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CISG CASE PRESENTATION

China 7 April 2005 CIETAC Arbitration proceeding (Cotton gin motes case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/050407c1.html]

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

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Case identification

DATE OF DECISION: 20050407 (7 April 2005)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2005/01; Case No. Shen G2004100

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Singapore (respondent)

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

GOODS INVOLVED: Cotton gin motes


UNCITRAL case abstract

PEOPLE'S REPUBLIC OF CHINA: China International Economic & Trade
Arbitration Commission [CIETAC] 7 April 2005 (Cotton gin motes case)

Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/120]
CLOUT abstract no. 1163

Reproduced with permission of UNCITRAL

Abstract prepared by Aaron Bogatin

A contract was concluded between a seller from Singapore and a buyer from China for the purchase of cotton gin motes in two deliveries.

On arrival of the second delivery, the goods were inspected by the buyer which found that the large majority did not conform to the original sample received and therefore were not in conformity with the contract (Article 35(2)(c) CISG). Upon the attempted return of the defective goods to the seller, the buyer was directed by the seller to its supplier in order to recover compensation. As the situation was not being resolved in a timely manner and the price of cotton was falling, the buyer decided to mitigate its damages and resell part of the usable goods.

The contract was silent on the governing law, thus the Arbitration Tribunal ruled that the CISG applied since the places of business of the buyer and the seller were in CISG countries. In its ruling on the merits the Tribunal held that acceptance of the first delivery by the buyer did not preclude the buyer from avoiding the contract at the time of the second delivery. The two deliveries were “interdependent” so neither could fulfill the purposes contemplated by the parties (Article 73(3) CISG).

It was also held by the Tribunal that resale of part of the goods was permitted due to the “unreasonable delay” in the seller taking them back (Article 88 CISG). The Tribunal further stated that the seller was responsible for damages payable to the buyer. The quantity of non-conforming goods was so large that it was deemed sufficient to amount to a fundamental breach, allowing the buyer to avoid the contract. After reducing the buyer’s claim for loss of profit, the foreseeable damages were held to consist of the difference between the purchase price and the resale price and expenses including storage charge, demurrage charge, as well as other fees (Article 74 CISG).

Referring to the fact that the buyer’s contractual relationship was with the seller, the Tribunal held that the buyer could only claim compensation from the seller. The seller, however, had the right to seek compensation from its supplier after compensating the buyer.

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Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 25 ; 73(3) ; 74 ; 77 ; 88 [Also cited: Article 58 ]

Classification of issues using UNCITRAL classification code numbers:

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

73C [Avoidance in installment contracts: defects in one delivery prevents use of other deliveries];

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

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

88A [Party obliged to preserve goods may sell them]

Descriptors: Fundamental breach ; Avoidance ; Installment contracts ; Damages ; Profits, loss of ; Foreseeability of damages ; Mitigation of damages ; Resale of goods

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Editorial remarks

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

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

Cotton gin motes case (7 April 2005)

Translation [*] by Meihua Xu [**]

Translation edited by WU Xiaoyu [***]

The China International Economic and Trade Arbitration Commission Huanan Commission (formerly known as China International Economic and Trade Arbitration Commission Shenzhen Commission. On 18 June 2004, renamed as China International Economic and Trade Arbitration Commission Huanan Commission, hereafter, the "Huanan Commission") accepted the case (Case number: SHEN G2004100) according to:

   -    The supplementary arbitration agreement regarding Contract No. COT/03/103 signed by Claimant [Buyer], China __ Company, and Respondent [Seller], Singapore __ Company on 15 July 2004; and
 
   -    The written arbitration application submitted by [Buyer] on 6 September 2004.

This case is qualified to use the Arbitration Rules of the Arbitration Commission (hereafter, the "Arbitration Rules"), which became effective on 1 October 2000.

On 23 September 2004, via express mail, the Secretariat of the Huanan Commission sent to the [Seller] the arbitration documents, including the arbitration notice, [Buyer]'s arbitration application and the attachment, the Arbitration Rules, and the arbitrators' name list based on the address provided by the [Buyer] in its arbitration application. However, the aforesaid documents were returned by post office because "the receiver had moved without new address." Later, the Secretariat of the Huanan Commission resent the aforesaid documents to the [Seller]'s new address provided by the [Buyer]. They have been received by the [Seller] according to the post office's record. Related arbitration documents have been sent to the [Buyer] as well.

Based on the Arbitration Rules, the [Buyer] appointed Mr. Huang as its arbitrator. The [Seller] failed to appoint or ask the Chairman of the Arbitration Commission to appoint an arbitrator. Therefore, on behalf of the [Seller], the Chairman of the Arbitration Commission appointed Ms. Zhang as the [Seller]'s arbitrator. Since the two parties failed to jointly appoint or ask the Chairman of the Arbitration Commission to appoint the Presiding Arbitrator, the Chairman of the Arbitration Commission appointed Mr. Xiao as the Presiding Arbitrator. The aforesaid three arbitrators formed the Arbitration Tribunal on 26 November 2004 to hear this case. On 26 November 2004, the Secretariat of the Huanan Commission sent the Arbitration Tribunal Formation notice to both parties.

The Secretariat of Huanan Commission scheduled a court session on 13 January 2005 at the place where Huanan Commission is located, and on 8 December 2004, it sent the court session notice to both parties.

The [Seller] failed to submit an arbitration defense.

On 13 January 2005, a court session was held in Shenzhen as scheduled. The agent of the [Buyer] attended the court session. After receiving the notice, the [Seller] did not send any agent to the court session without any explanation. Pursuant to Article 42 of the Arbitration Rules, the Arbitration Tribunal processed this case by default. The agent of the [Buyer] made a further oral statement, provided original evidence, and answered the Arbitration Tribunal's questions.

After the court session, the [Buyer]'s agent submitted a written representation statement and supplementary evidence to the Arbitration Tribunal, and modified its arbitration claims. On 26 January and 7 March 2005, the Huanan Commission sent the [Buyer]'s representation statement and supplementary evidence, and modified arbitration claims to the [Seller], asking the [Seller]'s opinion. However, the [Seller] failed to submit any response within the stipulated time.

This case has been concluded. The Arbitration Tribunal handed down this award by consent based on the facts ascertained at the court session and the existing material.

The following are the facts, the Tribunal's opinions and award.

I. FACTS

On 18 January 2004, the [Buyer] and the [Seller] signed Sales Contract No. COT/03/103 (hereafter, the "Contract") via fax with the following terms:

   -    Goods: USA Gin Motes;
   -    Quantity: 3,500 packages;
   -    Quality: based on the average of sample C;
   -    Net weight: 1,820,000 lb, which should be based on CIQ's inspection certificate;
   -    Price: US $0.14/lb, C&F China;
   -    Payment: by L/C;
   -    Shipping term: The goods shall be delivered by two shipments on 29 February 2004 and 10 March 2004, respectively; the destination port is Tianjin Newport China.

On 13 March and 20 March 2004, respectively, the contract goods arrived at Tianjin Newport, and the [Buyer] raised quality objection to the 2,210 packages of goods which it had taken delivery of. The two parties failed to settle the dispute by negotiation; therefore, the [Buyer] filed the arbitration application with the Huanan Commission, asking the Arbitration Tribunal to rule that:

   (1)    [Seller] shall refund the price for the goods of US $103,003.97 to the [Buyer];
 
   (2)    [Seller] shall pay the [Buyer]'s various economic losses of renminbi [RMB] 521,585.74;
 
   (3)    [Seller] shall bear the evidence verification fee, arbitration fee, and traveling fee incurred by the [Buyer].

On 26 January 2005, the [Buyer] added to these claims, asking the Tribunal to order the [Seller] to pay a demurrage charge of RMB 76,606, labor fee for cooperating SGS inspection of RMB 22,195, evaluation fee of RMB 5,000, totaling RMB 103,801.

On 2 March of the same year, the Secretariat of the Huanan Commission asked the [Buyer] to pay an extra arbitration fee for the additional arbitration claim, and the [Buyer] agreed to relinquish RMB 103,801 from US $103,003.97, i.e., the refund for the price of the goods.

POSITION OF THE PARTIES

[Buyer]'s position

The [Buyer] alleges that:

After the conclusion of the Contract, the [Buyer] issued the L/C and performed its contract obligations. After the goods delivered by the [Seller] arrived, on 17 March and 22 March 2004, respectively, the [Buyer] applied for commodity inspection with Henan Province Entry & Exit Inspection and Quarantine Bureau (hereafter, "Henan IQ") and was informed that the inspection could be performed only after the entire goods arrived at Zhengzhou. However, after the entire goods arrived at the destination port, while taking delivery and filing for customs application, the [Buyer] discovered that the seal number in the B/L was inconsistent with that on the goods, and the shipping company refused to let the [Buyer] take delivery of the goods. After repeated negotiations, the shipping company agreed to ship five containers of goods on 19 March and four containers on 23 March.

After receiving the goods, the [Buyer] discovered that the goods had severe defects, which did not conform to the samples. Therefore, on 28 March, the [Buyer] contacted the [Seller] immediately, informing of the aforesaid situation and asking for resolution. The [Seller] replied that it was to contact its supplier in the U.S. (hereafter, "the Supplier") On 10 April, the Supplier entrusted SGS to send staff to China to conduct an inspection on the goods. On 29 April, SGS issued an inspection certificate. On 20 May, Henan IQ issued an inspection and quarantine certificate, indicating that 77.4% of the goods was non-conforming, among which there was a large quantity of material waste (trash). The inspection certificate issued by SGS indicated that 88.74% of the goods was non-conforming.

The aforesaid two inspection certificates indicate that most of the goods delivered by the [Seller] was non-conforming. The [Buyer] had been sending letters to the [Seller], trying to settle this issue and the [Seller] was actively negotiating with its Supplier. The [Buyer] was trying to settle the problem by negotiation. However, the [Seller] failed to reach an agreement with the [Buyer], alleging that its Supplier did not cooperate.

The [Buyer] and the [Seller] have a contractual relationship. Therefore, the [Buyer] could only claim compensation from the [Seller]. The [Seller] has the right to ask compensation from its Supplier after compensating the [Buyer] first.

The [Buyer] has suffered severe economic loss due to the [Seller]'s breach of contract, and the goods could not be resold because of the defects. The price for cotton was decreasing, and in order to mitigate the loss, the [Buyer] took a measure to resell the goods after evaluation.

The basis for the [Buyer]'s compensation claim is as follows:

   -    Price for 77.47% of the goods, i.e., US $127,919.63 - Current value of these goods, i.e., US $24,915.66 = US $103,003.97;
   -    [Buyer]'s loss of profit of RMB 515,585.74;
   -    Loss of storage fee of RMB 6,000; loss of evaluation fee of RMB 5,000; demurrage charge of RMB 76,606; labor fee for cooperating SGS inspection of RMB 22,195.03; and loss of traveling fee for arbitration application and court session.

At the court session, the [Buyer] explained that the loss of profit was calculated as:

(Price in the contract with its client - price for the goods of which it had been take delivery) 77.47% non-conforming goods = loss of profit.

The [Buyer] asks for compensation based on the inspection certificate issued by Henan IQ due to the following reasons:

  1. The [Buyer] applied inspection with Henan IQ first.

  2. The [Seller] raised no objection to the inspection certificate issued by Henan IQ and applied the inspection result when negotiating with its Supplier. Therefore, it could be deemed that the [Seller] had accepted the inspection result impliedly.

  3. The percentage of non-conforming goods in SGS's inspection certificate is higher than that in Henan IQ's inspection certificate. Therefore, using Henan IQ's inspection result is beneficial to the [Seller].

  4. From the fax sent by the [Seller] to its Supplier, it could be seen that the compensation amount calculated based on SGS's inspection result was almost the same as that calculated based on Henan IQ's inspection result.

At the court session, the [Buyer] confirmed that the "CIQ" mentioned in the Contract is the abbreviation of China Entry & Exit Inspection and Quarantine Bureau.

The [Buyer] quoted provisions in the Contract Law of the People's Republic of China (hereafter, the "Contract Law of the PRC") first, then applied related stipulations in the United Nations Convention on Contracts for the International Sales of Goods (hereafter, the "CISG") to support its assertions.

The [Seller] has not made a defense or given different opinions.

IV. OPINION OF THE ARBITRATION TRIBUNAL

(1) The applicable law

The two parties failed to stipulate the applicable law in the Contract. The [Buyer]'s place of business is in China and the [Seller]'s is in Singapore. Both China and Singapore are Contracting States of the CISG and the two parties did not exclude the application of the CISG in the Contract; therefore, the Arbitration Tribunal deems that the CISG should be the applicable law.

(2) Contract violation liability

The Arbitration Tribunal notes that after the [Buyer] claimed compensation on the defective goods, the [Seller] had asked the [Buyer]'s opinions on the two letters which the [Seller] was to send to its Supplier, and the [Buyer] signed both of them: "agree with [Seller]'s opinion".

      1. The [Seller] informed its Supplier that after the inspection conducted by CIQ, the goods were found not in conformity with samples. CIQ suggested the return of the goods. The [Buyer] refused to accept the goods and requested the return of the goods, asking the [Seller] to take over the goods from Tianjin Newport at its own cost based on the price term of C&F Tianjin, China;

      2. The [Seller] asked its Supplier to refund the price by TT for the 125 packages of goods completely damaged. Qualities for B1 group and B2 group of goods (divided by SGS - note by the Arbitration Tribunal) were to be decided by CIQ or China Commodity Quality Inspection Company (CCQIC). The [Seller] also informed its Supplier that it could designate any surveyor to inspect the contract goods in China;

      3. The [Seller] admitted that the [Buyer] was its client. However, it alleged that the [Buyer] was the Supplier's final client, and asked to settle this issue together with the Supplier and have the Supplier bear the compensation and legal expenses.

The Arbitration Tribunal deems that by concluding the Contract, the [Buyer] and the [Seller] established a sales relationship. The [Seller] was neither the [Buyer]'s nor the Supplier's agent. Even though the contract goods were delivered by the Supplier to the [Buyer] directly, the [Seller] was still responsible for the performance of contract obligations, therefore, the [Seller] shall be responsible for compensation due to the severe defects on the goods.

(3) [Buyer]'s arbitration claims

      1. The two parties failed to stipulate an inspection organization to inspect the goods after they arrived at the destination port. However, both of them agreed that the net weight of the goods should be based on the inspection certificate issued by CIQ. In accordance with international trade usages, the inspection organization should inspect the weight and quantity of the goods. In addition, in the aforesaid letters sent to the Supplier, the [Seller] accepted that the quality of the goods should be based on the conclusion made by CIQ. Therefore, the quality of the goods in this case shall be based on the inspection and quarantine certificate issued by Henan IQ.

Based on the inspection and quarantine certificate issued by Henan IQ on 20 May 2004:

   -    There were only 498 packages of conforming goods in the 2,210 packages of goods received by the [Buyer], which was 22.5%;
   -    885 packages of goods were non-conforming, which was 40.05%; and
   -    827 packages were material waste (moldy, mixed nap, foreign material), which was 37.42%.
   -    There was a total of 1,712 packages of non-conforming and waste goods, which was 77.47% of the entire goods.

The Arbitration Tribunal notes that the [Seller] delivered non-conforming goods, which was as high as 77.47% of the entire goods. This was a fundamental breach of the Contract. Therefore, the [Buyer] has the right to return the goods and ask for refund of the price. The evidence shows that the [Buyer] has informed the [Seller] of the aforesaid requests. However, the [Seller] delayed in taking back the goods and refunding the price raising that it was negotiating with its Supplier regarding the return of the goods, with the result, the [Buyer] could not return the goods.

Under this circumstance, and in order to mitigate the loss, the [Buyer] disposed of the defective goods in a timely manner after making an evaluation, which was reasonable and in accordance with Article 88 of the CISG. The [Buyer] first asked a refund of US $103,003.97, and then voluntarily relinquished RMB 103,801 (i.e., US $12,506). Therefore, the [Seller] shall refund the [Buyer] US $90,497.97.

In accordance with Article 74 of the CISG, the [Seller] foresaw or ought to have foreseen other direct losses of the [Buyer] at the conclusion of the Contract, and the [Buyer] has provided evidence showing the existence of these losses. Therefore, the Arbitration Tribunal accepts the [Buyer]'s claims on loss of storage charge of RMB 6,000, labor fee for cooperating SGS inspection of RMB 22,195.03, and goods evaluation fee of RMB 5,000.

      2. The [Buyer] has paid a demurrage charge of RMB 76,606. The evidence shows that this charge was caused by the inconsistency between the seal number on the B/L and that on the goods delivered by the [Seller], but this was not due to the [Buyer]. Therefore, this claim of the [Buyer] is reasonable and acceptable.

      3. According to Article 74 of the CISG, the [Buyer] also asks the [Seller] to pay its loss of interest on the expectation profit, i.e., RMB 515,585.74, which was calculated as:

      The price for the contract the [Buyer] entered into with its client (Mengzhou City Yinhua Spinning Company, hereafter, "YH Company"), i.e., RMB 2,036,038 - The price for goods accepted by the [Buyer], i.e., US $165,121.50 (based on an exchange rate of RMB 8.3 : US $1, i.e., RMB 1,370,508.40) 77.47% (the percentage of non-conforming goods).

The evidence shows that the [Buyer] had signed a resale contract with YH Company, to which the [Seller] raised no objection, and the weight of the goods received by the [Buyer], i.e., 545.796 tons, was almost the same as the weight stipulated in the resale contract, i.e., 549.6861137 tons. This indicated that the [Buyer] took delivery of the contract goods to provide to its client. Even though there was a difference of 3.8901137 tons, if the seal number provided by the [Seller] had been the same as that indicated on the goods and if the goods had conformed to the samples, the [Buyer] would have been able to provide goods to its client. However, the seal numbers were inconsistent and the goods had severe defects. Article 73(3) of the CISG stipulates that:

"A [Buyer] who declares the contract avoided in respect of any delivery may, at the same time, declare it avoided in respect of deliveries already made or of future deliveries if, by reason of their interdependence, those deliveries could not be used for the purpose contemplated by the parties at the time of the conclusion of the contract."

After taking delivery of part of the goods and having them inspected by the inspection agency agreed by the two parties, the [Buyer] discovered severe defects on the goods, and declared the contract avoided in respect of deliveries already made (including the remaining goods it should have delivered to YH Company), which was in accordance with the above stipulation of the CISG.

The [Buyer] has taken delivery of 545.796 tons of goods worth US $165,121.50 (US $302.53/ton), i.e., RMB 1,370,508.40. However, the [Buyer] deducted the aforesaid amount from the price for 549.6861137 tons (1,211,849 lb) of goods it should have delivered to its client, i.e., RMB 2,036,038 without calculating the price for 3.8901137 tons of goods. This calculation of the [Buyer] is erroneous. The correct calculation should be:

      The price for the goods the [Buyer] should have delivered to its client (RMB 2,036,038) - the price for the same quantity of goods delivered by the [Seller] (US $165,121.50 RMB 8.3/US $1 + 3.8901137 tons US $302.53/ton RMB 8.3/US $1) 77.47% = RMB 508,018.45

Thus, the Arbitration Tribunal only grants RMB 508,018.45 for the [Buyer]'s loss of profit.

      4. The [Buyer] also asks compensation for a traveling fee for processing this case without providing evidence. The Arbitration Tribunal deems that this was an actual cost of the [Buyer], and according to Article 58 of the CISG, the Arbitration Tribunal holds that RBM 3,000 is a reasonable amount the [Seller] shall pay to the [Buyer], the winning party in this case.

      5. Since the arbitration claims of the [Buyer] are almost entirely accepted by the Arbitration Tribunal, the [Seller] shall bear the entire arbitration fee.

III. THE AWARD

Based on the aforesaid facts and the Arbitration Tribunal's opinion, the Tribunal rules that:

(1) [Seller] shall refund the price for the goods, US $90,497.97 to the [Buyer];

(2) [Seller] shall pay the loss of profit of the [Buyer], i.e., RMB 508,018.45 plus the storage charge of RMB 6,000, labor fee for cooperating SGS inspection of RMB 22,195.03, goods evaluation fee of RMB 5,000, and demurrage charge of 76,606, totaling RMB 617,819.48;

(3) [Seller] shall bear traveling expenses incurred by the [Buyer] for processing this case;

(4) [Seller] shall bear the entire arbitration fee.

[Seller] shall pay the aforesaid amount within 30 days of this award, otherwise, 6% annual interest shall be added to the payment made in US $ and 8% annual interest shall be added to the payment made in RMB.

This is the final award, which shall be effective as of the day of this award.

Presiding Arbitrator: ___

Arbitrator ___

Arbitrator ___

7 April 2005 in Shenzhen


FOOTNOTES

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

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

*** WU Xiaoyu LL.M, University of Groningen, Netherlands; LL.B. East China University of Politics & Law, Shanghai, P.R. China.

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