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CISG CASE PRESENTATION

China 20 February 1994 CIETAC Arbitration proceeding (Cysteine case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/940220c1.html]

Primary source(s) of information for case presentation: Compilation of CIETAC arbitration awards, published in May 2004

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Case identification

DATE OF DECISION: 19940220 (20 February 1994)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1994/03

CASE NAME: Unavailable

CASE HISTORY: Unavailable

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

BUYER'S COUNTRY: [-]

GOODS INVOLVED: Cysteine


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 12 ; 26 ; 39 ; 76 [Also revelant: Article 49 ]

Classification of issues using UNCITRAL classification code numbers:

12A [Effect of reservation under article 96 rejecting article 11];

26A1 [Effective declaration of avoidance: notice to other party required];

39A [Buyer must notify seller of lack of conformity of goods within reasonable time: failure to do so regarded as equivalent to acceptance of goods];

76B [Avoidance: damages recoverable based on current price]

Descriptors: Formal requirements ; Avoidance ; Lack of conformity notice, timeliness ; Damages

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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) 1994 vol., pp. 679-687

Translation: (English): Text presented below; see also <http://www.sccietac.org/cietac/en/content/content.jsp?id=913>

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at nn.80, 211, Nordic Journal of Commercial Law (2/2005)

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Case text (English translation)

Translation by Han Jian. Copyright © <http://www.sccietac.org>. Reproduced with permission of CIETAC. All translations should be verified by cross-checking against the original text. For the purposes of this presentation, the Respondent of the People's Republic of China is referred to as [Seller] and the Claimant, whose place of business is also in a country that has adopted the United Nations Convention on Contracts for the International Sale of Goods (CISG), is referred to as [Buyer].

China International Economic and Trade Arbitration Commission
South China Sub-Commission

Cysteine case [20 February 1994]

In their agreement, the Claimant [Buyer] and the Respondent [Seller] agree that the [Seller] shall supply goods to the [Buyer] in four batches. Later, the [Buyer] issues a purchase order for two batches of goods and, pursuant to the [Seller]'s request, issues the L/Cs for the two batches of goods. The [Seller] delivers only the first batch of goods. When the goods are resold by the [Buyer] to its clients, it is noticed that the quality of the goods does not conform to the requirements of the contract. The issues to be resolved in this case are: whether the purchase orders of the [Buyer] indicate that the agreement for the purchase of the last two batches of goods under the contract has been cancelled; and whether the [Seller] should be responsible for the quality problem discovered after the goods have been resold by the [Buyer].

THE ARBITRATION DECISION

I.  Facts of the Case

On 23 January 1990; the [Buyer] and the [Seller] signed a sale and purchase contract No. JHC9009. It was agreed that the [Seller] would sell to the [Buyer] 20,000 kg of L-Cysteine 99% Min USP 19. The goods were to be delivered in the months of March, April; May and June 1990. The quantity of goods to be delivered each month was to be 5,000 kg. The payment terms were CNF Hamburg, West Germany, US$ 15.45 per kg. The total price for the goods under the contract amounted to US $309,000. The goods were to be packed in iron barrels each weighing 20 kg. Payment was to be made by irrevocable L/C payable on sight. In addition to provisions in the contract regarding the shipping label, packing, shipping terms, shipping notice and documents, clause 6 of the contract also provided the following on the quality of the goods and compensation for losses:

   -    The seller warranted that the goods to be supplied would be made from the best materials and with the best craftsmanship. The goods would be new and never used before. The quality and specifications of the goods would fulfill the requirements of the contract exactly. The warranty period would be 12 months from the arrival of the goods at the port of destination.
 
   -    Upon arrival at the port of destination, the goods would be re-inspected by the local office of the China Commodities Inspection Bureau. If the specifications or quantity of the goods were found to be inconsistent with the requirements of the contract, the buyer would be entitled to claim compensation from the seller within 90 days of the goods being unloaded with the support of the certificate of inspection issued by the China Commodities Inspection Bureau (except for items covered by the insurance company or the shipping company). The seller would replace without charge the goods which did not fulfill the contractual requirements, make good any shortage or reduce the price payable. It would also bear the freight, loading and unloading costs, warehousing charges, the buyer's inspection fees plus interest on the replacement goods and would immediately pay the above expenses to the buyer in cash. If the inspection could not be completed within the stipulated period, the buyer would be entitled to extend the period of claim provided that prior notice was given to the seller.

After the conclusion of the contract, on 14 February 1990 the [Buyer] sent a purchase order; No. 10210087, to the [Seller]. The purchase order clearly specified that the quantity of goods to be purchased was 5,000 kg for the month of March and 5,000 kg for the month of April. Upon receipt of the purchase order, the [Seller] requested that the [Buyer] issue an L/C under its purchase order. Pursuant to its purchase order and the request of the [Seller], the [Buyer] issued an L/C on 16 February 1990 covering 10,000 kg of goods. It was specified in the L/C that the [Seller] would deliver 5,000 kg of goods in March and 5,000 kg of goods in April. Later, due to production problems, the [Seller] was unable to deliver the goods in March. It notified the [Buyer] and requested that the delivery date and the LIC be amended. On 14 April 1990, in response to the request of the [Seller], the [Buyer] issued a notice of amendment to the L/C extending the validity period of the L/C to 30 June 1990. The latest shipping dates of the two batches of goods under the L/C were put back to 30 April 1990 and 31 May 1990 respectively. The other terms and conditions of the L/C remained unchanged.

On 1 June 1990, the [Seller] notified the [Buyer] that 5,000 kg of goods had been sent to Hong Kong by truck. It also said that as the bank no longer extended it credit, it did not have enough funds to buy raw materials to produce the goods ordered by the [Buyer]. It did not expect the situation to change until the fourth quarter but at that time, the [Seller] would give first priority to the [Buyer] and supply the goods. The [Seller] also apologised for its inability to deliver the other 15 tonnes of goods on time.

On 11 June 1990, the [Buyer] replied to the [Seller] that it found it incomprehensible that the bank would withhold credit to fund an LIC that bad already been issued. It stated that even if the [Seller] could provide evidence of afresh shipment, the [Buyer] could only issue a new L/C and would not further amend the original L/C.

On 30 July 1990, the [Buyer] wrote to the [Seller] and pointed out that the [Seller] had only shipped five tonnes of goods on 30 June 1990. The other 15 tonnes had never been shipped and no specific shipping date had been specified. In the letter, the [Buyer] made the following claims and requests regarding the [Seller]'s failure to perform the contract:

      1.  The first batch of goods should have been shipped in March. The shipment was postponed to 30 June 1990. The [Buyer] paid US $5,871(7.6 per cent) more customs duty as a result.

      2.  If the [Seller] could deliver five tonnes of goods on 30 October 1990 and another five tonnes on 31 December 1990 at the price of US $13.50 per kg, CNF Hamburg, and agreed to cancel the other five tonnes of goods ordered, the [Buyer] would not request the [Seller] to pay compensation for the as yet undelivered 15 tonnes of goods. If there were to be further postponements, a penalty of US $2 per kg delayed would be payable by the [Seller]. If the [Seller] did not accept the above terms, it should pay compensation of US $30,000.

The [Seller] did not give an immediate reply to the [Buyer] on the above requests and terms. It was not until 9 November 1990 that the [Seller] replied by cable. It stated that it could supply 15 tonnes of goods at the 1991 international market price of the same quality as that of the five tonnes of goods already delivered. These could be shipped during the period from January to October 1991.

The first batch of 5,000 kg of goods delivered by the [Seller] was received by the [Buyer] in early August 1990. After taking delivery, the [Buyer] resold 2,000 kg of the goods to a Swiss client and 3,000 kg to a French client. After inspection, both clients informed the [Buyer] that the goods were poor quality and claimed compensation from the [Buyer]. On 30 August 1990 and 13 September 1990, the [Buyer] notified the [Seller] of the above situation, With regard to the goods purchased by the Swiss client, the [Buyer] said that it had been to the client's office and sampled the goods. It was found that the purity of the goods was very low. Out of the 2,000 kg of goods, 440 kg were used for trial. The trial production failed and the goods were abandoned. The other 1,560 kg of goods were still in the original unopened barrels. In the notice, the [Buyer] said that these goods were too low in purity and it seemed that they could only be thrown away or taken back by the [Seller]. With regard to the goods purchased by the French client, the [Buyer] said that it had already accepted the request of the French client to take back the goods. The [Buyer] requested that the [Seller] reply on the above issues as soon as possible. On 14 September 1990, the [Seller] replied to the [Buyer] requesting that the goods to be returned should remain unopened. Repayment of the entire amount paid on the goods should be allowed to be made within 30 days of the goods being returned. The [Buyer] considered that the [Seller]'s reply was not reasonable and would possibly cause greater losses to the [Buyer]. The [Buyer] therefore made an agreement with its clients that it would dispose of the goods at a discount of 50 per cent. The [Buyer] submitted the case to the Shenzhen Branch of the Commission on 6 June 1991 requesting that:

      1.  The [Seller] compensate the [Buyer] for its losses suffered as a result of the [Seller]'s non-delivery of the goods. The compensation should be at the rate of US $2 per kg. The total amount of compensation should be 2 x US $15,000 = US $30,000.

      2.  The [Seller] compensate the [Buyer] for its losses, suffered as a result of the delivery of substandard goods by the [Seller]:

            a.  Losses on the 50 per cent discount: 77,500 x 50 per cent = US $38,750;

            b.  The expenses paid by the [Buyer], which totaled US $25,339.

After the hearing on 27 May 1993, the [Buyer] made a supplementary submission on 12 June 1993. Apart from reiterating the above claims, it made the following requests:

      1.  The [Seller] should, pursuant to Articles 18 and 19 of the Foreign Economic Contract Law of the People's Republic of China (the Foreign Economic Contract Law), compensate the [Buyer] for its losses suffered as a result of the delay in the delivery of the goods on the part of the [Seller] at the customs duty rate of 7.6 per cent. The total loss amounted to US $5,871.

      2.  Apart from paying compensation, the [Seller] should, pursuant to Article 21 of the Provisions on Foreign Economic Contracts of the Shenzhen Special Economic Zone (the Provisions), pay to the [Buyer] a default fine of a thousandth of the total payment under the contract for the goods delayed for each day of delay. The total payment on the goods delayed amounted to US $77,500, and the number of days of delay was 30. The default fine payable should therefore equal US $2,325.

The major points of dispute between the parties were as follows:

      1.  The [Buyer] considered that pursuant to the contract the [Seller] should have delivered the first batch of 5,000 kg of goods in March. The [Seller] did not make this delivery until 30 June 1990, which was three months later than the stipulated deadline. This caused losses to the [Buyer] due to customs duty payments. The [Seller] submitted that it was originally agreed in the contract that the first batch of 5,000 kg of goods was to be delivered in March. After conclusion of the contract and the issue of the L/C, the [Seller] was unable to deliver the goods in March and requested that the [Seller] amend the delivery period. On 14 April 1990, the [Buyer] had already expressed its consent and issued a notice of amendment to the L/C of the first delivery date of 5,000 kg of goods to 30 April 1990. Accordingly, the [Seller] shipped the first batch of 5,000 kg of goods on 25 May 1990 (and not 30 June 1990 as claimed by the [Buyer]). The failure of the goods to reach the port of destination on time was the fault of the shipping company, and the [Seller] would not compensate for this.

      2.  The [Buyer] submitted that the parties agreed under the contract that the [Seller] would sell 20 tonnes of goods to the [Buyer]. In addition to its delay in delivery of the first batch of five tonnes of goods, the [Seller] never, delivered the other 15 tonnes of goods: Therefore, the [Seller] should compensate the [Buyer] for its losses suffered as a result of the [Seller]'s refusal to deliver the 15 tonnes of goods. The compensation should be calculated at the rate of US $2 per kg. In its first defence, the [Seller] submitted that the contract stipulated payment would be made by irrevocable L/C payable at sight. As the [Buyer] was unable to issue an L/C to the [Seller], the [Seller] was unable to perform its obligation of delivery. Therefore there was no refusal to deliver the goods. In its subsequent supplementary submission, the [Seller] further claimed that the purchase order issued by the [Buyer] after conclusion of the contract specified that the quantity of goods it had ordered equalled 10,000 kg of goods, being 5,000 kg for the month of March and 5,000 kg for the month of April. The purchase order was a specific request made by the [Buyer] as the buyer under the contract. The notice of amendment to the L/C issued later by the [Buyer] also specified that 5;000 kg of goods were to be delivered before 30 April 1990 and 5,000 kg of goods before 31 May 1990. Thereafter, the [Buyer] had repeatedly wired to enquire about the delivery of the 10 tonnes of goods confirmed under the purchase order. The other 10,000 kg of goods under the contract were never mentioned. The [Seller] considered that the purchase order and the L/C issued by the [Buyer], in addition to the confirmation of the [Seller], showed that the parties had come to a new agreement as to the quantity of goods to be delivered and the time of delivery of the goods and had amended the original contract accordingly. On 30 July 1990, the [Buyer] sent another cable regarding 20,000 kg of goods. This was a new request after the amendment of the contract. Taking into consideration the production conditions at that tame, the [Seller] had never accepted this request. No new agreement had been reached. Therefore the [Buyer] had no grounds for raising the issue of the remaining 10,000 kg of goods under the contract.

As regards the other 5,000 kg of goods under the L/C, the [Seller] attributed their non-delivery to the failure of the factory to obtain credit to buy raw materials as a result of the State's austerity programme. This was the result of force majeure and following this the parties had not been able to come to an agreement on a specific date of delivery. Therefore the delivery of the other 5,000 kg of goods was not performed.

      3.  The [Buyer] submitted that after receiving the 5,000 tonnes of goods delivered, it immediately resold them to its clients. Inspection of the goods revealed that there were serious quality problems with the goods, They were far below the USP 19 standard agreed upon under the contract and could not be used.

The [Seller] considered that the five tonnes of goods delivered fulfilled the requirements for the goods under the contract. It had subjected the goods to rigorous inspection and no problem regarding their quality had been found. The [Seller] pointed out that the general terms of the transaction under the contract explicitly stipulated that the goods, upon arrival at the port of destination, would be inspected by the local office of the China Commodities Inspection Bureau. The buyer was entitled to claim against the seller if the quality was found to be inconsistent with the contractual requirements for the goods. After taking delivery of the 5,000 kg of goods, the [Buyer] resold and disposed of them without inspecting them. The disposal of the goods by the [Buyer] as the owner of the goods showed that it had already accepted the goods. The [Seller] considered that the [Buyer] should have conducted some reasonable inspection of the goods upon their arrival. The [Buyer] had however, by immediately reselling the goods, relinquished its right to inspect and only made claims after several resale transactions on the strength of the inspection results of its ultimate client. The [Seller] found this unacceptable because:

      1.  The [Buyer] did not object to the quality of the goods after it took delivery and before it disposed of the goods. This showed that it was satisfied with the quality of the goods.

      2.  The [Buyer]'s acceptance and disposal of the goods had actually deprived it of the right to raise objections to the quality of the goods.

      3.  The [Seller] was not bound by the contract signed between the [Buyer] and its client. The quality standard agreed upon by the [Buyer] and its client could not be imposed upon the [Seller].

      4.  Complicated procedures were involved in the sale of goods across countries. In the course of resale, the goods might have been replaced or tampered with. It was difficult to determine whether the goods rejected by the clients of the [Buyer] were the same goods provided by the [Seller] or of the same quality as those provided by the [Seller].

II.  Views of the Arbitration Tribunal

      1.  The evidence submitted by the parties showed that after the contract was signed on 23 January 1990, the [Buyer] issued a purchase order to the [Seller] on 14 February 1990 specifying the quantity of the goods to be ordered as 5,000 kg for the month of March and 5,000 kg for the month of April. Though the purchase order did not show the quantity of goods to be purchased for the months of May and June as specified in the contract, it made specific reference to the contract dated 23 January 1990. The [Buyer] did not, through purchase orders or otherwise, express its intention to cancel the agreement to purchase the goods to be delivered in May and June pursuant to the contract. In the telex messages sent to the [Seller] by the [Buyer] on 15 May 1990, 17 May 1990, 29 May 1990 and 11 June 1990, references were also made in the caption to the contract on the purchase of 20 tonnes of L-Cysteine.

On the part of the [Seller], after it received the purchase order issued by the [Buyer], it did not, in any manner, question the [Buyer] as to whether the purchase order implied a change in the quantity of goods to be purchased under the contract. Nor did it confirm its consent to this change after it determined that the purchase order implied an amendment to the contract. On the contrary, it expressly apologised to the [Buyer] in the letter dated 1 June 1990 for its inability to deliver the outstanding 15 tonnes of goods on time because of funding problems. In the letter dated 9 November 1990, the [Seller] promised that it could supply the outstanding 15 tonnes of goods at the 1991 international market price. The parties had all along, therefore, clearly endeavored to honour the term regarding the quantity of goods agreed upon under the contract. They had neither, discussed nor issued any written notice on amendment of the contract, nor had they entered into any written agreement to amend the contract. Therefore the claim of the [Seller] that the purchase order issued by the [Buyer] constituted a request to amend the quantity of goods ordered under the contract could not hold. The [Seller] should be responsible for the losses suffered by the [Buyer] as a result of its inability to deliver 15 tonnes of goods pursuant to the contract.

According to international trade practice, compensation should be calculated on the difference between the contract price and the market price of the goods at the place of acceptance of the goods at the agreed time of delivery. On the evidence submitted by the [Buyer], the arbitration tribunal considered accordingly that a price difference of US $2 was reasonable. The total price difference on the 15 tonnes of undelivered goods should be US $30,000. The [Seller] should pay compensation to the [Buyer] on the basis of this calculation.

      2.  After the parties signed the contract, the [Seller] was unable to deliver the goods on time. Following negotiations between the [Buyer] and the [Seller], the original delivery dates for the first and second batches of goods agreed upon under the contract were amended and were valid. Pursuant to the amended dates for delivery, the [Seller] should deliver the first batch of 5,000 kg of goods before 30 April 1990. Evidence showed that the actual date of shipment agreed between the [Seller] and the carrier, Shekou Branch of China Ocean-Going Vessels Agency Company, was 28 May 1990 and the shipping deadline was 31 May 1990. The supplementary material later submitted by the [Buyer] also showed that it had agreed to the postponement of delivery until the end of May 1990. It agreed to a total delay of 30 days and did not insist on the postponement of delivery for three months. Therefore, the postponed period of delivery by the [Seller] should be 30 days.

According to international trade practice, the seller should compensate the buyer for the customs duty or excess customs duty payable by the buyer as a result of the delay in delivery by the seller. However, the [Buyer] in this case did not submit evidence of actual payment of customs duty at the rate chargeable by the European Community to the arbitration tribunal. The arbitration tribunal could not, therefore, render judgment on this matter and did not support the [Buyer]'s claim for compensation of customs duty.

The [Buyer], at the request of the [Seller], agreed to the postponement of the date of delivery to the end of April 1990. However, the [Seller] did not deliver the goods by the postponed deadline as agreed. It did not deliver the goods until the end of May 1990. This amounted to a breach of contract and the [Seller] should compensate the [Buyer] for the 30 days' delay. But the arbitration tribunal considered that it was inappropriate for the [Buyer] to base its claim on Article 21 of the Provisions and to request that the [Seller] pay a penalty of one per cent on the cost under the contract of the undelivered goods for each day of delay. The [Buyer] was entitled to the profit that it could have obtained pursuant to the contract but did not obtain because of the delay in delivery of the goods by the [Seller], or to the interest on the payment of the goods incurred by the 30 days' delay. As the [Buyer] did not claim for or produce evidence on its loss of profit, the arbitration tribunal considered that the [Seller] should pay the interest lost on the payment of the goods at the rate of ten per cent per annum. The total interest should be US $645.80.

      3.  The inspection of goods is an important element in international trade. The receipt of goods by the buyer does not imply the acceptance of the goods by the buyer: The buyer is still entitled to a reasonable opportunity to inspect the goods. However, according to international trade practice, after the buyer has received the goods, if it treats the goods in a way that counters the seller's title to the goods, it is deemed to have accepted the goods and loses its right to reinspect the goods. The buyer's sale of the goods to a third party, who would use a part of the goods, without the knowledge of the seller, is regarded as an action that counters the seller's title to the goods. As a result, the buyer loses its right to reinspect the goods.

      4.  It was explicitly stipulated in clause 6 of the contract that upon arrival at the port of destination, the goods would be reinspected by the local office of the China Commodities Inspection Bureau. If it was found that the quality or quantity of the goods did not fulfilll contract requirements for the goods; the buyer would be entitled to claim compensation from the seller within 90 days of the unloading of the goods on the support of the certificate of inspection issued by the China Commodities Inspection Bureau. The port of destination under this contract was Hamburg; Germany. The [Buyer] claimed that there was no Chinese commodities inspection authority in Hamburg. In this event, the [Buyer] should have, after receiving the goods, arranged for them to be inspected by a local inspection agent. The evidence submitted by the parties, however, showed that after receipt in August 1990 of the first batch of 5,000 kg of goods delivered by the [Seller], the [Buyer] did not follow the requirements for inspection as provided under the contract: It sold 2,000 kg of the goods to a Swiss client without arranging for the goods to be inspected by an inspection agent in Hamburg. It sold another 3,000 kg of goods to Shclyo Company which in turn sold them to a French client. It was not until December 1990 that the [Buyer] submitted samples of the goods to the SGS office at Antwerp, Belgium for inspection. Moreover, 440 kg of the goods had already been selected by the Swiss client for use. In accordance with the above international trade practice and the relevant stipulations in the contract, the arbitration tribunal did not support the [Buyer]'s claim for the loss incurred due to the substandard quality of the first batch of five tonnes of goods.

III.  The Decision

Based on the above facts and analysis, the arbitration tribunal made the following decisions on the contract:

      1.  The [Buyer]'s claim for the losses incurred due to the substandard quality of the five tonnes of goods delivered calculated at a discount of 50 per cent and for the loss of customs duty caused by the delay in delivery of the goods shall be dismissed.

      2.  The [Seller] shall within 45 days of the award pay to the [Buyer] a total of US $645.83 being interest loss on the payment of customs duty on the five tonnes of goods incurred as a result: of the delay in delivery of the goods. Further interest shall be payable in case of late payment.

      3.  The [Seller] shall within 45 days of the award pay to the [Buyer] US $30,000 being damages for the non-delivery of 15 tonnes of goods: Interest shall be payable in case of late payment.

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

This decision shall be final.

DISCUSSION

There are two major issues in this case:

      1.  Have the parties validly amended the quantity of goods to be purchased under the original contract?

      2.  Under what circumstances can the buyer be deemed to have accepted the goods and therefore have lost its right to reject the goods or make a claim?

The place of business of the seller was the People's Republic of China and the contract was signed in the People's Republic of China: According to the principle of greatest relevance, the laws of the People's Republic of China should be applicable to this case. Further, though the places of business of the parties were different, they were both parties to the Convention on International Sale of Goods Contracts of the United Nations (the Convention). Therefore, the Convention is also applicable in resolving the dispute in this case.

Article 7 of the Foreign Economic Contract Law stipulates that, 'A contract shall be concluded when the parties agree on the terms of the contract in written form and sign it.' Article 12 of the Foreign Economic Contract Law also provides that any notice of or agreement on the amendment or cancellation of a contract shall be in writing. During the drafting of the Convention in 1980 in Vienna, the participating nations had a heated debate over whether international sale of goods contracts should be made in writing. A compromise was finally reached. It was agreed that it was not necessary for international sale of goods contracts to be made in writing. A sale of goods' contract could be proven in any manner, including by a witness. However, countries that insisted on written contracts could make a reservation at the time of acceding to the Convention to the effect that any provisions in the Convention approving a sale of goods contract or an amendment to it, cancellation by agreement, or any quotation, acceptance and conveyance of messages in any form other than in writing shall not be applicable. When acceding to the Convention, China made such a reservation.

To return to the case: in its defence, the [Seller] submitted that after the contract on the 20,000 kg of goods was signed and took effect; it was indicated in both the purchase order and the L/C issued by the [Buyer] that the total quantity of goods to be delivered was to be 10;000 kg. This was confirmed by the [Seller] and the original contract was amended by the parties to the contract to this effect. The validity 2of' this claim was directly related to the [Seller]'s responsibility for the outstanding 10,000 kg of goods. In fact, the parties had never agreed in writing to cancel the transaction for the other 10,000 kg of goods. References were also made to this 10,000 kg of goods in correspondence related to the first 10,000 kg of goods. Therefore the amendment of the contract was not in written form and did not fulfill the requirements for this under the laws of China and the Convention. The parties had not validly amended the quantity of goods to be delivered that was stipulated in the original contract. Therefore the non-delivery of 10,000 kg of goods was a default on the part of the [Seller]. It could not be argued that the contract had been amended and that the [Seller] did not need to fulfill its obligation to deliver. Therefore the [Seller] should bear legal responsibility for non-delivery of the goods.

When the seller does not deliver the goods, the buyer may cancel the contract. If the buyer suffers no loss as a result of its cancellation of the contract, the contractual relationship between the parties may be terminated at this point. If, however, the buyer suffers losses as a result of its cancellation of the contract, the seller should compensate the buyer for these losses. There are normally two methods for claiming compensation. The first is for the buyer to purchase from the market the goods agreed to be supplied under the contract and then to request that the seller compensate it for its losses. The second is for the buyer to claim directly from the seller the difference between the contract price and the market price at the time of the seller's default. The [Buyer] in this case chose the second method. Where this latter method is used, it is necessary to determine the market price in order to calculate the price difference. Under the Convention two situations may determine market price, namely the price of the goods on cancellation of a contract before the buyer takes delivery and the price of the goods on cancellation of a contract after the buyer takes delivery. The market price in the former situation is the price at the time of the cancellation of the contract, whereas the market price in the latter situation is the price at the time of taking delivery of the goods (Article 76 of the Convention). The [Buyer] in this case made its claim before it received the latter 10,000 kg of goods. The amount of compensation should be determined at the market price of the goods at the time the [Buyer] cancelled the contract.

It is also stipulated in the Convention that the buyer, when cancelling the contract, must issue a notice of cancellation to the seller. What constitutes a notice of cancellation of a contract? If, in a letter to the seller, the buyer explicitly declares a contract void or cancels a contract by reason of the seller's breach of contract, identification of the notice of cancellation of the contract would be easy. It would also be relatively easy to determine the market price of the goods at the time of the cancellation of the contract. However, if the buyer grants to the seller a grace period after the seller has committed a fundamental breach of contract and explicitly states that remedies will be sought if the seller does not perform the contract within the grace period, does it imply that the buyer has issued a notice of cancellation of the contract? This type of notice should be deemed to be advance notice of cancellation. When the seller does not perform the contract within the grace period, such advance notice would become a notice of cancellation of the contract and there would be no need for the buyer to reiterate this. The market price should be determined according to the market price at the time the buyer issues the advance notice of cancellation. The arbitration tribunal used this method to determine the market price of the goods in this case. Apart from expressly declaring cancellation of a contract in writing, a notice of cancellation is deemed to have been given if it can be reasonably deduced from a letter that the party issuing the letter has expressed its intention to cancel the contract even though no explicit reference is made to the contract being 'cancelled' or 'void'. In calculating price difference, the date of issue of this letter can be used as the date for determining the market price.

The Convention takes the place of delivery of goods as the place where the market price is determined. The place of delivery in this case was Hamburg, Germany. Therefore, Hamburg was the place where the market price was determined.

Another major issue in the case is the acceptance of goods. Taking delivery of goods and acceptance of goods are two different legal concepts and, accordingly, different rights of the parties are determined by them. Taking delivery of goods is only a part of the process of handing over goods. Taking delivery can only prove that the seller has delivered and the buyer has received the goods and does not necessarily imply that the person taking delivery has accepted the goods. Acceptance of goods implies that the buyer confirms that the seller has delivered goods which fulfill the contractual requirements for the goods and also implies that the seller has performed its agreed obligations. The buyer, upon acceptance of the goods, has the unconditional obligation to make payment. If the buyer accepts the goods, it loses the right to reject the goods.

In between taking delivery of goods and acceptance of goods, inspection occurs. It is only after inspecting the goods that the buyer can determine whether the goods fulfill contractual requirements and decide whether to accept the goods delivered by the seller. The buyer should have a reasonable opportunity and a reasonable period of time to inspect the goods. Given reasonable opportunity, if the buyer does not inspect the goods within a reasonable period of time, it effectively accepts the goods. It is stipulated in the Convention that, `The buyer must notify the seller of the non-conformance of the goods to requirements for the goods under the contract within a reasonable period of time after the non-conformance is noticed or should have been noticed, specifying the nature of the non-conformance, or it will lose the right to claim compensation for this non-conformance.' That is to say, if the buyer fails to notify the seller in time, the seller has reason to believe that the goods delivered fulfill their requirements under the contract and the buyer can no longer claim damages.

The [Buyer] in this case could and should have inspected the goods at the port of destination of Hamburg, Germany. If a problem was found with the quality of the goods, it could reject the goods, claim compensation for losses or take other steps to remedy the situation, as the case may be. Instead of doing this it resold the goods to its client without first inspecting the goods. It was only when the client raised the quality problem that the [Buyer] arranged for the goods to be inspected by the inspection authorities. By this time, the 90-day period of inspection after the arrival of the goods at the port of destination agreed upon in the contract had already expired and the client had used part of the goods. The above actions of the [Buyer] are deemed to be indications that the [Buyer] had accepted the goods and there is no doubt that the [Buyer] had therefore lost its right to reject the goods. Had it also lost its, right to claim damages? There is no explicit provision on this in the Convention, but this conclusion can be reached from the above provisions even though there are different provisions or rulings in the laws and cases of some countries. According to British law, the above actions of the [Buyer] would be deemed to be counter to the [Seller]'s title to the goods. The [Buyer] is deemed to have accepted the goods and to have lost the right to reject the goods, but it may still claim damages for breach of warranty on the part of the [Seller].

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Pace Law School Institute of International Commercial Law - Last updated June 2, 2006
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