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CISG CASE PRESENTATION

China 25 May 2005 CIETAC Arbitration proceeding (Iron ore case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/050525c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20050525 (25 May 2005)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2004/09

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: [-] (claimant)

BUYER'S COUNTRY: [-] (respondent)

GOODS INVOLVED: Iron ore


Classification of issues present

APPLICATION OF CISG: Yes, selected by parties (not otherwise applicable)

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 34 ; 52 ; 54 ; 59 ; 64 ; 74 ; 76 ; 77 ; 78 ; 79 ; 80

Classification of issues using UNCITRAL classification code numbers:

34A [Seller's obligation to hand over documents];

52A [Early delivery: buyer may either take or refuse delivery];

54A1 [Buyer's obligation to pay includes enabling steps (common example): arranging for letter of credit];

59B [Payment due at time fixed or determinable by contract: no need for request by seller or other formality];

64A [Seller's right to avoid contract: grounds for avoidance];

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

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

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

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

79B [Impediments excusing party from damages];

80A [Failure of performance caused by other party (party causing non-performance): loss of rights]

Descriptors: Delivery ; Price ; Letters of credit ; Avoidance ; Fundamental breach ; Damages ; Mitigation of loss ; Interest ; Exemptions or impediments ; Failure of performance, other party

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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

Iron ore case [25 May 2005]

Translation [*] by Zheng Xie [**]

Edited by Jing Li [***]

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

   -    The arbitration clauses in Contracts PMCZY-04037-INF and PMCZY-04041-INF (hereinafter, the "Contracts") signed by Claimant [Seller], ___ Metal Company Limited, and Respondent [Buyer], Shanxi ___ Steel Factory, on 22 March and 26 March 2004, respectively; and
 
   -    The written Request of Arbitration submitted by the [Seller] on 10 June 2004.

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

ARBITRATION PROCEDURE

The [Seller] submitted a petition for property preservation. CIETAC forwarded the petition to the ___ Intermediate People's Court.

According to the Arbitration Rules, the [Seller] appointed Mr. ___ as Arbitrator, and the [Buyer] appointed Mr. ___ as Arbitrator; the parties did not reach an agreement to appoint the third arbitrator within the time period provided by the Arbitration Rules, so CIETAC appointed Mr. ___ as the Presiding Arbitrator. The aforesaid three arbitrators formed the Arbitration Tribunal to hear this case on 26 July 2004.

On 10 September 2004, the [Seller] submitted a written petition to CIETAC requesting Mr. ___, the Arbitrator appointed by the [Buyer] to withdraw. The Secretariat of CIETAC forwarded this petition to the [Buyer]. The [Buyer] objected. However, on 20 October 2004, CIETAC ruled in favor of the [Seller] and asked the [Buyer] to appoint another arbitrator. On 25 October 2004, the [Buyer] appointed Mr. ___ as Arbitrator, but he could not serve because of health problem. The Secretariat notified the [Buyer] of this and the [Buyer] appointed Mr. ___ as Arbitrator on 6 November 2004. Therefore, Mr. ___ (substituting Mr. ___), appointed by the [Buyer], the Presiding Arbitrator, and Mr. ___, appointed by the [Seller], formed the Arbitration Tribunal to hear this case.

On 10 December 2004, the Arbitration Tribunal commenced the arbitral proceedings in Beijing. Both parties appointed attorneys to attend. The parties presented statements, cross-examined the evidence, answered the Arbitration Tribunal's questions, and made arguments.

This case was completed. The Arbitration Tribunal handed down the award according to the majority opinion based on the facts verified at the arbitral proceedings and the materials submitted by the parties.

The followings are the facts, the Arbitration Tribunal's opinion, and the award.

FACTS

On 22 March 2004, the [Seller] ___, Metal Company Limited, and the [Buyer], Shanxi ___ Steel Factory, signed Contract PMCZY-04037-INF (hereinafter, Contract 04037), which stipulates that the [Buyer] agreed to purchase 35,000WMT of ___ iron ore from the [Seller] on the following terms and conditions:

   -    Quantity tolerance: 10% more or less;
   -    Shipping time: March 2004;
   -    Port of loading: Bangalore, India;
   -    Port of discharge: Qingdao, China;
   -    Unit price: USD125/DMT (CIF FO Qingdao);
   -    Payment: The [Buyer] shall issue an irrevocable 100% L/C before 25 March 2004.

Contract 04037 also stipulates delivery documents, notice of loading, force majeure, etc.

Article 13 of Contract 04037 is the arbitration clause. It provides:

"All disputes in connection with this contract or the execution thereof shall be settled by friendly negotiation. If no settlement can be reached, the case in dispute shall then be submitted for arbitration in Beijing to the China International Economic and Trade Arbitration Commission in accordance with the provisional rules of procedure of the China International Economics and Trade Arbitration Commission. The decision made by the Commission shall be accepted as final and binding upon both parties. The fee for arbitration shall be borne by the losing party unless otherwise awarded by the Commission."

On 26 March 2004, the [Seller] and the [Buyer] signed Contract No. PMCZY-04041-INF (hereinafter, Contract 04041), which stipulates that the [Buyer] agreed to purchase 35,000WMT of ___ iron ore from the [Seller] on the following terms and conditions:

   -    Quantity tolerance: 10% more or less;
   -    Shipping time: From the end of March to the beginning of April of 2004;
   -    Port of loading: Kakinada, India;
   -    Port of discharge: Qingdao, China;
   -    Unit price: USD 125/DMT (CIF FO Qingdao);
   -    Payment: The [Buyer] shall issue an irrevocable 100% L/C before 31 March 2004.

Other terms and conditions of Contract 04041 are the same as Contract 04037.

POSITION OF THE PARTIES

[Seller]'s position

The [Seller] argues:

      Breach by [Buyer] and avoidance by [Seller] of Contract No. 04037. After the Contracts took effect, the [Seller] actively performed its duties and shipped the goods to Qingdao, but the [Buyer] did not issue the L/C within the time period according to the Contracts. From March to 11 May 2004, the [Buyer] still failed to issue the L/C. In order to protect its legal interests and avoid enlarging damages, on 12 May 2004, the [Seller] notified the [Buyer] that it was avoiding Contract No. 04037 and requested the [Buyer] to compensate for all economic losses. Because of the [Buyer]'s aforesaid breach, the [Seller] alleges that it incurred economic loss totaling RMB 22,191,468.98.

      Breach by [Buyer] and avoidance by [Seller] of Contract No. 04041. In addition, on 25 March 2004, the [Seller] had sent an offer of ___ 63% fine ore to the [Buyer] and the [Buyer] accepted the offer on the same day. On 26 March 2004, the [Seller] and the [Buyer] signed Contract No. 04041, a sales contract for ___ iron ore. This contract stipulates that the [Buyer] agreed to purchase 35,000WMT (+/-10%) ___ iron ore from the [Seller] at the price of USD 115/DMT(CIF FO Qingdao), and that the [Buyer] shall issue an irrevocable 100% L/C before 31 March 2004. Contract No. 04041 also stipulates other terms and conditions. After Contract No. 04041 took effect, the [Seller] actively performed its duties and shipped the goods to Qingdao, but the [Buyer] failed to issue the L/C within the time period according to Contract No. 04041. In order to protect its legal interests and avoid enlarging damages, on 12 May 2004, the [Seller] notified the [Buyer] that it was avoiding Contract No. 04041 and requested the [Buyer] to compensate for its economic loss as well. The [Seller] claimed economic loss because of the [Buyer]'s aforesaid breach totaling RMB 19,141,236.04.

The [Seller] alleged that the [Buyer]'s aforesaid breaches caused the [Seller] to incur economic loss in the total amount of RMB 41,332,705.02.

The [Seller]'s arbitration requests are:

1. The [Buyer] should compensate the [Seller] for its economic loss in the amount of RMB 41,332,705.02 as of 31 May 2004, and any further economic loss incurred or enlarged after 1 June 2004.

2. The [Buyer] should compensate the [Seller] for attorneys' fees of RMB 661,323.28 incurred due to collecting the debts.

3. The [Buyer] should bear the total arbitration fee and property preservation fee.

The [Seller]'s calculation of damages:

Because of the [Buyer]'s breach, the [Seller] incurred economic loss of USD 50/DMT as of 31 May 2004, based on the market price of iron ore at that time, as well as CIQ investigation result and invoices. The [Seller]'s economic loss is calculated as follows:

      1. Contract No. 04037

      The contract price is USD 125/DMT, the CIQ quantity is 34,709.5DMT/35,702WMT, and the damages from 26 March to 31 May 2004 are calculated as:

      (1)  Loss of CIF price: USD 125 - USD 50 = USD 75/DMT, totaling USD 75 × 34,709.5DMT × 8.29 = RMB 21,580,631.63;
      (2)  Loss of interest (at the interest rate of 5.04%): USD 125 × 5.04% × 67/360 × 34,709.5DMT × 8.29 = RMB 337,377.21;
      (3)  Freight forwarding charges: RMB 124,950.00;
      (4)  Commodities investigation fee: RMB 47,522.00;
      (5)  Shipping fee: RMB 1,600.00;
      (6)  Reloading fee: RMB 71,400.00.

The total amount of the above is RMB 22,163,480.84.

      2. Contract No. 04041

      The contract price is USD 115/DMT; CIQ quantity is 35,141.1DMT/36,321.6WMT, and the damages from 1 April to 31 May 2004 are calculated as:

      (1)  Loss of CIF price: USD 115 - USD 50 = USD 65/DMT, totaling USD 65 × 35,141.1DMT × 8.29 = RMB 18,935,781.74;
      (2)  Loss of interest (at interest rate of 5.04%): USD 115 × 5.04% × 61/360 × 35,141.1DMT × 8.29 = RMB 286,105.10;
      (3)  Freight forwarding charges: RMB 126,898.03;
      (4)  Commodities investigation fee: RMB 39,522.00;
      (5)  Shipping fee: RMB 1,200.00;
      (6)  Reloading fee: RMB 72,513.16.

The total amount of the above is RMB 19,462,050.03.

Therefore, as of 31 May 2004, the combined total amount of damages claimed by the [Seller] is RMB 41,625,530.87.

[Buyer]'s response

The [Buyer] responded as follows:

      The two Contracts in this case are the first transactions between the [Seller] and the [Buyer] for sales of 63% ___ iron ore. The payment terms stipulated in these two Contracts are irrevocable 100% L/C. Under this payment method, the [Buyer] shall issue the L/C with the [Seller] as the beneficiary, and then the [Seller] shall deliver the goods and provide the documents to the negotiating bank. If the documents are in compliance with the terms and conditions of the L/C, the bank will make the payment. Thereafter, the bank will notify the [Buyer] to make payment against documents, and then the [Buyer] will take delivery of the goods by presenting the documents to the carrier.

      However, after the Contracts were signed -- for policy reasons, Bank of China has not issued the L/C. At the same time, the price of 63% iron ore at the port dropped dramatically. The correspondence of fax dated 21 April and 27 April 2004 shows that the parties were still renegotiating the price. The [Seller] also proposed to sign four supplementary agreements after the price was adjusted, but the supplementary agreements were not faxed to the [Buyer]. However, the [Seller] agreed to have the effective period of the L/C prolonged. Thereafter, when the parties were negotiating the price, the [Seller] sent a letter to the [Buyer] claiming all economic damages, after which the [Seller] submitted the arbitration application.

The [Buyer] argued that, according to international trade usages, the [Buyer] should issue the L/C before the [Seller] delivers the goods. Therefore, the damages caused by the [Seller] itself due to its violation of international trade usages should be borne by the [Seller] itself. Article 52(1) of the United Nations Convention on Contracts for International Sales of Goods (CISG) provides that "[i]f the seller delivers the goods before the date fixed, the buyer may take delivery or refuse to take delivery." Therefore, the [Seller] violated the CISG by shipping the goods before receiving the payment; the [Seller] even shipped the goods before the [Buyer] arranged for the issuing of the L/C, therefore, the [Buyer] was entitled to refuse delivery.

According to the regular L/C settlement procedure, the beneficiary shall review the L/C; if the L/C is consistent with the contract and need not be confirmed, the beneficiary shall load and ship the goods, prepare shipping documents, and issue a money order accordingly. However, the [Seller] shipped the goods before the [Buyer] issued the L/C, which means it did not act accordance with the L/C settlement procedure. Hence, the [Seller] should be liable for its own loss.

Moreover, the [Buyer] did not receive any notice of shipment or bill of lading from the [Seller]. And even if the two shipments arrived at the port as the [Seller] claimed, it cannot be proved that they were shipments for the [Buyer].

It is understood that on 17 March 2004, the [Seller] shipped the goods from Bangalore, India; however, the first Contract between the parties was signed on 22 March 2004, whereas the ship left the port five or six days before that; thus, it is not justified to claim that the goods were shipped for the [Buyer]. Before the Contract was signed, the goods had been shipped; before the payment was made, the goods arrived at the port of discharge; therefore, this arrangement was for the [Seller]'s own purpose, i.e., it sought to transfer the risk of price fluctuation to the [Buyer], because the market price of 63% ___ iron ore dropped dramatically.

According to Article 10 (notice of loading) of the Contracts, within seven business days after the goods are loaded, the [Seller] shall send a fax to the [Buyer] notifying the following information: contract number, name of vessel, name of goods, approximate value of goods, gross weight, and date of loading. For the purpose of actively performing the contract, if the [Seller] ships the goods before the L/C is issued, it should still notify the [Buyer] via fax within seven days after the goods are loaded. In the present case, the [Buyer] did not receive any shipping information; in addition, the [Seller] did not mention the fact that the goods had already been dispatched when demanding that the [Buyer] issue the L/C.

Article 34 of CISG states that:

"If the seller is bound to hand over documents relating to the goods, he must hand them over at the time and place and in the form required by the contract."

Because the [Seller] did not provide any document, such as notice of loading, notice of arrival, etc., it did not perform the Contract; in addition, the two shipments of goods could not be determined as those for the [Buyer]. It is irrelevant to the [Buyer] who holds the bill of lading and who is the owner of the goods. If the goods which the [Seller] shipped to port of Qingdao were those for the [Buyer], the [Seller] shipped the goods before the Contracts were signed and failed to notice the [Buyer] of loading of the goods. If the price of ___ iron ore had inflated, the [Seller] would not have done so.

[Seller]'s further arguments

The [Seller] further alleged:

1. Applicable law

Although the CISG does not automatically apply to this case based on the countries in which the [Seller]'s and the [Buyer]'s places of business are located, the [Seller] claimed that the CISG is a result of combination and compromise of many countries' laws and balances both the seller's and the buyer's interests. More importantly, both parties intended to apply the CISG. Therefore, these prerequisites justify the application of the CISG. The reasons for applying CISG are as follows:

      (1) In the Memorandum for Respondent submitted by the [Buyer] on 25 July 2004, the [Buyer] cited the CISG three times. In the arbitral hearing on 10 December 2004, the [Buyer] cited the CISG many times in its oral arguments. Meanwhile, in the Statement submitted by the [Buyer]'s attorney, the CISG was cited three times. Obviously, the [Buyer] agreed to or selected the CISG as the applicable law of this case.

Moreover, in the arbitral hearing on 10 December 2004, the [Seller]'s attorney expressly agreed on and/or selected the CISG as the applicable law of this case.

Therefore, based on the parties' intent, the CISG shall apply to this case.

      (2) In many similar cases, such as the Silicon case of 11 February 2000 [which involved a Seller from Hong Kong and a Buyer from Mainland Chins], CIETAC applied the CISG.

2. The conclusion and validity of the Contracts should not be doubted

During the cross-examination in the arbitral hearing on 10 December 2004, the [Buyer] did not object to, but admitted the truthfulness and validity of the Evidence Part I and II submitted by the [Seller]. In addition, the [Buyer] submitted the translated versions of the aforesaid evidence.

   -    In the Memorandum for Respondent submitted by the [Buyer] on 25 July 2004, the [Buyer] stated that:
 
"The two Contracts No. 04037 and 04041 signed on 22 and 26 March 2004, respectively, in this case are the first transactions between the [Seller] and the [Buyer] for sales of 63% ___ iron ore. After signing the Contracts …"
 
   -    In the Memorandum submitted on 10 December 2004, the [Buyer] also stated that:
 
"The two Contracts No. 04037 and 04041 signed on 22 and 26 March 2004, respectively, in this case are the first transactions between the [Seller] and the [Buyer] for sales of 63% ___ iron ore."
 
"The basis of this case is the Contracts signed by the parties. The Contracts are valid. After the Contracts were signed, due to the change of national policy and the fluctuation of the product price, the L/C was not issued."
 
   -    In addition, according to the clause on effectiveness, the effective date of Contract No. 04037 is 22 March 2004, and the effective date of Contract No. 04041 is 26 March 2004. Further, the evidence submitted by the parties associated with the issuing of the L/C also shows that the Contracts were effectively concluded and valid. If the Contracts were not signed or had not taken effect, why did the [Buyer] send letters expressing the intent to issue the L/C?

Since both parties claimed that the Contracts were signed and took effect, the [Seller] stated that the conclusion and validity of the Contracts should not be doubted.

3. The [Buyer] fundamentally breached the Contracts, and its allegation that the goods should be shipped after the L/C was issued lacks a legal basis.

Contract No. 04037 stipulates that the [Buyer] shall issue the L/C before 25 March 2004, and Contract No. 04041 stipulates that the [Buyer] shall issue the L/C before 31 March 2004. However, until 12 May 2004, the [Buyer] had not issued the L/C's when the [Seller] noticed it of the avoidance of the two Contracts in order to avoid enlarging its loss.

In its letter dated 5 April 2004, the [Buyer] stated, "the L/C cannot be timely issued," because "the President of the issuing bank is on a business trip." In its letter dated 26 April 2004, the [Buyer] stated, "because of the policy reason, the L/C has not been able to be issued. Right now Bank of China can issue a L/C for us." Obviously, the [Buyer] failed to arrange to have a L/C issued within the stipulated time period (even after the [Seller] extended it) because of its own reasons other than the [Seller]'s reasons or other reasons.

The [Buyer] did not perform its obligation to issue a L/C, and requested to lower the contract price in bad faith. Hence, the [Buyer] fundamentally breached the Contracts. The [Seller] avoided the Contracts in order to protect its legal interests and to avoid enlarging loss. This complies with the CISG and other laws.

In the arbitral hearing on 10 December 2004, the [Buyer] in its Memorandum for Respondent and its Attorney's Statement argued that, according to the CISG and international trade usages, the [Seller] should ship the goods only after a L/C was issued. This allegation lacks any legal basis.

Article 54 of CISG provides:

"The buyer's obligation to pay the price includes taking such steps and complying with such formalities as may be required under the contract or any laws and regulations to enable payment to be made."

Article 59 of CISG provides:

"The buyer must pay the price on the date fixed by or determinable from the contract and this Convention without the need for any request or compliance with any formality on the part of the seller."

It is the [Seller]'s legal obligation to ship the goods within the agreed time period in accordance with the Contracts; whereas, it is the [Buyer]'s legal obligation to issue a L/C within the agreed time period in accordance with the Contracts. ssuance of the L/C is not a precondition to shipment of the goods. Therefore, the [Buyer]'s allegation that the [Seller] should only ship the goods after the [Buyer] issued a L/C lacks a legal basis. The [Buyer] cited Article 59(2) of the CISG to support its allegation; this is a misunderstanding of this clause.

The [Buyer] did not issue a L/C in accordance with the Contracts and breached the Contracts in bad faith; this constitutes a fundamental breach. On the other hand, the [Seller]'s avoidance of the Contracts complied with the law. The [Buyer]'s allegation that the [Seller] should only ship the goods after a L/C is issued lacks any legal basis.

4. The legal nature of the parties' negotiation of price

The letters dated 5 April, 21 April, and 26-27 April 2004 show that during the performance of Contract No. 04037, the parties negotiated on the price of the first shipment of the iron ore.

In the arbitral hearing, the [Buyer] responded and argued that the parties were still negotiated the price, and therefore, have not signed any supplementary agreement. The [Seller] objected that this was unreasonable, and it was a misunderstanding of the parties' negotiation of price.

According to the CISG and other laws, after the Contracts are signed, the parties should perform the Contracts in good faith. If the [Buyer] intended to change the contract price, it should obtain the [Seller]'s agreement. The parties' negotiation on the price only sought to change the price clauses of the Contracts, in lieu of avoiding all clauses of the Contracts or to announce all clauses of the Contracts invalid; moreover, the conduct of negotiation remained a mere conduct, but did not result in a change of the contract price. Negotiation of price shall be considered to be settled only when both parties reach an agreement. The parties in the present case did not reach an agreement after negotiating the price (i.e., the [Buyer] argued that the supplementary agreement on the price had not been signed). Therefore, the original and effective Contracts (including price clauses) were still valid.

In conclusion, the legal nature of the parties' negotiation of price was only a conduct, instead of a result. This conduct could not necessarily result in a change of contract price, and it could not necessarily result in avoidance or invalidity of the original Contracts.

5. The decline of the price of iron ore was true and should not be disputed. This commercial risk does not fall within the scope of force majeure.

In the arbitral hearing on 10 December 2004, the [Buyer] argued that if the price of iron ore had not declined, but had increased, the [Seller] would not have shipped the goods; the [Seller] also noted that the Arbitration Tribunal raised a reasonable doubt of this allegation.

In fact, the price of iron ore at the markets at home and even abroad had been increasing from the year 2003 until April-May 2004; thereafter, the price declined dramatically. This is an undisputed fact, which can be proved by many records in the industries related to iron ore, such as steel, mine, shipping, agency, port, customs, etc.

Meanwhile, the documents submitted by the [Buyer] also prove the fact of the price decline of iron ore.

   -    In its letter dated 5 April, the [Buyer] stated, "[T]he President of the Bank is back, but the price of iron ore has dropped dramatically within a short period of time;"
 
   -    In its letter dated April 26, the [Buyer] stated, "since the price of 63% iron ore at the port has dropped to around RMB 800/MT;" and
 
   -    In the Memorandum for Respondent dated 25 July 2004, the [Buyer] stated, "at that time the price of 63% iron ore at the port had dropped dramatically."

Therefore, it is an undisputed fundamental fact that the price of iron ore had declined dramatically.

At the arbitral hearing on 10 December 2004, in order to conceal its bad faith conduct, the [Buyer] claimed that the reason that it did not issue the L/C on time was the government document Fa Gai Chan Ye [2004] No. 746 (Development and Reform Industry [2004] No.746), and that this was a case of force majeure. The [Seller] on the other hand argued that in international trade, the fluctuation of product price is a normal commercial risk; the drop of price of iron ore in this case is not relevant to force majeure because of the following reasons:

      (1) The real reason why the [Buyer] did not issue a L/C within the agreed time period was because, upon the decline of the market price, the [Buyer] intended to threaten the [Seller] to reduce the contract price therewith. However, because the market price was continuously and dramatically dropping, it was bad faith for the [Buyer] to reduce the contract price in accord with its own intent;

      (2) In its letter dated April 5, the [Buyer] stated, "[b]ecause the President of the Bank is on a business trip, a L/C cannot be timely issued;" in the letter dated April 26, the [Buyer] stated, "[r]ight now, Bank of China can issue a L/C for us." Obviously, because of its own reason, the [Buyer] failed to issue a L/C; this was not caused by any other reasons;

      (3) The Contracts stipulate that the dates of issuance of the L/C's are to be before 25 March and 31 March 2004respectively, but the government document Fa Gai Chan Ye [2004] No. 746 was not issued until 30 April 2004; more importantly, the content of the government document Fa Gai Chan Ye [2004] No. 746 does not fall within scope of force majeure, and is not relevant to the [Buyer] either;

      (4) The letter issued by Bank of China Lishi Branch is not relevant to this case.

6. All relevant evidential materials prove that the goods carried by the Vessel ___ and Vessel ___ were those for the [Buyer] under the Contracts.

In its response, the [Buyer] argued that it did not receive any notice of shipping or bill of lading from the [Seller], and that the goods which arrived at the port were not those under the Contracts and were unrelated to this case. Meanwhile, the goods carried by the first Vessel were loaded on 17 March 2004.

Regarding the [Buyer]'s response, the [Seller] made the following counter-arguement:

      (1) The [Seller] notified the [Buyer] of shipping the goods many times orally, by telephone, through facsimile, and in person.

      After the Contracts were signed, the Appendix, Application of Issuing L/C, expressly gave the [Buyer] notice of specific information including the contract number, name of goods, beneficiary, weight, price, etc. Therefore, Article 10 of the Contracts, stipulating that the [Seller] shall notice the [Buyer] of the contract number, name of vessel, name of goods, approximate total price, weight, and date of bill of lading within seven business days after the goods are loaded on board, does not affect the [Buyer]'s duty to arrange for issuance of the L/C.

After the Contracts were signed, in addition to notifying the [Buyer] orally and by telephone many times, the [Seller] also sent a fax on March 29 notifying the [Buyer] that "[t]he first Vessel ___ will (be expected to) arrive at the port of discharge, ___," and in its letter dated April 21, the [Seller] stated, "[t]he goods arrived at the port," and it had to "go through port bonded procedure," and also claimed expenses incurred after such procedure was completed. Furthermore, the [Seller] sent its staff to the [Buyer] noticing the information and demanding the issuance of the L/C's. During the aforesaid period, the [Seller] informed the [Buyer] explicitly many times of the information regarding shipping and arrival of the goods.

When knowing the arrival of the goods, the [Buyer] did not raise any objection to the shipping and arrival of the goods. The initial purpose for the [Buyer] intentionally not to issue a L/C was to force the [Seller] to reduce the contract price. When the price continuously and dramatically dropped, the [Buyer] intentionally breached with bad faith and eventually rejected to perform the Contracts. The [Buyer]'s allegation that the [Seller] did not notice via fax in accordance with Article 10 of the Contracts has no causal relationship with the [Seller]'s conduct of loading and shipping the goods.

      (2) Delivery of bill of lading and other documents

      According to UCP 500, if the payment method is L/C in international trade, bills of lading and other documents shall be delivered by negotiating bank and issuing bank. The [Buyer] has never issued a L/C, and now claimed that it did not receive the bill of lading. This is consistent with international trade usages, since the [Seller] could not deliver bills of lading.

      (3) The relevant evidence can sufficiently prove that the goods which arrived at the port were those under the Contracts for the following reasons:

            a. Ports of loading are consistent with the Contracts.

            The actual port of loading for the first Vessel ___ is Bangalore, India, and the port of loading stipulated in Contract No. 04037 is also Bangalore, India. The actual port of loading for the second Vessel ___ is Kakinada, India, and the port of loading stipulated in Contract No. 04041 is also Kakinada, India.

            b. The time period for loading is consistent with the Contracts.

            The time of loading for the first Vessel ___ is 17 March 2004, and the time of loading stipulated in Contract No. 04037 is March 2004, so the loading time is consistent. The time of loading for the second Vessel ___ is 8 April 2004, and the time of loading stipulated in Contract No. 04037 is from the end of March to the beginning of April, so this loading time is also consistent.

            c. The weights of iron ore carried by the two Vessels are consistent with the Contracts.

            The weight recorded in the bill of lading for the first Vessel ___ is 35,700MT, and the weight recorded n the bill of lading for the second Vessel ___ is 36,256.58MT. These are consistent with Contract No. 04037 and Contract No. 04041, i.e., 35,000MT (10% more or less, up to the [Seller]).

            d. The country of origin of the iron ore carried by the two Vessels is ___, which is consistent with the Contracts.

            e. The port of discharge for the two Vessels is consistent with the Contracts.

            The port of discharge for the two Vessels is Qingdao, which is consistent with the Contracts. Although the port of discharge recorded in the bill of lading for the first Vessel is Xingang, the Vessel was instructed to sail to Qingdao, and the actual port of discharge was Qingdao.

            f. The specification of the iron ore carried by the two Vessels is consistent with the Contracts

The iron ore carried by the two Vessels are both 63% iron ore, which is consistent with the Contracts.

By virtue of the above, it is undoubted that the goods carried by the Vessels ___ and ___ were those under the Contracts between the parties. In addition, the [Seller]'s instruction that the first Vessel should sail to Qingdao also proves this.

      (4) The goods were loaded on the first Vessel on 17 March 2004.

      Both parties have finished the procedure of offer and acceptance on 14 March and 15 March 2004, which was based on good faith. The [Seller] loaded the goods on 17 March 2004, which was consistent with the time of loading, i.e., 17-22 March 2004, stipulated in the offer of March 14.

Furthermore, in international trade, the seller is not prohibited from preparing or loading the goods, nor is he prohibited from selling the goods in transit based on good faith. More importantly, the time of the [Seller]'s loading the goods was consistent with the loading time, March 2004, stipulated in Contract No. 04037.

7. The [Seller]'s claim for damages

Article 74 of CISG provides:

"Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach …"

Article 76 of CISG provides:

"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 …"

Article 78 of CISG provides:

"If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it, without prejudice to any claim for damages recoverable under article 74."

Articles 58 and 59 of the Arbitration Rules provide for the arbitration fee, property preservation fee, and no more than 10% of reasonable expenses incurred by the winning party in dealing with the case.

Therefore, the [Seller]'s claim for damages, including loss of price, interests, the fees for port bonded procedure, attorneys' fees and property preservation fees, is reasonable and legitimate. The damages were calculated as follows:

      (1) Loss of price

The contract price: USD125/MT under Contract 04037, and USD115/MT under Contract No. 04041.

The current price: In the middle of May 2004 when the [Seller] noticed the [Buyer] to avoid the Contracts, the price of 63% ___ iron ore originating from ___ dropped to USD36/MT, and the CIF price was less than USD50/MT. However, for the convenience of the Arbitration Tribunal to verify and calculate, the [Seller] agreed to set the current price at USD50/MT (the higher price) in this case.

Furthermore, the weight recorded in the commercial commodities certificate for the first Vessel ___ was 34,709.5 MT; the weight recorded in the commercial commodities certificate for the second vessel ___ was 35,141.1MT. The foreign exchange rate was 1 USD: 8.29 RMB.

The loss of price: The [Seller] therefore suffered a loss of price of RMB 21,580,631.63 under Contract No. 04037 and RMB 18,935,781.74 under Contract No. 04041.

      (2) Interest as of 31 May 2004

      Because the [Buyer] did not issue a L/C, the [Seller] calculated the damages at the interest rate of 5.04%, i.e., the domestic loan rate published by People's Bank of China at the same time. Meanwhile, the interest shall be counted from the date of issuing L/C stipulated in the Contracts to 31 May 2004 (the date of request for arbitration), that is to say, 67 days under the Contract No. 04037 and 61 days under the Contract No. 04041.

      (3) Fees for port bonded procedure

      Because the [Buyer] neither took delivery of the goods nor went through customs declaration procedure after the two Vessels arrived at the port of discharge, the [Seller] had to authorize an agent to handle the port bonded procedure, and therefore, the [Seller] incurred the following fees:

Fees incurred under Contract No. 04037: agency fee of RMB 124,950, commodities inspection fee of RMB 47,522, transportation fee of RMB 1,600 and reloading fee of RMB 71,400.

Fees incurred under Contract No. 04041: agency fee of RMB 126,898, commodities inspection fee of RMB 39,552, transportation fee of RMB 1,200 and reloading fee of RMB 72,513.16.

The total amount of the above damages is RMB 41,625,530.87. In addition, the loss of interests should be calculated at 5.04% as explained in the above (2) from 1 June 2004 to the day of the issuance of this award.

Moreover, the [Seller] confirmed that the attorneys' fees incurred were RMB 661,323.28, the arbitration fee was RMB 539,940, and the property preservation fee was RMB 210,490.

In sum, the [Seller] claimed that the major reason why disputes arose in this case was that the [Buyer], knowing the decline of the product price, did not issue a L/C in order to force the [Seller] to reduce the contract price, and thereafter, it unilaterally reduced the price and intentionally breached the Contracts in bad faith when the price dropped dramatically. The [Buyer] failed to issue a L/C in accordance with the Contracts, which constituted a fundamental breach of contract. It was reasonable and legitimate for the [Seller] to avoid the Contracts and claim damages in order to avoid enlarging its loss. The Arbitration Tribunal should sustain the [Seller]'s claims.

[Buyer]'s further response to [Seller]'s claims

The [Buyer] further alleged:

      (1) The conclusion of the Contracts

      The Contracts were negotiated by the [Buyer]'s employees from its Qingdao office and by the [Seller]'s employees. The [Seller] provided the English versions of the Contracts, and sent the blank Contracts to the [Buyer] on 22 March and 26 March 2004 respectively. The [Buyer] stamped the Contracts and sent them back to the [Seller]. The [Buyer] did not have the version which were stamped and signed by both parties, which were submitted to CIETAC by the [Seller]. The Chinese versions of the Contracts submitted by the [Buyer] to the CIETAC were translated based on the Contracts attached to the [Seller]'s request for arbitration by the translators hired by the [Buyer]. Since both parties have been negotiating the contract price, it was the [Seller] who proposed to sign a supplementary agreement on the contract price. The [Buyer] has never obtained the Contracts signed and stamped by the parties. This is the basic situation of the negotiation of the Contracts. Since the price was not determined, the price has never been confirmed.

      (2) The [Buyer] did not breach the Contracts, and the alleged breach was not related to the fact that the [Buyer] did not issue a L/C.

      A L/C transaction is a documentary transaction. In a L/C transaction, the bank buys documents from the seller, and then the buyer makes the payment against the documents. After obtaining the documents from the beneficiary, the negotiating bank reviews the documents, and if the documents are consistent with the L/C, the negotiating bank advances the payment to the beneficiary. Since the [Seller] neither prepared nor presented any documents, the [Buyer]'s non-issuance of L/C was irrelevant to the fact that the [Seller] did not load or ship the goods. Therefore, the [Seller] did not actually perform the Contracts.

The [Seller] claimed that the goods were shipped to the [Buyer] under the Contracts, and that the bill of lading is the certificate of ownership, i.e. the person who holds the bill of lading is entitled to request the carrier to hand over the goods. The [Seller] shipped the goods and later took delivery of the goods. How could it [Seller] claim that the goods were shipped to the [Buyer] under the Contract? The [Buyer] did not receive any notice of loading or any other documents. Therefore, there is no evidence to prove that the two shipments of goods were for the [Buyer] under the Contracts.

The [Seller] alleged that the weights of the two shipments, name of port of discharge, etc. were consistent with the Contracts, and hence, the goods shipped were for the [Buyer] under the Contracts. However, the [Seller] sells goods to multiple buyers. Just because there would be lots of same situations, the Contracts stipulate that the [Seller] shall notice the [Buyer] via fax of certain important information, such as the contract number, name of vessel, name of goods, value of goods, gross weight, , date of loading, etc. However, the [Buyer] has never received any of such information. Therefore, the damages the [Seller] claimed were not incurred due to the Contracts of the present case. The goods for the [Buyer] under the Contracts have never been shipped by the [Seller].

      (3) The evidence and supplementary evidence submitted by the [Seller] do not prove that the goods carried by the two Vessels were the goods for the [Buyer] under the Contracts.

      -    At page 21 of the evidence submitted by the [Seller], there were only two pages of the photocopy of bill of lading; this incomplete photocopy lacked authenticity and did not specify the Consignee; even if it was aorder bill of lading, there should have been a signature on the back of the bill of lading.
 
      -    At page 24 of the evidence, this fax was only a printed copy, and had never been received by the [Buyer].
 
      -    At page 28 of the evidence, the customs declaration form neither contained the contract number, customs' approval number or date of release, nor was it stamped.
 
      -    At page 29 of the evidence, the entry-exit inspection and quarantine certificate did not record the Shipper or Consignee.
 
      -    The customs declaration form of another entity at page 55 of the evidence was submitted to prove the price at that time, but this form was not consistent with the customs declaration form at page 28 of the [Seller]'s evidence: the former was signed and stamped, but the latter was not signed or stamped. This also proves that the evidence submitted by the [Seller] lacked authenticity. Therefore, the [Buyer] objected to the authenticity of the [Seller]'s evidence.

None of the [Seller]'s evidence could prove that the two shipments of goods were for the [Buyer] under the Contracts. If the [Seller] intended to sell the goods to the [Buyer], the parties should conclude another contract. Since the evidence provided by the [Seller] is not related to this case, the supplementary evidence provided by the [Seller] is irrelevant too.

THE OPINION OF THE ARBITRATION TRIBUNAL

1. The applicable law

In its Memorandum for Respondent, the [Buyer] directly cited the CISG, and the [Seller] confirmed this application in its Attorney's Statement. Moreover, at the arbitral hearing, the parties expressly agreed that CISG should apply to this case. Therefore, the Arbitration Tribunal finds that the CISG shall apply to this case.

2. The validity of the Contracts and negotiation of the contract price by the parties

The Contracts were signed by the representatives commissioned by the [Seller] and the [Buyer]. After the Contracts were signed, unless otherwise stipulated, the Contracts were binding on both parties. In addition, Article 17 of the Contracts states, "Any amendment or modification to this contract shall be made in writing and subject to confirmation by the contracting parties." In the present case, neither party proved or claimed that "the parties stipulated otherwise", or that "the parties confirmed that the Contracts were revised". Therefore, the Contracts signed by the parties were legally binding on both parties, and the parties should perform the Contracts; otherwise, the Contracts are breached.

The [Seller] had suggested reducing the unit price to USD115/MT under Contract No. 04037, but the [Buyer] raised objection and requested that the unit price should be reduced to USD100/MT. At the arbitral hearing, the [Seller] also stated that the parties did not reach an agreement on the unit price to USD115/MT. Moreover, the parties neither agreed that the performance of the Contracts could be suspended before they reached an agreement on the modification of the contract price, nor did they agree to avoid the Contracts if they failed to reach an agreement on the modification of the contract price. Therefore, under such situations, although the [Seller] suggested modifying the contract price, the parties did not reach an agreement thereon; hence, the contract price was not modified, and the parties should perform according to the original Contracts.

3. Notice of loading

The [Seller] did not notify the [Buyer] of loading within seven days as stipulated in the Contracts. This was a defect of the [Seller]'s performance, but it did not exempt the [Buyer]'s liability to perform. Obviously, if this defect affected the [Buyer]'s taking delivery of the goods or caused the [Buyer] any damages, the [Seller] should be held liable thereof, but the [Buyer] did not raise a claim for damages. Therefore, although the [Seller] did not notify the [Buyer] of loading within seven business days, this did not change the [Buyer]'s duty to make payments under the Contracts.

4. Whether the goods shipped were the good for the [Buyer] under the Contracts

The Arbitration Tribunal finds that since the amount, specification, name of the goods, the name of the vessels, port of loading, and port of discharge were the same with those stipulated in the Contracts in this case (the goods actually arrived at Qingdao), and therefore, the goods shipped can be considered to be those under the Contracts. In fact, the [Buyer] did not object to the delivery of the goods and has been negotiating the price and the L/C until this arbitration was filed. This proved that the conditions of delivery were satisfied, and the [Seller] was ready to deliver the goods at any time.

In addition, the Arbitration Tribunal finds that the amount, name of goods, specification, modification of port, etc., sufficiently proved that the goods had been identified under the Contracts. Furthermore, the clause of the Contracts stipulating the control of ownership was only a clause on the [Seller]'s control of risk. This is a possibility of control of the goods set up by the Contracts. The [Seller] did not execute this control in this case, and this did not affect the identification of the goods under the Contracts. These two facts were not in conflict.

5. Whether the [Seller] delivered the goods ahead of time

The Arbitration Tribunal found that the Contracts did not stipulate that the [Seller] should ship the goods only after the Contracts were signed. Furthermore, the law does not require this. In foreign trade practice, it is normal to sell goods in transit; in addition, the [Seller] shipped the goods within the time period stipulated in the Contracts. Once the Contracts were signed, each party should carefully perform its obligations under the Contracts. Unless otherwise expressly stipulated, one party's performance is not a precondition to the other party's performance. And it is unreasonable for the party who failed to perform the contract to accuse the other party who actively performed the contract. Although the CISG provides that if one party delivers the goods before the delivery date fixed, the other party is entitled to refuse to take delivery. However, the exact language reads "may take delivery or refuse to take delivery," and the original intent of the drafters is that the party may reject an early delivery, but may not reject the goods or avoid the contract. A party's early delivery of the goods does not constitute a basis for the other party to avoid or suspend the contract, because the contract can be avoided or suspended only when it is fundamentally breached. Therefore, early delivery apparently does not constitute a fundamental breach, and hence, the [Seller]'s allegation was not established.

6. The government's conduct and force majeure

Article 12 of the Contracts stipulates that government conducts fall within the scope of force majeure. However, in the present case, the Contracts stipulate that the time periods of performance are before 25 March 2004 and 31 March 2004 respectively. However, the government circular Fa Gai Chan Ye [2004] No. 746, namely "Reinforcing the Coordination and Cooperation between Industry Policies and Credit Policies to Control the Credit Risk", was issued by the National Development and Reform Commission, People's Bank of China, and China Banking Regulatory Committee on 30 April 2004. It was after the expiration of the time period for the issuance of the L/C stipulated in the Contracts. Therefore, this government conduct did not constitute force majeure. The [Buyer]'s allegation that it failed to perform the Contracts because of the government conduct, which constituted force majeure, is not sustained.

7. The [Seller]'s price loss

The Arbitration Tribunal notes that the [Seller] avoided the Contracts on 12 May 2004, twelve days after the time, i.e., the end of April, before which the [Buyer] promised to issue the L/C and make payment. Taking into account the seven-day vacation for the 1 May international Labor's Day holiday in Mainland China, the [Seller]'s avoidance of the Contracts was not obviously delayed. Therefore, the [Seller]'s avoidance of the Contracts was not in conflict with the duty to mitigate damages provided by the law. The Arbitration Tribunal confirmed the avoidance of the Contracts.

The [Seller] argued that since the [Buyer] did not take delivery of the goods under the Contracts, the price was reduced to RMB 480/WMT, i.e., USD50/MT. The Arbitration Tribunal finds that there is no public market information on the goods under the Contracts (the parties' statements in the arbitral hearings), and the market price began to decline in May 2004 and still remained very low in July, and the price standard provided by the [Seller] had comparability and was reasonable. In addition, the [Seller] claimed for USD50/MT as the reference price to calculate loss, and the [Buyer] did not submit any contrary evidence. Therefore, the Arbitration Tribunal confirmed the referenced price the [Seller] suggested.

However, the contract price stipulated in the Contracts was a CIF price, but the reference price the [Seller] suggested is a C&F price. The CIF price and C&F price have an insurance premium difference. Since the [Seller]'s evidence shows that the premium rate is 1/1000, the Arbitration Tribunal finds that the CIF price shall be calculated as C&F price plus 1/1000 premium, i.e., USD50 + USD50 X1/1000 = USD50.05.

8. The [Seller]'s arbitration requests

      (1) The loss of RMB 41,625,530.87

      In the calculation of loss, the [Seller] includes the loss of CIF prices of the Contracts, interests on two contract prices, freight forwarding charges, commodities inspection charges, transportation fee and reloading fee.

As to the loss of CIF prices of the Contracts, based on the above point 7, the Arbitration Tribunal finds that the loss of price shall be calculated as follows:

            a. Under Contract No. 04037

            The contract price is USD125/DMT, CIQ quantity is 34,709.5DMT/35,702WMT. The loss incurred from 26 March to 31 May 2004 is calculated as follows:

USD125 - USD50.05 = USD74.95/DMT, totaling USD 74.95×34,709.5DMT×8.29 = RMB 21,566,244.54.

            b. Under Contract No. 04041

            The contract price is USD115/DMT, CIQ quantity is 35,141.1DMT/36,321.6WMT. The loss incurred from 1 April to 31 May 2004 is calculated as follows:

USD115 - USD50.05 = USD64.95/DMT, totaling USD64.95×35,141.1DMT×8.29 = RMB 18,921,215.75.

In sum, the [Buyer] shall compensate the [Seller] for its loss totaling RMB 40,487,460.29.

Regarding the interests on the contract prices, freight forwarding charges, commodities inspection charges, transportation fee and reloading fee, the Arbitration Tribunal finds that since the [Buyer] did not take delivery of the goods, and the [Seller] also had defects when performing the Contracts because it did not give the [Buyer] timely notice of loading the goods, the [Seller] shall bear part of the loss. Comprehensively considering these factors, the Arbitration Tribunal does not sustain the [Seller]'s claim for loss of interests, freight forwarding charges, commodities inspection charges, transportation fee and reloading fee.

Therefore, the [Buyer] shall compensate the [Seller] for its loss of RMB 40,487,460.29.

      (2) The claim for the attorneys' fees of RMB 661,323.28 and the property preservation fee.

      The Arbitration Tribunal finds that these fees were incurred due to this dispute, and the Arbitration Tribunal sustains the [Seller]'s first claim, and therefore, it sustains this claim.

As to the amount of the attorneys' fees, the Arbitration Tribunal notes that the Agreement of Commission signed by the [Seller] and its attorneys stipulates that the attorneys' fees are RMB 661,323.28, and the [Buyer] did not object to this. Therefore, the Arbitration Tribunal sustains this amount.

Regarding the property preservation fee, the Arbitration Tribunal notes that the [Seller]'s evidence shows that the [Seller] paid the property preservation fee of RMB 210,490 to the relevant court. The [Buyer] did not object to the authenticity of this evidence; therefore, the Arbitration Tribunal sustains this amount.

9. The arbitration fee

Based on the situation of this case, the Arbitration Tribunal finds that the [Seller] shall bear 20% of the arbitration fee, and the [Buyer] shall bear 80%.

AWARD

The Arbitration Tribunal handed down the following award:

    1.   The [Buyer] shall compensate the [Seller] for the economic loss of RMB 40,487,460.29;
    2.   The [Buyer] shall compensate the [Seller] for the loss of attorneys' fees of RMB 661,323.28;
    3.   The [Buyer] shall compensate the [Seller] for the loss of property preservation fee of RMB 210,490;
    4.   The arbitration fee is RMB 539,940, of which the [Seller] shall pay 20%, i.e., RMB 107,988, and the [Buyer] shall pay 80%, i.e., RMB 431,952. The [Seller] had already prepaid this arbitration fee, so the [Buyer] shall pay the [Seller] RMB 431,952.
    5.   The [Seller]'s other claims are dismissed.

The [Buyer] shall pay the above amount to the [Seller] within 60 days of the effectiveness of this award.

This is a final award. It takes effect when it is handed down.


FOOTNOTES

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

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

*** Jing Li, LL.M., University of Texas at Austin, School of Law; Master of Law, Sun Yat-Sen University School of Law, China; LL.B., Sun Yat-Sen University School of Law, China.

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Pace Law School Institute of International Commercial Law - Last updated July 21, 2008
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