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CISG CASE PRESENTATION

China 26 October 1993 CIETAC Arbitration proceeding (Frozen beef case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/931026c1.html]

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

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Case identification

DATE OF DECISION: 19931026 (26 October 1993)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1993/12

CASE NAME: Unavailable

CASE HISTORY: Unavailable

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

BUYER'S COUNTRY: United States (respondent)

GOODS INVOLVED: Frozen beef


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 25 ; 64 ; 74 ; 75 ; 76 ; 78 ; 81

Classification of issues using UNCITRAL classification code numbers:

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

64A1 [Seller's right to avoid contract (grounds for avoidance): fundamental breach of contract];

74A1 [General rules for measuring damages: loss suffered as consequence of breach includes loss of profit];

75A1 [Damages established by substitute transaction after avoidance: resale by aggrieved seller];

76A [Avoidance without purchase or resale under article 75: damages determined by estimate];

78B. [Rate of interest];

81A1 [Effect of avoidance on obligations: right to damages preserved]

Descriptors: Fundamental breach ; Avoidance ; Damages ; Profits, loss of ; Cover transactions ; Interest

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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. 501-505

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at nn.162, 167, Nordic Journal of Commercial Law (2/2005)

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Case text (English translation)

Queen Mary Case Translation Programme

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

Frozen beef case (26 October 1993)

Translation [*] by Zheng Xie [**]

Translation edited by Meihua Xu [***]

China's International Trade and Economic Arbitration Commission, [hereafter, the Arbitration Commission] accepted the present case about a sales agreement for 200 tons of frozen beef according to:

   -    The arbitration clause in Contract No. QFM92LS-01 signed by Claimant [Seller], Qingdao __ Import and Export Company, and Respondent [Buyer], American __ __ Company; and
 
   -    The written arbitration application submitted by [Seller] on 18 November 1992.

The Chairman appointed Mr. P as the Presiding Arbitrator. Mr. P, Mr. A appointed by [Seller] and, according to the Arbitration Rules, Ms. D appointed by the Chairman of the Arbitration Commission for [Buyer], who did not appoint the arbitrator within the stipulated time, formed the Arbitration Tribunal to hear the case.

On 26 December 1992, the Secretariat of Arbitration Commission sent the notice of arbitration and [Seller]'s application and appendix to [Buyer] by express mail. The express mail company's record shows [Buyer] has received the above documents, but [Buyer] did not appoint an arbitrator, nor did it provide any defense or response.

The Arbitration Tribunal held a court session on 27 May 1993 in Beijing. The notice of court session was sent to both [Seller] and [Buyer] according to the Arbitration Rules. [Seller] attended the session, made oral statement and answered the Arbitration Tribunal's questions. [Buyer] neither attended the court session, nor did it give any reasons. After the session, the Arbitration Tribunal corresponded with [Buyer] asking it to inform the Arbitration Tribunal whether it requested another court session or desired to submit defense materials. After receiving the above correspondence, on 10 June 1993 [Buyer] submitted a written request for another court session. The Arbitration Tribunal decided to hold a second court session on 21 June 1993, and notified the parties. On 28 June 1993, [Buyer] submitted the defense of jurisdiction with the reason that the contract stipulates the old name of the Arbitration Commission, which is different from the current name. On 6 July 1993, the Arbitration Tribunal ruled that the Arbitration Commission has jurisdiction on this case, and dismissed [Buyer]'s jurisdiction defense.

On 14 September 1993, the Arbitration Tribunal held the second court session in Beijing. [Seller] attended the session, but [Buyer] neither attended, nor did it provide any reasons or written defense materials.

The Arbitration Tribunal has concluded the case. The following are the facts, the opinion of the Tribunal and the award.

FACTS

On 8 June 1992 [Buyer] negotiated with __ Meat Products Factory to purchase 200 tons fine beef. Because __ Meat Products Factory has no capacity to export, [Seller] was authorized to sign the contract with [Buyer]. On 21 June 1992, [Seller] and [Buyer] signed Contract No. QFM92LS-01 for the purchase of 200 tons fine beef. The contract stipulates:

   -    Price: FOB Qingdao US $1,830/ton;
   -    Total price: US $366,000;
   -    Payment term (Clause 12): "[Buyer] shall apply to Chinese Hong Kong Bank to issue confirmed, irrevocable, no right of recourse, non-transferable, non-divisible, and payable at sight L/C by presenting inspection certificate and onboard B/L with [Seller] as beneficiary. The L/C shall be executed within seven days when quality guaranty bond is received. The content of the L/C must be strictly conforming to the contract."
   -    Inspection (Clause 13): [Seller] shall apply to Shandong Import and Export Commodity Inspection Bureau to inspect the goods. The inspection certificate issued by Shandong Import and Export Commodity Inspection Bureau is the evidence of quality of the goods.
   -    Performance bond. In addition, the parties [Seller] and [Buyer] are to pay each other renminbi [RMB] 210,000 as a performance bond.

On 21 June 1993 [Seller] paid [Buyer] RMB 210,000 as a quality guarantee bond in accordance with the contract. The contract stipulates that [Buyer] shall issue the L/C to [Seller] on 21 June, but [Buyer] did not execute the L/C on time. On 9 July 1993, [Buyer] asserted that it had issued the L/C and requested [Seller] to arrange production. On 10 July, the meat products factory began to manufacture the goods. On 20 July 1993, [Buyer] sent the L/C to [Seller], but [Seller] found the terms in the L/C were severely different from the contract. The contract stipulates that the inspection certificate issued by Shandong Import and Export Commodity Inspection Bureau shall be the evidence of quality of the goods, and is also a document for negotiation under the L/C, however, [Buyer] stipulated in the L/C that the person authorized by the applicant of L/C issue the inspection certificate before loading the goods on board to show that the goods were in good condition and to confirm that [Seller] could load the goods within the period specified in the contract, and that this inspection certificate should be the document for negotiation of the price of the goods. [Seller] requested [Buyer] to alter such terms in the L/C, but [Buyer] did not do this over a period of more than one month. Moreover, [Buyer] did not pay the performance bond RMB 210,000 agreed by the parties. Because [Buyer] neither altered the L/C, nor paid the performance bond, the contract could not be performed. On 21 August, [Seller] claimed damages from [Buyer]. The parties then negotiated, but failed to reach an agreement. [Buyer] did not return the quality guaranty bond, RMB 210,000. The dispute arose. [Seller] applied for arbitration with the Arbitration Commission.

[Seller]'s position

[Seller] asserts that [Buyer] refused to alter the L/C, which constitutes a breach of the contract, and that [Buyer] shall be liable for the breach. [Buyer] ignored Clause 12 and Clause 13 (sight L/C by presenting inspection certificate and onboard B/L), and arbitrarily added the term that the person authorized by the applicant of the L/C issue the inspection certificate before loading the goods on board and that this inspection certificate should be the document for negotiation of the price of the goods, which not only breached the contract, but also breached Article 5 of the Commodity Inspection Law of the People's Republic of China and the stipulation in the Import and Export Commodity Chart implemented by the Commodity Inspection Bureau. [Buyer] has the duty to alter the L/C according to the contract, but it ignored [Seller]'s right and refused to alter the L/C, which constitutes a severe breach of contract. [Buyer] should be liable for its breach.

According to Article 25 of the United Nations Convention on Contracts for the International Sale of Goods (1980) (CISG), [Buyer]'s failure to alter the L/C constitutes a fundamental breach of contract. According to Article 64(1)(a) CISG, [Seller] has the right to avoid the contract. According to Article 81 CISG, [Buyer] is entitled to damages. Article 74 of CISG stipulates, "Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach." Thus, it is justifiable for [Seller] to claim for the loss including loss of profit due to [Buyer]'s breach.

The following are [Seller]'s claims and calculations:

1. Return of performance bond with interest

[Buyer] shall return RMB 210,000 to [Seller] and pay interest to the date when the award is made.

   -    21 June-20 September 1992. Rate: 6.75 / 1,000 per month (92 days) = RMB 4,347
   -    21 September-12 December 1992. Rate: 8.64 / 1,000 per month (83 days) = RMB 5,020
   -    13 December 1992-15 May 1993. Rate: 9.36 / 1,000 per month (154 days) = RMB 10,090
   -    16 May-13 September 1993. Rate: 10.98 / 1,000 per month (121 days) = RMB 9,300
   -    Total of principal and interest = RMB 238,757.

2. Loss of expected profits

Because of [Buyer]'s breach, the contract was not performed.

   -    [Seller] produced 20.5 tons of goods, which were sold in the domestic market at the price of RMB 7,200/ton. According to the current currency exchange rate RMB 6.59: US $1, the expected profits for these goods is: (1830 - 7200 6.59) x 20.5 = US $15,117.52.
 
   -    The expected profits on 179.5 tons goods which were not produced is: (1830 - 8043 6.59) x 179.5 = US $109,407.05. (US $8,043 is [Seller]'s expected cost.)
 
   -    Total expected profits are US $124,524.57.
 
   -    [Buyer] should also pay annual interest at the rate of 2.375% on this amount from September 1992 to the date when the payment is made.

[Joinder of additional party]

[Seller] further asserts that during the period of arbitration, [Buyer], Amercan __ Company, in order to avoid the liability of breach, altered the Amercan __ Company and American __ Investment Company Shanghai Office to American __ Group Company and American __ Investment Company. [Seller] therefore requests the Arbitration Tribunal to add American __ Investment Company as Respondent, because:

1. The contract in this case was signed by Mr. Qian, who represented American __ Company, and [Seller], but when the contract was signed, American __ Company's representatives, Mr. Qian and Mr. Chen, provided the business cards which showed they represented the American __ Investment Company (Mr. Qian's position is General Director and General Manger, and later it was announced in the newspaper that Mr. Qian was the Chairman of the Board of Directors. Mr. Chen's position was the representative of this company's Shanghai Office. The address of this company in the U.S. is the same as the address of American __ Company. In addition, the address of the American __ Investment Company Shanghai Office is the same as that of American __ Company Shanghai Office).

2. After signing the contract, in the parties' correspondence, [Seller] faxed [Buyer] with the name of American __ Investment Company Shanghai Office many times, and [Buyer] replied to all of them. Moreover, [Buyer] sent [Seller] the fax with the name of American __ Investment Company.

OPINION OF THE ARBITRATION TRIBUNAL

1. The Arbitration Tribunal holds that in international trade, it is [Buyer]'s fundamental duty to issue the L/C. In this case, Respondent as [Buyer] executed the L/C which involved the inspection term not conforming to the contract. [Buyer] arbitrarily altered the term, so [Seller] has right to refuse it and requested [Buyer] to alter the L/C. [Buyer] refused to alter the L/C as requested by [Seller]. This constitutes a fundamental breach of contract. [Seller] is therefore entitled to avoid the contract.

2. Article 74 CISG states:

"Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract."

In this case, [Buyer] requested [Seller] to arrange the production and received [Seller]'s quality guaranty bond, RMB 210,000. [Buyer] breached the contract, and the contract could not be performed. Thus, [Buyer] shall return the quality guaranty bond and interest, and indemnify [Seller] the loss including the loss of profits. The loss shall include two parts: one is the price difference of the 20.5 tons goods produced; the other is the expected profits for the goods not produced.

The Arbitration Tribunal holds that the price difference of 20.5 tons goods produced is the loss that was actually incurred, and [Buyer] does not object to this claim. Thus, theArbitration Tribunal supports this claim.

To the loss of expected profits of 179.5 tons goods not produced, [Seller] calculated by deducting cost from the contract price, but it did not provide sufficient evidence for the cost. Thus, the Arbitration Tribunal decides to lower the amount, and the profits shall be 10% of the contract price. Accordingly, [Buyer] shall pay that loss of expected profits: US $1,830 x 10% x 179.5 = US $32,848.50.

To [Seller]'s request to add American __ Investment Company as Respondent, the Arbitration Tribunal holds that according to the facts, [Buyer], American __ Company has a tight relationship with American __ Investment Company, and is a vehicle for the latter to do speculative business. The following facts can prove it:

1. The business cards provided by Mr. Qian and Mr. Chen, who represented American __ Company negotiated and signed the contract with [Seller], show they are General Director, General Manger (or Chairman of the Board) of American __ Investment Company, and the representative of Shanghai Office;

2. The addresses of American __ Company and its Shanghai office are the same as that of American __ Investment Company. Some of the correspondence between the parties was sent from or to American __ Investment Company. However, when the dispute arose, the symbol of American __ Company Shanghai Office was deleted from the business address of American __ Investment Company Shanghai office;

3. The General Director and Manager of American __ Investment Company, Mr. Qian, received the quality guaranty bond, RMB 210,000; and Mr. Qian then notified [Seller] if [Seller] did not give up claim for damages, it would not return the quality guaranty bond.;

4. In the process of arbitration, all of the arbitration materials sent by the Arbitration Commission to American __ Company were sent to the address of American __ Investment Company. According to the two items of correspondence (one was the request for the second court session; the other objected to the jurisdiction of the Arbitration Commission), the notice and materials were received by American __ Company, but the two items of correspondence were only written that they were sent from Shanghai, with no specific address provided. The above facts show American __ Investment Company uses American __ Company as a vehicle to do business. In this way, it can get the benefits, and if it has to bear the liability, it will claim the names of the companies are different, and then it can avoid the liability. Accordingly, although, the Arbitration Tribunal does not add American __ Investment Company as Respondent, American __ Investment Company and American __ Company shall be jointly and severely liable for the damages.

AWARD

  1. [Buyer] shall return the quality guaranty bond, RMB 210,000, and pay interest, RMB 28,757. The total amount = RMB 238,757.

  2. [Buyer] shall indemnify [Seller] the loss of price difference, US $15,117.50, the loss of expected profits, US $32,848.50, and interest on the above amount calculated from September 1992 to October 1993, US $1,234. The total amount = US $49,200.

  3. [Buyer] shall pay the entire arbitration fee.

  4. The amount shall be paid before 10 December 1993. Otherwise, interest shall be added at the annual rate of 7%.

This is the final award.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of the People's Republic of China is referred to as [Seller]; Respondent of the United States 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 (renminbi) are indicated as [RMB].

** 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.

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