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CISG CASE PRESENTATION

China 27 February 1993 CIETAC Arbitration proceeding (Bread improving tablets case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/930227c1.html]

Primary source(s) for case presentation: Case text


Case Table of Contents


Case identification

DATE OF DECISION: 19930227 (27 February 1993)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1993/01

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Hong Kong (claimant)

BUYER'S COUNTRY: China (defendant)

GOODS INVOLVED: Bread improving tablets


Classification of issues present

APPLICATION OF CISG: CISG not applied although demanded by claimant

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 61 ; 74

Classification of issues using UNCITRAL classification code numbers:

Unavailable

Descriptors: Unavailable

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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: China International Economic and Trade Arbitration Commission, CIETAC awards (1995) No. 74 [304-308]

Translation (English): Text presented below; see also Selected Works of China International Economic and Trade Arbitration Commission Awards (1963-1988) updated to 1993: Authorised English Version (Hong Kong/London: Sweet & Maxwell: 1995), No. 74 = CISG and China: Theory and Practice, Michael R. Will ed., Faculté de droit, Université de Genève (1999) 89-93

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. 91

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Case text (English translation)

Reproduced with permission of Michael R. Will ed., "CISG and China: Theory and Practice", Schriftenreihe deuscher jura-Studenten in Genf (1999) 89-101, with Claimant of Hong Kong indicated as [Seller] and Respondent of Mainland China indicated as [Buyer].

China International Economic & Trade Arbitration Commission
CIETAC (PRC) Arbitration Award

Bread improving tablets case (27 February 1993)

The China International Economic and Trade Arbitration Commission, formerly the Foreign Economic and Trade Arbitration Commission of the China Council for the Promotion of International Trade, (the " Arbitration Commission"), pursuant to the arbitration clause in the contract signed by the Claimant [Seller] and the Respondent [Buyer] on April 30, 1992 and upon the written application for arbitration made by the [Seller] on July 18, 1992,[1] took cognisance of this case concerning a delivery dispute.

An arbitration tribunal was constituted comprising a presiding arbitrator appointed by the chairman of the Arbitration Commission pursuant to the Arbitration Rule and two other arbitrators, appointed by the [Seller] and the [Buyer] respectively.

After examining the application for arbitration filed by the [Seller], the written defence of the [Buyer] and the supporting materials provided by each party, the arbitration tribunal held a hearing in Beijing on December 21, 1992. Both parties attended the hearing, gave oral statements and answered the questions raised by the arbitration tribunal. On January 16, 1993, the [Buyer] provided the supplementary defence materials. The hearing was closed and an award was made by the tribunal according to the verified facts and the relevant laws. The facts, the tribunal's opinion and the award are as follows:

I. FACTS

The [Seller] claimed that on April 30, 1992, the [Seller] and the [Buyer] entered into Contract No. 92HMC-OOIHK, which provided that: the [Seller] was to sell two batches of Super A Bread Improving Tablets to the [Buyer], in a total of 3,600 packs; the unit price was US $3,060.00 per metric ton, CIF Dalian, for a total amount of US $275,400.00. The [Seller] would arrange the shipment of goods within 15 days upon the receipt of [page 89] 50 per cent of the payment for each batch of goods. The same day, after negotiations, both parties decided to amend the contract as follows: term of payment: the [Buyer] would issue a 100 per cent letter of credit for each batch of goods and the [Seller] should arrange the shipment of goods within one month upon the receipt of the letter of credit. Thus, another contract was concluded by both parties. As soon as the contract became effective, the [Seller] ordered the above-mentioned goods from a factory in Belgium and waited for the [Buyer] to issue the letter of credit in order to load the goods on board the vessel. On May 15, 1992, the [Buyer] instructed the [Seller] to cancel its order for goods. The next day, the [Seller] replied that it did not agree with the rescinding of the contract and if there was a difficulty, the [Buyer] could reduce the amount of goods ordered. The [Buyer] neither replied nor issued the letter of credit, which caused the [Seller] to suffer unnecessary economic loss and harm to its reputation. On July 13, 1992,[1] the [Seller] applied to the Arbitration Commission for arbitration.

Based on the above-mentioned facts, the [Seller] held that once a sales contract is concluded, it is binding on both parties and neither party can breach the contract. Since the [Buyer] presumptuously rescinded the legally effective contract, it should be liable for breach of contract. In accordance with Articles 16, 18 and 19 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interests and Articles 61 and 74 of the United Nations Convention on Contracts for the International Sale of Goods, the [Seller] requested that the [Buyer] pay US $13,770, i.e. five per cent of the total value of the contract as damages for breach of contract.

The [Buyer] argued in its defence that:

1. Regarding the validity of the two contracts, the facts and reasons stated in the arbitration application filed by the [Seller] were garnered from the clauses favourable to itself. The facts were: on April 30, 1992, the representatives of the [Seller] and the [Buyer] entered into Contract No. 92HMC-0011HK in Harbin. The contract stipulated that:

(1)    The [Seller] would sell two batches of Super A Bread Improving Tablets to the [Buyer], in a total of 3.600 packs;
 
(2) Terms of price were US $3.060/metric ton CIF Dalian and the total amount was US $275,400;
 
(3) The terms of payment were that 50 per cent of the total amount was payable in advance, and 50 per cent was TT;
 
(4) An additional term was that the contract was to be executed on the receipt of the advance payment from the end user. In case any other term of this contract contravened the additional term, this addition term should prevail.

In the application for arbitration, the [Seller] did not reveal this most important term in the contract. Since the end user of the contract and the representative of the [Seller] had previously imported 15 tons of Super A Bread Amelioration Tablets through a market bazaar in Xiamen, both parties decided to add this additional term in the contract. Thus, the [page 90] execution of the contract was based upon the smooth execution of the previous contract. This point was made very clear to the representative of the [Seller] when signing the contract. Based on this (stipulation of the additional term), the effectiveness of the contract is conditional. This means the contract would be effective only after the end user had made the advance payment. As the contract was ineffective, the question that the [Buyer] did not perform the contract did not arise.

The [Seller] and the [Buyer] signed two contracts with the same contract number on the same day not because, as stated in the arbitration application of the [Seller], "both parties, after negotiations, amended the contract." The only difference between the first contract and the second contract is that the term of price was reduced by half in the later contract. Both parties agreed to this in order to reduce the import duties. Therefore, from the practical point of view, the first contract is real while the second one was a "fake contract" amended in order to reduce custom duties. This point can also be reflected from the arbitration application of the [Seller] which used the contract price in the first contract as the basis for calculating damages arising from the breach.

2. The reason for non-performance of the contract was that the [Buyer] had clear evidence to show that the [Seller] could not perform the contract and therefore the [Buyer] exercised its right to stop performing the contract. By virtue of Article 17 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interests, if one party has clear evidence that the other party cannot perform the contract, the former can stop performing the contract temporarily. In the previous sales contract entered into by the [Seller]'s representative and the end user of the [Buyer], the [Seller] had provided inferior (substandard) products, resulting in great economic loss to the end user of the [Buyer]. Moreover, the problem had not been resolved in spite of several rounds of negotiations. This indicated that the [Seller] was irresponsible and provided substandard products. All this established well-grounded reasons for the [Buyer] to stop performance of the contract.

3. In its arbitration application, the [Seller] requested the [Buyer] to pay five per cent of the total contract price as damages for breach of contract. The essential requirement for award of damages for the breach of contract was that both parties concerned had to agree and it had to be stipulated in the contract. However, the [Buyer] could not find any clause to provide damages for the breach of contract. Thus, the request of the [Seller] that the [Buyer] had to pay five per cent as damages for the breach of contract had no legal basis.

According to the above-mentioned facts and arguments, the [Buyer] requested the tribunal to make an award as follows: [page 91]

1. The [Seller] shall assist the Xiamen market bazaar to solve the problem regarding the loss suffered by the Harbin market bazaar due to its providing 15MT Super A Bread Amelioration Tablets.

2. The [Seller] shall ensure that it has the capacity of providing Super A Bread Amelioration Tablets which comply with the quality standard stipulated in the contract. The [Buyer] will issue a letter of credit within one month and co-operate with the [Seller] in order to carry out the contract.

3. The [Seller] shall bear all expenses of the [Buyer] incurred for arbitration.

II. OPINION OF THE ARBITRATION TRIBUNAL

The tribunal is of the opinion that:

1. The [Seller] and the [Buyer] in this case have not chosen which law is to be applicable. Since the contract was signed in Harbin, China, and according to the principle of closest relation with the contract, the tribunal decided the law applicable would be where the contract was signed, i.e. the law of China.

2. There were two contracts in this case with identical contract number, date, goods, and quantity. The main difference is: the price of goods in the first contract is US $3,060 per ton totalling US $275,400, and in the second contract is US $1,530 per ton for a total of US $187,000. After investigation by the tribunal, it is clear that the second contract was made to evade custom duties. By virtue of Article 9 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interests, the second contract in this case is void.

3. The [Seller] requested the [Buyer] to pay US $13,770 as damages for the breach of contract with the reason that the [Buyer] failed to issue a letter of credit as stipulated in the second contract. Since the contract was void, the basis of the arbitration application of the [Seller] accordingly does not exist. The tribunal cannot uphold the request of the [Seller].

4. The tribunal is of the opinion that the first contract in this case is effective. However, the additional term of the contract stipulated a precondition in respect of the execution of the contract. After investigation, the tribunal discovered whom the "end user" was, as mentioned in the additional term. Both the [Seller] and the [Buyer] knew the identity of the end user before signing the contract. It was found that the end user had [page 92] not paid the advance payment. The tribunal, therefore, held that the precondition in the first contract in the respect of the execution of the contract has not been established. There was no such issue of breach of contract to both sides.

5. The tribunal is of the opinion that the issue of assisting Xiamen market bazaar to solve the loss suffered by Harbin market bazaar which was raised by the [Buyer], is beyond the scope of this arbitration and the tribunal will not consider it.

6. The tribunal is of the opinion that the [Buyer]'s request that the [Seller] shall ensure its ability to perform the contract and to ensure its reputation, is in essence raising the issue of "anticipated breach" to the [Seller]. The tribunal held that each contract and its related transaction is independent. The [Buyer] did not have sufficient grounds to form the basis for arguing an "anticipated breach" simply by raising a contractual dispute between another economic entity and the [Seller].

7. The tribunal is of the opinion that the [Seller] and the [Buyer] had jointly set up the second contract with the illegal purpose of evading custom duties. Since both parties had responsibility for this, each party shall bear half of the arbitration fee and each party shall also bear its own lawyer's fee and other expenses arising out of the arbitration.

III. AWARD

The tribunal makes an award as follows:

1. The [Seller]'s request that the [Buyer] pay US $13,770 for damages for breach of contract is dismissed.

2. The arbitration fee of this case is to be equally shared by both parties. The award is final. [page 93]


FOOTNOTES

1. Editors note: The dates are inconsistent in the Chinese version.

All translations should be verified by cross-checking against the original text.

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Pace Law School Institute of International Commercial Law - Last updated January 23, 2007
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