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

CISG CASE PRESENTATION

China 1989 CIETAC Arbitration proceeding (Thai-made emulsion case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/890000c1.html]

Primary source(s) of information for case presentation: CIETAC (South China) website

Case Table of Contents


Case identification

DATE OF DECISION: 19890000 (1989)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1989/02

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: [-]

BUYER'S COUNTRY: [-]

GOODS INVOLVED: Thai-made emulsion


Classification of issues present

APPLICATION OF CISG: Contract appears to have been governed by China domestic law with CISG provisions cited as "similar in principle."

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 71 ; 72

Classification of issues using UNCITRAL classification code numbers:

71A ; 71C [Grounds for suspension of performance: apparent that a party will not perform substantial part of obligations; Obligations of party suspending performance: immediately notify other party];

72A ; 72C [Avoidance prior to date for performance: when clear that party will commit fundamental breach; Advance notice of intent to avoid]

Descriptors: Suspension of performance ; Anticipatory breach ; Avoidance

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; see also CIETAC (South China) website <http://www.sccietac.org/cietac/en/content/content.jsp?id=901>

CITATIONS TO COMMENTS ON DECISION

Unavailable

Go to Case Table of Contents

Case text (English translation)

Translation by Guo Xiaowen. Copyright © <http://www.sccietac.org>. Reproduced with permission of CIETAC. All translations should be verified by cross-checking against the original text. For purposes of this presentation, the Claimant is referred to as the [Seller] and the Respondent is referred to as the [Buyer].


China International Economic and Trade Arbitration Commission
South China Sub-Commission

1989 Thai-made emulsion case

[...]

THE ARBITRATION DECISION

I. Facts of the Case

The [Seller] (the seller) and the [Buyer] (the buyer) signed contract No. SKD(88)032 on 21 December 1988 for the sale and purchase of 111.93 tonnes of Thai-made emulsion at a price of US $134,316. After signing the contract, the [Buyer] did not make the required down payment, equivalent to 50 per cent of the contracted price of the goods In turn, the [Seller] did not deliver the goods to the [Buyer] before the end of December 1988 as required in the contract. On 4 March 1989, the [Seller] delivered the goods, representing a total of 546 barrels of emulsion, to the city of Zhuhai by land, not by ship as stipulated in the contract. On 10 March 1989 the [Buyer] accepted 527 barrels which were packed and undamaged and refused to accept the remaining 19 barrels on which the packing was damaged.

On 17 March 1989, the Guangdong Commodities Inspection Bureau issued a notice of inspection, No. 4404 Zi No. 9030413 and a certificate of inspection for the goods According to the notice of inspection; the emulsion complied with the requirements of the contract. The certificate of inspection stated that the packing of 19 barrels was damaged, making it impossible for them to be transshipped, processed and used as normally intended. The [Buyer] accepted the goods but did not make the necessary payment to the [Seller]. Negotiations between the parties regarding the payment of the goods fell through. On 30 June 1989, the [Seller] submitted the dispute to the Shenzhen Branch of the Commission for arbitration.

[Seller]'s claim

In its application for arbitration, the [Seller] requested that:

1.     The [Buyer] pay the price due for the goods of US $129,642;
2. The [Buyer] pay interest of 1.2 per cent per month on the outstanding payment;
3. The [Buyer] reimburse the [Seller] US $5,974.78 for expenses for the issue of an L/C (in its letter to the arbitration tribunal dated 23 September 1989, the [Seller] amended the amount to US $267.66);
4. The [Buyer] bear half the freight costs from Shanghai to Zhuhai, in the amount of Rmbl7,500;
5. The [Buyer] bear the arbitration fees.

In its application the [Seller] stated its case as follows:

     1. After the [Seller] delivered the goods to Zhuhai, the [Buyer], on 10 March 1989, sent people to accept the 527 barrels of emulsion with undamaged packing. The commodity inspection results showed that the quality and quantity of the goods complied with the requirements of the contract. Therefore, the [Buyer] should fulfill its obligation to pay for the goods pursuant to the contract.

     2. The interest requested by the [Buyer] on the overdue payment for the goods was calculated in accordance with the interest payable on the Trust Receipt granted by the bank as stipulated in the contract. Interest would be calculated separately if the balance was not paid by the end of January 1989.

     3. The requirement that the [Seller] reimburse the expenses incurred for the issue of the L/C was clearly stipulated in the contract. On 21 August 1989, the [Seller] submitted three documents to the arbitration tribunal as evidence of these expenses.

     4. In its written submission to the arbitration tribunal dated 28 September 1989, the [Seller] stated that it was agreed in the contract that the ocean freight from Shanghai to Zhuhai, of approximately Rmb 5, 000 per container, was to be shared by the buyer and the seller equally. The seven containers made a total freight cost of Rmb 35, 000. The actual shipment was made over land and cost Rmb 92, 880. The [Seller] only requested the [Buyer] to pay Rmb 17, 500, however, pursuant to the contract. The balance would be paid by the [Seller].

[Buyer]'s defense

In its written reply dated 28 September 1989, the [Buyer] submitted to the arbitration tribunal that:

     1. The shipment date stated in the contract was to be before the end of December 1988. The actual date of arrival of the goods was 10 March 1989. Commodity inspection took place on 17 March 1989. There was a delay of 67 days in the delivery of the goods.

     2. The [Seller] had not completed relevant customs formalities in Shanghai, which caused a delay in the withdrawal of the goods and the [Seller] should be liable for this delay.

     3. This delay in delivery caused the [Buyer] a loss of US $50,000 due to the falling price of emulsion and a loss of US $70,000 due to the falling price of emulsion gloves.

The [Buyer] claimed damages from the [Seller] on the basis of the above arguments.

[Seller]'s response

In its written submission to the arbitration tribunal dated 10 October 1989, the [Seller] counter defended that it was perfectly ready to deliver the goods in time. The delay in delivery was entirely the fault of the [Buyer]:

     1. Before execution of the contract, the goods were ready and stored at the bonded warehouse in Shanghai, so the supply was secure.

     2. The supplier had confirmed to the [Seller] before 13 December 1988 the availability and supply of the goods.

     3. The [Buyer] had said that the import permit had expired, making it impossible for the [Seller] to deliver the goods punctually.

II. Views of the Arbitration Tribunal

After examining the request for arbitration and written counter defence submitted by the [Seller], the written reply submitted by the [Buyer] and the evidence submitted by both parties, and listening to the representations and arguments of the parties at the hearing, the arbitration tribunal formed the following opinions.

     1. On 4 March 1989, the [Seller] shipped the goods under the contract to Zhuhai. On 10 March, 1989, the [Buyer] accepted 527 barrels of emulsion with undamaged packing against the notice of inspection and certificate of inspection issued by the Guangdong Commodities Inspection Bureau. Therefore, the [Buyer] should fulfill its obligation of paying the [Seller] pursuant to the contract. In its request, the [Seller] already excluded the price of US$4,674 for the 19 barrels of emulsion rejected by the [Buyer] and asked only for the payment of US$129,642 for the 527 barrels of emulsion the [Buyer] had already accepted. The arbitration tribunal was of the view that the [Seller]'s request was reasonable and should be upheld.

     2. As the [Buyer] had, on 10 March 1989, accepted 527 barrels of the emulsion, it should pay for them. Interest should be paid on overdue payments. The arbitration tribunal was of the view that the [Seller]'s request that the [Buyer] pay interest was reasonable and should be upheld. However, the monthly interest rate of 1.2 per cent requested by the [Seller] was obviously higher than the normal interest rate on deposits and was unfair to the [Buyer]. The arbitration tribunal would consider the circumstances of the transactions and common practice in international trade and adjust the interest rate appropriately.

     3. During performance of the contract, the [Seller] shipped the goods from Shanghai to Zhuhai by land instead of by sea in view of changes in circumstances. The actual freight cost was therefore higher than stated in the contract. The [Seller] claimed only Rmb 17,500 from the [Buyer], half of the ocean freight costs stipulated in the contract. The arbitration tribunal was of the opinion that the contract had clearly provided for the freight cots to be shared equally by the contracting parties. Therefore, this request of the [Seller] was reasonable and should be upheld.

     4. The arbitration tribunal was of the view that the [Seller]'s request that the [Buyer] reimburse the [Seller] the expenses of US $267.66 for issuing an L/C to the Thai supplier was in agreement with the contract and should be upheld.

     5. Regarding the request of the [Buyer] that the [Seller] compensate the [Buyer] for the losses caused by the falling price of emulsion after the delay in delivery, the shipping deadline provided for in the contract was before the end of December 1988. Payment terms stated that 50 per cent of the price of the goods should be paid by the [Buyer] by down payment upon signing the contract and the balance to be paid by L/C in January 1989. After signing the contract, the [Buyer] never made the down payment. Judging from the materials submitted to the arbitration tribunal by the [Seller], the [Seller] was still amending the L/C issued to the Thai supplier on 17 January 1989. Although the goods were in storage at the bonded warehouse in Shanghai when the contract was signed, the [Seller] had not obtained the bill of lading on that day and was therefore unable to deliver the goods before the end of December 1988. Clearly, neither the [Seller] nor the [Buyer] had fulfilled their respective obligations regarding either the down payment or delivery of the goods pursuant to the contract. The [Seller] later delivered the goods to Zhuhai on 4 March 1989 and on 10 March 1989 the [Buyer] accepted 527 barrels from these goods which had undamaged packing. The parties did not dispute these facts. The arbitration tribunal was of the opinion that the clauses of the contract regarding the method of payment and the shipping deadline had been amended  by implication by the actions of the parties. It was unreasonable, therefore, for the [Buyer] to base its argument on the clause on the shipping deadline in the original contract and to claim compensation from the [Seller] of US $50,000 for losses caused by late delivery, and the request should be dismissed. The other request of the [Buyer], for compensation of US $70,000 for losses caused by the falling price of emulsion gloves was not related to this case, and the arbitration tribunal would not consider it.

     6. The arbitration fees for this case shall be borne by the [Buyer].

III. The Decision

Based on the above facts, analysis and judgment, the arbitration tribunal decided as follows:

     1. The [Buyer] shall pay US $129,642 for the emulsion within 30 days of the date of this award, together with interest thereon accrued from 10 March 1989 to the actual date of payment at the rate of seven per cent per annum.

     2. The [Buyer] shall pay the [Seller] US $267.66, being expenses incurred from the issue of the L/C, within 30 days of the date of this award.

     3. The [Buyer] shall pay the [Seller] freight costs of Rmb 17,500 within 30 days of the date of this award.

     4. The arbitration fees for this case shall be borne by the [Buyer].

This decision shall be final.

DISCUSSION

After the dispute arose, each party accused the other of breach of contract. The buyer did not make the down payment of 50 per cent of the contract. Although the contract stipulated that the seller should ship the goods before the end of December 1988, the seller was still amending its L/C issued to the Thai supplier and had not obtained the bill of lading which was a proof of title to the goods, which confirmed that it was impossible for the seller to deliver in accordance with the terms of the contract. The arbitration award did not further explore the possibility of the seller fulfilling its obligations by delivery by land before the end of December 1988. However, the tribunal seemed to have come to its conclusion by confirming that 'though the goods were already stored at the bonded warehouse in Shanghai, the [Seller] had not obtained the bill of lading on that day (i.e., 17 January 1989)'.

It was agreed in the contract that the buyer should pay the seller 50 per cent of the contract price by down payment after signing the contract. The term 'down payment' is slightly different to the term 'deposit' commonly used in the laws of China. It is uncertain if down payment here means deposit. According to the General Rules of the Civil Law of the People's Republic of China, a deposit is a way of guaranteeing the performance of obligations. After the debtor performs its obligations, the deposit should either go towards settlement of the price or be returned to the debtor. If the depositor does not perform its obligations, it is not entitled to claim the deposit back. In this case, the down payment was 50 per cent of the price of the goods under the contract. It was more in the nature of a prepayment. In its decision, the arbitration tribunal did not analyze the legal nature of the down payment. The failure to pay the down payment on the part of the buyer was a breach of contract. The payment of the down payment here should be deemed a term of the contract, so the seller was entitled to declare the contract void if the buyer failed to make it.

Why did buyer not make the down payment pursuant to the contract? Had it already known that the seller could not deliver the goods on time and already had evidence that the seller would default? According to Chinese law, when one party has definite proof that the other party cannot perform a contract, it can temporarily suspend the contract by immediately notifying the other party. When the other party provides sufficient proof of its performance of the contract, the contract should be performed. According to provisions on 'expected default', if the buyer had solid proof that the seller would be unable to deliver the goods before the end of 1988, it was entitled to temporarily put aside the requirement under the contract for the down payment, but should have at the same time immediately notified the seller of its decision to refrain from making the down payment for the moment and its grounds for this decision.

This provision is similar in principle to Article 71 of Chapter 5 of the Convention on International Sale of Goods Contracts of the United Nations (the Convention). Article 72 of the Convention, however, further states, `If it is obvious before the. Date of performance of the contract that one party will commit a fundamental breach of the contract, the other party can declare the contract void.' Chinese law does not have similar provisions to those of the Convention on whether a party is entitled to declare a contract void when the 'expected default' on the part of the other party is a 'fundamental breach'. However, no matter whether the buyer temporarily suspends the performance of the contract or declares the contract void, it should notify the seller immediately. In this case, the buyer did not notify the seller. More than two months after the deadline for delivery stipulated in the contract, the seller delivered the goods. The buyer accepted most of the goods and rejected the rest.

Under these circumstances, the legal position of the parties in the contract is as follows. First, the seller delivered the goods even though the buyer had not made the down payment. This should be deemed as relinquishing of the right to declare the contract void and to claim damages from the other party. Secondly, it is not clear whether the buyer had evidence that the seller could not deliver the goods pursuant to the contract. Even if it had, it did not notify the other party of its decision to refrain from making the down payment or to declare the contract void, or the grounds for such a decision. That it took neither of these steps should be deemed a relinquishment of its rights towards an expected default. As the buyer had not made the down payment, it had no right to demand punctual delivery from the seller.

The arbitration tribunal was of the opinion that neither party had fulfilled their respective obligations under the contract, the buyer for the down payment or the seller for delivery, and that the fact that the seller shipped the goods to Zhuhai on 4 March 1989 and the buyer accepted 527 out of the 546 barrels delivered, 'actually amended by implication clauses of the contract on the method of payment and the shipping deadline'. On the basis of this conclusion, the arbitration tribunal dismissed the buyer's request that the seller compensate it US$50,000 and US$70,000, being the losses it suffered by reason of the delay of delivery, and upheld the request of the [Seller] that the [Buyer] pay the price of the goods, plus freight costs. The arbitration tribunal judged the actions of the parties to have amended the contract by implication. This is key to the determination of the rights and obligations of the parties in this case. When the seller delivered the goods to Zhuhai on 4 March 1989, did the buyer have the right to refuse acceptance? Under the circumstances, yes. Although the buyer had not made the down payment pursuant to the contract, the seller did not have the right to unilaterally change the shipping date agreed in the contract. Both the shipping and down payment requirements were terms in the contract that could affect the interests of the parties concerned. It was therefore reasonable for the buyer to refuse the goods.

When the buyer accepted the goods, however, despite the seller's delay in delivery, did it have the right to claim damages from the seller on grounds of the seller's delay? As the buyer had not made the down payment pursuant to the contract, the seller was consequently freed from its obligations to deliver the goods within the time stipulated in the contract. Only when the buyer had fulfilled its obligations regarding the down payment could it be entitled to claim against the seller for the delay in delivery. By failing to make the down payment, the buyer lost its right to request punctual delivery pursuant to the contract. Two interpretations of the buyer's acceptance of the late delivery can be found. First, as neither party had fulfilled their contractual obligations, the original contract was void. The delivery of the goods by the seller and the acceptance of the goods by the buyer should be regarded as performance of a new contract. Second, the original contract still existed because neither party had cancelled it. The subsequent delivery and acceptance of goods should be deemed amendments to the terms of the contract relating to the payment and delivery of the goods. The judgment of the arbitration tribunal that the parties had 'amended by implication the contract' coincides with the latter interpretation, Neither party had claimed that the written contract was void. Their claims and defence were based on the terms of the contract, so the arbitration tribunal's decision was realistic.

It should be noted that the judgment is not consistent with legislation in China. According to Chinese law, a contract should be made in writing and any amendments to and/or cancellations of it should also be in writing. Written form includes printed contracts, handwritten contracts and agreements made by letter, cable and telefax.

Were the implied amendments to the contract permitted by law? This issue was not addressed. The affirmation of the effect of the implied amendments to the contract was apparently in conflict with existing Chinese law. The purpose of the requirement that contracts should be made or amended in writing is to provide effective evidence for the existence of an agreement, which cannot be achieved if it is not in writing. This legal requirement does not prohibit contracts that are not in writing. In commercial activities, instances where contracts are amended in unwritten form are common and where there is no dispute, the effectiveness of unwritten agreements and amendments should be accepted in judicial actions. In this case, there was no dispute as to the facts that the buyer had not made the down payment and the seller delayed delivery. The decision of the arbitration tribunal was to find a reasonable explanation and make a ruling based on the nature of the actions of the parties concerned. The final judgment considered the position of the parties in the transaction and the fairness and practicability of the facts, rather than forcing strict compliance with legislation.

A literal translation of relevant legislation would not find recognition that unwritten implied amendments to contracts are effective, and the judgment of the arbitration tribunal was the subject of different opinions amongst the legal profession. With the rapid development in communications technology, methods of effecting transactions are becoming more varied. The legal requirement that contracts should be made or amended in writing is now being challenged, but before existing legislation is amended to deal with this problem, similar controversies will remain unresolved.

Go to Case Table of Contents
Pace Law School Institute of International Commercial Law - Last updated June 2, 2006
Comments/Contributions
Go to Database Directory || Go to CISG Table of Contents || Go to Case Search Form || Go to Bibliography