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CISG CASE PRESENTATION

China May 2006 CIETAC Arbitration proceeding (Chemicals case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/060500c3.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/2006/17

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Republic of Korea (claimant)

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

GOODS INVOLVED: Chemicals (dioctly phthalate)


Classification of issues present

APPLICATION OF CISG: Yes [Article 1(1)(a)]. The tribunal ruled that the CISG governed the contract and that "the laws and regulations of China should be applied to matters not expressly settled in the CISG." However, because the parties cited the Contract Law of China in their pleadings, the tribunal applied that law to matters expressly settled in the CISG under its Articles 25, 74 and 77.

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 6 ; 25 ; 74 ; 77

Classification of issues using UNCITRAL classification code numbers:

6A1 [Implied exclusion of Convention: pleading of provisions of domestic law held to displace applicability of provisions of Convention];

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

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

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

Descriptors: Choice of law ; Fundamental breach ; Damages ; Mitigation of loss

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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 & Trade Arbitration Commission
CIETAC (PRC) Arbitration Award

Chemicals case [May 2006]

Translation by [*] William Zheng and Sandy Xie [**]

Edited by Wenwen Liang [***]

The China International Economic and Trade Arbitration Commission (hereinafter referred to as the "Arbitration Commission") has accepted the arbitration case G2005____ involving a sales contract dispute according to:

   -    The arbitral provision in "Purchase Contact No. DOP-RSC-050601" (hereinafter referred to as the "Contract in this case" or the "Contract") signed by Claimant AAA Corporation [of the Republic of Korea] (hereinafter referred to as the "[Seller]") and Respondent BBB Chemical Industry Co. [of the People's Republic of China] (hereinafter referred to as the "[Buyer]") on 1 June 2005; and
 
   -    The written arbitration application submitted by the [Seller] on 1 September 2005.

The arbitration procedures are subject to the China International Economic and Trade Arbitration Commission Arbitration Rules (hereinafter referred to as the "Arbitration Rules") effective as of 1 May 2005.

On 27 September 2005, the Secretariat of the Arbitration Commission (hereinafter referred to as the "Secretariat") sent the Notice of Arbitration and other related materials to both parties by express delivery.

The [Seller] appointed Mr. ___ as arbitrator. Since the [Buyer] has neither appointed an arbitrator nor entrusted the Chairman of the Arbitration Commission to designate one within the applicable period, the Chairman appointed Mr. ___ as arbitrator for this case in accordance with the Arbitration Rules. Since the parties did not jointly appoint or entrust the Chairman of the Arbitration Commission to designate a Presiding Arbitrator within the applicable period, the Chairman appointed Mr. ___ as the Presiding Arbitrator for this case in accordance with the Arbitration Rules. On 14 November 2005, the three arbitrators established the Arbitral Tribunal to hear this case.

On 14 November 2005, the Arbitral Tribunal decided to hold a hearing in Beijing on 22 December 2005 after consultation with the Secretariat. The Secretariat then sent the Notice of Establishing the Arbitration Tribunal and the Notice of Hearing to both parties by express delivery on the same day.

On 22 December 2005, the Arbitration Tribunal opened the hearing in Beijing as scheduled. Both parties assigned representatives to appear before the Tribunal, and agreed to submit the dispute to the Arbitration Commission and that the arbitration procedures will be subject to the Arbitration Rules that came into effect on 1 May 2005. No objection was made against any member of the Tribunal. During the course of the hearing, each party made oral statements on the case, expressed legal opinions, conducted cross-examination of the evidence and responded to the questions posed by the Tribunal.

On 6 January 2006, the Arbitration Tribunal received and accepted [Seller]'s application for the cross-examination of evidence at a second hearing. The Secretariat arranged for both parties to conduct the cross-examination of the relevant evidence on 20 January 2006 and documented the entire process. Both parties confirmed the completion of cross-examination of all of the evidence. On 10 February 2006, the [Buyer] submitted its Statement of Opinions after the hearing. On 13 February 2006, the Secretariat forwarded this Statement to the [Seller] and notified both parties that the Arbitration Tribunal held that it was not necessary to hold another hearing for the case as both parties had fully expressed their opinions during the hearing and sufficient time had been given to provide supplementary statements after the hearing.

The hearing has now been closed, and the Arbitration Tribunal hands down this award based on the facts and laws. The facts, opinions of the Arbitration Tribunal and award are as follows:

I. THE FACTS AND POSITION OF THE PARTIES

[Seller]'s position

The [Seller] stated in its Request for Arbitration that:

1. The [Seller] and the [Buyer] entered into Contract 0601 via facsimile on 1 June 2005 which mainly covered the following contents:

(1)   The Buyer: BBB Co. [of the People's Republic of China]
 
(2)   The Seller: AAA Corporation [of the Republic of Korea]
 
(3)   The goods: Chemicals (dioctly phthalate or DOP) in bulk
 
(4)   Quantity: 1,000 MT, +/-5% deviation packing up to the [Seller]
 
(5)   Quality: Standard of manufacturer
 
(6)   Shipment: The first half of June 2005
 
(7)   Unit Price: US $910/MT, CFR Shantou, China

2. On 3 June 2005 Korea time, the [Seller] mailed the original Contract 0601 to the [Buyer] through EMS (No. EE146080396KR), and requested the [Buyer] via facsimile to send back the Contract for filing after execution; the mail (No. EE 146080396KR) was confirmed as having been received at 14:02 on 7 June 2005 (Beijing time); the recipient was Chen ___.

3. On 3 June 2005, the [Seller] performed its obligation of booking shipping space in accordance with the shipment provisions of Contract 0601 and requested a confirmation from the [Buyer].

4. Since the [Buyer] did not open the L/C on time as stipulated in Contract 0601, the [Seller] notified the [Seller] by facsimile on 6 June 2005 that the deadline to open the L/C under the Contract was 6 June 2005.

5. The [Buyer] failed to open the L/C under Contract 0601 before the deadline of 6 June 2005 and did not reply to the [Seller] in writing. In order to minimize the loss resulting from the [Buyer]'s breach of contract, the [Seller] notified the [Buyer] by facsimile on 7 June 2005 (Korea time) that if the [Buyer] continued to not perform its obligation to open the L/C under Contract 0601, the [Seller] would re-sell the goods and claim for damages against the [Buyer] by legal means.

6. On 7 June 2005, the [Seller] notified the [Buyer] by facsimile that the goods under Contract 0601 had been resold with price terms of US $895/MT, CFR Changzhou, usance L/C payable within 90 days upon the issuance of B/L.

7. On 7 June 2005, the [Seller] and [Seller's Resale Contract Customer] entered into Contract DOP-RSC 050607 ("Contract 0607"). CCC Ltd. was the Seller's Resale Contract Customer, and its agent was DDD International Trade Co.

8. On 13 June 2005, the [Seller] received the L/C opened by the [Seller's Resale Contract Customer]; the number of the L/C was 01WLC0502027.

9. On 18 June 2005, the [Seller] shipped the goods under Contract 0601 and received the on board B/L (No. SHMCMCSHSA052101) opened by the carrier. For this aspect of the case, the total loss suffered by the [Seller] due to the [Buyer]'s default was the difference between the contractual amount under the Contract 0601 and the resale price of the goods under the Contract 0607, namely, fifteen thousand US dollars (US $15,000.00).

10. On 7 June 2005, the [Seller]'s counsel sent an attorney's letter to the [Buyer] by facsimile regarding [Buyer]'s failure to perform Contract 0601, requesting the [Buyer] to indemnify [Seller] within two working days for the direct economic loss in the amount of fifteen thousand US dollars (US $15,000.00) suffered by the [Seller] due to such failure. Otherwise, the [Seller] would submit the dispute to arbitration as stipulated in Contract 0601.

11. Since the [Buyer] failed to reply in writing to the [Seller]'s counsel within two working days to discuss the indemnification, the [Seller]'s counsel opened another attorney's letter on 9 June 2005, notifying the [Buyer] that [Seller] will claim all the losses against the [Buyer] through arbitration since, by 5 p.m. 9 June 2005 (Beijing time), there had been no reply from the [Buyer] regarding the indemnification for the economic losses. These losses include but are not limited to the price difference, arbitration fee and attorneys' fee arising out of the [Buyer]'s breach of Contract 0601.

[Seller]'s claim

The [Seller] alleges that Contract 0601 signed by both parties is legal and valid. [Seller] has well performed all of its obligations under the Contract on a bona fide basis. However, the [Buyer] has committed a material breach of contract and caused gross economic loss to the [Seller]. Therefore, the [Seller] submits this dispute to arbitration with the following claims:

   1.   Contract 0601 should be terminated;
 
   2.   The [Buyer] should indemnify the [Seller] for a total loss of fifteen thousand US dollars (US $15,000.00) attributed to the [Buyer]'s default under Contract 0601;
 
   3.   The [Buyer] is responsible of all the arbitration fees of this case;
 
   4.   The [Buyer] should indemnify the [Seller] for the attorneys' fee in the amount of RMB 19,576.34.

[Buyer]'s defense

In defense, the [Buyer] argued as follows:

1. The [Buyer] alleges that it had reached an oral agreement with the agent of the [Seller] to terminate the DOP-RSE-050601 Contract. Therefore it is legal and reasonable for the [Buyer] not to open the L/C in accordance with the Contract.

The [Buyer], for its business development, contacted the [Seller]'s agent EEE (Guangzhou) Trade Co. Ltd. (EEE Co.) for purchasing 1,000 MT DOP. And it entered into the DOP-RSE-050601 Contract with the [Seller] through facsimile on 1 June 2005. It was stipulated in the Contract that the [Seller] shall sell to the [Buyer] 1,000 MT DOP in bulk produced in Taiwan at the price of US $910/MT, and the time of shipment was to be the first half of June 2005. On 2 June 2005, EEE Co. consulted with the [Buyer] to replace the Taiwan-made DOP with Korea-made DOP. The [Buyer] refused and suspected the sincerity of the [Seller] and the [Seller]'s capacity to provide it with Taiwan-made DOP. It was agreed in the Contract that the place of origin would be Taiwan, but the [Seller] asked to change that after only one day. The request to change the place of origin caused the [Buyer] to worry about the [Seller]'s ability to provide the goods. As a result, the [Buyer] negotiated with EEE Co. to rescind the Contract, and turned to other suppliers. Upon the requirement of the [Buyer], EEE Co. orally agreed to rescind the Contract on behalf of the [Seller]. Therefore, it was not necessary for the [Buyer] to open the L/C as stipulated in Contract 0601.

2. The petition of the [Seller] for an arbitration award to terminate the Contract 0601 has no actual meaning, because the Contract is no longer legally binding since the [Buyer] had not opened the L/C within the prescribed time limit and the [Seller] failed to ship the goods with the prescribed time of shipment. There is no need for the [Seller] to petition for termination of the Contract 0601 through arbitration. The [Seller] abused its arbitration right and therefore, should bear the additional arbitration fees arising therefrom.

In accordance with Contract 0601, the [Seller] was obligated to provide 1,000 MT of Taiwan-made DOP to the [Buyer], the time of shipment was the early half of June 2005, and the deadline for shipment was 15 June 2005 while the deadline to open the L/C was 6 June 2005. However, due to the misunderstanding between both parties, neither did the [Buyer] open the L/C before 6 June 2005, nor did the [Seller] ship the goods before 15 June 2005. As a result, Contract 0601 is no longer legally binding and performance is no longer necessary or possible,

The claims submitted by the [Seller] contain no sufficient reasons or evidence for terminating Contract 0601, which is the [Seller]'s abuse of the right to arbitration. The value of Contract 0601 reached US $910,000.00 (RMB 7,500,000 in equivalent), and the [Seller] had paid US $7,099 in advance. The [Seller] is responsible for abusing the arbitration right and should be liable for all the arbitration fees.

3. The [Seller] resold the goods under the Contract 0601 at the price of US $895/MT which is obviously lower than the then price in the international market. The price of such goods in the international market at that time was US $900/MT, CFR Changzhou. It is possible that the [Seller] sold the goods under the Contract at a very low price to its affiliated client.

Therefore, the [Buyer] believes that it is not obliged to open the L/C as stipulated by Contract 0601 since it had already reached an oral agreement to terminate Contract DOP-RSE-050601 with the [Seller]'s agent under the circumstances that it was deeply worried about the ability of the [Seller] to supply the goods. The [Seller] should be held responsible for the increased arbitration fees due to its abuse of arbitration right.

[Seller]'s response

On 5 January 2006, the [Seller] defended in its post-hearing statement alleging that:

1. The Contract involved in this case had not been terminated.

In accordance with the Contract Law of the People's Republic of China ("Contract Law") and the United Nations Convention on Contracts for the International Sale of Goods (CISG), contracts that are legally concluded shall be protected by law and are legally binding upon parties to such contracts. Rights and obligations set forth by the contract may be terminated solely under the circumstances that the contract is rescinded, the obligations are performed by the debtor, or the liabilities are relieved by the creditor. However, none of the above situations occurred in this case.

During the hearing, the [Buyer] asserted that the Contract had been rescinded through oral consultation with the [Seller]'s agent EEE Co. This is groundless both in fact and in law.

First, the [Seller] has never appointed EEE Co. to act in its capacity to deal with the matters in connection with the contracts involved in this case. The [Buyer] never provided any evidence to support such appointment during the conclusion and performance of these contracts. EEE Co. did not appear in any form in these contracts either. Obviously, the [Seller] does not need to bear any legal liability for EEE Co.'s conduct. Any act of the [Buyer] done with EEE Co., including delivering notice to rescind the Contract, does not constitute a termination of the Contract.

Besides, in accordance with the Contract Law and CISG, a party demanding termination of a contract shall notify the other party. The contract shall be terminated upon the receipt of the notice by the other party. Therefore, if the [Buyer] believes it has the right to terminate the Contract in absence of consultation, it should have notified the [Seller]. However, the [Buyer] neither delivered such notice to the [Seller], nor provided any related evidence.

The [Seller] also pointed out that although the [Buyer] had provided two facsimiles from EEE Co. on 3 June 2005 in order to support the termination of the Contract, EEE Co. replied in the above two facsimiles to the [Buyer]'s request for terminating the Contract that the Contract should be continuously performed as it was and that the [Buyer] should open the L/C before 6 June. It is clear that the evidence submitted by the [Buyer] could not prove that the Contract had been terminated through consultation with EEE Co., but only reflected the [Buyer]'s bad intention of declining to perform its obligations thereunder despite EEE Co.'s request.

2. The [Seller] is legally entitled to request a termination of the Contract.

Pursuant to Article 94 of Contract Law, the parties to a contract may terminate the contract if the other party expressly states, or indicates through its conduct that it will not perform its material obligations prior to the expiration of the period of performance.

The Contract provides that the [Buyer] shall open the L/C before 6 June 2005. It has been found by the Tribunal that the [Buyer] has not opened the L/C till now. It is obvious that the [Buyer] failed to fulfill the obligation of payment which is the most fundamental obligation of a buyer in a sales contract.

On 6 June 2005, the [Seller] notified the [Buyer] by facsimile that it would terminate the Contract and claim for the damages therefrom if the [Buyer] failed to open the L/C within the time limit prescribed in the Contract. On 7 June 2005, the [Seller] again notified the [Buyer] by facsimile that it would re-sell the goods and claim for the losses through legal procedures if the [Buyer] still did not perform its contractual obligations. During the trial, the [Buyer] acknowledged all the above facsimiles and admitted that it had given no reply. But it defended that it was not necessary to execute the Contract any further and there was no need for the [Seller] to request for terminating the Contract, since both parties had failed to perform the obligations under the Contract and the goods had already been resold.

The [Seller] believes that it had no duty to perform the Contract further in that the [Buyer] did not perform its main contractual obligation. It would have increased the losses of the [Seller] and the purpose of the Contract could hardly have been realized, if it shipped the goods. As a result, it was not breach of contract but defense against [Buyer]'s non-performance of obligations which should have been performed first. Since the rights and obligations set forth in the Contracts in this case had not been terminated and the [Buyer] had not given any reply to the [Seller] for the request to terminate the Contract and indemnify it for its losses, the [Seller] has the right to apply for terminating the Contract with the Arbitration Tribunal when the parties failed to reach an agreement on contract termination and compensation.

3. The economic losses of the [Seller] are objective and true, and were caused by the [Buyer]'s default.

In order to prevent any further loss when the [Buyer]'s material breach occurred, the [Seller] had to resell the goods under the Contract. It was shown in the evidence (including the Resale Contract, the L/C opened by [Seller's Resale Contract Customer] and the B/L) submitted by the [Seller] that the name, place of origin and quantity of the goods resold by the [Seller] were identical to those of the goods under the Contract, but the selling price was US $895/MT, CFR Changzhou, which is lower than the price set forth in the Contract by US $15/MT. Based on report on the international sale price for DOP (the goods under the Contract) supplemented by the [Seller], the DOP sale price in the international market was US $890-910/MT on 2 June 2005 and dropped to US $880-890/MT on 9 June 2005. The report expressly showed that the sale price of DOP in the international market had been going down from the execution of the Contract to when the [Seller] resold the goods. Despite that circumstance, the [Seller] still managed to resell the goods at US $895/MT which was above the then average market price. This proves that the [Seller] had made its greatest efforts to minimize the losses caused by the [Buyer]'s breach on a bona fide base.

During the hearing, the [Buyer] defended that the resale price was lower than the then market price, and that it was possible that the [Seller] had resold the goods to its affiliate at a low price. However, the [Buyer] failed to provide any evidence to prove this assertion. The [Buyer]'s assertion that the [Seller] resold the goods at a low price has no factual basis and should not be supported by the Arbitration Tribunal.

The [Seller] alleges that the [Buyer]'s defenses are groundless in fact and law, and requests the Arbitration Tribunal to support all its claims.

[Buyer]'s rebuttal

Later on, the [Buyer] made the following Statement of Attorney:

1. There are sufficient reasons to suspect the [Seller] of fabricating trade background and loss, and forging contract, L/C and B/L to seize illegal interest.

During the hearing, the [Seller] failed to submit the following documents:

   -    The original or the original fax of Contract DOP-RSC 050607 which was signed on 7 June 2005 by and between the [Seller] and [Seller's Resale Contract Customer] to whom the goods were allegedly resold;
 
   -    The duplicate of L/C 01WLC0502027 it received on 13 June 2005 opened by DDD International Trading Co. Ltd under authorization of the [Seller] to Contract 0607;
 
   -    The duplicate of shipment B/L SHMCMCSHSA052101 opened by the carrier after the [Seller] had shipped the goods under Contract 0601 on 18 June 2005.

The [Seller] only furnished copies of the above mentioned contracts, the L/C and the duplicate of B/L, which was in violation of evidence rules. The [Buyer] firmly believes that after the Parties entered into Contract 0601, neither did the [Seller] sign Contract DOP-RSC 050607 with [Seller's Resale Contract Customer] nor did it deliver the goods to that customer. Thus, the [Seller] suffered no economic loss in this case, and it just made up its loss of US $15,000 by fabricating trade background and forging sales contract, L/C and B/L.

In compliance with Article 36 of Arbitration Rules and with reference to Articles 1, 2, 3, 10, 47, 50, 51 and 63 of "Some Provisions of the Supreme People's Court on Evidence in Civil Procedures", the [Seller] should bear the unfavorable legal consequences because it failed to submit the originals of the above evidence during the trial.

2. The [Buyer] requested that the [Seller] submit all the trade materials regarding its alleged resale of the 1,000t DOP under Contract 0601 to [Seller's Resale Contract Customer], and have them cross-examined, explained and refuted during the second hearing with the necessary additional fees to be assumed by the [Seller].

3. The Resale Contract DOP-RSC 050607 signed by and between the [Seller] and [Seller's Resale Contract Customer] as the Sub-Buyer on 7 June 2005 (the [Seller] only submitted the copy of the Contract) provides that DDD International Trading Co., Ltd is the Sub-Buyer's agent, the applicant of the L/C and the consignee of the B/L should be DDD International Trading Co, Ltd. Therefore, the [Seller] should furnish the Import Agency Agreement or Power of Entrustment to prove that [Seller's Resale Contract Customer] had entrusted DDD International Trading Co., Ltd to import the 1,000t DOP.

4. Contract DOP-RSC 050607 (the Resale Contract) was signed on 8 June 2005, and the shipment date was 15 June 2005. However, the shipment date on the B/L SCHMCMCSHSA052101 (the [Seller] only submitted the copy of the B/L) opened by the carrier after it loaded [Seller's Resale Contract Customer]'s 1,000t DOP was 18 June 2005, which was inconsistent with the shipping terms of the L/C 01WLC0502027.

5. The [Seller]'s request to terminate Contract 0601 has no actual meaning, because Contract 0601 is no longer binding due to the [Seller]'s and the [Buyer]'s conduct. It was unnecessary for the [Seller] to request the Arbitration Tribunal to terminate the Contract. Besides, the [Seller] should be liable for any extra arbitration fees arising out of its abuse of arbitration right.

After the second hearing, the [Buyer] submitted to the Arbitration Tribunal its Statement on the entire case and reiterated its opinion.

II. OPINION OF THE ARBITRATION TRIBUNAL

1. Applicable law and key issues

Section 12 ("Arbitration") of the Contract between the [Seller] and the [Buyer] dated 1 June 2005 stipulated that any dispute or discrepancy arising out of this Contract shall be submitted for arbitration to the China International Economic and Trade Arbitration Commission in Beijing. The Contract did not stipulate the applicable law for dispute resolution. The [Seller] and the [Buyer] are Korean and Chinese legal persons respectively. As both Korea and China are Contracting States to the CISG, the Arbitration Tribunal holds that CISG should be applied to resolve the contractual dispute in this case. The Arbitration Tribunal also notes that both Parties' Opinions of Attorney cited Chinese laws for reference, therefore, the laws and regulations of China and international trade customs should be applied to the matters not expressly settled in the CISG.

The Parties signed the Contract in this case through facsimile on 1 June 2005. The Contract, representing the true intention of the Parties, was legal and valid. Both Parties are obligated to perform the Contract in accordance with the terms stipulated in it. Pursuant to the Contract, the [Seller] should sell 1,000 MT DOP in bulk to the [Buyer] with +/-5% more or less at the Seller's discretion, the unit price should be US $ 910/MT. It was the [Buyer]'s failure to open the L/C as required under the Contract that caused the Contract in this case not to be performed.

The Arbitration Tribunal finds that the dispute between the Parties concentrates on the following three issues:

   (1)   Which party shall bear the responsibility for the failure to open the L/C;
 
   (2)   Whether the [Seller] is entitled to request termination of the Contract;
 
   (3)   Whether the [Seller] resold the goods under the Contract and suffered loss from the price difference.

The Arbitration Tribunal will make its analysis based on the above three issues.

2. On the issue of the failure to open the L/C

The Arbitration Tribunal notes that Section 15/b of the Contract expressly provides that [Buyer] shall open the L/C with full cable by 6 June 2005, but the [Buyer] did not open the L/C on the said day. The [Seller] thus sent a letter to the [Buyer] by facsimile on 6 June 2005, requiring that the LC be opened on that day. The [Buyer] failed to do so in accordance with the Contract and the reminder sent by the [Seller]. Neither party raised objection to the above facts.

The [Buyer] argued that:

   -    It was through the [Seller]'s agent EEE (Guangzhou) Trading Co. ("EEE Co.") that the Contract in this case was executed.
 
   -    On 2 June 2005, EEE Co. negotiated with the [Buyer] to change Taiwan-made DOP to Korea-made DOP, but the [Buyer] declined and asked EEE Co. to rescind the Contract.
 
   -    On behalf of the [Seller], EEE Co. orally agreed to rescind the Contract.

As a result, the [Buyer] believed that it was unnecessary for it to open the L/C as stipulated by the Contract.

The Arbitration Tribunal compared the evidence submitted by both Parties and conducted an investigation on the above issue. The Tribunal finds that the [Buyer] has not provided any evidence to prove the principal-agent relationship between the [Seller] and EEE Co., so the proposition that EEE Co. was the [Seller]'s agent was not accepted by the Arbitration Tribunal.

On the issue of the proposed change of origin of the goods

The [Buyer] did not provide any evidence to show that it had directly negotiated and consulted with the [Seller] on this issue, and the two facsimiles submitted were both letters sent by EEE Co. In the trial of this case, the Arbitration Tribunal has inquired of the [Buyer] about this issue and the [Buyer] admitted knowing that. Although the Arbitration Tribunal does not accept that EEE Co. is the [Seller]'s agent, but holds that the [Buyer] should have known the alteration of goods origin through the non-party EEE Co. The Arbitration Tribunal also notes that the facsimile sent by EEE Co. to the [Buyer] on 3 June 2005 read that "our company will stick to the Contract as it was originally executed since we did not reach an agreement on the alteration of goods origin yesterday." The Tribunal thus holds that the facsimile has made it very clear to the [Buyer] that the Contract should be performed as previously stipulated since the [Buyer] did not agree with the alteration of goods origin. The facsimile was sent on 3 June 2005 and there were still three days remaining before the deadline of issuing the L/C under the Contract. The [Buyer] was fully aware that the Contract was to be performed as it was originally executed, and that the [Seller] did not breach the Contract. On the contrary, the [Buyer]'s failure to open the L/C on the basis of suspicion of the [Seller]'s incapacity to supply the goods constitutes a material breach and the [Buyer] should be held responsible.

On the issue that the [Buyer] required EEE Co. to rescind the Contract and believed that EEE Co. had agreed to its requirement on behalf of the [Seller]

Based on the above opinions, the Arbitration Tribunal does not acknowledge that EEE Co. is the agent of the [Seller]. Since the [Buyer] did not provide any evidence showing that it had informed the [Seller] of its intent to rescind the Contract, the Arbitration Tribunal overrules the [Buyer]'s claim that it had expressly required to rescind the Contract. And its proposition that it was unnecessary to open the L/C is not accepted by the Arbitration Tribunal.

3. Whether the [Seller] has the right to require termination of the Contract

The [Buyer] insisted that since it failed to open the L/C as stipulated by the Contract, the continuous performance of the Contract was deprived of reasonable cause. Therefore, the [Seller] abused its right to arbitration by demanding to terminate the Contract. The Arbitration Tribunal notes that the [Seller] raised such demand by citing provisions of the Contract Law of the People's Republic of China ("Contract Law"), while the [Buyer] did not raise any objection to it. So the Tribunal holds the Contract Law applicable to this issue.

   -   In accordance with Article 91 of the Contract Law, the rights and obligations under a contract shall be terminated upon rescission.
 
   -   And Article 94 provides that the parties to a contract may terminate the contract when the other party delays performance of its obligations, or breaches the contract in some other manner, rendering it impossible to achieve the purpose of the contract.
 
   -   Article 96 expressly provides that a party demanding termination of a contract in accordance with the provision of Article 94 of this Law shall notify the other party. The contract shall be terminated upon the receipt of the notice by the other party. If the other party objects to such termination, it may petition the People's Court or an arbitration institution to adjudicate the validity of the termination of the contract.

The Arbitration Tribunal thus believes that the facts of this case are as follows:

   -   The [Buyer] expressed through its action that it would not perform its obligations under the Contract which constituted a breach of contract. Under such circumstances, the [Seller], as the innocent party, may notify the [Buyer] of the termination of the Contract, which the [Seller] did not do.
 
   -   The Arbitration Tribunal does not accept that the [Buyer] has once expressly demanded to terminate the Contract, and thus the Parties did not reach any agreement on the termination.

The Arbitration Tribunal holds that the [Seller]'s termination of the Contract was an exercise of the right to sue according to law. As a result, the [Buyer]'s proposition that the [Seller] abused its right to arbitration is not legally sound and is not accepted by the Tribunal.

4. Whether the [Seller] resold the goods under the Contract and this resulted in a loss of price difference

The Arbitration Tribunal notes that the [Buyer]'s defense focused on the [Seller]'s failure to provide the following documents: the original or facsimile original of Contract DOP-RSC050607 signed between the [Seller] and [Seller's Resale Contract Customer]; the duplicate of the L/C opened by DDD International Trading Co., under the appointment of the Sub-Buyer; and the duplicate of the shipping B/L SHMCMCSHSA052101. Only the copies of the above documents were provided, which the [Buyer] alleges violates the rules of evidence. Therefore, the [Buyer] firmly believes that the [Seller] fabricated the trade loss.

The Arbitration Tribunal also notes that the Secretariat scheduled an evidence cross-examination on 20 Jan 2006 upon the request of the [Buyer]. During the cross-examination, the [Seller] showed the original of the Resale Contract and the [Buyer] acknowledged it. However, the [Seller] did not provide the original L/C and B/L under the Resale Contract.

After reviewing the evidence and opinions submitted by both Parties, the Arbitration Tribunal holds that the [Buyer] failed to furnish any evidence to show the [Seller]'s fabrication of trade loss. On the contrary, during the trial it acknowledged having received the original Contract and the facsimile sent by the [Seller] on 6 June 2005 which reminded its obligation to open the L/C. Due to the [Buyer]'s breach of contract and failure to open the L/C on time, the Contract were not performed. In that situation, the [Seller] signed the Resale Contract with [Seller's Resale Contract Customer]. The name, origin and quantity of the goods under the Resale Contract were identical to those under the Contract in this case. As to whether the Resale Contract has been performed, the Arbitration Tribunal finds that the [Seller] provided the original Resale Contract which was acknowledged by the [Buyer], but it failed to provide the duplicate L/C and the original B/L under the Resale Contract. However, the Arbitration Tribunal notes that the [Seller] sent a letter to the [Buyer] on 7 June 2005, notifying that it would resell the goods under the Contract since a L/C had not been opened pursuant to the Contract. On the same day, the [Seller] sent another letter to the [Buyer], notifying that it had resold the said goods at the price of US $895/MT. The [Buyer] also acknowledged the receipt of the above faxes. Based on the aforementioned conduct of the [Seller], the Arbitration Tribunal has sufficient reasons to believe that the [Seller] took appropriate measures to prevent the losses from increasing by reselling the goods under the Contract when the [Buyer] breached the contract, which is in fulfillment of its obligation to prevent further loss. In addition, the [Seller] submitted two supplementary items of evidence to show that the price of DOP in the international market after the execution of the Contract and before the [Buyer] opened the L/C had dropped. Namely, US $890-910/MT on 2 June 2005 and US $880-890/MT on 9 June 2005. The [Buyer] denied this but failed to furnish any further evidence, showing the then price of the goods in the international market. Therefore, the Arbitration Tribunal accepts the reference price provided by the [Seller], and holds that it was reasonable for the [Seller] to resell the goods under the Contract when the [Buyer] refused to perform its contractual obligations. Besides, the resale price is not obviously lower than the reference price in the international market at that time, which proves that the [Seller] carried no malicious intent. The price difference of the goods does exist, and the [Buyer] shall pay the compensation due to its breach of contract.

5. On the issue of the [Seller]'s arbitration claims

      (1) The Arbitration Tribunal has affirmed the [Buyer]'s liability for breach of contract based on the above analysis. The Arbitral Tribunal supports the [Seller]'s claim to terminate the Contract and rules that the [Buyer] shall bear the economic losses suffered by the [Seller] due to its failure to perform the contractual obligations. The calculation method and the amount of the price difference arising out of the resale of the goods by the [Seller] are as follows: (US $910-US $895) 1,000 MT= US $15,000.

      (2) The [Buyer] shall indemnify the [Seller] for its attorney fee and all the arbitration fees of this case based upon the arbitration award. Under the principle of fairness and reasonableness, the [Buyer] shall indemnify the [Seller] for its attorneys' fee in the amount of RMB 19,576.34 and all the arbitration fees of this case.

III. AWARD

The Arbitration Tribunal decides:

   1.   The Contract DOP-RSC-050601 shall be terminated;
 
   2.   That the [Buyer] shall indemnify the [Seller] for a total loss of fifteen thousand US dollars (US $15,000.00) resulting from the [Buyer]'s breach of contract;
 
   3.   That the [Buyer] shall indemnify the [Seller] for the attorneys' fee in the amount of RMB 19,576.34.
 
   4.   That the [Buyer] is fully responsible for the arbitration fees of this case in the amount of US $7,099. The [Seller] has paid in advance US $7,099 to the Arbitration Commission. As a result, the [Buyer] shall pay US $7,099 to the [Seller].

The above payments shall be made by the [Buyer] to the [Seller] within 40 days of the decision.

This decision is final.


FOOTNOTES

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

** William Zheng is a graduate of the Pace University School of Law. His is special counsel with the Shanghai office of Sheppard Mullin Richter & Hampton LLP and Editor of the Shephard Mullin China Law Update. Sandy Xie is an Associate with this firm.

*** Wenwen LIANG, Ph.D candidate, University of Manchester, UK; LL.M. Wuhan University, China.

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Pace Law School Institute of International Commercial Law - Last updated October 30, 2009
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