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CISG CASE PRESENTATION

China 4 February 2002 CIETAC Arbitration proceeding (Styrene monomer case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/020204c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20020204 (4 February 2002)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Han, Jian (presiding arbitrator), Qiu, Nanzhu and Li, Hai

DATABASE ASSIGNED DOCKET NUMBER: CISG/2002/03

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Singapore (claimant)

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

GOODS INVOLVED: Styrene monomers


UNCITRAL case abstract

PEOPLE'S REPUBLIC OF CHINA: China International Economic & Trade
Arbitration Commission (CIETAC) 4 February 2002 (Styrene monomer case)

Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/99],
CLOUT abstract no. 986

Reproduced with permission of UNCITRAL

Abstract prepared by Lachmi Singh

This case deals primarily with breach of contract by failing to open a letter of credit (L/C) within the additional time fixed and the seller's right to avoid the contract in case of fundamental breach.

The parties entered into a contract for the sale of styrene monomer under a CFR term (cost and freight). Under the contract, payment was to be made by irrevocable L/C which would be negotiated within 90 days of the issuance of the bill of lading. Shipment of the goods was to take place in February 2001, and the L/C had to be issued before 18 February 2001. The contract provided that the seller may extend the L/C issuing period or claim damages if the buyer failed to issue the L/C. The buyer refused to issue the L/C stating that the market conditions had changed. Subsequently, the seller agreed to postpone the shipment, and extended the L/C issuance date, but the buyer continued to assert price issues and other issues. Since the goods were susceptible to deterioration if stored in high temperatures over a prolonged period of time, the seller sought to mitigate the loss by reselling them to another buyer, then commenced arbitration. Alleging fundamental breach by the buyer, the seller sought damages for economic loss and interest.

The buyer argued that it had not refused to issue the L/C but merely asked for a postponement which cannot be a fundamental breach because the buyer did not deprive the seller of what it was entitled to expect under the contract. The buyer argued that it was unaware that the seller had resold the goods to another buyer and, believing that the contract could be performed, the buyer had already resold the goods to its own customer. The buyer counterclaimed for damages for breach of the contract with the third-party customer and for the expenses incurred in performing the third-party contract.

The arbitral tribunal found that the buyer had breached the contract by failing to open the L/C within the stipulated time in accordance with the contract. The tribunal substantiated the buyer's duty to pay the price under the CFR term (INCOTERMS 2001), and cited articles 53, 54 and 59 CISG on the buyer's obligation to pay the price and comply with payment formalities. The tribunal also referred to articles 25, 63(1) and 64 CISG on fundamental breach of contract and seller's right to avoid the contract.

Ultimately, the tribunal found that the buyer had continued to refuse to perform its obligations even after an additional period of time was set by the seller and, accordingly, the seller was entitled to avoid the contract. Under articles 61, 74 and 75 CISG, the tribunal ordered the buyer to compensate the seller for its loss and pay interest on the damages owed.

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Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 25 ; 26 ; 63(1) ; 64 ; 74 ; 75 ; 77 ; 78 [Also cited: Articles 53 ; 54 ; 59 ; 61 ]

Classification of issues using UNCITRAL classification code numbers:

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

26A1 [Effective declaration of avoidance: notice to the other party required];

63A [Notice fixing additional final period for performance: additional final period for buyer's performance];

64A [Grounds for avoidance];

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

75A1 [Damages established by substitute transaction after avoidance: resale by aggrieved seller];

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

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

Descriptors: Fundamental breach ; Avoidance ; Nachfrist ; Damages ; Cover transactions ; Mitigation of loss ; Interest

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Editorial remarks

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

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

Styrene monomer case (4 February 2002)

Translation [*] by Meihua Xu [**]

Translation edited by William Zheng [***]

The China International Trade and Economic Arbitration Commission Shenzhen Commission (hereafter, the "Shenzhen Commission") accepted the case according to:

   -    The arbitration clauses in Sales Contract No. 1015 signed by Claimant [Seller], Singapore __ Chemical Products Company, and Respondent [Buyer], China __ Chemical Business Company (Case Number: SHENR2001063); and
 
   -    The written arbitration application submitted by [Seller].

The Shenzhen Commission sent the arbitration application, the evidence, and the arbitration material to the [Buyer], and the [Buyer] submitted an arbitration defense, counterclaim application, and evidence.

On 30 August 2001, Qiu, Nianzhu, the arbitrator appointed by the [Seller], Li, Hai, the arbitrator appointed by the [Buyer], and Han, Jian, the Presiding Arbitrator appointed by the Chairman of the Arbitration Commission because the two parties failed to jointly appoint or ask the Chairman of the Arbitration Commission to appoint one, formed the Arbitration Tribunal to hear this case.

After discussing with the Secretariat of the Shenzhen Commission, the Arbitration Tribunal decided to hold a court session on 16 October 2001. The Secretariat of the Shenzhen Commission sent to the two parties in time the notice of formation of the Arbitration Tribunal and the court session notice.

The court session was postponed to 9 November 2001 due to certain reasons. The Secretariat of the Shenzhen Commission sent the court session postponement notice to the two parties in time.

On 9 November 2001, the court session was held in Shenzhen. Both partied attended the court session. They made statements and arguments. The Arbitration Tribunal asked questions, made investigations, and verified related evidence.

After consultation, the Arbitration Tribunal handed down its award. The following are the facts, the Tribunal's opinion and award.

I. FACTS

On 2 February 2001, the [Buyer] and the [Seller] signed Sales Contract No. 1015 (hereafter, "the Contract") with the following terms.

   -    Goods: Styrene monomer;
   -    Quality: Satisfy the requirements set forth in the latest version of ASTM D2827;
   -    Quantity: 3,000 tons, [Seller] has the right to plus or minus load 5% of the goods;
   -    Price: US $670/ton, CFR Zhuhai;
   -    Payment terms: Irrevocable L/C, which will be negotiated within 90 days of the issuance of the B/L;
   -    Shipment: in February 2001, ship from port in Korea;
   -    Packaging: bulk;
   -    Demurrage charges and loading time: Reference to Ship Rental Contract SHINC;
   -    Inspection: At the loading port, the [Seller] shall appoint the inspector and bear the cost incurred thereof; At the unloading port, the [Buyer] shall designate the inspector and bear the cost incurred thereof; The quality and quantity of the goods should be confirmed based on the tanks at the port of arrival;
   -    Special term: Unless otherwise specified, INCOTERMS latest edition apply when not in contradiction to our general terms and conditions.
   -    Arbitration: Any dispute or compensation claim arising from or in connection with the performance of the contract shall be settled by negotiation. If the negotiation fails, the claims shall be submitted to China International Economic & Trade Arbitration Commission and arbitrated based on the Arbitration Rules of the PRC by applying Chinese law. The decision of the Arbitration Commission should be final and has binding effect on the two parties. The arbitration fee shall be borne by the losing party;
   -    Attachment: A workable L/C has to be opened by the latest on 18 February 2001 and this is an integral part of this contract; in case the L/C has not been opened within the stipulated deadline, then the [Buyer] is considered in default of this contract and the [Seller] reserves the right to either extend the L/C opening deadline or declare the [Buyer] in default of his contractual obligation and claim for damages.

During the performance of the contract, the parties had a dispute. The [Seller] filed an arbitration application with the Shenzhen Commission based on the arbitration clause in the Contract.

[Seller]'s claim

The [Seller] claims that:

   (1)  [Buyer] should pay [Seller] US $450,000 of economic loss due to its fundamental breach of the Contract;
 
   (2)  [Buyer] should pay the interest on the aforesaid US $450,000 from 18 February 2001 to October 2001, i.e., US $17,300, to the [Seller] (based on the loan interest rate announced by the Bank of China for the same period);
 
   (3)  [Buyer] should bear the arbitration fee, attorneys' fee, and traveling expenses incurred by the [Seller] for filing the arbitration application;

At the court session, the [Seller] requested to modify the interest calculation period to "from 1 March 2001 to 31 December 2001" for the following reason:

The interest should be calculated from 28 February 2001, and modifying it to 1 March was just for easy calculation; the ending date of the interest should be modified to 31 December 2001 because the Arbitration Tribunal would probably hand down the decision on that day.

[Buyer]'s defense and counterclaim

The [Buyer] defended the [Seller]'s arbitration claim and counterclaims that:

   (1)  [Seller] should pay the [Buyer] renminbi [RMB] 3,240,000, which the [Buyer] has paid to its domestic client as contract violation fee due to the [Seller]'s unilateral termination of the contract;
 
   (2)  [Seller] should pay the [Buyer] RMB 360,000, which the [Buyer] has paid as Tank Rental Contract violation fee due to the [Seller]'s unilateral termination of the contract;
 
   (3)  [Seller] should bear the arbitration fee, attorneys' fee, and traveling fee incurred by the [Buyer] for the arbitration claim.

The disputes between the parties are:

[POSITION OF THE PARTIES]

[Seller]'s position

The [Seller] alleges that:

On 2 February 2001, the [Buyer] and the [Seller] signed the Contract by friendly negotiation with the following terms:

   -    Goods: The [Seller] was to sell 3,000 tons of styrene monomer to the [Buyer]; the [Seller] has the right to plus or minus load 5% of the goods;
   -    Price: US $670/ton CFR Zhuhai;
   -    Shipment: in February 2001, shipping from port in Korea;
   -    Payment: by irrevocable L/C, which should be paid within 90 days of the B/L date;
   -    Attachment: "A valid L/C shall be issued before 18 February 2001, which is an indivisible part of the Contract. The [Buyer] is in violation of the contract if it fails to issue the L/C on time. In this event, the [Seller] is entitled to extend the L/C issuing period or declare that the [Buyer] has failed to perform its contract obligation, and the [Seller] may claim damages from the [Buyer]";

In addition, the Contract had stipulations on the quality of the goods, documents, packaging, and inspection issues.

However, after the conclusion of the contract, the [Buyer] asked to have the price of the goods lowered and for postponement of the shipment deadline and refused to issue the L/C as stipulated in the Contract, stating that the market had changed.

In order to perform the Contract, the [Seller] negotiated with the [Buyer] orally or by written document, and expressed that it would lower the price, however, the negotiation failed due to the [Buyer]'s violation on good faith principle and its harsh conditions.

Since the contract product, styrene monomer, is an easily polymerized chemical product, it would be polymerized if stored at high temperature for a long period of time. For the benefit of both the [Buyer] and the [Seller] and to mitigate the loss, the [Seller] (it was indicated as the Buyer in the original text) resold the goods to S Company in Korea at US $495/ton on 26 April 2001 in accordance with the Contract Law of the PRC and the CISG. Due to market changes, the resale caused severe economic loss to the [Seller].

The [Seller] asserts that the Contract in this case was formed by friendly negotiation, and reflects the true intentions of the two parties. The Contract was formed legally and had binding effect. The two parties should perform the contract obligations strictly. The [Buyer]'s refusal to issue the L/C has violated the obligations stipulated by the Contract and law, which has constituted a fundamental breach of the contract, and the [Buyer] shall be liable for the damages occurred thereof.

[Buyer]'s defense

The [Buyer] counter argues:

- [Buyer]'s statement of facts

[Buyer] believes the following facts can be basically supported:

1. The [Buyer] and the [Seller] signed a 3,000 tons 5% more/less contract on 2 February 2001 with the following terms:

"A workable L/C has to be opened by latest 18 February 2001 and this is an integral party of this contract; in case the L/C has not been opened within the stipulated deadline, then the [Buyer] is considered in default of this contract and the [Seller] reserves the right to either extend the L/C opening deadline or declare the [Buyer] in default of his contractual obligation and claim for damages."

The Contract was effective on the day of conclusion.

2. On 9 February 2001, the [Buyer] faxed to the [Seller], asking whether it was possible to postpone the loading date because the tanks in Zhuhai were all occupied due to the slump in the domestic market; otherwise, the ship could not be unloaded even it arrived at the port, which would be much trouble for both parties.

3. The [Buyer] did not issue an effective L/C before 18 February 2001 because the [Buyer] was negotiating the postponement of the shipping period with the [Seller].

4. The [Seller] did not execute its right to terminate the contract, and on 19 February 2001, the [Seller] faxed to the [Buyer], discussing the shipment postponement issue.

5. From 9 March 2001 to 5 April, the [Buyer] and the [Seller] were negotiating the performance of the contract. The [Buyer] was asking to continue to perform the contract, and agreed to make certain compensation to the [Seller].

6. On 6 April 2001, the [Seller] called the [Buyer], asking it to sign on the Reconciliation Agreement for the dispute drafted by the [Seller] before 2 p.m. on that day.

7. At 2:20 p.m, on 6 April 2001, Li, Qiong, an employee of the [Buyer], made modifications on long term supply and the shipping period, and signed and faxed the agreement to the [Seller]'s Guangzhou Office.

8. After receiving the aforesaid fax, the [Seller] asked the legal representative of the [Buyer], Zhang, Peidi, to sign the agreement. Later, Zhang, Peidi signed the agreement twice and faxed the documents to the [Seller].

9. On 27 April 2001, without termination of the Contract, the [Buyer] resold the 3,000 tons of goods purchased from the [Seller] to Dongling Chemical Company of Fangchun District, Guangzhou, (hereafter, "Dongling Company") at the local price.

10. On 30 April 2001, the [Buyer] signed a storage agreement with Zhuhai City Oil Company for the storage of the 3,000 tons of goods purchased from the [Seller].

11. On 26 July 2001, the [Buyer] acknowledged that the [Seller] had filed an arbitration application for the dispute in this case and had resold the goods. The [Seller] indicated that it was not going to perform the Contract. Under this circumstance, the [Buyer] had to send a letter to the [Seller], terminating the Contract.

[Buyer]'s reasoning

The [Buyer] alleges that:

1. Although the [Buyer]'s delay in issuing the L/C was a contract violation, it was not a fundamental breach of the contract for the following reasons:

      (1) First, the [Buyer] agrees with the [Seller] that the contract was formed legally and was effective, which means that it was also the [Buyer]'s position that the Contract had binding effect on both parties, and that the two parties should perform this valid and effective contract.

      (2) However, the [Buyer] violated the contract by delaying the issuance of the L/C, but not by refusing to issue the L/C as alleged by the [Seller].

      (3) The [Buyer] asked for postponement of issuance of the L/C because the deadline for performing the Contract was close, and the Contract could not be performed on time due to the lack of tanks. The [Buyer] had never indicated that it was not going to perform the contract, or that it would not issue the L/C, and the [Seller] had never executed its right to avoid the contract, but was negotiating the loading postponement issue with the [Buyer]. The [Buyer] did not refuse to perform the contract, but was making effort to perform the contract.

      (4) A fundamental breach of the contract means that a breach of contract committed by one party substantially deprived the other party of what he is entitled to expect under the contract. The [Buyer] did not refuse to issue the L/C, but was asking a postponement, which did not deprive the [Seller] of what it is entitled to expect under the Contract; therefore, the [Buyer] did not fundamentally breach the contract.

2. The damages claimed by the [Seller] have no causation relationship with the [Buyer]'s breach of contract. They were caused by the [Seller]'s improper exercise of reselling right without terminating the contract.

The damages claimed by the [Seller] were caused by the resale of the goods. In addition, the [Seller] alleges that it was entitled to resell the goods pursuant to Article 75 of the United Nations Convention on Contracts for the International Sales of Goods (hereafter, "the CISG"). That is a misinterpretation of the law. Article 75 of the CISG stipulates that:

"If the contract is avoided and if, in a reasonable manner and within a reasonable time after avoidance, the buyer has bought goods in replacement or the seller has resold the goods, the party claiming damages may recover the difference between the contract price and the price in the substitute transaction as well as any further damages recoverable under Article 74".

According to the aforesaid article, the requirement for the resale of the goods is that they were resold after the avoidance of the contract or within a reasonable time after avoidance, but not that when a party violates the contract, the other party is entitled to resell the goods.

According to Article 94 and Article 96 of the Contract Law of the PRC (hereafter, "the Contract Law") and applying them to the facts in this case, the [Seller] resold the goods on 26 April 2001. Before that, the [Buyer] had never indicated that it would not perform the contract. On the contrary, the [Buyer] was negotiating with the [Seller] on how to continue performing the contract.

The Contract Law stipulates that the contract avoiding party should inform the other party of the avoidance, and that the contract is avoided when the notice arrives; however, the [Seller] had never made any clear declaration of the avoidance of the contract. Therefore, the contract was not avoided on 26 April 2001. The [Seller] had no right to resell the goods without the avoidance of the contract; therefore, the [Seller] has no right to ask compensation from the [Buyer] for the damages caused by reselling the goods.

3. Considering the facts that the [Seller] is a registered company in Singapore, the [Buyer] makes a further statement based on the law of the United Kingdom under the condition that Chinese law applies to this case.

In the instant case, it was the [Seller] but not the [Buyer] that violated the contract. Objectively speaking, the [Seller] would be entitled to declare a [Buyer]'s contract violation and avoid the contract when a [Buyer] fails to issue the L/C within the stipulated time. However, in the instant case, the [Seller] did not exercise its right to avoid the contract within the stipulated time, which should be considered a waiver or prohibition of now asserting that right. It is the [Buyer]'s position that unless the [Seller] states clearly that it would avoid the contract if the [Buyer] fails to perform the contract obligation, the contract remains un-avoided, and the two parties still are bound by the contract. The [Seller]'s reselling the goods was in fact a contract violation, therefore, under the law of the United Kingdom, it would be considered that the [Seller] violated the contract first.

[Reasons for the [Buyer]'s counterclaims]

The basis for the [Buyer] counterclaims is:

The [Buyer] did not know that the [Seller] had unilaterally resold the goods under the Contract without avoiding the contract and that the [Seller] had filed its arbitration claim against the [Buyer] until the [Buyer] received the arbitration notice. Under Article 94 of the Contract Law, the [Buyer] was entitled to avoid the contract under such circumstances.

Pursuant to Article 96 of the Contract Law, the [Buyer] had sent the contract avoidance letter to the [Seller], and the [Seller] had confirmed the receipt of the letter at the first court session. Therefore, the [Buyer] fulfilled the notification obligation. According to Article 97 of the same law, the party is entitled compensation after the avoidance of the contract.

In the instant case, the [Buyer] had believed that the contract could be performed; therefore, in order to mitigate the loss and perform the contract, the [Buyer] resold the 3,000 tons of contract goods to Dongling Company on 27 April 2001 when the market was in a slump. However, the [Seller] resold the goods unilaterally without avoiding the contract, with the result that the [Buyer] was unable to provide the goods to Dongling Company, and had to pay the compensation for breach of contract, i.e., RMB 3,240,000, to Dongling Company, which was actually paid by the [Buyer] on 4 November 2001. Meanwhile, in order to perform the contract, the [Buyer] rented tanks; however, due to the non-performance of the contract, the [Buyer] paid RMB 360,000 for the vacant tanks on 16 November 2001.

The aforesaid compensation for breach of contract and tank vacancy fee were caused by the [Seller]'s reselling goods unilaterally without avoidance of the contract, therefore, the [Seller] should be liable for the aforesaid damages.

[Seller]'s counter arguments

The [Seller] makes the following counter arguments to the [Buyer]'s defense and counterclaim:

The [Buyer]'s breach of the contract stemmed from an anticipatory breach to an actual fundamental breach. Under the good faith principle and to protect the two parties' interest, the [Seller] had given the [Buyer] an additional reasonable period of time after the deadline for the performance of the contract had expired. On 19 February 2001, the [Seller] sent a letter to the [Buyer], agreeing to postpone the shipment deadline to 23 February, and later extended the L/C issuance date to 2 March. However, the [Buyer] had no faith in performing the contract, but was making things entangled by alleging price or tank issues.

Under this circumstance, the [Seller] agreed to lower the price and asked for compensation. The [Buyer] requested to postpone the shipment deadline to after May 2001. The [Seller] certainly rejected this unreasonable request of the [Buyer]. On 6 April 2001, the [Seller] suggested a "final agreement", by which the [Seller] would postpone the shipping deadline to April 2001 and the L/C issuing date to 13 April 2001, informing the [Buyer] that "if you do not sign on this agreement and send it back to us before 2 p.m. today, we will file an arbitration application immediately without further negotiation."

However, unfortunately, the [Buyer] did not treasure the grace period given by the [Seller] in good faith, but refused to perform the contract repeatedly, raising different kinds of excuses. The [Buyer] has not made any written response, with the result, it has progressed from anticipatory breach to fundamental breach.

The CISG stipulates that "the [Buyer] breaches the contract if it fails to perform any obligation required by the contract or this Convention." In the instant case, the [Buyer] has committed a fundamental breach of the contract.

The [Buyer] defended that it was unable to perform the contract due to a tanks problem, which cannot be established.

First, the two parties signed the contract on 2 February 2001. At the conclusion of the contract, the [Buyer] was aware or should have been aware of the obligation to accept the goods, and should have made sufficient storage preparation. If there had been no tanks as the [Buyer] is asserting, why did the [Buyer] agree and promise to accept the goods in February? Should the [Seller] be liable for non-performance of the contract due to the [Buyer]'s negligence?

Second, the principle of liability adopted in Contract Law is the principle of liability without fault, which is also called the principle of strict liability. The element for contract violation is unilateral, which means that an objective violation without fault is sufficient. The [Buyer]'s fundamental breach of the contract has been proved and its excuses have neither legal basis nor evidence to support them; they do not discharge [Buyer] from liability.

The [Buyer]'s defense looks like a tank issue, but actually is a price issue, which the [Buyer] did not deny. The [Buyer] expressed in its letters sent to the [Seller] that "we have suffered severe loss due to the extremely fluctuating and continuous slump in the market for styrene monomer"; that "the styrene monomer market is decreasing further, we agree to change the price to US $590/ton. We have suffered severe loss by performing this contract", etc.

The price is a fundamental term in a contract. As a company doing chemical products business for a long time, [Buyer] should have been aware of the market quotations and trend. The [Buyer] violated the principle of good faith by going back on its promise. Price fluctuation is a business risk. The [Buyer] would suffer loss of profit if the price goes down; similarly, if the price goes up, the [Seller] would bear the risk of suffering loss of profit. Risk and profit are both opposite and complementary to each other, which are equal and same to both parties. The principle of party autonomy and risk to be borne are the rules of a market economy. The [Buyer] intended to shift the business risks to others and refused to perform the contract when it failed to do so. This is the real reason for the [Buyer]'s refusal to perform the contract.

The provisions on remedies for [Buyer]'s breach of contract in the CISG stipulate that the non-breaching party is entitled to resell the goods (Article 75); on the other hand, the non-breaching party must take reasonable measure to mitigate the loss, including loss of profit. If he fails to do so, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated.

Article 119 of the Contract Law stipulates that:

"When one party breaches the contract, the other party should take reasonable measures to mitigate the loss, and it may not claim damages on the enlarged losses if he fails to do so."

It can be seen that the reselling right determined in the CISG and the Contract Law is both a legal right and a legal obligation. Mitigating the loss is for the interest of the party in breach, which is the [Buyer] in this case.

Styrene monomer is an easily polymerized chemical product, which could be polymerized if stored in a high temperature for a long period of time, causing changes to its physical and chemical performance; therefore, time is essential to the contract goods and to the sales of the contract goods. In order to mitigate the loss and the potential risks, the [Seller] had to take this measure by itself when the [Buyer] was refusing to perform its obligation. This measure was reasonable and proper.

The evidence shows that on as early as 30 January 2001 prior to the conclusion of the Contract in this case, the [Seller] had concluded a sales contract with Korea S Company for the purchase of the contract goods in this case, by which "the [Seller] requested to take delivery of the goods in February 2001". Due to the reason of the [Buyer], the [Seller] was unable to take delivery of the goods as stipulated in the Contract. S Company urged the [Seller] repeatedly, and the [Seller] was bearing a huge potential risk of facing a compensation claim. In order to avoid the risk and mitigate the loss of the [Buyer], the [Seller] decided immediately to resell the goods, which was rational, reasonable and legal.

As stated above, according to the CISG and the Contract Law, the [Seller] cannot claim compensation for the enlarged damages if he fails to take reasonable measures to mitigate the loss; therefore, the [Seller] would certainly resell the goods in order to protect its own interest.

Articles 107, 108 and 109 of the Contract Law and the CISG have stipulations on contract violation liability, compensation limit, and damage calculation.

Article 113 of the Contract Law stipulates that:

"If one party fails to perform or to perform as required by the contract, the damages caused to the other party equal the losses caused by the contract violation, including the profit by the fulfillment of the contract".

Article 78 of the CISG states that:

"If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to the interest on it ..."

The arbitration claims submitted by the [Seller] have legal and factual basis, which are legal and reasonable and should be protected and supported based on law.

II. OPINION OF THE ARBITRATION TRIBUNAL

The Contract in this case was formed based on negotiations, which reflect the true minds of the two parties, and is effective and has binding effect upon the two parties.

The applicable law

The [Seller]'s company was registered in Singapore, and the [Buyer]'s in Zhuhai, China. Both China and Singapore are Contracting States of the CISG; therefore, the CISG is applicable to the dispute in this case.

The Arbitration Tribunal notes that it was stipulated in the Contract that "unless otherwise specified, INCOTERMS latest edition apply when not in contradiction to our general terms and conditions". The Arbitration Tribunal respects this agreement of the parties.

      (1) For the issues of issuance of the L/C, shipment period, and the avoidance of the contract (avoidance declaration)

      The contract attachment stipulates that:

"A workable L/C has to be opened by 18 February 2001 at the latest. This is an integral party of this contract. In case the L/C has not been opened within the stipulated deadline, then the [Buyer] is considered in default of this contract and the [Seller] reserves the right to either extend the L/C opening deadline or declare the [Buyer] in default of his contractual obligation and claim for damages."

The evidence shows that on 9 February 2001, the [Buyer] faxed to the [Seller], asserting that:

"As you know, when we confirmed the 3,000 tons of goods, we requested a shipping deadline at the beginning of March 2001. Now the market is in a slump, the company is in a bad situation, and the factory's production capability is getting weak. Opening the styrene monomer market is becoming more and more difficult. There will be vacant tanks only if we set up the shipping date to 5 ~ 10 March 2001 or after, then we are able to take delivery of the goods. When we were negotiating the Contract, we requested to set the shipping period in March 2001, however, informing you the actual situation now is not late, otherwise, it would cause real trouble if the ship arrives."

On 15 February 2001 (it was 6 February on the letter - note by the Arbitration Tribunal), the [Buyer] faxed to the [Seller] again, asking to postpone the L/C opening deadline. The [Buyer] stated in the letter that:

"Due to the market fluctuation and the occupied tanks, we had to discuss with you to postpone the shipment to 10 March 2001 or later. Mr. Li confirmed orally later that the shipment was postponed to March, therefore, we are happy to confirm that:

A: The shipment on the subject will be effected during the period of 10th - 15th March 2001 or later;

B: The covering L/C will be issued to the beneficiary during the period of 28th February, 1st March 2001."

On 19 February 2001, Mr. Li, the agent of the [Seller] in Huanan area, faxed the [Seller]'s replying draft to the [Buyer] with the following content that:

"We have received your fax sent on 15 February 2000. You requested to postpone the shipment to 10th March to 15th March, and the L/C opening date to 28 February, which was in contradiction to your oral request and the fax on 9 February. We understand that the market is in a slump and the difficulties you are facing under this situation. We will do our best to perform this contract. As you know, the goods we are to provide to you were to be taken delivery in February, and our supplier has urged that we must take delivery of the goods in February, otherwise, we would suffer severe losses and damages, which would cause problems to both of us. After negotiation with our supplier, the best we can do is to postpone the shipment period to 5th ~ 10th March. You must open the L/C within this week (i.e., 23 February)."

On the same day, the [Seller] sent a letter to the [Buyer], asserting that:

"Based on our Contract, you should have opened the L/C by last Friday (18 February), however, we have not received any information showing that you have issued the L/C. On the 14th, (last Wednesday), Mr. Li, our agent in Huanan, went to your office and discussed this issue with Mr. Zhang. He told us to postpone the shipping deadline to 5 ~ 10 March. Within less than 24 hours after that, we received your fax to postpone the shipping deadline to 10 ~ 15 March. Obviously, we cannot accept this. Meanwhile, our supplier is urging us to take delivery of the goods in February. Please advise us the earliest time you can accept the goods today and open the L/C within this week. Since you failed to issue the L/C and take delivery of the goods within the stipulated time, we ask you to bear the entire responsibility for the losses and damages."

On 27 February 2001, the [Seller] faxed to the [Buyer], informing that:

"We have not received the L/C for the Contract, the deadline for opening the L/C stipulated in the contract has expired; therefore, you are considered in default by non-performance of contract obligation. Considering our established relationship, we agree to postpone the deadline for opening the L/C to 2 March at most."

On 9, 19, 20, and 30 March 2001, the two parties contacted and sent letters to each other with the main issues of postponing the shipment, changing the price, and damage compensation.

On 3 April 2001, the [Seller] sent a letter to the [Buyer], making response to the [Buyer]'s requests during negotiation that:

"Your counter-offer is not acceptable. It is obvious that the current situation is not satisfactory to you. We made a reasonable offer to settle the dispute. However, you not only rejected our offer, but also made an unreasonable counter-offer. For this issue, we do not want any delay. Before 5 p.m. tomorrow, which is 4 April 2001, please let us know whether you accept our conditions stated in the offer. If we do not receive any affirmative answer from you at that time, we will file for arbitration immediately."

On 4 April 2001, after discussion with the [Seller], the [Buyer] sent a letter to the [Seller] later, alleging that:

"After our telephone conversation, we express our regret for your firm stand. Even though we will suffer severe losses, in order to perform the contract, we accept US $590/ton Zhuhai CFR and the shipping date of 30 April 2001; other terms in the Contract remain the same. Yesterday we agreed to pay a US $150,000 as compensation, but the [Seller] did not want to understand the [Buyer]'s situation and refused to accept that offer. The [Buyer] had to suffer more losses by paying US $240,000 to the [Seller]; the [Buyer] is to pay the premium through the business transaction between the two parties to offset the aforesaid amount in 2001, if it cannot be paid off within 2001, the premium would be paid in the next calendar year until the full amount is paid."

On 6 April 2001, the [Seller] sent a letter to the [Buyer], making response to the [Buyer]'s fax sent on 5 April that:

"Attached is our final agreement, if you do not sign on it before 2 p.m. today, we will file an arbitration application immediately without further discussion."

The evidence shows and the Arbitration Tribunal confirms that after receiving the [Seller]'s letter on 6 April 2001, the [Buyer] did not accept the entire conditions in the [Seller]'s final agreement, but made substantial modifications. The following modifications were made in the final agreement signed by Mr. Zhang, the Legal Representative of the [Buyer] and sent back to the [Seller] on 9 April 2001:

  1. The deadline for opening the L/C was modified from 13 April 2001 to 17 April 2001;

  2. The original stipulation regarding compensation was that "the [Buyer] should pay the remaining amount by 10 January 2002 if it fails to pay US $240,000 before 31 December 2001; the stipulation after modification is that "if the [Buyer] is unable to pay off US $240,000 before 31 December 2001 due to the market slump and decreasing price, the [Buyer] should pay the remaining part in the next year";

  3. For the stipulation regarding the [Seller]'s priority on the [Buyer]'s purchase of styrene monomer, the original one states that "in 2001, the [Buyer] should give priority to the [Seller] for purchase of styrene monomer", the modified one states that "the [Seller] should be given priority for [Buyer]'s purchase of styrene monomer except for [Buyer]'s other long term suppliers."

It was stipulated in the contract that the [Buyer] must open an effective L/C before 18 February 2001; however, the aforesaid evidence showed that the [Buyer] was asking for postponement on shipment and failed to issue the L/C, based upon the reason that the market was in a slump and the tanks were occupied.

The price term in the contract was CFR term (cost and freight). Section B1 of INCOTERMS 2001 stipulates that "the [Buyer] should pay the price based on the contract."

Article 53 of the CISG stipulates that:

"The buyer must pay the price for the goods and take delivery of them as required by the contract and this Convention."

Article 54 of the CISG stipulates that:

"The buyer's obligation to pay the price includes taking such steps and complying with such formalities as may be required under the contract or any laws and regulations to enable payment to be made."

Article 59 CISG further states that:

"The buyer must pay the price on the date fixed by or determinable from the contract and this Convention without the need for any request or compliance with any formality on the part of the seller".

Article 25 of the CISG stipulates that:

"A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result."

Article 63(1) CISG states that:

"The seller may fix an additional period of time of reasonable length for performance by the buyer of his obligations."

Article 64 of the CISG states that:

"The seller may declare the contract avoided:

(a) if the failure by the buyer to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract; or

(b) if the buyer does not, within the additional period of time fixed by the seller in accordance with paragraph (1) of article 63, perform his obligation to pay the price or take delivery of the goods, or if he declares that he will not do so within the period so fixed;"

Based on the aforesaid facts and evidence, INCOTERMS 2000, and the related provisions in the CISG, the Arbitration Tribunal deems that it was stipulated in the contract that the payment should be made by L/C; therefore, the [Buyer] should open a L/C to pay the price for the goods. The [Buyer] violated the contract by failing to open the L/C within the stipulated time and in accordance with the contract. Because the [Buyer] delayed in opening the L/C in accordance with the contract, the [Seller] was unable to ship the goods on time. After being requested by the [Buyer], the [Seller] fixed an additional period of time of reasonable length, however, the [Buyer] failed to issue the L/C within the time fixed by the [Seller]. Under this circumstance, the [Seller] expressed clearly in the letter sent to the [Buyer] on 6 April 2001 that "if we do not receive the final agreement signed by you before 2 p.m. on 6 April 2001, there will be no further discussion."

The Arbitration Tribunal notes that the actual purpose for the [Seller]'s sending the letter on 6 April 2001 was that the [Seller] inform the [Buyer] that if it failed to sign the final agreement before 2 p.m. on 6 April 2001, there would be no further discussion on the Contract, and the business transaction would be terminated.

The evidence and the facts ascertained at the court session indicate that the [Buyer] failed to accept the entire conditions requested by the [Seller] and give an affirmative answer. Even in the letter sent to the [Seller] on 9 April 2001, the [Buyer] was insisting on its modifications and adding terms to the [Seller]'s conditions to mitigate the loss. The Arbitration Tribunal holds that the [Seller] was entitled to avoid the contract after 2 p.m. on 6 April 2001, and in fact, the [Seller] has exercised this right.

      (2) [Buyer]'s compensation issue

      According to Articles 61, 74, and 75 of the CISG, if the contract is avoided due to the buyer's breach, and the seller has resold the goods in a reasonable manner and within a reasonable time, the seller may claim damages from the buyer; and

"Damages for breach of contract by the buyer consist of a sum equal to the loss, including loss of profit ... 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."

The evidence shows that after avoiding the contract at 2 p.m. on 6 April 2001, the [Seller] signed Contract No. 1016 with Korea S Company on the same day, by which the [Seller] resold 2,850 tons of styrene monomer to S Company at US $495/ton FOB. This transaction has been completed.

After investigation and based on related evidence, the [Seller] resold the contract goods in this case to S Company at a price that was the same as the price on the international market at that time. In addition, based on the aforesaid facts and the provisions in the CISG, the Arbitration Tribunal deems that the [Seller] resold the goods to S Company within a reasonable time and in a reasonable manner, and that the [Seller] is entitled to receive compensation from the [Buyer] due to the [Buyer]'s breach of the contract. The loss of profit and loss of interest on the price claimed by the [Seller] were all foreseen or ought to have been foreseen by the [Buyer] at the conclusion of the contract, in the light of the facts and matters of which the [Buyer] then knew or ought to have known, as a possible consequence of the breach of contract.

The Arbitration Tribunal notes that the price term in the Contract was US $670/ton CFR Zhuhai, and the price term in Resale Contract No. 1016 with S Company was US $495/ton, FOB port in Korea. The term of the former was CIF and the term of the latter was FOB. In its compensation claim, the [Seller] has deducted sea transportation fee at US $25/ton. Based on the evidence, in June 2001, the sea transportation fee for styrene monomer from port in Korea to Zhuhai, China was US $21/ton; therefore, the Arbitration Tribunal concludes that the [Seller] properly deducted the sea transportation fee at US $25/ton from its compensation claim.

The Arbitration Tribunal also notes that the [Seller] resold 2,850 tons of goods to S Company; however, its compensation claim was based on 3,000 tons as in the original contract. 5% more or less loading was allowed in the original contract; therefore, the [Seller] should have calculated the damages based on the actual weight of the goods, i.e., 2,850 tons. Thus, the loss of profit by the [Seller] due to the [Buyer]'s breach of contract should be: (670 - 495 - 25) 2,850 = 427,500.

For the [Seller]'s claim of loss of interest on the price, i.e., US $450,000, from 18 February 2001 to October 2001 (US $17,300 based on the loan interest rate of the Bank of China at that time), the Arbitration Tribunal concludes that this claim of the [Seller] is actually for the interest on the price difference, which is the interest on the expectation profit.

The Contract stipulates: "Payment term: Irrevocable L/C; negotiable 90 days after B/L date; shipment: ship from port in Korea in February 2000; an effective L/C should be issued before 18 February 2001."

Based on the aforesaid stipulations, even if the [Buyer] had issued the L/C on 18 February 2001 as stipulated in the Contract, the [Seller] could only have issued the B/L on the shipment day. The Contract only stipulated that the shipping period was in February 2001 without specifying the exact shipment date. Calculating based on time, the shipment date would be at the end of February. The Arbitration Tribunal deems that 24 February is reasonable, therefore, 90 days after 24 February 2001, i.e., 24 April, is the negotiated date of the payment of the price. The interest on the price should be calculated from that day.

The Arbitration Tribunal notes that the [Seller] calculated the interest until 31 December 2001 assuming that the award would be handed down on that day, which means the [Seller] intended to calculate the interest to the day of the award; therefore, the Arbitration Tribunal holds that the [Buyer] should pay the [Seller] the interest on the price difference from 24 April 2001 to the day of the award (1 February 2002) at 5% annual interest rate, i.e., 427,500 0.769 5% = 16,437.

      (3) For the [Buyer]'s counterclaim

      It has been confirmed by the Arbitration Tribunal that the [Seller] was entitled to avoid the contract due to the [Buyer]'s breach of the contract, and that the [Seller] was entitled to resell goods in a reasonable manner and to claim damages from the [Buyer]. The Arbitration Tribunal notes that the [Buyer]'s counterclaims were all based on the premise that the [Seller] resold the goods to S Company after the avoidance of the contract, and that the [Buyer] was unable to receive the goods. The Arbitration Tribunal deems that the [Buyer]'s counterclaims lack legal and factual basis, and that the [Buyer] has no right to ask for compensation from the [Seller] for the damages caused by its own contract violation.

      (4) For the attorneys' fee and arbitration fee

      The evidence shows that the [Seller] has paid attorneys' fee of US $18,000. According to Article 59 of the Arbitration Rules, the Arbitration Tribunal holds that the [Buyer] should pay a reasonable amount of the [Seller]'s attorneys' fee, which would be US $10,000.

III. THE AWARD

The Arbitration Tribunal rules that:

1. [Buyer] shall pay the loss of the [Seller] of US $427,500 and the interest accrued thereon in the amount of US $16,437 within 30 days of this award;

2. [Buyer] shall pay the [Seller]'s attorneys' fee of US $10,000 within 30 days of this award, otherwise, an interest shall be added based on Chinese domestic bank loan interest rate at the same time;

3. [Buyer]'s counterclaims are dismissed;

4. [Buyer] shall bear the entire arbitration fee and counterclaim fee;

This is the final award

Presiding Arbitrator:

Arbitrator:

4 February 2002 in Shenzhen


FOOTNOTES

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

** 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.

*** William Zheng is a graduate of the Pace University School of Law. He is Special Counsel with the Shanghai office of Sheppard Mullin Richter & Hampton, LLP.

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