China 7 December 2000 CIETAC Arbitration proceeding (Refined white sugar case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/001207c1.html]
DATE OF DECISION:
DATABASE ASSIGNED DOCKET NUMBER: CISG/2000/14
CASE HISTORY: Unavailable
SELLER'S COUNTRY: France (respondent)
BUYER'S COUNTRY: People's Republic of China (claimant)
GOODS INVOLVED: Refined white sugar
PEOPLE'S REPUBLIC OF CHINA: China International Economic & Trade Arbitration
Commission (CIETAC) (now South China Branch) 7 December 2000 (Refined white sugar case)
Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/112],
CLOUT abstract no. 1103
Reproduced with permission of UNCITRAL
A Chinese buyer signed a contract with a French seller for the purchase of fine white cane sugar. Afterwards, the buyer signed a resale contract for the same goods with a client in China. After the date of delivery expired and despite repeated requests from the buyer, the seller refused to make the delivery, which prevented the buyer from honouring the contract for the resale. The buyer therefore initiated arbitration proceedings and requested the Arbitration Tribunal to order the seller to pay the costs, including the loss of profit from the premium in the resale contract caused by the breach of contract by the seller, the cash deposit for the performance bond for the contract, the penalty for breaching the contract and the compensation that the buyer must pay to its client for breaching the contract for resale.
The parties had not chosen a law to govern disputes. The Tribunal held that the CISG would be applicable, since the place of business of both parties was in States Parties to the Convention, and the parties did not rule out in the contract the applicability of the Convention.
The Tribunal held that the seller's failure to deliver the goods was a clear breach of contract. In accordance with Article 74 of the Convention, the Tribunal ruled that the seller should compensate the buyer, with interest, for the damages suffered, but the seller would only be responsible for the losses it had been aware of or ought to have been aware of at the time when the contract was signed. The Tribunal supported the claim made by the buyer for the loss of profit from the premium in the resale contract.
Concerning the cash deposit for the performance bond, the Tribunal held that there was no ground for the buyer to demand that the seller should pay the performance bond, and therefore it did not support the claim.Go to Case Table of Contents
APPLICATION OF CISG: Yes [Article 1(1)(a)]
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
74A ; 74A1 ; 74B [General rules for measuring damages: loss suffered as consequence of breach; Includes loss of profit; Outer limits of damages: foreseeability of loss as possible consequence of breach at time of conclusion of contract]
74A ; 74A1 ; 74B [General rules for measuring damages: loss suffered as consequence of breach; Includes loss of profit; Outer limits of damages: foreseeability of loss as possible consequence of breach at time of conclusion of contract]
CITATIONS TO OTHER ABSTRACTS OF DECISION
CITATIONS TO TEXT OF DECISION
Original language (Chinese): Unavailable
Translation (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
UnavailableGo to Case Table of Contents
|Case text (English translation)|
Refined white sugar case (7 December 2000)
Translation [*] by Meihua Xu [**]
Edited by John Zhu [***]
The China International Economic Trade and Arbitration Commission Shenzhen Sub-Commission (hereafter, the "Shenzhen Sub-Commission") accepted the case on 11 December 1998 according to:
|-||The arbitration clause in the sales contract signed by Claimant [Buyer], China __ Trade Company, and Respondent [Seller], __ Company of France on 29 October 1994; and
|-||The written arbitration application submitted by [Buyer].|
The Arbitration Rules of the Arbitration Commission (hereafter, the "Arbitration Rules"), which became effective on 10 May 1998 are applicable to this.
On 15 March 1999, the [Seller] raised objection to the Shenzhen Sub-Commission's jurisdiction over this case. On 17 June 1999, the Arbitration Commission made an (xx) Mao Zhong Zi No. __ Decision on Jurisdiction, concluding that the Shenzhen Sub-Commission had jurisdiction over the case and that the arbitration process shall be continued.
On 12 July 1999, Mr. X, the arbitrator appointed by the [Buyer], Ms. Z, the arbitrator appointed by the [Seller], and the Presiding Arbitrator C, who was appointed by the Chairman of the Shenzhen Sub-Commission since the two parties failed to jointly appoint or ask the Chairman of the Arbitration Commission to appoint a Presiding Arbitrator within the stipulated time, formed the Arbitration Tribunal to hear this case.
Due to the complexity of the case, on 12 April 2000, the Secretary General of the Shenzhen Sub-Commission agreed to postpone the deadline for handing down the decision to 12 October 2000.
On 14 August 2000, the Arbitration Tribunal held a court session in Shenzhen. The agents of the two parties attended. The Arbitration Tribunal heard the parties' statements and arguments and made investigations on related facts of this case.
On 21 September 2000, as requested by the Arbitration Tribunal, the Secretary General of the Shenzhen Sub-Commission made another postponement for handing down the decision on this case to 12 December 2000.
On 7 December 2000, the Arbitration Tribunal handed down its award by majority.
The following are the facts, the Tribunal's opinion and award.
On 29 October 1994, the [Buyer] and the [Seller] signed a sales contract for refined white sugar (hereafter, the "Contract") with the following terms:
|-||Goods: Grade A refined white sugar originating in Brazil, South America;|
|-||Quantity: 25,000 tons;|
|-||Price: The unit price is US $300/ton CNF, totaling US $7,500,000;|
|-||Destination port: Lianyungang, China;|
|-||Shipping term: The [Seller] shall finish loading within ten days at latest no more than twenty-five days of the receipt of L/C;|
|-||Quality: Polarization: 99.80% minimum; moisture: 0.04% maximum; ash: 0.04% maximum; incumsa:45RBU Maximum; granulation: 100% fine; solubility: 100% free flowing; color: crystal sparkling white.|
Article 15 of the Contract stipulates that after the [Buyer] issues an irrevocable L/C for US $7,500,000, the [Seller] shall issue a performance bond for US $130,000 within ten bank business days; otherwise, the [Seller] shall pay US $130,000 to the [Buyer] immediately.
Article 24 of the Contract stipulates that the L/C shall be issued on or before 20 November 1994, and the [Seller] shall pay a penalty for delay in loading at 1.5% of the entire price/week unless the delay was caused by force majeure.
The arbitration clause in the contract states that any dispute in connection with this contract shall be settled by negotiation; if negotiation fails, the dispute shall be submitted for arbitration to the Foreign Trade Arbitration Commission of the China Council for the Promotion of International Trade.
During the performance of the contract, the two parties had a dispute, and the [Buyer] filed an arbitration application with the Shenzhen Sub-Commission based on the arbitration clause in the Contract.
POSITION OF THE PARTIES
The [Buyer] alleges that:
After the conclusion of the Contract, the [Buyer] signed a resale contract (hereafter, "Resale Contract") with Henan __ Foods Company (hereafter, H Company) on 7 November 1994, by which the [Buyer] agreed to resell 25,000 tons of import Grade A white sugar at a unit price of renminbi [RMB] 4,400/ton. The goods' name and quantity in the Resale Contract are the same as those in the Contract in this case. Based on the Resale Contract and under the condition that the [Seller] fulfill its contract obligations, the [Buyer] would earn a gross profit of RMB 1,846.91/ton. Deducting import tax, value added tax, and port expenses, the [Buyer] would have earned a net profit of RMB 478.04/ton, totaling RMB 11,951,000.
On 17 November 1994, the [Buyer] asked the Bank of China to issue a L/C with the [Seller] as the beneficiary. On 21 November 1994, the two parties reached an agreement through negotiation and on 22 November 1994, the [Buyer] asked the Bank of China to modify the L/C. Later, the [Buyer] urged the [Seller] to deliver the goods, which was rejected by the [Seller]. Due to the [Seller]'s severe contract violation, the [Buyer] suffered losses including:
|-||The contract violation compensation of RMB 8,800,000 that the [Buyer] had to pay to its client;|
|-||The L/C issuance fee of RMB 72,381.09; and|
|-||Loss of profit of RMB 11,951,000 based on the price difference.|
The [Buyer] alleges that the [Seller] violated the Contract and the applicable law by failing to deliver the goods to the [Buyer]. Since the [Seller] severely violated the Contract, it should be liable for the entire losses of the [Buyer].
The [Buyer] seeks to have the Tribunal rule that:
In its material submitted on 7 November 2000, the [Buyer] withdrew its third and fourth claims.
As the agent of the [Seller]'s liquidator, Attorney S, attended the court session, and in the document submitted to the Arbitration Tribunal, Attorney S alleged that:
|-||On 30 October 1998, at the [Seller]'s shareholders special meeting, it was decided to dissolve France F Company (the [Seller]);|
|-||On 31 October, the [Seller] went into liquidation;|
|-||On 29 December 1998, as requested by court, a dissolution statement was released in the newspaper designated by the court for the first time;|
|-||On 31 December 1998, the [Seller] submitted a dissolution application to court after completing the liquidation process;|
|-||On 17 March 1999, the [Seller] announced the completion of the liquidation process in the newspaper for the second and the last time;|
|-||On 10 December 1998, during the dissolution process, the [Buyer] filed the arbitration application;|
|-||On 16 January 1999, the arbitration application was sent to the [Seller]'s legal address;|
|-||On 16 February, via Q Law Firm of France (hereafter, "Q Law Firm"), the arbitration application was forwarded to London F Europe Group Company (hereafter, "E Company");|
|-||On 24 March, the Higher Business Court of Paris notified Q Law Firm that the [Seller]'s company had been dissolved.|
The [Seller]'s company was a limited liability company. Based on the provisions of the company law, the responsibility of the shareholders of a limited liability company are limited to the amount of investment they made therein, and the company is responsible for the company's debt based on its entire assets.
Each step of the dissolution and liquidation was performed based on the law of France. Since the entire procedure for company dissolution has been completed and the [Seller]'s company has been dissolved, the [Buyer] filed an arbitration application against a non-existing company. After knowing the situation, the Arbitration Tribunal continued the arbitration process and even made a decision, which is meaningless and will violate the interest of the [Buyer]. Even though the [Seller]'s qualification as a legal person could be restored through legal procedure, this has little meaning since there were only 82,000 francs [FR] remaining in the account after liquidation.
It needs to be mentioned that during the liquidation process, no shareholder had priority to receive payment, and the [Seller] did not distribute the remaining asset to other creditors without considering the [Buyer]'s interest. As a general principle, the persons who perform the liquidation -- accountant, attorneys, and employees -- have priority to be paid over common creditors. Therefore, even though there were 82,000 FR in the account, the [Buyer] would not be paid first. As long as the [Buyer] fails to prove that the [Seller] committed fraud in the audit, it would not be paid even if it were able to restore the [Seller]'s qualification as a legal person. The dissolution of the [Seller]'s company was a common business action, which had nothing to do with the dispute in this case.
The [Seller] did not commit intentional fraud or severe mistakes, therefore, it should not bear any liability. The [Seller] was aware that it had no experience in dissolution or liquidation and that it was not a professional; therefore, in order to avoid mistakes during the liquidation process, the [Seller] entrusted a law firm in France to perform this process, which indicated that the [Seller] had performed to the best of its ability. The [Seller] did not distribute assets to others which should have been distributed to the [Buyer].
In addition, after receiving the [Buyer]'s arbitration application, the [Seller] did not discontinue the dissolution and liquidation process for the following reasons:
|-||It was the position of the law firm in France that the process could be continued based on trade usages;|
|-||There is no clear stipulation in France law regarding the issue of whether the process should be terminated;|
|-||Q Law Firm deemed that the [Buyer]'s credit was contingent and indefinite;|
|-||Processing a case involving arbitration could take a long period of time;|
|-||To maintain a company needed to satisfy the requirements for legal formality would involve a huge cost;|
|-||Prolonging the liquidation process would result in violation of other creditors' rights;|
|-||More importantly, the [Seller] had no assets to be distributed to the [Buyer] at that time. Even if the [Buyer]'s right as a creditor was confirmed, it would have no meaning at all.|
Mr. MK, the former president of the [Seller], should not bear any personal liability. Mr. MK signed the Contract with the [Buyer], which was a normal business action and was for the interest of the company but not himself. In June 1997, Mr. MK resigned his position, and the two parties had not contacted each other since January 1995. Mr. MK had reason to believe that this matter had been settled. Another person had been in charge of the procedures in detail after the conclusion of the Contract. The [Buyer] failed to file its arbitration application until four years later; therefore, it should be responsible for the damages result from the delay in filing the arbitration application. Mr. MK was not a party to the contract; therefore, he should not bear the compensation liability himself.
The Arbitration Tribunal's jurisdiction was based on the arbitration clause signed by the two parties, therefore, it has binding effect only on those two parties but not a third party. In other words, the Arbitration Tribunal should not make decision or award to a third party other than the two parties in this case. In the instant case, since the [Seller]'s company does not exist, even though the [Seller] or the former president made mistakes, they should not be held liable because as stated above, the Arbitration Tribunal's jurisdiction was based on the Contract; therefore, the Arbitration Tribunal could not make a decision that a third person be responsible for compensation by infringement other than based on the arbitration clause in the Contract.
The [Buyer] is alleging a loss of net profit for price difference after tax deduction, i.e., RMB 11,951,000, which is not acceptable. In accordance with Article 19 of the Law of the PRC on Economic Contracts Involving Foreign Interest and Article 74 of the United Nations Convention on Contracts for the International Sales of Goods (hereafter, the "CISG"):
"Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract."
Based on the price for sugar at international and domestic markets at the conclusion of the contract, the [Seller] was unable to foresee that the [Buyer] could resell the goods at a price much higher than the market price, receiving a profit of almost one-fold of the total contract price; therefore, the [Seller] cannot compensate the [Buyer]'s huge profit which [Buyer] alleges could have been earned by performing this contract.
It was stipulated in the contract that the performance bond would be refunded after the performance of the contract. Since this is not an actual loss of the [Buyer], the [Buyer] should not ask for compensation. A performance bond also works as liquidated damages. Based on the stipulations in Contract Law and the CISG, the [Seller] is not liable for the performance bond after compensating the damages of the [Buyer]. The performance bond and compensation for damages cannot be employed at the same time, and only one can be asked for.
The attorneys' fee should not be included in the damages. Generally, Chinese courts and arbitration organizations do not support claims for attorneys' fee. The [Buyer] did not list the L/C issuance fee in the arbitration claim; therefore, it cannot ask the [Seller] to make compensation for this cost.
IV. OPINION OF THE ARBITRATION TRIBUNAL
(1) The applicable law
The two parties failed to stipulate the applicable law in the contract. The [Buyer] is a company registered in China and the [Seller] is a company registered in France. Both China and France are Contracting States of the CISG and the two parties did not exclude the application of the CISG in the contract; therefore, the Arbitration Tribunal deems that the CISG should be the applicable law.
(2) Facts ascertained by the Arbitration Tribunal
After the conclusion of the contract, on 17 November 1994, the [Buyer] asked the Bank of China Henan Branch to issue a L/C with the [Seller] as the beneficiary. The total amount in the L/C was US $7,500,000 and the shipping period was no later than 25 November 1994.
Evidence shows that the [Buyer] and the [Seller] had negotiated modifications to several clauses in the L/C. On 21 November 1994, Mr. Y of the [Seller] sent a letter to the [Buyer], asking to make modifications to several clauses in the L/C. The [Buyer] listed the modifications on the L/C in its replying letter sent to the [Seller] on the same day, asking the [Seller]'s confirmation. On 24 November 1994, the [Buyer] made the following modifications on the related clauses in the L/C through L/C issuing bank:
On 20 December 1994, the [Buyer] sent a letter to the [Seller] asking the [Seller] to issue the performance bond and fax the loading notice to the [Buyer]; however, the [Seller] failed to fulfill the obligation to deliver the goods in accordance with the Contract.
On 6 January 1995, Mr. Y of the [Seller] sent a letter to the [Buyer], asking to modify the loading date of the L/C to the end of February. On 15 January 1995, the [Buyer] rejected the aforesaid request of the [Seller], alleging that the [Buyer] was to claim compensation from the [Seller] based on the Contract and the L/C. The [Seller] failed to deliver the goods under the Contract to the [Buyer].
(3) The Arbitration Tribunal's analysis and judgment on the arbitration claim
The Contract was concluded based on the two parties' friendly negotiation. The Arbitration Tribunal holds that this Contract is legal and effective and binding on the two parties. The [Seller] obviously violated the Contract by failing to deliver the goods. Pursuant to Article 74 of the CISG, the [Seller] should compensate the damages suffered by the [Buyer], including loss of profit. However, the [Seller] shall only be liable for the damages which it foresaw or ought to have foreseen at the conclusion of the contract.
The [Buyer] submitted the Resale Contract it entered into with H Company on 7 November 1994, by which the [Buyer] was to resell 25,000 tons of Grade A white sugar to H Company at a unit price of RMB 4,400/ton, totaling RMB 11,000. Based on this contract, the [Buyer] asks the [Seller] to pay its loss of profit of RMB 11,951,000.
The [Seller] alleges that, based on the price for sugar at international and domestic markets at the time of the conclusion of the contract, the [Seller] was unable to foresee that the [Buyer] could resell the goods at a price much higher than the market price, receiving a profit almost one-fold of the total price of the Contract; therefore, the [Seller] cannot compensate the huge profit under this Contract.
The Arbitration Tribunal notes that the [Seller] did not provide evidence showing the domestic market price for sugar at the time of the conclusion of the contract. However, the evidence provided by the [Buyer] showed that from October to December 1994, the price for sugar in Henan Province, China, remained at RMB 3.30/500g, i.e., RMB 6,600/ton. However, the price in the Resale Contract signed by the [Buyer] and H Company was much lower than the then market price. Therefore, the [Seller]'s aforesaid allegation is not acceptable.
Evidence shows that the [Buyer]'s cost for importing sugar included import price of US $300, import customs tax, value added tax, and other expenses, which amounted to RMB 3,921.96 based on an exchange rate of 8.5103. Thus, in accordance with the Resale Contract, the [Buyer] should have received a profit of RMB 478.04/ton, totaling RMB 11,951,000. The Arbitration Tribunal holds that the [Seller] shall be liable for this loss of the [Buyer].
As to the [Buyer] claim to have the [Seller] pay the performance bond, i.e., US $130,000 based on the Contract, the Arbitration Tribunal deems that the Contract requires the [Seller] to provide a performance bond prior to the delivery of the goods, which was to guarantee that the [Seller] perform its obligation to deliver the goods. Since the [Seller] failed to deliver the goods to the [Buyer], and the [Buyer] is asking a compensation on loss of profit, but not an actual performance of the contract, therefore, the [Buyer]'s claim for the performance bond has no basis, and is not acceptable.
In accordance with article 59 of the Arbitration Rules, the [Buyer]'s claim for an attorneys' fee of RMB 370,000 is reasonable. It does not exceed 10% of the award, and should be accepted.
As to the [Seller]'s qualification as a subject, the Arbitration Tribunal notes that the Shenzhen Sub-Commission accepted this case on 11 December 1998. As entrusted by the [Seller], on 12 March 1999, Q Law Firm sent a letter to the Shenzhen Sub-Commission, confirming that it had received the arbitration notice on 26 January 1999 and appointed an arbitrator, which indicated that the [Seller] had not completed the liquidation process at that time, but was actively involving in the arbitration. The [Seller] alleges that its company has been dissolved, that the [Buyer] filed an arbitration claim against a dissolved and non-existing company, and that the Arbitration Tribunal continued the arbitration process after knowing the situation, even made a decision. [Seller] alleges that this is in fact meaningless and damages the interest of the [Buyer].
After investigation, the Arbitration Tribunal ascertained that when the [Buyer] filed the arbitration claim, the [Seller] was performing the liquidation, but the liquidation had not been announced. The Arbitration Tribunal's role is to process and rule on the arbitration claim of the applicant. As to the issues of whether the [Seller] has assets to execute the award or whether its shareholders shall be liable, they are beyond the jurisdiction of the Arbitration Tribunal; therefore, the [Seller]'s aforesaid allegations cannot be established.
The [Buyer] alleges that as the shareholders of the [Seller], F Import and Export Company and E Company suddenly decided to dissolve and liquidate the [Seller]'s company under the circumstance that they were aware of the dispute between the [Buyer] and the [Seller] and that the [Seller] was making profit, therefore, the purpose for dissolution of the [Seller] was to avoid the debt, with the result, the [Buyer] would be unable to hold the [Seller] liable for the damages it suffered. Therefore, the [Buyer] asks the Tribunal to add F Import and Export Company and E Company as respondents.
The Arbitration Tribunal notes that the Shenzhen Sub-Commission accepted this case based on the arbitration clause in the Contract of this case, and F Import and Export Company and E Company are not the parties to that contract. Therefore, the Arbitration Tribunal has no jurisdiction over the dispute with them. As to the [Buyer]'s claim that F Import and Export Company and E Company infringed the interest of the [Buyer] during liquidation, the Arbitration Tribunal holds that the [Buyer] should resolve that issue by other legal methods.
[Seller] shall bear the entire arbitration fee of RMB 212,100.
III. THE AWARD
Based on the aforesaid facts and the Arbitration Tribunal's opinion, the Tribunal rules that:
|(1)||[Seller] shall pay RMB 11,951,000 to the [Buyer] within thirty days of this award and compensate the [Buyer]'s attorneys' fee of RMB 370,000;
|(2)||[Buyer]'s other claims are dismissed;
|(3)||[Seller] shall bear the entire arbitration fee.|
This is the final award.
Presiding Arbitrator: ___
7 December 2000 in Shenzhen
* 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] and Respondent of France 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]; amounts in the currency of France (francs) are indicated as [FR].
** 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 a 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.
*** John Zhu, LL.M. China University of Political Science and Law on a national graduate scholarship. He received his Bachelor of Law degree from Southwest University of Political Science and Law and Double Degree of English Literature from Sichuan International Studies University in Chongqing, China. His focus is on International Economic Law.Go to Case Table of Contents