Go to Database Directory || Go to CISG Table of Contents || Go to Case Search Form || Go to Bibliography
Search the entire CISG Database (case data + other data)

CISG CASE PRESENTATION

China May 2006 CIETAC Arbitration proceeding (Canned oranges case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/060500c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20060500 (May 2006)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2006/06

CASE NAME: Unavailable

CASE HISTORY: Unavailable

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

BUYER'S COUNTRY: Germany (claimant)

GOODS INVOLVED: Canned oranges


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 49 ; 74 ; 75 ; 76 ; 77 ; 79 [Also cited: Article 30 ]

Classification of issues using UNCITRAL classification code numbers:

49A [Buyer's right to avoid contract (grounds for avoidance): fundamental breach of contract];

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

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

76B [Damages recoverable based on current price];

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

79B ; 79C [Impediments excusing party from liability for damages; Other problems: hardship]

Descriptors: Avoidance ; Damages ; Cover transactions ; Mitigation of loss ; Exemptions or impediments ; Hardship

Go to Case Table of Contents

Editorial remarks

Go to Case Table of Contents

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

Go to Case Table of Contents

Case text (English translation) [second draft]

Queen Mary Case Translation Programme

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

Canned oranges case (May 2006)

Translation [*] by Zheng Xie [**]

Particulars of the proceeding
Facts
Position of the parties
Opinion of the Arbitration Tribunal
Award

PARTICULARS OF THE PROCEEDING

The China International Economic and Trade Arbitration Commission (hereafter, the "Arbitration Commission") accepted the case (Case number: G2006___) according to:

-    The arbitration clause in Contract No. hc041125yuan (the [Contract]) signed by
Claimant AAA Corporation [of Germany] (the [Buyer]) and Respondent
BBB [of the People's Republic of China (the [Seller]) on 25 November 2004; and
 
-    The written arbitration application submitted by the [Buyer] on 12 January 2006.

The Arbitration Rules of the Arbitration Commission [hereafter, the "Arbitration Rules"], which took effect on 1 May 2005, apply to this case.

Since the disputed amount subject to this proceeding is less than RMB 500,000, pursuant to Article 50 of the Arbitration Rules, a short procedure should apply. Because the [Seller] and the [Buyer] neither jointly appointed nor authorized the Chairman of the Arbitration Tribunal to appoint a sole arbitrator within the time limit, the Chairman of the Arbitration Commission appointed Mr.___ as the sole arbitrator pursuant to the Arbitration Rules. On 20 February 2006, the sole arbitrator formed the Arbitration Tribunal. Since the sole arbitrator who had been appointed was not available to hear this case, the Chairman appointed Mr. ___ as the sole arbitrator.

On 26 April 2006, the court session was opened in Beijing. Both the [Seller]'s and the [Buyer]'s representatives were present in the court session. The parties stated facts, presented their legal opinions, and argued and cross-examined the evidence. The Arbitration Tribunal investigate and inquired of some factual issues and verified the original items of evidence, and the parties answered the Arbitration Tribunal's inquiries regarding the factual and legal issues.

After the court session, both parties submitted supplemental evidence at the Arbitration Tribunal's request, and cross-examined the evidence in writing. The Arbitration Tribunal pointed out that if a party wishes to ask for another court session to cross-examine the supplemental evidence, the party should submit its request in writing. Neither party requested another court session.

Based on the facts verified in the court session and all written material, the Arbitration Tribunal entered its award.

The facts, the Arbitration Tribunal's opinion and award are as follows:

FACTS

The [Seller] and the [Buyer] signed a Contract for the sale of 42,000 cartons of canned orange (20 X 20' containers) on 25 November 2004 for the contract price of US $4.45/carton FOB. The delivery date was before February 2005.

POSITION OF THE PARTIES

The [Buyer]'s position

On 2 December 2004, the [Buyer] issued a letter of credit to CCC Food Import and Export Corporation ("CCC") as per the [Seller]'s instruction. On 17 January 2005, the [Seller] through CCC delivered ten (10) containers of 23,000 cartons to the [Buyer], but did not deliver the remaining ten (10) containers of 23,000 cartons.

On 3 March 2005, the parties executed a Supplemental Agreement stipulating that the date of delivery would be postponed to October 2005. Thereafter, the [Buyer] demanded delivery many times, but the [Seller] failed to perform its duty of delivery. The [Buyer] signed a contract with DDD Corporation ("DDD") for the contract price of US $5.58/carton CFR Ningbo (i.e., US $5.05/carton FOB Ningbo after the freight is deducted). The difference per carton is US $0.60; the total difference is US $13,800.

In view of the above, the [Seller] failed to perform its duty of delivery and caused the [Buyer] to suffer loss of price difference of US $13,800. The [Seller] should be liable for its breach.

The [Buyer] prayed for the following:

   1.   Contract No. hc041125yuan executed on 25 November 2004 should be revoked;
 
   2.   The [Seller] should pay damages of US $13,800 under the Contract;
 
   3.   The [Seller] should bear the arbitration fee of RMB 10,000, notary fee of RMB 1,500, and traveling expenses of RMB 6,259, totaling RMB 17,759.

The [Seller]'s position

(1) The contract price violated the minimum price of US $5.00 per 24/312 kilogram for canned oranges exported to the European Union, which was set in Document No. 208 (2004) issued by the China Chamber of Commerce for the Import and Export of Foodstuffs, Native Produce and Animal Byproducts [CCCFNA]. The [Seller] referred that business to CCC. The [Buyer] issued letters of credit directly to CCC, and the lading notice was directly sent to CCC. The [Buyer] and CCC had a direct trading relationship.

(2) After the parties executed a Supplemental Agreement, in the second and third quarters, because of a freeze and the typhoon season, orange production decreased, and the price increased, and the foreign exchange rate between RMB and US $ increased by more than 2%. In view of the above, CCCFNA issued Document No. 277 (2005) on 29 September 2005 to set the minimum price of $5.70/carton FOB for canned oranges of 312 kg exported to the European Union. If a company does not comply with this price, the company will not be issued a quality certificate for half of a year. Therefore, the [Seller] could not perform the Contract any more.

(3) Because of the changed situation which was not caused by the [Seller], it was unfair for the [Seller] to continue performing the Contract. The Contract should be revoked, and the parties should share the loss. Pursuant to Article 4 of the General Principles of Civil Law, Article 5 and Article 6 of the Contract Law of the People's Republic of China, the principle of fairness and good faith should be followed to determine each party's rights and obligations. Article 79 of CISG provides:

"A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences."

China is a Contracting State of the CISG, and the CISG should apply in a foreign-related case.

(4) Apart from the CISG, the UNIDROIT Principles of International Commercial Contracts [UNIDROIT Principles] provides for change of situation or hardship in Article 6.2.2 as follows:

   -    "There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party's performance has increased or because the value of the performance a party receives has diminished, and
 
   -    (a) the events occur or become known to the disadvantaged party after the conclusion of the contract;
 
   -    (b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract;
 
   -    (c) the events are beyond the control of the disadvantaged party; and
 
   -    (d) the risk of events was not assumed by the disadvantaged party."

The UNIDROIT Principles are well recognized in the world, and they provide that they "can be applied to interpret or supplement domestic law." The difficult situation addressed in the UNIDROIT Principles is similar to the principles of "frustration of contract" in common law systems and "change of situation" in civil law systems.

(5) "Change of situation" is also recognized in the academic world. The famous scholar Mr. Liang Huixing pointed out that "change of situation" means that after a contract takes effect, the bases of the contract were shaken or disappeared because some events, which the parties could not have anticipated occurs; it would be contrary to the principle of good faith if the contract remains effective, and it should allow the parties to change or revoke the contract. The situation refers to factors and circumstances that are the basis of the contract. Change means that the factors and circumstances change substantially, and that the result of the change is that the purpose of the contract cannot be realized. Change of situation includes: (1) natural disaster, such as flooding that causes the agricultural production to decrease and not be deliverable on time; (2) war; (3) risk caused by characteristics of commercial economy, such as inflation, depreciation of currency, increase of production costs, etc; (4) change of a country's economic policy; (5) administrative measures of government governing national economy.

The scholar Mr. Han Shiyuan holds that "change of situation" is an essential part of contract law theory, and includes the following necessary elements: (1) facts of change of situation must exist; (2) the change must occur before the contract is established; (3) the change must not be caused by either party; (4) the change of situation cannot be anticipated by the parties when signing the contract; (5) the change of situation makes it unfair to perform the contract.

(6) The facts of this case satisfy all elements of "change of situation."

      First, the facts of change of situation actually existed. In 2005, because of natural disaster including freezing weather and a typhoon, etc., the production of oranges decreased by 30% to 40%, and the decrease of production caused prices to increase dramatically;

      Second, the change of situation occurred after the Supplemental Agreement took effect and before it was completely performed.

      Third, the [Seller] is liable for the occurrence of the natural disaster, and was not negligent for the occurrence of the natural disaster.

      Fourth, the change of situation could not have been anticipated; the [Seller] could not have anticipated the occurrence of the natural disaster of freezing weather, typhoon, etc., when the Contract was signed.

      Fifth, it would be unfair for the [Seller] to continue to perform the Contract. The profits in the canned orange industry are very low. The minimum export price in the industry is more than the stipulated price in the Supplemental Agreement. If the [Seller] was required to perform the Contract at the original price, the [Seller] would suffer huge damages, which would be unfair to the [Seller].

(7) Difference between "change of situation" and "commercial risk".

The [Buyer] contended that the increase of price should be characterized as a commercial risk. Change of situation and commercial risk are basically different. The increase of price caused by natural disaster is not within the scope of commercial risk, but should be characterized as change of situation for the following reasons:

      Change of situation is usually caused by unpredictable economic factors, most of which are caused by substantial change. Those changes are not determined by law of value, but determined by unpredictable social factors. In addition, those changes are not normal risk. Commercial risk is determined by whether businessmen follow the law of value, and whether they know the market and the relationship between supply and demand. In economic activities, someone follows the law of value and catches business opportunities, and makes profits, and someone acts on the contrary and incurs loss or even files bankruptcy, which constitutes commercial risk.

      It should be noted that change of price is not the determinative or exclusive factor to characterize commercial risk or change of situation. In some circumstances, increase of price may constitute commercial risk, and in some circumstances, change of price may not be substantial to some persons, but substantial to the parties to the contract and constitutes a change of situation.

In this case, because of the freezing weather and typhoon, etc., the cost of canned oranges increased dramatically, which the [Seller] could not have anticipated; the price increase is an unusual change beyond the law of value and, therefore, it does not constitute commercial risk, but constitutes change of situation.

(8) The [Buyer]'s loss for replacement

On 10 November 2005, the [Seller] proposed to continue to perform the Contract at the price of US $4.70/carton FOB [rather than US $4.45/carton FOB]. The [Seller] offered to bear the price difference, and that was the biggest compromise of the contract price. The proposed price would still enable the [Buyer] to earn a fair profit. However, the [Buyer] did not respond to the [Seller], but signed a contract with DDD on 29 November 2005 to purchase canned orange for the price of US $5.58 per carton CFR Hamburg. The [Buyer] gave up the opportunity to purchase the goods at a lower price from the [Seller], but mistakenly purchased the goods at a higher price from a third party. The loss of price difference was caused by the [Buyer] itself, and the [Seller] should not be held liable for that loss. Therefore, the [Buyer]'s claim for loss of price difference for US $0.60 per carton lacks any basis, and the [Buyer]'s actual loss of price difference is US $0.25 per carton (i.e., US $4.70 -US $4.45).

(9) The [Buyer]'s allegation that the [Seller] should have performed the Contract earlier to mitigate damages.

The [Buyer] in its Opinions alleged that "pursuant to the Supplemental Agreement, the time of delivery is not a specified time, but a time period. The price did not change suddenly, but gradually increased. The [Seller] should have performed the Contract as early as possible when the price was increasing, if the [Seller] intended to perform its contractual duty in good faith. If the [Seller] did so, the loss could have been mitigated. However, the [Seller] failed to do so.

The [Buyer] should know that the production of canned orange is seasonal, i.e., only when oranges ripen can the production of canned orange start, and the production itself needs additional time. Even if the price was increasing gradually, the [Seller] could only wait to deliver the goods until autumn. That is also the reason that the Supplemental Agreement stipulates the time of delivery is before October, but not June or July. Therefore, the [Seller] did not intentionally delay performing the Contract, but could not perform earlier.

The [Buyer]'s position as to the [Seller]'s response

(1) The [Seller] alleged that the [Buyer] and CCC had a direct trading relationship because the [Buyer] opened the letter of credit directly for CCC. The [Seller] failed to differentiate transfer of a contract and a third party's substitute performance. Transfer of a contract should be agreed by both contracting parties and the third party. However, the three parties relating to this case neither negotiated transfer of the Contract, nor reached an agreement. The [Seller] did not provide any evidence. On the contrary, lots of evidence demonstrated that the [Buyer] opened the letter of credit for CCC and sent the lading notice to CCC as per the [Seller]'s instruction, and the [Buyer] performed the Contract. During the performance of the Contract, the [Buyer] had been contacting the [Seller]. Therefore, CCC as a third party performed the Contract on behalf of the [Seller]. The contracting parties are still the [Seller] and the [Buyer].

The Document No. 208 (2004) issued by CCCFNA could not be asserted as an excuse for the [Seller]'s incomplete performance. The Document is a self-disciplinary regulation but not mandatory. Furthermore, the Document was issued on 5 August 2004, and the Contract was signed on 25 November 2004. Therefore, the [Seller] could not assert the Document as an excuse for its incomplete performance.

The [Seller] had denied that it signed the Supplemental Agreement with the [Buyer]. However, the Supplemental Agreement delayed the delivery time in favor of the [Seller], and the signature complies with the one in the Contract. It is impossible for the [Buyer] to forge an agreement in favor of the [Seller]. The [Seller]'s allegation is contrary to common sense. The Supplemental Agreement also indicates that the Contract was not transferred to CCC.

In the court session, the [Seller] gave up the aforementioned position, and did not object to the [Buyer]'s statements of the basic facts. Therefore, the [Buyer] need not submit further material on that subject.

(2) The [Seller] should compensate the [Buyer] for its direct and indirect loss caused by the [Seller]'s incomplete performance. The [Seller]'s request that the [Buyer] should share the loss is not established for the following reasons:

      1. The [Seller]'s breach is not a common one. After the [Seller]'s first breach, the [Buyer] granted to the [Seller] a grace period of eight months, but the [Seller] breached the Contract again. The characteristics of the breach are severe. Under such circumstances, if the [Seller] was not held liable or is held less liable for its breach, it would be unfair to the [Buyer] and also violates the principle of good faith.

      2. Article 16 of the Contract stipulates, "except for force majeure, the [Seller] shall compensate the [Buyer] for its direct and indirect loss including loss of price difference caused by the [Seller]'s delay of delivery or non-delivery." Under that provision, only in the situation of force majeure, may the [Seller] not be liable for its non-performance. During the performance of the Contract, no force majeure occurred. In addition, the [Seller] neither alleged nor proved force majeure. Therefore, the [Seller] should be liable for its breach.

      3. The loss which the [Buyer] requests the [Seller] to compensate for was actually incurred, and is less than the actual amount of loss.

The [Buyer] as a trading company executes every sales contract for the purpose of resale. If the seller breached the sales contract, the [Buyer] would breach its contracts with its customers and incur more damages. In order to avoid that situation, the [Buyer] re-purchased the goods in a timely manner, which was an appropriate remedial measure. Furthermore, the [Buyer] had demanded that the [Seller] deliver the goods before re-purchasing from a third party.

In the court session, the [Seller] raised an objection that the [Buyer] purchased the goods from a third party one day before the time limit provided by the [Buyer]'s demand letter. This objection is not established. If the [Seller] delivered the goods one day before the time limit, and the [Buyer] had already re-purchased the goods, the [Seller]'s objection may be established. However, the [Seller] did not deliver the goods at all. Therefore, the time of the [Buyer]'s re-purchasing the goods is not essential. The time, quantity and specification of the replacing goods is in compliance with those under the Contract. The [Buyer]'s re-purchasing is an appropriate remedial measure for the [Seller]'s breach. The [Buyer]'s re-purchasing price complies with the price limit set by CCCFNA, and is also consistent with other prices stipulated in the contracts which the [Buyer] entered during the same period. The re-purchasing price reflects the true market price at that time. The re-purchasing price is appropriate. Therefore, the loss was really incurred by the [Buyer] for re-purchasing the goods. The expenses the [Buyer] spent in resolving this matter are the [Buyer]'s loss, and should be compensated by the [Seller].

      4. The Document No. 277 (2005) issued by CCCFNA cannot be asserted as an excuse for the [Seller]'s incomplete performance for the following reasons:

            First, according to the Chinese law, only national laws and administrative regulations have mandatory power. CCCFNA is not a national authority, but only an industry association. The Document issued by the Association is an industry regulation, but not law and has no mandatory power. In addition, the Document is only a meeting minute. The [Seller] did not prove that it is a member of the Association.

            Second, even if CCCFNA set export minimum price, which affects exports, the [Seller] cannot assert that as an excuse for its non-performance of the Contract. The price set by the Association was implemented since 1 November 2005. The latest time for the [Seller] to deliver the goods is October 2005. Therefore, the [Seller]'s non-delivery of the goods is not related to the price set by the Association.

      5. The increase of the contract price is a normal change of market price and normal business risk. It lacks legal or factual basis for the [Seller] to allege that the price increase constitutes "change of situation," and that the [Buyer] should share damages, This is so the following reasons:

            First, since 1 October 1999 when the Contract Law took effect, the Chinese laws have had no provisions regarding change of situation. The People's Supreme Court issued a pertinent legal interpretation before the Contract Law took effect. However, it lost validity after the Contract Law took effect. The cases cited by the [Seller] were decided before the Contract Law took effect, and should not be referred to after the Contract Law took effect. Therefore, there is no legal basis for change of situation.

A draft of the Contract Law had a provision regarding change of situation. However, in the Reviewing Result Report of the Draft of Contract Law, the Legal Commission of National People's Council stated:

"Based on the current experience, it is hard to define change of situation and to distinguish between change of situation and commercial risk, and it is also difficult to implement. And change of situation only applies in some special circumstances. It is premature to provide for change of situation in the Contract Law."

Therefore, change of situation is a special principle, and should be applied with strict conditions.

According to the scholars' discussion, change of situation includes at least the following factors:

            1. Objectively, the basis and circumstances for the contract to be established fundamentally change, and the basis for the contract to be established and exist disappear, and the parties have to face a new situation when performing the contract;

            2. Subjectively, neither party has fault or is liable for the change of situation.

            3. In terms of time, the change of situation occurs after the contract is entered into and before the performance is completed.

            4. The change of situation cannot have been anticipated by either party. If a party can anticipate the change of situation when signing the contract, it indicates that the party is willing to bear the risk, and should not assert change of situation. If the party did not anticipate the change of situation, but should have anticipated it in good faith, the party cannot assert change of situation.

            5. When change of situation occurs, it is unfair to continue performing the contract, which means that each party's interests lost substantial balance.

            6. When the parties cannot reach an agreement to revoke or change the contract, a party must request to change or revoke the contract through a legal or arbitration proceeding. Without an agreement or a court's or arbitration tribunal's decision to change or revoke the contract, the party, who unilaterally changes or revokes the contract, should be liable for the consequences.

            Second, in a market economy, price fluctuates based on the law of value. Price changes are normal circumstances in a market economy, and can be anticipated by businessmen, and the changes are predicable risks. Any commercial activity involves some risks. In this case, the increase of price is no more than 20%, and such change often occurs in a market economy. If such change constitutes change of situation, a majority of contracts lose meaning and stability. The cases cited by the [Seller] were determined pursuant to the People's Supreme Court's Interpretation at that time, and also because the prices in those cases changed hundreds of times.

            Third, the [Seller] anticipated or should have anticipated the increase of the price. The Supplemental Agreement avers that the [Seller] did not perform the Contract because of the increase of the contract price and lack of labor costs. Therefore, when the Supplemental Agreement was signed, the price had been increasing. However, the [Seller] still agreed to deliver the goods at the original price. Therefore, the [Seller] should perform its duty complying with the Contract.

            Finally, according to the Supplemental Agreement, the time of delivery is not a specified time, but a time period. The change of price did not occur suddenly but gradually. If the [Seller] intended to perform its duty, it should have performed the Contract when knowing the increase of the price, so that the loss could have been mitigated. However, the [Seller] failed to do so.

            7. The [Seller]'s allegation that the [Buyer] should share the loss because of the change of foreign exchange rate lacks any basis. The contract price is US $, and the [Seller] should bear the consequences of change of exchange rate between US $ and RMB. In addition, Article 10 of the Contract definitely stipulates that the [Seller] shall bear risk of foreign exchange rate changes between US $ and RMB.

(3) The [Seller] misunderstands Article 79 of CISG as "change of situation." Article 79 of CISG provides:

"A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences."

This provision does not provide for "change of situation," but "force majeure." It provides that "due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences" which is consistent with the definition of force majeure provided in Article 153 of the General Rules of Civil Law and Article 117 of the Contract Law, i.e., "an event that cannot be anticipated, avoided or overcome." The difference between the two concepts is as follows: under force majeure, the contract cannot be performed, and under "change of situation" the contract can be performed, but the performance would cause the parties' interests to become substantially unbalanced, or the performance has no meaning to the parties.

The CISG provides that the impediment caused that the contract cannot be performed. The [Seller], on the one hand, cited Article 79 of CISG and, on the other hand, ignored Article 76 of the CISG and raised an objection to the fact that the [Buyer] contracted to re-purchase the goods and suffered loss. Pursuant to Article 76 of CISG, even if the [Buyer] did not re-purchase the goods, the [Seller] should compensate the [Buyer] for the loss of price difference between the contract price and the current price when the contract is avoided. The [Seller] does not object to the current price.

(4) The [Seller] cited the Supreme People's Court's Interpretation which was issued before the Contract Law took effect, and lost validity when the Contract Law was implemented. The Hainan High People's Court's case that [Seller] cited is not related to "change of situation." Other cases cited by the [Seller] involve issues relating to "change of situation," however, these judgments were entered before the Contract Law was implemented, and those cases are not comparable to the instant case.

(5) On 10 November 2005, the [Seller] proposed to deliver the goods at the price of US $4.70 FOB Ningbo on the condition that the [Seller] would only deliver 10-15 containers out of 25 containers under two other contracts (one of the two was signed between the [Seller] and the [Buyer]'s subsidiary Shangde Import and Export Ltd., the dispute arising out of that contact is arbitrated by another arbitration tribunal of the Commission). If the [Buyer] agreed to the [Seller]'s proposal, its subsidiary had to give up the rights claiming 10-15 containers. Therefore, the [Buyer] is entitled to reject the [Seller]'s proposal.

(6) The Attachment, i.e., the minimum canned oranges export price list, valid from 1 January 2004 to 31 October 2004 is not relevant to this case. The Attachment, Notice of Issues Relating to Approval of Canned Orange Export, demonstrates that the approval system had been implemented before the [Seller] and the [Buyer] entered into their Contract. Therefore, the [Seller]'s allegation that its non-performance of the Contract was caused by the export approval system lacks factual basis.

THE ARBITRATION TRIBUNAL'S OPINION

(1) The applicable law

Article 18 of the Contract stipulates that the law of the People's Republic of China shall apply to any disputes arising out of the Contract. Considering that both parties cite the CISG in the written statements, arguments and responses, the Arbitration Tribunal held that it sustains the parties' intent to apply the law of the PRC as well as CISG. Therefore, the law of the PRC shall apply to this case; if the law of the PRC does not provide, CISG shall apply. If both the law of the PRC and CISG provide, both shall apply. Since Article 18 of the Contract stipulates that the applicable law is the law of the PRC, when there is a conflict between the law of the PRC and CISG, the law of the PRC shall apply.

(2) The parties to the Contract and the Supplemental Agreement

Before the court session, the [Seller] contended that the Contract was in fact a direct trading relationship between the [Buyer] and CCC, and that the [Seller] did not sign the Supplemental Agreement. Since in the court session, the [Seller]'s representatives did not insist on the aforementioned opinion by alleging that they did not know the [Buyer]'s former attorneys' position, the Arbitration Tribunal did not adjudicate that issue. In addition, the [Seller] admitted it was the contracting party under both the Contract and the Supplemental Agreement. Accordingly, the Arbitration Tribunal honors the [Seller]'s decision and holds that the [Seller] and the [Buyer] are the contracting parties under both the Contract and the Settlement Agreement executed on 3 March 2005.

(3) Facts of the case

The parties did not object to the fact that the [Seller] did not deliver ten containers of 23,000 cartons of canned oranges to the [Buyer] pursuant to the Contract and the Supplemental Agreement. Therefore, the Arbitration Tribunal confirmed that fact.

(4) Liability for the breach

The Contract and the Supplemental Agreement were entered by the parties. Pursuant to Article 60 of the Contract Law, which provides that the parties shall fully perform their contractual duties, and Article 30 of CISG, which stipulates that "[t]he seller must deliver the goods, hand over any documents relating to them and transfer the property in the goods, as required by the contract and this Convention," the [Seller] did not deliver the goods complying with the Contract, and breached the Contract. Therefore, the [Seller] should be held liable for its breach.

However, the parties substantially dispute on the issue who should bear liabilities for the non-delivery of the goods under the Contract. As to that issue, the Arbitration Tribunal holds the following opinion:

      1. The [Seller] alleged change of situation and asserted that the parties should share the loss alleged by the [Buyer].

After the parties entered into the Contract, because of the weather, the production of oranges decreased and prices increased; because of the operation of the market economy, the cost of can material and sugar increased; the foreign exchange rate between RMB and US $ fluctuated, and price of canned oranges increased. The parties do not disagree with those facts; therefore, the Arbitration Tribunal confirmed the same.

However, because of the change of the aforementioned objective situation, i.e., change of situation, the contract price was affected; the parties did not stipulate whether the Contract should be performed or how to perform under such circumstances. Neither the Contract Law nor the Supreme People's Court's Interpretations Regarding Various Questions Relating to the Contract Law, nor the CISG has provisions relating to the issues relating to change of situation.

Therefore, the Arbitration Tribunal holds that when neither law nor the Contract provides principle and guideline relating to change of situation, it lacks legal or factual basis to adjudicate the parties' disputes based on the principle of change of situation. The [Seller] alleges that the parties should be jointly liable for the loss caused by the [Seller]'s non-delivery of the goods, because the [Seller] could not perform the Contract and the Supplemental Agreement due to change of situation.

The [Seller] cited the Minutes of National Economic Cases Meeting of 1993 ("Minutes"), which state:

"If the situation that is the basis of a contract fundamentally changes due to some reason which cannot be anticipated by the parties, and for which neither party should be held liable; if the contract is required to be performed, it would be unconscionable. The contract may be changed or avoided as per the parties' requests."

The [Seller] also cited some of the Supreme Court's responses to certain cases and some of the court's rulings. The Arbitration Tribunal holds that:

   -    The Minutes, the Responses and the rulings (except case No. (2001) Qiong Gao Fa) cited by the [Seller] were granted before the Contract Law took effect. Moreover, China is not a common law country.
 
   -    Furthermore, since China is not a common law country, case No. (2001) Qiong Gao Fa, Zhong Zi Di No. 40 cited by the [Seller] is not binding on this arbitration. In addition, the [Seller] did not describe that case, so it failed to demonstrate that the instant case is similar to that case.

In sum, the Arbitration Tribunal does not sustain the [Seller]'s request that the parties share the liabilities based on the aforementioned grounds.

With respect to the [Seller]'s allegation that it could not perform the duty of delivery because of the minimum export price limit set by China Agricultural Products Import and Export Commercial Association, the Arbitration Tribunal holds that:

      First, the price limit set by a commercial association is not a mandatory national regulation, and cannot be asserted by the [Seller] as an excuse for its non-performance of the Contract;

      Second, the price limit was implemented from November 2005, which has no direct relationship with the time of delivery, i.e., October 2005, stipulated by the Supplemental Agreement.

The Arbitration Tribunal does not sustain the [Seller]'s allegation that the parties shall share the liabilities because of the price limit set by the Association.

      2. The [Seller]'s allegation that the damages claimed by the [Buyer] were not actually incurred and that, even if the [Buyer] suffered damages, they were caused by the [Buyer]'s own reason.

In order to prove its loss, the [Buyer] submitted evidence, i.e., Bill of Lading No. 0316000153 for the 23,000 cartons of A24/312G canned oranges under Contract No. 22193, which the [Buyer] entered into with Japan KAWASHO on 29 November 2009 in order to replace the goods under the Contract with the [Seller], and which were shipped on 8 January 2006 from Ningbo to Hamburg, Germany. Accordingly, the Arbitration Tribunal holds that, since the [Seller] did not submit any contrary evidence to prove the [Buyer]'s evidence is not true, the [Buyer] actually performed the contract with a third party in order to replace the goods subject to the Contract with the [Seller].

As to the loss of price difference between the Contract and the contract to replace the goods, the contract price subject to the instant case is US $4.45/carton FOB Ningbo, and the replacement contract price is US $ 5.58/carton CFR Hamburg; the transportation expenses from Ningbo to Hamburg is US $5,290 (proved by Invoice No. 2330206730 issued by Ningbo International Transportation Co.). The [Buyer] asserted that the price difference should be US $0.90 per carton, but it only claims US $0.60 per carton. Accordingly, the [Buyer] requests the [Seller] to compensate it for the loss of price difference as 23,000 cartons X US $0.60/carton = US $13,800.

As to the issue whether the [Buyer] should have purchased the replacement goods, the Arbitration Tribunal notes that on 10 November 2005, the [Seller] had sent an e-mail to the [Buyer] proposing that the [Buyer] accept ten (10) to fifteen (15) containers at the price of US $4.70 per carton, but the [Buyer] did not respond. In addition, the [Buyer] sent a letter dated 25 November 2005 to the [Seller] demanding it deliver the goods before 30 November 2005, stating that, otherwise, the [Buyer] would purchase replacement goods from other suppliers. However, the [Buyer] did not wait until 30 November 2005 to replace the goods, but reached the contract with the Japanese suppler to replace the goods on 29 November 2005.

The above facts indicate that the price which the [Seller] promised to provide is less than that provided by the Japanese supplier. As a businessman, the [Buyer] should have accepted the [Seller]'s price rather than the other price. However, the [Buyer] neither responded to the [Seller]'s proposal nor negotiated with the [Seller], but reached the contract with the Japanese supplier to replace the goods before the expiration of the time period, which the [Buyer] provided to the [Seller] to perform its duty of delivery.

The [Buyer] failed to accept a lower price pursuant to Article 119 of the Contract Law, and enlarged the loss. Pursuant to Article 119 of the Contract Law, the [Buyer] is not entitled to claim the enlarged damages. Therefore, the Arbitration Tribunal holds that the [Seller] shall compensate the [Buyer] for the loss of price difference as (US $4.70/carton (at which price the [Seller] promised to the [Buyer]) - US $4.45) X 23,000 cartons = US $ 5,750.

Regarding the [Seller]'s proposal to deliver the goods at US $4.70 per carton, the [Buyer], in its Response, alleges that the precondition of the [Seller]'s delivery at that price is that the [Seller] would only deliver ten (10) to fifteen (15) out of twenty-five (25) containers of goods under another two contracts reached between the [Seller] and the [Buyer], and if the [Buyer] accepted the proposed price, it means that the [Buyer] waives its right to request the [Seller] to deliver the remaining goods, and therefore, the [Buyer] could not accept the proposed price. As to that allegation, the Arbitration Tribunal holds that the [Seller]'s e-mail of 10 November 2005 proposed that the [Buyer] accept ten (10) to fifteen (15) containers of 312/G canned oranges because the season would pass soon, and the factory could not produce more cans to satisfy the Contract, but did not mention to which contract the proposed delivery was relating or that the [Buyer] would waive its right to request delivery of the remaining goods or waive its right to claim damages. Therefore, the Arbitration Tribunal does not sustain the [Buyer]'s allegation that if it had accepted the proposed price of US $4.70 per carton, the [Buyer] would have waived its right to request delivery of the remaining goods.

(5) The [Buyer]'s requests

      1. [Buyer]'s request to avoid Contract No. hc041125yuan entered on 25 November 2004: In the instant case, the parties do not object to avoiding the Contract (including the Supplemental Agreement); therefore, the Arbitration Tribunal sustains that request.

      2. [Buyer]'s request that the [Seller] compensate the [Buyer] for US $ 13,800 under the Contract: Based on the Arbitration Tribunal's aforementioned opinion, the [Seller] shall compensate the [Buyer] for the loss of price difference as US $0.25 X 23,000 cartons = US $5,300.

      3. Arbitration fees: Since the Arbitration Tribunal sustains most of the [Buyer]'s requests, the [Seller] shall bear the arbitration fees and the [Buyer]'s reasonable expenses incurred for this case.

The [Buyer] submitted pertinent proof of attorneys' fees and notarization fees, etc. Accordingly, the Arbitration Tribunal sustains the [Buyer]'s request for the attorneys' fees of RMB 10,000 and notarization fees of 1,500. As to the [Buyer]'s request for traveling expenses, pursuant to Article 46(s) of the Arbitration Rules, which provides, "the Arbitration Tribunal may order the losing party to compensate the winning party for reasonable expenses incurred for the case according to the specific situation of the case," the Arbitration Tribunal holds that, considering that the subject amount of the instant case is small, the [Buyer]'s request for traveling expenses of RMB 6,259 with proof and mostly for two persons' expenses was not justifiable. The Arbitration Tribunal ruled that the [Seller] shall instead compensate the [Buyer] for traveling expenses of RMB 3,500.

AWARD

   1.   Contract No. hc041125yuan entered on 25 November 2004 is avoided;
 
   2.   The [Seller] shall compensate the [Buyer] for US $5,300 under Contract No. hc041125yuan;
 
   3.   The [Seller] shall compensate the [Buyer] for attorneys' fees, notarization fees and traveling expenses totaling RMB 15,000;
 
   4.   The [Seller] shall bear the arbitration fees of US $3,469. The [Buyer] had prepaid US $3,469 which offset the arbitration fees. Accordingly, the [Seller] shall pay the [Buyer] US $3,469.

The [Seller] shall pay the above amounts within 30 days after this award is entered; otherwise, it shall pay interest at the rate of 2.1/10,000 per day.

This award is final and takes effect when entered.


FOOTNOTES

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

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

Go to Case Table of Contents
Pace Law School Institute of International Commercial Law - Last updated July 14, 2009
Comments/Contributions
Go to Database Directory || Go to CISG Table of Contents || Go to Case Search Form || Go to Bibliography