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CISG CASE PRESENTATION

China September 2006 CIETAC Arbitration proceeding (Air purifier case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/060900c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20060900 (September 2006)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2006/08

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Japan (claimant)

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

GOODS INVOLVED: Air purifiers


Classification of issues present

APPLICATION OF CISG: Yes [contractual agreement of the parties]

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 4 ; 8 ; 35 [Also cited: Articles 77 ; 85 ; 86 ; 88 ]

Classification of issues using UNCITRAL classification code numbers:

4B [Scope of Convention (issues excluded: agency issues];

8A [Interpretation of party's statement or other conduct: intent of party making statement or engaging in conduct];

35A ; 35B [Conformity of goods to contract: quality, quantity and description required by contract; requirements implied by law]

Descriptors: Scope of Convention ; Agency issues ; Intent ; Conformity of 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

Air purifier case (September 2006)

Translation by [*] Dong Ping [**]

Edited by William Zheng and Jingyuan Sun [***]

Particulars of the proceeding
Facts and position of the parties
Summary of issues
Opinion of the Arbitration Tribunal
Award

PARTICULARS OF THE PROCEEDING

The China International Economic and Trade Arbitration Commission [hereinafter the "Arbitration Commission"] accepted the case (Case no. G2005___) according to:

   -    The arbitration clause in Photocatalyst Air Purifier Sales Contract No. 03XN11JPW0501 (the "Contract"), which was signed on 12 June 2003 by Claimant AAA Joint-Stock Corporation [of Japan] (the "[Seller]") and BBB Limited Company [of the People's Republic of China] (the "[Respondent]"), and CCC Trading Development Co. Ltd. ("CCC" or the "[End User]"); and
 
   -    The Arbitration Application submitted by the [Seller] on 25 October 2005.

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

On 14 November 2005, the Secretariat of the Arbitration Commission (the "Secretariat") sent the Arbitration Notice, the Arbitration Rules and the List of Arbitrators to the [Seller] and the Respondent by express mail, and sent to the Respondent the Application for Arbitration and its attachments submitted by the [Seller]. The Secretariat required both parties to choose arbitrators and the Respondent to submit its Defense within the time limit.

The [Seller] appointed the Japanese arbitrator Mr. ___ as an arbitrator, and the Respondent appointed Mr. ___. Since both parties failed to jointly appoint or authorize the Chairman of the Arbitration Commission to appoint the presiding arbitrator, the Chairman of the Arbitration Commission appointed Mr. ___ as the presiding arbitrator of this case according to the Arbitration Rules. The three arbitrators declared themselves independent from the disputes, both parties, and their legal representatives. They signed statements accepting the designation. On 5 January 2006, the three arbitrators established the Arbitration Tribunal to hear this case. On the same day, the Secretariat sent both parties the Notice of Composition of Arbitration Tribunal and related documents.

On 8 December 2005, the Respondent applied to the Arbitration Commission to add a party, the "true buyer" and the "end-user"-- CCC Trading Development Co. Ltd. ["CCC" or "End User"], as a Co-Respondent. However, the [Seller] filed an objection to this application when it was forwarded to it by the Secretariat on 15 December 2005. On 19 December 2005, CCC submitted to the Arbitration Tribunal its Application to Join the Arbitration, declaring itself as "an important party who is the true buyer" and stating that "the Respondent was in fact an agent of the applicant (CCC - Arbitration Tribunal) to deal with the import procedures under the authorization of the applicant and the [Seller]". On 23 December 2005, the Respondent sent the Arbitration Commission the "Request for Deciding the Matter of Adding a Co-Respondent". On 26 January 2006, the Arbitration Commission responded to the Respondent that, since the [Seller] objected to adding the party, it was not entitled to add a third party as Co-Respondent.

The Respondent submitted its Defense and attachments thereto on 28 December 2005 and 15 February 2006. The Secretariat forwarded these documents to the [Seller].

On 22 February 2006, after discussion and consulting the Secretariat, the Arbitration Tribunal decided to hold an oral hearing in Beijing on 28 March 2006. On the same day, the Secretariat of the Arbitration Commission sent the Notice of Hearing to both parties.

On 28 March 2006, the Arbitration Tribunal held an oral hearing in Beijing as scheduled. Both the [Seller] and the Respondent sent agents and/or representatives to participate in the hearing. All the documents that the parties submitted before were passed to the opposite side. At the hearing, the parties presented oral statements and arguments on the facts and legal issues, cross-examined the evidence, and answered the questions of the Arbitration Tribunal. After the "Request for a Witness to Testify in Court" submitted by the Respondent was approved by the Arbitration Tribunal, witness Mr. Tian Aiguo [of CCC] appeared at the hearing and was questioned by both parties and the Arbitration Tribunal. At the end of the hearing, after listening to both parties, the Arbitration Tribunal decided that any additional materials must be submitted by 12 April 2006.

On 12 April 2006, both the [Seller] and the Respondent submitted additional evidence in a timely manner. After the Secretariat forwarded the above documents to the parties, they examined the documentary evidence. The [Seller] submitted a "Comment on Photocatalyst Air Purifier Sales Contract Dispute No. G2005___", and the Respondent submitted an "Attorney's Opnion". The Secretariat forwarded the above documents to the parties.

This case is now closed. According to the written materials and the facts verified in the hearing, the Arbitration Tribunal entered an unanimous award.

The following are the facts, the position of the parties, the opinion of the Arbitration Tribunal, and the arbitration award.

FACTS AND POSITION OF THE PARTIES

[Seller]'s position

The [Seller] alleged that:

      In April 2003, in order to introduce its photocatalyst air purifiers into the Chinese market, the [Seller] negotiated with CCC about the sales commission. In June 2003, the [Seller] learned during the negotiation that CCC was not entitled to deal with import and export in international trade. As a result, CCC asked the Respondent to be the buyer in the Contract. On 12 June 2004, the [Seller], the Respondent and CCC concluded the Photocatalyst Air Purifier Sales Contract [the "Contract"] in Beijing, China. The Respondent is the nominal buyer and CCC is the end-user in the Contract. Under the Contract, the [Seller] should prepare 3,000 photocatalyst air purifiers within a month after the contract is concluded and the Respondent should open the L/C within the prescribed period. The [Seller] prepared the goods under the Contracct as scheduled, but the Respondent failed to open the L/C on time.

      From July 2003 to April 2004, the [Seller] negotiated about the L/C issue with the Respondent by phone and by e-mails for many times. However, the Respondent refused to open the L/C for that CCC did not make the payment for the goods to it. The Respondent's non-performance caused economic losses to the [Seller].

The [Seller] alleged that the Respondent breached the Contract and caused damage to it. The [Seller] submitted the following arbitration claims:

   1.  Respondent should pay the [Seller] for transport cost and warehouse fees of Japanese yen [JPY] 12,529,896;
 
   2.  The Respondent should pay the [Seller] for the loss due to depreciation of the goods caused by non-performance of the Contract with the amount of JPY 72,800,000;
 
   3.  The Respondent should compensate the [Seller] for the attorneys' fee of JPY 4,266,494.80; and
 
   4.  The Respondent should bear the arbitration fee.

Respondent's defense

The Respondent alleged that:

      The Respondent is an import agent in this case. All the transactions were between the [Seller] and the third-party CCC. The [Seller] was aware of CCC's role as the principal. According to Article 402 of the Contract Law of the People's Republic of China:

"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."

Moreover, according to Article 20 of the Contract, since the Respondent only acted as an agent, all of the responsibilities of the buyer were to be undertaken by its principal, CCC. In addition, the Contract was void and the conditions for opening the L/C were not met. Even if the losses that the [Seller] alleged did occur, according to law of China and the relevant clauses in the Contract, there is no reason to hold the Respondent responsible under the Contract. All of the arbitration claims of the [Seller] should be rejected.

SUMMARY OF ISSUES

Based on the written materials submitted by both parties, the Arbitration Tribunal summarizes the parties' major points as follows:

A. [Seller]'s allegations

       1. The Contract is valid, the Respondent should have performed the contractual obligation to open the L/C.

The issue in this case arose from the relationship between the [Seller] and CCC. Since CCC was not entitled to deal with imports and exports in international trade, the Respondent signed the Contract with the [Seller] in the name of buyer. The Contract states that "it is concluded between buyer and seller, buyer agrees to purchase on behalf of the end user, and the seller agrees to sell the following products ..." Therefore, the Respondent, as buyer, is responsible for the contractual obligations of the buyer.

According to Article 402 of the Contract Law of the People's Republic of China, as the Contract states, the End User CCC shall be responsible for the relevant transaction clauses. However, the dispute arose when the Respondent failed to open the L/C, which is the obligation of the buyer and also a legal obligation that is binding on the agent and the third party. Therefore, the Respondent cannot use Article 402 of the Contract Law of the People's Republic of China as an escape clause.

The major contractual obligation of the Respondent is to open the L/C to the [Seller]. The arbitration claim of the [Seller] is to recover the direct loss casued by the Respondent's failure to fulfill this duty. It is the Respondent but not CCC who bears the obligation to open the L/C. The three contracting parties did not agree that CCC can refuse to open the L/C if CCC fails to make the payment for the goods to it. The Import Agency Agreement submitted by the Respondent is a contract between the Respondent and CCC, of which the [Seller] is unaware. Therefore, this agreement cannot prevent the Respondent from performing the obligation to open the L/C.

       2. The goods under the Contract are ordinary electronic products, not medical appliances.

              (1) The governmental approval in Section (1) of Article 19 of the Contract is not a required Sterilizer License, as specified by the Respondent. If the goods were "Restricted Products", the Respondent would be responsible to deal with or remind the [Seller] to deal with the formalities. It is reasonable for the [Seller] to believe that the goods are not "Restricted Products" since the Respondent never reminded the [Seller] about it when signing the Contract.

              (2) The 3,000 photocatalyst air purifiers under the Contract are electronic products, not medical appliances. The Sterilizer License the End User CCC applied for has nothing to do with this case. The name and model number of the products specified in the Sterilizer License are different from those of the goods under the Contract. The governmental approval was applied for in order to sell sterilizer machines in the future. Therefore, the approval procedure of the importing country stated by the Respondent is not relevant to this case.

              (3) The [Seller] signed a sales contract with Hai Nan Zhong You Technical Equipment Import and Export Corporation on 3 September 2003. The goods under this contract, 540 BF-H201A Air Purifiers, have the same model number as the goods under the Contract of this case. The sales contract and L/C transaction invoices, which were authenticated by the Chinese embassy to Japan, prove that 540 BF-H201A Air Purifiers are regarded as ordinary electronic products and governmental approval is not required for the transaction. The deal mentioned above was done in September 2003, which is strong evidence that the BF-H201A Air Purifier is an ordinary electronic product, not a medical appliance.

Moreover, if the goods under the Contract were regarded as medical appliances, the Respondent should have notified the [Seller] of the approval procedure of the importing country. The Contract stipulates the time of shipment, time of delivery, and time of opening the L/C, but not the governmental approval or any other relevant documents. Therefore, the Respondent was obliged to guarantee the obtaining of the governmental approval within a reasonable period. However, when the [Seller] performed all its contractual obligations, the Respondent failed to notify the [Seller] that the Contract could not be executed without the governmental approval. It was the Respondent's culpa in contrahendo that made the contract invalid. It should be responsible for the transport cost and warehouse fees incurred by the [Seller].

       3. The conditions for opening the L/C were met, and the Respondent should fulfill the contractual obligations.

The goods under the Contract were ordinary electronic products, so the approval procedure of the importing country was not necessary and the Contract should have been performed as scheduled. Section 5 of Article 5 and Section 1 of Article 7 state that the delivery date is 31 July 2003, the B/L date (or the airway bill date) is the date of delivery, and the Respondent was obliged to open the L/C ten days before the delivery. According to the Contract, the Respondent should have opened the L/C ten days before 31 July 2003. In other words, the Respondent should perform its obligation first. Therefore, it is groundless for the Respondent to allege that it did not need to open the L/C since the conditions were not met.

It is not true for the Respondent to allege that the [Seller] sent a notice to CCC to terminate the transaction. Since the [Seller] and the manufacturer of the goods jointly authorized CCC as the sales agent in China, the notice to terminate the transaction should be sent by them jointly. Therefore, CCC is still the sales agent in China of the [Seller] and the manufacturer. The Contract became effective when it was signed and sealed by the parties. It is legally binding on both parties and the Respondent should open the L/C accordingly.

       4. The Respondent should compensate the [Seller] for the direct losses incurred as a result of its faults.

The [Seller] has suffered direct losses caused by the faults of the Respondent. Therefore, the Respondent is liable for the direct economic losses of the [Seller], including the transport cost, warehouse fee, and loss due to depreciation.

The Respondent's refusal to open the L/C without notification to the [Seller] led to a long-time storage of the goods and the failure of delivery of the goods. According to the Japanese rules of five-year depreciation of the air purifiers, since the goods had been stored for more than two years due to the Respondent's fault, the [Seller] calculates the loss due to depreciation in a one-year period. The amount of the compensation = purchase price 20% (one-year depreciation period).

2. Respondent's allegations

       A According to Article 402 of the Contract Law of the People's Republic of China and Article 20 of the Contract, the Respondent, as the agent of the buyer CCC, is not liable for any contractual responsibilities.

             1. The Respondent is just an agent under the Contract. The End User CCC is the true buyer of the goods under the Contract. The Respondent only signed the Contract in the name of buyer. In fact, it is the agent of the true buyer CCC according to the authorization by the [Seller] and CCC. The above fact was acknowledged by the [Seller] in the Application for Arbitration.

The following facts support the Respondent's allegations:

                   a. The true buyer CCC and the [Seller] had a business relationship before entering into the Contract. On 7 May 2003, they agreed that the [Seller] would authorize CCC as its sales agent to sell air purifiers (Product Code: BF-H201AC/BF-H103AC) produced by DDD Electrical Equipment Joint-Stock Corporation ["DDD"] in the Chinese market. The [Seller], together with DDD, provided an authorization letter to CCC. The letter states that the CCC would order more than 3,000 air purifiers.

                   b. Since CCC could not deal with imports and exports in international trade, it asked the Respondent to perform as its agent in importing the air purifiers after confirming the basic transaction terms with the [Seller]. According to CCC's authorization, the [Seller] agreed to take the relevant steps for the Contract.

                   c. CCC, as the principal, signed an Agency Contract with the Respondent. It states that CCC is responsible for going through all the import formalities, including import certificate, license, and other necessary files, and shall give the original documents to the Respondent.

             2. The [Seller] was aware of the agency relationship between the Respondent and CCC. As discussed above, the [Seller] and CCC had established business contacts before the conclusion of the Contract. They had agreed on the major terms of the Contract, and then let CCC authorize the Respondent to sign it. The parties -- the [Seller], the Respondent, and the true buyer [CCC] -- signed the Contract. When the Contract was concluded, the [Seller], as the third party, was aware of the fact that the Respondent is the agent of CCC. Moreover, CCC also signed the Contract which stipulates that CCC should be responsible for the contractual liabilities of the buyer.

             3. According to Article 402 of the Contract Law of the People's Republic of China, the Respondent has assumed no responsibility under the Contract.

As there is no provision in the United Nations Convention on Contracts of International Sales of Goods (the "Convention") regarding foreign trade agency and the responsibility of a foreign trade agent, the law of China shall apply. There are two situations in the Contract Law of the People's Republic of China.

According to Article 402: "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 ..."; and

According to Article 403: "Where the agent enter into a contract in its own name with a third party who is not aware of the agency relationship between the agent and the principal ..."

In this case, the [Seller] (the third party) was aware of the agency relationship between the Respondent (agent) and CCC (principal). Thus, Article 402 applies. The Contract is binding on the principle, i.e., CCC, and the [Seller]. The Respondent (the agent) assumes no responsibility under the Contract.

             4. All of the contracting parties have made a clear and legitimate expression that the Respondent, as the agent of CCC, assumes no responsibility under the Contract.

                   a. Section 1 of Article 20 of the Contract states: "[Respondent] shall, in the name of the buyer and on behalf of the End User, sign and perform this contract. The End User will directly enjoy the rights and assume the obligations of the buyer provided in the contract." According to this, CCC shall directly enjoy all the contractual rights and assume all the obligations to the [Seller], the Respondent shall assume no responsibility under the Contract.

                   b. Section 2 of Article 20 of the Contract states: "The seller and the End User agree not to hold the buyer responsible for any delay in delivery." Therefore, the Respondent shall not be liable for any responsibility under the Contract arising from delay in delivery. In another word, in this case, the agent is not liable for any costs arising from delay in delivery.

To sum up, the [Seller] did not go through the Sterilizer License and administrative approval required for importibg on time. This causeda delay in delivery and made the contract invalid. The Respondent assumes no responsibility for the failure of delivery.

             5. The duty to open the L/C provided in the Sales Contract is not the obligation only of the Respondent. The [Seller] alleged that "the dispute in this case arose when the Respondent failed to open the L/C, which is not only provided in the Contract but also a basic obligation of the buyer." The Respondent believes that the requirement of opening the L/C is a method of payment which the parties chose among many methods such as T.T. and Bank Transfer. Since CCC could not open an L/C due to its inability to deal with imports and exports, it delegated the obligation to the Respondent. In fact, CCC should be responsible for the payment for the goods under the Contract.

       B. The Contract failed to become effective due to the fault of the [Seller].

             1. The goods under the Contract are disinfection devices. Although the name of the goods is listed as "Air Cleaner" in the Contract, the goods are disinfection devices by nature. Therefore, the allegation of the [Seller] that these goods are ordinary electronic products is false.

The followings facts can prove the nature of the goods.

                   a. The goods under the Contract are referred to as BF-H201A by the manufacturer DDD Electrical Equipment Joint-Stock Corporation. The goods have been identified in Hygiene Approval of Importing Sanitizer and Disinfecting Appliance in the People's Republic of China No. (2004) 0011. Although the model number in the Contract is BF-210A(C), it is identified as BF-H201A in the Authorization Letter signed by DDD on 25 November 2003. The number for the same product is BF-H201A(C) in China. There is no difference between BF-H201A and BF-201A(C). They are just different names of the same product in China and Japan.

                   b. In the documents related to the import government approval submitted by the [Seller] and the manufacturer DDD Electrical Equipment Joint-Stock Corporation, the goods are referred to as both BF-H201A and BF-201A©. Moreover, at the hearing, Ms. Shi X, the agent of the [Seller] confirmed that the goods under the Contract were the goods specified in the invoice, which used the name of BF-201A (C). Thus, BF-H201A and BF-H201A(C) are different names of the same product in Japan and China.

                   c. The manufacturer DDD also states on its own website that the products are disinfection devices, and posted the approval document No. (2004) 0011 of China's Ministry of Health.

                   d. The [Seller] acknowledged this fact. The Application for Arbitration and all other documents submitted by the [Seller] to the Secretariat and the Arbitration Tribunal have specified that the goods under the Contract are disinfection devices.

             2. Import license and hygiene and administrative approvals are required for the import of disinfection devices according to relevant laws of China.

The goods under the Contract are disinfection devices and are subject to import license administration. According to Law of the People's Republic of China on the Prevention and Treatment of Infectious Diseases and Measures for the Implementation, Regulation of the People's Republic of China on the Administration of the Import and Export of Goods, Disinfection Management Measures, and Regulation of China's Ministry of Healthy of Reporting and Accepting Hygiene Approval Application, approvals of China's Ministry of Health are required for importing disinfection devices and sanitizers.

             3. It was clear when the Contract i\was signed that the goods under it were to be imported as disinfection devices. The [Seller] should have known, and in fact did know that the goods are subject to import license administration. Thus the Respondent had no obligation to disclose this information.

             4. The effectiveness of the Contract is subject to the condition that the Respondent provides written confirmation after CCC and the [Seller] obtain the approval from the hygiene and administrative departments.

                   a. According to Article 19 (1) of the Contract, the [Seller] should send the approval documents of the China's Ministry of Health to the Respondent. The Respondent is not obliged to obtain the approval by itself,

                   b. The [Seller] and CCC finally obtained the above mentioned approval on 14 May 2004. However, the sales agency relationship between CCC and the [Seller], which was the premise of the existence of the Contract, had been terminated by the [Seller] on 6 May 2004. CCC timely informed its agent, the Respondent, of the above situation and told it to stop performing the Contract.

                   c. Since the date of delivery, the substantial term of the Contract, was non-executable, it should be regarded that the Contract has never come into effect.

                   e. Article 19(1) of the Contract is not a standard clause submitted by the Respondent. Considering that whether the [Seller] and CCC obtain the hygiene and administrative approvals would decide whether they can import the goods under the Contract, Article 19(1) stipulates that the effectiveness of the contract is subject to the condition that the Respondent provides written confirmation after the [Seller] obtained the above approval.

             5. Since the [Seller] failed to submit related documents, the administrative approvals were not processed in time. Secondly, the the approval procedure should be dealt with by the [Seller], the manufacturer, or their agent with authorization. Thirdly, the [Seller] did not send the hygiene and administrative approvals to the Respondent. Therefore, the condition for the Respondent to send written confirmation of the effectiveness of the Contract were not satisfied. All the above facts show that the [Seller] is at fault for causing the Sales Contract not to become effective.

       C. The conditions fo opening the L/C have never been met. The time of the opening the L/C was not definite.

The Contract never came into effect; neither did the agreement on the date of opening the L/C. Moreoever, time of shipment, time of delivery, date of B/L, and date of opening the L/C are not specified in the Contract and thus are non-executable. The Respondent could not open the L/C only based on an unspecified and non-executable date. Considering the procedure of hygiene and administrative approval, the time of shipment should be at least four months after the signing of the Contract. It was obviously impossible to open the L/C according to the Contract.

       D. Losses and responsibility

       First of all, since the Contract has never become effective, conditions of performance were not met, and the [Seller] has no basis for requiring compensation or damages.

       Second, the storage invoice submitted by the [Seller] is not competent to prove that the goods in the storage were the goods under the Contract. The quantity of goods in the invoice is 6,000, which is not in conformity with the quantity provided in the Contract.

       Third, the [Seller] cannot explain the calculation method of the "losses", which makes the amount of the "losses" doubtful.

       Finally, even if the "losses" occurred, they were caused by the [Seller].

             1. The warehouse fee and transport cost. The [Seller] asserts the above losses according to the invoices of warehouse fee and transport cost from 31 July 2003 to 31 October 2004. The Respondent believes that the losses were caused by the [Seller]:

                   a. Since the effectiveness of the Contract is subject to the import approval by the Chinese government, the goods could not be delivered as scheduled in the Contract due to the [Seller]'s failure to obtain the approval on time. The Contract should be executed by the parties after it becomes effective. However, the detection measures required in the approval procedure continued till 7 April 2004. After knowing that the delivery of the goods would be delayed, the [Seller] still kept the goods in storage. It is the [Seller]'s fault for the extra cost for storage incurred before obtaining the governmental approval on 14 May 2004.

                   b. Before it unilaterally terminated the Contract on 6 May 2004, the [Seller] should have dealt with the goods in good faith rather than keeping them in storage, according to Section (2) of Article 88 of the Convention which states:

"If the goods are subject to rapid deterioration or their preservation would involve unreasonable expense, a party who is bound to preserve the goods in accordance with article 85 or 86 must take reasonable measures to sell them. To the extent possible he must give notice to the other party of his intention to sell."

Therefore, the [Seller] is liable for the warehouse fee and the transport cost incurred after May 2004.

       2. The loss due to depreciation. There is no legal basis for the [Seller]'s claim under the Convention, Chinese laws, nor under the Sales Contract. The term of depreciation only applies to goods that are put into service but not for goods for sale. Article 77 of the Convention states:

"A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated."

In this case, to mitigate the losses, the [Seller] should have dealt with the goods on time, i.e., selling the goods. In this circumstance, the losses, if any, should be the difference between the contract price and the resale price, but not the loss due to depreciation sought by the [Seller].

OPINION OF THE ARBITRATION TRIBUNAL

1. Applicable law

Article 18 of the Contract states that the "1980 United Nations Convention on Contracts of International Sales of Goods applies to this contract." Since the domicile of the Respondent, the location of the Arbitration Tribunal, the place at which the contract was signed, and the place of performance of major contractual obligations are all located in China, according to the principle of the closest connection, the law of China shall apply to matters not covered by the United Nations Convention on Contracts of International Sales of Goods (the "Convention").

2. The Sales Contract and the relevant rules

On 12 June 2003, the [Seller], the Respondent (listed as buyer), and CCC Trading Development Co. Ltd. (listed as End User) concluded the Contract. The three parties agreed that "the buyer agrees to purchase on behalf of the End-user and the Seller agrees to sell 3,000 BF-H201A Air Purifiers at CIF China Newport, for a total contract price of JPY 540,000,000, and the manufacture is Japan/DDD Electronic Equipment Joint-Stock Corporation.

The following are other major contract clauses:

ARTICLE 5 Terms of Delivery states: "Time of shipment is before 31 July 2003; date of B/L (or Airway Bill) is the date of delivery."

ARTICLE 7 Terms of Payment states: "100% of the purchase price will be paid to the seller via L/C. The L/C shall be opened 10 days before delivery, and the beneficiary is the seller ..."

ARTICLE 16 Termination of the Contract states: "Unless otherwise specified, this contract will terminate under any of the following circumstances: A. Both parties reach a written agreement; or B. One party severely violates the contractual obligation in the time limit provided by the contract, and fails to present remedy measures within the 30-day limit since receiving the notification of the non-breaking party. In this case, the non-breaking party can terminate the contract by sending the other party a written notification."

ARTICLE 19 Effectiveness of the Contract and Other states: "The Contract will enter into force upon the buyer submitting a written confirmation after the government approved, and will terminate when both parties completely and timely fulfill all the obligations under the Contract, respectively. ..."

ARTICLE 20 Special Clause states: "A. [Seller] shall, in the name of buyer, and on behalf of the End User, sign and fulfill this contract; the End User shall directly enjoy the contractual rights and assume the contractual obligations of the buyer; B. The seller and the End User agree to not investigate the buyer's responsibility for any delay of delivery; C. The seller and the End User agree to not investigate the buyer's responsibility for any dispute arising from the quantity/quality of the goods under this contract; D. The buyer, the seller, and the End User will become the parties under Article 18 of this contract -- the Arbitration Clause; E. The End User of this contract is CCC Trading Development Co., Ltd."

3. The major issues and analysis of responsibilities

The Arbitration Tribunal notes that, after the Contract was concluded, the Respondent neither opened the L/C, nor did the [Seller] deliver the goods. The [Seller] alleges that, the Contract became effective upon the signature and seal of the parties, and that the [Seller] had the goods ready as scheduled while the Respondent did not open the L/C accordingly. The [Seller] alleges that this led to the non-performance of the Contract and the Respondent should be liable for the damages of the [Seller]. In its defense, the Respondent disagrees with the [Seller] and alleges that:

   -    According to Article 402 of the Contract Law of the People's Republic of China and Article 20 of the Contract, the Respondent, the agent of the true buyer CCC, assumes no responsibility arising from the Contract;
 
   -    The Contract never came into effect as the required administrative approvals were not obtained on time. The [Seller] was at fault for not obtaining the approvals.
 
   -    The conditions of opening the L/C were not met, and the time for that was uncertain.

Based on the materials submitted by both parties and the facts investigated in the hearing, the Arbitration Tribunal notes that the major reason for which the [Seller] wouild require the Respondent to compensate is that the latter did not fulfill the contractual obligation of opening the L/C. The issues the parties disputed over are:

   -    Whether the conditions to open the L/C were accomplished;
   -    Whether the Contract has come into effect; and
   -    How to determine the responsibilities.

The focal issue in this case is whether the Respondent shall be liable under the Contract, including liability for not opening the L/C.

(1) Whether the Respondent assumed the responsibilities under the Contract

The Respondent alleges that, according to Article 402 of the Contract Law of the People's Republic of China and Article 20 of the Contract, it is not liable for any responsibility arising from the Contract as an agent of the true buyer CCC. The Arbitration Tribunal notes that the [Seller] alleges in the Application of Arbitration that, "in April 2003, in order to sell Air Purifiers in the Chinese market, the [Seller] negotiated with CCC Trading Development Co., Ltd. about the issues of sales agency. In June 2003, the [Seller] found that CCC had no right to deal with imports in foreign trade, so CCC asked the Respondent to be the buyer in the Contract. On 12 June 2003, the [Seller], the Respondent, and CCC together signed the Contract for the sale of Air Purifiers in Beijing. The Respondent, as the nominal buyer in the Contract, and CCC, as the End User, agreed that the [Seller] should prepare 3,000 machines in one month after the signing of the contract, and that the Respondent should open the L/C as scheduled."

The Arbitration Tribunal also notes that (i) the [Seller] and the End User, and (ii) the [Seller], the manufacturer, and the End User signed a Contract of Authorization and a Letter of Authorization, on 7 May 2003, respectively. Both documents authorize CCC to be the exclusive agent for the sale of Air Purifiers and other electronic appliances produced by DDD Electronic Equipment Joint-Stock Corporation in the Chinese market. The above evidence proves that the facts which are declared by the [Seller] in the Application of Arbitration are true. In addition, the Contract provides that, "... the buyer agrees to purchase on behalf of the End User and the seller agrees to sell ..." 3,000 Air Purifiers BF -H201A. In particular, Article 20 of the Contract states that:

"A. [Respondent] shall, in the name of buyer, and on behalf of the End User, sign and fulfill this contract, the End User shall directly enjoy the contractual rights and assume the contractual obligations of the buyer;

"B. The seller and the End User agree to not investigate the buyer's responsibility for any delay of delivery;

"C. The seller and the End User agree to not investigate the buyer's responsibility for any dispute arising from the quantity/quality of the goods under this contract. ..."

The above facts and agreements support the Respondent's assertion that it is "the agent in the foreign trade under the Contract." Since there are no rules in the Convention about foreign trade agency, the law of China shall apply. Article 402 of the Contract Law of the People's Republic of China states:

"Where an agent, acting within the scope of authority granted by the principal, enter 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."

Therefore, the Arbitration Tribunal holds that the Respondent is not liable for the buyer's responsibilities under the Contract.

Article 20 of the Contract also states:

"The [Respondent] shall, in the name of the buyer, and on behalf of the End User, sign and perform this contract. The End User shall directly enjoy all the contractual rights and assume the contractual obligations of the buyer ... the seller and the End User agree to not investigate buyer's responsibility for any delay of delivery."

Thus, according to the Contract, the Respondent has assumed no responsibility of the buyer under the Contract.

(2) Whether the Respondent should be liable for not opening the L/C.

The Arbitration Tribunal notes that the [Seller] alleges that the Respondent could not use Article 402 of the Contract Law of the People's Republic of China as an escape clause. According to the Contract which states:

"The End User CCC shall be responsible for the relevant transaction clauses, while the controversial facts of this case happened during the period that the Respondent failed to open the L/C, the duty of the Respondent of opening the L/C is not only provided in the contract but also a basic obligation of the buyer, it only binds the agent and the third party according to the law ... the major contractual obligation of the Respondent is opening the L/C for the [Seller]."

The Arbitration Tribunal agrees with the assertions of the [Seller] that:

"The Respondent's duty to open the L/C is not only provided in the contract but is also a basic obligation of the buyer;" and that

"The major contractual obligation of the Respondent is to open the L/C for the [Seller]."

However, the Arbitration Tribunal rejects the [Seller]'s claim that "the obligation of the Respondent to open the L/C only binds the agent and the third party according to the law, so the Respondent shall be liable for not opening the L/C."

The Arbitration Tribunal holds that the obligation of the Respondent to open the L/C is actually the duty of the buyer to pay for the goods under the Contract. According to Article 402 of the Contract Law of the People's Republic of China and the Article 20 of the Contract, the Contract is binding on the [Seller] and the End User, and the End User enjoys the contractual rights and assumes the contractual obligations of the buyer under the Contract. Therefore, the Respondent has assumed no responsibilities even if the loss of the [Seller] was indeed caused by the Respondent's failure to open the L/C.

(3) Whether the Contract is effective, whether the conditions of opening the L/C have been met, and related responsibilities

The Arbitration Tribunal notes that Article 19 of the Contract Effectiveness of the Contract and Other states:

"The Contract will enter into force upon the buyer submitting a written confirmation after the government approved, and will terminate when both parties completely and timely fulfill all the obligations under the Contract, respectively. ..."

The parties disputed over whether the goods under the Contract are medical appliances, whether governmental approval is required, whether the contract came into effect, and whether the conditions of opening the L/C were met. The Arbitration Tribunal holds that if the goods under the Contract are medical appliances and government approval is required, the contract is invalid because the [Seller] failed to obtain the approval, and the [Seller] will be liable and cannot ask for compensation from the Respondent.

The [Seller] argues that:

"It is the Respondent's fault that made the contract invalid by not obtaining all the governmental approvals for the import;" and that

"If the goods belong to the category of restricted products, the Respondent is obliged to deal with relevant formalities individually or timely remind the [Seller] about it."

According to Article 402 of the Contract Law of the People's Republic of China, "the contract is directly binding upon the principal and the third party" and, according to Article 20 of the Contract, the Contract is directly binding on the [Seller] and the End User. Even if the duty to apply for the governmental approval shall be borne by the buyer and the contract is invalid because the approval was not obtained, the Respondent shall not be liable for the buyer's responsibilities. Even if the buyer is responsible for that the condition to open the L/C was not accomplished due to the invalidity of the Contract, the Respondent should not be liable for the buyer's responsibilities according to the Contract Law of the People's Republic of China and the Contract.

Since the buyer's responsibilities under the Contract, including opening L/C, should not be borne by the Respondent, it is improper for the [Seller] to require the Respondent to be liable for the contractual responsibilities. Thus, the Arbitration Tribunal does not consider whether the goods under the Contract are medical appliance, and whether governmental approval is required for importing them.

The Arbitration Tribunal notes that, the Respondent submitted to the Commission a request to add a party to the arbitration. The [Seller] objected to the request and alleged that "since the arbitration claims in this case are based on the losses arising from the non-performance of the Sales Contract by the Respondent's failure to open the L/C, the responsibilities should be borne by the Respondent." Therefore, the issue of the rights and obligations of the End User are not within the scope of the hearing.

4. Arbitration claims of the [Seller]

The Arbitration Tribunal rejects the [Seller]'s claims. Therefore, the [Seller] should be responsible for the transport cost, warehouse fees, loss due to depreciation, the attorneys' fee; and the arbitration fee.

AWARD

The Arbitration Tribunal unanimously rules as follows:

   1.   All of the arbitration claims of the [Seller] are rejected;
 
   2.   The arbitration fees, US $47,719, and the actual costs of arbitrator Mr. ___, US $12,000, shall be borne by the [Seller]. The above fees are offset against the payment the [Seller] made in advance.

FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant AAA Joint Stock Corporation of Japan is referred to as [Seller]; BBB Limited Company of the People's Republic of China is referred to as [Respondent]; and CCC Trading Development Co. Ltd of the People's Republic of China is referred to as [CCC] or [End User]. Amounts in the currency of Japan (Japanese yen) are indicated as [JPY]; amounts in the currency of the United States (dollars) are indicated as [US $].

** Dong Ping, Bachelor's Degree in Law, Peking University School of Law 2004; Master's Degree in International Economic Law, Chinese University of Hong Kong 2009.

*** William Zheng is a graduate of the Pace University School of Law. He is Special Counsel with the Shanghai office of Sheppard Mullin Richter & Hampton LLP and Editor of the Shephard Mullin China Law Update. Jingyuan Sun is an Associate with the New York office of the firm.

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Pace Law School Institute of International Commercial Law - Last updated October 28, 2009
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