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CISG CASE PRESENTATION

China post-1992 CIETAC Arbitration proceeding (White cardboard scrap paper case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/930000c2.html]

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

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Case identification

DATE OF DECISION: 19930000 (1993)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1993/14

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Apparently Hong Kong (respondent)

BUYER'S COUNTRY: Apparently Mainland China (claimant)

GOODS INVOLVED: White cardboard scrap paper


Classification of issues present

APPLICATION OF CISG: Convention cited: concepts of Convention discussed

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 4 ; 8 ; 25 ; 29 ; 74 ; 78 ; 82(1)

Classification of issues using UNCITRAL classification code numbers:

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

8C [Interpretation of party's statements or other conduct: interpretation in light of surrounding circumstances];

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

29A [Parties by agreement may modify or terminate the contract];

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

78B [Rate of interest];

82B [Buyer's inability to return goods in same condition]

Descriptors: Scope of Convention ; Unconscionability ; Intent ; Modification of contract ; Fundamental breach ; Damages ; Interest ; Restitution

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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; see also CIETAC (South China) website <http://www.sccietac.org/cietac/en/content/content.jsp?id=909>

CITATIONS TO COMMENTS ON DECISION

English: Fan Yang, The Application of the CISG in the Current PRC Law and CIETAC Arbitration Practice (December 2006) n. 77

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Case text (English translation)

Translation by Xu Sangiao. 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 [Buyer] and the Respondent is referred to as [Seller].

China International Economic and Trade Commission
South China Sub-Commission

Post-1992 White cardboard scrap paper case

[...]

THE ARBITRATION DECISION

I. Facts of the Case

On 6 June 1992, the Claimant [Buyer] and the Respondent [Seller] signed a sale of goods contract in the city of Shenzhen pursuant to which the [Seller] would sell to the [Buyer] 300 tonnes of pieces of white cardboard (scrap paper). The unit price would be HK $640 per tonne, FOB Hong Kong. The total cost of the goods was HK $192,000. The date of delivery was agreed as before the end of July 1992, and the port of destination would be a port in Fujian province in southern China, The cost of the goods under the contract was to be paid by the [Buyer] by irrevocable L/C 14 days before delivery by the [Seller]. An additional clause in the contract specified, 'This contract shall only be effective upon issue of the L/C'.

On 6 June 1992, the [Buyer], the [Seller] and the sales department of a foreign trade company, the ultimate user of the goods (the user), signed an agreement specifying terms on the quality of the goods to be delivered under the aforementioned contract and on the inspection of the goods after their arrival at the port of destination. It was agreed that the goods supplied by the [Seller] `must be pure white pieces of cardboard' and 'no other substance may be mixed with the goods'. The user 'must arrange for the inspection of the quality of the goods within ten days of the arrival of the goods at the port of destination and produce a written certificate of the inspection results.'

On 30 July 1992, the [Buyer] issued an L/C. Thereafter, the [Seller] shipped 246 tonnes of scrap paper, which were delivered by the [Seller] from Hong Kong to a port in Fujian.

On 27 August 1992, the Fujian office of the China Commodities Inspection Bureau issued a certificate of inspection which stated that sample inspection of the goods showed that pieces of white cardboard accounted for 34.96 per cent of the total weight, whereas miscellaneous paper and prohibited substances made up 61.37 per cent and 3.67 per cent of the remainder of the total weight respectively. The certificate concluded that the goods did not conform to the requirements of the contract or of the agreement.

During subsequent negotiations, the [Seller] verbally agreed that the [Buyer] could pick suitable scrap cardboard for use first and that the issue of the non-standard goods could be settled by negotiation later. The [Buyer] said that the user had accordingly picked out 20 tonnes of suitable scrap paper for use. However, the [Buyer] and the [Seller] could not reach an agreement on the remaining 226 tonnes of scrap paper. The [Buyer] therefore applied for arbitration.

The [Buyer] claimed that the quality of the goods delivered by the [Seller] did not conform to the requirements of the contract and the agreement. There was obviously a breach of contract and the [Seller] should offer appropriate compensation. The [Buyer] requested that:

1.     The breach of contract by the [Seller] in delivering non-standard goods be confirmed;
2. The [Seller] take back the goods and refund the payment of HK $157,440 on the goods, plus interest;
3. The [Seller] compensate the [Buyer] for its loss of over Rmb 88,000;
4. The [Seller] bear all arbitration and handling fees.

In its defence, arguments during the hearing and supplementary materials submitted after the hearing, the [Seller] claimed as follows:

1. The agreement stipulated that Party C (i.e., the user) `must arrange for the inspection of the quality of the goods within ten days of the arrival of the goods at the port of destination and produce a written certificate. The inspection certificate specified that the date of import of the goods was 15 August 1992 and the date of the certificate of inspection was 27 August 1992. As a result of the delay in the issue of the certificate of inspection, it had no legal effect and could not be used as a basis for a claim for compensation.

2. Normal scrap paper transactions in the international market usually allow a certain proportion of prohibited substances (around 3 per cent), and the scrap, paper supplied by the [Seller] basically fulfilled this requirement. In 1992, the FOB price of normal scrap paper in Hong Kong was HK $620-HK $700 per tonne whereas the FOB price for pure white scrap cardboard was HK $2,350 per tonne. The agreement on the quality and unit price of the goods in the contract and the agreement was based on gross misunderstanding between the parties and was obviously inequitable. Therefore the contract and the agreement should be amended or cancelled.

3. The [Buyer] had used a substantial part of the goods and should be regarded as having accepted the goods and foregone the right to request that the [Seller] take back the goods. Part of the remaining scrap cardboard was damp and damaged because the [Buyer] unpacked the goods without permission. According to Article 114 of the General Rules of the Civil Law of the People's Republic of China (the General Rules of the Civil Law), the [Buyer] had, therefore, lost its right to claim.

4. The [Seller] prepared the goods in July 1992 in accordance with the contract and stored the goods in rented space on a vessel. As a result of the [Buyer]'s delay in issuing the L/C; the [Seller] suffered great losses. The [Buyer] should compensate the [Seller] for the losses incurred in the renting of vessel space.

Based on the above, the [Seller] requested that the arbitration tribunal dismiss the claims of the [Buyer].

Although, in its defence, the [Seller] requested that the [Buyer] compensate it for the losses incurred in the renting of vessel space due to the [Buyer]'s delay in issuing the L/C, the [Seller] failed to state a specific amount of compensation. Nor did it raise a counterclaim and pay the counterclaim fee within the time limit specified in the Arbitration Rules. Therefore the arbitration tribunal did not consider the [Seller]'s claim.

II. Views of the Arbitration Tribunal

1. In order to confirm whether the quality of the goods delivered by the [Seller] was different from the requirements of the contract and the agreement, two issues must first be resolved:

      a. Were the terms with respect to the quality of the goods and unit price stated in the contract and the agreement obviously inequitable?;

      b. Was the certificate of inspection a valid basis for claim?

The [Seller] submitted that the terms of the agreement relating to the quality and unit price of the goods in the contract and the agreement were the result of a gross misunderstanding between the parties and obviously inequitable, and that the contract and the agreement should be amended or cancelled. Upon investigation, the arbitration tribunal found that the items being transacted for were specified in the contract to be 'pieces of white cardboard (scrap paper)', while the agreement signed between the parties and the user clearly stipulated that the goods to be supplied by the [Seller] 'must be pure white pieces of cardboard' and that `no other substance may be mixed with the goods'. Also, during the hearing, the [Seller] acknowledged that it was a professional firm that had been dealing in scrap paper for many years. The arbitration tribunal held that any other reasonable person in the same situation would probably not misunderstand such clear provisions. In addition, the evidence submitted by the [Seller] was not sufficient to convince the arbitration tribunal of the [Seller]'s explanations. The [Seller]'s claim could not, therefore, be upheld: The provisions relating to the quality and unit price of the goods under the contract and in the agreement were not obviously inequitable, and the parties should perform the contract accordingly. The [Seller] claimed that the certificate of inspection provided by the [Buyer] was issued after the time limit specified in the agreement had expired and the certificate of inspection was not, therefore, valid and could not be used as the basis for claim. The arbitration tribunal held that it was stipulated in the agreement that Party C (i.e., the user) `must arrange for the inspection of the quality of the goods within ten days of the arrival of the goods at the port of destination and produce a written certificate.' This clause specified the obligations of the user and did not contradict clause 14 of the contract, that the [Buyer] should claim compensation on the basis of a certificate of inspection within 90 days of the arrival of the goods at the port of destination. Moreover, the port of destination specified in the contract was the port of Saiqi in Wan, Fujian province, whereas the `date of import specified on the certificate of inspection was found by the arbitration tribunal to refer to the date of entry of the goods into China. The actual date of arrival of the goods at the port of Saiqi should be 18 August 1992. The date of issue of the certificate of inspection was 27 August 1992. This showed that the certificate of inspection was issued within ten days of the arrival of the goods at the port of destination and had not exceeded the time limit specified in the agreement. Therefore, the certificate of inspection was valid and could be used as the basis for claim.

Accordingly, the arbitration tribunal held that the [Seller]'s claim of the inequity of the quality and unit price for the goods agreed to under the contract and in the agreement could not be upheld and that the parties should perform their respective obligations under the contract. According to the certificate of inspection, the quality of the goods delivered by the [Seller] obviously did not conform to the quality of the goods that was agreed to under the contract and in the agreement. This therefore constituted a breach of contract and the [Seller] should compensate the [Buyer] for the losses it suffered due to the breach.

2. The arbitration tribunal found that after the [Buyer] knew that the quality of the goods delivered by the [Seller] did not meet contractual requirements, it entered into negotiations with the [Seller] to resolve the problem. Afterwards, in accordance with the verbal agreement reached between the parties, the [Buyer] picked 20 tonnes of suitable scrap cardboard from among the goods for use. However, the parties did not reach an agreement on how to deal with the remaining goods. The arbitration tribunal held that, because the [Buyer], even knowing that the goods delivered did not conform to contractual requirements, still agreed to pick suitable white scrap cardboard from the goods for use and did in fact pick out and use 20 tonnes of the goods, the [Buyer] had relinquished its right to request that the [Seller] take back the goods. The [Buyer]'s actions also made it impossible for the [Seller] to take back the goods in the state as they were when they were received. Therefore, the [Buyer]'s request that the [Seller] take back the goods and refund the cost of the goods could not be upheld.

The [Buyer] was, however, still entitled to claim damages from the [Seller]. The amount of the damages should be the difference between the value of the goods actually received and the cost of the goods under the contract. As the [Buyer] and the [Seller] had, upon negotiation, agreed that a part of the goods be used and had not been able to arrive at a price for the remaining goods, the arbitration tribunal considered that on a fair and reasonable basis and based on the conclusion of the inspection report that only 34.96 per cent of the goods was up to standard, the amount of damages payable to the [Buyer] by the [Seller] as a result of the non-conformance of the goods it delivered should be the cost of the goods under the contract discounted by 65.04 per cent. The [Seller] should therefore compensate the [Buyer] for HK $102,398.98, plus interest thereon in the amount of HK $6,144 for the period from 10 August 1992 to the date of the award at the annual rate of eight per cent.

Regarding the [Buyer]'s request that the [Seller] compensate the [Buyer] for other economic losses of Rmb 88, 000, the arbitration tribunal did not support this claim and considered that as the [Seller] could not be ordered to take back the goods, the above discount had already compensated the [Buyer] for the losses it suffered by reason of the non-conformance of the goods with the requirements for the goods under the contract. Therefore, the freight charges, customs duty, port charges, inspection fees and storage costs of the goods should be borne by the [Buyer].

3.     The arbitration and handling fees should be borne 40 percent by the [Buyer] and 60 per cent by the [Seller].

III. The Decision

Based on the above facts and the views of the arbitrators, the arbitration tribunal decided as follows:

1. The [Seller] shall, within 45 days of the award, compensate the [Buyer] for its losses of HK $108,542.98. If payment is not made on time, interest will be payable at the rate of ten per cent per annum.

2. The arbitration and handling fees of the case shall be borne 40 per cent by the [Buyer] and 60 per cent by the [Seller].

DISCUSSION

Though the disputed sum in this case was not large, the seller raised in its defence two important issues in the sale and purchase of goods:

1. Was the agreement regarding the quality and unit price for the goods under the contract based on gross misunderstanding between the parties and obviously inequitable?

2. Having used a part of the goods, was the buyer entitled to request that the seller take back the goods? In this case, the contracted items were 'pieces of white cardboard (scrap paper)' and the cost for the goods was HK $640 per tonne, FOB Hong Kong. In its defence, the seller submitted that, in 1992, the FOB price of normal scrap paper in Hong Kong was HK $620-HK $700 per tonne whereas the FOB price for pure white scrap cardboard was HK $2,350 per tonne. The agreement on the quality and unit price for the goods under the contract and in the agreement was based on a gross misunderstanding between the parties and was obviously inequitable. Therefore the contract and the agreement should be amended or cancelled

In its defence, the seller raised two issues:

1. The type of goods should be normal scrap paper and not pure white scrap cardboard. The agreement regarding pure white = scrap cardboard in the contract should be treated as a gross misunderstanding.

2. The price agreed upon was obviously inequitable. However, in its defence, the seller did not distinguish between gross misunderstanding and obvious unfairness. It also equated the gross misunderstanding regarding the type of goods with the gross misunderstanding as to the quality of the goods. The laws of China are applicable to the dispute in this case. Rule 59 of the General Rules of the Civil Law stipulates that,'One of the parties to the following civil acts is entitled to request the People's Court or an arbitration tribunal to amend or cancel such acts:

(1)    The acting party grossly misunderstands the substance of the act;
(2) Acts which are obviously inequitable.'

The above rule only establishes the legal principle by which one of the parties to a civil act is entitled to amend or cancel a civil act which exhibits gross misunderstanding and obvious inequity. The General Rules of the Civil Law do not contain specific provisions on how to determine what constitutes a gross misunderstanding, or obvious inequity. It therefore leaves the power to determine such a fact with People's Court or the arbitration tribunal.

Specific explanations on some of the legal principles of the General Rules of the Civil Law are given in the Provisional Opinion of the Supreme People's Court Several Questions on the Implementation of the General Rules of the Civil Law of the People's Republic of China (the Opinion), passed on 26 January 1988. Though the Opinion is a judicial explanation and is only binding on the courts, its contents have significant implications for our analysis of this case. Let us look at the definition of gross misunderstanding and obvious inequity contained in the Opinion.

Article 71 of the Opinion provides that gross misunderstanding is defined as the misunderstanding, on the part of the acting party, of the nature of the act, the other party to the act, or the type, quality, specifications and quantity of an item, as a result of which the consequence of the act is contrary to the party's intention and causes heavy losses.

Article 72 of the Opinion provides that obvious inequity occurs when one of the parties exploits either its own advantageous position or lack of experience of the other party, as a result of which the rights and obligations of the parties obviously no longer conform to the principle of equity and good consideration.

On the basis of these provisions and with reference to the opinion, it can be concluded that the seller's defence cannot be upheld, for the following reasons:

1. The items purchased and sold under the contract were 'pieces of white cardboard (scrap paper)'. It was also clearly stated in the agreement signed between the buyer, the seller and the user that the goods `must be pure white pieces of cardboard' and that 'no other substance may be mixed with the goods.' If the seller had misunderstood the category of the contracted item, it would have been impossible for the seller, as a professional firm with years of experience dealing in scrap paper, to make such specific provisions on the type of goods in the agreement. With the contract and the agreement as evidence, it is clear that the seller's defence of gross misunderstanding cannot hold.

2. The two defence claims of gross misunderstanding and obvious inequity are actually contradictory. For the defence claim of gross misunderstanding to hold, the type of item would have to be normal scrap paper. According to the evidence submitted by the seller, the FOB price for normal scrap paper in Hong Kong in 1992 was HK $620-HK $700 per tonne. The contract rate was HK $640 per tonne. Therefore, the price for the goods under the contract was not inequitable.

If the seller's argument of gross misunderstanding cannot hold, can the agreement regarding the price of the goods under the contract be determined to be obviously inequitable?

According to the Opinion, there are two conditions for obvious inequity. The first maintains that one of the parties either acts on the basis of its position of advantage or takes advantage of the lack of experience of the other party. The second maintains that as a result of this, the rights and obligations of the parties are obviously contrary to the principle of equity and good consideration. It is worth noting that the concept of 'good consideration' appears in the General Rules of the Civil Law, and the principle of `mutual benefit and consideration' in China's later Technical Contracts Law of the People's Republic of China, but that China's Economic Contracts Law of the People's Republic of China, amended in 1993, abandons the concept of 'good consideration'.

In this case, the seller is a professional firm with years of experience dealing in scrap paper. It was therefore impossible for the buyer to use any possible position of advantage or to take advantage of the seller through the seller's lack of experience in this business.

The second condition cannot be met either. Firstly, the seller submitted that, 'In 1492, the FOB price for pure white scrap cardboard in Hong Kong was HK $2,350 per tonne.' However, it could not provide sufficient evidence to support its claim.  Therefore its claim could not hold. Secondly, even if the seller had provided sufficient evidence to support its claim, it could not be concluded that the rights and obligations of the parties were obviously contrary to the principles of equity, and of mutual benefit and good consideration. In the first place, pure white scrap cardboard, the contracted item, is a type of scrap paper and has no standard specification or requirements. The seller could not prove that the contracted item was the type of goods that was worth HK $2,350 per tonne. In the second place, even if the seller could prove that the FOB price of the contracted item in Hong Kong was HK $2,350 per tonne, it could not be established that the price for the goods under the contract was obviously contrary to the principles of equity and mutual benefit and consideration. This is because the price for the goods under the contract was agreed to by the parties, and the difference between the contract price and the market price does not necessarily mean that an inequity has occurred. Moreover, if the seller, as a professional firm dealing in scrap paper, signed the contract being well aware that the price for the goods under the contract was different from the market price, it would be difficult for the seller to oppose the other party by invoking the principle of equity.

From the above analysis, it can be seen that the claims submitted by the seller are not supported by the two conditions for obvious inequity. It cannot be concluded that the agreement as to the price for the goods is obviously inequitable.

According to the General Rules of the Civil Law, one of the parties may request the amendment or cancellation of a civil act which exhibits gross misunderstanding and obvious inequity. In other words, the parties involved may request amendment or cancellation based on actual circumstances. In its defence, the seller's request to 'amend or cancel' the agreement on the category and price of the goods under the contract was ambiguous, as it did not specify whether it wanted to amend or cancel. When forwarding this defence, the seller did not make clear its definition of the legal principles of gross misunderstanding and obvious inequity, which led to an inability to make any further determinations that would have had to have been based on these definitions.

There is currently no specific provision in Chinese law on the return of goods. The Convention on the International Sale of Goods Contracts of the United Nations (the Convention) and the laws of other countries show that the return of goods is a remedy available to the buyer when the goods delivered by the seller do not fulfill contractual requirements, therefore constituting a fundamental breach of the contract. As the return of goods is a remedy that has serious consequences for the seller, indiscriminate use of this remedy would seriously affect the interests of the seller and result in a form of inequity. Strict conditions are usually laid down, therefore, as to where and when this remedy may be adopted. First, goods delivered by the seller must be inconsistent with the contract requirements, constituting a fundamental breach of the contract. The Convention's definition of a fundamental breach of contract is that the consequences of the breach on the part of one of the parties cause damages to the other party to such an extent that the other party is actually deprived of what it is entitled to expect to obtain under the contract, unless such consequences cannot be anticipated by the party committing the breach nor by a reasonable person with similar qualifications under similar circumstances. Secondly, the buyer must notify the seller within a reasonable period of time after the non-conformance of the goods is discovered or should have been discovered, stating the nature of the non-conformance and the decision to reject the goods. Thirdly, the buyer must be able to return the goods in the same condition as they were in at the time of receipt unless the inability to return the goods in the condition as they were is caused wholly by the seller.

In this case, the goods received by the buyer were proved on inspection to be inconsistent with the requirements defined in the contract. White scrap cardboard accounted for only 34.96 per cent of the total weight of the goods. The remainder comprised other types of paper and prohibited substances. This was totally different from the pure white scrap cardboard expected to be obtained by the buyer at the time the contract was concluded. Therefore, the act of the seller can be determined to constitute a fundamental breach of the contract. However, after it knew of the results of the commodities inspection, the buyer agreed with the seller that it would first pick suitable scrap paper from the goods for use. By entering into such an agreement with the seller, the buyer actually relinquished its right to cancel the contract and to request the return of the goods. Later, the user picked 20 tonnes of suitable scrap paper from the goods for use pursuant to the agreement between the buyer and the seller. The buyer had thus taken action which contradicted the seller's title to the goods. It was no longer possible for the buyer to return the goods in the same condition as they were at the time of receipt. Under these circumstances, the arbitration tribunal could not support the buyer's request for the return of the goods.

There is another issue in the decision of this case worth discussion. The arbitration tribunal dismissed the buyer's request for the return of the goods and the refund of the moneys that it had paid and decided that the [Seller] should pay compensation equal to a discounted price. It is of course true that after losing the right to request the return of the goods, the buyer was still entitled to claim compensation from the seller for the losses caused by the non-conformance of the goods delivered. In terms of procedure, however, the buyer did not, in its application for arbitration, request compensation equal to a discounted price of the goods under the contract. The decision of the arbitration tribunal proposes this request which the buyer itself should have raised but did not. This could be considered unfair to the seller. The arbitration tribunal however, made its decision considering the actual fairness of the situation against a question of fairness that arose from a failure to follow standard procedure, and decided for the former.

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