China 13 June 1989 CIETAC Arbitration proceeding (Sesame / urea case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/890613c1.html]
DATE OF DECISIONS:
DATABASE ASSIGNED DOCKET NUMBER: CISG/1989/01
CASE HISTORY: Unavailable
CLAIMANT'S COUNTRY: P.R. China
RESPONDENT'S COUNTRY: Jordan
GOODS INVOLVED: Sesame/urea
APPLICATION OF CISG: This was a barter transaction in which the tribunal appears to have applied the CISG
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issues:
Classification of issues using UNCITRAL classification code numbers:
Go to Case Table of Contents
Go to Case Table of Contents
CITATIONS TO ABSTRACTS OF DECISION
(a) UNCITRAL abstract: Unavailable
(b) Other abstracts
CITATIONS TO TEXT OF DECISION
Original language (Chinese): Zhongguo Guoji Jingji Maoyi Zhongcai Caijueshu Xuanbian [Selected Compilation of Awards of CIETAC] (1989-1995), Foreign Economic and Trade Press of China, Beijing (1997) No. 8 [34-40]
Translation (English): Text presented below; see also Selected Works of CIETAC Awards (1989-1995) updated to 1997 (Sweet & Maxwell Asia) No. 8 [32-38]
CITATIONS TO COMMENTS ON DECISION
UnavailableGo to Case Table of Contents
|Case text (English translation)|
Sesame / urea case (13 June 1989)
Translation [*] by YUAN Xiaotong [**]
Translation edited by Meihua Xu [***]
Claimant and Respondent entered into a barter contract. The contract provided that Claimant would sell 2,174 tons of sesame to Respondent in exchange for 10,000 tons of urea from Respondent with the equal value of the sesame. Later, the two parties made changes to the date of delivery, the opening of the letter of credit [L/C] and the term of liquidated damages. The contract went into effect upon the approval of the Ministry of Foreign Trade and Economic Cooperation (MOFTEC). Claimant delivered 2,147 tons of sesame while Respondent did not deliver the urea. Claimant filed the arbitration application.
The Arbitration Tribunal concluded that since Respondent's reasons for its failure to deliver the urea were untenable, Respondent should bear the liability of breach of contract. The Arbitration Tribunal declined to support Claimant's claim for the loss of price difference which was an extra claim other than the liquidated damages equal to 10% of the contract price as stipulated in the contract. But, taking into account that the liquidated damages stipulated in the contract was less than the actual loss Claimant suffered, the Arbitration Tribunal adjusted the compensation to a proper amount.
In accordance with the arbitration clause contained in contract (No.86/441A) signed by Claimant, ××× Agricultural Product Company, and Respondent, Jordan ××× Investment Company on 29 October 1986, and Claimant's Application for Arbitration dated 2 August 1988, the China International Economic & Trade Arbitration Commission (CIETAC, formerly China Council for the Promotion of International Trade Foreign Economic and Trade Arbitration Commission) accepted this arbitration case.
In terms of the Arbitration Rules of CIETAC, the presiding arbitrator and the two arbitrators formed an Arbitration Tribunal to jointly hear the case. The Tribunal held oral hearings on 14 and 15 December 1988 in Beijing. According to the intent of the parties, the Tribunal undertook mediation but no agreement was reached between the parties.
The details of the case, the opinion of the Arbitration Tribunal and the award are presented as follows.
I. Details of the Case
1. Conclusion and amendments of the contract
Claimant and Respondent entered into a barter contract of sesame and urea on 29 September 1986. The parties signed subcontracts for urea (No. 86/441A) and sesame (No. 86/441B) on 29 October 1986. Respondent was the seller of the subcontract of urea, and Claimant was the buyer. In the subcontract of sesame, Claimant was the seller and Respondent was the buyer. The contracts provided that Claimant should supply to Respondent 2,174 tons of sesame with value of US $900,000 in exchange for 10,000 tons of urea with the same value. The two subcontracts stipulated specific provisions on the date of delivery, the terms of payment and the punitive sum for breach of the contracts. The contracts obtained the approval from the MOFTEC on 12 November 1986.
As for the time of delivery, the two parties agreed, on 23 December 1986, to make some modifications. The 10,000 tons of urea which Respondent was obligated to deliver for one time in December 1986 and January 1987 as originally stipulated in the contract were decided to be delivered in February 1987 upon best efforts. The 2,174 tons of sesame which Claimant should deliver in installments during February and March 1987 as originally stipulated in the contract were decided to be delivered in two installments: the first installment was to be delivered during February and March 1987 and the second installment during March and April 1987. The parties modified the contracts again on 17 March 1987. The date to deliver the urea was postponed to the date before 30 April 1987 and the sesame was to be delivered for one time before 30 April 1987.
As for payment, the barter contract made provisions as follows. Claimant and Respondent were obligated to open irrevocable letters of credit [L/C] at sight respectively in favor of Claimant and Respondent thirty days before the dates of delivery of sesame and urea. As a guarantee for the barter contract, after the [L/C] for urea was negotiated, the payment would be deposited in a special account in the opening bank, namely the ×× Branch of the Bank of China. The payment aforesaid could not be used until the shipment of sesame was completed. Only if the ×× Branch received a guarantee in writing for the completed shipment, would Claimant authorize the ×× Branch to open the [L/C] for urea.
On 23 December 1986, the parties reached agreements to modify the terms of payment. The [L/C] for urea would be opened with best efforts in December 1986 and the [L/C] for sesame would be issued thirty days before the delivery. The [L/C] for urea issued by Claimant could not be negotiated until the ×× Branch confirmed the receipt of the [L/C] which was issued for sesame by Respondent in favor of Claimant in compliance with the contract. The guarantee for performance of the barter contract previously provided in the contract was decided to be revoked.
On 17 March 1987, the terms of payment were changed by the parties again. The valid period of the [L/C] for urea opened by Claimant on 25 December 1986 was extended to 5 July 1987 in Hong Kong. The [L/C] for sesame would be issued to the ×× Branch of the Bank of China before 31 March 1987.
The parties stipulated the liquidated damages as the penalty for delay of delivery. The barter contracts provided that the liquidated damages for the delay of delivery within two weeks was 1% of the value of the remaining part of goods but the liquidated damages would not exceed 5% of the value of the remaining part of the goods. On 23 December 1986, the parties agreed to the modified provision of penalty that the seller (of the two subcontracts) was obligated to compensate the other party the penalty equal to 10% of the contract price if the seller failed to perform the contracts.
2. The performance of the two subcontracts
On 12 January 1987, Claimant notified Respondent that the first installment of sesame could be shipped in February 1987. Claimant thereby required Respondent to open the [L/C] and to advise the destination port for shipment. In the telex on 14 January 1987, Respondent informed Claimant of the terms on the [L/C] which Respondent was supposed to open. As for the destination port, Respondent promised to advise Claimant as soon as it received the notice from its client in Europe. Later, the two parties were engaged in negotiating the destination port and invoice on the [L/C], and finally reached an agreement on 20 March 1987. But on 27 April 1987, when Claimant received the [L/C] for sesame opened by Respondent, Claimant found Respondent unilaterally added requirements to the [L/C] that: the sesame should be fumigated, healthy, non-radioactive and suitable for human foodstuff. Claimant expressed its opposition to these terms. The two parties consequently undertook negotiations. There were also disputes between the two parties on the sample of the sesame and whether to allow Respondent to send someone to see the goods stored in Claimant's storehouse and because of the sample of the sesame. The disputes did not terminate until June 1987. Respondent opened the [L/C]s for sesame in installments from June to September 1987. Claimant completed the shipment of 2,174 tons of sesame in September.
On 25 December 1986, Claimant opened the [L/C] with the total price of urea in accordance with the terms in the contract. Though Claimant extended the valid period of the [L/C] several times, Respondent finally failed to deliver the goods. Claimant finally completed, on 7 September 1987, modifying the terms in the [L/C] for urea which was related to the [L/C] for sesame upon Respondent's request. However, Respondent never performed its obligation to deliver the 10,000 tons of urea.
3. Position of the parties
Claimant submitted its arbitration application to CIETAC on 18 January 1988. But since Claimant offered an inaccurate name of Respondent in its application, it handed in a new application on 2 August 1988 with following claims of compensation:
(1) Since Claimant required that the [L/C] opened by Respondent indicate the destination port with the note "except States which have no foreign relations with the People's Republic of China", the sales market for the sesame consequently was restricted. Moreover, Claimant did not duly offer the sample of sesame. The sample of sesame was not sent in time and was not compliant with the contract. Claimant did not agree for Respondent to send staff to check the goods in its storehouse nor did Claimant duly agreed to add terms in the [L/C] which required that the sesame be fumigated, healthy, non-radioactive and suitable for human foodstuff. Respondent consequently lost several opportunities to sell the sesame and suffered economic loss. That was also the reason that the [L/C] for sesame was unable to be issued. All the liabilities should be borne by Claimant.
(2) Since Claimant opened a [L/C] which contained the restrictive term unacceptable for the seller of urea. The restrictive term bound the [L/C] for urea with the [L/C] for sesame. If the Bank of China did not receive the [L/C] for sesame, the [L/C] for urea was unable to be negotiated. The term potentially rendered the [L/C] invalid. In spite of Respondent's requirements, Claimant took no remedy measures. Therefore, Respondent had to withdraw the sales contract of urea. In August 1987, the restriction mentioned above was canceled, but the market price for urea had drastically increased. It was impossible to purchase urea at the original price. Therefore, Respondent should not be liable for the fact that the subcontract of urea was unable to be performed.
(3) In accordance with international practice and usages, the liquidated damages should amount to 5% of the contract price. In the Amendments to the Date of Delivery and Payment for Urea/Sesame signed by the two parties, the liquidated damages were increased to 10% of the contract price. This amount was able to include other possible damages. Even if Respondent compensated Claimant, the total amount should be US $90,000. Moreover, the payment of so-called "compensation" aforesaid aimed to maintain the friendly relationship between the two parties and it never implied Respondent had acknowledged it committed breach of contract.
(1) Defining the destination port for Claimant was a prerequisite to issuance of related documents, such as the license for export and the shipping bill of lading, and to manage the chartering. The note "except States which have no foreign relations with the People's Republic of China" was only a suggestion about how to define the destination port. All the issues about the destination port had been solved on 20 March 1987.
(2) The reason for the delay of delivery of sesame was that Respondent insisted on opening the [L/C] on the basis of sampling of goods and sending staff to see the goods in the storehouse. All these demands were raised without reasonable basis. The subcontract for sesame expressly provided that the inspection certificate issued by the China Commodity Inspection Bureau was the ultimate basis for the quality of the delivered goods. In addition, according to the practice of international trade practice, for deals clinched without sample, samples are not the basis for the quality of goods but only reference. As for Respondent's requirement to send the representatives of its buyer to see the goods, the contract contained no provision on this issue. Respondent did not raise this request in a written form before the time limitation for its issuance of the [L/C] of sesame (31 March 1987). Till April 1987, Respondent asked Claimant to permit the representatives of Respondent's client to see the goods. It was reasonable and justifiable for Claimant to decline Respondent's request. In addition, Respondent's unilateral requirement for certificates provided by Claimant that indicated that the sesame was fumigated and non-radioactive also lacked sustainable reasons.
(3) The provision which bound the two [L/C]s of urea and sesame was concluded by both parties with the signature of each party. According to the agreement concluded by the two parties on 17 March 1987, the dates of delivery for both urea and sesame were stipulated to be the end of April 1987. The [L/C] for urea was restricted by the [L/C] for sesame only when Respondent failed to duly deliver the urea.
(4) As for the liquidated damages for breach of contract, Claimant signed the barter contracts with the purpose to make profits from the import transaction. Exporting sesame was a deal of losing money, and so Claimant attempted to offset the loss by making profits from import of urea. But the failure of the urea import caused Claimant's serious loss. The liquidated damages which amounted to 10% of the contract price as stipulated in the contract were insufficient to compensate all the loss Claimant suffered. Respondent should undertake all the liability for Claimant's loss which arose out of Respondent's failure to perform the contract.
II. Opinion of the Arbitration Tribunal
1. The contract at dispute is a barter contract. Claimant has delivered the 2,174 tons of sesame with value of US $ 900,000 as stipulated in the contract. Respondent should be liable for its failure to deliver the 10,000 tons of urea with the same value as that of the sesame.
2. The terms which bind the [L/C]s of sesame and urea in the contract and relevant agreements form a business practice between the parties upon reference to the reciprocal letters of credit. Since both parties agreed to stipulate and add these terms to the contract, each party is obligated to perform its obligations in accordance with these stipulations. On 25 December 1986, Claimant opened the [L/C] for urea according to the contract and relevant agreements and so performed its obligation to issue a [L/C]. While Respondent did not perform its obligation to deliver the urea with the allegation that the letters of credit are bound up. But Respondent's arguments cannot exempt Respondent's liability for the breach of contract.
3. The two parties had reached an agreement on the contents of the [L/C] for sesame on 20 March 1987. Respondent should be responsible for its failure to open the [L/C] for sesame before 31 March 1987 as provided in the agreement aforesaid. The issues mentioned by Respondent, such as providing samples of sesame, checking the goods in the storehouse and adding new terms on the [L/C], are the conditions for the deal between Respondent and its client. Claimant's refusals did not constitute violations to its contract with Respondent. It is unreasonable for Respondent to take these issues as an excuse for its failure to deliver the urea.
4. The parties signed the agreement, the Amendments to the Date of Delivery and Payment for Urea/Sesame, on 23 December 1986. Article 4 of the agreement aforesaid provides that: the seller of urea shall compensate the other party 10% of the contract price if the seller does not deliver the goods. Therefore, Claimant's claim for the price difference between the contract price and the market price at the time of breach of contract shall be dismissed. But the liquidated damages which amounts to 10% of the contract price is far from sufficient to compensate the loss Claimant suffered out of Respondent's non-performance. According to Article 20 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interests, with reference to the United Nations Convention on Contracts for the International Sale of Goods (CISG), taking into account the loss Claimant suffered, such as the liquidated damages which Claimant paid to its demestic client, the interest on the payment for urea, and the storage fees for sesame, and the relationship between the deals of urea and sesame, the Arbitration Tribunal decides it is appropriate to adjust the compensation to a proper amount.
The Arbitration Tribunal hereby decides:
This award is final.
* All translations should be verified by cross-checking against the original text. 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]. Weight unit appears as mt. (metric ton) or ton.
** YUAN Xiaotong, LL.M. candidate, Faculty of Law McGill University, Montreal Canada, 2001 to present; LL.B. Renmin University of China Law School, 2001.
*** Meihua Xu, LL.M. University of Pittsburgh School of Law on an Alcoa Scholarship. She received her Bachelor of Law degree, with the receipt of Scholarship granted by the Ministry of Education, Japan, from Waseda University, Tokyo, Japan. Her focus is on International Business Law and International Business related case study.Go to Case Table of Contents