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CISG CASE PRESENTATION

China 16 September 2005 CIETAC Arbitration proceeding (Wool and Wooltop case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/050916c1.html]

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Case identification

DATE OF DECISION: 20050916 (16 September 2005)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2005/15

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Australia (claimant)

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

GOODS INVOLVED: Wool and Wooltop


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 14 ; 18 ; 23 ; 25 ; 32 ; 64 ; 76 [Also cited: Articles 61 ; 77 ; 78 ]

Classification of issues using UNCITRAL classification code numbers:

14A [Criteria for an offer (basic criterion): intention to be bound in case of acceptance];

18A [Acceptance (time and manner): criteria for acceptance];

23A [Time of conclusion of contract: contract concluded when acceptance becomes effective];

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

32B ; 32C [Shipping arrangements: seller's duties when obliged to arrange for carriage; Information necessary for insurance];

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

76B [Avoidance: damages based on current price]

Descriptors: Offers ; Acceptance of offer ; Avoidance ; Fundamental breach ; Carriage of goods ; Damages ; Interest

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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

Wool and Wooltop case (16 September 2005)

Translation [*] by William Zheng and Raymond Tan [**]

Edited by Meihua Xu [***]

(2005) Zhongguo Maozhong Jingcai Zi Di. ___

The China International Economic and Trade Arbitration Commission (formerly the Foreign Trade Arbitration Committee of China International Trade Promotion Commission, now renamed the China International Economic and Trade Arbitration Commission, and hereinafter the "Arbitration Commission") has accepted a case of arbitration (Case No. G___) involving a contract dispute on the following basis:

   -    Three Order Confirmations numbered D1899/AU626, D1901/AU627 and D1901/AU628 entered into by and between Claimant [Seller], ___ Australia Pty Ltd., and Respondent [Buyer], Zhangjiagang City ___ Ltd, on 5 March 2003, in which Item 1 of the Special Clause provides that "All other terms and conditions as per Chinatex's General Terms and Conditions Governing Purchase of Wool and Wooltops, dated 1 July 1990";
 
   -    Article 13, an arbitration clause in the General Terms and Conditions Governing Purchase of Wool and Wool tops, provided by __ Company (__ Import and Export Corporation) dated 1 July 1990, and
 
   -    The written arbitration application filed by the [Seller] with the Arbitration Commission on 19 March 2004.

This arbitration proceeding is subject to the Rules of the Arbitration Commission Arbitration (the "Arbitration Rules") effective 1 October 2000.

On 2 April 2004, the Secretariat of the Arbitration Commission sent the Notice of Arbitration, the Arbitration Rules and List of Arbitrators to both parties by express mail and delivered the application materials for arbitration of the [Seller] to the [Buyer].

On 26 April 2004, [Buyer] submitted a Letter of Objection to Arbitration Jurisdiction that it had filed with the Case Accepting Division of the Intermediate People's Court of ___ City, Jiangsu Province, that had been forwarded to the Arbitration Commission.

On May 31, 2004, the Arbitration Commission received a Notice dated __ __ __ (yy/mm/dd) from the Intermediate People's Court of ___ City, Jiangsu Province, which advised that the Court had accepted the case to examine the validity of the arbitration agreement under the contracts related to this case. The Court required the Arbitration Commission to suspend the arbitration proceeding pending its review of the case.

On 2 June 2004, the Secretariat of the Arbitration Commission sent to both parties Notice [(2004) Zhongguo Maozhong Jingcai Zi Di. ___] which stated that:

"The arbitration proceeding related to the case is now suspended; whether it shall be continued will be determined after the Court renders a decision on the validity of the arbitration agreement."

On 2 November 2004, the Arbitration Commission received judgments from the initial trial and the final trial from the Intermediate People's Court of ___ City, Jiangsu Province and the High People's Court of Jiangsu Province, respectively, ruling that:

"The bringing of the case to the Court by [Buyer] on the ground that there was no arbitration agreement is not in conformity with the provisions for acceptance of civil dispute cases as set out in Article 108 of the Civil Procedure Law of the People's Republic of China."

The Courts therefore dismissed the [Buyer]'s claim of lack of jurisdiction of the Arbitral Tribunal.

On 4 November 2004, the Secretariat of the Arbitration Commission sent both parties Notice [(2004) Zhongguo Maozhong Jingcai Zi Di. ___] advising that "the arbitration proceeding related to this case is now resumed."

The [Seller] designated Mr. ___ as an arbitrator and the [Buyer] appointed Ms. ___. Since neither party had appointed a chief arbitrator nor entrusted the Chairman of the Arbitration Commission to designate one, the Chairman appointed Mr. ___ as the chief arbitrator for this case in accordance with Article 24 of the Arbitration Rules of the Arbitration Commission. On 29 November 2004, the three arbitrators established the Arbitral Tribunal to hear this case.

On 3 December 2004, the [Buyer] submitted its Answer to the Complaint.

On 20 January 2005, the Arbitral Tribunal held a hearing in Beijing. Both [Seller] and [Buyer] assigned their representatives to appear before the Tribunal. During the hearing, each party made oral statements, responded to the questions by the Arbitral Tribunal, disputed related legal issues, and cross-examined the evidence submitted. During the hearing, both parties agreed to conduct a cross-examination in writing on the supplementary materials to be submitted after the hearing.

After the hearing, each party submitted supplementary evidence and written cross-examination opinions on the supplementary evidence.

In response to the [Buyer] application for another hearing, the Arbitral Tribunal held a second hearing in Beijing on 31 May 2005. Both [Seller] and [Buyer] assigned their representatives to attend the second hearing. During the hearing, each party made further statements on the case, responded to the questions of the Arbitral Tribunal, and cross-examined new evidence submitted.

On 29 August 2005, the Secretariat of the Arbitration Commission notified both parties that, with the consent of the Secretary-General of the Arbitration Commission, the deadline for rendering the arbitral award was extended to 29 October 2005.

With the hearings of this proceeding now finished, the Arbitral Tribunal renders the following award based on the facts determined during the arbitral hearing and from the available written evidence. The Arbitral Tribunal's opinion and award are as follows:

[A] DETAILS OF THE CASE

Position of [Seller]

On 5 March 2003, [Seller] entered into three Wool Purchase Contracts (Order Confirmations) numbered D1899/AU626, D1900/AU627, and D1901/AU628 with the [Buyer]. The contracts stipulated the quantity of the cargo, the price and shipment period, and stated;

"Payment: By irrevocable L/C at sight basis to be issued one month before shipment month by full telex in favor of ..."

[Seller] had the cargo ready according to the contract. However, [Buyer] had not issued the L/C pursuant to the contract stipulation. In numerous communications by telephone, the legal representative of [Buyer] stated that due to market changes and a cash flow problem, [Buyer] was unable to perform the contracts. Further, [Buyer] offered to pay the [Seller] 100,000 remnimbi [RMB] as indemnification. [Seller] rejected [Buyer]'s offer of indemnification and sent letters on 18 June 2003 and 21 August 2003 to require [Buyer] to issue the L/C forthwith. But the [Buyer] continued to refuse to perform its contractual obligation.

On 12 November 2003, [Seller] delivered notices to [Buyer] via facsimile and letters by mail to notify [Buyer] that [Buyer]'s failure to carry out the contracts resulted in and continues to effect a heavy economic loss upon [Seller] and that [Buyer] should indemnify [Seller] for the abovementioned loss. [Buyer] replied to [Seller] through letters on 13 November 2003 and 21 November 2003 stating that it had never entered into any Wool Purchase Contracts with [Seller], but rather only signed three letters of intent with ___ Hong Kong, Ltd., a Hong Kong Company, for the purposes of cooperating in purchasing wool.

However, the [Seller] insisted that the three contracts in this proceeding clearly showed that ___ Hong Kong, Ltd executed the three contracts as the consignee of the [Seller] and that the confirmation letters to the contracts demonstrated that Claimant [Seller] was the seller.

Because of the dispute between the parties over the aforementioned issue, [Seller] applied for arbitration. The renewed arbitration claims are as follows. [Seller] asked the Arbitration Tribunal to:

   1.    Declare that [Buyer] repay [Seller] the loss equal to the difference between the contract price and the market price at the time of the fundamental breach of contract by the [Buyer], in the amount of US $78,397.50;
 
   2.    Declare that [Buyer] repay [Seller]'s lost interest on the contract price, calculated on the basis of an annual interest rate of 1% from 30 August 2003 to 3 September 2003, in the total amount of US $99.29;
 
   3.    Declare that [Buyer] repay [Seller]'s lost interest on the difference between the contract price and the market price, calculated on the basis of an annual interest rate of 1% from 3 September 2003 to 28 February 2005, in the total amount of US $1,170.60;
 
   4.    Declare that [Buyer] indemnify [Seller] for both the arbitration fees and other reasonable expenses arising from [Seller]'s pursuance of the case, which according to Article 10 of the Arbitration Rules, is equal to 10% of the claimed amount or US $7,966.739.

Objection of [Buyer] in its Answers to the [Seller]'s Complaint:

1. There is no contractual relationship between [Seller] and [Buyer]

[Seller] never entered into a contract or an agreement with [Buyer]; the [Buyer] only executed an incomplete Purchase Confirmation with the Hong Kong Company which considered itself as the agent of [Seller]. However, due to the failure of the Hong Kong Company to hold the Consignment Letter from [Seller] and to notify the content of the Purchase Confirmation to [Buyer], the Hong Kong Company did not represent [Seller]. A Purchase Confirmation in the manner of a facsimile without notification of the content on the reverse side only constitutes an intention to purchase and not a complete agreement.

2. The trade matters between [Seller] and [Buyer] were not in conformity with international custom

[Seller] knew that [Buyer] had no right to import and must enter into a formal contract via a foreign-trade company to issue an L/C to [Seller] in order to complete the transaction. Thus, according to custom in the wool trade, the [Seller] should not purchase and it would be improper and impossible, for [Seller] to purchase the materials.

3. The Purchase Confirmation sent by [Buyer] was conditional

The intention of [Buyer] to the terms of payment in the Purchase Confirmation was conditional, which was set forth to be shipment on or before 30 June 2003 in Australia, to which the payment term was an irrevocable L/C at sight to be issued by [Buyer] to [Seller] before 30 May 2003. [Buyer] failed to issue the L/C before 30 May 2003 and there was no letter from [Seller] in response urging the [Buyer] to issue the L/C or indicating its purchase of materials. [Seller] did not mention losses arising out of transaction involving the purchase of the materials until after the arbitration proceeding began. This leads [Buyer] to doubt that [Seller] had provided real evidence or suffered actual losses.

4. [Buyer] failed to issue an irrevocable L/C one month prior to shipment; therefore, the [Seller] should not have purchased the materials and it is therefore impossible for the [Seller] to have incurred any losses

Pursuant to Article 32(2) and (3) of the United Nations Convention on Contracts for the International Sale of Goods (hereinafter referred to as the CISG), Seller was obligated to arrange the transport of the cargo and to notify the Buyer to arrange for the insurance. However, neither the [Seller] nor the Hong Kong Company ever notified the buyer which transport method would be used after the execution of the Purchase Confirmation, which further indicates that it was impossible for [Seller] to buy the materials. Moreover, even had the Purchase Confirmation been formed without any conditions, [Seller] should have tried to mitigate losses in compliance with Article 77 of the CISG.

5. The Order Confirmations by and between the Hong Kong Company and the [Buyer] are unfair and one-sided "letters of intent"

Had [Buyer] issued the L/C to [Seller], [Seller] could have later, when the wool price increased, refused to provide the wool to [Buyer] by asserting that it never entrusted the Hong Kong Company as its agent. In addition, the Hong Kong Company could have insisted that it was not liable according to the Exemption Clause located on the back-side of the Order Confirmation. In such an event, [Buyer] would then have had no protection of its interest.

[Seller]'s response

Responding to [Buyer], [Seller] states:

1. In 2003, [Seller], through the Hong Kong Company as its consignee, delivered three Order Confirmations to [Buyer] via facsimile. The Order Confirmations listed the quantity of the commodities, price, shipment period, and payment terms. Thus, they all constituted binding offers. The legal representative of [Buyer] executed all three Order Confirmations on 5 March 2008 indicating his consent to accept the offers from [Seller]. According to Article 18(1) of the CISG, execution of a confirmation letter constitutes an effective acceptance. Such acceptances arrived at [Seller] on the same day and came into full effect. As a result, the three contracts were legally formed.

2. Based on the execution process and the contents of the three documents, we can conclude that they are really contracts.

[Buyer] tries to deny the nature of the three documents as contracts based on the documents being named "Order Confirmations." There is no ground for this denial. All three contracts have clear and specific content and are complete.

In all three contracts, it is clearly stated that the Hong Kong Company signed the contracts as [Seller]'s agent and that the Seller therein refers to Claimant. [Buyer]'s signing of the contracts indicates that [Buyer] had knowledge of the consignment relationship and agreed to undertake its contractual liabilities towards [Seller] in accordance with all of the clauses in the contracts.

The clauses at the back of the contract are general ones and clauses relating to force majeure between a seller and its agent in international sales contracts. Such clauses are not applicable to [Buyer] and do not affect the formation of the contract.

3. Whether or not [Buyer] is granted the rights of importation and exportation does not affect its ability to execute and perform the contracts

The rights of importation and exportation make sense only for declaration at customs and they have no influence upon the formation of contracts of international trade. [Buyer] could have issued a L/C in accordance with the three contracts or through any agreement signed with other companies. As a result, [Buyer] cannot breach the contracts and disclaim any liability for breach by insisting it has no right of importation and exportation as a reason for failing to issue a L/C.

4. The L/C clauses are not the condition for the effectiveness of the contracts and all the three contracts have been effective since 5 March 2003.

CIF terms are applicable to all of the contracts and, as a result, all transportation and insurance matters are borne by [Seller]. The responsibility of [Seller] to inform the [Buyer] on shipment and insurance is not related to [Buyer]'s performance of its liabilities under the contracts, nor is it a required pre-condition to [Buyer]'s issuance of the L/C. In fact, [Seller] notified [Buyer] several times that the cargo was ready and that the shipment would be performed once [Buyer] issued the L/C.

5. There is no ground for [Buyer] to assert that the contracts are unfair. All three contracts were signed on the basis of equal consultation by both parties. The rights and responsibilities are balanced. Furthermore, [Buyer] did not point to any specific clause as evincing unfairness or one-sidedness.

Supplementary opinion of [Buyer]

1. The Hong Kong Company is not entitled to call itself as the agent of [Seller]. The contracts are effective only upon confirmation by [Seller].

2. The Order Confirmations are agreements of intention with content clearly located on the back-side of the sheets. Since the Hong Kong Company did not provide the sheet's back-side content to [Buyer], the Order Confirmations constitute incomplete agreements of intention.

3. There is no legal basis for [Seller] and the Hong Kong Company to force [Buyer] to perform nor was there any any loss.

[B] OPINION OF THE ARBITRAL TRIBUNAL

(1) Governing law

While [Seller] insists that the governing law of the contracts shall be the CISG, [Buyer] asserts that this arbitration was raised pursuant to Chinatex's General Trading Terms Governing Purchase of Wool and Wooltops dated 1 July 1990 chosen by the parties hereto. The Arbitral Tribunal shall perform the arbitration in accordance with the applicable law selected by both parties since such a selection is their true intent.

   -    The Arbitral Tribunal notes that the three contracts in this case, i.e., the three Order Confirmations signed by both parties set out in the "Special Clauses" that "All other terms and conditions as per Chinatex's General Terms and Conditions Governing Purchase of Wool and Wooltops dated 1 July 1990."
 
   -    In accordance with the above stipulation, the Arbitral Tribunal concludes that in addition to the terms and conditions for the transaction clearly set out in the contracts, both parties have also incorporated Chinatex's General Trading Terms Governing Purchase of Wool and Wooltops dated 1 July 1990 into those said contracts, making it one of the terms and conditions for the transactions between the parties.
 
   -    Further, Chinatex's General Trading Terms Governing Purchase of Wool and Wooltops dated 1 July 1990 are neither a bilateral treaty signed by China or Australia nor a regulation enacted or recognized by Chinese law. There is no governing law stipulated in this case and there is no applicable law clearly set forth in the Chinatex's General Trading Terms Governing Purchase of Wool and Wooltops dated 7 January 1990.

After examination, the Arbitral Tribunal finds that both Australia, where [Seller] is located, and China, where [Buyer] is located, are Contracting States of the CISG. As a result, the Tribunal concludes that where the application of the CISG has not been prevented by both parties, the CISG shall apply to the dispute arising out of the contracts in this case. The Tribunal also concludes that since China is the location of both the Buyer and where this arbitration is performed, issues not set out in the CISG shall be subject to PRC law in compliance with the doctrine of the most significant relationship.

(2) Effectiveness of the contracts

The position of the parties is:

   -    [Buyer] insists that there is no contractual relationship between the parties and that only incomplete Order Confirmations exist between [Buyer] and the Hong Kong Company which considered itself the agent of [Seller]. The [Buyer] insists that the Hong Kong Company has not been entrusted as [Seller]'s agent and has not informed it of the content located on the back-side of the contracts, making the Order Confirmations, to the utmost extent, merely an intention to make an agreement of purchase.
 
   -    [Seller], on the other hand, declares that in all three Order Confirmations, quantity, price, shipment period, as well as payment terms of the cargo were clearly set out, which together makes them binding offers. [Seller] also states that the execution of all three Order Confirmations by the legal representative of [Buyer] constitutes binding acceptances. According to Article 23 of the CISG, these three contracts were formed as of the acceptances and became effective. As to the issue regarding effective authorization between a consignor and its agent, [Seller] states its approval of the consignment of its agent. Lastly, [Seller] insists that the contents at the back of the contracts do not affect the formation of the contracts.

After trial, the Arbitral Tribunal has made the following issues clear:

On 5 March 2003, the Hong Kong Company, asserting that it was the agent of the [Seller], entered into three Order Confirmations with the [Buyer], i.e., the contracts in this cases, as follows:

1. Order Confirmation (No. D1899 / AU626):

Specifications: Australian raw wool FNF
Sort: 55
Unit price: 7.22 US $/kilo
Price term: CIF Shanghai
Quantity: 50,000 kilos,
Total price: US $360,000
Shipment: Before 30 June 2003, from an Australian port to Shanghai
Payment: Irrevocable documentary L/C issued via telex one month prior to shipment

2. Order Confirmation (No. D1900 / AU627):

Specifications: Australian raw wool FNF
Sort: 60
Unit price: 7.22 US $/kilo
Price term: CIF Shanghai
Quantity: 50,000 kilos,
Total price: US $360,000
Shipment: Before June 2003, from an Australian port to Shanghai
Payment: Irrevocable documentary L/C issued via telex one month prior to shipment

3. Order Confirmation (No. D1901 / AU628):

Specifications: Australian raw wool FNF
Sort: 54
Unit price: 7.40 US $/kilo
Price term: CIF Shanghai
Quantity: 25,000 kilos,
Total price: US $185,000
Shipment: Before June 2003, from an Australian port to Shanghai
Payment: Irrevocable documentary L/C issued via telex one month prior to shipment

All of the above three contracts contain the provisions of Special Clauses and Remarks. It was stated in the Remarks:

"Please note that in this transaction, we are acting as Agent for the Seller on the general terms and conditions as specified on the back of this Order Confirmation."

Further, it is clearly noted at the end of the contracts that ___ Hong Kong Ltd. was the agent of the seller and the contracts were signed by the representative of the agent. The buyer's representative signed his name as "Buyer" under the heading "WE AGREE."

During the trial, the [Buyer] recognized the authenticity of the signature of ___, who was the general manager of [Buyer], as the signatory on behalf of the [Buyer].

The Arbitral Tribunal notes that the General Terms and Conditions listed at the back of the contracts include the receiving of the Orders by the signing person of the Seller as the agent of such Seller, liabilities and responsibilities undertaken by the Seller being non-transferable to its agent, and force majeure, etc. During the trial, the [Seller] agreed that the contracts in this case were signed by its agent, and that it had granted the authorization to its agent, as well as that it did not fax the back side of the contracts to the Buyer at that time.

Article 14(1) of the CISG provides that a proposal for concluding a contract addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound upon acceptance. A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price. Article 18(2) provides that an acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror. Finally, Article 23 provides that a contract is concluded at the moment when an acceptance of an offer becomes effective in accordance with the provisions of the CISG.

According to the aforesaid facts, the goods name, specification, quantity, price, shipment, and payment were clearly indicated in the order confirmations signed by the [Seller]'s agent. Based on the aforesaid Article 14(1) of the CISG, the three order confirmations became effective as soon as the [Seller] signed them. The president of the [Buyer], ___, signed the three order confirmations as the buyer, and clearly expressed that "we have accepted the terms", which was then faxed to and received by the [Seller]'s agent, ___ Hong Kong Company.

The Arbitration Tribunal deems that the [Buyer]'s signing the three order confirmations, which were effective offers, has constituted an acceptance. Based on the aforesaid article 18(2) of the CISG, as a buyer, the [Buyer] faxed the acceptance to the offeror; therefore, the acceptance became effective upon the arrival to the offeror. Meanwhile, pursuant to the aforesaid article 23 of the CISG, the three order confirmations became effective when the [Buyer] faxed them to the agent of the [Seller] with its signatures. Thus, the Arbitration Tribunal does not support the [Buyer]'s assertion that there was no contract between the [Buyer] and the [Seller].

As to the issue of the authorization to the agent of the [Seller], the Arbitration Tribunal notes that the contracts clearly indicated that Hong Kong Company was the agent of the [Seller]. Later, the [Seller] sent a letter to the [Buyer], urging it to issue the L/C, which was a confirmation of Hong Kong Company's position as the agent of the [Seller]. Moreover, at the court session, the [Seller] again confirmed its authorization to Hong Kong Company; therefore, the Arbitration Tribunal deems that based on the principle of civil agent authorization, it could be made by written document or orally. Even when there is no written authorization letter or even no authorization in advance, as long as the client confirms afterwards, or admits the authorization, it is still effective.

As to the issue that the [Seller] failed to notify of the terms on the back of the order confirmation sheet to the [Buyer], the [Seller] did not deny this. The Arbitration Tribunal notes that those terms on the backside are agency terms and force majeure terms. At the time of the conclusion of the contracts, the [Seller] should have faxed or notified these terms to the [Buyer]. This was a failure on the part of the [Seller]. However, on the face of the order confirmation, it is mentioned that "the sales contract has been consummated between the buyer and the seller on the terms and conditions on the face and back of this order confirmation sheet", and it was also mentioned at the end that "based on the terms and conditions indicated on the back of this confirmation sheet, we act as the agent of the [Seller]." It is thus obvious that it was indicated on the face of the confirmation sheet that there were other terms and conditions on the backside as well. If the [Buyer] had thought that the terms on the backside are really important, it had the right to ask the [Seller] to fax or notify of those terms before signing the contract. However, there was no evidence showing that the [Buyer] has done so. In fact, this was also a mistake on the part of the [Buyer]. However, it has no effect on the fact that the contract in this case has been formed no matter whether it is the [Seller]'s mistake or the [Buyer]'s.

The Arbitration Tribunal also notes that the translation in Chinese in the order confirmations is different, mainly in the first paragraph. The Arbitration Tribunal notes that since the two parties signed the English version of the contract, therefore, the English version should be the basis. It was indicated in the first paragraph that "We hereby confirmed that we have received on behalf of the seller that the undermentioned order from you as the buyer and the sales contract has been consummated between the buyer and the seller on the terms and conditions on the face and the back of the order confirmation sheet." Which should be translated as ... [Chinese]. The aforesaid paragraph clearly indicates that the [Seller] has confirmed its receipt of the [Buyer]'s order and that the sales contract between the two partied had been formed, therefore, even if the [Seller] or the [Seller]'s agent signs on the contract, without the [Buyer]'s signature, the order confirmation sheet has no effect as a contract, but if the [Buyer] agrees and signs, the order confirmation becomes effective as a contract.

Meanwhile, the Arbitration Tribunal deems that as a special term, if it was indicated in the order confirmation that "it was only an intention to purchase, which has no binding effect unless the two parties sign a formal sales contract", then it should have no contractual effect, which should not be actually performed. However, in the instant case, there was no such special term.

Moreover, the [Buyer] provided to the Arbitration Tribunal the Standard Terms of Contract for Sales of Wool between China-Australia-New Zealand (2000 edition), asserting at the court session that the contract shall be based on those terms. The Arbitration Tribunal notes that the standard terms were determined by relevant organizations in China to promote wool business between China, Australia, and New Zealand. It can be referenced by parties, but has no enforcement. It does not mean that contracts concluded beyond the standard terms are non-effective.

(3) Performance of the contracts

[Seller] states that according to the contracts, the L/C shall be issued one month prior to the shipment and that [Buyer], although urged by the [Seller] many times, refused to issue the L/C. At the same time, [Seller] had the cargo ready pursuant to the contracts.

[Buyer] insists that since it did not have the right of importation and exportation, it could not issue the L/C, which resulted in its failure to perform the contracts. Further, [Buyer] said it never receives the letter from [Seller] urging it to issue the L/C, and that [Seller] should have had the cargo ready only after the issuance of the L/C. It also said that [Seller] breached the contracts since it did not have the cargo ready and did not notify [Buyer] of the names of the vessels onto which the cargo was to be shipped.

After trial, the Arbitral Tribunal made the following issues clear:

     1. It was set out in the payment terms of the contracts that an irrevocable documentary L/C should be issued via telex one month prior to the shipment with [Seller] as beneficiary.

     2. [Seller] sent a fax to [Buyer] on 18 June 2003, stating that:

"Cargos under those contracts are ready for transportation. However, we have not received the related L/C under the contracts to allow us to ship the cargo. If you could issue it as soon as possible, it would be highly appreciated."

[Seller] provided a receipt from the local telecommunication bureau which records a fax to [Buyer] with fax number ___ at _ a.m. that morning and lasting for 31 seconds. However, [Buyer] says they have never received the fax before.

On 21 August 2003, [Seller] faxed [Buyer]:

"Since our letter dated 18 June 2003, our Shanghai Office (***) has many times urged the issuance of the L/C as required under the abovementioned contract. It is regretful that we haven't received any L/C under which the cargo can be shipped. Therefore, we would like to inform you that we will engage attorneys to represent us in taking arbitral and relevant legal measures unless the L/C arrives at our office before 30 August 2003. We hope to receive a positive reply from you."

[Seller] provided the receipt from the local telecommunication bureau which records the fax to [Buyer] with fax number ___ at _ a.m. that morning and lasting for 40 seconds. However, [Buyer] says they have never received the fax before.

      4. [Seller] also provided several pieces of evidence from ___ Warehouse Company to show the inventory of wool. [Buyer] asked three questions in the cross-examination round: whether there exists ___ company; whether the certification issued by ___ company is fake; and whether the numbers in the certification were fake. [Buyer] said it would investigate in response to the questions

According to the opinion of the Arbitral Tribunal (see (2) above), the contracts herein are valid and binding on both parties. The Arbitral Tribunal concludes that the settlement clause of the contracts stipulates clearly and definitely that the Buyer should issue an irrevocable documentary L/C, and [Buyer] signed under "WE AGREE", which means that [Buyer] accepted all of the clauses expressly. According to the contracts, [Buyer] is required to issue the L/C one month prior to shipping. Therefore, the Arbitral Tribunal did not accept [Buyer]'s argument that they could legally not perform their duty by reason of not having the necessary import and export managerial authority. [Buyer] breached the contract by not carrying out the duty of issuing the L/C. In practice, [Buyer] could have performed its duty of issuing the L/C by some other proper means.

As to the letter urging establishment of the L/C which [Buyer] alleges not to have received, the Arbitral Tribunal concludes that it believes that [Seller] did urge [Buyer] to issue the L/C on 18 June 2003 and 21 August 2003. (namely Appendix 5 provided by the [Seller]), according to the telephone payment bill, the time it was delivered, the telephone or fax number and the duration of time of the dialing and fax transmission, etc. [Buyer] also alleged that:

"Even if the Arbitral Tribunal misunderstood that [Seller] had already issued the abovementioned Appendix 5, [Seller] cannot be absolved of its responsibility of breaching the contract by not offering the ship's name and time sheet."

Actually, the Arbitral Tribunal bases its decision on the facts rather than on any misunderstanding.

During the performance of a contract for the international sale of goods, the Buyer's duty to issue the L/C is not conditioned upon the Seller's demand for issuance. If the Buyer does not issue the L/C pursuant to the contract, it constitutes a fundamental breach of contract. In this case, the agreed price term is CIF, and according to the international trade customs, [Seller] has the duty to fully notify [Buyer] that [Seller] has delivered the goods so that [Buyer] can take necessary measures to receive the goods. However, in the present case [Buyer] breached the contract first by not issuing the L/C and, as a result, the [Seller] has the option either to demand the issuance of the L/C and renegotiate the shipping date, or to rescind the contract outright. Thus, in the present case, since the [Buyer] fundamentally breached the contract by failing to issue the L/C, the [Seller] was unable to ship the goods pursuant to the contract, naturally, [Seller] was unable disclose the ship's name and time sheet. As a result, [Seller] did not breach the contract and is free of liability.

Also, the Arbitral Tribunal notes that Article 7 of Chinatex's General Terms and Conditions Governing Purchase of Wool and Wooltops dated 1 July 1990 stipulates that under C&F or CIF the Seller should give notice to the Buyer about the ship's name, nationality, age, flag, and time sheet 15 days prior to shipping. After the Buyer's agreement, the cargo may be shipped. The Arbitral Tribunal concludes that since the contract stipulates that the L/C is to be issued one-month prior to shipping, but the [Buyer] failed to do so, which made it impossible for the [Seller] to ship as agreed. Therefore, the duty that notice be given 15 days prior to shipping becomes uncertain. Thus, [Seller]'s failure to provide [Buyer] the ship's name and time sheet 15 days earlier as agreed does not constitute a breach of contract by [Seller], for which the [Seller] shall not be held liable.

[Buyer] had questioned [Seller]'s proof of inventory to which [Buyer] said it needed 60 days to investigate. However, it has been over 60 days from the date of their proposal in response to the cross-examination, 13 March 2005, to the last session, 31 May 2005, but [Buyer] has not provided any details of the investigation or any opinion about it within the time period. As a result, [Buyer]'s dissent to [Seller]'s proof of inventory cannot be supported. Moreover, [Seller]'s claim does not rest on the evidence as to inventory (reasons will be stated below) and therefore the Arbitral Tribunal does not need to check it.

(4) [Seller]'s arbitral claims

[Seller] requests that [Buyer] pay to [Seller]:

   -    The loss in difference between the contract price and the market price at the time of the fundamental breach by [Buyer] in the amount of US $78,397.50;
 
   -    Lost interest in the amount of US $1,170.60; and
 
   -    Attorneys' fees and other expenses related to the case in the amount of US $7,966.73.

[Seller] alleges that [Buyer] fundamentally breached the original contract because [Buyer] did not issue the L/C before the 30 August 2003 deadline. [Buyer] claims that due to the failure of [Buyer] to issue a L/C, [Seller] should not have prepared the goods or that [Seller] did not suffer losses.

Article 61(1) of the CISG states:

"If the buyer fails to perform any of his obligations under the contract or this Convention, the seller may: (a) exercise the rights provided in articles 62 to 65; (b) claim damages as provided in articles 74 to 77."

Article 76(1) provides that:

"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 ..."

According to the above rules, the Arbitral Tribunal concludes that [Buyer] did not perform the agreed duty of issuing the L/C, even after a reasonable period given by the [Seller]. As a result, [Buyer] fundamentally breached the contract and [Seller] has the right to order indemnification. Also, as stated in court, [Seller] did not resell the goods under the contract, and further, [Seller] mailed notice to [Buyer] to avoid the contract on 12 November 2003. Thus, according to Article 76 of the Convention, [Seller] can recover the difference between the contract price and the market price at the time of the fundamental breach by [Buyer]. The Arbitral Tribunal does not agree with the allegation of the [Buyer] that it was impossible for [Seller] to have suffered any loss since the [Buyer] failed to issue the L/C one month prior to the shipment of the goods.

Based on the proof [Seller] provided, the Arbitral Tribunal affirmed the loss in difference between the contract price and the market price at the time of the fundamental breach by [Buyer] as follows:

Under Contract D1899 / AU626: (unit price in original contract - unit price of insurance - unit price of shipping - market price) quantity = (7.22 - 7.22 0.0522% - 0.035 - 10.32 0.6371) 50,000 = US $30,560;

Under Contract D1900 / AU627: (unit price in original contract - unit price of insurance - unit price of shipping - market price) quantity = (7.20 - 7.20 0.0522% - 0.035 - 10.32 0.6371) 50,000 = US $29,560;

Under Contract D1901 / AU628: (unit price in original contract - unit price of insurance - unit price of shipping - market price) quantity = (7.4 - 7.4 0.0522% - 0.035 - 10.41 0.6371) 25,000 = US $18,277.50.

Total loss from price differences: The total amount of the losses from all three contracts from price differences is: 30,560 + 29,560 + 18,277.50 = US $78,397.50

As to the interest loss, the Arbitral Tribunal concludes that, in this case, [Buyer] should pay the indemnification to [Seller] for breach of contract rather than the payment for goods and the amount of compensation was determined in the award. [Seller] did not suffer any interest loss. Therefore, the Arbitral Tribunal denies this request.

As to the indemnification of [Seller]'s fees in the case, not all [Seller]'s requests are supported by the Arbitral Tribunal. The Tribunal concludes that it is reasonable for [Buyer] to pay US $4,000 to [Seller] for attorneys' fees and other related expenses.

      (5) As to the arbitral fees, the Tribunal concludes that [Seller] shall be responsible for 20% and [Buyer] shall be responsible for 80%.

[C] THE AWARD

The Arbitral Tribunal unanimously decides:

   1.    [Buyer] shall pay [Seller] US $78,397.50 to compensate for losses suffered by [Seller] from price differences;
 
   2.    [Buyer] shall pay [Seller] US $4,000 to partially compensate for the attorneys fees and other expenses for this case suffered by [Seller];
 
   3.    The other arbitration claims by the [Seller] are rejected;
 
   4.    20% of the arbitration fee ($4,272) for this case or $854.40 shall be paid by [Seller], and 80% or $3,471.60 shall be paid by [Buyer]. The above arbitration fee was paid to the arbitration commission in advance by [Seller]. Set-off: [Buyer] shall pay $3,417.60 to [Seller] to compensate for the arbitration fee pre-paid for it by [Seller].

[Buyer] shall complete payment within thirty days following this decision. This decision is final, and effective as of the day it is rendered.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of Australia is referred to as [Seller]; Respondent of the People's Republic of China is referred to as [Buyer]. 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].

** William Zheng is a graduate of the Pace University School of Law. He is Special Counsel with the Shanghai office of Sheppard Mullin Richter & Hampton, LLP. Raymond Tan is an Associate with this law firm.

*** 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 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.

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Pace Law School Institute of International Commercial Law - Last updated May 31, 2011
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