to mitigate damages, and according to the stipulation, we will send our staff to actively investigate where the goods are, and will inform you in time."

On 9 June 1998, the [Seller] received the payment under the Contract through the bank.

On 10 July 1998, Shenzhen Company sent a letter to the [Buyer] stating:

"According to your notice via telephone, we contacted the freight forwarder at Shantou port and found that the 500 tons of MMA were taken by Shantou Company Light Industry Ltd. The freight forwarder at Shantou port stated that the carrier had a basis for releasing the goods. We therefore negotiated with Shantou Company. However, we encountered considerable difficulty. Because we did not receive the goods, we inform you that we cannot pay the price under the Contract. We are sorry!"

POSITION OF THE PARTIES

[Buyer]'s allegations and claims

In the Arbitration Application, the [Buyer] alleged that without the [Buyer]'s agreement, the [Seller] unilaterally changed the consignee under the Contract, and instructed the carrier to release the goods to a third party, which was not consistent with general trade practice, and severely breached the Contract. Article 18 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest stipulates:

"If a party fails to perform the contract or its performance of the contractual obligations does not conform to the agreed terms which constitutes a breach of contract, the other party is entitled to claim damages or demand other reasonable remedial measures."

The [Buyer] therefore requests the [Seller] to refund the contract price and to compensate for the loss of interest and other loss caused by the breach.

The [Buyer] filed the following claims:

(1)   The [Seller] shall refund US $650,336.70 and bear the loss of interest, US $90,526;
(2)   The [Seller] shall compensate the [Buyer] for the loss caused by its breach;
(3)   The [Seller] shall bear the arbitration fee and the attorneys' fee.

[Seller]'s response

In its response, the [Seller] asserted:

1. The [Seller] had performed all of its duties in accordance with the Contract, and did not breach the Contract. The [Buyer] did not receive the goods because it did not execute the right to request the shipping company to release the goods based on the original B/L, and it did not go to the shipping company to take the delivery at all.

      (1) The Contract stipulates that the delivery term is CFR Shantou. According to Seller's duty of delivery under the term CFR as stipulated in International Chamber of Commerce Incoterms 1990, the [Seller] fulfilled the duty of delivery under the Contract when it delivered the goods on board the ship and also delivered the full original shipping documents to the [Buyer] within the time stipulated in the Contract. The C terms (including CFR) described in Incoterms 1990 provide for symbolic delivery, which means the [Seller]'s delivery of the B/L, which represents the ownership of the goods, or other shipping documents to the [Buyer] substitutes for the physical delivery of the goods. Under these delivery terms, goods and documents are separated; Seller fulfils the duty of delivery and is entitled to payment when it delivers the documents.

In this case, the [Seller] completed loading the goods within the time stipulated in the Contract, and delivered the full original B/L to the [Buyer] through the bank. In addition, when the [Seller] presented the original B/L and other shipping documents against payment, the [Buyer] did not raise any objection. This shows that the full set of original B/L had no defect, and would not have any adverse impact on the [Buyer]'s right under the B/L. Thus, the [Seller] has completely fulfilled its duty of delivery under the Contract, and the contractual relationship between the [Buyer] and the [Seller] ended. Furthermore, even if as alleged by the [Buyer], it did not receive the goods -- from the legal perspective, this is the risk of loss of or damage to goods (regardless of whether the loss or damage is caused by natural disaster or people), the risk had passed to the [Buyer] when the goods were loaded on board. This is common knowledge in international trade. Therefore, after the goods were loaded on board, the [Buyer] is not entitled to claim a refund against the [Seller] for loss of goods.

      (2) The [Buyer] had not claimed the "breach" with the [Seller] within about one year, nor did the parties negotiate this issue after the [Seller] delivered the original B/L to the [Buyer] through the bank. If it was true that the [Seller] breached the Contract and caused the [Buyer] to suffer damages as alleged by the [Buyer], why did the [Buyer] keep silent for five years, and suddenly filed this arbitration application without negotiation with the [Seller]? Regarding this question, the [Seller] "confirmed" the following fact with the carrier of the goods under the Contract. According to the carrier, the carrier did not receive the [Buyer]'s request to take delivery of the goods based on the original B/L No. SCKS39, and no one submitted the original B/L to the carrier.

According to international trade practice, the B/L is a proof of an ocean transportation contract, a proof that goods are received by a carrier or loaded on board, and a document which by presenting a carrier promises to deliver the goods. A B/L can prove that the shipper and carrier have signed a shipping contract. However, when the shipper transfers the B/L to a third party (usually a consignee), the B/L is the shipping contract between the carrier and the third party (consignee). A B/L signed by a carrier proves that the carrier received the goods described in the B/L, and will deliver the goods to the consignee according to the B/L. According to common knowledge of international trade, the B/L is an ownership certificate, and the person who holds the B/L has the right to take delivery of the goods. However, if the holder of the original B/L does not present the original B/L to the carrier requesting to take delivery of the goods, the carrier is not obligated to look for the original B/L holder requesting it to take delivery.

The [Buyer] not only obtained the ownership of the goods under the Contract but also concluded the shipping contract with the shipping company after receiving the original B/L for the goods. From a legal perspective, the [Buyer] is not entitled to claim for ownership of the goods against the [Seller] based on the Contract for sale of goods. The only way for the [Buyer] to claim ownership of the goods is to request the carrier to deliver the goods by presenting the original B/L. However, the [Buyer] did not submit the original B/L to the carrier, so objectively it did not execute any right under the B/L. Therefore, the [Buyer]'s allegation that it could not receive the goods by presenting the original B/L is not true, and the fact is that the [Buyer] had never requested the shipping company to deliver the goods.

2. The [Buyer] asserted that after many investigations, it found that the [Seller] issued the Letter of Indemnity, and also alleged that the [Seller] changed the consignee stipulated in the Contract without the [Buyer]'s agreement, and severely breached the Contract. This was not consistent with the facts; in additional, it lacks legal basis.

The [Buyer] intended not to completely discover this transaction; in fact, the [Buyer] not only knew but also designed that the domestic relationship of this transaction was not simple.

A Letter of Indemnity is a contractual document between the issuer and the shipping company, and is not binding on a third party. In other words, only the shipping company can claim rights against the issuer based on this Letter of Indemnity, and a third party cannot claim rights directly against the issuer. In addition, according to the legal relationship among the three parties, when the [Seller] transferred the B/L to the [Buyer], the B/L became the shipping contract between the [Buyer] and the shipping company. Once a shipping company issues a B/L, it bears the duty to deliver the goods to the original B/L holder. Without the original B/L holder's agreement, even if it had obtained a Letter of Indemnity, the shipping company should not release the goods to the third party rather than the original B/L holder; otherwise, the shipping company shall compensate the original B/L holder for any loss caused by such releasing. Therefore, if the [Buyer] did not receive the goods by presenting the original B/L as it alleged, the [Buyer] should have claimed damages first with the shipping company.

The [Buyer] ignored the normal legal relationship, and did not execute its right with the shipping company, but claimed the right directly with the [Seller] ignoring that the Letter of Indemnity has no direct legal connection with the Contract for sale of goods. The [Buyer] did so in order to escape the liability of negligence when not executing the right to take delivery of the goods, and intended to transfer the loss to the [Seller]. This is inconsistent with legal logic, and lacks legal and principle basis.

Therefore, the [Seller] requests the Arbitration Tribunal to dismiss all of the [Buyer]'s claims, and to rule that the [Buyer] shall pay the entire arbitration fee.

Supplementary material

Both parties submitted supplemental material. In addition to emphasizing the aforesaid opinions, they presented new statements as follows:

- [Buyer]'s supplementary material

The [Buyer]'s main allegations are as follows:

1. In this transaction, the [Seller] instructed and guaranteed the carrier to release the goods under the Contract to the third party, which constituted a fundamental breach of contract and infringement, so the [Seller] shall bear legal liability to the [Buyer].

The parties as businessmen should know that one basic legal principle is that the parties shall be bound at least by two ways; one is the parties' promise and agreement, which are binding between the parties as laws; the other is mandatory laws, which apply to relevant civil acts and need no express agreement by the parties, and which the parties cannot exclude. Therefore, when determining and commenting on the legal consequences of the parties' conduct (including performance, breach and infringement), the Arbitration Tribunal should comprehensively consider these agreements and laws.

The [Seller] not only had the contractual duty to deliver the goods and transfer the ownership to the [Buyer], but also had the duty of good faith stipulated in laws to guarantee and facilitate the completion of the transaction. In other words, during the transaction under the Contract, the [Seller] should not conduct itself in a way that is inconsistent with the fundamental purpose of the Contract. The [Seller]'s duty of delivering the goods consists of two parts:

   -    One is the contractual duty to load the goods according to the Contract, and deliver the relevant documents to the [Buyer];
 
   -    The other is the duty stipulated by laws to facilitate completion of the transaction in good faith, and to assist in the transport of the goods safely to the destination, and not to set any barrier to or change the process of the delivery by its conduct or non-conduct.

These two duties form the [Seller]'s complete duty of delivering the goods; neither duty shall be absent. However, the [Seller] violated the principle of good faith, so it violated the duty of delivery stipulated by the laws. In this case, the [Seller] clearly knew the [Buyer] was the party to the Contract, and it had already delivered the documents including the B/L to the [Buyer] through the bank, but it arbitrarily instructed the carrier to release the goods to a third party without presenting the B/L, with the result that the [Buyer] could not factually and legally obtain ownership of the goods under the Contract, so the [Seller] did not complete its duty of delivery in terms of law, and fundamentally breached the Contract. Therefore, the [Seller] should bear all civil liabilities.

According to the description of the seller's duty of delivery of goods under CFR in Sale of Goods written by Benjamin, UK, a seller's duty of delivery under CFR contracts is divided into three stages: first, provisional delivery when the goods are loaded and shipped; second, symbolic delivery when the documents are delivered; third, complete delivery of cargo when the goods are delivered to the buyer at the destination port. At the third stage, complete delivery of cargo, the seller bears a negative duty, i.e., "seller bears the duty not to set any barrier by intervention of the shipping contract for buyer to take delivery of the goods at the destination port."

2. The [Seller]'s conduct constituted infringement of the [Buyer]'s right.

In this case, the [Seller] instructed the carrier to release the goods without presenting the B/L and gave the carrier a guarantee, and the carrier accepted the [Seller]'s instruction and guarantee and released the goods without the B/L, so the [Seller] and the carrier infringed the [Buyer]'s rights including ownership and right of taking delivery under the B/L. Although the infringement was finally conducted by the carrier, it was the [Seller] who instructed and guaranteed the carrier to do so. Therefore, the [Seller] and the carrier jointly infringed the [Buyer]'s rights, and should be held jointly and severely liable.

3. The [Buyer]'s right to claim

In the transaction in this case, there are at least two independent relationships of debt: one is the contractual relationship between the [Buyer] and the [Seller] based on the Contract for sale of goods; the other is the infringement relationship among the [Seller], the carrier, and the [Buyer] due to releasing the goods without the B/L. According to the facts in this case, the [Buyer] has corresponding claims under these two relationships, which are not in conflict. The [Buyer] has the right to choose, and the [Seller] shall not intervene.

4. Because of the foreign trade agency system stipulated in the laws of the PRC, the [Buyer] was an agent in this transaction. The Contract in this case was signed by the [Buyer] and the [Seller], so they bear mutual obligations and rights; this relationship between the [Buyer] and the [Seller] is no different from any common contractual relationship. Under a transaction arrangement such as the Contract for sale of goods between the [Buyer] and the [Seller], it is not important whether the [Buyer] was the actual user (or actual buyer); what is important is who is the buyer in term of law, and who is the corresponding party to whom the [Seller] owes a duty. The [Seller] should have delivered the goods to the [Buyer] in accordance with the Contract. It is the [Buyer] who with the relevant party determined how to deliver the goods to the actual buyer, and arranged the relevant obligations and rights; as to this, the [Seller] has no right to participate, and it had no right to dispose of the rights of the [Buyer] and the relevant party.

5. The reason why the [Buyer] did not receive the goods.

The [Seller] alleged that because the [Buyer] did not present the original B/L to the carrier to take delivery of the goods, the [Buyer] did not receive the goods. It is obvious that the [Seller]'s position is illogical. On 18 March 1998, i.e., the second day after the ship arrived at Shantou port, the goods were released by the carrier without the B/L under the [Seller]'s instruction. However, the [Buyer] did not obtain the original B/L under the L/C from the bank until 24 March 1998. At that time, the [Buyer] could not objectively take delivery of the goods.

6. The time when the [Buyer] claimed damages from the [Seller]

From the legal perspective, the [Buyer]'s claim is valid if it filed the claim within the stipulated time (in this case, the statue of limitation is four years); it is not important when the [Buyer] filed the claim within the four years. In addition, the facts show that the [Buyer] claimed damages from the [Seller] in a timely manner. On 24 March 1998, the [Buyer] obtained the full set of documents from the bank; thereafter, on 28 March, the [Buyer] informed Shenzhen Company to check the information regarding the arrival of the ship. On 10 April, Shenzhen Company sent a letter to the [Buyer] alleging that others had taken delivery of the goods on 18 March, and the specific facts were not clear. Because it was hard to check the information, until 10 July Shenzhen Company noticed the [Buyer] alleging that the goods were taken by Shantou Company, and the reason was not clear. Thereafter, following further inquiry, the [Buyer] now learned that the carrier had released the goods to Shantou Company by virtue of the Letter of Indemnity. Therefore, the [Buyer]'s attorney immediately made a telephone call to the [Seller] inquiring about the reason in February 1999, and the [Seller] stated, "Shanghai Company and Shantou Company sent the Letters of Indemnity to Mitsubishi Corp requesting to forward the Letters of Indemnity to the carrier and to instruct the carrier to release the goods to Shantou Company." It was not until then that the facts were clear to the [Buyer] and the [Buyer] knew that its rights under the Contract were infringed by the [Seller]. Therefore, on 14 March, the [Buyer] filed this arbitration application.

The [Buyer] submitted the legal opinion provided by the relevant experts the [Buyer] had consulted.

- [Seller]'s supplementary material

The [Seller]'s main opinions are as follows:

1. In this case, the [Buyer] was entrusted and involved in this import of MMA as a middleman; the [Buyer] was only entrusted to open the L/C, but not to take the delivery of the goods. The [Seller] alleged that the [Buyer] was the agent of Shenzhen __ Company ("Shenzhen Company") to import MMA in this case and prepared to take delivery of the goods, and did not know the existence of other parties. The [Buyer]'s allegation was not true.

The MMA transaction was initiated in December 1997 per Shanghai Company's request. Thereafter, because of the foreign trade power issue, Shanghai Company contacted Shantou Company, and Shantou Company through Shenzhen Company introduced the [Buyer] to be involved in this transaction. The [Seller] did not know the transaction terms between Shantou Company, Shenzhen Company and the [Buyer]. Before the Contract was signed, the [Buyer] or Shenzhen Company had not negotiated the Contract with the [Seller]. The fact is that after being entrusted by Shenzhen Company, the [Buyer] requested the [Seller] to send a written confirmation of the Contract terms between the [Seller] and Shanghai Company by alleging that it was required to open the L/C, and the [Seller] faxed the written confirmation of the Contract terms to the [Buyer] per its request on 16 February 1998.

The [Buyer] drafted the Contract in this case according to the written confirmation of the Contract terms in the contract between the [Seller] and Shanghai Company, and at the same day faxed the Contract to the [Seller] for its execution. This proves that the [Buyer] knew the history of this transaction, and at least knew the existence of Shanghai Company. From the beginning, the [Buyer] was involved as the agent to open the L/C, and did not participate in the negotiation of the Contract. Absolutely, the [Buyer] did not express that it would take delivery of the goods. On 9 March 1998, Ms. Wan L, an employee of the [Buyer], responsible for this transaction sent a fax to Ms. Wu J, a business manager of the [Seller], requesting the documents including the B/L. When faxing the relevant documents to Ms. Wan L on the second day (10 March), Ms. Wu J used the same fax cover sheet, which clearly stated, "To: Shantou Company Light Industry Entity/ Attn: Mr. Chen Y," Ms. Wan L did not raise any objection to this. If the [Buyer] did not know of the existence of Shantou Company, it is illogical for Ms. Wan L not to have inquired or objected when the documents which belonged to the [Buyer] were faxed to the third party.

A ship for transportation of chemical products in separate packages like MMA is expensive, and the demurrage of such a ship is as high as tens of thousands of US dollars per day. It usually takes three or four days for a ship from China to Japan. In the transaction with the payment by L/C, the original B/L can be obtained through the bank by presenting the L/C, which takes at least six to seven days. If the [Buyer] did not arrange for loading and taking the delivery of the goods, a high demurrage fee would be incurred and would have to be paid. Therefore, in transactions of separate packaged chemical products like MMA between China and Japan, it is common for a consignee to issue a Letter of Indemnity and fax the B/L to take deliver the goods in order to avoid demurrage. If the carrier is a Japanese shipping company, a Chinese consignee usually issues a Letter of Indemnity to a Japanese consignor, and then the Japanese consignor issues a Letter of Indemnity to the Japanese shipping company. In this MMA transaction, Shanghai Company and Shantou Company adopted the same method. Shanghai Company had prepared itself to take delivery of the goods before identifying the agent to open the L/C, and at the beginning of February 1998 issued the Letter of Indemnity to the [Seller], asking the [Seller] to send it to the shipping company to release the goods without the original B/L; Shantou Company was the specified consignee, and requested the shipping company to release the goods with the Letter of Indemnity when the ship arrived at the port on 13 March. This is common practice in sales of chemical products in separate packages between China and Japan, and not an individual case.

The [Buyer] alleged that it spent considerable time investigating where the goods were. However, regarding this allegation, it is not worth arguing at all. Any person with some knowledge of international trade knows that an original B/L is determinative to shipping companies. When the holder presents the original B/L to a shipping company, the shipping company shall deliver the goods to the original B/L holder; if the shipping company released the goods to others, it should compensate the original B/L holder for damages. In this general international system, it is unnecessary for the original B/L holder to investigate the goods. However, the [Buyer] did not claim damages from the shipping company, but wasted time to investigate the goods; this is the same as the [Buyer] giving up its rights under the B/L.

2. The [Buyer] alleged that the [Seller] infringed its ownership and arbitrarily disposed of the goods by issuing the Letter of Indemnity to the shipping company, so the [Buyer] requested the [Seller] to compensate for damages. The [Seller] asserted that the [Buyer]'s aforesaid allegation is a mis-explanation of the legal nature of relevant facts, and is not established by legal principles.

The nature of a Letter of Indemnity is a guarantee, i.e., a promise. According to general legal principles and the Guarantee Law of the People's Republic of China, a guarantee is a debt, i.e., a debt of guarantee; however, it is a secondary debt with the precondition of existence of a primary debt. When the primary debt cannot be executed, the guarantor shall perform its debt of guarantee; otherwise, a creditor shall request the primary debtor to perform the duty. Since the nature of a Letter of Indemnity is a debt of guarantee, when a dispute arose, it should be resolved based on the relationship of debt according to the relevant law governing debt instead of infringement. In this case, the [Seller] bears the duty of guarantor (debt) only to the shipping company, so only the shipping company can claim damages from the [Seller] based on the Letter of Indemnity. The [Seller] did not assume a duty of guarantee to the [Buyer], so the [Buyer] is not entitled to claim damages from the [Seller] based on the Letter of Indemnity.

The [Seller] delivered the goods to the shipping company at the port in Japan, and then lost the actual control of the goods; it was objectively impossible for the [Seller] to dispose of the goods physically. In addition, the [Seller] delivered the original B/L to the bank, so it was impossible for the [Seller] to legally dispose ownership of the goods. As to legal disposal, the [Seller]'s issuance of the Letter of Indemnity to the shipping company only means that the [Seller] bears the liability of a guarantor; the Letter of Indemnity has no validity for the carrier to bear duty to release the goods. The [Buyer]'s allegation that "the [Seller] arbitrarily disposed of the goods," is not established. Therefore, there is no causal relationship between the [Seller]'s issuing the Letter of Indemnity and the carrier's releasing the goods, and the [Seller]'s conduct was not in the nature of disposing of the goods in terms of law.

3. The [Buyer] alleged that the Contract stipulates that the notified party is Shenzhen Company and that the [Seller] did not notify this party, so it breached the Contract. The [Seller] asserted that the [Buyer]'s aforesaid allegation is not established. Clause 3 of the "Delivery Terms" in the Contract only stipulates that "Notified party: Shenzhen Company shall be specified in the original B/L," but does not stipulate that the [Seller] shall perform the duty of notice. On 10 March 1998 (the second day after the goods were loaded), the [Seller] faxed the full set of shipping documents to Ms. Wan L of the [Buyer]. Although the [Seller] did not send a notice to Shenzhen Company, it notified the [Buyer]. According to Incoterms, the [Seller]'s duty of notice is to notify the [Buyer] under the Contract. Therefore, the [Seller] performed the duty of notice to the [Buyer], and did not breach the Contract.

4. Moreover, the [Buyer] is not the actual buyer under the Contract. The [Buyer] was involved in this transaction at the final stage of performance; in addition, the [Buyer] made a telephone call to the [Seller] alleging that it was entrusted to open the L/C under the Contract, and requesting the [Seller] to sign the Contract in order to meet formality requirements to open the L/C. In fact, all relevant parties knew that the [Buyer] was not the actual buyer, and that its duty was only to open the L/C. It was Shantou Company which should take delivery of the goods, and the [Buyer] neither had any obligation nor was entitled with rights as to delivery of the goods, as all relevant parties knew.

After the goods were loaded, the [Seller] delivered the full set of original B/L to the [Buyer] through the negotiating bank; in its statement, the [Buyer] admitted that it received the B/L on 24 March 1998. The Contract stipulates the L/C shall be cleared 90 days after the issuance of the B/L. In fact, the [Seller] cleared the L/C and received the full payment of the goods under the Contract on 9 June 1998. During this period, the [Buyer] had not inquired of the [Seller] where the goods were; in addition, the [Buyer] did not negotiate or claim damages from the [Seller] prior to this arbitration. After the arbitration application was filed, the person responsible for this transaction from Shanghai Company confirmed that Shanghai Company had received all of the MMA under the Contract, and had made the full payment to Shantou Company. The relevant person from Shanghai Company alleged that Shantou Company actually made part of the payment. These facts show that the [Buyer] had never given up requesting the payment which it made in advance in the entire year before filing the arbitration application, but did not try to take the goods.

5. The [Buyer]'s allegation ignored the legal facts to determine the legal relationship, and violated the basic legal principle of good faith. Because of the foreign trade agency system in China, in many international transactions, actual importers have to entrust foreign trade agency companies which have the foreign trade power to sign sales contracts with foreign companies. Although in a contract, the foreign trade agency company is described as the buyer, the contract is performed according to the relevant parties' intent before the performance; sometimes the foreign trade agency company is not entrusted with all of the essential rights and obligations of the actual buyer, and its rights and obligations are limited to some specified scope; in other words, the symbolic buyer is in the nature of a facilitator to perform the Contract. In this situation, a party bears the duty to keep the expressions consistent, so that the legal relationships are clear. The parties' aforesaid duties are based on the basic civil law principle of good faith.

The [Buyer] alleged that if there is a written contract, it shall be the only basis for determining the parties' rights and obligations. The [Seller] asserted that the [Buyer]'s aforesaid allegation is extremely incomplete and inconsistent with the laws. When a dispute arises regarding explanation of the rights and obligations of the parties, it cannot be determined mechanically regardless of the true intent of the parties when signing the contract. China ratified the United Nations Convention on Contracts for International Sales of Goods (CISG), and is a Contracting State. The general provisions of the CISG stipulate the principle of good faith in international trade. Article 8 of the CISG states:

"(1) For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was.

"(2) If the preceding paragraph is not applicable, statements made by and other conduct of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances.

"(3) In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties."

The [Buyer]'s aforesaid allegation is not consistent with this principle, so it is not established according to the laws.

The [Buyer] cited statements in Benjamin's Sale of Goods to show that it has the right to request the [Seller] to guarantee to deliver the goods to the [Buyer]. However, this statement is obviously based on the assumption that the consignee is the actual buyer. In this case, the [Buyer] was not the actual buyer, and neither did it have the subjective intent to take delivery of the goods, nor did it actually take delivery of the goods. Therefore, the precondition of the statement cited by the [Buyer] did not exist in this case, so the statement cannot be used as a basis for the [Buyer] to allege that the [Seller] breached the Contract. The end-user in this case is Shanghai Company; as to this, the [Buyer] clearly knew. The fundamental purpose of the Contract is to enable Shanghai Company to receive the goods in a timely manner. To some extent, the reason the [Seller] issued the Letter of Indemnity was to assist the actual buyer to realize the purpose of the Contract per its request.

The [Buyer] alleged that the focus of this case was that the [Seller] issued the Letter of Indemnity with the result that the [Buyer] could not take delivery of the goods with the original B/L. The [Buyer] mistakenly used an essential fact or concept: i.e., "could not take delivery" and "did not take delivery". The former is a description of objective facts, but the latter includes subjective factors. The [Buyer]'s claim is obviously inconsistent with the basic principle of prohibition of arbitrarily using rights in the laws of the PRC.

The [Seller] also presented a defense to the experts' legal opinions submitted by the [Buyer].

OPINION OF THE ARBITRATION TRIBUNAL

1. The applicable law

The Contract in this case was signed in China, and the arbitration place is also in China; in the written opinions, most of the parties' legal basis is the laws of the PRC; therefore, the Arbitration Tribunal holds that the laws of the PRC apply to this case.

2. Issues of the case

The facts are clear, and the parties have almost no dispute on them. The parties' disputes are over different legal opinions.

3. The parties' obligations and rights

The Contact is for an international sale of goods; the [Buyer] is Claimant, and the [Seller] is Respondent. The [Buyer] and the [Seller] have corresponding obligations and rights based on the Contract and the laws. The [Seller] alleged that in this MMA transaction, the [Buyer] was only entrusted to open the L/C, and was only a symbolic buyer, but not an actual buyer, and that the [Buyer]'s rights and obligations were limited to facilitating the performance of the Contract. The Arbitration Tribunal holds that this allegation of the [Seller] lacks legal basis. The foreign trade agency system, which the [Seller] cited many times, specifies rights and obligations of principal and agent in import and export trade. Obligations and rights of buyers and sellers in import and export trade shall be determined by import and export contracts. The two legal relationships are different; no law stipulates that the rights of an agent as the party of a sales contract shall be restricted, and that an agent shall not execute rights as buyer.

The [Seller] alleged that the [Buyer] was involved only at the final stage of the transaction in order to open the L/C. However, the Arbitration Tribunal holds that the [Buyer] through the bank opened the L/C and made the payment to the [Seller], which are the basic obligations of a buyer, and bore all risks in this transaction. A seller's basic right or fundamental purpose is to safely and timely receive the payment. In other words, no other step is more important to a seller than a buyer issuing a L/C and making payment.

The [Seller] did not agree that the parties' rights and obligations are determined only by the Contract, and alleged when a dispute arises regarding explanation of the rights and obligations of the parties, it cannot be resolved mechanically regardless of the true intent of the parties when signing the contract. The Arbitration Tribunal notes that the [Seller] emphasized many times that the [Buyer] was involved in this transaction at the final stage; therefore, there were not lots of direct contacts between the [Buyer] and the [Seller], so the parties' rights and obligations should be determined by written documents during the [Buyer] and the [Seller]'s short-term transaction. Without the [Buyer]'s written expression, the [Seller] arbitrarily determined that the [Buyer]'s true intent was to permit it to issue the Letter of Indemnity and instruct the carrier to release the goods without the B/L; this obviously disrespected the [Buyer]'s intent; therefore, the Arbitration Tribunal does not sustain the [Seller]'s aforesaid allegation.

Accordingly, when the [Buyer] performed its duty as the party to the Contract, the [Seller] should have performed with the [Buyer] but not the third party as the corresponding party

4. Whether the [Seller] breached the Contract

The [Seller] alleged that it had loaded the goods in accordance with the Contract, and also delivered the original B/L, which represents the ownership of the goods, to the [Buyer] through the bank and the [Buyer] received that, so the [Seller] fulfilled its duty to deliver the goods. The Arbitration Tribunal holds that the [Seller] actually performed its duty to load the goods, to which the [Buyer] did not object; however, although the [Seller] delivered the original B/L representing ownership of the goods to the [Buyer] through the bank, without the [Buyer]'s instruction, the [Seller] issued the Letter of Indemnity to the carrier requesting release of the goods to the third party, Shantou Company without presenting the B/L. Such conduct by the [Seller] was obviously inconsistent with its delivery of the original B/L with the result that the goods under the Contract were taken by the third party; the [Seller]'s delivery of documents was inappropriate and defective, so it is deemed that the [Seller] did not perform its duty to deliver the goods, and breached the Contract.

The [Seller] alleged that according to a seller's duty to deliver the goods stipulated in the CFR terms of Incoterms 1990, if the [Seller] delivers the goods on board at the loading port within the time stipulated in the Contract, and delivers the full set of original shipping documents to the [Buyer], it has fully performed the duty to deliver the goods. The Arbitration Tribunal holds that the [Seller] did not completely understand a seller's duty to deliver the goods under the CFR term. Item 8 of seller's duties under CFR is to deliver the documents "in order to enable buyer to take delivery of the goods from the carrier at the destination port." In this case, the [Seller]'s conduct caused the [Buyer] to be unable to take delivery of the goods with the original B/L; this is different from the situation in which natural disaster or other personal reasons cause Buyer to be unable to take delivery of the goods, and it is the [Seller]'s inappropriate conduct which caused the [Buyer] to be unable to take delivery of the goods.

The [Seller] alleged that on 10 March 1998 it faxed the B/L to the [Buyer], and at the left corner of the fax cover sheet it was written, "To: Mr. Chen Y, Shantou Company Light Industry Entity," so the [Seller] alleged that the [Buyer] impliedly agreed that Shantou Company take delivery of the goods without the B/L. The Arbitration Tribunal holds that the [Seller]'s aforesaid allegation is not established: first, these words did not state that Shantou Company would take delivery of the goods without B/L; second, the [Seller] issued the Letter of Indemnity requesting the carrier to release the goods on 13 March, so chronologically the [Buyer] could not know of this conduct on the part of the [Seller].

5. Issue of good faith

The [Seller] alleged that the [Buyer] neither went to take delivery the goods, nor claimed its right based on the original B/L, but claimed damages from the [Seller], which was not consistent with the principle of good faith. The Arbitration Tribunal holds that the payment method under the Contract is by L/C; when the [Seller] delivers the shipping documents strictly consistent with the L/C after the goods were loaded, it would safely receive the payment, which the fact proves. However, when the [Seller] could safely receive the payment under the Contract:

   -    On the one hand, the [Seller] alleged that it was Shanghai Company which initially contacted with it for this MMA transaction, and due to lack of foreign trade power, Shanghai Company contacted Shantou Company, which introduced Shenzhen Company to be involved in this transaction, but the [Seller] did not know the transaction terms among Shantou Company, Shenzhen Company and the [Buyer], and ignored the [Buyer]'s right;
 
   -    On the other hand, the [Seller] ignored each party's independence and conflict of interests, and ignored the risk, which the [Buyer] would bear when the goods were released without the B/L, but per Shanghai Company's request, issued the Letter of Indemnity requesting the carrier to release the goods.

This is obviously inconsistent with the principle of good faith. The [Seller] issued the Letter of Indemnity on the fourth day after the goods were loaded requesting the carrier to release the goods without the B/L. At that time, the original B/L had not arrived at the bank. When the [Buyer] obtained the original B/L on 24 March, the goods had been taken on 18 March. The [Seller] alleged that the [Buyer] did not go to take delivery of the goods; this allegation was obviously inconsistent with the chorological order, and legally meaningless. The [Buyer] is holding the original B/L and is entitled to claim damages from the carrier based on breach of the contract, or with the party who took the delivery based on infringement of the right. However, the [Seller] issued the Letter of Indemnity requesting the carrier to release the goods without the B/L, which constituted breach of the Contract. When this fact was confirmed by the [Buyer], the [Buyer] was also entitled to claim against the [Seller] for the relevant rights. The [Buyer] has discretion to choose the way to claim its right if it is not inconsistent with the laws.

6. The [Buyer]'s claims

The [Seller] issued the Letter of Indemnity instructing the carrier to release the goods without the B/L with the result that the [Buyer] could not take delivery of the goods, so the [Seller] breached the Contract, and shall compensate the [Buyer] for the relevant damages. The [Buyer]'s claim for refund of the payment is sustained. As to the loss of interest, the Arbitration Tribunal holds that the annual interest rate shall be 5%, and interest shall be calculated to the day when the payment is made. Regarding other loss and the attorneys' fee, the [Buyer] did not submit any relevant evidence, so the Arbitration Tribunal does not sustain this claim.

7. The arbitration fee and the arbitrator's actual expenses

Considering the facts of this case, the Arbitration Tribunal holds that the [Buyer] shall pay 10% of the arbitration fee, and the [Seller] shall pay 90%. The [Seller] shall pay the actual expenses of the arbitrator it appointed.

AWARD

According to the majority's opinion, the Arbitration Tribunal handed down the following award:

(1)   The [Seller] shall refund US $650,336.70 to the [Buyer];
 
(2)   The [Seller] shall pay the [Buyer] interest on the amount of US $650,336.70 in Item 1 from 10 June 1998 to the day when the payment is made at the annual interest rate of 5%.
 
(3)   The [Buyer]'s other claims are dismissed.

The [Buyer] shall bear 10% of the arbitration fee, and the [Seller] shall bear 90%. The [Seller] shall pay the actual expenses for the arbitrator which it appointed.

The [Seller] shall make one payment regarding the above amounts to the [Buyer] within 45 days of this award.

This is the final award.


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 Japan is referred to as [Seller]. Amounts in the currency of the United States (dollars) are indicated as [US $].

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

*** Meihua Xu, LL.M. University of Pittsburgh School of Law on an Alcoa Scholarship. She received her Bachelor of Law degree, with the receipt of Scholarship granted by the Ministry of Education, Japan, from Waseda University, Tokyo, Japan. Her focus is on International Business Law and International Business related case study.

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Pace Law School Institute of International Commercial Law - Last updated March 11, 2008
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