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CISG CASE PRESENTATION

China 9 September 2002 CIETAC Arbitration proceeding (Elevator case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/020909c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20020909 (9 September 2002)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2002/22

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Unavailable (claimant)

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

GOODS INVOLVED: Elevators


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 8 ; 25 ; 53 ; 64 ; 74

Classification of issues using UNCITRAL classification code numbers:

8C [Interpretation of party's statements or other conduct: interpretation in light of surrounding circumstances];

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

53A [Obligation of buyer to pay price of goods];

64A1 [Seller's right to avoid contract (grounds for avoidance): fundamental breach of contract];

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

Descriptors: Intent ; Price ; Avoidance ; Fundamental breach ; Damages ; Set-off

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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

Elevator case (9 September 2002)

Translation [*] by Zheng Xie [**]

Edited by John W. Zhu [***]

-   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 number: M__) according to:

   -    The arbitration clauses in Contracts No. 94-1205, No. 95-0216, No. 95-0325 and No. 95-0619 for the sale of elevators executed by Claimant [Seller], Shanghai __ Elevator Ltd., and Respondent [Buyer], __ Industries Ltd., on 5 December 1994, 18 April 1995, 20 April 1995, and 19 June 1995, respectively; and
 
   -    The written arbitration application submitted by the [Seller] on 29 October 2002.

The Arbitration Rules of the Arbitration Commission (hereafter, the "Arbitration Rules"), which took effect on 1 October 2000, apply to this case.

Before accepting this arbitration application, the Arbitration Commission has already accepted the arbitration application filed by __ Industries Ltd. as Claimant according to Contract No. 94-1205. Shanghai __ Elevator Ltd. is the Respondent in that proceeding. The case number is G__.

An Arbitration Tribunal was formed on 4 March 2002 to hear this case. The members of the Tribunal are Mr. Cao __, the arbitrator appointed by the [Seller], Mr. Che __, the arbitrator appointed by the [Buyer] and Mr. Wang, the presiding arbitrator appointed by the Chairman of the Arbitration Commission according to Article 24 of the Arbitration Rules, since the parties neither jointly appointed nor authorized the Chairman to appoint the presiding arbitrator.

On 20 and 21 June 2002, the Arbitration Tribunal held court sessions in Beijing. Both parties sent representatives to the court session. The parties made statements on the case, answered the Arbitration Tribunal's question and cross-examined the evidence in the court session. After the court session, both parties submitted supplementary material.

This case has been completed. Based on the written materials and the facts confirmed in the court session, the Arbitration Tribunal made the arbitration award within the period stipulated in the Arbitration Rules.

The following are the facts, the Arbitration Tribunal's opinion and the award.

I. FACTS

From December 1994 to June 1995, the parties entered into four contracts for the purchase of 97 elevators/lifts. The contracts are described as follows:

Contract No. Signing date Quantity Net price Price with tax included
94-1205 5 Dec. 1994 36 Elevators, 12 Lifts 8,191,766 9,830,110.20
95-0216 18 Apr. 1995 15 Elevators 2,337,759 2,805,310.00
95-0325 20 Apr.1995 22 Elevators 2,304,190 2,765,028.00
95-0619 19 June1995 12 Elevators 2,502,376 3,002,852.00

(The currency above is US $).

The four contracts stipulate that:

   -    Delivery period: Before 31 August 1996;
 
   -   
 
Loading: Port in Japan;
 
   -   
 
Shipping: By installments; the quantity of each installment is decided according to the L/C issued by the [Buyer];
 
   -    Payment: As a performance bond and a condition precedent to the taking effective of the contract, the [Buyer] shall pay 10% of the net contract price within 30 days after the contract is executed. The payment term and method stipulated in the four contracts are that the [Buyer] should issue the L/C to the [Seller] 240 days before each installment is shipped, and pay 20% of the contract price of this installment 60 days before the installment arrives at the port. (The L/C shall be issued according to the net price; the price with tax included is the net price plus 20%).
 
   -    Customs clearance: The [Seller] shall be responsible.

In total, the [Buyer] purchased 97 elevators and lifts from the [Seller], and the contract price is US $18,403,309.20, and the performance bond is US $1,533,609.

After signing the four contracts, the [Buyer] paid the performance bonds, respectively according to each contract. The total amount paid was US $1,533,608.60.

Up to July 1995, the [Seller] had placed seven orders for 97 elevators and lifts with Japan __ Company. After June 1996, the elevators and lifts were shipped to Shanghai by installments. The [Buyer] only took delivery of three elevators under Contract No. 94-1205 on 27 December 1996, and two elevators under Contract No. 95-0216 on 11 April 1997.

The [Buyer] did not issue the L/C according to the contracts. Except for the performance bonds paid by the [Buyer], the [Buyer]'s other payments are described as follows:

   -    US $1,483,642 on 18 December 1996;
 
   -    US $1,546,206.30 on 16 June 1997;
 
   -    RMB 800,000 paid by Huadi Branch of __ Real Estate Development Company on 8 July 1997 with the [Buyer]'s authorization;
 
   -    US $140,000 on 15 July 1997; and US $22,000 on 20 November 1997.

The total amount paid by the [Buyer] under the four contracts was US $4,822,086.90 (including US $4,725,456.90 and RMB 800,000.)

Then, the [Seller] revised and resold the remaining 78 elevators under the four contracts. The [Seller] alleged that because the [Buyer] caused it to suffer damages during the performance of the contract, the [Seller] filed the arbitration application.

POSITION OF THE PARTIES

[Seller]'s claims

In the arbitration application, the [Seller] filed the following claims:

   (1)    Requesting to cancel Contracts No. 94-1205, No. 95-0216, No. 95-0325 and No. 95-0619 for sales of elevators; and
 
   (2)    Requesting the [Buyer] to compensate its economic loss of US $4,000,000, part of which should be offset by the [Buyer]'s performance bond and payments exceeding the contract price of the goods received by the [Buyer]. The [Buyer] should pay the remaining amount, i.e., US $303,258.60.

[Seller]'s allegations

The [Seller] alleged the following facts and reasons:

1. The [Buyer] purchased 97 elevators and lifts from the [Seller], of which the total contract price is US $18,403,309.20 and the performance bond is US $1,533,609. The [Buyer] is a project company specially established for __ Real Estate Development Project, and has to rely on the developer's capital invested in the project to perform the duty of payment under the four contracts. The provisions of the four contracts are almost the same except for the specifications and quantity of the goods. During the performance, the four contracts are integrated, and cannot be divided.

2. After the four contracts took effect, the [Seller] performed its duty strictly in accordance with the contracts; however, the [Buyer] refused to perform its main obligations thereunder and did not pay a large amount of the contract price for a long time, and even the payments that were made were severely delayed, all of which indicated that the [Buyer] fundamentally breached the contracts.

In June 1995, the [Seller] placed seven orders for all of the 97 elevators and lifts with its supplier, Japan __ Company. The beginning of 1996 was the deadline to perform the duty of payment under the four contracts, but the [Buyer] suggested postponing the time of delivery because of problems with the project. In June 1999, the elevators were shipped to Shanghai by installments, but the [Buyer] failed to make the payments and take delivery of the goods according to the contracts. Considering this situation and the necessity to enforce the right of first performance defense, the [Seller] did not transship the goods which arrived at the port, but carried out the customs clearance and took delivery of the goods in Shanghai with the [Buyer]'s agreement in order to avoid demurrage. The [Seller] delivered 30 elevators under Contracts No. 94-1205 and 95-0219 till November 1996, but the [Buyer] did not make any payment. However, the [Seller] paid RMB 6,665, 906.60 for the customs clearance fee and duty. In order to properly store the goods, the [Seller] paid the storage fee in advance on behalf of the [Buyer]. Accordingly, the [Seller] requested the [Buyer] to pay the contract price according to the contract. After negotiation, the parties agreed that the [Buyer] should pay part of the contract price in cash first, which was primarily used to pay the amount of the duty which the [Seller] had paid for the [Buyer] in advance. In the meantime, the [Seller] issued a pro forma invoice according to the quantity of the elevators calculated based on the price stipulated in the contract. Thus, on December 18 of the same year, the [Buyer] made the first payment of US $1,483,642.

Almost all of the 97 elevators and lifts were shipped to Shanghai at the end of March 1997, and the [Seller] has incurred and has been incurring a large amount of customs clearance and storage fees. However, the [Buyer] only took delivery of five elevators including three elevators under Contract No. 94-1205 on 27 December 1996, and two elevators under Contract No. 95-0216. The [Seller] paid the duty for the [Buyer] in advance as much as RMB 15,566,667.60.

The [Buyer] has only paid US $4,822,086.90 (including US $4,725,456.90 and RMB 800,000).

3. Although according to the parties' agreement, some remedies have been made, the [Buyer] fundamentally breached the contract which caused severe economic loss to the [Seller].

After the [Buyer] made the last payment in November 1997, the amount owed is still as much as US $15,114,830.90, equal to RMB 120,000,000 (according to the foreign exchange rate of 1:83, the same below), which adversely affects the [Seller]'s business.

At the beginning of 1997, because the developer of the Guangzhou __ Real Estate Development Project was in severe financial difficulty, this project was suspended. The [Buyer] lost its position as the main supplier of the project. The new developers ordered elevators of other make for a majority of the buildings of this project. In order to mitigate damages, after negotiation, the parties agreed that the elevators which the [Buyer] could not take delivery of should be revised and resold. The [Seller] has revised and resold 78 elevators for RMB 61,593,547.18 until now.

The [Seller] has paid the storage fee in advance for and on behalf of the [Buyer] since the first installment arrived at the port in July 1996 because the [Buyer] could not perform its payment duty and the [Seller] had to store the goods in the warehouse temporarily. There are 14 elevators still in the rented warehouse; the [Seller] has paid the storage fee of US $3,168,410.26. Because the [Buyer] could not perform the contract, which caused the delay of shipment of the goods, the [Seller] had to pay a storage fee of Japanese Yen 15,000,000 in Japan, equal to RMB 1,052,409.12. In addition, the [Seller] has spent RMB 1,129,800 for revising the elevators.

4. In light of the current situation, it is impossible to continue to perform the four contracts; the [Buyer] should be liable for its breach of contract and should compensate the [Seller] for the loss incurred due to its breach. The [Seller]'s claims are supported by sufficient facts and legal basis and should be sustained.

Because the [Buyer] lost its position as the main elevators supplier, the purposes of the four contracts between the [Seller] and the [Buyer] cannot be realized due to the [Buyer]'s default. Therefore, the [Seller] has the right to cancel [avoid] the contract according to the relevant law, and requests the Arbitration Tribunal to avoid the four contracts between the parties without retroactivity and discharge the performance of the unperformed part of the contracts.

On 10 October 2001, according to the contract, the [Buyer] by written confirmation gave up the performance bond which had been paid and promised to be liable for its breach of the contract. In addition, according to the contract, because all of the payments which the [Buyer] had already made were 70 days later than the time stipulated in the contracts, the [Buyer] should pay the [Seller] the liquidated damages of US $920,165.46, which is 5% of the total contract price of the four contracts.

After the goods arrived in Shanghai, the [Seller] has paid for the storage fee for the [Buyer] in advance for more than five years. In addition, because the [Buyer] failed to make the payment in accordance with the contract, the [Seller] requested Japan __ Company to delay the shipment of the goods which were manufactured on time, and had to pay this company for the additional storage fee. The [Seller] should compensate the [Buyer] for this additional fee.

When the [Buyer] was not able to perform the contract, after reaching agreement with the [Buyer], the [Seller] revised and resold the elevators to mitigate the loss. The [Buyer] should compensate the [Seller] for the cost to revise the elevators, because it is a reasonable expense to mitigate the loss.

The fourteen elevators have been in the warehouse for five years, so they cannot be revised and have totally lost their value. The contract price of these goods is US $2,454,464.87, which constitutes the [Seller]'s direct loss and the [Buyer] should compensate for this.

In sum, the [Seller]'s actual and ascertained loss is RMB 87,164,164.91, equal to US $10,501,706.61. The [Buyer] has already paid the [Seller] US $4,822,086.90; after deducted the contract price for the goods taken by the [Buyer] (US $1,125,345.50), the remaining amount (inclusive of the performance bond) is US $3,696,741.40, which should be used to compensate the [Seller]'s loss. For the deficiency of US $6,804,965.21, the [Buyer] should make further compensation. Meanwhile, the [Buyer] should pay the [Seller] the liquidated damages of US $428,659.50 according to the contract. The [Buyer] should also pay the [Seller] the loss of interest, the arbitration fee which the [Seller] paid in advance for the [Buyer], and the [Seller]'s other reasonable expenses related to this case. Because the [Buyer] cannot afford the entire amount above in light of its current financial capacity, the [Seller] only requests the Arbitration Tribunal to rule that the [Buyer] should compensate the [Seller] for the economic loss of US $4,000,000. After the amount, i.e., US $3,696,741.40, which has already been paid, is deducted, the [Buyer] should pay the [Seller] the remaining part, i.e., 303,258.60. The [Buyer] should perform its other duties owed to the [Seller], which are not claimed in the arbitration application.

[Buyer]'s response

The [Buyer] provided the following response:

1. The four contracts were legal and valid. The order of the parties' performance according to the contracts is that, according to Article 11 of the contracts, the [Buyer] should pay the performance bond first, and then, according to Article 12 of the contracts, the [Buyer] issue the letters of credit. The stipulation in this Article that the L/C should be issued "240 days before the shipping time" was requested by the [Seller], because the [Seller] alleged that it needed 240 days from making the order to ship the goods. According to Clause 2 of Article 18 of the contracts, after issuing the L/C, "if the [Buyer] could not issue the L/C to the [Seller] within the stipulated period" and "failed to issue the L/C within 70 days after the stipulated period expires", the [buyer] has no right to request the [Seller] to refund the performance bond, and the [Seller] can forfeit the performance bond paid by the [Buyer]. According to Article 12 and Article 10, "the quantity of each installment should be decided according to the L/C issued by the [Buyer]", and the [Seller] should place orders according to the quantity described in the L/C and ship the goods within 240 days after receiving the L/C.

2. Performance of the contracts. After signing the contracts, the [Buyer] paid the performance bond in accordance with the contracts but did not issue any L/C. The [Seller] has not notified the [Buyer] that it had placed any orders.

3. The [Buyer] should not be held liable for any breach but agrees that the [Seller] is entitled to a forfeiture of the performance bond.

Article 18 of the contracts provides the damages which the parties had anticipated when signing the contracts. According to this Article, if the [Seller] breached the contracts, the [Buyer] could only request it to pay the penalty and refund the performance bond, and could not request it to compensate for the loss due to the delayed construction caused by the [Buyer]'s breach. If the [Buyer] breached the contracts, the [Buyer] should not be held liable for any damages but the performance bond.

Accordingly, when signing the contracts, the parties limited the [Buyer]'s liability for breach within the performance bond. So the [Buyer] is not liable for any damages to the [Seller] but the performance bond.

4. The [Seller] should bear its own loss under the contracts in this case.

      (1) There is no causal relationship between the [Seller]'s loss and the [Buyer]'s performance.

The only direct cause for the [Seller]'s loss under the contracts in this case is that the [Seller] placed the orders with Japan __ Company before it received the quantity described in the L/C issued by the [Buyer]. In its counterclaim application, the [Seller] admitted that it needed eight months to prepare for delivering the elevators under the contracts, which is the reason why the contracts stipulate "the [Buyer] should issue the L/C 240 days (eight months) before shipping each installment i.e., sight L/C" (Clause 1 Article 12) and "the quantity of each installment should be determined by the L/C issued by the [Buyer]" (Article 10). According to these provisions, the [Seller] should place orders with Japan __ Company after received the cargo list and the requirement to ship the goods delivered by the [Buyer] in the form of a L/C, which is the reason why eight months were provided in the contracts for it to perform its delivery obligation. These stipulations were requested by the [Seller]. Thus, if performing strictly in accordance with the contract, the [Seller] should not have placed orders with Japan __ Company until 31 December 1995 when the [Buyer] issued the L/C for the elevators needed, and when the specifications and quantity were determined. On the contrary, if the [Buyer] did not issue the L/C, the [Seller] should not have placed order with Japan __ Company; if so, the [Seller] would not have suffered any loss.

However, the [Seller] placed the orders for a large number of elevators with Japan __ Company as early as June and July 1995, and unilaterally changed the shipping date as early as 30 June 1996 and also changed the destination port to Shanghai. The [Seller]'s conduct shows that it ignored the duty and the order of each party's performance. Thus, there is no causal relationship between the contracts signed by the parties and the earlier order placed by the [Seller].

      (2) The [Seller] has the duty to place orders after receiving the [Buyer]'s shipping requirements and list of goods.

The elevators under the four contracts are customized goods; therefore, the [Seller] should have placed orders according to the notice of the [Buyer]'s final identification. The [Seller] breached the contract when placing the orders before receiving the above notice. It is the [Seller] who breached the contracts by placing orders earlier than the requirement under the contracts. To perform the contracts earlier than the stipulated time also breached the contracts.

      (3) Because the shipping period, the destination, the actual shipping date do not conform to the contracts, and the consignee of the Bills of Lading is neither the [Buyer] nor the developer of the __ Real Estate Development Project, the [Buyer] alleged that the above goods were not the elevators under the four contracts, but those which the [Seller] ordered with Japan __ Company for performing other contracts; it is unfair to request the [Buyer] to be liable.

      In sum, the provisions of the four contracts on liabilities for contract breach are definite, fair and valid. Even though the [Seller] suffered losses beyond the damages for contract breach as stipulated in the contracts, because such loss was caused by its own conduct and had nothing to do with the [Buyer] and not resulted from the performance of the four contracts, the [Buyer] should not be held liable. Thus, the [Seller]'s arbitration claims should be dismissed.

[Seller]'s revised arbitration claims

After the court session, the [Seller] changed its arbitration claims. The final claims are as follows:

   (1)    [Seller] requests the Arbitration Tribunal to cancel [avoid] Contracts No. 94-1205, No. 95-0216, No. 95-0325 and No. 95-0619 for sales of elevators.
 
   (2)    [Seller] also requests the Arbitration Tribunal to rule that the [Buyer] should compensate the [Seller] for its economic loss of US $3,000,000 caused by the [Buyer]'s breach.

As to the change of the arbitration claims, the [Seller] explained as follows:

      The [Seller] is entitled to receive the total contract price of US $18,403,309.20 according to the four contracts. Because of the [Buyer]'s breach:

   -    The [Seller] received US $1,125,345.5 for the five elevators accepted by the [Buyer];
 
   -    The additional storage fee paid was RMB 4,220,819.38, equal to US $508,532.44;
 
   -    The cost for revising the remaining elevators to mitigate the loss is RMB 1,129,800, equal to US $136,120.48; and
 
   -    The amount received from reselling the revised elevators was RMB 61,593,547.18, equal to US $7,420,909.30.

Because of the [Buyer]'s fundamental breach of the four contracts, the [Seller]'s actual loss is US $18,403,309.20 - US $1,125,345.5 + US $508,532.44 + US $136,120.48 - US $7,420,909.30 = US $10,501,707.32.

The total amount already paid by the [Buyer] under the four contracts is US $4,822,086.90; after the contract price of the goods accepted by the [Buyer] is deducted, the remaining amount is US $3,696,741.40. Because the [Buyer] had officially agreed and admitted that except for Contract No. 94-1205, it did not perform the other three contracts; the performance bond paid for these three contracts is US $714,432, which should be used to offset the [Seller]'s damages caused by the [Buyer]'s breach. Thus the identified damages which the [Buyer] still owes to the [Seller] is US $10,501,707.32 - US $714,432 = US $ 9,787,275.32.

However, since the [Seller] has filed a counterclaim for the damages of US $4,774,129 under Contract No. 94-1205 among the identified but unpaid damages above in arbitration No. G200010217 against the [Buyer], the [Seller] only requires the [Buyer] to compensate US $5,013,146.32 (US $9,787,275.32 - US $4,774,129) in this arbitration. Meanwhile, the [Buyer] should pay the [Seller] the liquidated damages of US $428,659.50 according to the contracts (the amount of liquidated damages under Contract No. 94-1205 claimed in Arbitration No. G20010217 has already been deducted). The [Seller]'s loss of interest caused by the [Buyer]'s breach should be calculated from the payment date stipulated in the contracts to the date when the [Buyer] actually makes the payment, and the interest rate should be the lending interest rate at the same time. The [Buyer] should also compensate the [Seller] for the arbitration fee and the other related expenses which the [Seller] paid on behalf of the [Buyer] in advance.

Because it is hard for the [Buyer] to pay off the entire above amount due to its financial capacity, the [Seller] only requests the Arbitration Tribunal to order the [Buyer] to compensate the [Seller] for its economic loss of US $300,000. The [Buyer] should also perform its other duties owed to the [Seller], which are not claimed in the arbitration application.

Based on the four contracts, the total amount which the [Buyer] had already paid the [Seller] is US $4,822,086.90. The [Buyer] admitted that it had already accepted three elevators under Contract 94-1205 with the value of US $758,016, and two elevators under Contract No. 95-0216 with the value of US $367,329.5. In addition, in the court session, the [Buyer] expressly stated that because of its fundamental breach, the performance bond of US $714,432 which it had already paid under the four contracts except Contract No. 94-1205 should be used as compensation for its non-performance of these three contracts. So the disputed amount is US $4,822,086.90 - US $758,016 - US $367,329.50 - US $714,432 = US $2,982,309.40. However, the parties are in dispute over the nature of this amount, over the contract that it relates to and over method for its disposition, all of which directly relate to this arbitration and to Arbitration No. G20010217 and affect the final ascertained facts and results of these two arbitrations. Both parties have expressly requested the tribunal to determine these problems on both arbitrations. Thus, the [Seller] reiterated that it was necessary for the Arbitration Tribunal to decide the amount which is within the scope of this arbitration on the basis of the four contracts disputed in the two arbitrations, and to rule that this amount should be used as compensation for the [Buyer]'s breach, and the [Buyer] should pay the [Seller] the remaining part.

[Seller]'s supplementary statements

The [Seller] made the following supplementary statements:

1. The nature of the amount paid by [Buyer] and the contract to which such amount should be attributed. The [Buyer] made eight payments, totaling US $4,822,086.90. The [Buyer]'s allegation that the above amount except for the performance bond of US $714,432 under Contract No. 95-0216, No. 95-0325, and No. 95-0619 is payment under Contract No. 94-1205 does not conform to the facts.

First, the performance bond of US $819,176.60 under Contract No. 94-1205 has never been changed to advance payment thereunder. The [Buyer] alleged that the payment certificate issued by the [Seller] was "receipt of prepayment", so it should be treated as the prepaid contract price. The [Seller] held that "receipt of prepaid payment" under Contract No. 94-1205 referred to the performance bond, so it was unnecessary to repeat the nature of the payment in the receipt. The [Buyer] should prove that the parties reached an agreement, if it alleged that the nature of performance bond stipulated in the contract had been changed to advance payment; otherwise, its allegation can not be sustained.

In addition, the Arbitration Tribunal should note that the payment certificates for the performance bond under the other three contracts are also "receipt of prepayment."

And the [Buyer] admitted many times in writing or orally that it would compensate the [Seller] by waiving its right to the performance bond. This sufficiently proves that "receipt of prepayment" is the payment of certificate of the performance bond.

Second, the parties have never reached any agreement to change the terms of the 15 elevators for Zi Wei Yuan among the 48 elevators under Contract No. 94-1205.

Third, on 20 October 1996 the [Seller] issued a pro forma invoice of US $1,483,624 for the seven elevators for Zi Wei Yuan under Contract No. 94-1205, and on 18 December 1996 the [Buyer] paid this amount. The background is that in September 1996, six elevators under Contract No. 95-0619 and 15 elevators under Contract No. 94-1205 arrived in Shanghai, and the total value is more than US $5,400,000. At that time, the [Buyer] had already severely breached the contract and did not make any payment. Thus, on 27 September 1996, the [Seller] sent a letter to the [Buyer] requesting it to issue the L/C and make the payment as soon as possible. On 8 October 1996, another nine elevators arrived at the port. Up to this time, 30 elevators under Contracts No. 94-1205 and 96-0619 have arrived at the port and the total value is US $7,800,000; however, the [Buyer] could only pay US $1,500,000. In order to mitigate damages, the [Seller] chose to issue the pro forma invoice for the seven elevators for Zi Wei Yuan value of which is close to the [Buyer]'s financial capacity to the greatest extent and urged the [Buyer] to make the payment as soon as possible. This conduct could not be deemed as a modification of the contract as agreed by the parties. Because at that time the [Buyer] had fundamentally breached the contract, the [Seller] had to take remedial measures to collect the contract price to prevent frustration of the contract and enlargement of the loss. This amount relates to the contract price of 30 elevators under the two contracts and part of the fees incurred when the goods arrived at the port. The invoice only functioned as the notice of payment.

Fourth, in June 1997 when the [Buyer] made another payment, all of the 97 elevators under the four contracts had arrived at the port. The [Buyer] has the duty to pay off the contract price under the four contracts and compensate the [Seller] for all of its loss. When making its payments, the [Buyer] neither specified nor asked for the [Seller]'s agreement, so the parties did not reach any agreement to modify the contract and separate part of the goods as an individual transaction. The [Buyer]'s request that the Arbitration Tribunal should attribute these payments to the contract price under Contract No. 94-1205 has no basis.

Fifth, according to the [Buyer]'s allegation that except for the performance bond under Contract No. 95-0219, No. 95-0235 and No. 95-0169, all of the payments were made under Contract No. 94-0219. However, after accepting the three elevators under Contract No. 94-1205 the [Buyer] took the delivery of three elevators under Contract No. 95-0216. This fact shows that the payments were not made only under Contract No. 94-1205.

The [Seller] alleged that the amount of US $819,176.60 which the [Buyer] paid in January 1995 was the performance bond under Contract No. 94-1205. All of the payments after December 1996 were made to the [Seller] for part of the contract price and damages for loss caused by its fundamental breach of the four contracts. These payments can be neither divided nor only attributed to Contract No. 94-1205.

2. The [Buyer]'s fundamental breach is the only reason for the [Seller]'s severe economic loss. It is beyond doubt that there is a causal relationship between them.

The [Buyer] alleged that the [Seller] should have placed the orders for the [Buyer] when receiving the L/C. This allegation has no factual or legal basis at all.

First, the contracts do not stipulate any time and/or other limits about placing orders with Japan __ Company. The [Seller]'s duty is to guarantee that the 97 elevators would shipped before 31 August 1996. If the goods were to shipped before 31 August 1996, the [Seller] had the right to decide when to place orders with Japan __ Company.

Second, Clause 1 of Article 12 is about the [Buyer]'s obligation and it refers to the shipping of the goods, not placing orders for the goods. The conclusion that orders should be placed after the L/C was issued cannot be drawn at all.

Third, after receiving orders, Japan __ Company needs eight months to arrange and manufacture the goods. It is reasonable and necessary to place orders with Japan __ Company in June and July 1996. The [Seller]'s conduct was reasonable at the beginning of the performance and based on the trust of the [Buyer]'s proper performance of the contracts.

Moreover, the [Seller] planned to accept the goods by installments before 31 August 1996; in other words, the [Seller] must prepare for the [Buyer]'s request for a large number of elevators before 31 August 1996. The quantity of 97 elevators, the goods under the four contracts is large; the contracts were concluded for a large project. In order to avoid any adverse effect which may possibly occur, the [Seller] properly specified that the shipping date was 30 June 1996 so that it could guarantee the supplying capacity according to the contract; this date is within the shipping period stipulated in the contract, so it neither constituted unilateral change of the shipping date earlier, nor constituted breach of the contracts. In addition, the contracts in this case are not FOB but C&F, and the [Seller] had the duty to physically deliver the goods and was responsible for customs clearance; whatever the shipping date was determined, the [Seller] had never requested the [Buyer] take delivery earlier. The [Seller] did not claim for any damages and expenses incurred before 31 August 1996, i.e., the deadline of shipping.

3. The parties did not stipulate the compensation limit in the contracts, so the [Buyer] should compensate the [Seller] for its entire loss caused by its breach.

The [Buyer] alleged that the last sentence of Clause 2 of Article 18 was the provision of liability limit, and that [Buyer]'s liability for breach of contract should be limited to the amount of performance bond. The provision of compensation should include some express words, for example, the provisions in the above contracts stipulate that if the [Buyer] issued the L/C late, it should pay the liquidated damages, i.e., 0.5% per seven days, but the total amount should not exceed 5% of the contract price; the 5% here is the limit of the liquidated damages. However, the parties stipulated that when the [Buyer] breached the contract in this way more than 70 days, the [Seller] had the right to revoke the contracts and forfeit the performance bond; so there is no liability limit, but only a provision to provide the [Seller]'s a right of choice.

Compensation for damages is a remedial measure. The purpose is to compensate for the non-breaching party's loss, so the principle is that the amount of compensation should be equal to the loss. As to the scope of the breaching party's liability, Article 74 of CISG states:

"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."

The scope of the breaching party's liability obviously includes the other party's direct loss, namely the reliance interest and indirect loss, namely the expectation interest.

In this case, when signing the contracts, the [Buyer] obviously knew that if it fundamentally breached the contracts, the [Seller] would suffer the loss of the contract price stipulated in the contracts, and the loss includes the loss of cost of performing the contracts and the expected profits. The storage fee, the cost of revising the elevators, and the loss of interest, which the [Seller] paid in order to mitigate the loss, are within the scope which the [Buyer] could reasonably anticipate.

The [Seller] alleged that the parties did not stipulate the liability limit of the [Buyer] in the contract, and the [Seller]'s claim did not exceed the limit stipulated by the law, so the [Seller]'s claim should be sustained.

[Buyer]'s supplementary material

The following is the main content of the [Buyer]'s supplementary material submitted after the court session:

1. The United Nations Convention on Contracts for International Sales of Goods (1980) (CISG) and the Contract Law of the People's Republic of China shall apply to this case.

Because China is a Contracting State of CISG and, in the court session, the parties admitted the application of CISG to this case. Meanwhile, the place of performance of the contracts in this case and the arbitration place are in China, so the Contract Law of the People' Republic of China shall apply to this case.

2. The [Buyer]'s liability under contracts No. 95-0216, No95-0325 and No. 95-0619 should be limited to the amount of performance bond; the [Buyer] should not be liable under Contract No. 94-1205, and the reason was given in arbitration No. 20010217.

According to Article 18 of the contracts, when signing the contracts, the parties had sufficiently anticipated the damages that would be caused by the other party's breach and limited the damages within the above described scope. This stipulation complies with Article 74 of CISG and Article 113 of the Contract Law of the People's Republic of China.

3. The [Seller]'s loss has no causal relationship with the [Buyer]'s conduct, so the [Seller] should be liable for its own loss.

According to Article 18 of the contracts, if the [Buyer] breached the contracts, its maximum liability was that it could not request the [Seller] to refund the performance bond, i.e., 10% of the contract price; if the [Seller] breached the contract, its maximum liability was to pay the [Buyer] a penalty which should not exceed 5% of the contract price.

According to this stipulation, the parties' liabilities for breaching of the contracts are unequal and unfair; the [Buyer]'s liability was twice that of the [Seller]'s. Accordingly, the contracts signed by the parties provide the [Seller] sufficient protection.

In addition, the provisions of the contracts show that the signing of the four contracts did not necessarily cause the current loss. Because the contracts had already satisfied the [Seller]'s request that the [Buyer] should issue the L/C eight months before the shipping period, the [Seller] should not place its orders until this time condition was satisfied. As the [Seller] alleged, eight months are sufficient for Japan __ Company to manufacture the elevators under the contracts; meanwhile, according to the contracts, the [Seller] had the duty not to place the orders until the L/C was issued by the [Buyer].

There is no factual or legal basis to sustain the [Seller]'s allegation that Article 18 of the contracts stipulates the [Seller]'s right only; this Article stipulates the parties' liability and limit of liability for breaching of the contract; this stipulation and limit is in compliance with the law and was expressly accepted the parties; the [Seller] could not draw any other conclusion out of the parties' expression.

In sum, the [Buyer] holds that the disputed contracts were valid, and the stipulation about the liability for breach is definite, valid and fair. If the [Seller] incurred any loss out of the scope of liability stipulated in the contracts, it was caused by the [Seller]'s own conduct and had nothing to do with the [Buyer], and it did not incur losses during the performance of the contracts in this case, so the [Buyer] should not be held liable. Accordingly, the [Seller]'s arbitration claims should be dismissed.

II. OPINION OF THE ARBITRATION TRIBUNAL

1. The applicable law

The parties did not stipulate the applicable law in the contracts. In both of the court sessions and the arbitration documents submitted, the parties stated that the United Nations Convention on Contracts for International Sales of Goods (1980) (CISG) and the law of the People's Republic of China should apply to this case. Thus, the Arbitration Tribunal holds that CISG and the law of the PRC apply to this case. The parties disputed on the application order of CISG and the law of the PRC; the Arbitration Tribunal holds that according to the principle of conflict of laws that international conventions prevails domestic laws, when the law of PRC is in conflict with the CISG, the CISG shall prevail.

2. The undisputed facts

According to the written documents submitted by the parties and the information identified in the court session, the parties have no disputes on the following facts, which the Arbitration Tribunal confirms:

   (1)    The four contracts are valid.
 
   (2)    The amount of performance bond paid by the [Buyer] under the four contracts except Contract No. 97-1205 is US $714,432.
 
   (3)    The total amount paid by the [Buyer] to the [Seller] is US $4,822,086.90 (including the performance bond).
 
   (4)    The [Buyer] took the delivery of five elevators from the [Seller], which includes three elevators under Contract No. 94-1205 with the total value (tax included) of US $758,016, and two elevators under Contract No. 95-0216 with the total value (tax included) of US $1,125,345.50.
 
   (5)    The [Seller]'s loss including the revising fee, the storage fee, the loss of the elevators still in the warehouse, the reduced value loss of the revised elevators, etc., is US $10,501,707 (the [Buyer] does not agree with the [Seller] as to who should be liable for this loss).

In addition, since both this arbitration and Arbitration No. G20010217 involve the payment dispute under Contract No. 94-1205 and the [Seller] has filed a counterclaim under Arbitration No. G20010217, after asking for the parties' opinions, both parties agreed to have the Arbitration Tribunals seek to resolve this issue by mediation.

3. The facts about the performance and breach of the contracts

      (1) The issuance of the L/C

      According to the four contracts, the goods should be shipped before 31 August 1996, and the [Buyer] should issue the sight L/C with the [Seller] as the beneficiary 240 days before each installment was shipped; so the [Buyer] should issue the L/C in accordance with the contracts no later than 31 December 1995.

The [Buyer] alleged that because the parties signed a memorandum in relation to the performance of Contract No. 94-1205 on 5 December 1994, which stipulates that "the negotiation terms of L/C should be negotiated later by the parties." In addition, during the actual performance of the contract, the [Buyer] paid the [Seller] by T/T, and the [Seller] did not raise any objection when receiving the payment, the parties impliedly agreed on this payment method by their conduct. The [Seller] alleged that the contracts expressly stipulate that the payment should be made by L/C, and the parties should perform in accordance with the contracts if the parties did not reach any other agreement on the payment method.

The Arbitration Tribunal finds that neither party suggested negotiating "the negotiation terms of the L/C" described in the memorandum of Contract No. 94-1205, so the parties did not reach any new agreement on the negotiation terms. As to the issue of negotiation, the Arbitration Tribunal holds that the [Buyer] as the applicant for issuing the L/C should actively and voluntarily contact the [Seller], so the [Buyer] should be held primarily liable for the non-negotiation. Furthermore, the payment method by L/C stipulated in Contract No. 94-1205 is definite and practicable. Thus, the Arbitration Tribunal holds that unless the parties reached another agreement on the payment term, the [Buyer] should issue the L/C to the [Seller] in accordance with Contract No. 94-1205. Furthermore, the parties did not sign any memorandum under the other three contracts; the [Buyer] should issue the L/C according to the stipulation in the contracts. So, the Arbitration Tribunal holds that the [Buyer] breached the contracts because it did not issue the L/C on time.

      (2) The [Seller]'s orders with Japan __ Company

      The [Buyer] alleged that only after the [Buyer] paid the performance bond and issued the L/C, could the [Seller] place the orders; it is the [Seller] who requested that the [Buyer] should issue the L/C 240 days before the shipping date, which is stipulated in Article 12 of the contracts, because the [Seller] alleged that it needed 240 days from placing the orders to shipping the goods. If the [Seller] had not placed the orders until 31 December 1995 (240 days before 31 August 1996), it would not suffer any loss at all. The [Seller] alleged that the contracts did not stipulate the time when the [Seller] should place the orders with Japan __ Company, it is reasonable for the [Seller] to place the orders in July 1995.

The Arbitration Tribunal finds that the four contract do not stipulate when the [Seller] should place the orders, and the quantity, specification and model of the elevators are specified in the four contracts and the appendixes thereof; the delivery period is definite, i.e., before 31 August 1996. When the [Buyer] paid the performance bond from January to July 1995 according to the four contracts, and at that time no fact showed that the [Buyer] would not perform its duty in accordance with the contracts, it is reasonable for the [Seller] to actively perform the contracts by placing the orders with Japan __ Company in July 1995; the [Seller]'s conduct has no causal relation with its loss incurred later.

      (3) The [Seller]'s duty to deliver the goods

      According to the four contracts, the elevators should be shipped by installments before 31 August, 1996, and the destination port was Guangzhou. In fact, the [Seller] shipped the goods to Shanghai from June 1996 to March 1997, and it did not perform its delivery duty strictly in accordance with the contracts.

The Arbitration Tribunal holds that the [Seller] breached the contracts on delivery of the goods. However, the [Seller]'s breach occurred after the [Buyer]'s breach by not issuing the L/C on time. The [Buyer] neither suffered any damages because of the [Seller]'s breach nor claimed for its right arising from the [Seller]'s breach; on the contrary, at the [Seller]'s request the [Buyer] paid part of the contract price and accepted five elevators; through the [Seller]'s introduction, the [Buyer] as the actual lessee signed the warehouse storage contract with Shanghai Electricity (Group) Corp. In addition, the [Buyer] did not claim for any damages caused by the [Seller]'s late delivery or the wrong destination port.

      (4) The liability for breach of the contracts

      In conclusion, the Arbitration Tribunal holds that the [Buyer] breached the contracts because it did not issue the L/C in accordance with the contracts. When the [Buyer] breached the contracts and did not issue the L/C, the [Seller] had already placed the orders for the elevators and the goods were being manufactured. Under such circumstances, the [Seller] had the right to request the [Buyer] to continue to perform the contracts, i.e., the [Buyer]'s duty of "making the payment of the contract price" and of "taking delivery of the goods" stipulated in Article 53 of CISG. In fact, when the [Seller] shipped the goods to Shanghai, the parties negotiated many times and partially performed the contracts -- the [Buyer] paid part of the contract price to the [Seller] and accepted five elevators. However, the [Buyer] did not perform the duties of paying the remaining contract price and taking delivery of other elevators under the contracts, so it breached the contracts. The [Buyer]'s breach caused the [Seller] to incur loss. Thus, the [Buyer] should be liable for its breach and compensate the [Seller] for its damages.

4. The performance bond

The [Buyer] alleged that, except for the forfeiture of the performance bond, it should not be liable for other damages. The Arbitration Tribunal holds that the purpose of the performance bond in the four contracts is to ensure the [Buyer]'s performance of the contracts. The contracts do not stipulate that the liability should not exceed the performance bond when the [Buyer] breaches the contract. So the [Buyer]'s allegation should not be sustained. The loss which the [Seller] incurred is about US $10,501,707, which the [Buyer] should have foreseen when violating the contracts, so the [Buyer] should be held liable.

A dispute exists as to the nature of the US $819,176.60 paid by the [Buyer] to the [Seller] under Contract No. 94-1205. The [Seller] alleged that this payment was performance bond, and the [Buyer] alleged that it was advance payment, because the payment certificates issued by the [Seller] were titled "receipt of prepayment". The Arbitration Tribunal holds that the amount and time of this payment (transferred through Guangdong Provincial Bank Hong Kong Branch on 31 December 1994) complied with the stipulation of the performance bond in Contract No. 94-1205; unless the parties agreed otherwise, the 13 "receipts of prepayment" (all of the receipts were dated 6 December 1994, and the total amount is US $819,176.60) submitted by the [Buyer] as evidence cannot independently prove that the parties agreed to change the performance bond under Contract No. 94-1205 to prepaid contract price. In fact, considering the parties' arbitration claims, the dispute on this issue is meaningless, because both parties treated the payment of US $819,176.60 under Contract No. 94-1205 and the payment of US $714,432 under the other three contracts as an amount offsetting the contract price or part of the loss, and the [Seller] did not forfeit this amount beyond the scope of the loss.

5. The division of the [Seller]'s loss, the [Buyer]'s payment, and the elevators accepted in this arbitration and in arbitration No. G20010217

According to the [Seller]'s statement, it has filed a counterclaim for the loss of US $4,774,129 under Contract No. 94-1205 in Arbitration No. G20010217, and this issue will be decided by the arbitration tribunal in that arbitration. The remaining US $5,013,146 of loss under the other three contracts should be decided by the Arbitration Tribunal in this case.

The [Buyer] paid the [Seller] US $4,822,086.90 (including performance bond). The parties do not dispute as to the amount and time of the seven payments, but disputed on the corresponding relationship between the payments and the four contracts. The Arbitration Tribunal holds that the payment certificates submitted by the [Buyer] and the invoices issued by the [Seller] show that among the seven payments, the payment of US $819,176.60 made on 31 December, 1994 and the payment of US $1,483,642 made on 13 December 1996 were under Contract No. 94-1205. (The [Seller]'s allegation that the invoice which it issued on 30 October 1996 only functioned as the notice of payment is not persuasive, because the invoice specified Contract No. 94-1205 and the corresponding model of the elevators.) These two payments should be determined in arbitration No. G20010217. The other payments, i.e., US $2,510,268.30 (including US $714,432 of performance bond) were under the other three contracts, so the Arbitration Tribunal in this case should determine.

In addition, among the five elevators which the [Buyer] accepted, the three elevators with the value of US $758,016 under Contract No. 94-1205 should be determined in arbitration No. G 20010217, and the two elevators with the value of US $367,329.50 under Contract No. 95-0216 should be determined by the Arbitration Tribunal in this case.

6. The [Seller]'s arbitration claims

      (1) The request to cancel [avoid] the contracts

      The [Seller] requested to cancel [avoid] the four contracts in this case. The [Buyer] in this case is the Claimant in Arbitration No. G20010217and it also claims to cancel [avoid] Contract No. 94-1205.

The Arbitration Tribunal holds that the four contracts in this case cannot be fully performed because of the [Buyer]'s breach, and the [Buyer] has no financial capacity to continue to perform the contracts, which was the situation described in Article 94 of the Contract Law of the PRC, "A party may cancel the contract where the other party delayed performance or otherwise breached the contract thereby frustrating the purpose of the contract", so the Arbitration Tribunal sustains the [Seller]'s request to cancel [avoid] the four contracts.

      (2) The [Seller]'s claims for damages

      The total amount of the [Seller]'s arbitration claims:

      According to the [Seller]'s statement, the [Seller] is entitled to compensation of US $5,013,146.32, but considering the [Buyer]'s financial capacity, it only requests the [Buyer] to compensate for the economic loss of US $3,000,000.

By the foregoing, because the [Seller]'s economic loss was caused by the [Buyer]'s default in contract performance and such loss should have been foreseen by the [Buyer] when it breaching the contracts, the Arbitration Tribunal sustains the [Seller]'s request that the [Buyer] should compensate it for US $3,000,000.

7. The offset part

Based on the above opinion, the Arbitration Tribunal finds that the amount which the [Buyer] had already paid in this case is US $2,510,268.30 (including the performance bond of US $714,432). The [Seller] deducted the performance bond of US $714,432 as an offset from the total loss of US $10,501,707.32, so the total loss under the four contracts is US $9,787,275.32, i.e., the sum of US $4,774,129 counterclaimed by the [Seller] in arbitration No. G 20010217 and US $5.013,146.32 claimed by the [Seller] in this case; thus, the amount of US $5,013,146.32 alleged by the [Seller] and the amount of US $3,000,000 claimed by the [Seller] in this case did not include the performance bond of US $714,432, so the performance bond of US $714,432 cannot be used to offset the sum claimed. In addition, the [Buyer] accepted two elevators under Contract No. 95-0126 with a value of US $367,329.50; after this value is deducted from the amount of US $2,510,268.30, which the [Buyer] has already paid, the remaining amount, i.e., US $2,142,938.80, should be used to offset the loss claimed by the [Seller].

8. The amount which the [Buyer] should pay

After the amount of US $2,142,938.80 which the [Buyer] had already paid is deducted from the amount of US $3,000,000 which the [Seller] claimed and the Arbitration Tribunal sustains, the [Buyer] should pay the [Seller] US $857,061.20.

The [Seller] had no express claims for interest, liquidated damages and expenses incurred in this case, so the Arbitration Tribunal does not consider these issues.

9. The arbitration fee

The [Seller] should bear 20% of the arbitration fee, and the [Buyer] should bear 80%.

III. AWARD

   (1)    Contract No. 94-1205, No. 95-0216, No. 85-0325 and No. 95-0619 are canceled.
 
   (2)    After the amount of US $2,142,938.80 which the [Buyer] has already paid is deducted from the amount of US $3,000,000 which the [Seller] claimed and the Arbitration Tribunal sustains, the [Buyer] should pay the [Seller] US $857,061.20.
 
   (3)    The arbitration fee is RMB 419,000, of which the [Seller] should bear 20%, i.e., RMB 83,800, and the [Buyer] should bear 80%, i.e., 335,200. Since the [Seller] has paid the entire arbitration fee in advance, the [Buyer] should pay the [Seller] RMB 335,200.

The [Buyer] should pay the above amount within 30 days after the date of this award; otherwise, interest should be added.

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 [Seller]; Respondent is referred to as [Buyer]. Amounts in the currency of the United States (dollars) are indicated as [US $]; amounts in the currency of the People's Republic of China (renminbi) are indicated as [RMB].

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

*** John W. Zhu, LL.M. China University of Political Science and Law (National Graduate Scholarship); Bachelor of Law, Southwest University of Political Science and Law; Double Degree, English Literature, Sichuan International Studies University, Chongqing, China. Focus: International Economic Law.

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Pace Law School Institute of International Commercial Law - Last updated February 27, 2008
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