China 10 July 1993 CIETAC Arbitration proceeding (Heliotropin case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/930710c1.html]
DATE OF DECISION:
DATABASE ASSIGNED DOCKET NUMBER: CISG/1993/09
CASE HISTORY: Unavailable
SELLER'S COUNTRY: People's Republic of China (respondent)
BUYER'S COUNTRY: United States (claimant)
GOODS INVOLVED: Heliotropin
APPLICATION OF CISG: Yes
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
8A [Intent of party making statements or engaging in conduct]; 9D [Usages and practices]; 35A ; 35B3 [Conformity of goods to contract: quality, quantity and description required by contract; Requirements implied by law: quality of goods held out as sample or model]; 74A [General rules for measuring damages: loss suffered as consequence of breach]; 77A [Obligation to take reasonable measures to mitigate damages]
8A [Intent of party making statements or engaging in conduct];
9D [Usages and practices];
35A ; 35B3 [Conformity of goods to contract: quality, quantity and description required by contract; Requirements implied by law: quality of goods held out as sample or model];
74A [General rules for measuring damages: loss suffered as consequence of breach];
77A [Obligation to take reasonable measures to mitigate damages]
CITATIONS TO ABSTRACTS OF DECISION
(a) UNCITRAL abstract: Unavailable
(b) Other abstracts
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. 383-388
Translation (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
English: Dong WU, CIETAC's Practice on the CISG, at n.68, Nordic Journal of Commercial Law (2/2005)Go to Case Table of Contents
|Case text (English translation)|
Heliotropin case (10 July 1993)
Translation [*] by Zheng Xie [**]
Translation edited by Meihua Xu [***]
China International Trade and Economic Arbitration Commission [hereafter, the Arbitration Commission] accepted this case according to:
|-||The arbitration clause in Contract No. 91 BSCTUR20010 signed by Claimant [Buyer], U.S. __ Company, and Respondent [Seller], Sichuan __ Import and Export Corporation on 12 February 1991; and
|-||The written arbitration application submitted by [Buyer] to the Arbitration Commission on 3 December 1992.|
The Chairman of the Arbitration Commission appointed Mr. P as the presiding arbitrator according to the Arbitration Rules. Mr. P, Mr. A appointed by [Buyer], and Mr. D appointed by the Chairman of the Arbitration Commission after being requested by the [Seller] formed the Arbitration Tribunal and heard the case.
On 13 April 1993, the Arbitration Tribunal held a court session in Beijing. Both parties attended the session. They made oral statements and arguments, and answered the Arbitration Tribunal questions. After the session, the parties submitted supplementary materials.
The Arbitration has concluded. According to the written materials and the result of the court session, the Arbitration Tribunal handed down its award by consent.
The following are the facts, the opinion of the Arbitration Tribunal and the award.
On 12 February 1991, [Buyer] and [Seller] signed Contract No. 91 BSCTUR20010. The contract stipulates that [Buyer] purchases 10 tons Heliotropin containing not less than 99% aldehyde at the contract price of US $130,000. According to the contract, [Seller] shall ship the goods to New York port or Los Angeles port before the end of April 1991 and the price term is US $13/kg. Clause 13 of the contract stipulates that the contract takes effect only when [Seller] sends the sample of the goods to [Buyer], and [Buyer] approves.
POSITION OF THE PARTIES
In the application for arbitration, [Buyer] asserts that in March 1993, [Seller] sent the sample to [Buyer], and [Buyer] approved; therefore, the contract was effective. In March 1991, [Buyer] issued the L/C with [Seller] as beneficiary in accordance with the contract. In April 1991, [Seller] notified [Buyer] that it could only deliver 4.5 tons Heliotropin. After negotiating, [Seller] agreed to deliver 9.54 tons, with the price for 5.04 tons increased. Thus, [Buyer] had to alter the L/C twice. At the end of June 1991, the 9.54 tons of goods arrived at New York port. On 3 July, the goods were sent to [Buyer]'s client. On 8 July 1991, [Buyer]'s client informed [Buyer] that there were problems with the goods, the color and flavor of the Heliotropin that [Seller] delivered did not conform to the sample, and [Buyer]'s client refused to take delivery. [Buyer] notified [Seller] of this, but [Seller] did not reply. On 12 July 1991, [Buyer] informed [Seller] twice that because the goods had defects, [Buyer] requested to return the goods; [Buyer] also sent the inspection certificate which states that the goods delivered are yellow, the color of each pail is different, and the goods have the flavor of camphor; the flavor of each pail is different, and some pails do not have the special flavor of Heliotropin. On 16 July 1991, [Seller] replied to [Buyer] and refused [Buyer]'s request to return the goods, and agreed to cooperate with [Buyer] to make clear the reason.
On 19 July 1991, [Buyer] wrote to [Seller] inquiring as to [Seller]'s opinion regarding applying to the U.S. inspection organization to make clear the reason. On 20 July 1991, [Seller] replied asserting:
"It is your duty to apply to the U.S. inspection organization to inspect the goods again. If you assert the goods are not conforming, you must show the inspection certificate issued by an authority which is a corresponding authority to the China Inspection Bureau, to prove the true quality when the goods arrived at the port."
On 21 July 1991, [Buyer] wrote to [Seller] and pointed out:
"According to the contract, if the goods arrive at the port and [Buyer] finds the goods have defects, it can claim for damages with the inspection certificate issued by the agreed inspection organization. Thus, [Buyer] solicits [Seller]'s opinion whether [Seller] admits that the inspection company suggested by the shipping company is the proper one. You did not object according to the fax you sent on July 20. If you object, please notify us soon."
When [Buyer] sent this mail, [Seller] did not make any objection of the inspection organization. Accordingly, [Buyer] reasonably believes that [Seller] agreed on the inspection organization. Then, [Buyer] informed [Seller] of the inspection result of the 9.54 tons of goods, and stated that the goods would be further inspected; [Buyer] requested [Seller] to suggest within 24 hours that if the goods were not conforming, [Buyer] should return the goods or resell the goods at a reduced price and [Seller] would indemnify [Buyer]. [Seller] replied asserting that the goods had no defects. [Buyer]'s representative went to Sichuan to negotiate with [Seller] about the disposal of the goods. Although [Buyer] offered many reasonable suggestions, [Seller] did not accept them.
On 26 July 1991, [Buyer] wrote to [Seller] with the inspection certificate issued by the U.S. inspection organization. The inspection certificate shows:
The inspection certificate points out that the quality of the goods has nothing to do with the transportation of the goods. Stillwell & Gladding, a laboratory with a hundred year's history, issued the inspection report which proves that the goods do not conform to the sample. On 29 July 1991, [Seller] wrote to [Buyer] asserting that it had sent the inspection certificate to the factory, but [Seller] could not accept [Buyer]'s request in the fax of July 27, and said it would discuss the matter and give its reply later. However, [Seller] neither did this, nor did it reply to [Buyer]'s further correspondence. On 2 August 1991, [Buyer] wrote to [Seller] stating that because [Seller] neither accepted nor replied to [Buyer]'s reasonable suggestions, in order to mitigate damages, [Buyer] had to resell the goods at a reduced price on 31 July 1991. [Buyer] requested [Seller] to reply to resolve the dispute in order to avoid taking legal measures. However, on 10 August 1991, [Seller] denied that it had breached the contract; [Seller] neither indemnified [Buyer], nor did it give any suggestion to solve the dispute. In addition, [Seller] made out some facts to criticize [Buyer].
[Buyer] alleges that Clause 1 of the contract clearly states that the goods must contain not less than 99% aldehyde and Clause 13 of the contract specifies that the goods must be confirmed by [Buyer], and then the contract takes effect. According to the above stipulation, this is a typical transaction of sale by sample. In fact, after [Seller] sent [Buyer] the sample, and [Buyer] approved and stored the sample, and [Seller]'s factory stored a copy of the sample too; the purpose is to produce goods conforming to the sample, and to use the sample as a reference should disputes arise. The reason for using sale by sample for this transaction is that in international transactions, sale by sample is usually used for goods with color and flavor; Heliotropin is just such a type of goods.
On the basis of the above facts and reasons, [Buyer] makes the following claims:
In response, [Seller] alleges that:
1. The contract in this case is not a sale by sample; it is a sale by description with conditions. When the parties negotiated and signed the contract, and after [Seller] delivered the goods, and before [Buyer] raised the objection, [Buyer] never stated that the contract was a sale by sample. In addition, [Buyer] did not mention the color and flavor of the goods; let alone that the color and flavor should conform to the sample. Clause 13 of the contract stipulates, that the contract takes effect when [Buyer] confirms the sample. The contract only made approval of the sample a condition for the contract to be effective. The legal action with condition takes effect only when the condition is satisfied, which means that it is a common business practice for [Seller] to send the sample to [Buyer] for approval, and it is not the parties' duty in a sale by sample to approve and store the sample. Sales by sample and sales by description are fundamentally different in law. In this case, once the contract took effect, Clause 13 -- the clause that stipulates the condition for the contract to take effect -- shall not be applied any more. The sample [Buyer] mentions is only a reference; this is proved by the L/C. The L/C uses parenthesis ( ), when describing the quality, in which the factory and quality are mentioned; about the quality, the reference is (Same quality as the sample presented). [Seller] alleges that (1) according to grammar, same quality is the appositive with 99% Min, both of which mean 99% Min; (2) when it is translated to Chinese, it is 10,000 Kg Heliotropin with aldehyde not less than 99% (i.e., the same quality as the sample). It is same with the stipulation in Contract No. 91 BSCTUR20010. To the reason why [Buyer] emphasized the quality in the L/C, [Seller] asserts that [Buyer] may take such careful measure to guarantee the success of the transaction.
2. During the performance of the contract, the parties neither agreed on sale by sample, nor did they take common measures to seal the sample. On the basis of this, [Seller] asserts that the contract in this case is not a contract for sale by sample. In any event, [Seller] emphasizes that the goods delivered conform to the sample. If [Buyer] asserts the goods are not conforming, [Seller] suggests that [Buyer] should prove that the sample it used to compared to the goods, is the one sent by [Seller], not by another factory.
3. The validity of [Buyer]'s re-inspection certificate:
According to the contract, [Buyer] has the right to re-inspect the goods, but the contract does not describe the standard and method of inspection. Because the contract was signed in China, China law shall be applied. Article 21 of the Regulations for the Implementation of the Law of the People's Republic of China on Import and Export Commodity Inspection stipulates,that the exported goods shall be inspected by samples in accordance with the quality, quantity and weight stipulated in the contract and L/C. Accordingly, for this contract of sale by description, the organization to re-inspect the goods shall conduct the re-inspection according to the stipulation in the contract and the L/C. The inspection beyond this breached China law, and it is not binding on the parties.
[Seller] requests the Arbitration Tribunal to dismiss [Buyer]'s claims.
OPINION OF THE ARBITRATION TRIBUNAL
1. The contract was signed and performed mainly in China, and the dispute arose mainly in China. Thus, the Arbitration Tribunal holds the law of the People's Republic of China is applied.
Because China and the U.S. are parties to United Nations Convention on Contracts for the International Sale of Goods (1980) (CISG), according to the Civil Law of the People's Republic of China and the Law of the People's Republic of China on Economic Contract Involving Foreign Interest, the CISG is primarily applicable.
2. The Arbitration Tribunal holds that the issues in dispute are:
(1) The meaning of Clause 13 of the contract, the contract will be effective subject to sample approval, and the usage of the sample in this transaction;
(2) Is the warranty of the [Seller], limited to the express stipulation, 99% aldehyde Min? Is [Buyer]'s assertion that the flavor is not right, above and beyond [Seller]'s warranty commitment?
(3) Is the inspection report submitted by [Buyer] valid?
3. The Arbitration Tribunal notes that the name of the goods described in the contract is Heliotropin, which is the technical term for Piperonal (CH2O2: C6H3 CHO, i.e., C8H6O3), when it is used as perfumery; this shows that the parties did not intend to do a common chemical transaction, but a special chemical transaction for perfumery, for which flavor is an essential factor.
4. The Arbitration Tribunal holds that in a transaction for the sale of goods, the stipulation of quality shall include not only that stipulated in the contract, but also according to the basic principle of conforming to the relevant standard, national standard or industry standard published in the country of origin of the goods; if the contract stipulates the specific factory, it shall include the specification, sample, introduction, label that the factory declares to the public.
The contract in this case does not specify the manufacturing factory; the origin of the goods is China, so [Seller]'s warranty shall include the Standard of Piperonyl QB-783-81 issued by the Ministry of Industry of the People's Republic of China, which is submitted by [Buyer] to the Arbitration Tribunal. After reading the Standard QB-783-81, the Arbitration Tribunal holds that [Seller]'s warranty includes not only the express stipulation, 99% Aldehyde Min but also the standard of color, flavor, solidifying point and deliquescing point stipulated in QB-783-81.
5. The Arbitration Tribunal notes that the Experiment Method for color and flavor in Standard QB-783-81 stipulates that the same standard for comparison with samples is applied. The Arbitration Tribunal understands that under the current scientific and technical position, the comparison method is the only feasible one; that the sample is the basis to inspect color and flavor. The Arbitration Tribunal holds that the parties in this case are companies that engage in chemical transactions, including perfumery transactions, so they shall know that Claimant [Buyer] cannot get the standard sample provided by the Ministry of Industry described in Standard QB-783-81; [Buyer] requested [Seller] to send a sample and obtain [Buyer]'s approval in order to use the sample as the basis to inspect the goods. Accordingly, sample approval stipulated in Clause 13 of the contract is not only the condition for the contract to be effective, but also the standard for [Buyer] to inspect the goods.
6. After reviewing the export inspection report for Certificate No. 5110/318 issued by Sichuan Import and Export Commodity Inspection Bureau, the Arbitration Tribunal concludes that the report does not completely reflect the quality, because:
(1) The report is only used for the Bureau internally to exchange for the certificate, and it is not an official inspection certificate, so it is not legally binding;
(2) The report only describes the solidifying point and deliquescing point, not the color and flavor requested by Standard QB-783-81.
Accordingly, [Seller] has not provided sufficient reasons and evidence to support its assertion that the goods he delivered conform to the sample he sent, and so the Arbitration Tribunal does not support this assertion.
7. The Arbitration Tribunal reviewed the inspection certificate issued by General Inspection Company and Stillwell Gladding, and the correspondence of the parties, and holds:
(1) [Seller] requested that [Buyer] show the inspection certificate issued by an authority which is a corresponding authority to the China Inspection Bureau. This is a meaningless request because China Import and Export Commodity Inspection Bureau is a government organization, and [Seller] does not provide evidence to prove there is a corresponding government organization in the U.S. Thus, [Seller]'s request cannot be satisfied.
(2) [Seller] has the right to object, within a reasonable period, to the inspection organization to which [Buyer] applied, and to negotiate with [Buyer] to decide the inspection organization for re-inspection. However, [Seller] neither did this within a reasonable time, nor did it reply to [Buyer]'s active suggestion to negotiate with [Seller].
Thus, the Arbitration Tribunal holds that because [Buyer] sent the inspection report to [Seller], and [Seller] did not make any objection within a reasonable time, [Seller] accepted and admitted [Buyer]'s inspection report.
8. In conclusion, the Arbitration Tribunal holds that according to Article 35 of CISG, the goods delivered by [Seller] did not conform to the contract, so [Seller] breached the contract. In accordance with Article 74 of CISG, [Seller] shall indemnify [Buyer] the loss including loss of profits.
1. [Seller] shall indemnify [Buyer] the loss due to non-conforming goods and reselling them at a reduced price, US $21,571.10, and the extra loss of [Buyer] for this case of US $3,381.90.
2. [Seller] shall pay the arbitration fee. [Buyer] has paid the arbitration fee in advance, so [Seller] shall indemnify [Buyer].
3. Each party shall pay its own attorneys' fee.
[Seller] shall pay the above amount within 45 days of the date of this award; otherwise, it shall pay additional interest at the monthly rate of 0.5% for the principal, US $24,953.00.
This is the final award.
* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of the United States is referred to as [Buyer]; Respondent of the People's Republic of China is referred to as [Seller]. Amounts in the currency of the United States (dollars) are indicated as [US $].
** Zheng Xie, LL.M. Washington University in St. Louis, LL.M., BA in Economics, University of International Business and Economics, Beijing.
*** 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