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CISG CASE PRESENTATION

China 9 November 2005 CIETAC Arbitration proceeding (DVD machines case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/051109c1.html]

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

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Case identification

DATE OF DECISION: 20051109 (9 November 2005)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2005/04

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: People Republic of China (respondent)

BUYER'S COUNTRY: Australia (claimant)

GOODS INVOLVED: DVD machines


UNCITRAL case abstract

PEOPLE'S REPUBLIC OF CHINA: China International Economic & Trade Arbitration
Commission (CIETAC) (now South China Branch) 9 November 2005 (DVD machines case)

Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/114],
CLOUT abstract no. 1119

Reproduced with permission of UNCITRAL

Abstract prepared by Weidi Long

An Australian buyer and a Chinese seller entered into a contract for the sale of DVD players. The contract specified that the goods would be loaded and shipped in one batch, that the payment would be made by letter of credit (L/C) and that the L/C could only be cashed after all the goods had been delivered. However, the seller shipped the goods in five batches, and the L/C was cashed when only a portion of the goods had been delivered. The buyer argued that the seller had been late in delivering the goods, and the way in which the goods had been delivered was not in line with what was agreed in the contract. This had caused heavy economic losses for the buyer. The buyer initiated arbitration proceedings, asking the Arbitration Tribunal to order the seller to pay a penalty for having breached the contract by its delay in delivering the goods, to compensate the buyer for the extra shipping costs due to the fact that the seller had delivered the goods in batches and the loss of interest due to the cashing of the L/C sooner than agreed and to pay the arbitration fees.

The parties had not decided in the contract on a law to govern disputes. Since their places of business were in States Parties to the CISG, the Tribunal determined that the case should be governed primarily by the Convention. The Tribunal also noted that the Convention was not applicable to the question of the validity of the contract or of the ownership of the goods, under article 4 of the Convention. It further held that, for matters not provided for in the Convention, according to the principle of the closest connection the domestic law of China should be applied.

Under article 14, article 15(1) and article 18(2) CISG, the Tribunal held that a contract between the parties existed and was legally valid under the contract law of the People's Republic of China. Pursuant to this legislation, the Tribunal ruled that the seller had delayed the delivery of the goods, and should be responsible for breach of contract.

As for the buyer's request for the payment of a penalty for breach of contract, the Tribunal held that the issue should be governed by the relevant provisions in the contract law of the People's Republic of China as the Convention did not contain relevant provisions. The Tribunal therefore supported the buyer's request.

Regarding the extra costs that the buyer had had to pay for shipping the goods in batches, the Tribunal held that the L/C stipulated that the seller was not to ship the goods in batches, and that the seller's decision to change the manner of delivery was another breach of contract. Under articles 45, 61 and 74 CISG, the Tribunal ruled that the seller must pay compensation for damages.

As for the loss of interest due to the early cashing of the L/C, the Tribunal held that the loss of interest was caused by the seller delaying the delivery, however the buyer did not have any evidence to prove that the loss caused by such a delay was greater than the penalty agreed to in the contract. The Tribunal therefore held that the buyer did not have any legal basis for claiming compensation for the loss of interest after receiving the compensation for breach of contract (article 78 CISG).

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Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 4 ; 8(3) ; 14 ; 18(2) ; 74 ; 78 [Also cited: Articles 15(1) ; 45 ; 61 ]

Classification of issues using UNCITRAL classification code numbers:

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

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

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

18A [Acceptance of offer: criteria for acceptance];

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

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

Descriptors: Scope of Convention ; Penalty clauses . Intent ; Offers ; Acceptance of offer ; Damages ; Interest

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Editorial remarks

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

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

DVD machines case (9 November 2005)

Translation [*] by Meihua Xu [**]

Translation edited by William Zheng [***]

The China's International Trade and Economic Arbitration Commission Huanan Commission (hereafter, the "Huanan Commission") accepted this case, concerning a dispute over delayed payment, according to:

   -    The arbitration clause in the purchase order signed by Claimant [Buyer], Australia __ Electronic Company, and Respondent [Seller], China __ Electrical Equipment Company on 7 October 2004; and
 
   -    The written arbitration application submitted by [Buyer] on 8 July 2005.

Article 10 of the purchase order stipulates that:

"Any dispute arising from or in connection with this contract should be submitted to the China's International Trade and Economic Arbitration Commission to be arbitrated based on the effective Arbitration Rules, and its decision is final."

The case is qualified to use the Arbitration Rules of the Arbitration Commission (hereafter, "the Arbitration Rules"), which became effective on 1 May 2005.

The Secretariat of the Huanan Commission sent the entire arbitration documents including but not limited to the arbitration notice to the [Buyer] and the [Seller].

The [Seller] did not submit any written defense before the court session, but presented an oral defense at the court session. On 10 October 2005, after the court session, the [Seller] submitted a written defense.

Since the parties failed to reach an agreement on whether to jointly appoint or ask the Chairman of the Arbitration Commission to appoint the Presiding Arbitrator, on 9 August 2005, the Chairman of the Arbitration Commission appointed Ms. W as the Presiding Arbitrator to form the Arbitration Tribunal to hear this case.

The Huanan Commission decided to hold a court session at 9 a.m. on 26 August 2005, which was postponed to 9 a.m. on 30 August 2005. The agents of the two parties attended the court session.

The parties tried mediation after the court session without reaching any agreement. After the court session, the [Buyer] and the [Seller] submitted supplementary material and evidence.

The Arbitration Tribunal handed down its award on 9 November 2005. The following are the facts, the Tribunal's opinion and award.

I. FACTS

(1) Purchase order

On 6 October 2004, the [Buyer] sent Purchase Order No. 01-041006 to the [Seller]. The [Seller] confirmed the purchase order, affixed its seal to it, and sent it back to the [Buyer] on 7 October 2004. The parties agreed that the [Buyer] was to purchase the following items:

Name Description Model Quantity Unit Price Sum Remarks
Portable DVD Equipment
 DV-977VW
 
2,500 sets US $153.00

US $382,500.00

 

 Attachments
 
Equipment 25 sets
 Free of charge
 
 
Package   50 sets  
Remote control   50 pcs  
Total

 
US $382,500

The purchase order contains the following terms:

  1. Technical manual: See attached "Product Technology Confirmation List";
  2. Payment: 30 days Forward L/C;
  3. Shipment deadline: 10 November 2004;
  4. Delivery location: FOB Shenzhen, China;
  5. Before loading, the [Seller] must provide SAA certificate and CE report for plug and cable;
  6. Penalty for delayed delivery: A penalty of 3% of the total price will be charged for 1 ~ 7 days delay; a penalty of 5% of the total price will be charged for 8 ~ 10 days delay; a penalty of 10% of the total price will be charged for 11 ~ 15 days delay;
  7. After-sales warranty: 1% the entire equipment; 2% the packaging;
  8. The [Seller] should not sell the same model purchased by the [Buyer] to its clients in Australia or New Zealand;
  9. The [Seller] shall notify the [Buyer] of the inspection one day in advance, and the entire goods shall be finished manufacturing before inspection;
  10. Any dispute arising from or in connection with this contract should be submitted to the Arbitration Commission to be arbitrated based on the effective Arbitration Rules. The decision is final and has binding effect on the two parties.

The product technology confirmation list attached to the purchase order has stipulations on the entire equipment, power supply, remote control, screening printing material, equipment screen printing, carton, implied devices and remarks. The following are the stipulations for the cartons:

   -    Outside design: The [Buyer] shall provide the plan;
   -    Printing content: Bar code and mark;
   -    Remarks: 10 items of equipment per carton, each carton shall not exceed 20kg.

(2) [Buyer]'s arbitration claim

On 8 July 2005, the [Buyer] submitted its arbitration application to Huanan Commission, asking the Arbitration Tribunal to rule that:

  1. The [Seller] shall pay the penalty for the delay in delivery of US $35,955.00;
  2. The [Seller] shall pay the extra expenses incurred by installment shipment, i.e., US $660.70;
  3. The [Seller] shall pay the loss of interest by bring forward the L/C acceptance of US $758.60;
  4. The [Seller] shall pay the [Buyer]'s attorneys' fee of renminbi [RMB] 30,000;
  5. The [Seller] shall bear the arbitration fee and case procedure fee.

(3) Issues in dispute and reasons

      1. The [Buyer] alleges that:

      The [Buyer] and the [Seller] have conducted several business transactions. The purchase order in this case stipulates that the [Buyer] was to purchase 2,500 Portable DVD machines at a unit price of US $153/machine, totaling US $382,500.

During the performance of the contract, the [Seller] delayed in making delivery of the goods repeatedly, which caused severe economic loss to the [Buyer]. Regarding this, the [Buyer] has asked for compensation from the [Seller] via e-mail; however, the [Seller] replied that it was to pay the penalty for the delay without making response to [Buyer]'s other claims.

The goods were purchased for the Christmas sales season in western countries. They were seasonal items; therefore, delivery on time was essential. The [Seller] was aware that the [Buyer] was pressed for time; however, the [Seller] intentionally violated the contract notwithstanding the [Buyer]'s reminders, with the result, the [Buyer] breached the contract with its client, for which its client has claimed damages. This has severely damaged the [Buyer]'s reputation, and the damages incurred thereof are still being confirmed. The [Buyer] reserves the right to claim damages from the [Seller] later.

For the above reasons, the [Buyer] filed arbitration claims with the Huanan Commission, and is seeking support from the Arbitration Tribunal.

      2. The agent of the [Seller] presented the following defense at the court session

      [Seller]'s agent first alleged that the two parties had no business transaction or sales relationship, and the entire evidence submitted by the [Buyer] has nothing to do with the [Seller]. The reason for this is that it was a company in Hong Kong, M Company Limited (HK) (hereafter, M Company), which was mentioned in the L/C and B/L, but not the [Seller], who was contacting the [Buyer].

However, the agent of the [Seller] later denied the aforesaid defense stated orally and confirmed the evidence and the reliability of the facts stated by the [Buyer].

      3. Representation statement submitted by the [Buyer]'s agent

            (1) [Seller] should pay the penalty for late delivery

            The delivery deadline stipulated in the purchase order was 10 November 2004. Due to the repeated delays in deliveries, the [Buyer] makes its first claim based on Article 6 of the purchase order, which is that the penalty shall be calculated based on the number of days delayed. The total penalty is US $35,955, and the calculation in detail is:

   -    300 DVD machines should be delivered on 19 November, which was delayed for 9 days. The penalty is 300 US $153 5% = US $2,295;
 
   -    2,200 DVD machines should be delivered from 24 November to 10 December, which was delayed for more than 11 days. The penalty is 2,200 US $153 10% = US $33,660.

            (2) [Seller] should pay the extra expenses incurred by installment shipment

            The purchase order stipulates that 2,500 DVD machines should be manufactured by 9 November and shipped as a whole by 10 November; however, the [Seller] air shipped the goods in five shipments, which caused four extra local charges incurred in Hong Kong and Sydney, Australia. The shipping agent provided detailed data on the charges based on the number of transactions, which does not include charges based on weight. The local charge in Hong Kong and local charge in Sydney total US $660. The following are the calculations in detail:

   -    Local charge in Hong Kong totals: 4 (283 + 15 + 40 + 150) = Hong Kong dollars [HK] $1,952 = US $250.46 (Exchange rate: US $1 = HK $7.7935);
   -    Local charges in Sydney totals: 4 (100 + 35) = Australia dollars [AUD] 540 = US $410.24 (Exchange rate: US $1 = AUD 1.3163).

            (3) [Seller] should pay the loss of interest by bring forward the L/C accepting date

            The [Buyer] accepted the L/C on 19 November; however, the [Seller] only delivered 300 machines within the stipulated time. The L/C states that it should be accepted after 100% of the goods are received (see Article 42c of the L/C); therefore, the accepting date should be 30 days after the delivery date.

The annual loan interest at the Bank of China Sydney Branch is 5.875%; therefore, the total loss of interest by bring forward the L/C accepting date is US $758.60:

   -    500 machines were delivered on 24 November (5 days delay); totals US $76,500; 5 days' interest: US $61.60;
 
   -    500 machines were delivered on 2 December (13 days delay); totals US $76,500; 13 days' interest: US $160.10;
 
   -    850 machines were delivered on 6 December (17 days delay); totals US $130.050; 17 days interest: US $355.90;
   -    350 machines were delivered on 10 December (21 days delay); totals US $53,550; 21 days interest: US $181.00

            (4) [Seller] should pay a reasonable amount for [Buyer]'s agency fee for this case

            Seeking friendly negotiation and continuous cooperation, the [Buyer] had repeatedly asked for compensation from the [Seller] before filing the arbitration application and entrusted its attorney to send the letters, hoping to reach a reconciliation agreement with the [Seller] through negotiation. However, the [Seller] was ignoring this, which caused the [Buyer] to waste considerable time, effort, and cost; therefore, the [Buyer] asks the Arbitration Tribunal to rule that the [Seller] must pay a reasonable amount of the [Buyer]'s arbitration costs, i.e., RMB 30,000, based on the situation in this case.

Above all, it is the [Buyer]'s position that the [Seller] has violated the principle of good faith.

      4. [Buyer]'s allegation in the letter sent on 9 October 2005

      Even though the two parties were hoping for reconciliation, they failed to reach an agreement within two weeks stipulated by the Arbitration Tribunal; therefore, the [Buyer] asks the Arbitration Tribunal to decide this case based on the law.

      5. [Seller]'s written defense submitted on 10 October 2005 alleged that:

      [Seller] is an electricity company in Shenzhen. On 16 August 2005, the [Seller] received Arbitration Notice No. SHENM2005106 sent by the Huanan Commission, informing that Australia Electric Company (the [Buyer]) had filed an arbitration application with the Huanan Commission and that a court session was to be held on 30 August. The [Seller] insisted that it had no financial relationship with the [Buyer]. Based on the material submitted by the [Buyer], [Seller] asserted that [Buyer] was doing its transaction with M Company. In the instant case, the [Buyer] filed its arbitration claim against the [Seller]. Even though the [Seller] and M Company were related, they were totally different subjects; therefore, the [Buyer] should have filed the arbitration claim against M Company.

On 18 October 2005, the [Seller] submitted a written "application", which had the same content with its defense submitted on 10 October 2005.

II. OPINION OF THE ARBITRATION TRIBUNAL

(1) The applicable law

The two parties failed to stipulate the applicable law in the purchase order. The Arbitration Tribunal notes that the [Buyer]'s place of business is in Australia, and the [Seller]'s in the People's Republic of China. Both China and Australia are Contracting States of the United Nations Convention on Contracts for the International Sales of Goods (hereafter, the "CISG"), therefore, the CISG has priority to be applied.

Secondly, according to Article 4 of the CISG, it "governs only the formation of the contract of sale and the rights and obligations of the [Seller] and the [Buyer] arising from such a contract", and it is not concerned with the validity of the contract or the property in the goods sold. The Arbitration Tribunal notes that the [Seller] is a Chinese corporation, and that it was clearly stipulated that the delivery should be made at the place of the [Seller], Shenzhen, and that the arbitration should be conducted in China. Thus, the Arbitration Tribunal deems that based on the proximate connection principle, the Chinese domestic law shall be applied, provided there is no stipulation in the CISG.

(2) The effectiveness of the purchase order

The evidence shows that the parties signed the purchase order voluntarily, which reflects the true minds of the two parties; there are both parties' seals and agents' signatures at the end of the document, where indicted as "[Buyer]" and "[Seller]". The [Seller] had no doubt about the reliability of the document. The Arbitration Tribunal notes that based on Articles 14, 15(1), and 18(2) of the CISG, the purchase order sent by the [Buyer] to the [Seller] on 6 October 2004 was a valid offer, and the [Seller]'s sealing and sending it back to the [Buyer] was a valid acceptance. Therefore, the Arbitration Tribunal holds that the purchase order was signed legally, which was in accordance with the stipulations on offer, acceptance, and the form of a sales contract under the CISG, and does not satisfy the requirement for a void contract as stipulated in Article 52 of the Contract Law of the PRC (hereafter, "the Contract Law"). It is a valid agreement, and has binding effect on the two parties.

(3) Other terms in the purchase order and the L/C

      1. The purchase order not only stipulates that the [Buyer] was to purchase 2,500 DVD machines at a unit price of US $153, but also states that 25 machines would be provided with no charge. The product technical confirmation list attached to the purchase order specifies that 10 machines should be packed in one carton.

      2. According to the purchase order, on 8 October 2004, the [Buyer] issued a L/C for the full amount of the price with M Company as the beneficiary. Pursuant to the L/C, installment shipment was prohibited. Article 42c stipulated "30 days after sight for 100% invoice value."

(4) The performance of the purchase order

       1. Whether the China ___ Electrical Equipment Company and the Australia ___ Electronic Company are seller and buyer and have a sales relationship

      According to the aforesaid analysis, the purchase order is legal and effective. Based on the stipulations in the purchase order, the above parties have a sales relationship. However, in the written application and defense submitted after the hearing, the [Seller] mentioned that it was M Company but not the [Seller] who had financial relationship with the [Buyer]; therefore, the [Buyer] should have filed arbitration application against M Company. At the court session, the agent of the [Seller] made the same statement at first, but later confirmed the sales relationship and the business transaction .

The Arbitration Tribunal notes that M Company (located in Hong Kong - note by the Arbitration Tribunal) mentioned by the [Seller] appears both in the L/C and the air shipping document; however, the Arbitration Tribunal holds that the consignor of the B/L or the beneficiary of the L/C does not necessarily have to be the [Seller]. The [Seller] could entrust others to perform the aforesaid obligations; therefore, it should not be concluded that M Company is the seller instead of the [Seller] in this case and that the parties of the transaction were changed just because M Company located in Hong Kong was mentioned in related documents.

The purchase order evidences the sales relationship between the [Buyer] and the [Seller], and the relating facts prove that the goods have been delivered. In addition, the agent of the [Seller] confirmed the sales facts at the court session; therefore, the Arbitration Tribunal does not accept the [Seller]'s assertion that it has nothing to do with the purchase order or the delivery of the goods.

       2. [Seller]'s delivery of the goods

            A. Transportation method

            Article 3 of the purchase order stipulates that the delivery place is FOB Shenzhen, China, and that the latest shipping date is before 10 November 2004. The Arbitration Tribunal notes that the transportation method was changed from "by boat" to "by air" during the performance of the contract. The two parties had no dispute on this change. The agent of the air shipment is P Company, and __ Air Shipping Company issued the B/L for air shipment.

            B. Number of shipments and the total amount of the delivery

            Article 4 of the purchase order states that the latest shipping time is before 10 November 2004; Article 9 stipulates that the [Seller] must inform the [Buyer] of inspection one day in advance, and that the entire goods must be manufactured before inspection. The L/C prohibits installment shipment.

However, the five air shipment B/Ls issued by __ Air Shipping Company provided by the [Buyer] indicate that the 2,500 DVD machines required by the purchase order were delivered by the [Seller] by five air shipments. The five shipments were:

   -    On 19 November 2004, 30 cartons;
   -    On 24 November 2004, 50 cartons;
   -    On 2 December 2004, 50 cartons;
   -    On 6 December 2004, 85 cartons; and
   -    On 10 December 2004, 38 cartons.

The Arbitration Tribunal also notes that the consignor in the air shipping B/L (it was mentioned as "shipper" in the original text) is M Company, which is located in Hong Kong.

Meanwhile, based on the stipulation in the purchase order that 10 machines should be packed in one carton, the Arbitration Tribunal confirms that:

   -    On 19 November 2004, 300 DVD machines were delivered;
   -    On 24 November 2004, 500 DVD machines were delivered;
   -    On 2 December 2004, 500 DVD machines were delivered;
   -    On 6 December 2004, 850 DVD machines were delivered; and
   -    On 10 December 2004, 380 DVD machines were delivered

The Arbitration Tribunal notes that the [Seller] delivered 30 DVD machines more than 2,500 machines as stipulated in the purchase order, among which 25 machines were provided by the [Seller] for free, and 5 were extra delivered. The [Buyer] confirmed that the [Seller] has delivered the entire goods as required by the contract.

The beneficiary in the L/C and the consignor in the air shipping B/L were all M Company with the same address.

       3. [Buyer]'s payment

            A. Payment for the goods

            Article 3 of the purchase order determines that the payment is to be made by 30 days forward L/C; however, during the performance of the contract, the [Buyer] brought forward the acceptance of the entire price of the goods on 19 November 2004 based on the two parties' agreement. The Arbitration Tribunal notes that the agent of the [Seller] also admitted that the acceptance of L/C in advance was based on the two parties' agreement, and mentioned that the acceptance could not be performed without the other party's cooperation.

            B. [Buyer]'s payment of transportation fee for 2 500 DVD machines

            Based on the FOB term in the purchase order, the [Buyer] shall bear the transportation fee by boat; during the performance of the contract, the [Buyer] has paid the air shipment charge which was changed afterwards. The Arbitration Tribunal also notes that five shipments increased the two places' airport charges accordingly. The documents issued by the shipment agent and the attached invoices provided by the [Buyer] indicate that except for the charges related to weight, there were charges incurred both in Hong Kong and Australia. The four charges incurred in Hong Kong total 488 HK$, and two charges incurred in Australia total 135 AUD. On 16 December 2004, Priority Cargo Logistic Company, the air shipment agent, faxed to the [Buyer] the following list. The original text is:

"Please kindly check the list below for charges which are related to each shipment in Hong Kong and Sydney for air cargo. The list which related to weight is excluded.

Local Charges in Hong Kong:
 
-  Handling Fee HK $283
-  Airline Doc Fee HK $15
-  Airport Bridge Toll Fee HK $40
-  Custom Clearance Fee HK $150
 
Local Charges in Sydney:
-  Custom Clearance Fee AUD 100
-  Documentation Fee AUD 35"

(5) [Seller]'s contract violation on delay in delivery and the [Buyer]'s first claim

According to Article 6 of the purchase order, the [Buyer]'s first claim is that the [Seller] shall pay the penalty of US $35,955 for its delay in delivery. The calculation in detail is:

   -    3,000 machines were delivered on 19 November with 9 days delay, and the penalty is 300 US $153 5% = US $2,295.00;
 
   -    2,200 machines were delivered from 24 November to 10 December with more than 11 days delay, and the penalty is 2,200 US $153 10% = US $33,660.00;

The Arbitration Tribunal deems that the purchase order is an effective agreement and that the [Buyer] has fulfilled its obligation to make payment; however, the five deliveries made by the [Seller] all exceeded the deadline stipulated in the purchase order, i.e., 10 November 2004. The [Seller]'s delay in delivery has constituted a contract violation, and it should bear the responsibility. The [Buyer] is entitled compensation based on the purchase order and the related law.

The CISG has no stipulation on penalties. Article 114 Section 1 of the Contract Law of China states that:

"The parties may determine a contract violation fee that the party breaching the contract should pay to the other party based on the extent of violation, and they may also determine the method of calculating damages caused by violation of the contract."

Article 6 of the purchase order clearly stipulates the penalty for delay in delivery and the method of calculating it, which is that there shall be a "penalty of 3% of the entire price for 1 ~ 7 days delay; 5% for 8 ~ 10 days delay; and 10% for 11 ~ 15 days delay."

Based on the aforesaid, the Arbitration Tribunal deems that the [Buyer]'s claim that the [Seller] shall pay US $35,955 as a penalty for delayed delivery has sufficient factual and legal basis, which the Arbitration Tribunal supports.

(6) [Buyer]'s other arbitration claims

      1. For the extra expenses incurred by installment shipments

      The [Buyer]'s second claim is to have the [Seller] bear the extra expenses incurred by installment shipments. The reason for this claim is that according to the purchase order, 2,500 DVD machines should be finished manufacturing on 9 November, and loaded as a whole on the 10th; however, an extra four charges were incurred in Hong Kong and Sydney by the five air shipments:

            A. Charges incurred in Hong Kong total: 4 (283 + 15 + 40 + 150) = HK $1,952 = US $250.46 (Exchange rate: US $1 = 7.7935 HK$);

            B. Charges incurred in Australia total: 4 (100 + 35) = AUD 540 = US $410.24 (Exchange rate: US $1 = 1.3163 AUD).

The above totals US $660.70

The Arbitration Tribunal notes that the purchase order did not stipulate the number of deliveries the [Seller] should make; however, Article 9 states that the [Seller] should "inform the [Buyer] of the inspection one day in advance, and the entire goods should be finished manufacturing upon inspection." Meanwhile, the L/C prohibits installment shipment on the agreement by both of the parties; therefore, the Arbitration Tribunal holds that as a method of making payment, even though the L/C is a different concept from the contract, it evidences and supplements the purchase order. Obviously, [Seller]'s delivery of the goods by five installment shipments violates the stipulation on the prohibitions of installment shipment; therefore, the Arbitration Tribunal deems that the [Seller] has violated the contract not only for the delay in delivery but also the number of deliveries. The penalty for delay in delivery does not include the penalty for the latter.

Articles 45 and 61 of the CISG state that

A party may "claim damages as provided in articles 74 to 77" if the other party "fails to perform any of his obligations under the contract or this Convention."

Article 74 of the CISG stipulates that:

"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."

The Arbitration Tribunal notes that based on the FOB term agreed by the two parties, even though the [Buyer] should bear the transportation fee by boat, and it actually paid the air shipping fee after modification, if the [Seller] had delivered the entire goods in one shipment, the [Buyer] should have been able to avoid the four local charges incurred in Hong Kong and Sydney. When the [Seller] violated the contract for the numbers of delivery, it should have foreseen the damage that the [Buyer] would incur. Thus, the Arbitration Tribunal holds that the extra four local charges, totaling US $660.70, claimed by the [Buyer] have sufficient evidence and calculation basis; therefore, the [Seller] shall be liable for this, and that the [Buyer]'s second claim is accepted.

      2. For the loss of interest due to the acceptance of price in advance

      The [Buyer] asks the [Seller] to bear the loss of interest due to the acceptance of price in advance because the [Buyer] brought forward the acceptance of the price on 19 November 2004. However, the [Seller] only delivered 300 DVD machines within the stipulated time, and the remaining four deliveries were made after the acceptance of the price. Article 42c of the L/C stipulates that acceptance of price occurs after receipt of the entire goods; therefore, the acceptance should be made 30 days after the actual delivery date.

The Arbitration Tribunal notes that even though the third claim of the [Buyer] is for the loss of interest for the acceptance in advance, it was also caused by the [Seller]'s delay in delivery, which is another claim by the [Buyer] other than the contract violation fee based the [Seller]'s delay in delivery.

The key point for the [Buyer]'s aforesaid claim is that as one consequence results from [Seller]'s delay in delivery, should the [Seller] bear the [Buyer]'s loss of acceptance of price in advance if the contract violation fee has been compensated under the circumstance that the [Buyer] has no evidence showing that the amount of this loss is higher than the contract violation fee.

Article 113 of the Contract Law stipulates that:

"If one party fails to perform or to perform as required by the contract, the damages caused to the other party equal the losses caused by the contract violation, including the profit by the fulfillment of the contract. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract."

Contract Law 114, paragraph 2, states that:

"If the agreed contract violation fee is less than the losses caused by the breach, the parties may ask the People's Court or arbitration organization to increase the amount; if the agreed contract violation fee is much higher than the losses caused by the breach, the parties may ask the People's Court or arbitration organization to decrease the amount appropriately."

Based on the above, the Arbitration Tribunal deems that the contract violation fee for the delayed delivery is punitive damages, and that the parties may ask the arbitration organization to increase the amount of it only when it is less than the losses caused by the breach of the contract. The Arbitration Tribunal notes that the [Buyer] has failed to prove that it has suffered losses more than contract violation fee due to the [Seller]'s delay in delivery; therefore, the Arbitration Tribunal holds that the [Buyer]'s claim for loss of interest beyond the US $35,955 contract violation fee lacks agreement and legal basis; therefore, the [Buyer]'s third claim is not accepted. In the instant case, except for the contract violation fee, the [Seller] need not bear any other damages.

3. [Buyer]'s attorneys' fee

      The [Buyer] asks the [Seller] to pay its attorneys' fee of RMB 30,000, submitting the agency agreement and the invoice after the court session. Based on the agreement of the two parties at the court session, the two parties made written verifications, and the [Seller] did not raise any objection. Based on Article 46(2) of the Arbitration Rules, the Arbitration Tribunal should hold that the losing party shall pay a reasonable amount of the winning party's attorneys' fee in the award.

The Arbitration Tribunal notes that the [Seller]'s violation of contract caused the dispute in this case, and the [Buyer]'s attorneys' fee was incurred thereof; therefore, the [Seller] shall make compensation for the [Buyer]'s attorneys' fee. However, based on the instant case and the aforesaid stipulations, the amount should be adjusted to RMB 20,000. Thus, part of the [Buyer]'s fourth claim is accepted.

(7) The arbitration fee

Based on the aforesaid analysis and the extent that the Arbitration Tribunal supports the [Buyer]'s claims, the [Buyer] shall bear 5% of the arbitration fee and the [Seller] shall bear 95%.

III. THE AWARD

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

(1) [Seller] shall pay the contract violation fee for its delay in delivery of US $35,955;

(2) [Seller] shall pay the [Buyer]'s loss caused by installment shipment, i.e., US $660.70;

(3) [Buyer]'s third arbitration claim is dismissed;

(4) [Seller] shall bear [Buyer]'s attorneys' fee of RMB 20,000;

(5) [Buyer] shall bear 5% of the arbitration fee and the [Seller] shall bear 95%;

The [Seller] shall pay the aforesaid four items within fifteen days of this award. This is the final award. It shall be effective as of the date of the award.


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 [Buyer] and Respondent of the Peoples' Republic of China is referred to as [Seller]. Amounts in the currency of the United States (dollars) are indicated as [US $]; amounts in the currency of the Peoples' Republic of China (renminbi) are indicated as [RMB]; amounts in the currency of Hong Kong (dollars) are indicated as [HK$]; amounts in the currency of Australia (dollars) are indicated as [AUD].

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

*** 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.

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Pace Law School Institute of International Commercial Law - Last updated January 18, 2012
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