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CISG CASE PRESENTATION

China April 2006 CIETAC Arbitration proceeding (Mono ethylene glycol case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/060400c2.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20060400 (April 2006)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2006/21

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Republic of Korea (respondent)

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

GOODS INVOLVED: Mono ethylene glycol


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 25 ; 26 ; 49 ; 63 ; 64 ; 74 ; 75

Classification of issues using UNCITRAL classification code numbers:

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

26A1 [Effective declaration of avoidance: notice to the other party required];

49A [Buyer's right to avoid contract: grounds for avoidance];

63A [Seller's right to fix additional final period for buyer's performance];

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

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

75A2 [Damages established by substitute transaction after avoidance: repurchase by aggrieved buyer]

Descriptors: Fundamental breach ; Avoidance ; Nachfrist ; Damages ; Foreseeability of damages ; Cover transactions ; Substitute goods

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Editorial remarks

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

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

Mono ethylene glycol case (April 2006)

Translation [*] by Jingyuan Sun [**]

Edited by Qian Wang [***]

The China International Economic and Trade Arbitration Commission (["CIETAC"], hereinafter the "Arbitration Commission") accepted the case (Case No. R20050262) according to:

-    The arbitration clauses in Sales Contracts No. DSCY018, DSCY019 and DSCY020 concluded on 16 May 2005, by the Claimant Suzhou AAA Chemical Co., LTD [of the People's Republic of China] (hereinafter the "[Buyer]") and Respondent Korean BBB Corporation [of the Republic of Korea] (hereinafter the "[Seller]"); and
 
-    The Request for Arbitration submitted by the [Buyer] on 28 July 2005.

The Arbitration Rules of the Arbitration Commission (hereinafter the "Arbitration Rules") which took effect on 1 May 2005 apply to this case.

On 8 August 2005, the Secretariat of the Arbitration Commission sent by express mail to [Seller]'s address, which the [Buyer] provided in writing, the Notice of Arbitration, the [Buyer]'s Request for Arbitration with evidence provided by the [Buyer] enclosed, the Arbitration Rules and the List of Arbitrators of the Arbitration Commission. The Secretariat also sent relevant arbitration documents to the [Buyer].

On 9 November 2005, the Chairmen of the Arbitration Commission organized the Arbitration Tribunal to hear the case. The Tribunal consisted of Ms. ___, the presiding arbitrator according to Article 24 of the Arbitration Rules, Mr. ___, arbitrator chosen by the [Buyer], and Mr. ___, arbitrator appointed by the [Seller].

The Secretariat of the Arbitration Commission decided that the Arbitration Tribunal would hear the case in Beijing on 22 December 2005.

The Secretariat of the Arbitration Commission notified the aforementioned formation of the Arbitration Tribunal and the hearing to the [Buyer] and the [Seller], respectively, by express mail on 9 November 2005 and 11 November 2005.

On 22 December 2005, the Arbitration Tribunal held the hearing in Beijing as scheduled. Both the [Buyer] and the [Seller] sent representatives. During the hearing, the representatives presented the facts of the case and their own claims, and each examined the evidence of the opposing party and answered questions of the Arbitration Tribunal.

After the hearing, both parties submitted written supplementary opinions, additional evidence and comments on the opposing party's new evidence. The Arbitration Tribunal had the Secretariat of the Arbitration Commission send the aforementioned written documents submitted by both sides to the corresponding opposing party.

The case is now closed. The Arbitration Tribunal made a joint decision based on the facts verified during the hearing and currently available written documents.

The facts of this dispute, the Arbitration Tribunal's opinion and the award are as follows.

I. THE FACTS OF THE CASE

On 16 May 2005, the [Buyer] and Zhangjiagang Bonded Zone AAA International Chemical Trading Co., Ltd (hereinafter the "Zhangjiagang AAA") signed an "Importing Agency Agreement", in which the [Buyer] agreed to act as a foreign trading agent of Zhangjiagang AAA and be responsible to import 2,000 tons of mono ethylene glycol from the [Seller] on behalf of Zhangjiagang AAA.

On 16 May 2005, the [Buyer] and the [Seller] signed three Sales Contracts (hereinafter the "Contracts") for the purchase of 2,000 tons of mono ethylene glycol. The three Contracts are the contracts in dispute, numbered DSCY018, DSCY019, and DSCY020.

According to the aforementioned three Contracts, the [Seller] sold to the [Buyer] mono ethylene glycol at the price of US $670 per ton, 2,000 tons in total. All goods should be loaded on board for shipping before 31 May. The loading port was in the Republic of Korea, and the destination port was Zhangjiagang in China. The form of payment was to be an irrevocable L/C within 120 days after the date of the Bill of Lading.

After the Contracts were signed, a dispute arose between the parties during the performance of the Contracts. The [Buyer] applied for arbitration to settle it according to the arbitration clauses in the Contracts.

The [Buyer]'s claim

Before Zhangjiagang AAA authorized the [Buyer] to sign the aforementioned Contracts, it had reached a preliminary agreement with Zhangjiagang Bonded Zone CCC International Trading Co., Ltd. (hereinafter the "CCC Co.") for the resale of 2,000 tons of mono ethylene glycol. After the [Buyer] and the [Seller] signed their Contracts, Zhangjigang AAA and CCC Co. signed a "Sale and Purchase Contract" on 16 May 2005.

That contract mainly stipulates that:

  1. Zhangjiagang AAA will sell the 2,000 tons of mono ethylene glycol it purchases from the [Seller] to CCC Co. at RMB 6,950 per ton;

  2. CCC Co. should pick up all the mono ethylene glycol from a warehouse designated by Zhangjiagang AAA between 5 June and 4 July 2005;

  3. In case of [Zhangjiagan AAA's] delay in providing the goods, Zhangjiagang AAA shall pay CCC Co. 0.001% of the total amount of the contract price every day as a late penalty.

When signing the Contracts with the [Seller], the [Buyer], as entrusted by Zhangjiagang AA, informed the [Seller] of the preliminary resale agreement between Zhangjiagang AAA and CCC Co., and required the [Seller] to deliver the goods on time.

The [Seller] confirmed the shipping vessel with the [Buyer] by fax on 16 May 2005.

According to the Contracts, the [Buyer] opened three irrevocable documentary L/Cs (nos. LC95BV0278/5, LC95BC0285/5, and LC95BC0286/5) at the Taicang Branch of the Bank of China. The [Buyer] then informed the [Seller] of the L/Cs by fax.

On 18 May, after receiving the fax regarding the L/Cs, the [Seller], faxed the [Buyer] the dates of loading and shipping the goods.

Since the price of mono ethylene glycol changed in the international market, the [Seller] proposed to postpone the deadline of loading the goods to sometime before 30 June 2005, stating that it could not finish loading all the goods by 31 May 2005 due to its resource allocations and other reasons.

Considering the cooperative relationship between the parties, the [Buyer] agreed to the [Seller]'s request to delay the loading date. Since it did not receive any written notification about the specific loading date and the changes in the L/Cs, the [Buyer] faxed the [Seller] on 27 June, requiring the [Seller] to notify it in writing within three business days upon receiving the fax of the specific loading date and the desired changes in the L/Cs.

Since the [Seller] did not inform the [Buyer] of the loading date or the desired changes in the L/Cs within three business days after it received the aforementioned fax, the [Buyer] sent representatives to the [Seller]'s Shanghai office, respectively, on 20 June and 27 June 2005. The representatives negotiated with the [Seller]'s chief representatives Mr. Wanning Xu and Ms.Yuanyuan Cui, requesting the [Seller] to make a clear reply regarding the date of loading and shipping the goods. The [Seller] claimed that it could not perform the Contracts at the original contract price. The parties did not reach an agreement regarding the price during their negotiation.

On 30 June, the [Buyer] received a fax from Woori Bank in the Republic of Korea, which notified the [Buyer] that the [Seller] refused to accept the aforementioned L/Cs.

Because the [Seller] proposed to postpone the loading date, on 6 June Zhangjiagang AAA and CCC Co. signed a Supplementary Agreement regarding Zhangjiagang's delay in delivery of the goods and its payment of the late penalty.

Since the [Seller] refused to accept the L/Cs, the Contracts could not be performed. To meet CCC Co.'s demand for 2,000 tons of mono ethylene glycol, on 8 July 2005, the [Buyer], under the authorization of Zhangjiagang AAA, reached an agreement with U.S. Vinmar Corporation, importing from the latter 1,500 tons of mono ethylene glycol. Meanwhile, Zhangjiagang AAA signed an "Industrial and Mineral Products Purchase and Sale Contract" with Zhangjiagang Bonded Zone Huijia International Trading Corporation to purchase from the latter 500 tons of ethylene glycol.

On 15 July, Zhangjiagang AAA and CCC Co. signed an "Agreement" regarding the new sources of mono ethylene glycol and the payment of the late penalty.

The [Buyer] believes that the [Seller's] conduct constituted a fundamental breach of the Contracts.

In a sales contract, it is a basic obligation of the seller to deliver the goods on time under the terms of the contract. However, contrary to its obligation under the Contracts, the [Seller] never loaded or shipped the goods, in spite of the [Buyer]'s several requests. Thereby, the Contracts could not be performed. This meant that Zhangjiagang AAA not only could not get the goods under the Contracts, but also suffered various losses because it violated its contractual obligation to CCC Co. by failing to deliver the goods to CCC Co. on time.

After the [Seller] fundamentally breached the Contracts, Zhangjiang AAA had to make substitute purchases from other sources to deliver the goods to CCC Co. on time. By doing so, Zhangjiagang AAA incurred enormous economic losses due to the huge rise of the price of mono ethylene glycol in the international market. Since the [Seller] breached the Contracts, Zhangjiagang AAA could not deliver the goods to CCC Co. on time. CCC Co. demanded that Zhangjiagang AAA pay the late penalty according to their contractual terms.

According to the United Nations Convention on Contracts for the International Sale of Goods [hereinafter "CISG"], since Zhangjiagang AAA made substitute purchases in a reasonable manner, the [Seller] should be responsible for the difference between the contract price and the price in the substitute transactions and other damages Zhangjiagang AAA incurred due to the [Seller]'s breach of the Contracts.

Based on the aforementioned facts, the [Buyer] believed that the [Seller] breached the Contracts and violated the relevant provisions of the CISG. According to the Foreign Trade Law of the People's Republic of China, Article 20 of Provisional Rules on Foreign Trade Agency System, and Article 5(3) of the Importing Agency Agreement between Zhangjiagang AAA and the [Buyer], the [Buyer] (acting on behalf of Zhangjiagang AAA), requests that the [Seller] be held liable for Zhangjiagang AAA's various losses caused by the [Seller]'s breach of the Contracts.

The [Buyer] requested the Arbitration Tribunal to find that the Contracts was avoided and that the [Seller] is responsible for all the aforementioned damages and the arbitration fee.

The [Buyer] requested the Arbitration Tribunal to enter an award finding that:

1.    The Contracts signed by the [Buyer] and the [Seller] (No. DSCY018, DSCY019 and DSCY020) on 16 May 2005 should be avoided;
 
2.    The [Seller] should be responsible for the [Buyer]'s economic loss of RMB 3,170,808;
 
3.    The [Seller] should bear the arbitration fee.

Later, the [Buyer] provided a supplementary statement, explaining that the aforementioned Claim 2 included the difference between the contract price and the price in the substitute transaction (RMB 2,782,500), the late penalty (RMB 381,555) and the fee to open the L/Cs (RMB 6,753).

The [Seller]'s defense

The [Seller] alleged that:

1. The [Buyer] was not a suitable party to the arbitration. The Contracts were binding directly on the [Seller] (the third party) and Zhangjiagang AAA (the principal).

The [Buyer] alleged that it was competent to claim damages on behalf of Zhangjiagang AAA according to Article 20 of Provisional Rules on Foreign Trade Agency System. The article states that:

In case of the failure of implementation of import or export contacts, incomplete, delayed or an implementation inconsistent with the terms of the contracts due to the failure of the foreign parties to implement the obligation under the agency agreement, the agents shall, as per the relevant stipulations contained in the import or export contracts and the agency agreement, lodge timely claims for damages to the foreign parties or adopt other remedies.

In fact, the Contract Law of People's Republic of China (hereinafter "Contract Law"), which was enacted during the Second Session of the 16th National People's Congress on 15 March 1999 and took effect on 1 October 1999, replaced the Provisional Rules on Foreign Trade Agency System regarding the agency agreements in foreign trade. Article 402 of the Contract Law provides that:

Where the agent, acting within the scope of authority granted by the principal, enters into a contract in its own name with a third party who is aware of the agency relationship between the principal and agent, the contract is directly binding upon the principal and such third party, except where there is conclusive evidence establishing that the contract is only binding upon the agent and such third party.

In this case, the [Seller] was aware that the [Buyer] was acting as an import agent of Zhangjiagang AAA when negotiating the Contracts. According to Article 402 of the Contract Law, the Contracts should be directly binding upon the [Seller] (the third party) and Zhangjiagang AAA (the principal).

Obviously, the [Buyer] is not a suitable party to the arbitration regarding the Contracts and is not competent to represent Zhangjiagang AAA to claim that the [Seller] should be liable for Zhangjiagang AAA's damages caused by the [Seller's] breach. The [Buyer's claims should be dismissed.

2. The Contracts came into effect and the [Buyer] breached them first.

During the negotiation for the sale of 2,000 tons of mono ethylene glycol (+/-5%), the [Buyer] and the [Seller] agreed to accommodate the purchase through three Contracts to make it easy for the [Buyer] to open the L/Cs. On 16 May 2005, they signed the Contracts, numbered DSCY018, DSCY019 and DSCY020. Contract No. DSCY018 covered 700 tons of mono ethylene glycol, No. DSCY019 covered 700 tons, and No. DSCY020 covered 600 tons. The terms in the three Contracts were identical except for the quantity of the goods. According to the Contracts, the deadline to open the L/Cs was the next day after the Contracts were signed, i.e., 17 May 2005.

The Contracts were valid under the Contract Law and thus both parties should perform their respective duties. However, the [Buyer] only opened the L/C on time for Contract No. DSCY018. The [Buyer] opened the L/Cs for Contracts No. DSCY019 and No. DSCY020 on 18 May 2005, beyond the deadline specified by the contractual terms. Since the purchase of 2,000 tons of the goods was divided into three Contracts to make it easier for the [Buyer] to open the L/Cs, the [Seller] believed that the [Buyer] violated a main payment requirement regarding the transaction of 2,000 tons of the goods as a whole and thereby committed a fundamental breach.

3. The [Buyer]'s breach of contract rendered it impossible to achieve the purpose of the Contracts. The [Seller] informed the [Buyer] that it would not perform its contractual obligations. The [Buyer] has no ground to claim that the [Seller] should be responsible for its damages.

First, the price of the goods involved in the Contracts underwent constant and rapid fluctuation. In fact, the price on the day the Contract was signed was rapidly falling from CFR US $1,100 per ton -- the highest price in the past three weeks. The then price was generally believed in the industry as the lowest price, and it was estimated that the price would go up again. So it was of great importance that the importer (the [Buyer]) opened valid L/Cs in a timely manner and made sure that it would perform its contractual obligations. The price indeed arose, as expected, from CFR US $670 per ton (the lowest price) to CFR US $730 per ton after the parties signed the Contracts.

Second, since the [Seller] is not a manufacturer of the goods, but a middleman in the relevant business and trade, how the [Buyer] and the [Seller] performed the Contracts will directly affect the conclusion of contracts between the [Seller] and its provider of the goods, their effects and/or their performance. So as an important condition of this transaction, the [Seller] emphasized and requested the [Buyer] to ensure that it could open the L/Cs within the short period specified by the Contracts.

It was because the [Buyer] failed to open the L/Cs on time that the [Seller]'s supplier cancelled its contract with the [Seller] to provide 2,000 tons of mono ethylene glycol to the [Seller]. The [Seller] subsequently informed the [Buyer] that it would not continue to perform all three Contracts. Moreover, the [Seller] did not accept the L/Cs which the [Buyer] did not open on time. Such refusal by itself clearly showed that the [Seller] would not continue to perform its contractual obligations. Since the [Buyer] was aware that its delay in opening the L/Cs rendered it impossible for the [Seller] to perform the Contracts, the [Buyer] had not inquired the [Seller] about the loading and shipping of the contractual goods after the deadline for loading (31 May 2005) passed until the Buyer applied for arbitration.

The [Seller] had a legal and factual basis for not performing the Contracts. The damages incurred by Zhangjiagang AAA, if any, resulted from the [Buyer]'s failure to fully perform its contractual obligations. Hence, there are no legal or factual grounds for the [Seller] to be held liable for the [Buyer] to compensate Zhangjiagang AAA for Zhangjiagang AAA's violation of its contract with Huajia.

4. The [Seller] can hardly verify the authenticity and the relevance of the evidence the [Buyer] submitted to prove the damages that Zhangjiagang AAA incurred.

In conclusion, the [Seller] believed that the facts of this case were clear and that it provided sufficient evidence. The [Buyer] is not a suitable party to this arbitration. The main reason why the [Seller] did not perform its contractual obligations under the Contracts was that the [Buyer] breached the Contracts by not fully performing its obligation to open the L/Cs on time. Such a breach made the purpose of the Contracts futile. The [Buyer] had no factual or legal ground to claim that the [Seller] should be held responsible for the aforementioned damages. Therefore, to protect the [Seller]'s legal rights, the [Buyer]'s request for arbitration should be dismissed.

II. THE ARBITRATION TRIBUNAL'S OPINION

1. Applicable law

The Contracts stipulated "Incoterms 1990 with latest amendments to govern." Accordingly, Incoterms 2000, the latest amendment to Incoterms 1990, applies to the rights and obligations of both parties of this case. Since Incoterms 2000 does not cover breach of contract and its consequences, and since the People's Republic of China and the Republic of Korea both adopted the United Nations Convention on Contracts for International Sales of Contract (hereinafter "CISG"), the Arbitration Tribunal holds that the CISG shall apply to breach of contract and its results.

As to whether the [Buyer] is a suitable party, the Arbitration Tribunal rules that the agency law of [Buyer], namely, the [agency] law of People's Republic of China is the applicable law.

2. The Applicability of Article 402 of the Contract Law of People's Republic of China

The [Seller] claimed in its defense that the [Buyer] was not a suitable party to this arbitration because, according to Article 402 of the Contract Law, the Contracts were directly binding on the [Buyer's] principal, Zhangjiagang Bonded Zone AAA International Chemical Trading Co., Ltd (hereinafter "Zhangjiagang AAA").

The Arbitration Tribunal holds that the [Seller] did not prove that it was aware of the agency relationship between the [Buyer] and Zhangjiagang AAA. The [Seller] pointed out that it copied "Manager Huang" of CCC Co. when it faxed to the [Buyer], respectively, on 16 May and 18 May 2005, but the [Buyer] maintained that "Manager Huang" was an agent it hired. In the Arbitration Tribunal's opinion, no matter whether "Manager Huang" was an employee of CCC Co. and no matter whether the [Seller] was aware that CCC Co. was the end-user of the goods covered by the Contracts, the [Seller] did not prove that it knew of the agency relationship between [the Buyer] and Zhangjiagang AAA when it signed the Contracts with the [Buyer]. Since the [Seller] did not provide sufficient evidence for its defense, the Arbitration Tribunal does not support it.

3. The Effectiveness of the Contracts

The [Buyer] and the [Seller] signed three Contracts, numbered DSCY018, DSCY019 and DSCY020, respectively, on 16 May 2005. These are the contracts in dispute. According to their agreement, the [Buyer] purchased 700 tons, 700 tons and 600 tons of mono ethylene glycol [respectively, under each Contract] at the price of US $670 per ton from the [Seller]. Both parties signed the Contracts and the [Buyer] affixed its company seal to them.

The Arbitration Tribunal holds that the Contracts reflect the intent of both parties and are legally valid, and that they define the rights and obligations of the parties.

According to the arbitration clauses in the Contracts, the Arbitration Tribunal is competent to hear disputes between the parties regarding the performance of the Contracts.

4. The Performance of the Contracts

The [Buyer] stated that it opened three irrevocable documentary L/Cs at the Taicang Branch of Bank of China and that the numbers of the L/Cs were LC95BV0278/5, LC95BC0285/5, and LC95BC0286/5. The [Buyer] submitted copies of the L/Cs. The identification of the goods, its quantity and its price were the same as those in the Contracts. The drawer of the L/Cs was the [Buyer] and the beneficiary the [Seller]. The [Seller] also verified the authenticity of the copies of the L/Cs. Therefore, the Arbitration Tribunal supports the [Buyer]'s statement regarding the aforementioned factual issue.

However, the [Seller] pointed out that the Contracts provided that the L/Cs should be opened no later than 17 May 2005, while the [Buyer] only opened the L/C for Contract No. DSCY018 on time and opened the other two L/Cs both on 18 May 2005, beyond the contractual deadline.

The Arbitration Tribunal notes that each of the three Contracts provided: "Special Conditions: L/Cs should be opened not later than 17 MAY 2005." However, among the three L/Cs the [Buyer] opened with the Bank of China, only LC95BV0278/5 was opened on 17 May 2005, and the other two, LC95BC0285/5 and LC95BC0286/5, were both opened on 18 May 2005, one day later than the prescribed date in the Contracts. Therefore, the Arbitration Tribunal holds that although the [Buyer] performed its obligation under Contract No. DSCY018 to open the L/C, it violated the agreements under Contract No. DSCY019 and Contract No. DSCY020 regarding the date to open the L/Cs. However, the Arbitration Tribunal does not support the [Seller]'s claim that because the purchase of the 2,000 tons of mono ethylene glycol was divided into three Contracts to make it easier for the [Buyer] to open L/Cs, the [Buyer] violated the main payment requirement for the sale of the 2,000 tons of mono ethylene glycol as a whole.

The [Seller] claimed that the [Buyer's] delay in opening the two L/Cs constituted a fundamental breach of the Contracts, and this made the purpose of the Contracts futile.

This Arbitration Tribunal examined Article 25 of the CISG. It provides that:

A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.

According to the purchase contract between the [Seller] and LeiTian Co. submitted by the [Seller], the Arbitration Tribunal cannot decide whether the [Buyer]'s one-day delay in opening the L/Cs for Contract No. DSCY019 and Contract No. DSCY020 deprived the [Seller] of what it was entitled to under its contract with LieTian Co. and whether the [Buyer] could have foreseen such a result.

Since it is hard to decide whether the [Buyer]'s one-day delay in opening the L/Cs constituted a fundamental breach, according to Article 63(3) and Article 64 of the CISG, only if the [Buyer] fails to perform its payment obligation within "an additional period of time of reasonable length" fixed [by the seller] in accordance with Article 63(1), or if the [Buyer] declares that it will not make payments within the period so fixed, could the [Seller] declare the Contracts avoided. However, in cases where the [Buyer] has paid the price, the [Seller] loses the right to declare the Contracts avoided unless it does so in respect of late performance by the [Buyer] before the [Seller] has become aware that performance has been rendered. Therefore, this Arbitration Tribunal holds that:

-    The [Seller] should have strictly performed its obligation under the Contract No. DSCY018 to deliver the goods since the [Buyer] opened the L/C for this contract as scheduled;
 
-    The [Seller] should have declared Contract No. DSCY019 and Contract No. DSCY020 avoided before it received the L/Cs for these contracts, if it regarded it unacceptable that the [Buyer] violated their agreement regarding the date to open the L/Cs.

Since the [Seller] did not provided any evidence to prove that it informed the [Buyer] of the avoidance, the Arbitration Tribunal does not support the [Seller]'s claim that the Contracts were avoided.

The evidence from Woori Bank submitted by the [Seller] showed that the [Seller] rejected the L/Cs on 28 June 2005, more than one month after the [Buyer] opened them. This, in this Arbitration Tribunal's opinion, does not comply with the relevant provisions of the CISG. However, there is evidence showing that the [Seller] faxed the [Buyer] about the date of shipment on 18 May 2005, and that both parties were negotiating on 20 June 2005 about the delivery of goods. The Arbitration Tribunal holds that the [Seller]'s conduct showed that it in fact accepted the [Buyer's] L/Cs.

In summary, the Arbitration Tribunal holds that:

-    The [Buyer] performed its obligation under the Contracts to open the L/Cs.
 
-    Although the [Buyer] opened the L/Cs for Contract No. DSCY019 and Contract No. DSCY020 one day later than the date specified by the Contracts, the [Seller] did not object to the delay then but notified the [Buyer] of the new date of shipment.
 
-    The [Seller] should be deemed to have actually accepted all of the L/Cs from the [Buyer].
 
-    The [Seller's] subsequent failure to deliver the goods as required by the Contracts constituted a breach of contract and the [Seller] should be liable for the [Buyer]'s loss as a result of such breach.

5. Regarding the [Buyer]'s claims

      (1) The request to declare the Contracts avoided

      As discussed above, the [Buyer] opened the L/Cs for the Contracts, but the [Seller] failed to deliver the goods to the [Buyer] as required by the Contracts. Thus, according to Article 49 of the CISG, the [Buyer] has the right to declare the Contracts avoided. The [Seller] claimed that the fact that it asked the [Buyer] to sign a new sales contract according to the new market price of the goods showed that it notified the [Buyer] to terminate the Contracts. Although the Arbitration Tribunal cannot support the [Seller]'s claim, it can infer [Seller]'s intent to avoid the Contracts. What is more, since the Contracts cannot be performed any more, the Arbitration Tribunal supports the [Buyer]'s request to declare the Contracts avoided.

      (2) The request to require the [Seller] to compensate the [Buyer]'s economic damages

      The [Buyer] submitted a "Detailed Report of Damages" to the Arbitration Tribunal during the hearing. It stated that the damages included the difference between the original contract price and the price in the substitute transaction, the late penalty, and the fee to open the L/Cs.

            a. The difference between the contract price and the price in the substitute transaction

            The Arbitration Tribunal holds that since the [Seller] did not deliver the goods, it should be liable for the difference between the original contract price and the higher expense the [Buyer] incurred to make substitute purchases from other sources, which it did within a reasonable time.

According to the [Buyer's] evidence, the [Seller] wanted to postpone the date of shipment to 30 June 2005, and both parties renegotiated the performance of the Contracts on 20 June. After this, the [Seller] still did not deliver the goods. Thereafter, the [Buyer] acted within a reasonable time to contract with Vinmar International LTD (hereinafter "Vinmar") on 8 July 2005 for a substitute purchase of 1,500 tons of mono ethylene glycol. According to Article 75 of the CISG, the [Seller] is liable for "the difference between the contract price and the price in the substitute transaction" for the 1,500 tons of mono ethylene glycol.

The Arbitration Tribunal notes that the price in the Contracts was a CFR price and was required to be paid by a 120-day usance L/C, while the price in the contract with Vinmar was a CIF price and the method of payment was a 90-day usance L/C. The Arbitration Tribunal holds that the difference in insurance premium between the CFR price and CIF price is approximately balanced out by the difference in the interest payment in the 120-day usance L/C and the 90-day usance L/C. Accordingly, the Arbitration Tribunal used the replacement purchase price in [Buyer]'s contract with Vinmar to calculate the [Buyer's] loss, i.e., the difference between the original contract price and the price in the substitute transaction of the 1,500 tons of mono ethylene glycol, as follows: (US $815 /ton - US $670 /ton) value added tax rate 1.17 tariff rate1.055 1,500 tons = US $268,471.13.

Regarding the other 500 tons of goods, the [Buyer] maintained that the price of the sales contract between Zhangjiagang AAA and Huijia, should be used to calculate its loss regarding the price difference. However, the Arbitration Tribunal holds that the sales contract between Zhangjiagang AAA and Huijia is not a "substitute transaction" under the CISG, and its price should not be relied upon to measure the [Buyer]'s loss resulting from the price difference. The Arbitration Tribunal believes that it is reasonable to calculate the loss for the 500 tons of goods based on the international market price when the aforementioned sales contract was concluded.

As to the price of the goods under the Contracts, the [Buyer] provided both the domestic and the international market price from 10 May to 25 May 2005 and from 7 July to 22 July 2005, and the [Seller] submitted the market price curve between 14 December 2004 and 14 December 2005. Since both parties' data were from Yimao Zixun (Shanghai) Ltd., the Arbitration Tribunal adopts the data and notes that the CFR price of mono ethylene glycol in the international market on 13 July 2005 was between US $785 and US $795 per ton. Therefore, the Arbitration Tribunal calculates the [Buyer]'s loss for the 500 tons of the goods, for which [Buyer] did not make a replacement purchase, based on US $790 per ton as follows: (US $790 /ton - US $670 /ton) value added tax rate at 1.17 tariff rate 1.055 -500 tons = US $74,061.

In summary, the [Seller] is liable for the [Buyer]'s damages of US $342,532.13 in total. Since the [Buyer] claimed the damages in RMB, according to the exchange rate of 1:8.126, the damages are RMB 2,783,416.09.

            b. The late penalty

            The [Buyer] claimed for a late penalty, appealing to the Agreement between Zhangjiagang AAA and CCC Co. on 17 July 2005. According to the Agreement, Zhangjiagang AAA should pay to CCC Co. RMB 318,555 as the late penalty.

Article 74 of the CISG provides:

Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. 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, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract.

The Arbitration Tribunal believes that the [Buyer] did not prove that the [Seller] was aware of the relationship between Zhangjiagang AAA and CCC Co., or that the [Seller] could foresee that its breach of contract would cause Zhangjiagang AAA to pay CCC Co. the late penalty, which the [Buyer] could not avoid by making a replacement purchase. Therefore, the Arbitration Tribunal does not support the [Buyer's] claim for the late penalty.

            c. The fee for opening the L/Cs

            The Arbitration Tribunal holds that the fee for opening the L/Cs should be regarded as the [Buyer]'s ordinary business cost. Since the Arbitration Tribunal has supported the [Buyer]'s claim for the loss resulting from the price difference, the [Buyer] should bear the fees for opening the L/Cs.

      (3) The arbitration fee

      The Arbitration Tribunal holds that the [Buyer] bears 10% of the arbitration fee and the [Seller] bears 90% of it.

6. The Extra Expense for the out-of-state Arbitrator

Since Xinyu Liu, the arbitrator appointed by the [Buyer], was working outside of China, the Arbitration Tribunal collected US $6,000 from the [Buyer] in accordance with Article 69 of Arbitration Rules to cover the arbitrator's expense to participate in the hearing in Beijing. The Arbitration Tribunal holds that the [Buyer] should bear such expense.

III. AWARD

1.    The Sales Contracts (No. DSCY018, DSCY019, and DSCY020) that the parties concluded on 16 May 2005 are avoided.
 
2.    The [Seller] shall compensate the [Buyer] RMB 2,783,416.09 for the loss due to the price difference.
 
3.    The Arbitration Tribunal rejects the [Buyer]'s other claims.
 
4.    The [Buyer] shall be responsible for US $6,000, the extra expense incurred by the out-of-state arbitrator Xinyu Liu. It has offset the payment completely by the actual fees it submitted to the Arbitration Tribunal in advance.
 
5.    The arbitration fee is RMB 194,270. The [Buyer] pays 10% of it, i.e., RMB 19,427 and the [Seller] pays 90% of it, i.e., RMB 174,843. Since the [Buyer] paid the total arbitration fee in advance, the [Seller] should give the arbitration fee, RMB 174,843, directly to the [Buyer].

The [Seller] should pay the amounts owed to the [Buyer] in 2 and 5, above, within thirty days after this award takes effect. If the [Seller] delays its payment, the [Buyer] will be entitled to interest on it at an annual interest rate of 6%.

This is the final award. It takes effect when entered.


FOOTNOTES

* All translation 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 the Republic of Korea is referred to as [Seller] Amounts in US currency (dollars) are indicated as [US $]; amounts in the currency of the People's Republic of China (renmimbi) are indicated as [RMB].

** Jinguan Sun is an Associate of the New York Office of the law firm of Sheppard Mullin Richter & Hampton LL.P. Sheppard Mullin produces the the China Law update website.

*** Qian Wang, J.D. 2010, New York University School of Law.

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Pace Law School Institute of International Commercial Law - Last updated May 25, 2010
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