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CISG CASE PRESENTATION

China 9 October 2002 CIETAC Arbitration proceeding (Elevator case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/021009c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20021009 (9 October 2002)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2002/13

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: [-] (claimant)

BUYER'S COUNTRY: [-] (respondent)

GOODS INVOLVED: Elevators manufactured in Japan


Classification of issues present

APPLICATION OF CISG: Yes ["The parties did not stipulate the applicable law in the contract. However, the contract is for the international sale of goods and both parties expressed in their statements that the law of the PRC and CISG should apply to this case. Accordingly, the Arbitration Tribunal holds that the Law of the PRC (hereafter the 'domestic law' and the CISG shall apply to this case; when the CISG does not have a provision on some issues, the relevant provision in the domestic law shall apply."]

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 9 ; 25 ; 74 ; 75 ; 77 ; 78 ; 85

Classification of issues using UNCITRAL classification code numbers:

9C [Practices established by the parties];

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

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

75A1 [Avoidance: damages established by substitute transaction (resale by aggrieved seller];

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

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

85B [Seller's duty to preserve goods: seller in possession or controlling disposition of goods]

Descriptors: Usages and practices ; Fundamental breach; Avoidance ; Damages ; Cover transactions ; Preservation of goods ; Mitigation of loss ; Interest

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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

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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 October 2002)

Translation [*] by Zheng Xie [**]

Edited by John W. Zhu [***]

  1. The arbitration procedure
  2. The parties' claims and evidence
  3. Opinion of the Arbitration Tribunal
  4. Award

I. THE ARBITRATION PROCEDURE

The China International Economic and Trade Arbitration Commission (hereafter, the "Arbitration Commission") accepted this case (Case number: G.) on 9 July 2001, according to:

   -    The arbitration clause in the contract for sales of elevators, Contract No. 94-1205 (hereafter, the "Contract), signed by Claimant [Buyer], __ Trade Company, and Respondent [Seller], Shanghai __, on 5 December 1994; and
 
   -  The written arbitration application submitted by the [Buyer] on 19 June 2001.

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

On 9 July 2001, the Secretariat of the Arbitration Commission sent the Arbitration Notice to the [Buyer] and the [Seller]. At the same time, the Secretariat sent the [Buyer]'s arbitration application with the Appendixes, the Arbitration Rules and the Arbitrators List to the [Seller], and required it to appoint its arbitrator, submit its response or file a counterclaim within the period stipulated in the Arbitration Rules.

Mr. ___, the arbitrator appointed by the [Buyer], Mr. ___, the arbitrator appointed by the [Seller], and Mr. ___, the Presiding Arbitrator appointed by the Chairman of the Arbitration Commission according to Rule 24 since the parties failed to reach an agreement on whether to jointly appoint or ask the Chairman of the Arbitration Commission to appoint the Presiding Arbitrator, formed the Arbitration Tribunal to hear this case on 9 August, 2001.

The [Seller] submitted a counterclaim and response with Appendixes to the Arbitration Tribunal on 10 September 2001 and 29 September 2001, respectively. The Secretariat has forwarded these documents to the [Buyer].

The [Buyer] submitted its opinions and objections to the [Seller]'s response and counterclaim. The Secretariat has sent these documents to the [Seller] as well.

On 17 October 2001, the Arbitration Tribunal held a court session in Beijing. Before the substantive issues were reviewed:

   -    The [Buyer] again raised its objection to the [Seller]'s counterclaim. The [Buyer] alleged that it filed this arbitration application based on Contract No. 94-1205, but the [Seller]'s counterclaim was based on four contracts as a whole, which included the Contract in this case. It was [Buyer]'s position that the Arbitration Commission should not accept the [Seller]'s counterclaim and should not consolidate the [Buyer]'s claim and the [Seller]'s counterclaim.
 
   -    The [Seller], in turn, alleged that the four contracts were related, and if the Arbitration Tribunal did not consolidate the [Buyer]'s claim and the [Seller]'s counterclaim, it would request the Arbitration Tribunal to delay the court session, so it could file a new counterclaim.

After the [Buyer] agreed, the Arbitration Tribunal decided to delay the court session until 7 November 2001, and requested the parties to submit supplementary documents. The parties submitted their supplementary documents within the stipulated time. Meanwhile, the [Seller] filed an application to change its counterclaim. The Secretariat exchanged the above documents with the parties.

On 7 November 2001, the Arbitration Tribunal held a court session in Beijing. Both parties sent representatives. The parties made statements, arguments and cross-examinations of evidence on the facts and legal issues of this case, and answered the Arbitration Tribunal's questions.

After the court session, the parties submitted supplementary documents and evidence. Meanwhile, the [Seller] filed its application to add a counterclaim. The Secretariat exchanged the above documents with the parties. The parties then submitted their opinions and objections to the opposite party's statements and claims, The Secretariat also sent those to the opposing parties.

Because this case is complicated, the Arbitration Tribunal could not complete it before the stipulated time, i.e., 9 May 2002, according to the Arbitration Rules. Thus, the Arbitration Tribunal requested the Secretary-General of the Arbitration Commission to extend the hearing period for an additional two months. The Secretary-General held that the Arbitration Tribunal's request was necessary and reasonable and agreed to extend the hearing period for an additional two months, i.e., until 9 July 2002. The Secretariat sent the notice extending the hearing period to the parties.

On 21 June 2002, the Arbitration Tribunal held a second court session in Beijing. Both parties sent their representatives. The parties repeated their claims and opinions, and each specified its own arbitration claims and counterclaims. There was cross-examination of the opposite party's evidence and the parties answered the Arbitration Tribunal's questions. The Tribunal requested the parties to submit supplementary documents within 15 days after the court session.

On 8 July 2002, the Arbitration Tribunal again requested the Secretary-General of the Arbitration Commission to extend the hearing period for another additional two months. The Secretary-General agreed and extended the hearing period for a second time, i.e., until 9 September 2002. The Secretariat sent the notice extending the hearing period to the parties.

The [Buyer] and the [Seller] submitted supplementary documents in a timely manner after the second court session. The Secretariat sent these documents to the opposite parties.

Because this case was complicated, on 5 September 2002, the Arbitration Tribunal for the third time requested the Secretary-General of the Arbitration Commission to extend the hearing period for another additional one month. The Secretary-General agreed and extended the hearing period for the third time, i.e., until 9 October 2002. The Secretariat sent the notice extending the hearing period to the parties.

This case has been concluded. Based on the written documents and evidence submitted by the parties and the facts ascertained in the two court sessions, the Arbitration Tribunal handed down the award by consent.

The following are the parties' claims and evidence, and the Arbitration Tribunal's opinion and award.

II. THE PARTIES' CLAIMS AND EVIDENCE

The [Buyer]'s position

In its arbitration application, the [Buyer] alleged that on 5 December 1994, the [Buyer] and the [Seller] signed Contract No. 94-1205 for sales of elevators, i.e., the Contract in this case, in Guangzhou. The Contract includes the following terms:

   -    Goods. The [Buyer] purchases from the [Seller] 36 (elevator) elevators and 12 (escalator) elevators;
   - Manufacturer: Japanese __ Electric Machine Company;
   - Brand: __;
   - Contract price (tax not included): US $8,191,766 CIF Guangzhou;
   - Shipping port: A main port in Japan;
   - Destination port: Guangzhou;
   -    Delivery date: Delivery by installments before 31 August, 1996; the amount of each installment is decided according to the L/C issued by the [Buyer];
   -    Payment: The [Buyer] shall, within 30 days after signing the Contract, pay the [Seller] 10% of the contract price (tax not included) by T/T as the deposit for performance bond;
   -    Effective date: The Contract takes effect when the [Buyer] pays the above deposit to the [Seller];
   -    Customs clearance: The [Seller] shall be responsible for customs clearance when the goods arrive at the Guangzhou Port, and the [Buyer] shall pay the [Seller] for the customs clearance charges and duties, i.e., 20% of the contract price;
   -    Insurance: The [Seller] shall be responsible for the insurance; the insured amount shall be 110% of the invoice value; the coverage shall be comprehensive insurance.
   -    Payment terms: The [Buyer] shall, 240 days before each installment is loaded, issue a confirmed, irrevocable, transferable, transshipment and installment permissible, sight L/C with the [Seller] as the beneficiary.

The Contract also includes the detailed description of shipping mark, package, quality guarantee, force majeure, damages, arbitration, etc.

After the Contract was concluded, the parties signed a Memorandum, but they did not reach any agreement on the terms described in this Memorandum. After negotiation, the [Buyer] paid the contract price in the following installments:

   -    On 31 December 1994, US $819,176.60 paid in advance;
   -    On 13 December 1996, US $1,483,642 paid by T/T;
   -    On 7 June 1997, US $1,446,206.30 and US $100,000 by T/T.

The [Buyer] prepaid to the [Seller] US $3,849,024.90, but the [Seller] only delivered three elevators after receiving the payments.

   -    The total price (tax not included) of the three elevators delivered was only US $636,369, and after adding the customs clearance charges and duties, i.e., 20% of the total price, the total value was only US $763,642.80.
 
   -    In fact, the [Seller] unilaterally disposed of goods which should have been delivered to the [Buyer] and refused to refund the contract price for the goods which were not delivered to the [Buyer].
 
   -    On 11 April 2001, the [Buyer] sent a letter to the [Buyer] requesting it to reply within fifteen days, but the [Seller] did not reply.

The [Seller]'s non-performance constituted a substantial breach of the Contract. Thus, the [Buyer] filed the following claims:

1. The Contract signed by the [Seller] and the [Buyer] should be cancelled;

2. The [Seller] should refund to the [Buyer] the price of US $3,085,382.10 for the goods undelivered, and pay for the interest, US $680,000 thereon (calculated from July 1997 to July 2001 according to statutory US dollar interest rate, with the interest for the time after to be calculated separately);

3. The [Seller] should compensate the [Buyer] for the reasonable expenses of US $200,000 (including the attorneys' fee, the traveling expenses, etc.) incurred for this case;

4. The [Seller] should bear the entire arbitration fee for this case.

When filing the above statements and claims, the [Buyer] also submitted evidence including the Contract signed by the parities, the Memorandum signed by the parties on 5 December 1994, the [Buyer]'s payment receipt, the invoice issued by the [Seller], the List of Elevators Delivered for __ Project provided by the [Seller] to the [Buyer], and the letter requesting refund of the price sent by the [Buyer] to the [Seller] on 11 April 2001, etc.

The [Seller]'s position

The [Seller] responded to the claims of the [Buyer] and filed the following counterclaims:

First, from December 1994 to June 1995, the parties signed four contracts (including the Contract in this case), which were closely related and included the sales of ninety-seven elevators. On 5 December 1994, the [Seller], according to the needs of the Guangzhou __ Residential Housing Project, signed the Contract in this case with the [Buyer]. The Contract including the following terms:

   -    Goods: The [Buyer] purchased from the [Seller] forty-eight elevators, including thirty-six elevators and twelve escalators (not including some parts), for the __ Residential Community and the __ Residential Community.
   -  Manufacturer: Japanese __ Electric Machine Company;
   -  Net contract price (tax not included): US $8,191,766;
   -  Total contract price (tax included): US $9,830,119.20;
   -    Delivery date: Shipping by installments from the Japanese port before 31 August 1996; the amount of each installment shall be determined according to the L/C issued by the [Buyer];
   -    Effective date: The Contract takes effect when the [Buyer] pays for 10% of the total contract price as a performance bond within 30 days after the conclusion of the Contract;
   -    Payment: The [Buyer] shall, 240 days before each installment is loaded, issue the L/C with the [Seller] as the beneficiary, and pay for 20% of the net contract price of each installment (the L/C is issued according to the net contract price, and the total contract price (tax included) is the net contract price plus 20%,) sixty days before that installment arrives at the destination port.
   -    Customs clearance: The [Seller] shall be responsible for the customs clearance.

The Contract also specifies the liability for breach and damages. In addition, the [Buyer], for the same residential housing project, signed another three contracts for purchases of elevators, Contracts No. 95-0216, 95-0325 and 95-0619 on 18 April 1995, 20 April 1995 and 19 June 1995, respectively. The above four contracts were closely related. The conformity and identity of the purpose, the parties, the delivery period, and the users of the four contracts made them undividable.

Second, the [Buyer] refused to perform its main duty under the Contract, and did not pay for a large amount of the contract price, and paid for part of the contract price much later than the stipulated time in the Contract, so it fundamentally breached the Contract.

After signing the Contract, the [Buyer] paid for the deposit for performance bond stipulated in the Contract, so the Contract in this case took effect in January 1995.

Because an elevator is designed and manufactured according to the specific customer's requirements, and the size, controlling system, weight limited, operation speed, stories and stops, etc. are specifically designed for the specific customer, the elevator falls within the category of specific goods in terms of law. Thus, an order with the Japanese __Company is generally made eight months earlier than the date of delivering the goods, so that the Japanese __ Company can arrange the production in advance. According to the trade practice between the [Seller] and the Japanese __ Company, the Contract in this case was divided into twelve sections, which the [Seller] had expressly informed the [Buyer] of when receiving the deposit for performance bond. Then, the [Seller] made the order with the Japanese __ Company and paid off the price.

At the beginning of 1996, the time for performing the principal payment obligation under the four contracts expired, but the [Buyer] did not make any payment, and requested to delay the delivery by alleging that there was some problem with developing the project. Under this circumstance, with the [Buyer]'s agreement, the [Seller] completed the customs clearance in Shanghai in order to avoid incurring the large amount of demurrage fee at the port; the [Seller] incurred the customs clearance charges and duties, i.e., RMB 6,665,906.60. In order to properly store the elevators, by the [Seller]'s introduction, the [Buyer] signed a storage contract with Shanghai __ (Group) Storage Company on 10 November 1996, but it was the [Seller] who paid for the storage fee for the [Buyer]. Thus, the [Seller] requested the [Buyer] pay for the contract price. After negotiation, the parties agreed that the [Buyer] would pay part of the contract price by cash, which was mainly used to compensate the [Seller] for the customs duties which the [Seller] paid for the [Buyer]. Meanwhile the [Seller] issued the pro forma invoice for the number of elevators, which was calculated based on the contract price.

On 18 December 1996, the [Buyer] made the first payment of US $1,483,642, which was only equal to the value of three elevators after the customs duties were deducted. According to the Contract, the [Buyer] should pay off the net contract price for the four contracts, i.e., US $15,336,091, no later than the beginning of 1996, i.e., eight months (240 days) before the latest date of loading the elevators, and pay off 20% of the net contract price for the four contracts in April 1996, i.e., two months (60 days) before the elevators arrived at the destination port. In other words, the [Buyer] should perform its duty to make the payment before the [Seller] shipped the goods and completed the customs clearance.

   -    However, the above time for the [Buyer] to make the payments was much later than the payment time stipulated in the Contract and even later than the stipulated shipping time.
 
   -    At the end of March 1997, all of the goods, i.e., ninety-seven elevators, under the four contracts were shipped to Shanghai, and the [Seller] paid a large amount for the customs clearance charges and storage fee, but the [Buyer] failed to make the payment and take the delivery according to the Contract;
 
   -    The [Buyer] only took five elevators, i.e., three elevators under this Contract on 27 December 1996, and two elevators under Contract No. 95-0216 on 11 April 1997.

The [Seller] continued keeping the remaining elevators and paid the storage fee incurred on the [Buyer]'s behalf. The customs duties, which the [Seller] paid for the [Buyer], were RMB 15,566,667.60.

After the [Seller] urged the [Buyer] to pay the contract price, the [Buyer] paid US $1,546,206.30 on 16 June 1997, and RMB 800,000 on 8 July 1997, US $140,000 on 15 July 1997, and US $22,000 on 20 November 1997, respectively. Thereafter, the [Buyer] did not make any further payment nor did the [Buyer] take the elevators. In sum, the [Buyer] paid a total of US $4,822,086.90 (including US $4,725,456.90 and RMB 800,000) for the four contracts. After the deposit for performance bond, i.e., US $1,533,608.60, was deducted, the price paid was only US $3,288,478.30. The [Buyer] still owes US $15,114,830.90, the principal of the price, which is far less than the total contract price of US $18,403,309.20. In addition, the payment was made by the [Buyer] much later than the time stipulated in the Contract.

Third, although after negotiation the parties agreed to take some remedial measures for part of the goods, the [Buyer]'s fundamental breach of the Contract still caused the [Seller] to suffer severe loss. After the [Buyer]'s introduction and the [Seller]'s investigation, the [Seller] acknowledged that the developer of Guangzhou __ Residential Housing Projects was facing severe financial difficulty and could neither finance the project nor pay for the price of elevators, and the project was stopped. The above situation was the main reason for the [Buyer]'s fundamental breach.

In order to mitigate the loss, the parties agreed that the elevators, which the [Buyer] could not take, would be modified for resale. Seventy-eight elevators have been modified and resold since then, and the loss of RMB 61,593,547.18 was avoided. The loss caused by the [Buyer]'s breach was mitigated to the lowest amount. However, there are still fourteen elevators stored in the rented storage, and the [Buyer] had paid for the storage fee of RMB 3,168,410.26 until the end of 2001; the storage fee is enlarged continually. In addition, because the [Buyer] could not perform its duty under the Contract, the [Seller] incurred a storage fee in Japan, i.e., Japanese Yen (JPY) 15,000,000, which was equal to RMB 1,052,409.12. Although the modification of the elevators enabled the [Seller] to receive part of the contract price, it incurred the cost of RMB 1,129,800. After the modification, the resale price was less than the original contract price. The resale price of the seventy-eight modified elevators was only RMB 61,593,547.18; the original contract price was US $14,823,498.80, which was equal to RMB 123,035,040.04. Due to this price difference, the [Seller] suffered the loss of RMB 61,441,492.86

For the above reasons, the [Seller] holds that the [Buyer] fundamentally breached the Contract. In accordance with the stipulation on damages in the Contract, the [Seller] made the following counterclaims:

1. The [Buyer] should pay the [Seller] for the liquidated damages of US $491,505.96 (i.e., 5% of US $9,830,119.20, the total contract price);

2. The [Buyer] should compensate the [Seller] for the economic loss of US $2,000,000.

When filing the above counterclaims, the [Seller] provided evidence, including:

   -    The Japanese __ Company's production schedule for the elevators under the Contract;
   -    The receipt of deposit for performance bond under the Contract;
   -    The receipts of deposit for performance bond under Contracts No. 95-0216, 95-0325 and 95-0619;
   -    The packing list issued by the Japanese __ Company;
   -    The report filed by the [Seller] with the Customs for application to store the elevators in the bonded warehouse;
   -    The in/out customs warehouse forms;
   -    The application filed by the [Seller] with the National Technology Supervision Bureau to modify the national standard for elevators and relevant part of the response;
   -  The cost schedule for modification of the elevators, etc.

The [Buyer]'s response

As to the [Seller]'s counterclaims, the [Buyer] responded as follows:

1. During the performance of the Contract, the [Buyer] performed its duty according to the revised clauses of the Contract.

   -    As to the Contract in this case, the parties signed the Memorandum which denied some essential terms, such as delivery; during the performance of the Contract. The parties impliedly revised some essential terms of the Contract, i.e., to perform the Contract according to the parties' oral agreement or the agreement by fax, and the performance of the Contract showed the parties' agreement to such revision. During the performance of the Contract, the [Buyer] made each payment to the [Seller] with the amount and at the time agreed by the parties, so the [Buyer] did not breach the Contract. However, after receiving the payment, the [Seller] misappropriated the money for other purposes.
 
   -    As to the other three contracts, although the [Buyer] did not perform its duty and breached the contracts, the [Seller] also bore the liability for the breach by not claiming from the [Buyer] the deposit for the performance bond.

2. Even if the [Seller] suffered some economic loss when doing business, the [Buyer] should not bear any legal liability. The economic loss was caused by the [Seller]'s negligence or other reasons and the fact that the [Seller] did not perform its duty in accordance with the Contract, and had nothing to do with the [Buyer]. The [Seller] should therefore bear its own loss.

3. The [Buyer] had fully performed its duty under the Contract, but the [Seller] did not perform the duty to deliver the goods after receiving the payment; thus, the disputes in the case were caused by the [Seller]'s nonperformance of its duty under the Contract. The [Buyer] as the observant party has the right to cancel the Contract and request the [Seller] to refund the contract price and pay interest, the [Buyer]'s attorneys' fee, and other reasonable expenses incurred for this arbitration. Moreover, the [Buyer] should not be liable for any of the [Seller]'s loss, and the [Seller]'s counterclaims should not be sustained.

Meanwhile, the [Buyer] revised part of its arbitration claims, i.e., changing the second claim to:

"The [Seller] shall refund to the [Buyer] the remaining part of the contract price, i.e., US $2,988,243.50, and pay for the interest of US $680,000."

The [Buyer]'s other three claims remain unchanged. The [Buyer] made the following statements as to the revision:

1. After signing the Contract, on 31 December, 1994, the [Buyer] paid:

The deposit for the performance bond under the Contract for the forty-eight elevators, i.e., US $819,176.60, including:

      (1) The deposit for the fifteen elevators of __ Residential Community US $325,538.70; and

      (2) The deposit for the thirty-three elevators of __ Residential Community of US $493,637.90.

Because the [Seller] issued the invoice for advances on sales, the deposits were changed to advance payments, to which the [Seller] did not object.

After the Contract took effect:

   -    The [Buyer] made payments of US $1,483,642 and US $1,446,206.30 by T/T on 13 December 1996 and 7 June 1997, respectively. The [Buyer] has at least paid off the contract price (tax not included) of fifteen elevators for __ Residential Community under this Contract.
 
   -    On 27 December 1996 and 11 April 1997, the [Buyer] took the three elevators with the total price (tax included) of US $758,016 for __ Residential Community, and two elevators (A4 and B1) with the total price (tax included) of US $ 367,329.50 under Contract No. 95-0216 (for convenience, the account for the price of these two elevators was closed in this case).
 
   -    Then, the [Buyer] paid the customs clearance fee of 364,564.10, which included US $100,000, RMB 800,000 (equal to US $102,564.10 according to the foreign exchange rate of 1 : 1.78), US $140,000 and US $22,000 made on 7 June 1997, 9 July 1997 and 20 November 1997, respectively.

In sum, the [Buyer] paid the [Seller] a total of US $4,113,598 and took the delivery of five elevators with the total price (tax included) of US $1,125,345.50; so the [Seller] should refund to the [Buyer] the remaining part of the price, i.e., US $2,988,243.50.

2. As to the applicable law, the [Buyer] alleges that the Contract Law of the People's Republic of China and United Nations Convention on Contracts for the International Sale of Goods (1980) (CISG) apply to this case, and that the former preempted the later.

3. As to the performance of the Contract, the [Buyer] alleges that:

      (1) All of the seven payments which the [Buyer] made were for the performance of the Contract, i.e., the contract price of fifteen elevators for Residential Community.

      (2) Because the subject goods under the Contract were specific objects and specially designed for the Guangzhou __ Project, in order to reduce possible mistake, the [Buyer] and the [Seller] signed a Memorandum on the same day when the Contract was concluded. The Memorandum revised part of the Contract, including a change from "the shipping mark is determined by the [Buyer]" to "the shipping mark is determined by the parties", and changed the L/C negotiation terms to state that "the parties will negotiate the terms later." A requirement of written notice of a detailed list of the goods and invoices was added.

      (3) The Contract specifies the order of the parties' performance for each installment under the Contract. According to the specified order, the [Buyer] should make the payment before the [Seller] delivered the goods. Because the goods under the Contract were specific objects with high technical requirements, and it took some time to manufacture, a spot transaction was impossible. Accordingly, the Contract specified 240 days between the L/C issuing date and the shipping date, so the [Seller] had sufficient time to make the order, production arrangement, installation, etc. The above facts show that the [Seller] could only perform its duty under the Contract after the [Buyer] made the payments. Meanwhile, the Contract stipulated the goods should be delivered by installments, so the quantity, specification technical data were uncertain and affected by the __ Project, and the [Seller] could prepare and deliver the goods according to the quantity and specification described by the [Buyer] in either the L/C or the notice. The [Buyer] alleges that the performance order specified in the Contract was for the [Seller]'s best benefit and could effectively make the [Seller] avoid the loss when the [Buyer] failed to make the payments.

      (4) When performing the contract for the elevators of __ Residential Community, the [Buyer] did not make the payments by L/C but by T/T, because the Memorandum stipulated that the negotiation term for the L/C should be negotiated by the parties later, but then the parties failed to reach any agreement on the negotiating terms of L/C. Thus, there were no terms about the L/C for the [Buyer] to follow. So, by performance, the [Buyer] changed the payment terms for sales of elevators for __ Residential Community, and orally informed the [Seller] of this revision before making the first payment. The invoice issued by the [Seller] on 30 October 1996 can prove the above facts. The Contract did not specify the time to issue the L/C for each installment, but specified the deadline to issue the L/C, which was 31 December 1996.

The issuance of the L/C was only one step for the payment, but different from making the payment; the stipulated period for issuing L/C is not equal to that for making the payment. When the payment term was changed from L/C to T/T, because the Contract did not stipulate the period to make the payment, the deadline for issuing the L/C could not be the basis to determine whether the payment made by the [Buyer] was delayed. Furthermore, when knowing that the stipulated period for issuing the L/C had expired, and the [Buyer] did not issue the L/C, the [Seller] did not raise any objection, but accepted the [Buyer]'s payment by T/T, so the [Seller] impliedly agreed on the [Buyer]'s actual payment and payment term.

      (5) The Contract specified that the [Seller] should deliver the goods at the Guangzhou Port. In fact, the [Buyer] went to Shanghai to take delivery of the five elevators that were delivered. The change of the delivery place for these five elevators was agreed by the [Buyer], but the [Buyer] insisted that the other elevators, which it made the payment for, should be delivered to the place stipulated in the Contract. However, the [Seller] neither transported the elevators to Guangzhou, nor delivered to the [Buyer] the B/L for the goods shipped to Shanghai.

4. The [Buyer] alleges that the Contract stipulated that the sales of the elevators should be done by installments, which means that both the issuance of the L/C and the delivery of the goods should be completed by installments, for the following reasons:

      (1) The elevators under the Contract were in a large number, and the requirements of specification and technical data were different; it was hard to complete by one payment or one delivery;

      (2) The elevators under the Contract would be used for the residential housing project, which involved the development of some communities. The development status was different among the communities, and the order for sales of the elevators was determined according to the development status, so the sales should be completed by installments. As to the situation for the Contract in this case, the performance should be done according to the development status of the __ Residential Community and the __ Residential Community.

The [Seller]'s response

The [Seller] made the following response:

1. As to the applicable law, both parties, at the court session, agreed that the CISG and the Contract Law of the PRC apply to this case. According to the principle that an international convention preempts domestic laws, the CISG shall apply to this case with priority, and the Contract Law of the PRC shall apply as a supplementary law. In addition, when the Contract was concluded, the Contract Law of the PRC was not in force. According to the principle that the law has no retroactive force, the Law of the PRC of Economic Contract Involving Foreign Interest and the relevant judicial interpretations shall apply to this case, and if this law lacks the corresponding stipulation on the disputes in this case, the Contract Law of the PRC shall be referred to.

2. As to the Memorandum and the issuance of the L/C, during the arbitration procedure the [Buyer] made many conflicting statements about the Memorandum. On the one hand, it alleged that the parties did not reach any agreement in the Memorandum; on the other hand, it alleged that the Memorandum revised almost all of essential terms in the Contract. The modification of a contract needs the parties' express agreement; otherwise, it is presumed that the contract is not modified, and the original one is still valid. The Memorandum did not specify any terms of L/C, so it did not modify the original Contract at all.

Article 12 of the original Contract had the stipulation on the issuance and negotiation of the L/C, so the [Buyer] should have properly issued the L/C with honesty and good faith in accordance with the Contract. In addition, the reason alleged by the [Buyer] for signing the Memorandum cannot be sustained. The Residential Housing Project related to this case received its presale permits early as May 1994 to March 1995. If the design of this project was not determined in December 1994 as the [Buyer] alleged, how could the presale permits have been carried on? And how could the [Buyer] interpret the specific stipulation on the specification and technical data of the elevators in the appendix of the Contract?

3. The [Buyer] arbitrarily changed the concept by alleging:

"The shipping period should be determined by calculating 240 days on the basis of issuance of the L/C; the [Seller] should perform its duty to make the order with the Japanese Company only after the [Buyer] has issued the L/C."

Otherwise, the stipulation that the shipping deadline was 31 August 1996 in Article 10 of the Contract was meaningless. In fact, the parties unconditionally specified the shipping period, based on which deadline for the [buyer] to issue the L/C was determined. The Contract neither specified nor was it possible to specify any precondition for the [Seller] to make the order with the Japanese Company, which was the preparation for performing the Contract.

4. The [Seller] alleges that the [Buyer]'s statement that "the [Seller] made the order with the Japanese Company, because it had over confidence in the developer's financial capability," proves the [Seller]'s presumption that the [Buyer] had no capability to perform the Contract and could not issue the L/C.

The [Buyer] could not perform not because the negotiation term was indefinite, but because the developer was in financial difficulty. There was no actual barrier for the [Buyer] to issue the L/C. Moreover, the fact that in September 1996 the [Seller] urged the [Buyer] to issue the L/C proves that it was unnecessary for the parties to specify any additional terms on negotiation of L/C. If the terms on negotiation of the L/C needed to be specified or to be modified, the [Buyer] should bear the duty to inform the [Seller] of the suggested terms on negotiation and solicit the [Seller]'s opinion. The [Buyer]'s allegation that the terms on negotiation were too indefinite to issue the L/C was only an excuse to cover the truth that it lacked credit to issue the L/C.

III. THE OPINION OF THE ARBITRATION TRIBUNAL

1. The scope of this arbitration

The Arbitration Tribunal finds that in both parties' statements and especially in the [Seller]'s response and counterclaims, the contracts for sales of elevators No. 95-0216, 95-0325 and 95-0619 were mentioned. However, the Arbitration Tribunal holds that:

Because the acceptance, hearing and award of this case are based on the arbitration clause in Contract No. 94-1205 signed by the parties, and the [Buyer] expressly raised the objection to the consolidation of the other three contracts with this case, the Arbitration Tribunal only analyzes and makes judgment on the Contract in this case and the disputes related to this Contract. The disputes related to the other three contracts can be solved by application for another arbitration.

2. The applicable law

The parties did not stipulate the applicable law in the Contract. However, the Contract in this case is for the international sales of goods and both parties expressed in their statements that the law of the PRC and CISG should apply to this case. Accordingly, the Arbitration Tribunal holds that the law of the PRC (hereafter, the "domestic law") and the CISG shall apply to this case; where CISG haS no provisions on certain issues, the relevant provisions of the PRC law shall apply.

3. The performance and the breach of the Contract

      (1) The performance of the duty to issue the L/C

      According to the Contract, the goods should be shipped before 31 August 1996, and the quantity of each installment should be determined according to the L/C issued by the [Buyer]. The [Buyer] should, 240 days before each installment is loaded, issue a confirmed, irrevocable, transferable, transshipment and installment permissible, sight L/C with the [Seller] as the beneficiary. The effective period of the L/C negotiation period was extended to 30 days after the goods were shipped, and the L/C expired in China. Accordingly, at the latest, the [Buyer] should issue the L/C in accordance with the Contract before 31 December 1995. As to the duty to issue the L/C, the [Buyer] alleges that although the Contract specified that the [Buyer] should make the payments by L/C, the Memorandum signed by the parties on 5 December 1995 stipulated, "The specific terms on negotiation of the L/C shall be negotiated by the parties later." In addition, the [Buyer] made partial payment by T/T, and after receiving the payment the [Seller] did not object to this payment method, so the [Seller], by its conduct, impliedly agreed to this change of payment method.

The [Seller] alleges that the Contract had the definite specification of payment by L/C; when the parties did not reach any new agreement on the payment term, they should perform in accordance with the Contract. After carefully reviewing the evidence submitted by the parties and ascertaining the facts in the court session, the Arbitration Tribunal finds that as the [Buyer] alleged, it made three payments to the [Seller] by T/T on 13 December 1996 and 7 June 1997, respectively, and after receiving the three payments, the [Seller] did not object to the payment method; thus, the [Seller], by its conduct, impliedly agreed on the payment by T/T. The above fact can only show that the parties modified the payment term of the Contract for these three payments. However, the parties specified in the Contract that the goods should be delivered by installments and the payment for each installment should be made by L/C unless the parties reached other agreements on the payment terms, so the above payments by T/T did not mean that the parties completely revised the payment term for the following installments. In addition, neither party had suggested to negotiate "the specific term on negotiation of L/C" as stipulated in the Memorandum; and the parties did not reach any new agreement on the payment term. Thus, as to the remaining part of the contract price, the [Buyer] should make the payments in accordance with the Contract, i.e., by L/C. The [Seller] did not by its conduct agree the [Buyer] could make the payment for the following installments by T/T in stead of L/C. The Arbitration Tribunal holds that the [Buyer] should issue the L/C in accordance with the Contract; otherwise, it breached the Contract.

      (2) The performance of the duty to make payment

      The Contract stipulated that the [Buyer] should pay the [Seller] by T/T for 10% of the total contract price, i.e., US $819,176.60, within 30 days after the conclusion of the Contract. The [Buyer] alleges that from 31 December 1994, when the [Buyer] paid the [Seller] for US $819,176.60, to 20 November 1997, the [Buyer] made in total seven payments to the [Seller], amounting to US $4,113,598. The [Seller] did not raise any objection to the amount and time of the above seven payments, but it alleged that not all of the amount of these seven payments was for the Contract in this case; some of the amount was paid for the other three contracts for sales of elevators. The Arbitration Tribunal holds that the payment certificates submitted by the [Buyer] and the invoice issued by the [Seller] show that only two payments among the seven, i.e., US $819,176.60 on 31 December 1994, and US $1,483,642 on 13 December 1996, were made under the Contract in this case. Due to lack of sufficient evidence, the Arbitration Tribunal cannot ascertain that the other five payments were made under the Contract in this case. Thus, the Arbitration Tribunal finds that the [Buyer] has paid the [Seller] US $2,302,818.60 toward the contract price.

      (3) The performance of the duty of delivery and taking delivery

      After investigation, the Arbitration Tribunal finds that during the performance of the Contract, the [Seller] has prepared all of the goods, i.e., ninety-seven elevators, under the four contracts, including the Contract in this case, ready for delivery, but did not deliver all of the goods to the Guangzhou Port as the contracts stipulated, but delivered to Shanghai. As to the above goods, the [Buyer] only took delivery of five elevators, including three under the Contract in this case (the total price (tax included) was US $758,016), and two under Contract No. 95-0216 (the total contract price (tax included) was US $367,329.50); the [Buyer] did not take the delivery of other elevators. In respect of this, the Arbitration Tribunal holds that all of the four contracts stipulated that transshipment was permissible; although the destination port stipulated in the contracts was Guangzhou, the [Buyer] did not raise any objection to the fact that the [Seller] transported the goods to Shanghai, but took the delivery of five elevators in Shanghai. In addition, by the [Seller]'s introduction, the [Buyer] as the actual leasee signed a storage contract with Shanghai __ (Group) Storage Company; this fact shows that the [Buyer] agreed that the [Seller] temporarily kept the goods in Shanghai.

4. The [Buyer]'s claims

      (1) The issue on cancellation of the Contract

      The Arbitration Tribunal finds that it is impossible for the parties to continue performing the Contract, so the cancellation of the Contract is sustained.

      (2) The [Buyer]'s claim for refund of the contract price of US $2,988,243.50 and interest of US $680,000

      The Arbitration Tribunal notes that the amount that the [Buyer] claims is US $4,113,598 (the total amount of seven payments made by the [Buyer]) less US $1,125,345.50 (the total contract price of the five elevators which the [Buyer] has taken the delivery of). The [Seller] admitted the seven payments which the [Buyer] made, but did not agree that all payments were made for the Contract in this case. [Seller] alleges that only three of the five elevators which the [Buyer] took the delivery of were under the Contract in this case; the other two were under Contract No. 95-0216. After reviewing the documents and evidentiary materials, the Arbitration Tribunal finds that among the seven payments, only the first payment of US $819,176.60 as the deposit for performance bond and the second payment of US $1,483,642.00 were proved by the invoice issued by the [Seller] to be the payments under the Contract in this case, and no evidence can prove that the other five payments were related to the Contract. Thus, the Arbitration Tribunal holds that the amount which the [Buyer] paid under the Contract in this case was US $2,302,818.60, and the contract price of three elevators which the [Buyer] took delivery under the Contract in this case was US $758,016, so the [Seller] shall refund to the [Buyer] US $1,544,802.60.

As to the interest, because the Arbitration Tribunal only sustains refund of US $1,544,802.60, the interest claimed shall be reduced accordingly. Therefore, the Arbitration Tribunal only sustains the [Buyer]'s claim for interest of US $350,000.

      (3) The claim for compensation of reasonable expenses (including the attorneys' fee and traveling expenses), i.e., US $200,000

      The Arbitration Tribunal holds that because the [Buyer] did not provide any relevant evidence, this claim cannot be sustained.

5. The [Seller]'s counterclaims

The [Seller] counterclaims for liquidated damages of US $491,505.96 and economic loss of US $2,000,000. After investigation, the Arbitration Tribunal finds that because the [Buyer] refused to issue the L/C and take the delivery of the goods, the [Seller] fulfilled the duty to mitigate the loss and incurred a large amount of expenses including expenses for modifying the elevators, storage fee, customs clearance charges, etc. The [Buyer] should compensate the [Seller] for the above loss. Article 119 of the Contract Law of the PRC stipulates:

"Where a party breached the contract, the other party shall take appropriate measures to mitigate the losses; where the other party sustained further losses due to its failure to take appropriate measures to mitigate its losses, it may not claim damages for such further loss. Any reasonable expense incurred by the other party in mitigating losses shall be borne by the breaching party."

Accordingly, the Arbitration Tribunal ascertained that the loss suffered by the [Seller] due to the [Buyer]'s breach is US $477,129.00, and the [Buyer] shall compensate the [Seller] for this amount. The Arbitration Tribunal finds that the [Seller] alleged that considering the [Buyer]'s financial situation, it voluntarily reduced the amount claimed for to US $2,000,000. The Arbitration Tribunal sustains the [Seller]'s counterclaim for the economic loss of US $2,000,000. However, because the law of the PRC stipulates that the nature of liquidated damages is compensatory, when the Arbitration Tribunal sustains the [Seller]'s counterclaim for damages, if the [Seller] still claims for liquidated damages, it means double compensation. Thus, the Arbitration Tribunal does not sustain the [Seller]'s counterclaim for liquidated damages.

6. The arbitration fee

The [Buyer] shall pay 30% of the arbitration fee, and the [Seller] shall pay 70%; as to the arbitration fee for the counterclaim, the [Buyer] shall pay 90% and the [Seller] shall pay 10%.

IV. AWARD

   (1)  The Contact in this case, i.e., the Contract for sales of elevators No. 94-1205 is cancelled;
 
   (2)  The [Seller] shall refund the contract price of US $1,544,802.60 and pay interest of US $350,000;
 
   (3)  The [Buyer] shall compensate the [Seller] for the economic loss of US $2,000,000;
 
   (4)  The [Buyer]'s other claims are dismissed;
 
   (5)  The [Seller]'s other counterclaims are dismissed;
 
   (6)  The arbitration fee for this case is US $55,316, of which the [Buyer] shall pay 30%, i.e., US $16,594.80 and the [Seller] shall pay 70%, i.e., US $38,721.20. The above arbitration fee has been prepaid by the [Buyer] to the Arbitration Commission, so the [Seller] shall compensate the [Buyer] in the amount of US $38,721.20.
 
   -    The arbitration fee for the counterclaims is RMB 316,795, of which the [Buyer] shall pay 90%, i.e., RMB 285,115.50, and the [Seller] shall pay 10%, i.e., RMB 31,679.50. The above arbitration fee for the counterclaims has been prepaid by the [Seller], so the [Buyer] shall compensate the [Seller] in the amount of RMB 285,115.50.
 
   (7)  After the above amounts are offset, the [Buyer] shall pay to the [Seller] US $66,476.20 and RMB 285,115.50. The [Buyer] shall make the payment within 30 days after this award is handed down; otherwise, interest will be added according to the law.

This award is final.

THE PRESIDING ARBITRATOR
THE ARBITRATOR :
THE ARBITRATOR:

9 October 2002 in Beijing


FOOTNOTES

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

** 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 December 10, 2007
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