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CISG CASE PRESENTATION

China 30 March 1993 CIETAC Arbitration proceeding (Talcum block case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/930330c1.html]

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

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Case identification

DATE OF DECISION: 19930330 (30 March 1993)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1993/07

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: People's Republic of China (claimant)

BUYER'S COUNTRY: Hong Kong (respondent)

GOODS INVOLVED: Talcum blocks


Classification of issues present

APPLICATION OF CISG: Yes, although the award is silent on the governing law, the tribunal applied provisions of the CISG.

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 7 ; 40 ; 74 ; 78 [Also cited: Articles 38 ; 39 ]

Classification of issues using UNCITRAL classification code numbers:

7C2 [Recourse to general principles on which Convention is based: reasonableness applied as basis for determination of rate of interest];

40B [Seller's knowledge of non-conformity (seller fails to disclose known non-conformity): seller loses right to rely on articles 38 and 39];

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

78B [Rate of interest]

Descriptors: Lack of conformity known to seller ; Damages ; Interest ; General principles ; Set-off ; Reasonableness

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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): Zhong Guo Guo Ji Jing Ji Mao Yi Zhong Cai Wei Yuan Hui Cai Jue Shu Hui Bian [Compilation of CIETAC Arbitration Awards] (May 2004) 1993 vol., pp. 257-260

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

Talcum block case (30 March 1993)

Translated [*] by Yan Tianhuai [**]

Edited by William Zheng and Julie Yu [***]

The China International Economic and Trade Arbitration Commission (hereinafter, "Arbitration Commission") accepted this case according to:

   -    The arbitration clause in Sales Contract 89DA3076-007 (hereinafter, the "Contract") signed by and between Claimant, Dalian ___ Import and Export Company(a Chinese company) (hereinafter, "[Seller]"), and Respondent, Hong Kong ___ Trading Company (hereinafter, "[Buyer]"), on 25 August 1989; and
 
   -    The written arbitration application submitted by the [Seller].

According to the Arbitration Commission's arbitration rules (hereinafter, "Arbitration Rules"), Mr. A, the arbitrator appointed by the [Seller], Mr. D, the arbitrator appointed by the Chairman of the Arbitration Commission upon delegation by the [Buyer], and Mr. P, the presiding arbitrator appointed by the Chairman of the Arbitration Commission, formed an arbitration tribunal (hereinafter, "Arbitration Tribunal") to hear this case.

After examining the [Seller]'s arbitration application and the attached evidence as well as the [Buyer]'s defense and attached evidence, the Arbitration Tribunal held a hearing of this case in Beijing on 21 October 1992. Both parties attended the hearing, made oral statements and arguments, and answered the Arbitration Tribunal's questions. After the hearing, both parties submitted supplementary material to the Arbitration Tribunal.

The case has been concluded. The Arbitration Tribunal renders this arbitral award based on the facts and under the law. The facts and the Arbitration Tribunal's opinion and award are as follows.

I. FACTS

On 25 August 1989, the [Seller] and the [Buyer] entered into the Contract, under which the [Seller] agreed to sell to the [Buyer] 7,500 metric tons of Talcum Blocks at a unit price of US $40.00 per metric ton FOB Yingkou, China with total value amounting to US $300,000. The Contract specified that the whiteness of the goods should be above 86 percent. On 8 November 1989, the [Seller] delivered the first shipment of the goods, 3,098.81 metric tons in quantity and US $123,952.40 in compliance with the contract price on board at the port of Yingkou, China to be shipped to Inchon, South Korea. Prior to shipment of the goods, the [Buyer] had caused a letter of credit ("L/C") covering the goods under the Contract to be issued to the [Seller]. However, the [Seller]'s demand for payment under the L/C was dishonored due to the non-conformity of the documents presented by the [Seller] with the L/C. After arrival of the goods in South Korea, the [Buyer]'s client, a South Korean Company, upon inspection of the goods, asserted that there were severe quality defects in the goods and lodged a claim for damages against the [Buyer]. Thereafter, the [Buyer] refused to pay the [Seller]. The parties failed to reach a settlement of their dispute through negotiation. The [Seller] filed an application for arbitration with the Arbitration Commission.

The [Seller]'s position

The [Seller] alleges:

The said 3,098.81 metric tons of the goods were delivered on board after being confirmed and agreed by Mr. Wang, the [Buyer]'s Chairman of Board of Directors, on site of the port of shipment. The goods were also inspected by the inspection center of Haicheng ___ Foreign Trading Company, which issued a certificate showing that the goods were qualified. Meanwhile, the [Buyer] did not raise objection to the quality of the goods within the time limit set forth in the Contract, nor did it present any inspection certificate issued by relevant authorities. So, in the [Seller]'s opinion, the [Buyer]'s refusal to make the payment of the price is unjustifiable. In addition, because the [Buyer] refused to perform its obligation under the Contract for the remaining 4,401.19 metric tons of the goods, it shall be liable for damages suffered by the [Seller] thereof. Therefore, the [Seller] puts forward the following claims:

1. The [Buyer] shall pay the [Seller] the price for 3,098.81 metric tons of the goods in the amount of US $123,952.40 plus the interest accrued from January 1990 to December 1991 in the amount of US $15,617.92, totaling US $139,590.32;

2. The [Buyer] shall pay the [Seller] the interest accrued on the price of the remaining 4,401.19 metric tons of the goods in the amount of US $22,185.00 and storage fee in the amount of US $51,634.00; the [Buyer] shall also bear the storage fee and operation fee incurred by the [Seller]'s supplier in the amount of RMB $47,820.38; and

3. The [Buyer] shall bear the arbitration fee in the amount as determined by the Arbitration Tribunal.

The [Buyer]'s position

The [Buyer] contends:

1. The [Buyer]'s client found that there were severe quality defects in the goods immediately after it took delivery of 3,098.81 metric tons of the goods on 14 November 1989 and lodged a claim for damages against the [Buyer] on 24 November 1989. Soon after, the [Buyer] contacted the [Seller] and informed the [Seller] that the goods were defective and that the [Buyer]'s client claimed for damages. On 8 December 1989, one employee of the [Seller], Mr. Liu Xianzhong, directly sent to the [Buyer]'s client a fax, stating that the goods "were of poor quality, sorry for causing trouble to your company." On 20 December 1989, another employee of the [Seller], Ms. Qu, sent a fax to the [Buyer]'s branch company in South Korea, clearly expressing that "there existed quality problems in the goods, we agree to compensate your company in a proper way." The forgoing facts show that the [Seller] has admitted that there were defects in the goods and has agreed to compensate the [Buyer] for damages. As to the inspection certificate issued by the inspection center of Haicheng ___ Foreign Trading Company on 28 October 1989, in the [Buyer]'s opinion, it proves only to the effect that the quality of the samples inspected were good but nothing to the quality of the 3,098.81 metric tons of the goods. Also, the [Seller]'s allegation that the goods had been confirmed by Mr. Wang before being loaded on board is untrue; the truth is that Mr. Wang, after making an on-site examination of the goods together with the [Seller]'s representative, found that around one-third of the goods contained impurities and immediately informed the [Seller] that the goods should not be shipped unless the impurities were removed, but unknown to Mr. Wang, the [Seller] shipped the goods at the night of the day Mr. Wang examined the goods without any removal.

2. After the arrival of the goods in South Korea, the [Buyer]'s client inspected the goods and found that the goods were severely mixed with impurities and could not be used as raw material to produce papers. The [Buyer]'s client forthwith lodged a claim against the [Buyer] for compensation for 30 percent of the total value of the shipment. Upon the [Buyer]'s insistence, the [Buyer]'s client finally agreed to reduce the compensation claim to 25 percent of the total value of the shipment for 774.7 metric tons of non-conforming goods in the amount of US $60,955. Thereafter, on 29 November 1989, the [Buyer] sent a fax to Mr. Tian, the General Manager of the [Seller], notifying him of the claim from the [Buyer]'s client. In fact, during the time period from November 1989 to December 1989, Mr. Li, the Deputy General Manager of the [Seller], as well as Mr. Liu and Ms. Qu, the staff of the [Seller], either via fax or through phone call, acknowledged that there were quality defects in the goods and agreed to make compensation. The [Seller] now alleges that the goods were not defective and that the [Buyer] lodged the claim for damages beyond the time limit set forth in the Contract and failed to present an inspection certificate as evidence. The [Seller]'s allegation contradicts what [Seller] has admitted and, therefore, is unjustifiable.

3. It is the [Seller] itself, rather than the [Buyer], which should be responsible for not receiving the payment under the L/C. The [Seller] knew that its demand for payment under the L/C was dishonored by the issuing bank due to the inconsistency between the documents presented and the L/C. The reasons why the [Buyer] failed to ask the bank to make the payment in spite of the discrepant documents were: (1) the [Buyer]'s claim for damages against the [Seller] arisen out of the Contract had not been settled; and (2) the [Buyer]'s claim for compensation against the [Seller] for the losses arisen from previous transactions in the aggregate excess of US $200,000 had not been settled. Moreover, notwithstanding the fact that the Contract was concluded by and between the [Seller] and the [Buyer], the irrevocable L/C at sight was issued by the issuing bank upon application of another Hong Kong company. The [Seller] should ask the issuing bank or that Hong Kong company for the payment. Its demand for the price of the goods from the [Buyer] is unwarranted according to the law.

4. As to the [Seller]'s request for fulfillment of the obligation under the Contract for the remaining 4,401.19 metric tons of the goods, the [Buyer] contends that the [Seller]'s practices in implementing the more than twenty deals between the parties since 1987 indicated that the [Seller] was untrustworthy, because the goods delivered by the [Seller] in the past were claimed for damages by the [Buyer]'s clients for six times due to quality problems and the goods under the Contract were defective and were claimed for damages by the [Buyer]'s client again; pursuant to Article 17 of Chinese Foreign Economic Contract Law, the [Buyer] was entitled to suspend the performance of the Contract prior to the settlement of the these problems.

In addition to above defenses, the [Buyer] counterclaims to set-off the price of the 3,098.81 metric tons of the goods with the damage it suffered in the amount of US $60,955 plus the interest accrued on it in the amount of US $30,782.26 as well as the loss of profit in the amount of US $30,091.34.

II. OPINION OF ARBITRATION TRIBUNAL

After due deliberation on the dispute in the instant case, the Arbitration Tribunal holds:

1. Whether the goods were confirmed by the [Buyer] before shipment

The [Seller] asserts that it shipped the goods after they were examined and confirmed by the [Buyer]. The Arbitration Tribunal notes that, in the three faxes sent to the [Seller], respectively, on 23, 25, and 31 October 1989, the [Buyer] clearly informed the [Seller] that there were large amount of impurities in the goods and requested that the goods should not be shipped unless the impurities were removed. In fact, the [Seller] shipped the goods without removing impurities from them.

2. Inspection before shipment

The Contract contained no provision requiring pre-shipment inspection of the goods. The [Seller] asserts that "the goods turned out to be of good quality after inspection". The so-called inspection meant the examination of the chemical composition of the talcum samples provided by the [Seller]'s supplier conducted by the inspection center of Haicheng ___ Foreign Trading Company on 28 October 1989. There are several problems concerning this inspection: (1) the inspection center of Haicheng ___ Foreign Trading Company was neither an inspection authority designated under the law nor an inspection institution specified in the Contract; (2) it was inconsistent with the basic requirement of commodity inspection that the samples were selected and provided by the supplier itself, and there was no statement on the inspection certificate to explain the connection between the samples and the goods under the Contract; (3) the quality problem raised by the [Buyer] was not the non-conformity of the chemical composition of the goods with the Contract but the existence of impurities in the goods, which were visible to human eye. So, the inspection certificate presented by the [Seller] cannot be adopted as evidence to prove that the goods were in conformity with the Contract.

3. Whether the [Buyer] lost the right to raise objection on quality

The Contract provided that an objection on the quality of the goods, if any, should be raised by the [Buyer] within 30 days following the arrival of the goods at the destination port, provided that an inspection certificate issued by a notary public agreed by the [Seller] was presented. The [Seller] alleges that the [Buyer]'s objection on the quality of the goods was unacceptable because the [Buyer] failed to present the inspection certificate required by the Contract. The Arbitration Tribunal is of the opinion that the [Seller] was aware of the non-conformity of the goods with the Contract before the goods were shipped because the [Buyer] had informed it orally or in writing of the quality defects in the goods and stressed that the goods should not be shipped as they were. After the arrival of the goods at the destination port, the consignee found that the goods were defective and promptly informed the [Buyer], who notified the [Seller] forthwith. In its replies to the [Buyer]'s and the consignee's faxes, the [Seller] summarily admitted the quality defects in the goods and expressed its apologies, without requesting the [Buyer] to have the goods inspected by a inspection institution. This fact showed that the [Seller] actually had knowledge of the non-conformity of the goods with the Contract. Pursuant to Article 40 of United Nations Convention on Contacts for the International Sale of Goods (CISG), the seller is not entitled to rely on the provisions of Article 38 and 39 regarding the time limit for buyer's inspection of the goods and for giving notice to the seller of the nature of the lack of conformity if the lack of conformity relates to facts of which the seller knew or could not have been unaware. So, the [Seller]'s allegation is groundless. Even when the [Buyer] asked the consignee to pick out the defective goods and after the consignee finally picked out the defective goods in a quantity equal to 25 percent of the goods, the [Seller] did not raise any objection. Therefore, the Arbitration Tribunal holds that the [Buyer]'s contention that the goods lacked conformity with the Contract is established and its counter claim not to pay 25 percent of the price of the goods to the [Seller] is granted.

4. The [Buyer]'s claim to set-off the price of the goods

The [Buyer]'s claim to set-off US $60,955 of the price of the goods with the equivalent amount damage it suffered, which was evidenced by the damage calculation table and the payment receipt issued by the [Buyer]'s client, shall be granted. The [Buyer]'s claim to set-off a portion of the price of the goods with the interest accrued on aforesaid amount of damage shall be dismissed because the price of the goods has been kept in the [Buyer]'s hand and has not been paid to the [Seller] yet, and the [Buyer] actually suffered no loss of interest. The [Buyer]'s claim to set-off a portion of the price of the goods with the loss of profit it suffered shall also be dismissed because the [Buyer] fails to provide evidence to support such a claim.

5. The [Seller]'s arbitration claim

The [Buyer] accepted the goods; according to the Contract, it should pay the [Seller] the price of the goods. After deducting the price of the non-conforming goods, the [Buyer] shall pay the balance of the price of the goods to the [Seller]. The [Seller] claims for interest on the price of the goods but fails to specify an interest rate. It is inferred from the interest amount claimed by the [Seller] that interest rate adopted by the [Seller] is 6.3 percent per annum, which is reasonable. So, the [Seller]'s claim for interest shall be granted.

6. The [Seller]'s claim for damage suffered from the [Buyer]'s non-performance of the Contract with respect to the balance of the goods

After examining the six documents presented by the [Seller] as evidence to prove the lost of storage fee and freight related to the balance of the goods under the Contract, it is found that such fees were paid by a third party rather than the [Seller]. No evidence proved that the [Seller] ever suffered any damage from the [Buyer]'s non-performance of the Contract with respect to the balance of the goods. So, its claim for the damage is dismissed.

III. AWARD

1. The [Buyer] shall, within 45 days of the date of this award, pay the [Seller] the price of the goods in the amount of US $62,997.40 plus the interest accrued on it from January 1991 to December 1991 in the amount of US $7,937.67, totaling US $70,935.07. For any late payment, interest calculated at the monthly rate of 0.5 percent will be added.

2. The [Buyer] and [Seller] each shall bear 50 percent of the arbitration fee. The [Seller] has prepaid RMB XXX. The [Buyer] shall reimburse the [Seller] RMB XXX at the same time it enforces the award.

This award is final.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, the Claimant of the People's Republic of China is referred to as [Seller] and the Respondent of Hong Kong is referred to as [Buyer]. Amounts in the currency of the United States (dollars) are indicated as [US $]; amounts in the currency of the People's Republic of China (renmimbi) are indicated as [RMB].

** Tianhuai Yan, LL.M., Golden Gate University Law School; LL.M. Nanjing University Law School; Becon, Nanjing University Business School. Attorney at Law, admitted in P.R. China and California, USA; Partner, G & D Law Firm, Nanjing, China.

*** 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. Julie Yu is a Chinese Consultant with this law firm. Ms. Yu actively participates in pro bono projects, such as volunteering at the Legal Aid Centre.

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