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CISG CASE PRESENTATION

China April 2005 CIETAC Arbitration proceeding (Caprolactam case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/050400c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20050400 (April 2005)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2005/22

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Singapore (claimant)

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

GOODS INVOLVED: Caprolactam


Classification of issues present

APPLICATION OF CISG: Yes [Article 1(1)(a)]

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 4 ; 8

Classification of issues using UNCITRAL classification code numbers:

4B [Scope of Convention (issues excluded): agency];

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

Descriptors: Scope of Convention ; Agency issues ; Intent

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Editorial remarks

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

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

Caprolactam case (April 2005)

Translation [*] by Zheng Xie [**]

Edited by Li Jie [***]

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

PARTICULARS OF THE PROCEEDING

The China International Economic and Trade Arbitration Commission (hereafter, the "Arbitration Commission") accepted the case (Case number: G2003____) according to:

   -    The arbitration clauses in the following contracts entered into between Claimant [Seller], AAA Private Limited, a Singapore corporation, and Respondents of the People's Republic of China: BBB Trade Limited [First Respondent], and CCC Trade Limited [Second Respondent]:
 
Contracts HLSZ-098-637 and HLSZ-098-638 signed 26 January 2001;
Contracts HLSZ-098-639 and HLSZ-098-640 signed 29 January 2001;
Contract HLSZ-098-641 signed 22 February 2001;
Contracts HLS-098-642 and HLSZ 098-643 signed 7 March 2001;
Contracts HLSZ-025-99-201 and HLSZ-025-99-2002 signed 27 April 2001;
Contract MOLE-05-04/01 signed 8 May 2001;
Contract MOLE-05-05/01 signed 17 May 2001; and
 
   -    The written arbitration application submitted by the [Seller] on 19 August 2003.

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

[The action commenced as a proceeding between Claimant [Seller] and the First Respondent.]

On 25 September 2004, the Secretariat of the Arbitration Commission served the parties the Arbitration Notice, the Arbitration Rules, and Panel of Arbitrators, and also sent the [Seller]'s arbitration application and evidence to the First Respondent.

The First Respondent appointed ___ as arbitrator, and the [Seller] appointed ___ as arbitrator. Because the parties did not jointly appoint a Presiding Arbitrator within the provided period, the Chairman of the Arbitration Commission appointed ___ as the Presiding Arbitrator pursuant to Article 24 of the Arbitration Rules. The aforementioned three arbitrators formed the Arbitration Tribunal on 31 October 2003 to hear this case, and on the same day the Secretariat served the parties the aforementioned Notice of Formation of the Arbitration Tribunal.

After discussion with the Secretariat, the Arbitration Tribunal decided to open a court session in Beijing on 30 March 2004. On 25 February 2004, the Secretariat served the parties the aforementioned Notice of Court Session.

The Arbitration Tribunal opened the court session in Beijing on 30 March 2004 as scheduled. [Seller] and the First Respondent sent their arbitration representatives to appear. The representatives presented the facts and position to the Arbitration Tribunal, and examined the evidence, and answered the Arbitration Tribunal's questions.

After the court session, the parties submitted written documents.

On 15 July 2004, the First Respondent submitted a letter to the Arbitration Tribunal requesting the Arbitration Tribunal to grant a reasonable time for the parties' settlement negotiations or the Arbitration Tribunal's mediation. After consulting the Chairman of the Arbitration Commission, the Arbitration Tribunal ordered an extension of the final award date to 31 January 2005.

Because the Presiding Arbitrator was busy, on 23 September 2004 the Chairman appointed ___ as the Presiding Arbitrator pursuant to Article 31 of the Arbitration Rules. On the same day, the Secretariat served the documents to the [Seller] and the First Respondent.

On 27 October 2004, the [Seller] submitted a letter to the Arbitration Tribunal petitioning to add CCC Trade Limited as a Second Respondent. The Secretariat solicited the First Respondent's opinion through the Secretariat. The First Respondent did not raise any objection.

On 7 December 2004, the Arbitration Commission sent a letter to the two Respondents requesting them to jointly appoint an arbitrator according to the Arbitration Rules, and requesting the Second Respondent to file a response within the time limit prescribed in the Arbitration Rules.

On 30 December 2004, the Second Respondent submitted a letter to the Arbitration Commission requesting that the current Arbitration Tribunal continue hearing this case.

On 4 January 2005, the Arbitration Tribunal requested the Secretary to extend the deadline for final award to 31 October 2005.

Because the two Respondents did not jointly appoint an arbitrator, on 6 January 2005 the Arbitration Tribunal as constituted, after soliciting the parties' opinion and consulting the Secretariat, scheduled a second court session in Beijing on 22 February 2005.

On 22 February 2005, the Arbitration Tribunal opened that court session. Each party sent its representative. The Second Respondent submitted a letter appointing ___ as its arbitrator, alleged that it intended to settle this matter with the [Seller], and accepted the jurisdiction of the Arbitration Commission. The [Seller] and the First Respondent also executed the Second Respondent's letter. The [Seller]'s and the First Respondent's representatives presented facts and each party's position, and cross-examined evidence, and answered the Arbitration Tribunal's questions.

Based on the facts verified in the court session and the written material provided, the Arbitration Tribunal entered this award by consent.

The facts, the Arbitration Tribunal's opinion and award are as follows:

FACTS

In 2001, the First Respondent and the [Seller] reached an agreement that the First Respondent would buy Caprolactam from the [Seller], and that the goods would enter China through Man Zhou Li. Because the First Respondent had no import power, the [Seller] was requested to sign a contract with the First Respondent's designated border-trading company, which should complete the import procedures. The following series of contracts were entered into:

   -    From 6 January 2001 through 7 March 2001, the First Respondent entrusted DDD Economic And Trade Co., Ltd ("DDD" Company) to execute seven contracts with the [Seller], i.e., Contracts HLSZ-098-637 to HLSZ-098-643 and also entrusted it to complete the import procedures.
 
   -    On 27 April 2001, the [Seller] and the First Respondent executed two more contracts, i.e., Contracts HLSZ-025-99-201 and HLSZ-025-99-202. For these contracts, the First Respondent entrusted EEE Trade Corporation ("EEE" Corporation) to completed the import procedures.
 
   -    On 8 and 17 May 2001, FFF Trade Co., Ltd. ("FFF" Company) entrusted by the First Respondent entered two contracts with the [Seller], i.e., Contracts MOLE-05-04/01 and MOLE-05-05/01, and the FFF was also entrusted to complete the import procedures.

Except for the entrusted party, date of execution, date of lading, quantity and price term, other terms and conditions were same in the aforementioned eleven contracts which stipulated as follows:

1. The First Respondent should buy Caprolactam manufactured by R City (Russia) Plant with the same quality and package from the [Seller], and the port of delivery was Man Zhou Li;

2. If the [Seller] delayed delivering the goods, it should pay liquidated damages to the First Respondent at 0.5% of the delivered goods per two weeks;

3. If the First Respondent delayed paying the contract price, it should pay the [Seller] liquidated damages at 1% of the outstanding balance per month;

4. Except that the seven contracts executed by DDD stipulated that the payment should be made within 90 days after the goods arrived, the other four contracts stipulated that the payment should be made at the same time as the goods arrived.

After the execution of the aforementioned contracts, the [Seller] delivered 5,925 tons of Caprolactam to the port of Man Zhou Li for the total contract price of $6,385,865, but the First Respondent only paid $1,905,589. Although the [Seller] demanded the remaining payment several times, the First Respondent failed to pay the outstanding balance, totaling $4,481,276.

In view of the above, the [Seller] commenced this arbitration proceeding and prayed for the following relief:

(1)   The First Respondent should pay the balance, i.e., $4,493,785;
 
(2)   The First Respondent should pay interest of $1,138,228 accrued for the outstanding balance (at the interest rate of 1% stipulated in the contracts);
 
(3)   The First Respondent should bear the arbitration fee.

POSITION OF THE PARTIES

The First Respondent's position

The [Seller] submitted eleven contracts to the Arbitration Tribunal.

      In nine of these contracts, i.e., HLSZ-098-637, HLSZ-098-638, HLSZ-098-639, HLSZ-098-640, HLSZ-098-641, HLSZ-098-642, HLSZ-098-643, MOLE-05-04/01, and MOLE-05-05.01. DDD or FFF was the party with whom [Seller] contracted in these cases. The First Respondent had no legal relationship to these nine contracts in terms of the form of the contracts and/or the facts. These nine contracts did not stipulate any of the First Respondent's rights or obligations, and were not binding on the First Respondent. Since the First Respondent was not a party to these nine contracts, the request by the [Seller] to have the First Respondent perform these contracts and bear liabilities lacks legal and factual basis.

      The [Seller] alleged that the First Respondent is the Consigner of the nine contracts, but cannot provide any evidence to prove this agency relationship. In fact, the First Respondent never had any agency relationship with the Buyer of the nine contracts. Therefore, it is groundless to ask the First Respondent to bear any responsibility for the buyers in the nine contracts.

      With respect to Contracts HLSZ-025-99-201 and HLSZ-025-99-202, the First Respondent alleged that because it lacked import and export power, which had to be approved by a competent national agency, pursuant to Article 2 of Temporary Measures of Foreign Trade Agency System Enacted by Ministry of Foreign Economic and Foreign Trade on 29 August 1991, the First Respondent should not have executed any foreign sales contracts. Therefore, these two contracts should be deemed void.

The relationship between the [Seller] and the First Respondent was in fact a consulting arrangement. The [Seller] and the First Respondent executed an Agreement on 2 March 2001. This Agreement stipulated that the First Respondent was retained as a consultant in order to develop business in China, and that it should:

   -    Provide periodic reports as well as a feasibility study regarding the marketability of Caprolactam in China;
   -    Prepare all then necessary conditions for the marketing of Caprolactam in China, and provide information and recommendations regarding marketing strategy and development;
   -    Advise of requirements to sell Caprolactam in China, and of the present commercial and economic situation in China; and that all information provided should be helpful for purposes of the [Seller]'s developing market and business in China.

The aforementioned Agreement also stipulated that the [Seller] should pay the First Respondent $12,000 per year as a consulting fee; and when the [Seller] sold Caprolactam in China and received payment, it should pay the First Respondent $5 per ton as a commission. It was apparent that a consulting relationship but not a sales relationship existed between the [Seller] and the First Respondent.

The [Seller]'s position alleged in its supplemental material

The contracts executed by FFF. With respect to the two contracts executed by FFF, the [Seller] contended that although it was a trade company that signed these two contracts, the actual buyer was the First Respondent, because "Referring the Contracts thru FFF 505/504" stated by the First Respondent showed that it was the First Respondent's intent to entrust FFF to execute Contracts 505 and 504 because:

   -    The First Respondent had been advising the [Seller]. not FFF, of the status of sales and payments;
 
   -    The First Respondent had been promising to the [Seller], not FFF, to make payments;

The [Seller] had been demanding that the First Respondent, not FFF, pay the contract price and the [Seller] had been negotiating with the First Respondent, not FFF, regarding the schedule of payments.

The contracts signed by DDD. Regarding the seven contracts signed by DDD, although it appeared that the buyer was the trading company, the actual buyer was the First Respondent, and these contracts were binding on the First Respondent Because:

   -    The First Respondent had been advising the [Seller]. not DDD, of the status of sales and payments;
 
   -    The First Respondent had been promising to the [Seller], not DDD, to make payments

The [Seller] had been demanding that the First Respondent, not DDD, pay the contract price. The [Seller] had been negotiating with the First Respondent, not DDD, regarding the schedule of payments and the [Seller] has taken legal action against the First Respondent, not DDD.

The contracts executed by First Respondent. Regarding the two contracts directly executed by the First Respondent, the [Seller] alleged that two contracts were originally signed by GGG International Chemicals (Hong Kong) Ltd. ("GGG" Chemicals), not by the First Respondent. Because the First Respondent could not establish a Letter of Credit, the First Respondent requested to sign the contracts directly in replacement of the contract signed between the [Seller] and GGG. EEE, a consignee entrusted by the First Respondent, was "Consignee". During the performance of these two contracts, EEE performed in accordance with its position as the First Respondent's agent.

All eleven contracts. With respect to all eleven contracts, the [Seller] alleged that the delivery records issued by Beijing Branch of China International Transportation Co. Man Zhou Li showed that the three trading companies were "Consignees." Except for the signing party, date of execution, date of lading, quantity and contract price, the other terms and conditions stipulated in the eleven contracts were the same. Therefore, whether the signatory party was the First Respondent or not, the First Respondent was the actual buyer under these eleven contracts.

In sum, the [Seller] alleged that although the parties that signed nine of the eleven contracts were trading companies, the trading companies were the agents of the First Respondent. Because the First Respondent lacked foreign trade power, it entrusted the trading companies to execute the contracts. After the eleven contracts were executed, it was the First Respondent who performed a buyer's duty, not the trading companies. The parties' correspondence demonstrated that the parties confirmed that the contracts were binding on the First Respondent, not the trading companies. Therefore, the First Respondent was the actual buyer and a party to the eleven contracts. The trading companies and the First Respondent had agency relationships.

Pursuant to Article 402 of the Contract Law of the People's Republic of China,
where an agent, acting within the scope of authority granted by the principal, entered into a contract in its own name with a third person who was aware of the agency relationship between the principal and agent, the contract is directly binding upon the principal and such third person, except where there is conclusive evidence establishing that the contract is only binding upon the agent and such third person. Because the [Seller] had known the First Respondent and the trading companies' agency relationships, and because the [Seller] also submitted evidence to prove that the nine contracts were directly binding on the First Respondent, the [Seller] was entitled to take legal action against the First Respondent directly.

The First Respondent's position

The [Seller] and the First Respondent had a consulting relationship. Pursuant to the Agreement between the parties, the [Seller] was to pay fixed annual service fees to the First Respondent, and the First Respondent was to provide service regarding the [Seller]'s products in China's market. In addition, after the [Seller] received payments from buyers, the First Respondent can get a sales commission. In fact, the parties had been in this consulting relationship for several years, and the [First Respondent] only earned service fees and commission but not any other economic interest including profits.

Regarding the eleven contracts, the First Respondent had never taken delivery of the goods as a buyer nor made any payments to the [Seller]. The parties' correspondence showed that the First Respondent not only provided services stipulated in the Agreement but also assisted the [Seller] in demanding payments from the actual buyers. It was obvious that the [Seller] knew the actual buyer was not the First Respondent.

The fax sent by the [Seller] to the First Respondent on 20 June 2002 stated:

"We note that you have been assisting us to sell the above-referenced goods. Please note that we can pay your commission only after we receive the full amount under the letter of credit ... we request you to successfully complete this transaction as an agent. If you have any question, please do not hesitate to contact us."

The [Seller]'s evidence also provided that:

"If Steed, Changan and Shanxi Factory failed to pay the outstanding amount, we would seek your cooperation to take legal action ... we would fully assist you and pay any legal fees, audit fees and other pertinent expenses you incurred."

The First Respondent's position in its supplemental opinion

Pursuant to Chinese law, a sales contract is a contract under which the seller transfers the ownership of the goods, and the buyer pays the contract price. In this case, the [Seller] and the First Respondent had no sales relationship; the First Respondent had never obtained ownership of the goods from the [Seller] or paid the [Seller] the contract price as a buyer. These facts were undoubted.

The [Seller] alleged that "the parties had deemed each other as a contracting party." In the court session, the [Seller] contended that it deemed the First Respondent as the actual buyer, because it had sent facsimiles to the First Respondent. Parties' relationships are established and defined by law not by a party's unilateral intent.

On 18 May 2002, the First Respondent in its fax sent to the [Seller] stated, "[w]e have to sell it," and "we can pay you back." These statements should be interpreted in the full content of the fax. This fax was a status report provided by the First Respondent when assisting the [Seller] in selling Caprolactam, and it was not a promise to pay the contract price. The First Respondent was a middleman, not a buyer, and had no duty to make payment, and would not make any promise to pay the contract price. More importantly, such statements did not make the [Seller] misunderstand that the First Respondent was the actual buyer, because its fax of 9 April 2003 stated, "if Steed, Changan and Shanxi Factory failed to pay the outstanding amount, we would seek your cooperation to take legal action against the [Seller]."

As for the two contracts directly executed by the First Respondent, the First Respondent explained that on 4 April 2001, the [Seller] and GGG executed sales contracts; thereafter, because GGG failed to issue letters of credit, the [Seller] decided to cancel the transaction. However, the goods had already been shipped from Russia and would arrive at Man Zhou Li at the beginning of May 2001. In order to lock the contents of these two contracts and avoid a drop of the market price, on 27 April 2001, the [Seller], with the full knowledge that the First Respondent had no foreign trade power, signed Contracts HLSZ-025-99-201 and HLSZ-025-99-202 with the First Respondent. The reason the First Respondent executed these two contracts was to assist the [Seller] in shipping the goods to China and seeking a buyer. Like the other nine contracts, it was the trading company which imported the goods to China and delivered the goods to the actual buyer, CCC, and it was also the trading company which obtained payments from the actual buyer and thereafter forwarded the [Seller]. The First Respondent only assisted in communicating among the parties. The First Respondent only intended to assist the [Seller] in selling the goods in China and to obtain a commission when executing these two contracts.

In the court session, the [Seller] alleged that the trading companies were the First Respondent's agents and were entrusted by the First Respondent to execute the sales contracts. However, this allegation was contrary to the facts. As early as before June 2000, the [Seller] had entered Caprolactam sales contracts with DDD, which stipulated that DDD should import goods and seek buyers in China, and also should accept payments from buyers and forward the payments to the [Seller]. At that time, the First Respondent was not involved. At the end of June through the beginning of July 2000, because DDD did not sell the goods well, the [Seller] requested the First Respondent to assist DDD in selling the goods. In the middle of July 2000, the [Seller] officially retained the First Respondent to develop the market and assist in sales, and promised to pay the First Respondent a commission of $10/ton. The [Seller] contended that the First Respondent and the trading companies were in an agency relationship, but failed to submit any evidence to support its position.

The [Seller]'s position

The contracting party listed in Contracts HLSZ-025-99-201 and HLSZ-025-99-022 was changed from GGG to the First Respondent. The First Respondent's original arrangement was that the [Seller] and GGG as buyer executed a sales contract overseas, and GGG and a trading company, EEE as an importer, was to execute a contract. Thereafter, neither the First Respondent nor EEE could issue a letter of credit with GGG as beneficiary. GGG requested cancellation of the contracts because it did not want to take risk. In order to complete the transaction, the [Seller] and the First Respondent sent a letter to GGG requesting shipment of the goods to EEE, and the [Seller] promised that it would not demand payment from GGG. The [Seller] and the First Respondent executed the contracts, with the First Respondent replacing GGG and bearing the duty of payment.

Based on the aforementioned arrangement, GGG should not have any rights or bear any duties under the Contracts, and the First Respondent should pay the contract price to the [Seller] after receiving the goods.

With respect to the nine contracts executed by DDD and FFF, the First Respondent, in its correspondence with the [Seller] regarding the performance of these contracts, repeatedly stated that Contracts MOLE-05-04/01 and MOLE-05-05/01 were entered through FFF, and it had already received all goods and sold part of the goods to HHH Steed Company, etc., the ultimate user; the First Respondent could not pay the [Seller] the contract price because the final user did not pay it, and also because the market price was dropping; the First Respondent requested the [Seller] to reduce the price and to waive the agency fee, transportation charges, tax, etc, because the market price was dropping, and also promised to pay the contract price to the [Seller].

The pertinent correspondence showed that FFF and DDD were the First Respondent's foreign trade agents; the First Respondent was the actual buyer and promised to pay the contract price.

In sum, although the contracting parties of the nine contracts were the trading companies, they were the First Respondent's agents. Therefore, the First Respondent was the actual buyer and a party to the eleven contracts.

The [Seller] also alleged that the documents submitted by the First Respondent were related to other matters which incurred before 2001, not relating to any transactions under the eleven contracts in this case.

The [Seller] alleged that although the contracting party of the nine contracts was not the First Respondent but trading companies, the correspondence between the parties showed that the [Seller] as the third party had known of the agency relationship between the First Respondent and the trading companies before executing the contracts. Therefore, Article 402 of the Contract Law should apply.

The [Seller]'s position stated in its Petition to Add an Additional Respondent

The [Seller] went to D1 City, F City and D2 City for the second time, and finally found FFF's and DDD's offices, reached FFF's legal representative Mr. Yu and DDD's contract person Ms. Qiao, and obtained sufficient evidence from them to show that the First Respondent concealed information, i.e., that FFF and DDD were the First Respondent's agents, which would definitely affect a fair judgment, and also obtained evidence to show that the First Respondent and the Second Respondent were joint buyers and jointly performed the contracts.

According to the Agency Agreement executed by DDD and the First Respondent in September 2000, DDD was the First Respondent's agent with respect to the import of Caprolactam from Russia, and DDD should complete the import procedure for the First Respondent. The Agency Agreement stipulated that Contracts HLSZ-098-637 and HLSZ-098-643 were within the scope of the agency. Therefore, the First Respondent was the actual buyer of these contracts.

In the letter dated 12 November 2002, Mr. Xu promised that as for payment of the contract price to the foreign company under Contract HLSZ-098-637, his company would pay RMB 2,458,225.50 (roughly $296,175) to DDD, and would pay RMB 1,400,000 that day; after the remaining amount was paid, DDD should pay the foreign company. Mr. Xu represented both the First Respondent and the Second Respondent, because Mr. Xu represented the First Respondent in signing the contracts with the [Seller], and promised that his company would pay RMB 1,400,000 that day. In fact, the referenced RMB 1,400,000 was wired by the Second Respondent on that day. Therefore, his company refereed by Mr. Xu was the Second Respondent. In the same month, the [Seller] received US $296,135 trans-wired by DDD, which showed that the foreign company referred to by Mr. Xu was the [Seller], and the Second Respondent was the actual buyer who paid the contract price.

According to the Wire Confirmation issued by China Industrial and Commercial Bank on 12 November 2002, the Second Respondent paid to DDD the sum of RMB 1,400,000, which showed that the Second Respondent actually performed the contracts. This confirmed Mr. Wu's allegation presented in the court session that the Second Respondent was the actual buyer and consignee.

According to a Payment Agreement executed by FFF as agent and the Second Respondent as principal in September 2002, the entire contract price under Contracts MOLE-05-04/01 and MOLE-05-05/01 should be paid by the Second Respondent to the [Seller], and FFF did not bear any obligation. The signatory of the Second Respondent was the First Respondent's General Manger, Mr. Wu. Therefore, both the First Respondent and the Second Respondent were the actual buyers.

In his letter to FFF's legal representative Mr. Yu, Mr. Wu of the First Respondent stated:

"According to our agreement with the [Seller], we decided on a unit price of $752.50 under Contracts 504 and 505 for negotiation, and the [Seller] will invoice us the same; if there is any question, we will directly negotiate with the [Seller]."

This statement sufficiently demonstrated that the First Respondent was the actual buyer under the contracts. At the end of this letter, it requested FFF to invoice the Second Respondent, which also showed that the Second Respondent was the actual buyer. Therefore, the First Respondent and the Second Respondent had the same rights and bear the same obligations under the contracts, and jointly performed the contracts.

According to Yu ___ of FFF and Qiao ___ of DDD, after going through customs, the goods were delivered to the First Respondent and the Second Respondent in accordance with Mr. Wu 's and Mr. Xu's requests, and all payments of the contract price were made by the Second Respondent. Therefore, the First Respondent and the Second Respondent were the joint buyers under the contracts.

According to the aforementioned investigation, Mr. Wu and Mr. Xu ___concealed the facts that the Second Respondent was also a joint buyer of the contracts, and DDD and FFF were also the Second Respondent's agents. Pursuant to Article 403 of the Contract Law of the People's Republic of China, where the agent entered into a contract in its own name with a third person who was not aware of the agency relationship between the agent and the principal, if the agent failed to perform its obligation toward the principal due to any reason attributable to such third person, the agent shall disclose the third person to the principal, allowing it to exercise the agent's rights against such third person. Since the First Respondent and the Second Respondents were joint buyers of the contracts and jointly performed the contracts, the [Seller] added the Second Respondent in this proceeding.

On 1 February 2005, the [Seller] alleged in its petition that considering the First Respondent paid $119,005 and $336,405, respectively, during the arbitration proceeding from 22 June 2004 to 1 November 2004, the [Seller] therefore amended its claim amount from $4,481,276 to $4,025,866, and requested the two Respondents jointly and severally to pay the outstanding amount, interest and arbitration fee.

THE ARBITRATION TRIBUNAL'S OPINION

This proceeding involved various contracts, and the [Seller] added a Respondent and amended its claim. The Arbitration Tribunal confirmed the undisputed facts as follows before issuing its opinion:

   (1)    The [Seller] amended its claim from $4,481,276 to $4,025,866;
 
   (2)    The [Seller] added CCC as the Second Respondent, and CCC agreed to the Arbitration Commission's jurisdiction in writing, and also consented to be added as a Respondent;
 
   (3)    The two Respondents confirmed the contents of the contracts and statement of performance submitted by the [Seller] on 1 February 2005 including the buyer's agent, contract number, date of notice of delivery, date of invoice, quantity, unit price, total price, amount paid, balance, overdue dates and interest on outstanding balance.

1. Applicable law

The eleven Contracts did not stipulate the applicable law. The [Seller] is a Singapore corporation, and the buyers are Chinese corporations. Since both China and Singapore are Contacting States of the United Nations Convention on Contract for International Sales of Goods (CISG), CISG shall apply to this case. If the CISG does not prescribe, laws and regulations of People's Republic of China shall apply.

2. Validity of the eleven contracts

Contracts HLSZ-098-639 to HLSZ-098-643 were signed by the [Seller] and DDD, and Contracts MOLE-05-04/01 and MOLE-05-05/01 were signed by the [Seller] and FFF. As to these nine contracts, the [Seller] and the two Respondents disputed on the issue of who was the actual buyer under these contracts, but did not dispute on the establishment and validity of the contracts. In addition, the First Respondent admitted that the [Seller] did in fact deliver the goods. Therefore, the Arbitration Tribunal held that the nine sales contracts were duly established and legally valid.

As to Contracts HLSZ-025-99-201 and HLSZ-025-99-202, the [Seller] and the two Respondents disputed the validity of these two contracts.

The [Seller] alleged that the First Respondent's original arrangement was that the [Seller] and GGG as buyer execute a sales contract overseas, and that GGG and a trading company EEE as an importer to execute a contract. Thereafter, neither the First Respondent nor EEE could issue a letter of credit with GGG as beneficiary. GGG requested cancellation of the contracts because it did not want to take the risk. In order to complete the transaction, the [Seller] and the First Respondent sent a letter to GGG requesting shipment of the goods to EEE, and the [Seller] promised that it should not demand payment from GGG; the [Seller] and the First Respondent executed the contracts, with the First Respondent replacing GGG as bearer of the duty of payment, and with the understanding that the [Seller] would not demand payments from GGG.

The First Respondent alleged that because it was not granted a foreign trade power by a competent national agency, these two contracts were void.

The Arbitration Tribunal found that (1) the two contracts superficially showed the [Seller] and the First Respondent were the contracting parties, and both parties executed and sealed the contracts; (2) the [Seller]'s evidence showed that EEE completed the import procedures for the goods under the contracts and delivered the goods to the person designated by the First Respondent; (3) in the court session, the First Respondent admitted that the [Seller] had already delivered the goods under the contracts.

In conclusion, the Arbitration Tribunal did not sustain the First Respondent's position that the two contracts were void.

3. Which parties should be bound by the eleven contracts

This is the key issue of the present case. In the opinion submitted to the Arbitration Tribunal on 27 April 2004, the [Seller] repeatedly alleged as follows:

   (1)    In Contracts HLSZ-098-639 to HLSZ-098-643 signed by the [Seller] and DDD and Contracts MOLE-05-04/01 and MOLE-05-05/01 signed by the [Seller] and FFF, the First Respondent was the actual buyer, and DDD and FFF were the Respondents' agents. The First Respondent did not execute the Contracts, because it lacked foreign trade power and had to entrust a trading company to complete the import procedures.
 
   (2)    The contracting buyer of Contracts HLSZ-025-99-201 and HLSZ-025-99-202 was changed from GGG to the First Respondent.

However, the First Respondent alleged that:

   (1)    The nine contracts which the [Seller] entered with DDD and FFF were not binding on the First Respondent, because they were not legally or factually related to the First Respondent.
 
   (2)    The First Respondent did not establish any valid agency relationship with the buyers of the nine contracts.
 
   (3)    The [Seller] and the First Respondents were in a consulting relationship.

The Arbitration Tribunal decides as follows:

      (1) The seven contracts entered between the [Seller] and DDD

      After reviewing the supplemental evidence submitted by the [Seller], the Arbitration Tribunal found that (1) the Agency Agreement was entered by the First Respondent and DDD and clearly stated "principal" and "agent"; (2) the Agency Agreement was entered in September 2000 before the execution of the contracts in this case; (3) the subject products were Caprolactam produced in Russia, which was consistent with the subject matter of the contracts of this case; (4) the Agency Agreement's scope included Contracts HLSZ-098-605 through 637-645, which conformed to the contract nos. in this case; (5) the Agency Agreement was executed by the First Respondent and DDD.

The Arbitration Tribunal also noted that the First Respondent orally denied the existence of the Agency Agreement, but did not submit any evidence to the Arbitration Tribunal denying the existence of the Agency Agreement, and the facts showed that when signing the contracts, the [Seller] knew the agency relationship between the First Respondent and DDD. Therefore, the Tribunal found DDD was the agent of the First Respondent. Pursuant to Article 402 of the Contract Law:

"Where an agent, acting within the scope of authority granted by the principal, entered into a contract in its own name with a third person who was aware of the agency relationship between the principal and agent, the contract is directly binding upon the principal and such third person, except where there is conclusive evidence establishing that the contract is only binding upon the agent and such third person."

Although the buyer under the seven Contracts, No. HLSZ-098-637 through HLSZ-098-634, was listed as DDD, the Contracts were binding on the [Seller] and the First Respondent. The First Respondent was liable for outstanding amount and interest under the Contracts.

      (2) The two sales contracts signed by FFF (Nos. MOLE-05-04/01 and MOLE-05-05/01)

      The [Seller] submitted a Payment Agreement between FFF as agent and CCC (i.e., the Second Respondent, noted by the Tribunal) as Principle . The Arbitration Tribunal found that this Payment Agreement stipulated that FFF wired the contract price of $408,500 under Contract MOLE-05-04/01 to the [Seller], and would wire $403,600 under Contract MOLE-05-04/01 to the [Seller] soon. Thereafter, the balance would be cleared between the [Seller] and the Principal, and the Agent was not liable for the balance under Contracts MOLE-05-04/01 and MOLE-05-05/01, and the Principal should be liable for any consequences caused by this arrangement. This Payment Agreement was executed by FFF and the Second Respondent.

Therefore, the Second Respond should be liable for the unpaid balance and interest under the two contracts signed by the [Seller] and FFF.

      (3) Contracts HLSZ-025-99-201 and HLSZ-025-99-202

      After the court session and arguments, the First Respondent did not deny either the existence or of the authenticity of the two contracts. In addition, the First Respondent did not deny that the [Seller] had already delivered the goods and completed its duty of delivery under these two contracts.

The evidence submitted by the parties also showed that the First Respondent had sold the goods to its customers. Therefore, since the Arbitration Tribunal did not sustain the First Respondent's position that the two contracts were void, the First Respondent should perform its duty of payment under the two contracts.

As to the First Respondent's allegation that the First Respondent and the [Seller] was in a consulting relationship, after the court session and viewing the "Agreement" and other evidence, the Arbitration Tribunal held that the evidence provided by the First Respondent was not sufficient to prove that the "Agreement" related the eleven contracts in this case. In addition, the "Agreement" stipulated that any disputes should be resolved by litigation, the Arbitration Tribunal had no jurisdiction to adjudicate the issue relating the alleged consulting relationship. The Arbitration Tribunal held that the eleven contracts were binding on the [Seller] and the two Respondents.

4. Arbitration Requests

As to the [Seller]'s first request, according to the Arbitration Tribunal's above opinion (2) and (3), the Arbitration Tribunal sustained this request. After reviewing the contracts and breakdown chart of performance, the Arbitration Tribunal held that the overdue amount was $4,025,866. The two Respondents should separately pay the [Seller]: the First Respondent should pay $3,676,926 and the Second Respondent should pay $348,940.

Regarding the [Seller]'s second request, the [Seller] claimed monthly interest rate of 1% as stipulated in the contracts. The Arbitration Tribunal held that this request was contrary to the stipulation in the contracts, which stated:

"Delay in payment: Should the buyer fail to pay to the seller on time as stipulated in the contract, they have to pay seller interest rate of 1% per month or pro rata. If the delay exceeds two months, seller has the right to sell the goods ..."

Accordingly, the Arbitration Tribunal did not completely sustain the [Seller]'s requested calculation based on the contracts and breakdown chart of performance. According to the principal of fairness and reasonableness, the Arbitration Tribunal calculated interest as RMB 516,890.14 under the contracts between the [Seller] and DDD, RMB 48,657.60 under the contracts between the [Seller] and FFF, and RMB 48,183.72 under the contracts between the [Seller] and the First Respondent. Accordingly, the First Respondent should pay interest of RMB 565,073.86, and the Second Respondent should pay interest of RMB 48,657.60.

5. Arbitration fee

The Arbitration Tribunal held that the [Seller] should bear 10% of the arbitration fee, the First Respondent should bear 50%, and the Second Respondent should bear 40%.

AWARD

   (1)    The First Respondent should pay the [Seller] $3,676,926 and the Second Respondent should pay $348,940.
 
   (2)    The First Respondent should pay the [Seller] interest of RMB 565,073.86, and the Second Respondent should pay interest of RMB 48,657.60.
 
   (3)    The arbitration fee is $70,778, of which the [Seller] should pay 10%, i.e., $7,078, the First Respondent should pay 50%, i.e., $35,389, and the Second Respondent should pay 40%, i.e., $28,311. The [Seller] had already prepaid $70,778 to the Arbitration Commission, which offset the arbitration fee. Therefore, the First Respondent should pay the [Seller] $35,389, and the Second Respondent should pay $28,311.
 
   (4)    As to the above (1), (2) and (3), the two Respondents should pay the [Seller] before and including 7 May 2005. If any payment is late, interest at the monthly rate of 0.5% should be paid from 7 May 2005 to the date when the payment is actually made.

The awards are final and take effect when entered.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant AAA Private Limited of Singapore is referred to as [Seller]; BBB Trade Limited and CCC Trade Limited of the People's Republic of China are referred to as [First Respondent] and [Second Respondent], respectively. Amounts in the currency of the United States (dollars) are indicated as [US $]; amounts in the currency of the People's Republic of China (renmimbi) are indicated as [RMB].

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

*** Li Jie, Master degree of Law, Tsinghua University in Beijing, BA in Law, Tsinghua University, Beijing.

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Pace Law School Institute of International Commercial Law - Last updated October 21, 2009
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