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CISG CASE PRESENTATION

China 26 June 2003 CIETAC Arbitration proceeding (Alumina case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/030626c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20030626 (26 June 2003)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2003/10

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Hong Kong [?] (claimant)

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

GOODS INVOLVED: Alumina


UNCITRAL case abstract

PEOPLE'S REPUBLIC OF CHINA: China International Economic & Trade
Arbitration Commission (CIETAC) 26 June 2003 (Alumina case)

Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/98],
CLOUT abstract no. 976

Reproduced with permission of UNCITRAL

Abstract prepared by Aytekin Gurbuz

A Chinese buyer contracted to purchase 30,000 tons of alumina from a Hong Kong seller. The seller alleged that buyer breached the contract by failing to issue the required letters of credit (L/Cs). Therefore, the seller resold the goods to other buyers at reduced prices. The seller claimed the loss caused by the buyer's breach, including the loss of anticipated profits. The seller further requested interest, the arbitration fee, attorneys' fees and other expenses.

The buyer argued that it signed the contract under economic duress and it also raised a force majeure-type defence contending that it was unable to issue the L/Cs due to a change of regulations and a restriction of alumina imports to China. The buyer argued that it should be exempted from liability for the these reasons. The contract, signed on 19 September 2001, stipulated that the contract is governed by Hong Kong law, and "the parties incorporate the provisions of Part II and Part III of the CISG except to the extent inconsistent with the express provisions" of the contract or contrary to the applicable law.

The arbitral tribunal ruled that Hong Kong law, as well as Part II and Part III of the CISG applied, except to the extent inconsistent with the express provisions of the contract or contrary to the applicable law. The tribunal held that the buyer did not prove the existence of economic duress, and denied the buyer's force majeure-type defence, holding that the new regulation did not fully prohibit the importation of alumina to China. Therefore, this regulation did not render the buyer unable to perform its duty under the contract: it could still have taken delivery of the goods.

The tribunal ruled that, under Hong Kong sales law and the CISG, the buyer fundamentally breached the contract when it failed to open the L/Cs (article 25 CISG), and therefore, the seller was entitled to avoid the contract and claim for damages, including the loss of anticipated profits (article 74 CISG and article 52 of the Regulation of Sales of Goods of Hong Kong). The tribunal calculated the damages separately regarding all three [end-user] under article 75 CISG and held that the seller was obliged to mitigate the damages under article 77 CISG.

The tribunal denied the seller's claim for interest under article 78 CISG because the amount claimed by the seller was actually damages, not related to any sum in arrears, and the seller did not incur any loss of interest.

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Classification of issues present

APPLICATION OF CISG: Yes [Agreement of the parties]

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 25 ; 74 ; 75 ; 76 ; 77 ; 78 ; 79 [Also relevant: Articles 61 ; 64 ]

Classification of issues using UNCITRAL classification code numbers:

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

74A ; 74A1 [General rules for measuring damages: loss suffered as consequence of breach; Includes loss of profit];

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

76B [Avoidance: damages recoverable based on current price];

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

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

79B [Impediments excusing party from liability for damages]

Descriptors: Avoidance ; Fundamental breach ; Damages ; Profits, loss of ; Cover transactions ; Interest ; Mitigation of loss ; Exemptions or impediments

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Editorial remarks

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

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

Alumina case (26 June 2003)

Translation [*] by Zheng Xie [**]

Translation edited by Meihua Xu [***]

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

PARTICULARS OF THE PROCEEDING

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

   -    The arbitration clause in Contract No. ALA-21886SRK (hereafter, the "Contract") signed by Claimant [Seller], __ Resources Ltd., and Respondent [Buyer], Sanmenxia Alumina Ltd, on 19 September 2001;
 
   -    The written arbitration application submitted by the [Seller] dated 8 April 2002.

On 25 April 2002, the Secretariat of the Arbitration Tribunal sent the written arbitration notice to the parties by express mail, and also sent the [Seller]'s arbitration application, the Arbitration Rules and the Arbitrators List to the [Buyer].

The [Seller] appointed __ as arbitrator. Because this arbitrator is domiciled in Hong Kong, on 19 June and 27 May 2002 according to Article 88 of the Arbitration Rules, the Arbitration Commission notified the [Seller] to pay the expenses for the arbitrator to travel to Beijing. However, the [Seller] did not pay these expenses within the period stipulated by the Arbitration Commission, so the Chairman of the Arbitration Commission appointed Chen __ as arbitrator for the [Seller]. The [Buyer] appointed Liu __ as arbitrator. Because the parties neither jointly appointed nor authorized the Chairman to appoint a Presiding Arbitrator, the Chairman appointed Shen __ as the Presiding Arbitrator according to Article 24 of the Arbitration Rules. The above three arbitrators formed the Arbitration Tribunal on 28 June 2002 to hear this case.

On 20 August 2002, the [Seller] filed a written application with the Arbitration Commission requesting to change arbitrator Chen __ to arbitrator __, who it had originally appointed, and paid the relevant expenses. After reviewing the application, the Chairman agreed to change arbitrator Chen to arbitrator __. Thus, the arbitrators, Shen __, Liu __, and __ formed the Arbitration Tribunal to hear this case.

On 26 August 2002, the [Buyer] submitted its written Response and relevant evidentiary material to the Arbitration Tribunal.

On 2 September 2002, the Arbitration Tribunal held the first court session in Beijing. Both parties' representatives and agents presented at the court session. The parties made oral statements, cross-examined each other's evidence, and answered the Arbitration Tribunal's questions.

After the court session, the parties submitted written statements and supplementary evidence. The [Seller] amended its arbitration application, and paid the related fees according to the Arbitration Rules. The Secretariat exchanged the parties' written statements and evidence by express mail.

On 17 January 2003, the Arbitration Tribunal held the second court session. Both parties' representatives and agents presented. The parties made additional oral statements, cross-examined each other's evidence, and answered the Arbitration Tribunal's questions.

On 21 March 2003, the Secretariat sent notice that, with the Secretariat's approval, the deadline for the award was extended to 26 April 2003. And on 22 April 2003, the Secretariat sent notice that, with the Secretariat's approval, the deadline for the award was extended for an additional two months, i.e., to 26 June 2003.

This case is completed. The Arbitration Tribunal handed down the award by consent. The followings are the facts, the Arbitration Tribunal's opinions, and the award.

FACTS

On 19 September 2001, the [Seller] and the [Buyer] signed Contract No. ALA-21886SRK. It stipulates that the [Buyer] purchases from the [Seller] 30,000 tons of sandy calcined metallurgical grade alumina of standard quality. The Contract also stipulates the times of shipment, price and payments as follows:

3. TIMES OF SHIPMENT:

3,000MT-5,000MT SEPTEMBER 2001,
10,000MT-12,000MT OCTOBER 2001,
BALANCE OCTOBER/NOVEMBER 2001 IN SELLER'S OPTION

4. TERMS OF DELIVERY: CIF FREE OUT LIANYUNGANG, PEOPLE'S REPUBLIC OF CHINA

5. PRICE: THE PRICE OF THE ALUMINA SOLD HEREUNDER SHALL BE USD 157.00/159.00 NALCO/AUSTRALIA RESPECTIVELY PER METRIC TON.

***

8. PAYMENT: PAYMENT SHALL BE MADE BY BUYER TO SELLER BY IRREVOCABLE LETTER OF CREDIT IN FAVOUR OF SELLER TO BE OPENED THROUGH A FIRST-CLASS BANK REASONABLY ACCEPTABLE TO SELLER AND FULLY WORKABLE AND RECEIVED BY SELLER.

TWO L/CS SHALL BE OPENED:

-    1ST L/C-10,000MT (+/-10%) OF ALUMINA PAYABLE AT SIGHT TO BE OPENED LATEST 26TH SEPTEMBER 2001.
-    2ND L/C-20,000MT (+/-10%) ALUMINA AT 180 DAYS AFTER SIGHT OF DOCUMENTS COVER THE TOTAL INVOICE AMOUNT PLUS INTEREST AT 6.5 PERCENT PER ANNUM TO BE OPENED LATEST OCTOBER 15, 2001.

POSITION OF THE PARTIES

[Seller]'s position

In the arbitration application, the [Seller] alleged that:

According to the Contract, the [Buyer] should issue the first L/C on or before 26 September 2001 and the second L/C on or before 15 October 2001 with the [Seller] as the beneficiary. However, the [Buyer] did not issue the Letters of Credit within the stipulated periods and breached the Contract. The [Seller] contacted the [Buyer] requesting that it issue the L/C with the [Seller] as the beneficiary, and notifying that if the [Buyer] did not issue the Letters of Credit, the [Buyer] should be liable for any loss accordingly incurred. However, the [Buyer] still failed to perform the Contract. On 18 October 2001, the [Seller] sent a fax to the [Buyer] avoiding the Contract.

According to the Contract and Article 74 of CISG, if the [Buyer] breached the Contract, the [Seller] has the right to claim for any loss caused by the [Buyer]'s breach, including the loss of anticipated profits.

If the [Buyer] had performed its duty to issue the first and the second Letters of Credit under the Contract, the [Seller] would have obtained profit of US $512,130, which is calculated as follows:

      (1) 3,000 tons in September 2001: the total price (3,000 tons, US $159/ton) is US $477,000; after the price paid to the original supplier, i.e., US $145/ton and transportation fee US $3.64/ton, totaling US $1,470,000 is deducted, the profit is US $31,080;

      (2) 10,000 tons in October 2001: the total price (10,000 tons, US $157/ton) is US $1,590,000; after the price paid to the original supplier, i.e., US $143/ton and transportation fee US $4.00/ton, totaling US $1,470,000 is deducted, the profit is US $120,000;

      (3) The remaining 20,000 tons: the total price (20,000 tons, US $157/ton) is US $3,140,000 plus 6.5% annual interest, totaling US $102,050; after the price paid to the original supplier, i.e., US $135/ton and transportation fee US $9.00/ton, totaling US $2,880,000, is deducted, the profit is US $362,050;

The total loss of profits is US $513,130. The other loss of unsold goods is US $60,000.

Accordingly, the [Seller] filed the following arbitration claims:

1. The [Buyer] shall compensate the [Seller] for the loss of US $573,130 caused by the [Buyer]'s breach, including the loss of profits, US $513,130, and other loss, i.e., US $60,000;

2. The [Buyer] shall pay interest on the above US $573,130 until the day when the payment is actually made at the annual interest rate of 10%;

3. The [Buyer] shall pay the arbitration fee;

4. The [Buyer] shall pay the expenses incurred by the [Seller] that were paid to the Arbitration Commission;

5. The [Buyer] shall compensate the [Seller] for the expenses related to this arbitration, including traveling expenses and communicating expenses;

6. The [Buyer] shall bear the [Seller]'s attorneys' fee and other expenditure.

[Buyer]'s response

In its Response, the [Buyer] alleged

1. The Export Contract was signed when the [Buyer] was under the [Seller]'s economic duress.

On 9 February 2001, the parties had signed an earlier contract, Export Contract No. ALIN--20738PRK, for the sale of 1,018.046 tons alumina. In that case, the [Buyer] was the seller and the [Seller] was the buyer. The contract price was US $1,575/ton FOB Tianjin China. The payment should be paid by L/C against documents. The destination port was Inchon, Korea.

The [Buyer] performed its duty in accordance with the Contract, and delivered the goods to Tianjin on time. During the performance, the [Seller] requested to amend the documents, and change the destination to Long Island, U.S.A, and the [Buyer] satisfied the [Seller]'s request. The [Buyer] delivered the full set of documents according to the L/C and the [Seller]'s request. On 6 April 2001, the [Seller] promised to pay all contract price by T/T when receiving the [Buyer]'s amended original documents.

On 10 April 2001, upon receiving the amended original documents sent by the [Buyer], the [Seller] asked the [Buyer] to bear the extra expenses caused by unloading labor after the risk had been transferred to the [Seller], and refused to pay the remaining 10% of the contract price as it had promised. Then, the [Seller] requested to deduct the alleged damages of US $39,732.26 from the contract price which should be paid to the [Seller]. The [Buyer]'s basic profit to export the goods under that contract was less than RMB 50,000. In addition, according to international customs, the contract and the relevant law, the additional expenses should not be paid by the [Buyer]. This was an unreasonable request by the [Seller], so the [Buyer] had the right to refuse. However, the [Seller] refused to make the payment.

In September 2001, the [Seller] suggested that [Buyer] sign a new contract for sales of alumina with the [Seller], which is Contract No. ALA--21886SRK, the Contract in this case, and stated that if [Buyer] would sign this new contract, the [Buyer] would get the US $39,732.26 refunded; otherwise, the [Seller] would continue to refuse to make the payment.

On 19 September 2001, the [Buyer] ratified the new Contract under economic duress; two days after, the [Buyer] received the payment from the [Seller].

In sum, according to the United Nations Convention on Contract for International Sales of Goods (CISG) and the Regulations on Sales of Goods of Hong Kong, the [Seller]'s conduct constituted economic duress.

2. After the Contract was signed in this case, the law regarding import of alumina to China changed, which was out of the parties' control, so the performance of the Contract encountered a legal barrier. According to the relevant law, the [Buyer] shall be exempted of liability in such circumstances.

The Contract in this case was signed on 19 September 2001. Around 25 September 2001, when it was going to complete the procedure, the [Buyer] was informed that the law on import of alumina was to be changed, and that after 1 October, alumina cannot be imported if the new law is not complied with. On 29 September 2001, the emergent announcement of Temporary Automatic Record of Import of Alumna was released by the National Economic and Trade Commission, Ministry of Foreign Trade and Economic Cooperation, and General Administration of Customs.

On 30 September 2001, the Ministry of Foreign Trade and Economic Cooperation issued the Emergent Announcement of Strengthening Management of Import of Alumna." The [Buyer] as a manufacturer should prepare eight documents, such as Environmental Protection Certificate, etc., for the new import procedure according to the above regulations. These documents could not be obtained within a short time. Meanwhile, because of the restriction of Registration of Manufacture with Imported Materials, the registration could not be completed within a short time.

The [Buyer] informed the [Seller] of the above situation by oral and written notice in order to get the [Seller]'s understanding. For a long time after October 2001, the [Buyer] could not import the goods of same kind because of the regulations. After knowing of the change of the regulations in China, the [Seller] still insisted on the performance of the Contract, and alleged that the [Buyer] breached the Contract.

On 18 October 2001, the [Seller] suggested to avoid the Contract. On 29 December 2001, the [Buyer] sent a fax to the [Seller] stating that once the problem is solved, the parties can continue the performance of the Contract. The [Seller] rejected this proposal.

Even if the [Buyer] is liable, it is only liable for the issuance of the first L/C for the 3,000 tons of goods delivered before the change of the law in China. The [Buyer]'s liability for shipping time and issuance of the L/C after the amended regulations took effect on 1 October 2001 was exempted.

3. The [Seller]'s claims lack factual and legal basis.

The basis for the [Seller]'s claims is the anticipated profits which is calculated as the contract price with deductions from the original price and for transportation expenses. According to Article 61 of CISG, even if the [Buyer] breached the Contract, the [Seller] is only entitled to the damages stipulated in Article 74 to Article 77. Article 52 Clause 3 of the Regulation of Sales of Goods of Hong Kong stipulates the conditions and basis for claims when a buyer refuses to take delivery of the goods, which is not what the [Seller] understood.

The faxes between the parties from September to October 2001 show that the [Seller] did not actually have the goods under the Contract in this case, so no loss was incurred; if there was some loss, it is the communication fee, etc. As far as the [Buyer] knows, from October to November 2001, the price of alumina originated in Australia was about US $159/ton CIF Free out of main ports in China. Based on this, the [Seller] did not incur any actual loss.

[Seller]'s supplementary statements and amended arbitration claims

In and after the court session, the [Seller] submitted supplementary statements and amended the arbitration claims. The [Seller] alleged that, according to the Contract, the [Seller] shipped the first installment of the goods to mainland China in September 2001. However, the [Buyer] did not issue the first L/C before 26 September 2001. Although the [Seller] reminded the [Buyer] many times, the [Buyer] still failed to issue the first L/C. In order to mitigate the loss, the [Seller] resold the first installment of 3,000 tons alumina to a third party, Shandong __ Import and Export Company, at the price of US $156/ton, which is US $3/ton less than the price of US $159/ton under the Contract in this case; thus, the [Seller] incurred the actual loss of US $9,000.

In addition, the [Seller] clarified its other arbitration claims. Thus, the [Seller] amended its arbitration claims as:

1. The [Buyer] shall pay the [Seller] for the loss of anticipated profits, US $491,050, which was caused by the [Buyer]'s breach;

2. The [Buyer] shall pay the interest on the above US $491,050 from 26 September 2001 to 2 September 2002, when the court session was held, at the annual interest rate of 6.5%, which was stipulated in the Contract, totaling US $29,907;

3. The [Buyer] shall compensate the [Seller] for the arbitration fee, US $18,105, and the expenses incurred by the arbitrators, US $6,000;

4. The [Buyer] shall bear the [Seller]'s attorneys' fee and expenses, totaling US $78,967;

5. The [Buyer] shall pay the traveling, administrative and other expenses incurred by arbitration process, totaling US $60,000;

6. The [Buyer] shall pay the interest on the total above US $684,029 from 2 September 2002 to the date on which award is made, at the annual interest rate of 6.5% stipulated in the Contract, i.e., US $118.58 per day;

7. The [Buyer] shall pay the interest from the date the award is made to the date when the payment is made at the interest rate of 8.125% (this is the interest rate for non-payment of awarded amount stipulated in the law of Hong Kong).

Meanwhile, the [Seller] made the following supplementary statements against the [Buyer]'s Response:

      (1) It lacks factual basis for the [Buyer] to claim that it delayed issuing the Letters of Credit because of change of the law regarding import of alumna.

First, the [Buyer] had never informed the [Seller] of its intent to delay the performance of the Contract. On 15 October 2001, the [Seller] sent the first fax confirming that it did not receive the [Buyer]'s explanation for the reason why it could not issue the Letters of Credit before that noon. The [Buyer] did not mention that the "Chinese government is amending the regulations regarding import of alumina" until it sent the second fax on 15 October 2001, failing to explain that this was the reason that it could not get approval or issue the L/C. The [Buyer] did not request to extend the time of performing the Contract either.

Second, the reports released by CTI in October and November 2001 show the information on the import of alumina from different countries to China. These reports show that although the regulation of import of alumina was changed as the [Buyer] alleged, during these two months the import of alumina continued. It lacks basis for the [Buyer] to allege that it could not get the approval to import alumina because of the new regulation. The independent reports released by __ Agencies Pty Ltd in October and November 2001 also pointed out that a large amount of alumina was imported and unloaded at the ports in China. The imports of alumina did not stop during these two months.

Even if the change of regulation on import of alumina delayed the approval for import of alumina, the [Buyer] should have issued the Letters of Credit with the [Seller] as the beneficiary within the stipulated time, and taken delivery of the goods and awaited approval. Not to obtain the approval does not mean that the [Buyer] could not receive the goods in China. Thus, it is unreasonable for the [Buyer] to refuse to issue the Letters of Credit by alleging that the regulation was changed. The [Buyer] could have performed the Contract.

      (2) The [Seller] believes that the [Buyer] did not issue the Letters of Credits due to the following reasons: first, the [Buyer] could not get loan from banks; second, the [Buyer] did not want to pay the storage fee; third, the [Buyer] did not want to bear the risk that the price of the goods might drop when awaiting the approval. The [Buyer] did not issue the first Letter of Credit on or before 26 September 2001 which is before the announcement of the new regulation. In addition, the [Buyer] should have issued the Letters of Credit on 26 September and 15 October 2001, but it did not apply to register the import in September, but applied to register in October 2001, which shows that the [Buyer] used the change of regulation as an excuse for its breach of the Contract.

[Buyer]'s response

As to the [Seller]'s supplementary statements, the [Buyer] alleges:

The [Seller] did not prepare for the performance of the Contract: the 3,000 tons alumina which the [Seller] alleged was prepared for the [Buyer] was actually not for the [Buyer]. Contract No. ALA-21720SRK signed on 9 August 2001 by the [Seller] and Shangong __ Import and Export Company shows that the goods under the Bill of Lading dated 16 September 2001 submitted by the [Seller] were part of the goods sold to Shandong __ Import and Export Company. This contract was performed before the Contract in this case was signed, and has nothing to do with the [Buyer], not to mention the reduction of price.

[Seller]'s rebuttal

As to the [Buyer]'s above allegation, the [Seller] alleges that first, according to the law of Hong Kong, the [Buyer]'s issuing the L/C is a precondition for the [Seller] to perform its duty under the Contract; because the [Buyer] did not issue the Letters of Credit according to the Contract, the [Seller] has no duty to perform its contractual duty; second, according to the law of Hong Kong and the Vienna Convention, the [Buyer] breached the Contract, because it did not issue the Letters of Credit. Thus, the [Seller] has the right to avoid the Contract and claim for damages including loss of the anticipated profits. The [Seller] has no duty to continue performance of the Contract.

THE OPINION OF THE ARBITRATION TRIBUNAL

1. The applicable law

The Contract stipulates, "the Parties hereby incorporate by reference the provisions of Part II and Part III of the United Nations Convention on Contracts for the International Sale of Goods (Vienna 1980), except to the extent inconsistent with the express provisions of this Agreement or contrary to applicable law. This Agreement shall be governed by and construed in accordance with the law of Hong Kong (without regard to choice of law principles)." Thus, the law of Hong Kong applies to this case. Meanwhile, the parties incorporated by reference the provisions of Part II and Part III of CISG except to the extent inconsistent with the express provisions of this Agreement or contrary to applicable law, so Part II and Part III of CISG, except to the extent inconsistent with the express provisions of this Agreement or contrary to applicable law also apply to this case.

2. The issue of economic duress alleged by the [Seller]

The [Buyer] alleges that it signed the Contract in this case under economic duress, because the [Seller] promised to make the payment under another contract between the parties, Contract No. ALIN-20738PRK.

The Arbitration Tribunal holds that first, contract No. ALIN-20738PRK is independent of the Contract in this case, and is a different legal relationship, so it is not within the scope of this arbitration; second, the documents regarding the performance of the above contract and the correspondence submitted by the parties could not prove that the Contract in this case was signed by the [Buyer] under any economic duress.

The Contract in this case is the true expression of the parties, and is legal and valid. Thus, the Arbitration Tribunal does not sustain the [Buyer]'s allegation of economic duress.

3. The issue on the change of regulation

The [Buyer] alleges that during the performance of the Contract, the Chinese government changed the regulations on import of alumina which caused the [Buyer] to be unable to perform its contractual duty; under such circumstances, the [Buyer] shall be exempted from liability.

The [Seller] alleges that it lacks factual basis for the [Buyer] to allege that the change of regulation caused it to be unable to perform its duty under the Contract; even if the regulation was changed, that could not be the basis for the [Buyer] not to issue the Letters of Credit.

First, after reviewing the material submitted by the parties, the Arbitration Tribunal notes that on 29 September 2001 the Emergent Announcement of Temporary Automatic Record of Import of Alumna was released by National Economic and Trade Commission, Ministry of Foreign Trade and Economic Cooperation, and General Administration of Customs. On 30 September 2001, the Ministry of Foreign Trade and Economic Cooperation issued the Emergent Announcement of Strengthening Management of Import of Alumna." However, the Arbitration Tribunal holds that the amended regulation does not completely prohibit import of alumina, but stipulates some new requirements regarding the approval and registration of import of alumina, so the [Buyer] could perform the Contract, and the amended regulation did not cause the [Buyer] to be unable to perform its duty under the Contract.

Second, in its Response, the [Buyer] alleges, "because of the Chinese government's restrictive regulation on import of alumina, the manufacturer could not obtain the registration certificate of import of alumina within a short time in October and November 2001. If the [Buyer] could not obtain the registration certificate of import of alumina, it would incur severe economic loss (the demurrage is 5/10000 of the contract price per day)." According to the [Buyer]'s above statements, after the Chinese government amended the regulation on import of alumina, the [Buyer] could still take the delivery of the goods from the [Seller], but it needed to obtain the registration certificate for customs declaration after receiving the goods; during this period, because the customs declaration could not be completed within a short period, the [Buyer] might incur some demurrage. The Arbitration Tribunal holds that in international trade transactions, such risks shall be borne by the [Buyer], and the [Buyer] should not refuse to perform the Contract in order to avoid that risk.

Third, the Arbitration Tribunal finds that the [Seller] submitted a fax sent by the [Buyer] on 27 September 2001 in which the [Buyer] explained why it did not issue the Letters of Credit, alleging that "There is something wrong in the procedure of opening the L/C." The [Buyer] did not object to the truthfulness of this fax. In this fax, the [Buyer] did not state that it could not issue the Letters of Credit because of the change of regulation, but because of a procedural problem in opening the L/C. The [Buyer] did not mention that "the China government had issued a publication on aluminum importing," until 15 October 2001 in the fax. Thus, the Arbitration Tribunal holds that the [Buyer] did not issue the Letters of Credit not only because of the change of regulation.

Accordingly, the Arbitration Tribunal holds that the change of regulation on import of alumina cannot be a reasonable basis for the [Buyer] to refuse to perform its contractual duty. The [Buyer] did not issue the Letters of Credit, and fundamentally breached the Contract. The Arbitration Tribunal does not sustain the [Buyer]'s allegation that "Because of the change of regulation on import of alumina, the [Buyer] shall be exempted of liability."

4. The issue on delivery of the goods

The price term stipulated in the Contract is CIF Free Out Lian Yun Gan, the shipping times were that the first shipment should be made in September 2001; the second shipment should be made in October 2001, and the remainder should be delivered in October or November 2001. The [Buyer] should have issued Letters of Credit on 26 September and 15 October 2001, respectively. According to the CIF term, the [Seller] should notify the [Buyer] of the shipping time according to the Contract. However, during the performance of the Contract, the [Buyer] did not issue the Letters of Credit according to the Contract, which constituted a fundamental breach, so the [Seller] had no duty to deliver the goods. In addition, according to Article 52 of the Regulation on Sale of Goods of Hong Kong and Article 74 of CISG, when the [Buyer] did not open the Letters of Credit and fundamentally breached the Contract, the [Seller] has the right to avoid the Contract and claim for damages including the loss of anticipated profits. The delivery of the goods is not the necessary condition for the [Seller] to claim for damages.

5. The [Seller]'s arbitration claims

      (1) The claim for the first installment

      The [Seller] alleges that the first installment, 3,000 tons alumina arrived in September 2001. However, because of the [Buyer]'s breach, the [Seller] resold the above goods at US $156/ton to a third party customer in order to mitigate the loss, and the [Seller] incurred a loss of US $9,000. The [Seller] submitted Contract No. ALA-21720SRK signed by the [Seller] and Shandong __ Import and Export Company (hereafter, "Shandong __") on 9 August 2001. However, the [Buyer] alleged that this contract was signed before the Contract in this case was signed and that the quantity of the goods under this contract is 25,000 tons, which is not in accord with the quantity of the first installment.

According to the evidentiary material and the facts verified at the court session, the Arbitration Tribunal notes that, although the contract between the [Seller] and Shangong __ was signed before the Contract in this case, the delivery port is Lian Yun Gang, and the delivery time is September 2001, which are consistent with the first installment under the Contract in this case. As to the inconsistency of the quantity of the goods, the [Seller] submitted considerable material to prove that "the [Seller] purchased the goods in a large quantity, and distributed the goods to buyers who signed the contracts afterward," "the [Seller] used +/_10% more or less to distribute the 3,000 tons of goods in the first installment to Shandong __." Thus, the Arbitration Tribunal holds that because the goods under the Contract are not special, the way of transaction as the [Seller] described is reasonable. When the [Buyer] did not issue the Letters of Credit in accordance with the Contract, it is reasonable for the [Seller] to resell the goods to a third party buyer. According to Article 75 of CISG, the [Buyer] shall compensate the [Seller] for the loss of anticipated profit due to reselling the goods, i.e., the difference of the contract price and the resale price, US $9,000.

      (2) The claim for the second installment

      As to the second installment, the [Seller] submitted the sales contract signed with its supplier, __ Marketing AG on 4 September 2001, and the contract price is US $143/ton. According to the transportation fee report in September 2001, and considering the increase of the transportation fee in the market, the [Seller] determined the transportation fee was US $4/ton in October 2001. The price under the Contract in this case is US $159/ton. Thus, the profit of the second installment is US $ (159-143-4) X 10,000 tons = US $120,000.

The Arbitration Tribunal notes that the [Seller]'s evidence shows that the [Seller] had already prepared the second installment. Although the [Buyer] fundamentally breached the Contract, according to Article 77 of CISG the [Seller] should take reasonable measures to mitigate the loss including the anticipated profit caused by the [Buyer]'s breach. Meanwhile, according to the [Seller]'s allegation, "the [Seller] purchased the goods in a large quantity, and distributed the goods to buyers who signed contracts afterward," and these are general goods under the Contract without specialty. The Arbitration Tribunal holds that the [Seller] should and could timely dispose of the goods in order to mitigate the loss after the Contract is avoided.

Thus, according to the [Seller]'s allegation that it purchased the goods in a large quantity, and then distributed them to other buyers, and considering the [Seller]'s loss of profits for the second installment, the Arbitration Tribunal holds that the loss of profit shall be calculated according to the market price CIF Lian Yun Gang in October 2001.

Because the time when the [Seller] resold the first installment to Shandong __ is close to the time when the Contract was avoided, and the parties did not submit any evidence to prove the price was greatly fluctuating during this period, the Arbitration Tribunal holds that the price at which the [Seller] resold the first installment to Shandong __, i.e., US $156/ton CIF Lian Yun Gang, can be reasonably deemed to be the market price when the Contract was cancelled. The second installment which the [Seller] prepared for the [Buyer] was originated in Australia; the contract price for the second installment is US $159/ton, and the price difference is US $3/ton.

In sum, the amount the [Buyer] shall compensate the [Seller] for the loss of profits for the second installment is US $ (159-156) X 10,000 tons = US $30,000.

      (3) The claim for the third installment

      As to the third installment, the [Seller] submitted its supplier __ Aluminum Co. Ltd.'s offer, and alleged that they did not sign a formal contract and the price was not determined. Therefore, the [Seller] provided a CRU Monitor Alumina Report in October 2001 showing that in October 2001 the market price of alumina was US $135/ton, and claimed for the loss of profit based on the difference of the contract price and the market price.

The Arbitration Tribunal finds that on 18 October 2001 the [Seller] announced to avoid the Contract because of the [Buyer]'s fundamental breach. In the court session, the [Seller] stated that because of the [Buyer]'s breach, the [Seller] did not prepare the goods for the third installment, and that there is no issue of resale. The Arbitration Tribunal holds that because the [Seller] did not prepare the goods, it did not incur any actual loss but only loss of anticipated profit. Under the above circumstances, according to Article 76 of the CISG, the [Seller] has the right to claim for the difference between the contract price and the market price when the Contract was avoided. The CISG also stipulates that the market price shall be the price at the place where the goods shall be delivered at the time when the goods shall be delivered. The [Seller] submitted a CRU Monitor Alumina Report of October 2001 which shows the FOB market price of Nalco alumina in October 2001. The Arbitration Tribunal holds that, first, this price can only show the average international market price, but not the CIF Lian Yun Gang price of Nalco alumina in October 2001; second, the [Seller] alleges that the goods prepared for the third installment is Nalco alumina, but did not provide any evidence. Thus, the Arbitration Tribunal holds that the above market price submitted by the [Seller] cannot be used as the market price when the Contract was avoided.

The [Buyer] alleged that in October 2001 the market price of Nalco alumina was increasing, and submitted Contract No. ALA-22088SRK signed by the [Seller] and Wuhan Tranye International Company (hereafter, "Wu Han Company") on 29 October 2001, which shows that the Nalco price was US $159/ton CIF Qingdao.

After reviewing the above material submitted by the parties, the Arbitration Tribunal holds that as to the third installment, the [Buyer]'s fundamental breach caused the [Seller] to incur the loss of anticipated profit. However, because the parties did not provide the reasonable market price at the delivery place stipulated in the Contract, comprehensively considering the parties' allegations, evidence and the loss of profits for the prior two installments, the Arbitration Tribunal holds that it is reasonable for the [Buyer] to compensate the [Seller] for the loss of profits of US $80,000.

The Arbitration Tribunal finds that the loss of profit for the third installment which the [Seller] claimed for includes the interest for the 180 days forward L/C, totaling US $102,050. The Arbitration Tribunal holds that although the interest is stipulated in the Contract, the precondition for the [Seller] to obtain the interest is that the [Seller] must deliver the goods in accordance with the Contract, and purchase the goods under the Contract for about US $3,000,000, which could be paid after 180 days after the second L/C was issued. However, as to the third installment, because the Contract was avoided due to the [Buyer]'s fundamental breach, the [Seller] need not spend money preparing the third installment. The Arbitration Tribunal holds that the [Buyer]'s fundamental breach not only exempted the [Seller] from its duty to prepare the goods and spend money, but also deprived the [Seller] of the right to obtain the above interest; the [Seller] could rearrange the money. Therefore, the Arbitration Tribunal does not sustain this claim of the [Seller].

      (4) The issue on interest

      According to Article 78 CISG, "If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it." The Arbitration Tribunal holds that, in this case, the amount which the [Seller] claimed for is actually damages due to the [Buyer]'s breach, but is not related to any sum in arrears, and the damages would be determined by the arbitration award, and the [Seller] did not incur any loss of interest. Thus, the Arbitration Tribunal does not sustain the [Seller]'s claim for interest.

      (5) The issue on the attorneys' fee

      The [Seller] incurred an attorneys' fee totaling US $78,967. Because not all of the [Seller]'s arbitration claims are sustained, the Arbitration Tribunal holds that the [Buyer] shall reasonably compensate the [Seller] for the attorneys' fee, totaling US $11,900.

      (6) The [Seller] did not submit any relevant evidence to prove the traveling, administrative and other expenses, so the Arbitration Tribunal does not sustain this claim.

      (7) The issue on the arbitration fee

      Because the Arbitration Tribunal sustains most of the [Seller]'s claims, the [Seller] shall bear 30% of the arbitration fee, and the [Buyer] shall bear 70%.

      (8) The issue on the expenses incurred in this case

Because the foreign arbitrator was appointed by the [Seller], the [Seller] shall bear the expenses, totaling US $9,000.

AWARD

      (1)  The [Buyer] shall pay the [Seller] the loss of profits, totaling US $119,000;
 
      (2) The [Buyer] shall pay the [Seller] the attorneys' fee, totaling US $11,900;
 
      (3) The [Seller]'s other claims are dismissed;
 
      (4) The arbitration fee is US $18,714, of which the [Seller] shall bear 30%, i.e., US $5,614.20, and the [Buyer] shall bear 70%, i.e., US $ 13,099.80. The [Seller] has prepaid the arbitration fee, i.e., US $18,714; so the [Buyer] shall pay the [Seller] US $13,099.80;
 
      (5) The [Seller] shall bear the expenses incurred by the foreign arbitrator, totaling US $9,000, which the [Seller] has paid to the Arbitration Commission in advance.

The [Buyer] shall pay the above amounts within 60 days after the award is handed down; otherwise, annual interest shall be added at the rate of 8%.

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

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

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Pace Law School Institute of International Commercial Law - Last updated October 20, 2010
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