China September 2004 CIETAC Arbitration proceeding (Steel products case) [English text]
[Cite as: http://cisgw3.law.pace.edu/cases/040900c1.html]
DATE OF DECISION:
DATABASE ASSIGNED DOCKET NUMBER: CISG/2004/07
CASE HISTORY: Unavailable
SELLER'S COUNTRY: Switzerland (respondent)
BUYER'S COUNTRY: People's Republic of China (claimant)
GOODS INVOLVED: Steel products
APPLICATION OF CISG: Yes
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
4B [Scope of Convention (issues excluded): penalty clauses, agency issues]; 7B1 [Materials for interpretation of Convention: international case law and scholarly studies]; 25A1 [Effect of fundamental breach: avoidance of contract]; 74A ; 74B [General rules for measuring damages: loss suffered as consequence of breach; Outer limits of damages: foreseeability of loss]; 76B [Damages recoverable based on current price]; 77A [Obligation to take reasonable measures to mitigate damages]
4B [Scope of Convention (issues excluded): penalty clauses, agency issues];
7B1 [Materials for interpretation of Convention: international case law and scholarly studies];
25A1 [Effect of fundamental breach: avoidance of contract];
74A ; 74B [General rules for measuring damages: loss suffered as consequence of breach; Outer limits of damages: foreseeability of loss];
76B [Damages recoverable based on current price];
77A [Obligation to take reasonable measures to mitigate damages]
CITATIONS TO ABSTRACTS OF DECISION
(a) UNCITRAL abstract: Unavailable
(b) Other abstracts
CITATIONS TO TEXT OF DECISION
Original language (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
UnavailableGo to Case Table of Contents
Beijing, September 2004
Claimant AAA Steel Co Ltd of aaa, PRC
Respondent BBB AG of bbb, Switzerland
PARTIAL AWARD AND REASONS THEREFOR MADE
PURSUANT TO ARTICLE 57 OF THE CIETAC RULES
(2004) CIETAC AWARD NO. 0291-1
|[Terms of Reference
Summary of Procedure
Position of the Parties
|2.||The grounds for and the basis of Buyer's claim|
|4.||Seller's supplementary points of defence|
|5.||Buyer's points of reply|
|6.||The affidavit of Kenny Chen|
|7.||Buyer's supplementary reply to Mr. Kenny Chen's affidavit|
|8.||Failure [of parties] to comply with directions|
|Issues, Conclusions (thus far), and Directions|
|9.||Agreed list of issues|
|10.||Whether DDD was Seller's agent|
|11.||Whether or not clause 7.2 of the contract is a penalty clause and, if so, whether it is
void or whether that clause is in fact an agreed liquidated damages clause
|12.||Whether in either event, ie that the clause is a penalty clause or a liquidated damages
clause, the damages claimed by Buyer are limited by the provisions of Article 74 of CISG
|13.||Whether the proper law of the contract was CISG or CISG as read with Chinese Contract
Law, the relevant law of the People's Republic of China or whether or not the law of
Switzerland, being the place of the address of Seller at the time of the exection of the
contract,together with CISG, constitutes the proper law of the contract
|14.||Whether or not CISG constitutes a complete code|
|15.||Article 114 of the Chinese Contract Law|
|16.||Choice of the proper law / substantive law of the contract|
|17.||Considerations arising from the curial law or lex arbitri|
|18.||The final sentence in clause 7.3 of the contract|
|19.||The submission that the contract was in a Standard Form|
|20.||The authority of CCC|
|21.||Buyer's evidence and submissions in regard to its alleged loss|
|22.||Seller's evidence and submissions in regard to Buyer's alleged loss|
|23.||Article 76 of CISG|
|24.||The Arbitral Tribunal's discretion in regard to the application of Article 114|
|25.||Mitigation of damages|
|26.||Questions of interest|
|28.||Conclusions thus far|
|29.||Further directions and orders]|
[TERMS OF REFERENCE]
For the sake of ease of reference and brevity, the following abbreviations are used below:
|(a)||China International Economic and Trade Arbitration Commission is referred to as the Arbitration Commssion;|
|(b)||Claimant, AAA Steel Co Limited is referred to as [Buyer];|
|(c)||Respondent, BBB AG, is referred to as [Seller];|
|(d)||Shanghai CCC Steeling Material Co Ltd is referred to as CCC;|
|(e)||DDD Tradings SA Brazil Nanjing Office is referred to as DDD; and|
|(f)||The United Nations Convention on Contracts for the International Sale of Goods (Vienna Sales Convention) is referred to as CISG.|
SUMMARY OF PROCEDURE
The China International Economic and Trade Arbitration Commission (hereinafter referred to as "the Arbitration Commission") accepted a dispute arising under the contract marked "CONTRACT No. 77-639 (with the Buyer's Reference No. :02HKWTJ7208069T039 and hereinafter called "the Contract") signed by and between the AAA Steel CO., Ltd. of aaa, P.R.C. (hereinafter called "the Claimant" or "[Buyer]") of the one part and BBB AG of Fischergasse 1 CH-6362 Standard, Switzerland (hereinafter called "the Respondent" or "[Seller]") of the other part. The Arbitration Commission took cognizance of the dispute based on the arbitration clause incorporated in the Contract, and the written arbitration application filed by the Claimant on December 16th, 2003. The CIETAC number of the case is R2003XXXX.
The dispute was referred to the Arbitration Commission pursuant to Clause 6 of the Contract. It states as follows:
|"(1)||All disputes arising out of or in connection with the present Contract including disputes on its conclusion, binding effect, amendment and termination shall be resolved by China International Economic and Trade Arbitration Commission in Beijing in accordance with its rules of arbitration.|
|(2)||The decision shall be final and binding for both parties.|
|(3)||Arbitration shall be held in English Language.|
|(4)||The arbitration fees shall be born by the loosing party unless otherwise awarded by the commission."|
A Notice of Arbitration was sent to the Claimant [Buyer] and the Respondent [Seller] respectively on December 30th, 2003 by the Secretariat of the Arbitration Commission. Attached to the Notice of Arbitration to the [Buyer] were the Panel of Arbitrators and CIETAC Arbitration Rules, and to the [Seller] were the Application for Arbitration submitted by the Claimant, the Panel of Arbitrators and the CIETAC Arbitration Rules.
On February 9th, 2004, an Arbitration Tribunal was formed consisting of Mr. XXX, the Presiding Arbitrator appointed by the Chairman of the Arbitration Commission in conformity of the Article 24 of the CIETAC Arbitration Rules as the parties failed to jointly appoint or jointly entrust the Chairman of the Arbitration Commission to appoint the presiding arbitrator within the time limit, Mr. XXX, the Arbitrator appointed by the [Buyer], and Mr. XXX, the Arbitrator appointed by the [Seller].
The [Seller] submitted its Statement of Defense to the CIETAC Secretariat on February 20, 2004.
On March 3rd, 2004, the Arbitration Tribunal drafted a Direction to parties in regard with submissions to facilitate the smooth running of the case and to inform parties that an oral hearing is decided to be held in Beijing for three days commencing from July 26th 2004. The CIETAC Secretariat issued the formal Notice of Hearing to parties on June 25, 2004.
The hearing was held in Beijing at due time. Both the [Buyer] and the [Seller] were represented by their authorized arbitration attorneys at the hearing, who made oral statements and arguments, replied to the questions of the Tribunal, and filed written submissions concerning the facts and legal issues of the case. After the hearing, both parties submitted written supplementary documents to the Arbitration Commission in accordance with the directions made by the Tribunal in the hearing.
The Tribunal now proceeds to make a Partial Award according to Article 57 of the Arbitration Rules.
[POSITION OF THE PARTIES]
1. [Buyer]'s Claim
[Buyer] of aaa, P.R. China, represented in this Arbitration by EEE Law Firm, claims damages from [Seller] of bbb, Switzerland, represented by FFF Lawyers, in the following amounts:
|(a)||Reimbursement of anticipated profit:
Average Market price (Evidence VII: Market prices on
December 13 and 23, 2002) - less contractual price and
port charge (Evidence VIII: calculation sheet)
|(b)||Reimbursement of the banking service charge:||RMB||19,340|
|(c)||Reimbursement of the retaining expense:||RMB||400,000|
|(d)||Reimbursement of traveling and other cost:|
|(e)||Reimbursement of interest up to payment of claim:|
|(f)||Reimbursement of arbitration fee:|
2. The grounds for and the basis of [Buyer]'s claim
2.1 [Buyer] claims that it and [Seller], through their respective agents, CCC and DDD, negotiated a contract for the supply of certain steel products by [Seller] to [Buyer].
2.2 A contract no. 77-639 with [Buyer] reference no. 02HKWTJ7208069T039 was concluded by an exchange of faxes on 10 and 11 September 2002. The Contract shows that its date of execution was 5 September 2002.
2.3.1 Pursuant to the Contract referred to above, [Seller] sold 5,560 MT of new produced hot rolled steel sheets in coils to [Buyer] for a total consideration of US$1,559,000.00.
2.3.2 Under the heading SPECIFICATION and the sub-heading Shipment, it is provided that shipment would be "By October 10, 2002 ex any Azov Sea and/or Black Sea Port by bulk shipment".
2.4 [Buyer], pursuant to the terms of the Contract, had a Letter of Credit no. 002LC0200895 issued in favour of [Seller] on 19 September 2002 for the purchase consideration.
2.5.1 On 22 September 2002, DDD, on behalf of [Seller], notified CCC, on behalf of [Buyer], that it would not fulfil its contractual obligations.
2.5.2 According to [Buyer], the information given to by DDD was to the following effect:
"1. [Seller] first sold the contractual cargo to the Middle East market before. Then it sold to your company in Chinese market in secret at the increased price by USD 18 per MT. But now Hong Kong GGG (producer) and client in Middle East knew its intention now, informed the Head Office of GGG, and prepared for arbitration. It can not but sold to the client in Middle East again and say sorry to you.
2. [Seller] informed our company that it would like to compensate USD 2 per MT as the opening fee occurred by your company and hope you can understand its plight situation. It will guarantee to give you preferential treatment concerning the products produced by GGG in the future.
3. We are still trying our best but maybe with little hope for it will be very difficult for [Seller] to buy the product from GGG if it had sold to you this time. It is still unreasonable to try to keep this transaction by increasing the price again.
4. One company is only the agent but not [Seller] itself. So we will try our best to cooperate with you to solve the problem ...."
2.5.3 On 23 September 2002, CCC received a fax from DDD. The fax read as follows:
"[Seller] would like to conciliate with the client in Middle East and GGG for it had made the more profit with the effort of [Seller] i.e. to compensate client in Middle East in order to perform this contract. We told it that you are the main importer in East China. [Seller] also does not want to give you bad impression. Maybe there is still some chance for they are negotiating now. It will perform the contract if negotiating result is good. Otherwise it will compensate you as promised before. Please wait some days with the patience and will let you know if there is any new progress. Thanks."
2.6 On 9 October 2002, DDD informed CCC by fax that [Seller] intended returning the above letter of credit, which it ultimately did.
2.7 [Buyer], relying on the United Nations CISG as read with Chinese Contract Law, seeks an award in its favour for damages as set out in paragraph 1 above.
3. [Seller]'s defence
3.1 In paragraph 1 of [Seller]'s Statement of Facts, the Contract is admitted. [Seller] however states in paragraph 2 that [Buyer] purchased the goods for CCC. The latter company did not have an import licence, but [Buyer] did, and because of that position CCC arranged for the importation of the steel through [Buyer].
3.2 In paragraph 3, [Seller] denies that DDD was its agent. [Seller] goes on to say:
"DDD was not an agent of the [Seller] and was helping the [Seller] merely to advance its own business objective. The [Seller] has discovered that in the course of DDD's contact with CCC, DDD has provided CCC certain incorrect information without prior consent or verification from the [Seller]."
3.3 [Seller] admits that it failed to fulfil the Contract, see paragraphs 4 and 6 of its Points of Defence. [Seller] says it informed CCC, through DDD, that there was no vessel available for the shipment of goods in time to Taicang, the destination port, and that the only available vessel would have delivered the goods later than the date set in the agreement for delivery and "at a much higher freight rate than normal". [Seller] goes on to say in paragraph 4 that it offered CCC three options:
"A. To ship the goods to South China (Huangpu port);
B. To change the delivery terms to FOB and then customer could arrange for shipment by himself.
C. To cancel the Contract, return the L/C to the applicant (i.e. the Claimant) and to pay liquidated damages in accordance with Clause 7.2 of the Contract."
3.4 At a later point in time, [Seller] was informed through DDD that CCC had agreed to cancel the Contract and requested the return of the Letter of Credit which [Seller] had received.
3.5 On 9 October 2002, DDD informed CCC as to the procedure to return the Letter of Credit, after which [Seller] returned the Letter of Credit.
3.6 In paragraph 7, [Seller] says that as it did not hear further about the matter, it had no reason to believe that the Contract was not validly cancelled, and then went on to sell the goods to another buyer.
3.7 Under the heading Legal Argument:
|(a)||[Seller] does not accept [Buyer]'s submission that the proper law is CISG and
Chinese Contract Law. [Seller] maintains that the proper law of the Contract is
|(b)||[Seller] states that both it and [Buyer] are from countries which are signatories to
CISG. It adds that even if both parties were not in countries that are signatories to
CISG, international practice dictates that the law of Switzerland, ie the law where
[Seller] carries on business, should be applied, and
|(c)||[Seller] points to Article 2.6.1 of the Judicial Interpretation of the PRC Foreign Related Economic Contract Law [Fa(Jing)fa(1987)No.27], in support of further argument that where the parties do not choose the laws applicable to an international purchase contract of goods, the laws of the country of where the seller has its address, at the time of the conclusion of the contract, shall be applied.|
3.8 In paragraph II. The [Buyer]'s Claim for Damages Should be Set Aside, [Seller] alleges that having regard to the facts above, the Contract was cancelled by consent.
3.9.1 In paragraph III. The [Seller] Should at the Most be Liable to Pay For the Amount of Liquidated Damages as Specified in the Contract if the Tribunal Deemed the Contract had Not Been Discharged, [Seller] refers to Clause 7.2 of the Contract. This clause provides for payment of penalty and reads as follows:
"If Buyer opens an acceptable Letter of Credit as per the Contract and thereafter the Seller cancels the present contract or fails to deliver the Goods for reasons other than Force Majeure, the Seller shall pay a penalty of USD/MT 2 to the Buyer. The Seller will pay no further claims on this account."
3.9.2 [Seller] maintains that this clause is not a penalty clause but in fact a liquidated damages clause. [Seller] says that the liquidated damages (penalty) is the amount which under Article 74 limits the amount of damages that can be recovered for breach of contract. The clause relevantly says:
"Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract."
3.10 [Seller] has in any event denied each and every subheading of damages claimed by [Buyer].
4. [Seller]'s Supplementary Points of Defence
In [Seller]'s Supplementary Points of Defence, [Seller]:
|(a)||in paragraph II(1) reiterates its statement that [Buyer] consented to the cancellation
or is deemed to have accepted the cancellation of the Contract because of the fact
that it did not protest within a reasonable time;
|(b)||states that as [Buyer] is an import agent, it could not have earned the anticipated
profit even if it had fulfilled the Contract. It points out that [Buyer] relied on the
prices of "Russian hot rolled steel coils in Shanghai provided by the website "mysteel"
(Evidence VII of the Claimant). However, the website "mysteel" is not an
authoritative source of information and is no way to be a reference of market price.";
|(c)||makes the point that because the dates on which the price of hot rolled steel coil
selected by [Buyer], viz December 13 and 23, 2002, were not relevant to the
Contract at all, [Buyer]'s claim for anticipated profits cannot be sustained; and
|(d)||says in paragraph 4 that the amounts claimed by [Buyer] exceed the foreseeable loss at the time of the execution of the Contract, in the light of the fact that both parties decided that US$2.00 per MT was the most appropriate figure reflected in the Contract as damages that [Buyer] would suffer in the event of a breach of Contract.|
5. [Buyer]'s Points of Reply
5.1 In [Buyer]'s Points of Reply, [Buyer] advances the following relevant contentions under the heading Statements of Facts:
|(a)|| In paragraph 3, [Buyer] points to the following article of Chinese Contract Law "If
within the scope of the power delegated by the principal, the agent, in his/her own
name, concludes a contract with a third party, and the third party knows the proxy
relationship between the agent and principal at the time of concluding the contract, the
contract shall directly bind the principal and the third party". [Buyer] relies on this
article to establish that DDD was [Seller]'s agent.
|(b)||[Buyer] denies that it agreed to cancel the Contract.|
5.2 Under the heading Legal Argument, [Buyer] advances the following contentions:
|(a)||It refers to the Judicial Interpretation of the PRC Foreign Related Economic Contract
Law [Fa(Jing)fa(1987)No.27] cited by [Seller] in its Defence and points out that this
was rescinded by the Supreme Court of the People's Republic of China on June 16,
|(b)||It maintains that Chinese Contract Law is the proper law of the Contract, to be read with "CISG". In sub-paragraphs 1-5, [Buyer] advances its reasons for this contention, viz:|
|"1.||The terms and conditions of this contract were negotiated, concluded, and
signed through the faxes and emails of the [Buyer] and the agent of
the [Seller] which is located in China even the [Seller] is not. The
agent is familiar with the Chinese transaction practice and laws. The
place of conclusion of this contract was actually in China.
|2.||The shipment port is Azov Sea and / or Black Sea port which is not
in the country of the [Seller] but the destination port and final use of
the contractual cargo is in China.
|3.||The [Seller[ is only trading company not real shipper. This can be
found from the clue in the article 3.2.1 of contract mentioning that
"Third party documents except for invoice and B/L's acceptable"
and from faxes which said the [Seller[ bought from GGG and resold
to the [Buyer].
|4.||The Buyer is located in China.
|5.||The Place of arbitration is in China."|
5.3 In paragraph III. The [Seller should be responsible for all the damages other than the penalty as specified in the contract, [Buyer] says:
"There is Paragraph one of Article 114 in the Chinese Contract Law, which stipulates that 'The parties to a contract may agree that one party shall, when violating the contract, pay breach of contract damages of a certain amount in light of the breach, or may agree upon the calculating method of compensation for losses resulting from the breach of contract.'
This is the so-called liquidated damages clause in the [Seller]'s Defense.
The paragraph two of this same Article continues stipulating that: 'If the agreed breach of contract damages are lower than the losses caused, any party may request the People's Court or an Arbitral Institution to increase it; If it is excessively higher than the losses caused, any party may request the People's Court or an Arbitral Institution to make an appropriate reduction.'
So this paragraph means that any clause in the contract which contains any forms of breach of contract damages can be negotiated between both the parties to the contract. But the breach of contract damages must be fair and on the basic estimate of the actual damage, otherwise, the damage which is too lower can be increased by the Arbitral Tribunal once upon the Buyer] requests so.
So even there is liquidated damages clause in the contract just as what the [Seller] says, the Law stipulates that this amount can be increased other than what the [Seller] says that 'The [Seller] should at the Most liable for the amount of liquidated damages as specified in the contract...' for the US $11,120 is too lower and unreasonable for the following reasons:
So the [Seller] should be responsible for the actual damages even there is the sentence in the contract saying that "the Seller will pay no further claims on this account."
6. The Affidavit of Kenny Chen
6.1 [Seller] has served and filed an Affidavit of Kenny Chen dated 30 April 2004. The salient points made by Mr Chen in this affidavit are as follows:
|(a)||In paragraph 1, he states that he is a director of DDD.
|(b)||In paragraph 2, he states that DDD assisted [Seller] in regard to the Contract, the
subject matter of this dispute.
|(c)||In paragraph 3, he says that [Buyer] was not the end user of the goods, the end user
|(d)||In paragraph 4, Mr Chen states that in mid September he received a telephone call from [Seller] and learnt that it was unable to deliver the goods pursuant to the Contract because of unexpected difficulties in shipping arrangements. He was instructed to relay this development to CCC and to give CCC three options:|
|(i)||that the goods be shipped to South China (Huangpu Port); or
|(ii)||to change the delivery terms to FOB, and CCC would make arrangements
for shipping itself; or
|(iii)||to cancel the Contract and for the return of the Letter of Credit.|
|(e)||In paragraph 5, Mr Kenny Chen states that CCC agreed to have the Contract
cancelled and DDD informed [Seller] of the same. Mr Chen does not say when that
conversation took place. The date of that conversation, as will more fully appear from
that which follows in regard to the question of the date of the avoidance of the
Contract, may be very significant.
|(f)||In paragraph 6, DDD subsequently sent faxes to CCC including the ones in which
DDD said that [Seller] had sold the goods to a Middle Eastern buyer. This
information was not correct. The information about a Middle Eastern buyer was
made "it thought that the [Buyer] might be unhappy if it learnt about the sale to
another Chinese buyer although the Contract had been cancelled. The Middle
Eastern Buyer story was just an excuse, which was in fact fake, for DDD, with a
view to maintaining a harmonious relationship between DDD and CCC.
|(g)||In paragraph 8, Mr Chen says that he had once discussed the payment of liquidated damages with CCC in accordance with clause 7.2 of the Contract but CCC did not give him a definite answer "such as the banking arrangement". He then went to Taiwan and since then has not followed up this issue.|
6.2 The Secretariat, at the request of the Tribunal, notified [Seller]'s lawyers that Mr Kenny Chen should attend the hearing of the Tribunal, so that both the Tribunal and the lawyers for [Buyer], would be able to ask Mr Chen certain questions. The Secretariat was advised by the lawyers for [Seller] that Mr Chen was not available to attend the hearing of the Tribunal.
6.3 At the hearing, on 26 July 2004, Mr Tony Zhang (Zhang Zhen-an) for [Buyer], objected to Mr Chen's Affidavit being admitted into evidence.
Mr Harry Du for [Seller], argued that the affidavit should be admitted.
6.4 After hearing submissions of the parties, the Tribunal accepted Mr Chen's Affidavit into evidence, but informed the parties in the light of the fact that Mr Chen was not available to answer any questions, his Affidavit would be given no weight.
6.5 However, where facts in Mr Chen's Affidavit are relevant and supported by other evidence or documents not in dispute, there can be no basis for rejecting those facts. Here, the Tribunal recalls that on or about 22/23 September 2002, Mr Chen, after learning from [Seller] that it was unable to deliver the goods pursuant to the Contract, gave CCC the three options referred to in paragraph 6.1(d)(i)-(iii) above.
7. [Buyer]'s Supplementary Reply to Mr Kenny Chen's Affidavit
7.1 The salient points made in the Supplementary Reply are as follows:
|(a)||In paragraph 1, it seems to be admitted that [Buyer] was an agent for CCC but it is
contended that [Buyer] has the right to claim damages on its behalf.
|(b)||In paragraph 2, [Buyer]'s claim for damages is on the basis that [Seller] knew the
market price for the steel had gone up considerably.
|(c)||In paragraph 4, it normally takes 45 days from "the black port to Shanghai port". The
goods would therefore have arrived in the ordinary course of events around the
middle or end of December 2002, and that should be the date for the calculation of
|(d)||In paragraph 5, it is contended in regard to banking and "retaining expense" claimed by [Buyer], reliance is made on Article 59 of the CIETAC Rules which provides as follows:|
"The Tribunal has the power to decide in the arbitral award that the losing party shall pay the winning party as compensation a proportion of the expenses reasonably incurred by the winning party in dealing with the case. The amount of such compensation shall not in any case exceed 10% of the total amount awarded to the winning party."
7.2.1 It is not without significance that in the Reply above, the allegations of fact made in Mr Kenny Chen's Affidavit and summarized in paragraph 6 above, have not been denied. In particular, there is no denial of the fact that CCC agreed to have the Contract cancelled. The Tribunal stresses that there is not only no denial of that fact, but that [Buyer] has not put on any evidence from CCC as to the conversation with Mr Kenny Chen, who said what to whom, and when that conversation took place. This failure to deal with these allegations, may be as a result of a mere omission, or it might have been a deliberate forensic choice not to traverse these facts. Under the heading "Directions" below, the Tribunal suggests a way forward so as to afford procedural fairness to both parties.
7.2.2 The ultimate significance of the matters referred to above has still to be determined, more particularly in the light of the fact that [Seller], as pointed out elsewhere in this Partial Award, has emphatically denied that Mr Kenny Chen was [Seller]'s agent with authority to act on its behalf.
8. Failure to comply with directions
8.1 In order to facilitate the smooth running of this arbitration, the Arbitral Tribunal issued a series of directions on 3 March 2004. A copy of these directions are in the official CIETAC file of these Arbitration Proceedings.
Here paragraph 5.1 is referred to as follows:
"By not later than 30 June 2004, the parties' legal representatives will exchange written outlines of Submissions which will address the following matters:
The facts which each party says should be found by the Arbitration Tribunal.
|(b)||The Law supported by the relevant authorities in regard to:|
|(i)||The proper law of the Contract.
|(ii)||The allegation by the Respondent that the Contract was cancelled
and a settlement reached.
In this regard, the parties are required to provide the authorities that
they rely on dealing with cancellation and settlement of a dispute.
|(iii)||Whether the CISG constitutes a complete code, and whether or not
any provision in the Contract for liquidated damages is valid.
|(iv)||How the penalty clause is to be interpreted, and whether it is open to
the Respondent to contend that the penalty clause should be read as
a liquidated damages clause
|(v)||Whether a party to a Contract who has a liquidated damages clause in its favour, is bound by it, or whether that party can, in law, claim damages for breach of contract instead of claiming liquidated damages."|
8.2 As will appear from the paragraphs below, neither party has complied fully with those directions and, during the course of the oral hearing, sought leave to adduce further evidence.
8.3 The Tribunal granted leave for this further evidence to be adduced, and accepted it on a provisional basis, subject to the further three sets of directions are contained in the official CIETAC file of these Arbitration Proceedings.
8.4.1 Subsequent to the oral hearing, [Seller] served and filed "Submissions on Applicable Law" dated 29 July 2004.
8.4.2 Both [Buyer] and [Seller] have served and filed further submissions dated 6 August 2004 and 9/11 August 2004 respectively. In addition thereto, [Buyer] has submitted a document which purports to be a Steel Import Agency Agreement.
[ISSUES, CONCLUSIONS (thus far), AND DIRECTIONS]
9. Agreed list of issues
9.1 In order to further facilitate the smooth hearing of this arbitration, the Tribunal extracted the following List of Issues:
|(a)||Whether DDD was [Seller]'s agent.
|(b)||Whether the proper law of the Contract was CISG or CISG as read with Chinese
Contract Law, the relevant law of the People's Republic of China.
|(c)||Whether or not [Buyer] impliedly agreed to cancel the Contract when it accepted
the return by [Seller] of the Letter of Credit, without protest.
|(d)||Whether or not CCC:|
|(i)||had authority as agent or otherwise of [Buyer] to agree to the cancellation of
the Contract; and
|(ii)||whether or not it did so; and
|(iii)||whether if it did so, it agreed on behalf of [Buyer] to waive and/or abandon any claim for damages which [Buyer] might otherwise had had.|
|(e)|| Whether or not clause 7.2 of the Contract is a penalty clause and, if so, whether it is void or whether that clause is in fact an agreed liquidated damages clause.
|(f)||Whether in either event, ie that the clause is a penalty clause or a liquidated damages
clause, the damages claimed by [Buyer] falls within Article 74 of CISG.
|(g)||Whether or not the Arbitral Tribunal has the power to increase and/or reduce any
amount of liquidated damages pursuant to Article 114 of the Chinese Contract Law.
|(h)||The quantum of damages [Buyer] may have suffered.
|(i)||Questions of interest.
9.2 The Arbitral Tribunal directed both parties to:
|(a)||state whether there were any other issues that they intended to canvass at the hearing;
|(b)||serve and file written submissions in reply to the List of Issues.|
9.3 Both parties did submit replies to the List of Issues and stated there were no other issues that they proposed to raise.
9.4 During the course of and after the opening addresses of the lawyers for both parties, the Tribunal members put certain questions to the lawyers for both parties. The Tribunal urged both parties' lawyers to take their time and provide reasoned responses.
In addition thereto, it became clear as the proceedings continued on 26 July 2004 that certain issues had not been canvassed by both parties.
The Tribunal members advised the parties of these issues and informed them that they would be given an opportunity to put further evidence before the Tribunal addressing these issues.
The matter was adjourned at about 3.40 pm to enable the parties to obtain instructions and, if possible, put evidence before the Tribunal concerning these issues.
9.5 This fact and the fact that the parties sought to adduce additional evidence, virtually at the heel of the hunt, has resulted in the fact that the arbitration could not be completed in the allotted time of 3 days, and as state above, both parties have been permitted to put on further evidence and further submissions in writing.
9.6 Despite the fact that there was the agreed list of issues, [Seller], in its submissions of 9 August 2004, has for the very first time raised the issue of mitigation of damages. In the light of the fact that whole issue of damages is still very much up in the air, the Tribunal has decided that this issue, should be allowed to be raised and dealt with.
9.7 These matters will be referred to again on the question of costs.
10. Whether DDD was [Seller]'s agent
10.1 The question as to whether DDD (Mr Kenny Chen) was [Seller]'s agent goes to two issues:
|(a)||Whether or not the statements made by Mr Kenny Chen of DDD in regard to the
non delivery of the steel can be attributed to [Seller].
|(b)||Whether the statement made by Mr Kenny Chen to CCC in paragraph 5 of his Affidavit was made by him as agent for [Seller] or whether or not he made these statements of his own bat.|
10.2 On the one hand, [Seller] seems to suggest that the statements made by Mr Kenny Chen in regard to the non delivery of the steel were not made by him as its agent and that DDD was merely helping [Seller] to advance its own business objectives. [Seller] discovered subsequently that DDD (presumably Mr Kenny Chen) has provided CCC with certain incorrect information, without [Seller]'s prior consent or verification but, at the same time, as pointed out above, [Seller] relies on the facts set out in Mr Kenny Chen's Affidavit in support of its case.
10.3 [Seller] stands by paragraph 3 of its Defence where it is unequivocally denied that DDD acted as [Seller]'s agent.
10.4 Delivery of the steel was admittedly not made. This failure to deliver constituted a fundamental breach of contract within the meaning of Article 25 of CISG. The question as to whether or not Mr Kenny Chen of DDD was the agent for [Seller], seems to the Tribunal, not to be relevant to the non delivery of the steel.
10.5 However, as stated above, the conversation referred to in paragraph 5 of Mr Kenny Chen's Affidavit may well be relevant to the date of avoidance of the Contract, but only on the basis that Mr Kenny Chen was acting as [Seller]'s agent with its full knowledge and consent.
10.6 The Tribunal emphasizes that [Seller] cannot have it both ways. It cannot on the one hand deny that Mr Kenny Chen was its agent, and at the same time rely on him as having acted for [Seller] in regard to the allegation that CCC agreed, on behalf of [Buyer], to cancel the Contract.
10.7 The question of Mr Chen's alleged agency was raised pertinently during the hearing which commenced on 26 July 2004, and the Tribunal advised Mr Du to tell whether or not he wanted to adduce any further evidence on this issue. He said, in no uncertain terms, that he did not want to do so.
10.8 Having regard to paragraph 3 of [Seller]'s Points of Defence and having regard to the state of the evidence, the Tribunal cannot find that Mr Kenny Chen was acting as [Seller]'s agent. Nor can the Tribunal come to the conclusion that he was authorised by [Seller] to negotiate the cancellation of the Contract.
11. Whether or not clause 7.2 of the Contract is a penalty clause and, if so, whether it is void or whether that clause is in fact an agreed liquidated damages clause
11.1 This is an unusual case in that ordinarily the party attacking the validity of the penalty clause is the party against whom the clause is directed. In this case, that party, ie [Seller], argues in support of clause 7.2 and [Buyer], the party who would normally seek to invoke a penalty clause, argues against it.
11.2 Article 6 of CISG says:
"The parties may exclude the application of this Convention or, subject to Article 12, derogate from or vary the effect of any of its provisions."
11.3 As held in the ICC Arbitration Award of March 1999 (Case No 9978), the validity of a penalty clause falls to be determined in accordance with the proper law of the contract which, in that case, was German law.
11.4 Sieg Eiselen, in his October 2002 article "Remarks on the Manner in which the UNIDROIT Principles of International Commercial Contracts May be Used to Interpret or Supplement Article 74 of the CISG", says in sub-paragraph n, page 5 of 21, Unidroit 74 Database Directory, in "GUIDE TO ARTICLE 74" "Use of UNIDROIT Principles to help interpret CISG Article 74", the following:
"The CISG consciously does not deal with so-called liquidated damages and penalty clauses. The framers of the Convention agreed that the validity and application of such clauses were to be dealt with in terms of the applicable legal system due to widely divergent approaches in the different legal systems, Staudinger/Magnus, Art 74, Rn 59 & 60; Honsell/Schönle Art 74, Rn 32; Witz/Salger/Lorenz, Art 74, Rn 42. Article 7.4.13 of the UNIDROIT Principles, however, is based on the validity of such clauses subject to a judicial discretion to reduce the amount where it is grossly excessive. The vagaries of private international law will therefore decide this issue and the UNIDROIT Principles cannot provide any interpretative assistance to the CISG, Russia 23 November 1994 Arbitration proceeding 251/1993, restricting the damages to the extent of the penalty clause."
11.5 In the Tribunal's view, the validity of clause 7.2 of the Contract, and the effect of that clause on the quantum of damages, is to be determined in accordance with Chinese law, which as is held elsewhere in this Partial Award, is the proper law of the Contract.
11.6 Neither of the parties' lawyers could draw the Tribunal's attention to any of the provisions in Chinese law to the effect that a penalty clause is invalid.
11.7 Mr Guiguo Wang, in his article The New Contract Law of China (2000) 15 JCL 242 at p 10, has written as follows:
"The Law permits the parties to agree liquidated damages for breach of contract. For instance, parties may fix an amount as penalty for breach of contract (Article 114 of the Contract Law. The parties concerned may also agree on a formula for calculating the amount). The liquidated damages clause becomes operational once a party expresses by words or acts not to perform the contract regardless of whether the period for performance has expired (The Contract Law, Article 108). If the penalty amount is less than the loss suffered including economic loss that is foreseeable at the conclusion of the contract, the party concerned may request the court or arbitration tribunal to raise the amount so that all losses can be covered (The Contract Law, Articles 113 and 114. The Law also provides that where the penalty amount is higher than the losses suffered, the defaulting party may request the court or arbitration tribunal to make appropriate reductions. The word appropriate clearly indicates the Law's preference for enforcing penalty clauses. Other laws may also apply in cases of breach of contract. In such cases if the other laws offer higher penalties, the party concerned may choose other laws. The Law on Consumer Protection is one such law). Penalties may also be agreed upon for delay of performance. This is new in Chinese contract practice. Under such circumstance, if any party fails to perform the contract in time, he must pay the penalty to the other party."
11.8 It is interesting to note that Mr Guiguo Wang, in his article above, seems to elide the concepts of liquidated damages on the one hand and penalties on the other. He does not distinguish between the two concepts, which are clearly distinguishable in common law systems.
11.9 A liquidated damages amount is an amount representing a genuine pre-estimate of the damages that a party to a contract will suffer in the event of a particular breach, whereas a penalty sum is not determined as any such genuine pre-estimate.
11.10.1 The Tribunal notes that the right of the parties to stipulate a penalty in a contract for its breach seems to be predicated upon "... the seriousness of the breach". This qualification seems to suggest that, under Chinese Contract Law, a penalty is only valid if it is akin to the concept of "liquidated damages" as contain in the common law systems.
11.10.2 Upon a careful reading of Article 114, it would appear as if a penalty to be valid, it must be determined "according to the seriousness of the breach."
11.11 Neither of the parties has addressed the Arbitral Tribunal on this aspect.
11.12.1 Neither party has lead any evidence on the issue as to whether or not the penalty was agreed to by the parties in accordance with the seriousness of the breach.
11.12.2 No evidence was led by either party as to the basis of how the USD/MT 2 referred to in clause 7.2 was fixed.
11.12.3 In the absence of any such evidence, the Tribunal is unable to conclude that this amount represented a genuine pre-estimate of the damages [Buyer] would suffer in the event of the non delivery of the steel. Accordingly, the Tribunal cannot come to the conclusion that clause 7.2 provided for liquidated damages. Having regard to the fact that there was no evidence as to how the amount was fixed, the Tribunal is driven to the conclusion that this amount was nothing more than a penalty.
11.12.4 But as pointed out above, there does not appear to be any clear statement in Chinese Contract Law as to whether or not a mere penalty is invalid.
11.13 In the premises, [Buyer]'s submission that clause 7.2 is invalid, as it constitutes an invalid penalty, presents certain difficulties.
11.14 Fortunately, it is not necessary for the Tribunal, in the light of the other conclusions to which the Tribunal has arrived, to make any final decision on whether clause 7.2 is invalid. For the purpose of this Partial Award and in [Seller]'s favour, the Tribunal will assume that the "penalty" provision in clause 7.2 is valid. In the premises, it is not necessary to address the detailed submissions which [Seller] has made in support of the validity of the penalty provision of clause 7.2.
12. Whether in either event, ie that the clause is a penalty clause or a liquidated damages clause, the damages claimed by [Buyer] are limited by the provisions of Article 74 of CISG
12.1 [Seller] alleges that if it is obliged to pay damages, such damages for breach of contract under Article 74 of CISG, is limited to USD/MT 2 as set out in clause 7.2 of the Contract, as the amount which was foreseeable or ought to have been foreseeable as the loss or damage [Buyer] would suffer in the event of the failure by [Seller] to deliver the steel pursuant to the Contract.
12.2 The Tribunal is of the opinion that the question of foreseeability under Article 74 is really irrelevant. The relevant issues are:
|(a)||the impact of Article 114 of Chinese Contract Law, discussed below; and
|(b)||the true construction of the last sentence of clause 7.2 of the Contract and/or whether or not this sentence in this clause constitutes a waiver of [Buyer]'s right to invoke Article 114 of the Chinese Contract Law.|
12.3.1 [Seller] has put other contracts containing penalty clauses into evidence between itself and [Buyer].
12.3.2 The Tribunal has heard submissions from Mr Harry Du as to the relevance of these contracts to any of the issues this Tribunal has to decide. The fact that these contracts may contain similar penalty clauses is in no way relevant.
13. Whether the proper law of the Contract was CISG or CISG as read with Chinese Contract Law, the relevant law of the People's Republic of China or whether or not the law of Switzerland, being the place of the address of [Seller] at the time of the execution of the Contract, together with CISG, constitutes the proper law of the Contract
13.1.1 There was a considerable debate between the parties in the documents which they submitted prior to the commencement of the hearing in regard to whether or not CISG constitutes a complete code, or whether or not CISG, together with Chinese Contract Law and/or the law of Switzerland, being the place where [Seller] had its address at the time of the conclusion of the Contract, constitutes the proper law of the Contract.
13.1.2 In the Tribunal's view, the questions raised in this paragraph are irrelevant to the determination of the issues between the parties excepting, as stated above, the validity or otherwise of the penalty clause in clause 7.2 of the Contract. But for the sake of completeness, and in deference to the submissions made by both parties on this point, and in case this point is agitated further in some court in a challenge to this Partial Award, this question will be dealt with in detail in paragraph 15 below.
13.2.1 The Tribunal holds what is relevant to the determination of liability and quantum are the questions:
|(a)||What is the curial law of the Arbitration?
|(b)||If the curial law of the Arbitration is Chinese Law, does Chinese Law dictate the
duties and powers of the Arbitral Tribunal?
|(c)||Whether or not one of these duties and powers is the duty and the power to apply
Article 114; and
|(d)||The true construction of the last sentence of clause 7.2 of the Contract and/or whether or not this sentence in this clause constitutes a waiver of [Buyer]'s right to invoke Article 114 of the Chinese Contract Law.|
13.2.2 There is no express choice of law in the Contract, the subject matter of this dispute.
13.2.3 Both the People's Republic of China and Switzerland are signatories to CISG.
13.2.4 CISG, therefore, as part of Chinese Law becomes part of the proper law or the substantive law of the Contract.
13.3 The focus of the debate during the oral hearing was whether CISG constituted a complete code or whether or not regard had to be had thereto in conjunction with either the law of the People's Republic of China, and/or Switzerland. These matters will be dealt with in separate paragraphs below.
14. Whether or not CISG constitutes a complete code
14.1 Mr Du argues that one can only have regard to CISG and no other aspect of Chinese Law.
14.2 In the alternative, Mr Du submitted that there was a "hierarchy", ie:
|(b)||the Contract; and
|(c)||the law of contract of the Seller, ie Swiss law.|
14.3 When pressed the point as to whether or not this was an admission that the Tribunal could have regard to some body of law other than that set out in CISG, Mr Du said that his submission above was only in the alternative, and that his principal submission was that CISG was a complete Code.
14.4 Mr Du's contention cannot possibly be correct. One has to have regard to a body of law to assist in the construction of the contractual terms where CISG is silent. Some examples of this are:
|(a)||Clause 2.7 refers to the passing of the risk in the goods. What is meant by the words
"passing of the risk" will not be found in the Convention but by reference to some
legal system, either that of the People's Republic of China or Switzerland.
|(b)||Clause 4.4 refers to claims being made within a number of calendar days from the
date of discharge. What constitutes a calendar day has to be determined in
accordance with some legal system. There is no definition of "calendar days" in
|(c)||Clause 7.2 refers to an acceptable letter of credit. Whether or not the Letter of
Credit established by [Buyer] was acceptable is a matter of law which has to be
determined in accordance with some legal systems, either Swiss or Chinese.
|(d)||Clause 7.4 refers to an anti dumping investigation. Again, the meaning to be ascribed to that phrase must be determined by reference to some system of law that would, in this case, either be Chinese or Swiss.|
14.5 The Tribunal remains, for the reasons set out above, unpersuaded that one is bound by the four corners of the Convention, and that this Tribunal cannot refer to the Convention with the proper law of some recognized legal system.
15. Article 114 of the Chinese Contract Law
15.1 [Buyer] has drawn attention to Article 114 of the Chinese Contract Law, the relevant paragraph reads as follows:
"The parties may stipulate that in case of a breach of contract by either party a certain amount of penalty shall be paid to the other party according to the seriousness of the breach, and may also stipulate the method for calculating the sum of compensation for losses caused by the breach of contract.
If the stipulated penalty for breach of contract is lower than the loss caused by the breach, the party concerned may apply to a people's court or an arbitration institution for an increase. If the stipulated penalty for breach of contract is excessively higher than the loss caused by the breach, the party concerned may apply to a people's court or an arbitration institution for an appropriate reduction.
If the parties agree upon a penalty for the breach of contract by a delayed fulfillment, the breaching party shall, after paying the penalty for breach of contract, discharge the debts notwithstanding."
15.2 Mr Du properly admitted that Article 114 could, in the appropriate circumstances, apply to an international commercial arbitration. He however stated that it did not apply in this case, as the proper law of the arbitration clause was not Chinese law.
Mr Du very properly conceded in his written submissions of 29 July 2004 that "It is a significant and fundamental issue whether or not Article 114 of Chinese Contract Law applies to the case."
15.3 The impact of Article 114 will be dealt with more fully below.
16. Choice of the Proper Law/Substantive Law of the Contract
16.1 Under Article 126 of the Contract Law, where the contract "... is silent with respect to the applicable substantive law, the contract will be governed in accordance with the law of the country having the closest connection to the contract, i.e., the law of the country most closely associated or connected with the performance of the contract.", see Professor Jingzhou Tao, "Arbitration Law and Practice in China" paragraph 244, page 84, Kluwer Law International, The Hague.
16.2 This principle is consistent with well established authority, viz:
|(a)||The rule stated in Dicey and Morris, The Conflict of Laws (10th ed), is in the following terms:|
Rule 145 - The term "proper law of a contract" means the system of law by which the parties intended the contract to be governed, or, where their intention is neither expressed nor to be inferred from the circumstances, the system of law with which the transaction has its closest and most real connection.
|Sub-rule 1||When the intention of the parties to a contract, as to the law
governing the contract, is expressed in words, this expressed
intention, in general, determines the proper law of the
|Sub-rule 2||When the intention of the parties to a contract with regard to
the law governing the contract is not expressed in words,
their intention is to be inferred from the terms and nature of
the contract, and from the general circumstances of the case,
and such inferred intention determines the proper law of the
|Sub-rule 3||When the intention of the parties to a contract with regard to the law governing it is not expressed and cannot be inferred from the circumstances, the contract is governed by the system of law with which the transaction has its closest and most real connection.|
|(b)||Sykes and Pryles, Australian Private International Law, p 547, point out that a two
tier approach based on the first, with the second and third sub-rules combined, has
generally been adopted by the English courts.
|(c)||Australian case law, see John Kaldor Fabricmaker Pty Ltd v Mitchell Cotts Freight
(Aust) Pty Ltd (1990) 6 ANZ Insurance Cases 60-960 at 76,350-76,357 where the
issue pertinently arose as to whether the second sub-rule exists. Brownie J, after an
exhaustive analysis of the authorities held that the better view was that it did and that
"the correct view is that the proper law of the contract is determined by the
subjective view, or the inferred actual intention of the parties, where that inference
can be drawn. Where that inference cannot be drawn, then and only then should the
court go on to impute an intention to the parties, by reference to the system of law
having the closest and most real connection with the transaction."
|(d)||Furness Withy (Aust) Pty Ltd v Metal Distributors (UK) Ltd, The Amazonia  1 Lloyds Rep 236, where the English Court of Appeal held that although the parties intended that English law should be the proper law of the charter, incorporation by reference of the Australian Sea-Carriage of Goods Act 1924 (Cth) nullified that intention and made the law of South Australia, including the aforesaid Act, the proper law of the charter containing the arbitration clause. See also Ocean Steamship Co Ltd v Queensland State Wheat Board  1 KP 402.|
16.3 The arbitration clause giving rise to an implication
Under English and Australian Law, one of the most probable grounds for implying an agreement as to the substantive law applicable to the merits, is the existence of an agreement that any dispute shall be submitted to arbitration in a particular place, ie country, state or territory. In the Kaldor case the arbitration clause provided for an arbitration in London, subject to English law. Such a choice contains an implication that the law of that place should be applied as the substantive law relating to the merits of the dispute: Hamlyn & Co v Talisker Distillery  AC 202 at 212-213; Kwik Hoo Tong Handel Maatschappij NV v James Finlay & Co  AC 604 at 608; Mackender v Feldia AG  2 QB 590; D Rhidian Thomas, "Arbitration Agreements as Signpost of the Proper Law"  Lloyd's Maritime and Commercial Law Quarterly 141; D Rhidian Thomas, Proper Law of Arbitration Agreements"  Lloyd's Maritime and Commercial Law Quarterly 304.
In Compagnie d'Armememt Maritime SA v Compagnie Tunisienne de Navigation SA  AC 572 it was held that this test was too high. In Tzortzis v Monark Line A/B  1 WLR 406, it was held that by choosing London as the place of the arbitration the parties impliedly selected English law as the proper law of the contract. See also Norske Atlas Insurance Co Ltd v London General Insurance Co Ltd (1927) 43 TLR 541; Naamlooze Vennootschap Handels-en-Transport Maatschappij Vulcaan v A/S J Ludwig Mowinckels Rederi  2 All ER 152 at 156; Maritime Insurance Co Ltd v Assecuranz-Union Von 1865 (1935) 52 L1 L Rep 16 at 19-20; NV Kwik Hoo Tong Handel Maatschappij v James Finlay & Co Ltd  AC 604; Hellenic Steel Co v Svolamar Shipping Co Ltd; The Komninos S  1 Lloyd's Rep 370 at 376.
Although not at all conclusive, where there is an arbitration clause frequently used in a particular country, substantial weight must be accorded to that fact: Compagnie d'Armememt at 600, where Wilberforce LJ held:
An arbitration clause must be treated as an indication, to be considered together with the rest of the contract and relevant surrounding facts. Always it will be a strong indication; often, especially where there are parties of different nationality or a variety of transactions which may arise under the contract, it will be the only clear indication. But in some cases it must give way where other indications are clear.
See further Egon Oldendorff v Libera Corporation  1 Lloyd's Rep 380.
16.4 As pointed out by Fouchard Gallard Goldman On International Commercial Arbitration, Kluwer, The Hague 1999 in paragraph 1428 at p 788:
"It is important to note that, in the continental legal tradition, the choice of a place of arbitration cannot, in itself, be considered a choice of applicable law."
At p 789, the learned authors point out that:
"Contemporary international arbitration practice tends to give less importance to the choice of the seal of arbitration. In an award made in Paris in 1976 in ICC Case No. 2735, it was considered that the choice of applicable law could be inferred from the determination of the seat of the arbitration: ICC Award No. 2735 (1976), Yugloslavian seller v U.S. purchaser, 104 D.I. 947 (1977), and observations by Y. Derains. By contrast, a 1988 award made in London in ICC Case No. 5717 rightly stated, with regard to the law applicable to the merits of the case and despite an awkward reference to the "agreement to arbitrate," that:
"[t]he choice of London as the place of arbitration and English as the language of the contract does not, in itself, indicate an intention of the parties that English law should govern the validity of the agreement to arbitrate: ICC BULLETIN Vol 1, No. 2 at 22 (1990).""
16.5 [Buyer] has in paragraph 1 of its Points of Reply pointed to five factors in support of its submission that the proper law of the Contract, in addition to CISG, is that of the law of the People's Republic of China.
16.6 The Tribunal is of the opinion that none of these factors are, in themselves, determinative of the issue.
16.7 The Tribunal has carefully considered the submissions by Mr Du dated 29 July 2004. It is suffice to say that they do not address the consequences of the curial law of the Arbitration being Chinese Law and the fact that that must, inevitably, trigger the application of Article 114 unless it is excluded by the final sentence of clause 7.2 of the Contract.
16.8 But, in deference to the detailed submissions made by Mr Du in his written submissions of 29 July 2004, the Tribunal will address the issues which he has raised:
|(a)||Mr Du has very properly conceded that "It is a significant and a fundamental issue
whether or not Article 114 of Chinese Contract Law applies to the case."
|(b)||Mr Du has further conceded that "... it is a well-established practice around the world
that the procedural law of the arbitration situs applies irrespective of the type of
|(c)||Mr Du has however denied that Chinese procedural law automatically triggers "... the
application of any domestic substantive law including Article 114 of Chinese Law."
In amplification of this submission he has stated that "Procedural law application and substantive law application are two separate issues and the determination of the proper law applicable to the contract does not rely on the place of arbitration. According to Article 19 of Chinese Arbitration Law, an arbitration agreement should exist independently and the validity of the arbitration agreement does not relate to the validity of the contract."
This submission however is, with very great respect to Mr Du, not in point. As pointed out in paragraph 17.2 below, the powers and duties of the arbitrator are determined in accordance with the curial law or the lex arbitri, which is the Law of the situs, viz China, and with the consequences referred to in paragraph 17.3 below.
16.9 The Diefenbacher case referred to by Mr Du on page 3 of his written submissions is similarly not in point. There is no doubt that the law governing the arbitral procedure will not necessarily be the same as the substantive law. But this is not the question which arises.
16.10 Mr Du argues in paragraph "D" that if CISG is not a complete code, it has to be read together with Swiss Law. He has referred to The Hague Convention on private international law, but, in the Tribunal's view, this is not relevant to the problem which has arisen in this case. Mr Du has specifically referred to Article 8 37(1) which reads:
"To the extent that the law applicable to a contract of sale has not been chosen by the parties in accordance with Article 7, the contract is governed by the law of the State where the seller has his place of business at the time of conclusion of the contract."
One is not here dealing with the law applicable to a contract of sale, one is concerned (although not directly so) with the proper law of the arbitration clause and, in respect of which, Article 8 37(1) is silent and the curial law of the arbitration, in respect of which, nothing is said, in The Hague Convention.
Mr Du has referred to an opinion of their Swiss Counsel, Dr Arthur G Nick of the firm Nick & Ineichen, in regard to the enforceability of a penalty clause. For the reasons and upon the grounds set out above, the Tribunal does not think that the decision in this case depends on whether or not clause 7.2 is a penalty and/or is valid.
16.11 The Tribunal has read and has paid very careful attention to the further submissions on this aspect in Mr Du's submissions of 9 August 2004. For the reasons which have been already set out above, those submissions do not really take the debate any further.
16.12 The Tribunal assumes for the purpose of this Partial Award that clause 7.2 is valid. The Tribunal also assume that the penalty provision therein is also valid. But as the Tribunal emphasizes elsewhere, these consideration become irrelevant to the conclusions that have been reached.
16.13 In the Tribunal's opinion, there has been an implied choice by the parties of Chinese Law as the proper law of the Contract. The Tribunal comes to this conclusion from:
|(a)||the fact that the parties have agreed that the place of arbitration is in China;
|(b)||the choice of the CIETAC Rules for the conduct of the arbitration;
|(c)||the fact that clause 4.5 of the Contract provides that claims are to be based on
"China Entry Exit Inspection and Quarantine of the People's Republic of China ...";
|(d)||[Seller] has not pointed out any other provision of the Contract or any other factor that would militate against the factors referred to above.|
16.14 Mr Du for [Seller] has relied on the judicial interpretation of the PRC Foreign Related Economic Contract Law [Fa(Jing)fa(1987)No.27].
16.15 Mr Tony Zhang (Zhang Zhen-an) for [Buyer] has pointed out that [Fa(Jing)fa(1987)No.27] was rescinded by the Supreme Court of the People's Republic of China on 16 June 2000.
16.16.1 For the reasons set out in paragraph 14 above, the Tribunal holds CISG does not constitute a complete code.
16.16.2 For the reasons set out in this paragraph, the Tribunal is of the opinion that the proper law of the Contract is the Law of the People's Republic of China.
16.16.3 And therefore, this Tribunal in determining the rights and obligations of the parties, is entitled to have regard to CISG as read with the Law of the People's Republic of China including Article 114.
17. Considerations arising from the curial law or lex arbitri
17.1 It is beyond dispute that the situs or the site of this Arbitration is Beijing, China.
17.2 The curial law/the lex arbitri, ie the law of the situs or the site of the arbitration, viz, Chinese Law, determines the powers and duties of the arbitrators. This statement is supported by the highest authority, see, for example, Dalmia Dairy Industries Ltd v National Bank of Pakistan  2 Lloyds Reports 223 and 270. This statement also has the support of F A Mann in "State Contracts and International Arbitration" (1967) British Year Book of International Law 1 at p 4. The article published in "Contemporary Problems in International Law" edited by Dr Julian D M Lew, London 1986, 11 at p 131 under the heading 'The Law Governing the Agreement and Procedure in International Arbitration in England' with the subheading 'The Procedural Law of an Arbitration'. Please also refer to Klaus Peter Berger "Studies in Transnational Economic Law V9 International Economic Arbitration, Chapter 2 p 96 and, very importantly, "Commercial Arbitration" by Sir Michael J Musthill and Stewart C Boyd 2nd Edition p 62, where in the paragraph marked "2" the learned authors state:
"The curial law governs: the manner in which the reference is to be conducted; the procedural powers and duties of the arbitrator; questions of evidence; the determination of the proper law of the contract."
17.3 This fact triggers the application of Article 114 of Chinese Contract Law above.
17.4 After considering all of the submissions that have been made, it is the Tribunal's view that the powers and duties of the Arbitral Tribunal are determined by the curial law of the arbitration which is Chinese Law and that in turn triggers, in an appropriate case, the provisions of Article 114.
18. The final sentence in clause 7.2 of the Contract
18.1 Mr Du, on behalf of [Seller] drew the Tribunal's attention to the final sentence in clause 7.2 of the Contract. That sentence reads as follows:
"The Seller will pay no further claims on this account."
18.2 Mr Du submitted that [Buyer], by agreeing to this sentence in clause 7.2, waived and/or abandoned any right it otherwise would have had to seek a revision of the amount referred to in the penalty clause, by invoking Article 114 above.
18.3 [Seller], in the Tribunal's opinion, would have the burden of proof of establishing all of the elements of an abandonment or waiver. It has put on no evidence in this regard.
18.4 The phrase "... on this account.", relates, to the penalty and means that, but for the penalty referred to in clause 7.2, there will be no other penalty. The Tribunal holds that the better view is that this sentence is tautologous and does no other work than merely restate that the agreed penalty is the upper limit of any penalty.
18.5 It would be taking a quantum leap to hold that that sentence would be detract from the Arbitral Tribunal's powers to act under Article 114, if it would otherwise be proper for the Arbitral Tribunal to do so.
18.6 In the premises, the Tribunal rejects the submission that the last sentence of clause 7.2 of the Contract precludes the Arbitral Tribunal from acting under Article 114.
19. The submission that the Contract was in a Standard Form
19.1 Mr Tony Zhang (Zhang Zhen-an) for [Buyer] has relied on Articles 39, 40 and 41 of the Chinese Contract Law in support of his contention that clause 7.2 of the Contract is invalid.
19.2 Article 40 provides that:
"Standard terms are contract provisions which are prepared in advance by a party for repeated use, and which are not negotiated with the other party in the course of concluding the contract."
19.3 From the emails placed before the Arbitral Tribunal at the hearing, it is clear that the subject Contract was, indeed, negotiated. In the light of the further holdings in this Partial Award, it is not necessary to decide this point, but if obliged to do so, the Tribunal would not hold that the Contract is a Standard Terms Contract and, therefore, there is no substance in this point, which the Tribunal rejects.
19.4.1 The Tribunal has read and carefully considered Mr Tony Zhang's further submissions in support of his argument that the subject Contract was in a standard form. He argues in paragraph 4:
"We can not supply any evidence to support that the Clauses of the Contract have been fully negotiated by both the parties for there were no any evidence if the terms were not fully negotiated. And please also be noted that the burden of proof is on side of the [Seller] even if the [Seller] claimed that it had done on the contrary."
19.4.2 The Tribunal rejects this submission. If it is [Buyer]'s case that this Contract was in a standard form, there must be available to it an abundance of evidence to the effect that the Contract was not negotiated, but was provided by [Seller] as a "take it or leave it" situation.
19.4.3 There is just no such evidence.
20. Whether or not CCC:
|(a)||had authority as agent or otherwise of [Buyer] to agree to the cancellation of
the Contract; and
|(b)||whether or not it did so; and
|(c)||whether if it did so, it agreed on behalf of [Buyer] to waive and/or abandon any claim for damages which [Buyer] might otherwise had had.|
20.1 There is a clear distinction between an implied agreement to cancel the contract, and an implied agreement to give up the right to claim damages. There is an argument available to [Seller] that [Buyer] by accepting the return of the Letter of Credit, might have agreed to cancel the Contract. This might have some relevance to the date of the avoidance of the Contract for the purposes Article 76 of CISG. As stated elsewhere, in the absence of further evidence on this point, the Tribunal is presently unable to come to any firm conclusion one way or the other. But that does not carry with it an implied agreement not to claim damages. [Seller] has not discharged the burden of proving a waiver and/or abandonment of the right to claim damages.
20.2 [Seller] carries the burden of proof that the agreement to return the Letter of Credit constituted a waiver and/or an abandonment of any claim to damages which [Buyer] might otherwise have had.
In the Tribunal's opinion, [Seller] has not discharged this burden of proof.
20.3 Mr Kenny Chen did not consider [Buyer] to have abandoned and/or waived any claim for damages it might have, in fact in paragraph 8, he admits that he once discussed with CCC payment of liquidated damages in accordance with clause 7.2 of the Contract, but CCC did not give him a definite answer, eg in regard to banking arrangements.
20.4 Reference may here also be made to DDD's fax of 23 September 2002, where after referring to a possible conciliation with the client in the Middle East, it went on to say:
"Maybe there is still some chance for they are negotiating now. It will perform the contract if negotiating result is good. Otherwise it will compensate you as promised before. Please wait some days with patience and will let you know if there is any new progress. Thanks."
This is entirely inconsistent with the allegation that by accepting the return of the letter of credit, CCC for [Buyer] and/or [Buyer] agreed to waive and/or abandon any claim that it might otherwise have had for damages.
20.5 Accordingly, [Seller] has not discharged the onus of proving that [Buyer] has so waived and/or abandoned its claim for damages.
20.6 The content of Mr Chen's Affidavit does not:
|(a)||prove that CCC was authorised to, and entitled to, act on behalf of [Buyer];
|(b)||that [Buyer] agreed to waive and/or abandon any claim it might otherwise have had for damages because of the non delivery of the steel.|
20.7 Furthermore, there is no acceptable evidence, but in fact there is the [Seller] denial, that Mr Kenny Chen was [Seller]'s agent and entitled to contract on its behalf.
21. [Buyer]'s evidence and submissions in regard to its alleged loss
21.1 In paragraph III of its Reply, [Buyer] argues, inter alia, as follows:
"So even there is no liquidated damages clause in the contract just as what the [Seller] says, the Law stipulates that this amount can be increased other than what the [Seller] says that "The [Seller] should at the Most liable for the amount of liquidated damages as specified in the contract..." For the US $11,120 is too lower and unreasonable for the following reasons:
So the [Seller] should be responsible for the actual damages even there is the sentence in the contract saying that "the Seller will pay no further claims on this account."
21.2 [Seller], in paragraph II of its Supplementary Points of Defence argues inter alia as follows:
"2. The [Buyer] has also failed to prove any loss or damage sustained by it, if any. The [Buyer] claims "anticipating profit" at the amount of RMB 5,353,660. We cannot understand why the [Buyer] as an import agent can have such huge "profit" even if the Contract had been performed. In calculation of such "profit", the [Buyer] relies on the prices of Russian hot rolled steel coils in Shanghai provided by the website "mysteel" (Evidence VII of the [Buyer]). However, the website "mysteel" is not an authoritative source of information and is no way to be a reference of market price.
3. Further the calculation adopted by the [Buyer] in quantifying the quantum (Evidence VIII of the [Buyer]) is misleading and should be rejected. It is because the dates on which the price of Russian hot rolled steel coil selected by the [Buyer], namely December 13 and 23, 2002, were not relevant to the Contract at all."
21.3 What [Buyer] failed to realize prior the oral hearing commencing on 26 July 2004 was that:
|(a)||it had no evidence to the effect that no substitute transaction had been entered into, a
prerequisite for invoking Article 73; and
|(b)||that its evidence on the "Current Price" left a lot to be desired.|
21.4 One must not lose sight of the fact that in the Application for Arbitration [Buyer] claimed RMB 5,353,660 as "Reimbursement of anticipated profit". No such claim is permissible under Article 76. It seems abundantly clear to me that when [Buyer] initially considered the basis of its claim and got its evidence together, it paid scant regard to Article 76 of CISG and that the whole focus of its case, when it attempted to make out a claim under Article 76, altered on the second day of the oral hearing, viz 27 July 2004.
21.5 The deficiencies in [Buyer]'s case were in breach of the directions referred to above, and in breach of the provisions of Article 38 of the CIETAC Arbitration Rules requiring "that the parties shall produce evidence in support of the facts on which their claim ... is based.".
21.6 On the third day of the hearing, after having been given time by the Tribunal to do so, [Buyer] submitted an Affidavit by CCC. For all intents and purposes, this affidavit was not in proper form. Ultimately, an Affidavit by Mr Zhao Sun Fu was submitted, together with a bundle of documents in support of the criteria in Article 76, and in support of the damages calculation.
21.7 This amended affidavit and these documents were provisionally admitted into evidence subject to [Seller] having 10 days to examine them and make detailed submissions in reply, should it wish to do so.
21.8 Mr Du, on behalf of [Seller], was given an opportunity to ask Mr Zhao questions. It was clear from the answers given by Mr Zhao that although he had no personal knowledge of the matters referred to in his Affidavit, he was CCC's internal counsel, he was in a position to make the proper enquiries and he did so.
21.9 Mr Tony Zhang (Zhang Zhen-an), in a further written submission entitled "Replies to questions raised by the Arbitrators For the hearing dated as of July 27, 2004", and which was admitted as [Buyer]'s Exhibit No. 3, made the following submission in regard to the calculation of damages:
"The net price without import duty in USD can be easily calculated by Unit price / (1.17 + 1.17 x 5 %) X 8.26 (VAT: 17% and import duty: 5% for the product concerned).
So the current net price in USD for the product concerned in Chinese port for Russian product is as following table:
|Thickness||Oct. 8||Oct. 14||Oct. 28||Nov. 11||Nov. 25||Dec. 23||Dec. 30|
So total difference between the fixed price and the current market is calculated as follows:
The current market price for the product concerned is on the basis of December 23, 2002 for the reason that the [Buyer] did not receive any reply from the Respondent after it returned the L/C on end of December after contacted it for many times. So the [Buyer] can declare the contract have been avoided by the breach of the contract by the fundamental breach of the Contract by the [Seller] in suitable time. Another reason is that the cargo would have arrived in the Chinese port if the [Seller] had shipped cargo as per the terms of the Contract.
So the [Buyer] calculates the loss based on the current price of this date and is reasonable."
21.10 Mr Tony Zhang (Zhang Zhen-an), on behalf of [Buyer], submitted a number of documents supporting the current price of the goods as at 8, 22 October and 16 November.
21.11.1 Mr Tony Zhang (Zhang Zhen-an) also went on to claim an agent's fee in support of which he said the following:
"The CCC pays 1.2% of total value of the Contract as the agent fee to Minmetal as per agent agreement (Supplementary exhibit E). So total agent fee is USD 18.708."
21.11.2 The Tribunal is unable to agree that this claim has any substance in it. If [Buyer] was entitled to claim the same amount of damages and CCC could claim, it cannot at the same time argue that its claim for damages has to be looked at as an agent for CCC.
21.12 In paragraph 1 of its Supplementary Points of Reply, [Buyer] argues as follows:
"The agent has the contractual rights and obligations to the foreign contractual party as has the obligation to claim through arbitration or litigation in accordance with the terms stipulated in the import or export contract in accordance with Article 15 and Article 24 of "The temporary rules concerning the foreign trade agency system". So the [Buyer] has the right to claim on its behalf and the loss to be claimed is the loss caused by its Principal, i.e. Shanghai CCC Company."
21.13 The Tribunal has already held that the proper law of the Contract is CISG, as read with Chinese Contract Law.
21.14 Accordingly, Articles 15 and 24 above apply. It therefore follows that this Tribunal is to consider the loss sustained by CCC, and it is that loss that is recoverable in these proceedings, provided, of course, that such loss is, in the opinion of this Tribunal, greater than the amount of US $11,120 referred to above.
21.15 There is no valid basis for claiming an agent's fee under Article 76. The agent's fee does not appear to have anything to do with the current price.
21.16 No evidence has been led as to the banking service charge. [Buyer] will be given an opportunity of producing that evidence at the next hearing.
21.17 The other claims, as listed in paragraph 1 above, all relate to legal costs and those will be dealt with separately.
22. [Seller]'s evidence and submissions in regard to [Buyer]'s alleged loss
22.1 In its very detailed submissions dated 9 August 2004, [Seller] does not suggest that there is any evidence which it has available to it, and/or that it wants to lead any further evidence to contradict the facts set out in Mr Zhao Sun Fu's Affidavit and the documents attached thereto.
22.2 [Seller], during the course of the oral hearing, has submitted an affidavit from Mr Andrey Kimryakov, [Seller]'s sales manager.
22.3 This affidavit was admitted provisionally subject to [Buyer] having an opportunity to examine it, call for supporting documents, and make submissions in reply. That opportunity was accorded to [Buyer].
22.4 In paragraph 5, Mr Kimryakov stated that [Seller] resold about 5,560 MT of the steel for an amount of USD 1,585,821.20 on 8 October 2002. In support of this fact, it annexed a contract with Xiamen contract number 77-639.
22.5 The Tribunal has compared the specification of the instant Contract with that of the Xiamen contract. The quantities are the same, but the prices are however different. The difference in price is the sum of $US 26,821.20 made up as to the difference between 1,585,821.20 in regard to the Xiamen contract and 1,559,000.00 in regard to the instant Contract. There are two material differences. In regard to the instant Contract, delivery was by ship by 10 October 2002, whereas in the Xiamen contract was delivery was by ship by 30 November 2002. The second difference related to the price. The instant Contract price was net CFRFO Taicang, PR China, whereas the Xiamen contract was net CFRRO Huangpu, PR China.
22.6.1 The Affidavit of Mr Zhao, as stated above, provisionally admitted.
22.6.2 But it would appear as if its contents may well be irrelevant, in that it may upon further analysis refer to the current price at an incorrect date. Furthermore, it should be supported by proper documentary evidence and not merely journal extracts. This Tribunal should know what the status of the various journal extracts are, and proper evidence should be led to establish those facts.
Up to now, this has not been done.
22.7 The evidence led by [Seller] in regard to the question of damages also leaves a lot to be desired. There is no evidence by [Seller] in regard to the "Current Price" of the steel as at any of the following dates:
|(a)||the "Current Price" of the steel as at 22/23 September 2002, 10 October 2002 or 23
December 2002 the date on which it alleged that there was an agreement made by
Mr Kenny Chen on behalf of DDD acting for [Seller] and CCC acting for [Buyer]
that the Contract should be cancelled, and/or the date of the institution of these
Arbitration Proceedings; and
|(b)||what difference to the price the port, ie Taicang on the one hand, and Huangpu on the other, would have made.|
22.8 Accordingly, whilst the evidence of Mr Andrey Kimryakov raises some inferences as to market value, but it does not address market value as at any possible relevant date and, in any event, does not explain the price difference because of the two ports.
22.9 Whilst Mr Andrey Kimryakov's Affidavit has been considered carefully, it really does not take this enquiry very much further.
22.10.1 [Seller] have made detailed submissions. These submissions read as follows:
"The [Buyer] confirmed during the hearing that they are claiming damages under Article 76 of the CISG, i.e. "the difference between the price fixed by the contract and the current price at the time avoidance as well as any further damages recoverable under Article 74".
Pursuant to Secretariat Commentary (please see paragraphs 4 and 5 of Guide to CISG Article 76 marked Exhibit-2 herein) and the draft counterpart of Article 76, the price to be used in the calculation of damages is the current prevailing price at the place of delivery. The relevant day for calculation of damages is the date on which the contract was avoided.
|1.||The [Buyer] has used wrong time in calculating damages.|
From the facts of the case and according to the aforesaid commentary, the relevant date for calculating damages should be September 22, 2002, or October 8, 2002 or at the latest October 31, 2002. The following facts strongly support our conclusion in this regard:
|(1)||The [Buyer] has admitted that on September 22, 2002 the [Seller] notified
the [Buyer], through DDD, that they would not fulfill the obligation under the
Contract (please see paragraph 7 of the Application for Arbitration. The
English translation of the relevant fax from DDD was set out in paragraph 7
of the Application for Arbitration).
|(2)||By the Statement of Kenny Chan (sic Chen?) and relevant copy email from
Kenny Chan to the [Seller], the [Seller] has shown that 3 options were given
to the [Buyer] in September 2002 to which the [Buyer] without expressing
any objection has led the [Seller] to believe that the [Buyer] has accepted the
cancellation of the Contract by the [Seller].
|(3)||The [Buyer] further admitted under paragraph 10 of the Application for
Arbitration that the [Seller] informed the [Buyer] on October 9, 2002 that it
was preparing to return the L/C. The [Buyer] also admitted that they
received the returned L/C on Oct. 31, 2002 (please see paragraph 6 on p.3
of the Points of Reply dated March 15, 2004) and "then the [Buyer] knew
that the [Seller] finally decided not to perform this contract."
|(4)||By its own admissions of the [Buyer] or by Kenny Chan's said Statement the [Buyer] was informed of the cancellation of the Contract by the [Seller] on September 22, 2002. Such knowledge of cancellation was reinforced to the [Buyer] by the said fax of October 8, 2002.|
Thus, the date of which the Contract was avoided was the first time by which the [Seller] notified the [Buyer] about the cancellation of the Contract, that is, September 22, 2002; or the time by which the [Buyer] knew of the [Seller]'s return of the L/C, that is October 8, 2002; or at the latest the date of the return of the L/C, that is, October 31, 2002.
|2.||The [Buyer] failed to provide reliable and/or relevant evidence in proving the current price required under Article 76 or for the calculation of the damages claimed.|
On the last day of the hearing the [Buyer] submitted to the Tribunal the following "evidence": an Affidavit Statement, an offer from Salzgitter Handel dated October 22, 2002; a confirmation of offer dated November 16, 2002 and a number of copy extracts from the magazine ... (Shanghai Hua Dong Gang Cai Xin Xi) ("the Hua Dong Magazine") to support the so-called "current market price" alleged by the [Buyer] and to support the damages claimed. It is submitted by the [Seller] that all those copy documents are unreliable or irrelevant for the calculation of damages or "current price" under Article 76.
|(a)||Instead of providing other more concrete and direct evidence like stock records for the relevant months of CCC, the [Buyer] chose to provide at a very late stage an "Affidavit statement" in English by a staff in the legal department of CCC to support the assertion that CCC has not made any purchase or resale of the steel in question. It is submitted that the said "Affidavit" is unsafe and unsatisfactory piece of evidence in that:|
|(i)||it was made by a person not conversant with English
and whether the correctness of the content thereof is
|(ii)||it was not made by a person with suitable capacity or
who has knowledge of this case; and
|(iii)||there was no documentary or other satisfactory evidence to show the source of the information stated therein and the content of it is unreliable.|
|(b)||The copy Offer dated October 22, 2002 from Salzgitter Handel is unreliable or irrelevant in that:|
|(i)||it was only an offer, and as stated in the said offer, the
price quoted would be subject to final confirmation
for "actual purchase" (please see words highlighted
in green in Exhibit 3 hereof);
|(ii)||the company only offered for sale steel from another
Russian company NLMK but not MKK as in the
present case (please see words highlighted in yellow
in Exhibit 3 hereof);
|(iii)||the first port of delivery and the final port are both
different from those in the present case;
|(iv)||the size or the steel grade or standard of the steel offered for sale were unknown from the copy Offer.|
|(c)||The copy Order Confirmation dated November 26, 2002 from SeverStal Export GmbH is unreliable or irrelevant in that:|
|(i)||the description of the standard of the goods sold
under the Confirmation was different from that for
the steel sold under the Contract;
|(ii)||the description of the standard of the goods sold
under the Confirmation was different from that for
the steel sold under the Contract;
|(iii)||the date of the Order Confirmation is not the relevant date for determining the current price under Article 76 (please see paragraph 3 above).
|(iv)||the price quoted in the Confirmation shall not be a suitable comparables for the current price required under Article 76.|
|(d)||The copy extracts from the Hua Dong Magazine are unreliable or irrelevant in that:|
|(i)||The [Buyer] failed to provide any evidence to prove
the authentication of the said Magazine being a
leading or authoritative magazine in relation to the
pricing of hot rolled steel coil. First, there is no ISBN
number on the said Magazine. Second, the [Seller]
has searched for the copy of the said Magazine in the
State Library in Beijing (the largest library in China)
and was informed that the Hua Dong Magazine is not
an official publication.
|(ii)||The copy extracts provided by the [Buyer] are only
advertisements by a company name Shanghai Huaye
Iron & Steel Materials Co., Ltd. It is stated at the top
of the advertisement that "large quantity purchase will
enjoy special discount" (please see the words
highlighted in green on Exhibit 4), the price stated
therein could not reflect the actual price of any actual
|(iii)||The prices set out in the advertisement referred to
"..." and "..." (please see the words highlighted in
yellow on Exhibit 4), there is no evidence whatsoever
from the [Buyer] to prove that the same referred to
the same kind of steel coil in the captioned case or
whether they are also from GGG;
|(iv)||The sizes of the steel offered for sale is not clear from
the advertisement, variance in size obviously affect the
price of the steel sold;
|(v)||The standard or grade of the steel offered for sale in
the advertisement is unknown from the advertisement
or is different from that in the present case;
|(vi)|| The delivery condition seemed to be missing from the
advertisement, one cannot compare the same with
that in the present case;
|(vii)||The first port of delivery is unknown from the
advertisement and the last port is different from that
in the present case;
|(viii)||The [Buyer] has chosen December 30, 2002 advertisement for calculating the current market price, as submitted in paragraph 3 above, such date should not be the relevant date for calculating damages under Article 76.|
|(e)||All the aforesaid factors in items (a) to (d) above affect the actual price of the steel sold in actual sale and purchase of steel. To consolidate, the [Buyer] has only provided the Tribunal with some information about the offer but not actual price of steel coils different in substance and quality and standard from those in the present case; none of the prices provided by the [Buyer] can be accepted as a suitable comparable for the actual market price of steel with same quality, standard, size and original as those in the present case. Further, the date of "evidence" provided was not the relevant date for considering the current price under Article 76. It is submitted by the [Seller] that the [Buyer] has failed to give the current price as required under Article 76.|
|3.||The calculation and the formula for the calculation provided by the [Buyer] are wrong.|
|(1)||The [Buyer] has made its calculation for damages by using the date
December 30, 2002. As mentioned aforesaid, the relevant date for
calculation is as that set out in paragraph 3 above, and therefore the
basis for calculation of the [Buyer] was wrong.
|(2)||The [Buyer] has provided a formula: "Unit price/(1.17+1.17x5%)x
8.26" on page 4 of Replies to the questions raised by the Arbitrators
for the hearing dated as of July 27, 2004. Among others, 5% refers
to the import duty and 17% refers to VAT. However, the [Buyer]
fails to provide any authority in support for the said formula, nor did
it make clear what was the purpose for the said formula. According
to our consultation, the import duty for steel coils varies from 3-5%
and the VAT (value added tax) is added only to the increased value
portion and should not be double calculated with import duty.
|(3)||The aforesaid formula for calculation, no matter what would be its purpose, must be wrong. As pointed out above, no terms of carriage were set out in the advertisement of the Hua Dong Magazine, any formula for calculation including any reference to tax levied must be wrong.|
|4.||The sales contract made by the [Seller] with Xiamen C & D Company on October 8, 2002 is the best reference to prove the market price.|
The contract with Xiamen C & D (please see [Seller] Exhibit D that was submitted to the Tribunal during the hearing) was entered into approximately the same time as the Contract was avoided. In addition, the subject matter and all the material terms of the contract between the [Seller] and Xiamen C & D are exactly the same as those of the Contract. We believe that such a contract entered into on an arm's length basis is the best evidence available to prove the prevailing market price. In the contract with Xiamen C & D, the total price for 5,560 MT same products from the same producer was USD 1,585,821.20, and therefore this price should be regarded as the best evidence for the prevailing market price."
22.10.2 Prima facie there is considerable substance in some of the criticisms made by [Seller] of the evidence presented by [Buyer] in support of its claim for damages.
22.10.3 If these criticisms are accepted finally, it might well be that although [Buyer] has succeeded in all of the other issues which it has raised, there may be a final award dismissing its claim with costs which, in the light of the costs accounts submitted by [Seller] and [Buyer], could be very substantial.
22.11 In the light of the course proposed below, it is inappropriate to say any more about [Buyer]'s quantification of its loss at this stage. The Tribunal prefers to reserve its comments until [Buyer] has been given the fullest opportunity of meeting [Seller]'s criticisms and, of course, [Seller] putting before the Arbitral Tribunal such further evidence and submissions on this question that it may be advised to do.
23. Article 76 of CISG
23.1 The following issue is critical in regard to the finalization of this Partial Award:
What the "Current Price" of the subject goods was at the relevant port of delivery, or if there was no current price at that place, the price at such other place as serves as a reasonable substitute, making due allowance for differences in the cost of transporting the goods (Article 76(2)), at the date of the avoidance of the Contract?
23.2 Mr Tony Zhang (Zhang Zhen-an) said during the course of the oral hearing during July 2004, that his client's case for damages was under Article 76 of CISG. It is not without significance, that this was the first intimation from the legal representatives of [Buyer] of that fact, and as pointed out above, this was not the case which [Buyer] sought to make in its Application for Arbitration in which it sought damages for loss of profits.
No prior notification of the fact that [Buyer] was bringing its claim under Article had previously been made.
23.3 Article 76 reads as follows:
|"(1)||If the contract is avoided and there is a current price for the goods, the party
claiming damages may, if he has not made a purchase or resale under article
75, recover the difference between the price fixed by the contract and the
current price at the time of avoidance as well as any further damages
recoverable under article 74. If, however, the party claiming damages has
avoided the contract after taking over the goods, the current price at the time
of such taking over shall be applied instead of the current price at the time of
|(2)||For the purposes of the preceding paragraph, the current price is the price prevailing at the place where delivery of the goods should have been made or, if there is no current price at that place, the price at such other place as serves as a reasonable substitute, making due allowance for differences in the cost of transporting the goods."|
23.4 In the UNIDROIT Guide to Article 76, under the heading "Use of the UNIDTROIT Principles to help interpret CISG Article 76" and the subparagraph to that article "Remarks on the manner in which the UNIDROIT Principles may be used to interpret or supplement Article 76 of the CISG" by Bruno Zeller, the first paragraph of paragraph 3 reads as follows:
"3. Calculation of Damages
CISG Article 76 and the counterpart UNITROIT Principle in essence establish a formula whereby the injured party can calculate damages where the contract has been avoided and no substitute transaction has been entered into (the Secretarial Commentary is the closest counterpart to an Official Commentary on the CISG; see <http://cisgw3.law.pace.edu/cisg/text/secomm/secomm-76.html>). It is established that CISG article 76 and hence UNIDROIT article 7.4.6 are only to be used if a concrete calculation of damages pursuant to CISG article 75 is not possible (Germany, Oberlandesgericht [Appellate Court] Hamm, 19. Zivilsenat, 22 September 1992, 19 U 97/91, <http://cisgw3.law.pace.edu/cisg/text/secomm/secomm-76.html>)."
23.5 Under Article 76, the Arbitral Tribunal has to determine the current price of the goods the subject matter of the Contract "at the time of avoidance."
23.6 The phrase "at the time of avoidance" is not defined in CISG and may possibly refer to:
|(a)||the date when delivery of the goods should have been made and the failure to deliver took place, viz 10 October 2002;
|(b)||the date on which DDD informed CCC that the goods would not be delivered and DDD
gave CCC the three options (whenever that date was). The date has not been proved with
any degree of certainty;
|(c)||the date on which [Buyer] allegedly agreed to cancel the Contract. Again paragraph 5 of
Mr Kenny Chen's Affidavit is referred to. What needs re-emphasizing is that [Seller]
denies that Mr Chen acted as its agent and hence [Seller] may have considerable difficulty
in advancing an argument that the date of the alleged agreement to cancel the Contract, as
referred to in paragraph 5 of Mr Kenny Chen's Affidavit, is the relevant date.
Furthermore, [Seller] would have to prove that CCC had authority to act for [Buyer] in
making any such alleged agreement.
|(d)||the date on which CCC and/or [Buyer] agreed to accept the return of the Letter of
Credit. The Tribunal points out here that there is no acceptable evidence before the
Tribunal from either Mr Chen, on behalf of DDD, and/or anyone at CCC and/or [Buyer]
as to actually what happened. Was there any such agreement? What was said by whom
|(e)||the date of the institution of these Arbitration Proceedings, ie the date on which the application by [Buyer] for this Arbitration was made to CIETAC.|
23.7 In the article by Sieg Eiselen "Remarks on the Manner in which the UNIDROIT Principles of International Commercial Contracts May Be Used to Interpret or Supplement Article 74 of the CISG" (October 2002) UNIDROIT 74, the following is stated in paragraph i.:
"Neither article 74 CISG nor the UNIDROIT Principles contain an express provision about the time at which damages are to be calculated (Staudinger/Magnus, Article 74, Rn 55; Schlechtriem/Stoll 33). However, the underlying principle is suggested by the provisions in article 76 CISG and article 7.4.6 of the UNIDROIT Principles dealing with the current price of goods as presumptive measure of the calculation of damages. This would suggest that damages are to be calculated at the time the action is lodged and not at the time of the breach."
23.8 In the same UNIDROIT article by Bruno Zeller, paragraph 4, under the heading "Current Price", reads as follows:
"4. Current Price
CISG Article 76(2) and UNIDROIT Principle 7.4.6(2) attempt to clarify the current price by tying it to the prevailing place where delivery of the goods should have been made. In general, UNIDROIT article 7.4.6 uses simpler language and condenses parts of CISG article 76 into a more readable form. It can be argued therefore that it would be advantageous if the Principle were read before the counterpart provision of the CISG is applied. It would allow the court or arbitral tribunal to get a "feeling" of what the CISG attempts to achieve.
CISG article 76 and UNIDROIT article 7.4.6 attempt to give solutions to two problems, namely, the determining of the date when the contract has been declared avoided and, secondly, the place where the current price has to be determined.
The problem of timing has been addressed and clarified at the 10th plenary meeting of the Diplomatic Conference at which the CISG was promulgated (Legislative History, 1980 Vienna Diplomatic Conference, Summary Records of Meetings of the Plenary Meetings, para. 38 et seq. (A/CONF.97/C.L.245)). The meeting minutes clearly state that the time is not the time when the party who "declared the contract avoided had for the first time the right to do so". Instead the crucial time is the "time of avoidance". This phrase was taken over by the CISG as well as the UNIDROIT Principlies. Both instruments use the same phraseology and therefore the clarification has been provided and the time is definitely not when a "Nachfrist" was granted pursuant to CISG articles 49 to 64."
23.9.1 Although not determinative of the question, the word "Avoid" is stated in the Shorter Oxford English Dictionary to include the meanings "to get rid of, put an end to".
23.9.2 Prima facie, the Tribunal has difficulty in holding that the time of avoidance is the date when the goods should have been delivered but were not delivered.
There is a clear distinction in law between the date of an act of repudiation by one party to a contract and the date of the acceptance of that repudiatory act by the other.
An act of repudiation does not bring a contract to an end unless the act of repudiation is accepted by the other party. The non delivery of the goods may be an act of repudiation (but not necessarily so - this would depend on all the circumstances), but that does not bring the contract to and end.
If the date of repudiation was intended by the framers of the Convention to be the date of avoidance, that could have been said in very simple language.
The Tribunal notices that Article 75 reads "if the contract is avoided ...". The Tribunal draws some comfort from those words in Article 75 to come to the prima facie conclusion that the word "avoidance" in Article 76 refers to the avoidance of the contract and not merely the failure to supply. There might well be an argument in favour of the proposition that the contract is only avoided when the repudiation of it by one of the parties is accepted by the other party. Until such time, the contract remains on foot and might well not be avoided.
Even where there is a repudiatory act by one party to a contract, there may be a change of mind and the contract might be fulfilled.
23.9.3 [Seller]'s denial that Mr Kenny Chen acted as its agent has been dealt with. The Tribunal has difficulty holding in those circumstances that there was any acceptance of the repudiation by any agreement stemming from a discussion between CCC and Mr Kenny Chen. In any event, as pointed out above, the Tribunal has no idea when that conversation took place and/or its what its content was. Furthermore, the Tribunal is given no evidence that CCC was authorised to act for [Buyer] in agreeing to the cancellation of the Contract. As a matter of law, any such authority would have to be clearly proved.
23.9.4 Prima facie, it would appear as if the Contract was avoided when [Buyer] / CCC accepted the return of the Letter of Credit. But there again, no sufficient evidence was placed before the Arbitral Tribunal as to the circumstances under which the Letter of Credit was returned, who said what to whom, and whether or not CCC and/or [Buyer], apart from receiving back the Letter of Credit, did anything else or said anything else consistent only with the acceptance of [Seller]'s repudiation.
23.9.5 The thoughts expressed above in regard to the date of avoidance are prima facie only. A final decision will be made only when the Tribunal has given both parties a full further opportunity of addressing this issue in evidence and in submissions.
24. The Arbitral Tribunal's discretion in regard to the application of Article 114
24.1.1 This Tribunal, after reading Article 114, has a discretion as to whether or not the provisions of that article should be invoked.
24.1.2 If there is merely a minor difference between the purchase price of the goods in the subject Contract and the current price at the relevant date at the relevant port, then the Tribunal's strong prima facie view is that it would not invoke Article 114. If however there is a substantial difference, the Tribunal would be persuaded to do so.
24.2 The further directions that the Tribunal propose be made in order to finally resolve this matter, and the question of interest and costs is set out below in the final paragraph of this Partial Award.
25. Mitigation of damages
25.1 The question of mitigation of damages is really the reverse of the coin as to the measure of [Buyer]'s loss, if any.
25.2 [Seller], the Tribunal holds, bears the burden of proving the facts going to mitigation. These facts would include the fact that [Buyer] should reasonably have taken steps to mitigate its loss and what steps were reasonably available to it.
25.3 Whilst it has made submissions in this regard, it has placed no evidence before the Arbitral Tribunal excepting that of Mr Andrey Kimryakov, whose evidence, for the reasons above, does not really take the matter very much further.
25.4 If [Seller] wishes to pursue this question, ie the question of mitigation, it should do so in a proper manner and produce all relevant evidence going to this issue.
26. Questions of interest
26.1 Whether or not [Buyer] is entitled to claim interest on damages, if it is successful in this Arbitration, is within the discretion of the Tribunal.
26.2 The Tribunal would have been considerably more sympathetic to a claim for interest, if [Buyer] had determined for itself the proper date on which its damages were required to be assessed, and had presented its case on that basis.
26.3 However, it cannot be said that [Seller]'s actions are without fault. [Seller] has been found to be in fundamental breach of the Contract. It appears as if in order to save shipping costs and to obtain a higher price for the subject goods, it was prepared to disregard the standard of good faith that contracting parties are entitled to expect from each other.
26.4 If this Tribunal comes to the conclusion that Article 114 is to be invoked, any award from damages should carry interest at the official Chinese Bank Rate. The Tribunal would invite submissions from the parties as to that rate. The Tribunal would also award interest on the Award at the same rate.
27.1 The lawyers for [Buyer] have submitted a bill of costs in which they show that the total amount of their costs is and will be to the order of RMB 65,000 (presumably up to the date of the end of the July hearing).
27.2 [Seller] has submitted copies of memoranda of fees totaling $US 43,652.
27.3 The Arbitral Tribunal has been given no supporting vouchers by [Buyer] or any break up as to how its costs are arrived at.
27.4 Under Article 59 of the CIETAC Rules, the Arbitral Tribunal has power to determine what amount the losing party should pay the winning party for costs, but the amount will not exceed 10% of the total amount awarded to the winning party.
27.5 According to Articles 58 and 59 of the CIETAC Rules, the amount awarded under Article 58 need not be included in the amount awarded under Article 59.
27.6 There has been fault on both sides in regard to the conduct of this Arbitration.
27.7 This fault has added considerably to the costs of the Arbitration and that could have been avoided, had both parties complied with the directions of this Tribunal.
28. Conclusions thus far
For the reasons and upon the ground set out above, the Tribunal comes to the following conclusions:
|(a)||There has been a fundamental breach of contract by [Seller]. The defences to [Buyer]'s claims are to be rejected except for the issue of the quantum of damages.
|(b)||Clause 7.2 has not been proved to be invalid.
|(c)||The last sentence of clause 7.2 of the Contract does not preclude the application of Article 114.
|(d)||[Buyer] has not waived and/or abandoned its right to claim damages.
|(e)||Whether or not this Tribunal will exercise its discretion under Article 114 will depend upon the current price of the goods at the time of the avoidance of the Contract by [Seller] of
|(f)||The current price at the relevant date still remain open questions, and in regard to which the Tribunal will seek further evidence and/or submissions from the parties (see the further
|(g)||The question whether the Arbitral Tribunal will apply Article 114 will obviously depend
upon the current price of the goods at the relevant date and with delivery at the relevant
port or if there was no such price, then the price determined under Article 76(1).
|(h)||Interest on damages, if any, and costs will be determined in the final award when the
Tribunal determines the remaining Article 76 questions above.
|(i)||Further evidence and submissions in regard to costs will be required.|
29. Further Directions and Orders
29.1.1 In order to save costs and bring this matter to a speedy conclusion that the further evidence and further submissions on outstanding issues could be done in writing.
29.1.2 In the light of the importance of determining the current price at the relevant port on the relevant date, the Tribunal does not think that this is an appropriate case for the balance of the hearing to be on documents only. The Tribunal will probably, in order to get to the bottom of the matter, want to put questions so as to probe all aspects and come to a fair and proper decision.
29.1.3 Taking all matters into account, the Tribunal is persuaded that the best and safest course would be to relist this matter for hearing and issue a set of directions in order to ensure that there will be no further delays.
29.2 Accordingly, the Tribunal makes the following directions:
|(a)||Within three (3) days from the issuing of these Directions, [Buyer] will serve and file such further evidence in proper form in regard to its alleged losses, as it is advised to do.
|(b)||In this evidence [Buyer] must pay particular regard to the criticisms raised by [Seller] in its submissions of 9 August 2004 and the prima facie views expressed in this Partial Award
in regard to the determination of the current price of the goods at the relevant port on the
|(c)||All evidence of going to the current price must be properly supported. It is insufficient to refer to pages of journals without proving the status of the journals. As the language of the
Arbitration is in English, proper translations must be provided of any material that [Buyer]
wants to rely on.
|(d)||[Seller] will have three (3) days from the receipt of [Buyer]'s evidence in sub-paragraph (a) above, to put on any further evidence may be advised to do in regard to the losses
claimed by [Buyer] and/or mitigation of such alleged losses. [Seller] will also bear in mind
that all evidence must be put on in a proper form and properly supported, and that any
material in the Chinese language that it relies on must be properly translated.
|(e)||[Buyer] will have three (3) days from the receipt of the [Seller] submissions to serve and
file its replying evidence.
|(f)|| Within the same time frame as set out above, both parties will serve and file detailed bills
of costs supporting their claims for legal costs. It is to be noted that it is insufficient to refer
to invoices for legal services without setting out what the legal services were and the basis
for any claims. If there are cost agreements between the solicitors and their clients, those
cost agreements should be annexed to proper affidavits.
|(g)||By 15 October 2004, the lawyers for both parties will exchange detailed submissions on the following issues:|
|(i)||The meaning of the phrase "current price at the time of avoidance" in Article 76
of CISG. It is noted that [Seller] receives its instruction from Switzerland and has
the assistance of Swiss lawyers. It should not be a difficult task for [Seller] to
refer to and provide English translations of any Continental or other decision on
Article 76 of CISG, their Swiss lawyers should be able to research this and assist
the Arbitral Tribunal by researching and referring to judgments of European courts
on the meaning of Article 76, alternatively, to academic writing by acceptable
authors on the true construction of the words in Article 76.
|(ii)||Who should pay the costs of the Arbitration?
|(iii)||Whether there should be any special orders for costs, more particularly in the light
of the fact that neither party complied with this Tribunal's directions in regard to
evidence and submissions?
|(iv)||What the quantum of costs should be in regard to each party?|
|(h)||Whether there should interest awarded in favour of [Buyer] in the event of there being an
award in its favour and, of so, at what rate?
|(i)||This matter is listed for further oral hearing in Beijing at the CIETAC office for not more
than three (3) days commencing 25 October 2004.
|(j)||All witnesses who sign any statements in pursuance of these directions must be available
for questioning at the oral hearing on those three (3) days.
|(k)||Costs so far are reserved.|