Go to Database Directory || Go to CISG Table of Contents || Go to Case Search Form || Go to Bibliography

CISG CASE PRESENTATION

China 7 December 2005 CIETAC Arbitration proceeding (Heaters case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/051207c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20051207 (7 December 2005)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2005/05

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Germany (respondent)

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

GOODS INVOLVED: Heaters


UNCITRAL case abstract

PEOPLE'S REPUBLIC OF CHINA: China International Economic & Trade Arbitration
Commission (CIETAC) (now South China Branch) 7 December 2005 (Heaters case)

Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/114],
CLOUT abstract no. 1118

Reproduced with permission of UNCITRAL

Abstract prepared by Panfeng Fu

A Chinese buyer and a German seller signed a contract for the purchase of electrical warm-air heaters and other products. The goods were to be delivered c.i.f. During the performance of the contract, the buyer asked to return the goods under the clauses for the return of goods in the contract. However, the parties did not reach an agreement on such return. The buyer then initiated arbitration proceedings, asking the Arbitration Tribunal to order the seller to accept the returned goods promptly, refund the money paid, pay a penalty for delaying the refund of the sum paid, and accept responsibility for the import duty related to the goods, storage charges and other fees.

The parties had not made any provision in the contract regarding the law by which disputes would be governed. Since the places of business of the parties were in States Parties to CISG, the Tribunal ruled that the case should be governed first and foremost by the Convention. For matters not provided for in the Convention, the Tribunal held that, according to the principle of the closest connection, the domestic law of China should be applied.

The Tribunal held that the request by the buyer to return the goods was in line with the provisions of the clauses on the return of goods in the contract, which should be upheld. In accordance with these clauses, the seller should refund the money on the basis of the contract price, and be responsible for import duty and other relevant costs. However, the parties had different understandings of what was meant by "contract price". The difference mainly concerned whether the "contract price" should include freight. The Tribunal held that, under article 8 of the Convention, if the parties had different understandings of the term "contract price" all relevant circumstances should be taken into consideration to determine their intention; or the interpretation that a reasonable person would arrive at should be adopted. For this reason, the Tribunal held that the refund should be calculated at the unit price of each and every model among the goods returned. This was the way the buyer had calculated the price to be refunded in a letter sent to the seller, therefore "a reasonable person of the same kind as the seller would have understood the 'contract price'" in such a way.

With regard to the responsibility for the delay in returning the goods, the Tribunal, pursuant to PRC Contract Law, held that when the method of performance was not clearly described in the contract, the parties should abide by the principle of good faith and reach an agreement in accordance with the provisions of the contract or the relevant usages. In the case at hand the behaviour of the seller had been inconsistent with the principles of honesty and credibility and the requirement that the contract was to be honoured in good faith (article 7 CISG). The seller had therefore breached the contract by violating the clauses concerning the return of goods. As for the penalty for breach of contract, the Tribunal held that the buyer's request was clearly based on what was set forth in the contract, and should therefore be supported.

Nevertheless, the Tribunal held that the amount of the penalty established in the contract was too high, and made an adjustment to the amount in accordance with the relevant provisions of the contract law of the People's Republic of China. In addition, the Tribunal upheld the buyer's request that the seller should pay for storage costs.

Go to Case Table of Contents

Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: 4 ; 7 ; 8 ; 9 ; 39 ; 80 [Also cited: Article 79 ]

Classification of issues using UNCITRAL classification code numbers:

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

7A3 ; 7C22 [Principles of interpretation: observance of good faith; Recourse to general principles on which Convention is based: timeliness and specificity of notice];

8A ; 8B ; 8C [Interpretation of party's statement or other conduct: intent of party making statement or engaging in conduct; Interpretation based on objective standards; Interpretation in light of surrounding circumstances];

9D [Usages and practices];

39A11 ; 39A2 [Requirement to notify seller of lack of conformity: within reasonable time; Specification of nature of non-conformity];

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

Descriptors: Scope of Convention ; Penalty clauses ; Good faith ; General principles ; Intent ; Usages and practices ; Lack of conformity notice, timeliness ; Lack of conformity notice, specificity ; Failure of performance, other party

Go to Case Table of Contents

Editorial remarks

Go to Case Table of Contents

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

Go to Case Table of Contents
Case text (English translation)

Queen Mary Case Translation Programme

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

Heaters case (7 December 2005)

Translation [*] by Meihua Xu [**]

Edited by John Zhu [***]

The China International Economic and Trade Arbitration Commission Huanan Sub-Commission (Formerly known as "China International Trade and Economic Arbitration Commission Shenzhen Sub-Commission, renamed as "China International Economic and Trade Arbitration Commission Huanan Sub-Commission, hereafter, the "Huanan Sub-Commission") accepted the case according to:

   -    The arbitration clause in the purchase contract signed by Claimant [Buyer], China __ Company, and Respondent [Seller], Germany __ Company, (hereafter, the "Contract") on 7 August 2003; and
 
   -    The written arbitration application submitted by [Buyer] on 30 April 2005.

On 1 June 2005, the Huanan Sub-Commission sent the arbitration notice to the two parties.

Article 16 of the Contract, titled "Dispute Resolution", stipulates that:

"Any dispute arising from or in connection with this contract should be settled by negotiation. If the negotiation fails, the dispute should be submitted to the China International Economic and Trade Arbitration Commission to be arbitrated in accordance with the Arbitration Rules in effect at the time of applyig for arbitration. The arbitration place is in Shenzhen, China. The decision made by the Arbitration Commission is final and binding on the parties."

The Arbitration Rules of the Arbitration Commission (hereafter, "the Arbitration Rules"), which became effective on 1 May 2005, are applicable to this case.

The Secretariat of the Huanan Sub-Commission sent the entire arbitration documents including but not limited to the arbitration notice, notice of formation of the Arbitration Tribunal, court session notice, arbitration application, arbitration defense, and the evidence to the [Buyer] and the [Seller]. These documents have been received by both parties.

The [Buyer] filed the arbitration application on 30 April 2005 and the [Seller] submitted its arbitration defense on 1 August 2005. Both parties submitted written statements after the court session.

On 26 August 2005, Mr. Z, the arbitrator appointed by the [Buyer], Mr. X, the arbitrator appointed by the [Seller], and Mr. S, the Presiding Arbitrator appointed by the Chairman of the Arbitration Commission 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, formed the Arbitration Tribunal to hear this case.

On 30 September 2005, a court session was held in Shenzhen. Both the [Buyer] and the [Seller] sent agents to the court session. They made statements on the facts of this case, presented arguments and evidence verifications, and answered the Arbitration Tribunal's questions.

With both parties' agreement, on 21 October 2005, the Arbitration Tribunal mediated this case, but with no result.

On 7 December 2005, the Arbitration Tribunal handed down this award. The following are the facts, the Tribunal's opinion and award.

I. FACTS

(1) The Contract

On 7 August 2003, the [Buyer] and the [Seller] signed the Contract, by which the [Buyer] was to purchase Space heating/storage heaters (hereafter, the "heaters") on the terms of CIF Tianjin Newport; the delivery period and place was on 18 September 2003 to Tianjin Newport (two days delay was allowed); the total price of the goods including transportation fee was Euro [EUR] 115,676.

Article 13 of the Contract stipulates:

"The [Seller] promises that:

1) By 31 October 2003, if the goods purchased by the [Buyer] have not been sold or are still remaining, the [Seller] should allow the [Buyer] to return them at the contract price unconditionally, and the [Seller] shall bear the import customs tax and other related expenses for the goods returned;

2) Within five days of the [Buyer]'s sending return notice, the [Seller] shall pick up the goods in Beijing ([Seller] shall bear the transportation fee). If the [Seller] delays in picking up the goods, it should bear the storage charge incurred thereof;

3) The [Seller] shall refund the price for the returned goods within 120 days of the return, otherwise, 1% daily interest shall be added."

On 13 August 2003, the [Buyer] and the [Seller] signed a modification to this agreement, by which the parties modified the quantity of the goods and the corresponding price and the transportation fee. The total price for the goods including the transportation fee was EUR 129,464.

(2) Negotiation on the return of the goods

The whole process of the two parties' negotiation on the return of the goods was as follows:

      a. On 26 March 2004, the [Buyer] sent a return notice to Mr. C, the agent of the [Seller] who had signed the Contract, and attached a heater return list and the [Buyer]'s bank account number. The last line of the return list, the remarks section, indicated that "the actual return shall be based on the check on site."

      b. On 30 March 2004, the [Buyer] sent a list, indicating the price for the goods being returned and the import costs.

      c. On 19 April 2004, Mr. C replied to the [Buyer], alleging that he signed the Contract only as entrusted by the [Seller] and that he was not a party to the Contract and asked the [Buyer] to contact the [Seller] directly.

      d. On 20 April 2004, the [Seller] replied to the [Buyer] regarding the return list sent by the [Buyer] on 26 March 2004. In this letter, the [Seller] stated that it was surprised that the [Buyer] did not inform the [Seller] of the remaining goods earlier, and pointed out that the [Buyer] failed to mention the place where the goods were stored, the process by which the two parties should check and transfer the goods, and related information. The [Seller] asked the [Buyer] to provide the aforesaid information in detail within five days of the receipt of the letter, otherwise, the [Seller] would be unable to take back the goods and the [Buyer] shall be liable for the entire costs incurred thereof.

      e. On 30 April 2004, the [Buyer] replied to the [Seller] that "the [Seller] should take over the goods in our storage of Beijing Branch and transact the removal procedure with our Principal there." In the attachment, the [Buyer] listed the quantity of the goods being returned, the price, and the related costs in detail.

      f. On 6 July 2004, M (Guangzhou) Technology Company (which is a company invested by the [Seller] and Hong Kong citizens C and L jointly. The three parties invested 60%, 20%, and 20% of the fund, respectively. Thereafter, "M Company") sent a letter to the [Buyer], informing that as entrusted by the [Seller], it had negotiated with the [Buyer] on issue of the return of the goods on 1 June 2004, and made the following explanations:

            (1) The [Seller] basically agrees to take back the goods; however, before accepting the return, the two parties must check the quantity and quality of the goods, and decide the price and costs for the returning goods accordingly;

            (2) Since the return of the goods is to be performed in China, the price for them shall be exchanged into renminbi [RMB] based on the exchange rate on the day the goods entered into China, i.e., EUR 1 = RMB 9.47, and the calculation should be made in RMB. The [Buyer] must issue a formal receipt indicating "tax paid" when receiving payment;

            (3) After confirming the quantity, quality, and the price of the goods being returned, the [Seller] shall refund the price within 120 days after receiving the goods based on the two parties' agreement.

      g. On 15 September 2004, M Company sent a letter to the [Buyer] again, asking the [Buyer] to make response before 30 September.

      h. On 27 September 2004, the [Buyer] replied to M Company and Mr. C with the following contents:

            (1) M Company and Mr. C should provide the entrustment letter as issued by the [Seller], indicating that the [Seller] has entrusted M Company to take care of the return issue so as to guarantee the effectiveness of the legal documents M Company signed with the [Buyer];

            (2) The [Buyer] accepts the [Seller]'s request to check the quantity and quality of the goods and decide the refund price and the costs accordingly;

            (3) As to the currency the refund shall be made in, the [Buyer] alleges that this should be based on the related provisions in article 13 of the Contract;

            (4) The [Buyer] is worried about whether the [Seller] could refund the price and the costs on time, therefore, the [Buyer] hopes that the [Seller] could provide a guarantee on the return of the price and costs when making the return arrangement.

      i. On 28 September 2004, the [Buyer] sent a letter to the [Seller], informing that it was negotiating with M Company and Mr. C, asking the [Seller] to issue a formal entrustment letter.

      j. On 21 October 2004, M Company sent a letter to the [Buyer], stating that the [Seller] was to issue the related entrustment letter, re-alleging that the refund should be made in RMB, and indicating that the [Seller] had no obligation to provide any guarantee.

      k. On 9 November 2004, the [Buyer] sent a letter to M Company again, urging M Company to provide the formal entrustment letter issued by the [Seller] in order to negotiate the return issue further.

      l. On 11 November 2004, M Company faxed the entrustment letter issued by the [Seller] to the [Buyer].

      m. On 16 November 2004, M Company sent a letter to the [Buyer], asking the [Buyer] to make response as soon as possible.

      n. On 17 November 2004, the [Buyer] replied to M Company, confirming that the refund shall be made in the currency adopted by the Contract, i.e., EUR, and stating that the [Buyer] wanted a further negotiation on checking the quantity and quality of the goods and deciding the refund price and costs.

      o. On 29 November 2004, the [Buyer] sent a letter to the [Seller], asking the [Seller] to send the entrustment letter via fax or mail directly in order to confirm the effectiveness of the entrustment letter sent by M Company on 11 November 2004.

      p. Later, the [Buyer] and the [Seller] sent letters to each other, discussing a face-to-face negotiation.

      q. On 24 January 2005, the [Buyer] and the representative of M Company discussed the return issue at the [Buyer]'s office, however, they did not sign any meeting record.

      r. On 18 February 2005, the [Buyer] sent an attorney's letter to the [Seller], restating the [Buyer]'s position and requesting the [Seller] to send staff by 10 March 2005 to pick up the return goods stored at the [Buyer]'s warehouse in Beijing.

      s. On 30 April 2005, the [Buyer] filed this arbitration application.

(3) [Buyer]'s arbitration claim

The [Buyer] asks the Arbitration Tribunal to rule that:

      1. [Seller] shall immediately accept the goods to be returned;

      2. [Seller] shall pay to the [Buyer] the price for the returned goods totaling EUR 97,366.18, and the penalty for delay in making payment calculated to the day of actual payment (to the end of March 2005, totaling EUR 233,678.83);

      3. [Seller] shall pay to the [Buyer] the expenses related to the return of the goods, including import customs tax and other expenses, totaling RMB 377,811.59, and the penalty for late payment calculated to the day of actual payment (to the end of March 2005, totaling RMB 906,747.81);

      4. [Seller] shall pay the storage charge for the returning goods, i.e., RMB 31,900;

      5. [Seller] shall bear the [Buyer]'s attorneys' fee of RMB 400,000;

      6. [Seller] shall bear the arbitration fee.

(4) Main issues in dispute between the parties

      1. Responsibility for failure to return the goods on time

      [Buyer]'s position

      The [Buyer] asserts that in March 2004, it notified the [Seller] of its desire to return goods by written document which did not violate the Contract, and that the [Seller] is liable for failing to return the goods for the following reasons:

            (1) There was no defect on the written return notice sent by the [Buyer] in March 2004.

On 26 March 2004, based on article 13(1) of the Contract, the [Buyer] sent notices attached with lists of items to be returned to the [Seller] and Mr. C, respectively, asking for the return of the goods. Normally, the [Seller] should contact the [Buyer] after receiving the return notice, discussing the return issue in detail, however, the [Seller] failed to do so.

Take Mr. C's response as a sample, the [Buyer] sent the return notice to Mr. C on 26 March 2004. However, Mr. C did not respond in a timely manner, but replied on 19 April 2004 after a one-month delay. To the [Buyer]'s surprise, as he was the representative of the [Seller] who signed the Contract and as a shareholder and important manager of the [Seller]'s joint venture corporation, M Company, Mr. C alleged in his replying letter that he had nothing to do with the return. The [Seller] refused the return of the goods at first too, which indicated that the [Seller] was performing negatively and insincerely on the return of the goods.

            (2) The [Seller]'s assertion that because there was no storing address for the return goods in the return notice, the [Seller] was unable to pick up the goods was not in accordance with the facts. Even though article 13(2) of the Contract stipulated that the [Seller] shall pick up the returning goods in Beijing, the two parties have to check, inspect, and complete the related procedures together. In fact, from the conclusion of the Contract to the present, there were no changes in either the [Seller]'s office address, phone number, legal representative's contact information, or the [Seller]'s Beijing Office's address, phone number, and manager's contact information. Therefore, if the [Seller] had wanted to contact the [Seller] on the return issue, it would have been very convenient to do so; this was not an "unable to pick up" situation as alleged by the [Seller].

            (3) The Contract clearly stipulated the return procedure in detail, which is that the [Seller] shall accept the return of the goods unconditionally and refund the price for the return goods and related costs within 120 days after receiving the goods. The return of the goods and the refund of payment do not happen at the same time, and they have their order. If the [Seller] had had objection to the refund of the price and related costs, it should have accepted the goods first, then negotiated the refund with the [Buyer]. However, the [Seller] failed to do so. On 26 March 2004, the [Buyer] asked for return of the goods, and as stated above, the [Seller] rejected the request of [Buyer] first. In July 2004, the [Seller] seemingly agreed on the return of the goods, but failed to accept the return goods within five days after receiving the return notice from the [Buyer] as stipulated in article 13 of the Contract, making many requests, such as: confirming the price for the returning goods and the costs prior to the acceptance of the goods, calculating the price for the returning goods based on an exchanging rate of EUR 1 = RMB 9.47, and issuing a formal tax paid invoice to the [Seller].

Due to the [Seller]'s aforesaid acts, the return of the goods could not be performed, for which the [Seller] should be held liable.

      [Seller]'s response

      The [Seller] counter argues that the [Seller] had never violated the Contract on the performance of the Contract or the return of the goods. It was the [Buyer] who caused the [Seller] to be unable to complete the return of the goods, and the reasons are as follows:

            (1) The [Buyer] delayed giving notice to the [Seller]. According to the Contract, the [Buyer] should have returned the remaining goods to the [Seller] by 31 October 2003. The Contract did not specify the exact returning time. However, based on the related stipulations in the United Nations Convention on Contracts for the International Sales of Goods (hereafter, the "CISG"), the [Buyer] should notify the [Seller] within a reasonable period of time. The Contract Law of the PRC has a similar stipulation. However, the [Buyer] did not inform the [Seller] until five months after the stipulated time had expired, which obviously violated the good faith principle and constituted a delay in performing the contract.

In addition, the contract goods were heaters, which were to be used in the winter in Beijing, therefore, pursuant to trade usages and the situation at that time, the [Buyer] should have informed the [Seller] as soon as possible to enable the [Seller] to mitigate the loss when it knew for sure that there were unsold goods. However, the [Buyer] delayed in giving notice to the [Seller] until the whole winter had passed. It was obvious that the [Buyer] violated the Contract intentionally; therefore, the [Seller] reserves the right to claim damages for the [Buyer]'s contract violation.

            (2) There were severe defects on the [Buyer]'s return notice, which was an improper contract performance, and was a severe contract violation. Based on the stipulations in the Contract, the [Buyer] should have given notice to the [Seller] regarding the return issue by 31 October 2003 when it knew that there were remaining goods.

In addition, in accordance with the related stipulations in the CISG and the Contract Law of the PRC, the [Buyer] should have performed its informing obligation completely and properly based on trade usages and trade purpose, in other words, the [Buyer] should have given information regarding the returning issue, including the specifications, quantity, and price for the returning goods, the detailed time, place and document for picking up the goods, contact person, and inspection and pick-up procedures, which would enable the [Seller] to take over the goods. However, the [Buyer] failed to fulfill this informing obligation properly.

- First, on 26 March 2004, the [Buyer] sent the return notice to the wrong person (which was Mr. C) with only the total amount of the goods.

- Second, on 20 April 2004, the [Seller] asked the [Buyer] to provide the specifications, quantity, and price for the return goods, the detailed time, place and document for picking up the goods, contact person, and inspection and taking over procedures. However, in the [Buyer]'s notice sent on 30 April 2004, the [Buyer] only notified of the specifications, quantity and price for the return goods without mentioning the handing over issue in detail, such as the detailed time, place and document for picking up the goods, contact person, and inspection and taking over procedures, which meant that the [Buyer] failed to notify of other information. The [Buyer] did not provide the aforesaid information until after the court session when requested by the Arbitration Tribunal. Obviously, the [Buyer]'s performance violated the contract obligations.

- Third, even after the [Seller] agreed to take over the goods based on the price requested by the [Buyer], the [Buyer] did not return the goods, raising many excuses. The [Buyer] was afraid that the [Seller] would not make payment within the stipulated time after receiving the goods. During the negotiation on handing over procedures, the [Buyer] asked the [Seller] to provide a guarantee for the return of the goods, by which the [Buyer] put pressure on the [Seller]. This has violated the Contract (see letter sent by the [Buyer] to the [Seller] on 27 September 2004).

- Fourth, on 24 January 2005, the [Buyer] asked a new price for the returning goods notwithstanding the price which had been agreed by the two parties on 30 April 2004. The [Buyer] also repudiated the agreements regarding the return of the goods, causing the negotiation to be unable to be continued. The aforesaid facts were evidenced by meeting records in 2005 and the reply letter sent by the [Buyer] to the [Seller].

- Fifth, in fact, the [Seller] was unable to take over the goods based on the so-called return notice sent by the [Buyer] on 26 March 2004, because:

(1) The [Buyer] had never informed the [Seller] and the [Seller] had no way of knowing where the [Buyer]'s warehouse in Beijing is located even though the [Seller] had repeatedly asked the [Buyer];

(2) It was not until the court session, that the [Seller] first knew that the return goods had been stored at Beijing Jingmao Food and Oil Warehouse (which is a public warehouse, hereafter, "Jingmao warehouse") based on the warehouse rental receipt. Before that, the [Seller] was unaware and had no way to know where the goods were stored;

(3) Based on the invoices, the return goods were stored by Beijing S Company, which was neither a contract party in this case, nor the subject of the rights or obligations in this case; therefore, its storage of the goods had no connection with the [Seller], and the [Seller] was unable to get information from S Company regarding the storage, return, and taking over the goods;

(4) The return goods were stored based on the warehouse rental contract entered into by S Company and Jingmao Warehouse. Not mentioning who had the right of the goods, only the party with the bill of taking over the goods could pick up the goods. However, the [Buyer] had never mentioned, notified, or provided a bill for taking over the goods, without which the [Seller] was unable to return or pick up the goods;

(5) Return and taking over the goods include inspection and checking the goods, of which the [Buyer] has never notified the [Seller]. Therefore, the [Buyer]'s so-called notice is not a due performance in law, with the result, the [Seller] was unable to accept the return or take over the goods.

- Sixth, according to article 79 and 80 of the CISG, the [Seller] was unable to take over the goods completely due to the [Buyer]'s contract violation, therefore, the [Seller] should not be held liable.

      2. Contract liquidated damages

      [Buyer]'s position

      The [Buyer] alleges that the [Seller] is liable for contract violation and should pay liquidated damages. The liquidated damages should be calculated from 125 days after the [Seller] received the return notice and should be at a 1% daily interest rate, which was in accordance with both the contract stipulations and the two parties' actual intentions.

Based on article 13(2) and 13(3) of the Contract, the [Seller] was obligated to make refund to the [Buyer] within 125 days after receiving the return notice, otherwise, a 1% daily interest shall be added to any delayed payment. The [Seller] misunderstood this because, based on the [Seller]'s opinion, no matter based on what, as long as the [Seller] does not accept the returning goods, it does not need to refund the price, not even mention the contract violation fee. This explanation encouraged the [Seller] to delay in accepting the return goods in a disguised form, causing the liquidated damages to became meaningless, which was not the parties' real intention at the conclusion of the contract.

In addition, the [Buyer] alleges that the 1%/day liquidated damages is reasonable. When the two parties signed the Contract in August 2003, the bidding time for heaters in Beijing was close. In order to open the Beijing market for the [Seller]'s goods and considering the [Buyer]'s profit, the two parties signed the Contract, by which the [Buyer] was allowed to return the goods unconditionally and the [Seller] would be charged the liquidated damages for delayed refund with a 1% daily interest for the purpose of better performance.

In order to prove that the goods being sold have a quality guarantee, many stores in China promise that if an item of counterfeit goods is found, a ten-fold penalty would be charged. After dispute arises, many precedents of Chinese courts support these promises, which is helpful for establishing an honest and reliable market mechanism.

Moreover, if the [Seller] had performed as required by the Contract, the highest liquidated damages would not have any effect on it. Therefore, a 1% daily contract violation fee was the real intentions of the two parties and is reasonable.

      [Seller]'s response

      The [Seller] counter argues that the [Buyer] is liable for the failure to return the goods; therefore, the [Seller] is not responsible for any claim of the [Buyer], including but not limited to the claim for the refund or the payment of the liquidated damages. The reasons are stated as follows:

            (1) As to the understandings on article 13(2) and 13(3), it is the [Seller]'s position that they should be interpreted based on contract stipulations and actual performance of the Contract.

Based on the entire contract, it can be seen that article 13(2) actually stipulated [Seller]'s responsibility for non-return or delay in taking over the goods, which means that after the [Buyer] sends the return notice, if the [Seller] fails to take over the goods within the stipulated time, it should bear the storage charge incurred thereof.

Article 13(3) determines the responsibility for the [Seller]'s delay in making payment including the so-called liquidated damages if the [Seller] fails to make payment within 120 days after taking over the goods. The precondition for making payment is taking over the goods. If the two parties fail to perform the return of the goods, then the [Seller] need not to make payment or bear the responsibility for non-payment or liquidated damages.

            (2) According to article 13(3), the [Seller] should refund the [Buyer] within 120 days after the return of the goods. However, the facts of this case are that due to the [Buyer]'s fault, the two parties were unable to return the goods. Since the two parties did not effect a return of the goods, how could there be a refund after return? -- not to mention a contract violation on making payment or penalty on the delayed payment. In addition, based on related stipulations, the liquidated damages are too high, which violated the equality principle and is a void stipulation; therefore, the [Seller] is not liable for making refund or liquidated damages for the delay in making payment.

      (3) Tax and expenses related to the return of the goods

      [Buyer]'s position

      The [Buyer] alleges that due to the insincerity of the [Seller] on accepting the return of the goods, it set down preconditions during the negotiation on the return of the goods, with the result, the return was unable to be performed, for which the [Seller] should be held liable. The [Seller] should accept the return of the goods immediately, refund the price for the returning goods, tax and expenses related to the return of the goods, and the storage charge for the return goods.

      [Seller]'s response

      The [Seller] acknowledges that article 13(2) of the Contract provides that the [Seller] should take over the goods within five days of the return notice of the [Buyer]. However, due to the [Buyer]'s fault, such as refusing to inform the [Seller] of the address where the goods were stored, to provide document for taking over the goods, to make arrangement for inspection and transfer, the result was the [Seller] was unable to take over the goods. Thus, why should the [Seller] be liable for the storage charge for the delay in taking over the goods? In addition, based on the evidence provided by the [Buyer], the real rentee of the warehouse was not the [Buyer], but S Company, which has no legal relationship with the [Buyer] and its storage of goods has nothing to do with the [Buyer]; therefore, there is no reason to impose the storage charge on the [Seller].

Since the two parties failed to finish the return of the goods, and they had never reached any agreement on the return of the goods, the [Seller] has no responsibility to pay and is not liable to pay the related tax and expenses.

IV. OPINION OF THE ARBITRATION TRIBUNAL

(1) The applicable law

The Contract in this case is an international sales contract, and it has no stipulation on the applicable law. The [Buyer]'s place of business is China, and the [Seller]'s is in Germany. Both China and Germany are Contracting States of the CISG; therefore, the provisions and general principles in the CISG shall be applied first.

The delivery term stipulated in the Contract was CIF Tianjin Newport, the delivery place was Tianjin Newport, China, the place for the return of the goods was Beijing, China, and the place of arbitration was Shenzhen, China. Therefore, China has the proximate connection with the Contract in this case. As to issues beyond the scope of the CISG, the Arbitration Tribunal holds that based on the proximate connection principle stipulated in article 145(2) of the General Principles of the Civil Law of the PRC and article 126(1) of the Contract Law of the PRC, Chinese law shall be applied.

(2) [Buyer]'s request to return the goods

The Arbitration Tribunal notes that the Contract reflects the true minds of the two parties and does not violate mandatory provisions of the laws and administrational regulations of China. Therefore, it is valid and has binding effect on the two parties.

Article 13 of the Contract stipulates the requirements for the return of the goods, and the two parties have no dispute on the stipulation that "if there are unsold goods by 31 October 2003, the [Seller] shall take over the goods unconditionally at the contract price." However, the parties had a dispute on other issues related to the return of the goods and no agreement had been reached after negotiation, with the result that the return of the goods could not be performed until the day of court session.

There is a contractual basis for the return of the goods on which the two parties have no dispute, and returning goods as soon as possible is beneficial to mitigate the loss. Moreover, only after the return of these goods, is the Arbitration Tribunal able to make a decision on the arbitration claim including the refund of the price. Therefore, at the court session, the Arbitration Tribunal ruled that the two parties should first start the returning process after the court session.

On 10 October 2005, after checking and inspection, the two parties finished their return procedure in Beijing. Except for the appearance defects on three heaters, the two parties had no dispute on the return of the remaining goods:

Series No.
Name
   Model    Quantity
1 Space heating/Storage Heater  ETS308S 150
2 Space heating/Storage Heater ETS408S 86
3 Space heating/Storage Heater ETS508S 97
4 Space heating/Storage Heater ETS608S 9
5 Heat insulation brick 141770 1,680
6 Heat insulation brick 141771 1,680
Total   3,702

(3) The price that should be refunded

Regarding the goods that have been returned, based on article 13(1) of the Contract, the [Seller] is obligated to refund the price for those goods at the contract price, and to bear the import customs tax and other related expenses. The two parties have no dispute over the [Seller] bearing the import customs tax and the related expenses; however, they cannot reach an agreement on the calculation of the price for the returned goods.

The Arbitration Tribunal notes that article 1 of the Contract, which is the stipulation on name, specifications, quantity, and price for the goods leads to the following list:

No. Item
Code
Description Unit Price
EUR
Quantity Total Amount
EUR
"S.E" products (220V,50Hz)
00100 72525 ETS308S Space heating/storage heater  132 300 39,600
00200 72626 ETS408S Space heating/storage heater 156 160 24,960
00300 72627 ETS508S Space heating/storage heater 168 20 3,360
00400 72628 ETS608S Space heating/storage heater 191 20 3,820
00500 141771 Heat insulation brick 9.5 1760 16,720
00600 141770 Heat insulation brick 9.5 1760 16,720
Amount (EUR) 105,180
Carriage, Handling (EUR) 10,496
Total Amount (EUR) 115,676

The modification agreement only modified the quantity, corresponding price, and transportation fee without changing the calculation method. The total price for the goods including the transportation fee is EUR 129,464.

Based on the above stipulations in the Contract, the price for the goods contains two sets of calculations: first, there is a total of the unit price for each model multiplied the quantity, then that plus the transportation fee equals the total price under the Contract. The two parties had a dispute on the total amount of the price to be refunded. The [Buyer] alleges that it should be based on the total amount including the transportation fee; however, the [Seller] argues that it should be calculated based on the unit price without the transportation fee. It can be seen that the two parties' dispute results from the parties' different understandings on article 13(1) of the Contract.

Article 8 of the CISG states that:

"(1) for the purpose of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was;

(2) If the preceding paragraph is not applicable, statements made by and other conduct of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances;

(3) in determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties."

Based on the aforesaid stipulations, when the two parties interpret the "contract price" differently, all relevant circumstances of the case should be considered to determine the intent of the party or the understanding a reasonable person would have had.

The Arbitration Tribunal notes that in the list indicating the price to be refund and the import expenses sent by the [Buyer] to Mr. C on 30 March 2004 and in the attachment to the replying letter sent to the [Seller] on 30 April 2004, the [Buyer] calculated the price to be refund based on the unit price for each model, and the [Buyer] only mentioned the total contract price in the arbitration application. Therefore, the Arbitration Tribunal concludes that a reasonable person of the same kind as the [Seller] would have understand the "contract price" as the unit price of each model, but not the total contract price as alleged by the [Buyer].

Based on the above analysis, the Arbitration Tribunal deems that the refund price should be calculated based on each model's unit price, which should be EUR 83,151.

Based on the aforesaid refund amount, the import customs tax and other related expenses is RMB 322,652.19 [import customs tax RMB 215,402.71 + import value added tax RMB 236,719.34 + other import expenses RMB 30,178.00) price for refund of EUR 83,151/ total price for import goods EUR 124,294].

(4) Responsibility for contract violation on failing to accept the return of the goods on time

Article 13 of the Contract stipulates that the [Seller] shall take over the goods in Beijing by itself within five days after the [Buyer] sends the notice. From the content of this article, the two parties only determined the return deadline (within five days of the [Buyer]'s notice), return place (in Beijing), and return method ([Seller] shall take over the goods by itself) without mentioning the content of the return notice, return place in detail, inspection and checking on the goods, or transfer procedures. However, it does not mean that the two parties could delay in performing return obligations arbitrarily. On the contrary, the two parties should have performed obligations based on the law and regulations under the circumstance that there was no clear stipulation in the Contract.

Article 60 of the Contract Law of the PRC stipulates that

"The parties shall fully perform their respective obligations in accordance with the contract. The parties shall abide by the principle of good faith, and perform obligations such as notification, assistance, and confidentiality, etc. in light of the nature and purpose of the contract and in accordance with the relevant usage."

Article 61 of the same law states that:

"Where, after the contract becomes effective, there is no agreement in the contract between the parties on the terms regarding quality, price or remuneration and place of performance, etc. or such agreement is unclear, the parties may agree upon supplementary provisions to such terms through negotiation. In the case of a failure in doing so, the terms shall be determined from the context of relevant clauses of the contract or by transaction usages."

Article 62 section 1(5) of the Contract Law of the PRC stipulates that:

"Where a relevant term of the contract was not clearly prescribed, and cannot be determined in accordance with Article 61 hereof, one of the following provisions applies …

(v) If the method of performance was not clearly prescribed, performance shall be rendered in a manner which is conducive to realizing the purpose of the contract …"

Based on the aforesaid stipulations, when the method of performance was not clearly described in the Contract in this case, the parties shall abide by the principle of good faith to supplement it through negotiation; if the parties fail to reach a supplementary agreement, or determine it in accordance with the relevant provisions of the Contract or in accordance with the relevant usage, the performance shall be rendered in a manner which is conductive to realizing the purpose of the contract.

In the instant case, the goods to be returned were the unsold or the remaining goods by 31 October 2003. Therefore, the [Buyer] should first inform the [Seller] whether there were unsold or remaining goods. As to the content of the return notice, the Arbitration Tribunal deems that as long as the models and quantity of the goods were clearly indicated in a notice which would enable the [Seller] to make preparation to accept the goods, the requirements for a reasonable return notice is fulfilled.

Based on the aforesaid standard, the Arbitration Tribunal holds that the first return notice sent by the [Buyer] on 26 March 2004 had descriptions of the goods to be returned in detail, which was a reasonable notice.

After receiving the [Buyer]'s return notice, the two parties should have negotiated the inspection and handing over of the goods in good faith. However, the Arbitration Tribunal notes that during the actual performance of the Contract, the [Seller] violated the honest and goods faith principle. After receiving the two return notices sent by the [Buyer], especially after Mr. C denied that he was authorized to take care of the return issue on behalf of the [Seller] in his replying letter sent on 19 April 2004, the [Seller] replied to the [Buyer] on 20 April 2004. However, the [Seller] neither continued negotiation with the [Buyer], nor did it provide the entrustment letter proving that it had entrusted M Company or Mr. C to take care of this matter, with the result, the [Buyer] was unable to determine whether M Company or Mr. C was authorized to take care of the return issue. Even if M Company or Mr. C had been authorized, their requests during the negotiation to clear the account in RMB had no contractual or legal basis, which set an unreasonable barrier to the return of the goods. Therefore, the Arbitration Tribunal deems that the [Seller] shall be liable for failure to accept the return of the goods in time;

(5) [Buyer]'s other arbitration claims

      1. Liquidated damages

      The [Buyer] asks the [Seller] to pay the liquidated damages for the [Seller]'s delay in making refund, and claims that the liquidated damages should be calculated from 1 August 2004 (based on the date on which the goods should have been returned, i.e., 30 April 2004, when the [Buyer] replied to the [Seller]). Since the [Seller] should be liable for failing to take over the goods, the Arbitration Tribunal holds that this claim of the [Buyer] has a clear contractual basis and should be supported, however, a 1% daily liquidated damages is too high, according to article 114 of the Contract Law of the PRC, the liquidated damages shall be adjusted to a 10% annual interest rate based on the equal and reasonable principle.

      2. Storage charge

      In its arbitration application, the [Buyer] asked the [Seller] to pay the storage charge for the return goods of RMB 31,900. Even though the payment was made by the [Buyer]'s subsidiary company in Beijing as indicated in the storage invoice, this charge was incurred for the goods in dispute in this case. Since the [Seller] should bear the responsibility for non-return of the goods in time, the Arbitration Tribunal holds that this claim of the [Buyer] has a clear contractual basis and should be accepted.

      3. Attorneys' fee

      The [Buyer] asks the [Seller] to pay its attorneys' fee on the arbitration application without providing evidence showing the attorneys' fee that was incurred or that should have been incurred; therefore, the Arbitration Tribunal does not consider this claim of the [Buyer].

      4. Arbitration fee

      Based on the aforesaid analysis, the Arbitration Tribunal holds that the two parties shall bear the arbitration fee equally.

III. THE AWARD

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

(1) [Seller] shall refund the price for the returned goods of EUR 83,151, the import customs tax and other related expenses of RMB 322,652.19, and the interest on the aforesaid sum calculated from 1 August 2004 to the day of actual payment at a 10% annual interest rate;

(2) [Seller] shall pay the storage charge for the returned goods of RMB 31,900;

(3) [Buyer]'s other claims are dismissed;

(4) [Seller] and [Buyer] shall bear the arbitration fee equally;

The [Seller] shall pay the aforesaid items 1, 2, and 4 within thirty days of this award, otherwise, a 4% annual interest shall be added.

This is the final award. It shall be effective as of the date of the award.

Presiding Arbitrator ___; Arbitrator ___; Arbitrator ___

7 December 2005 in Shenzhen


FOOTNOTES

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

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

*** John Zhu, LL.M. China University of Political Science and Law on a national graduate scholarship. He received his Bachelor of Law degree from Southwest University of Political Science and Law and Double Degree of English Literature from Sichuan International Studies University in Chongqing, China. His focus is on International Economic Law.

Go to Case Table of Contents
Pace Law School Institute of International Commercial Law - Last updated January 18, 2012
Comments/Contributions
Go to Database Directory || Go to CISG Table of Contents || Go to Case Search Form || Go to Bibliography