China 5 March 2005 CIETAC Arbitration proceeding (L-Lysine case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/050305c1.html]
DATE OF DECISION:
DATABASE ASSIGNED DOCKET NUMBER: Unavailable
CASE HISTORY: Unavailable
SELLER'S COUNTRY: People’s Republic of China (claimant)
BUYER'S COUNTRY: The Netherlands
GOODS INVOLVED: L-Lysine
Prepared by Lei Tong
The Claimant [Buyer] and the Respondent [Seller] concluded a L-Lysine Sales Contract, in which the Buyer agreed to by L-Lysine from the Seller. But the Seller only delivered about 2/3 of the goods. Parties then changed the delivery schedule, and the Seller still did not deliver the goods. The Buyer cancelled the rest of the goods thereafter and brought the case to Arbitration. The Buyer's claim is, first, the difference between the contract price of the L-Lysine and the market price of that at the time of contract avoidance declaration and, second, the interest thereof. The Seller's defenses are: Force Majeure caused by SARS and flood, changes of situation, obvious unfair in the contract clause, and the Seller was exempted from its obligation to deliver the goods due to the Buyer's cancellation of the rest of the goods. The key points of this dispute are: 1) the changes of delivery time, and 2) the market price of that at the time of contract avoidance declaration. The Arbitration Tribunal holds that: 1) the Seller did not delivery enough goods according to the schedule agreed and later changed by both parties, which is a serious breach of the Contract, according to CISG, the Buyer is entitled to declare an avoidance of the contract; 2) the Seller did not prove any disclaimer situation, thus it should be liable for the breach and compensate the Buyer the difference between the contract price of the L-Lysine and the market price of that at the time of contract avoidance declaration and other damages; 3) market price should be the price of the same goods in the place of delivery at the time of the Buyer's contract avoidance declaration. Therefore, the Arbitration Tribunal basically upheld the Buyer's claims.
APPLICATION OF CISG: Yes
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
1A [Internationality: Parties' places of business in different States]; 73A1 [Declaration of avoidance with respect to defective installment]; 76B1 [Damages recoverable based on current price; At time of avoidance (art. 76(1))]; 78 [Interest]; 79 [Impediment Excusing Party from Damages]
1A [Internationality: Parties' places of business in different States];
73A1 [Declaration of avoidance with respect to defective installment];
76B1 [Damages recoverable based on current price; At time of avoidance (art. 76(1))];
79 [Impediment Excusing Party from Damages]
CITATIONS TO ABSTRACTS OF DECISION
(a) UNCITRAL abstract: Unavailable
(b) Other abstracts
CITATIONS TO TEXT OF DECISION
Original language (Chinese): Unavailable
Translation (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
UnavailableGo to Case Table of Contents
Case text (English translation) [first draft]
Queen Mary Case Translation Programme
2005 L-Lysine case
Translation [*] by Lei Tong [**]
The Buyer, registered in Rotterdam, the Netherlands and a Chinese Seller entered into an L-Lysine sales contract on June, 20, 2003 (hereinafter referred to as the Contract). According to the contract, Seller agrees to sell and the Buyer agrees to buy 445 ton L-Lysine (hereinafter referred to as the goods); the price of the goods is USD 11,750 per ton, the term is FOB Shanghai, and the total contract price is USD 7,781,750. Parties changed the delivery schedule, but the Seller only delivered 289 ton goods between July and October of 2003, and did not deliver the rest of the goods, which is 156 ton. The Buyer informed the Seller by a letter dated November 7, 2003 to cancel the 156 ton undelivered goods and request the Seller to take all the responsibilities thereof.
Failed to reach an agreement through negotiation, the Buyer thus brought the case to arbitration and claimed:
|(1)||the difference between the contract price of the L-Lysine and the market price of that at the time of contract avoidance declaration, which is USD 5,551,480;|
|(2)||the interest of USD 5,551,480;|
|(3)||request the Tribunal to decide the expenses the Seller spends on the case, including arbitration fees, lawyer fees (later decided to be RMB 9,891,353.80), travel expenses, and other compensation the Buyer is entitled to.|
The Seller gave the following defenses:
(1) During the contract, SARS and flood happened in China, which influenced the production and operation of the Seller, thus the Seller could not perform the contract. Nonetheless, the Seller informed the Buyer several times about the force majeure, and still produced the goods between July and September of 2003. The Buyer delivered 289 ton goods, which is 65% of the total quantity.
(2) There was a change in situation. Comparing with the contract price, the market price was increased by more than 200% in the second half year of 2003, which was unforeseeable and unpreventable serious change of situation. In this circumstance, parties shall be allowed to change or cancel the contract in order to avoid the unfairness.
(3) Because of the abovementioned two force majeure and change of situations, the price clause in the contract shall be adjusted. It is stated in the first article of the contract that:
"A.M. price is the maximum contract price. If the market price in country of destination 7 days before shipment is lower,then seller will reduce the contract price. If not, buyer has the choice to cancel the shipment."
According to this article, when the market price declines, the Buyer is entitled to decrease the contract price, but it did not stipulate the solution for market price rising. Thus, this article is unfair, should be adjusted.
(4) From the behaviors and business letters of the Buyer, it can be noticed that the Buyer knew the situation and changed the delivery schedule. According to Article 8 of the contract, the Seller shall deliver 105 ton on July, 140 ton on August, and 200 ton on September. The Seller delivered 289 ton between July and September, and did not deliver the last 156 ton.
Though negotiation, parties changed the delivery schedule twice. The first time was on September 15th 2003. After this change, the Seller delivered 85 ton, and still have 156 ton undelivered. On October 28, 2003, the Seller sent an email to the Buyer, requested to change schedule of the undelivered 50 ton from the end of October to delivering 30 ton before November 10, and change the letter of credit accordingly. The Buyer confirmed the changes on October 29, which was the second change. After the second change, the delivery schedule became: 30 ton before November 10; 100 ton by the end of November, 26 ton by the end of December.
The Buyer declared to cancel the 165 ton goods on the letter on November 7, 2003. It was within the performance term of the second changes of schedule. The Buyer's unilateral cancelation of the order means that it gave up the right to the undelivered goods, so the Seller did not need to deliver the rest of the goods, and should not be liable therefore.
The Buyer has the following opinions towards the Seller's defenses:
(1) CISG applies to this case since both parties are members of CISG;
(2) SARS cannot be a force majeure. SARS happened before April 2003 in China, when Seller agreed with the contract, it should have known and considered about the disease; according to the official announcement of the Chinese government on June 14, 2003, the SARS has been put under control; Assuming that SARS was a force majeure, the Seller did not inform the Buyer thereof. Thus, the Seller could not claim SARS as a force majeure according to Article 79.1, 79.3, and 79.4 of CISG.
(3) The flood cannot be deemed as a force majeure either. The flood happened on July 2003, but the buyer first noticed the Seller on September 3, 2003, the notice time is unreasonable. The Buyer accepted the changes of delivery schedule on September 12 and changed the contract because of the understanding the consideration of the influence of the flood. Thus, the Seller could not claim force majeure according to Article 79 of CISG. The Seller submitted two statements about the flood from environment protection bureau and flood prevention bureau of the city, which were not qualified authorities to give the statement. The statement should be provided by the China International Chamber of Commerce. And the statements were provided quite late and vague, should not be used as evidence.
(4) Change of situation is not a disclaimer in CISG, neither is it an exemption in the contract. The Seller is a professional producer of L-Lysine, it shall be able to consider and realize the changes of price at the time of signing the contract. In face, since 1995, the price of L-Lysine has been changing up-and-down dramatically, and the fluctuation range was once 200%.
(5) The defense of "obvious unfair" is not in line with the Judicial Interpretation of the Supreme People's Court, neither did the Seller provide any evidence to prove that the Buyer used its advantages or the Seller was lack of experiences.
(6) Regarding the changes of delivery schedule, the Buyer did change the delivery schedule on September 15, 2003 because the Seller claimed it was affected by the flood and requested a late delivery, but it was not because of the "change of situation". The Buyer conducted according to Article 47 of the CISG. But the Buyer never agreed on the "second change of schedule".
(7) According to Article 47 of CISG, "the buyer may fix an additional period of time of reasonable length for performance by the seller of his obligations". The Buyer gave the Seller an additional period on September 15, 2003, and the Seller did not deliver 60 ton goods on October 2003, which was a fundamental breach of the contract. The Seller requested another extension on October 28, 2003 to January or February 2004. Thus, according to Article 49(1)(b) of CISG, the Buyer has the right to terminate the contract in this circumstance. The Buyer's action of terminating the contract on November 7, 2003 was a legitimate measure according to CISG given that the Seller could not deliver even after the additional period.
(8) According to Article 76.1, the Buyer may claim the difference between the price fixed by the contract and the current price at the time of avoidance, which is USD 5,551,480.
(9) The Buyer believes, China Livestock Weekly Prices Watch is a major journal on Chinese domestic forage products price, and it's fair to both parities to use this journal as a basis. The date provided by the journal was issued by December 3, 2003, which reflects the price of L-Lysine between October 2003 and December 3, 2003. The price was concluded based on the actual transaction prices in the market. In addition, the Buyer also submitted some sales invoices for evidence.
The L-Lysine data from the custom database provided by the Seller was not from the Chinese custom's official website. Even if the price from that website was the true custom clearance price from the custom, custom clearance price and market price are two different concepts. Normally, there are 1-2 months time difference between signing the contract and exporting the goods, thus, the custom clearance price can only reflect the price of the L-Lysine when the contract was signed, not when the L-Lysine was exported.
The Seller has the following supplementary opinions:
(1) Whether there was a second change of schedule is one of the key points. On October 28, 2003, the Seller wrote in the email:
"... we hereby finally confirm you that we are able to make the first shipment of 30 mt Lysine before November 10 ... Concerning the remaining quantities,we confirm that we will effect all the shipments before the end of year 2003."
The Buyer replied:
"... We will arrange the shipments for the 30 mt Lysine on beginning next week ... we insist on another 20 mt for Rotterdam be shipped out before Nov 10 and all the others delivered on schedule, but not before end of this year which is not a clear figure to us."
The Buyer wrote in the email on October 29:
"As I informed yesterday in my e-mail, we can only accept that all shipments will be delivered on scheduled ... Pls arrange the 30 mt you confirmed yesterday ASAP."
From the abovementioned 3 emails, parties changed part of the delivery schedule of the undelivered 156 ton goods, 50 ton which should have been delivered by October was changed to be delivered by November 10. At the same time, another 20 ton shall be handled before November 10, and the rest shall be delivered according to the schedule fixed by the first change. Thus, after the second change, the delivery schedule is as follows:
|30||ton||before November 10,||second change|
|20||ton||before November 10 (to Rotterdam),||second change|
|80||ton||before November||first change|
|26||ton||before December||first change|
(2) Even if the Seller breached the contract, the damages are calculated unreasonably. The material the Buyer provided is just an analysis article, it cannot reflect the real exporting price, the only objective date should be the one from the custom. If the Arbitration Tribunal thinks the Seller breached the contract by non-delivery of the 165 ton goods, and shall compensate the Buyer, then the market price stipulated in Article 76 shall be the price of FOB shanghai, which is the price of FOB shanghai at the time when the Seller was supposed to export the goods. Thus, the price difference shall be USD 1,301,500.
(3) The invoices the Buyer provided are copies, we cannot tell whether they are real, and they are not related to the case.
(4) The Buyer hired lawyers in the Netherlands, Hongkong and Beijing, the lawyer fees are too high, it is unreasonable to claim it from the Seller. In addition, Article 59 of the Arbitration rules shall apply regarding the 10% actual cost.
OPINIONS OF ARBITRATION TRIBUNAL
(1) Governing Law
The Contract in this case is an internal sales contract. China and the Netherlands are all members of CISG. Two parties' places of business are in China and the Netherlands respectively. In addition, in the written opinions of both parties, they either claim CISG is the governing law of this case, or claim rights according to CISG, thus, according to the consensus of both parties and Article 1 of CISG, CISG shall be the governing law of this case.
Because the main dispute is delivery, and the delivery place is in China; the Seller's place of business is in China; and parties sometimes use Chinese law to claim or defense, thus, Chinese law applies in absence of CISG.
(2) Contract in dispute
Parties concluded an L-Lysine Sales Contract on June 20, 2003 for 445 ton L-Lysine, FOB Shanghai for USD 1,750 per ton. The Contract was concluded through mutual consensus and shall be effective and binding to both parties.
(3) Delivery time and change
According to Article 8 of the Contract, 445 ton goods shall be delivered between July and September 2003 as follows:
Seller delivered part of the goods, then proposed to the Buyer to deliver the rest of the goods in 3months. On September 11, the Buyer informed the Seller that it cannot accept the proposal, but in order to help the Seller deliver the goods, the Buyer suggested the following change:
|35||ton||September 15, 2003|
And request the Seller reply on the same day. One day after, the Seller agreed on the Buyer's suggestions. On September 15, the Buyer thanked the Seller for the changes, and promised that it will confirm on the next day or Wednesday about the destination of the 40 ton goods. The Tribunal holds that the confirmation on September 15, 2003 is a new agreement between the parties for the change of delivery schedule.
Seller claims that there are two changes of schedules, the first one is on September 15, and the second one is on September 29. The Seller provided one email from the Seller to the Buyer on October 28, and two emails from the Buyer to the Seller on the next day. The Seller claimed that the abovementioned three emails proved the second change of delivery schedule.
After reviewing the above mentioned 3 emails, the Tribunal overruled that these emails constitute a second change. The reasons are as follows: 1) the Seller made a new offer on the email sent on October 28, there were two parts of this new offer, part one was delivering 30 ton before October 11, and part two was delivering the rest of the goods before 2003. In the Buyer's reply, it agreed on the 30 ton to be delivered before October 11, but request another 20 ton to be delivered as well before October 11 to Rotterdam, and the rest of the goods to be delivered according to the previous schedule. The email sent by the Buyer on October 29 didn't change much compare with the one sent on October 28. Obviously, the Buyer's emails do not constitute an acceptance of the offer made by the Seller on October 28, but it should be deemed as a new offer. And there is no evidence which can prove that the Seller did accepted the new offer. So the second change did not happen.
(4) Performance of the contract
According to the Contract, the Seller shall deliver the 445 ton goods by several shipments to the Buyer, and the Buyer shall make the payment by letter of credit after the date of the Bill of Loading. Parties confirm that up to October 5, 2003, the Seller has delivered 289 ton goods and there were still 156 ton undelivered. Thus, the question becomes that whether not delivering 156 ton goods constitute a breach of the contract and the Seller shall be liable for compensation.
The Seller delivered 65 ton on July 2003, 124 ton on August, 85 ton on September and 15 ton on October.
Because parties changed the delivery schedule, the Tribunal thus will not consider the performance before the change, the changed delivery schedule shall prevail.
According to the changes on September 15, the Seller should deliver 75 ton before the end of September, but only 70 ton was delivered; 60 ton should be delivered by October, but only 15 ton was delivered; 80 ton and 26 ton should be delivered by November and December respectively, but the Seller did not deliver any goods in these two months. In the end, there were 156 ton goods not being delivered, which exceeded 1/3 of the total quantity, which is 445 ton.
(5) Force Majeure
The Seller claimed that it shall be exempted from part or all of the responsibilities due to the Force Majeure caused by SARS and flood in 2003.
According to Article 79 of the CISG, A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences. And parties agree that this impediment shall be understood as Force Majeure.
The condition to use this impediment is that the situation has to beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences. And it is stipulated in Article 3 that the exemption provided by this article has effect for the period during which the impediment exists; it is stipulated in Article 4 that the party who fails to perform must give notice to the other party of the impediment and its effect on his ability to perform. In addition, according to the general rules of Force Majeure and Chinese law, the party which claims an exemption under Force Majeure has the burden of prove. That Party shall provide evidence from the qualified authority.
SARS happened two months before parties signing the contract, so SARS was not unexpected. Beside, SARS was under control by June 2003. At the time of the conclusion of the contract, the Seller should have had enough opportunities to consider the influence of SARS in China and it shall not become an impediment as stipulated in Article 79 of the CISG.
According to newspapers, the flood happened in July 2003, but the Seller but the buyer first noticed the Seller on September 3, 2003, the notice time (2 months) is unreasonable. In addition, the Seller provided the evidence on August 2004, which is too late, and the evidence could not prove that the flood influenced the Seller's production, and the flood is the reason caused the non-delivery of the goods. More importantly, the Buyer accepted the changes of delivery schedule proposed by the Seller due to the flood on September 15 and the delivery schedule was postponed by 3 months. The change of delivery schedule shall be deemed as a consideration of the influence of the flood. Thus, the flood shall not be deemed as an impediment as stipulated in Article 79 of the CISG.
According to the abovementioned analysis, the Tribunal overruled the disclaimer claims due to SARS and Flood.
(6) Change of situation
Change of situation is stipulated in neither the Contract in dispute, nor the Contract Law of China, or the CISG, thus, the Tribunal overruled the claim.
(7) Obviously unfair
The Seller claimed that according to Article 1 of the Contract, when the market price declines, the Buyer is entitled to decrease the contract price, but it did not stipulate the solution for market price rising. Thus, this article is unfair, should be adjusted.
The Tribunal thinks that parties' consensus and agreement are respected in both Contract law of China and CISG. The Tribunal can only change the articles of the contract if it is expressly stipulated in law. The Seller considers Article 1 is obviously unfair, but the Seller did not provide any evidence to prove that this article was agreed by the Seller under the Buyer's deceive, threat or the Buyer was taking advantage of the Seller. The Seller only stated that the Buyer was an experienced company while the Seller does not have so much experience, thus it agreed on the article. The Tribunal thinks this reason is not enough to overrule the basic principle of contract, that is, to respect the intention and consensus of the parties, and interpret the contract according to its articles. In addition, the Buyer claimed that the Seller is a professional producer and trader of the goods. SO the Tribunal thinks that experience itself cannot become a reason for cancelling or changing the contract clause, so that the Seller's obviously unfair claim can not be upheld.
(8) Avoidance declaration
On November 7, 2003, the Buyer sent the Seller a fax, stating:
"Having regard to the fact that you have declined our without prejudice proposal regarding the contract mentioned hereabove we may herewith inform you that all proposals are hereby withdrawn and further give you notice that we hereby claim a wash-out of the non-delivered quantity of 156mt under contract no.× at a current price level of USD 51,843 per mt. We expressly reserve the right to calculate our damages at a higher level if pursuant to the market conditions we will buy the non-delivered quantities at a higher price than USD 51,843 per mt."
The Seller thinks that the Buyer cancelled the 156 ton non-delivered goods by this fax, and the Seller thus did not need to deliver the rest of the goods, neither should the Seller take any responsibilities. The tribunal thinks that although the word "wash-out" is vague, considering the whole event, and the correspondence, the meaning of the fax shall be: inform the Seller that the declaration of avoidance of the undelivered 156 ton goods, request the Seller to compensate the loss of the Buyer thereof, the loss shall be calculated according to the market price, USD 51,843/ton, but the Buyer reserve the right to use a higher price, which it uses to buy new goods. The Tribunal held that according to this fax, the Seller did not need to deliver the 156 ton goods, but it was not exempted from the liabilities to damages.
Since the Seller delivered 5 ton less in September, 45 ton less on October, these short delivery constitute a breach of contract as well. According to Article 73 of the CISG:
(2) If one party's failure to perform any of his obligations in respect of any installment gives the other party good grounds to conclude that a fundamental breach of contract will occur with respect to future installments, he may declare the contract avoided for the future, provided that he does so within a reasonable time.
The Tribunal thinks, that delivery goods is the main obligation of the Seller, but the Seller delivered only 1/4 of the goods it supposed to deliver. In addition, the Seller requested to postpone the delivery schedule again and rejected the Buyer's suggestion. Considering all these facts, the Tribunal thinks that on November 7, 2003, it is in line of the CISG that the Buyer informed the Seller an avoidance of the contract to the 156 ton non-delivered goods. And to declare avoidance does not necessarily need to use the exact words.
The Tribunal held that the Seller did not deliver enough goods on time, which constituted a fundamental breach of the contract and since there is no exemption can be used legally, the Seller shall be liable for the damages.
According to Article 76 of CISG, 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 avoidance, therefore, the Buyer is entitled to the difference between the contract price of the L-Lysine and the current price of that at the time of contract avoidance declaration. And according to Article 74, the Buyer may also claim other damages.
Parties have different opinions about the current price, but they both agree to refer to the Chinese market price. Current price should be the market price of the same goods in the place of delivery at the time of the Buyer's contract avoidance declaration. FOB shanghai means the delivery port is Shanghai, so the current price shall be the price of the goods in China on November 7, 2003. And the current price shall represent the market price that any company shall pay for if it wants to buy the goods in Chinese market.
The Buyer provided a price table of L-Lysine published in China Livestock Weekly Prices Watch and two sales invoices of L-Lysine at that time. All the evidences showed the same facts that the price of L-Lysine was about two times of the contract price. Although the Seller objected the evidence, it did not provide better evidence. Although the Seller provided reliable custom data for the price, but that price is the market price before the exportation. For example, the contract in dispute was signed on June, but the exportation was at July to September, the difference is 1-3months. Thus, the price from custom can not be used as an evidence of the current price. In addition, the Seller admitted that the price of L-Lysine doubled in the second half year of 2003 in its defense, which is inconsistence with the Buyer's claim. Based on the above mentioned analysis, the Tribunal decides that the current price will be decided by the price table published in China Livestock Weekly Prices Watch.
Since there is no price stated in the from on November 7, 2003, the Tribunal decides to take an average price of the three prices before that date, and three prices after that date. So the current price shall be USD 41,991.50/ton, thus, the Buyer is entitled to a price difference of (USD 41,991.50/ton - USD 11,750/ton) × 156 ton = USD 5,051,674.
According to Article 78 of CISG, the Buyer is entitled to claim interest. In this case, the principal is USD 5,051,674, yearly interest rate is 2.25%, and the interest period shall be calculated from the date of arbitration application, which is December 5, 2003 to the date of issuance of the award, which is March 5, 2005, in total 1.25 year.
So the Interest shall be USD 5,051,764 × 2.25% × 1.25 = USD 141,224
(12) Lawyer fee
Since this dispute was caused by the Seller's breach of contract, so the Buyer shall be liable for the damages it caused to the Seller because of this case. Therefore, the Seller shall compensate the Buyer the lawyer fees it spent on this case. And the Tribunal thinks RMB 4,151,000 is a reasonable number.
(13) Arbitration fee
According to parties responsibilities, the arbitration fee shall be shared by the Seller and the Buyer for 90% and 10% respectively.
The Award is final and takes effect upon issuance.
* All translations should be verified by cross-checking against the original text.
** Ms. Lei Tong, LLM, lawyer, JunZeJun Law Offices Shanghai Office; e-mail: <Lei.email@example.com>, <firstname.lastname@example.org>.Go to Case Table of Contents