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CISG CASE PRESENTATION

China 30 March 1994 CIETAC Arbitration proceeding (Cow's liver fungus case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/940330c1.html]

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

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Case identification

DATE OF DECISION: 19940330 (30 March 1994)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1994/04

CASE NAME: Unavailable

CASE HISTORY: Unavailable

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

BUYER'S COUNTRY: Germany (respondent)

GOODS INVOLVED: Cow's liver fungus


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 35 ; 58 ; 71 ; 77 [Also cited: Article 38 ]

Classification of issues using UNCITRAL classification code numbers:

35B4 [Conformity of goods to contract (requirements imposed by law): packaging to protect goods in usual manner for similar goods]'

58B [Time for payment: contracts involving carriage];

71A1 ; 71C1 [Grounds for suspension of performance: apparent that other party will not perform substantial part of obligations; Obligations of party suspending performance: immediately notify other party];

77A [Obligation to take reasonable measures to mitigate damages]

Descriptors: Conformity of goods ; Carriage of goods; Suspension of performance ; Mitigation of loss

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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., p. 745-750

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at n.117, 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

Cow's liver fungus case (30 March 1994)

Translation [*] by Zheng Xie [**]

Translation edited by Meihua Xu [***]

China's International Trade and Economic Arbitration Commission (hereafter, "the Arbitration Commission") accepts the present case on 24 September 1992, according to the arbitration clause in Sales Confirmation No. 91CQ-GX95 signed by Claimant Chongqing XX Import and Export Company [Seller] and Respondent XX Company, Germany [Buyer], on 23 May 1992 and the written arbitration application submitted by [Seller] on 23 May 1992.

According to the Arbitration Rules and the Arbitration Commission forms, the Arbitration Tribunal consisting of Presiding Arbitrator, Mr. P, Arbitrator, Ms. A and Arbitrator Mr. D, hears the case.

The Arbitration Tribunal held a court session in Beijing on 19 January 1993. [Seller]'s and [Buyer]'s representatives presented, made oral statements and arguments, and answered the Arbitration Tribunal's questions. After the session, the parties submitted supplementary materials.

The Arbitration Tribunal has concluded the case on the basis of the written materials and the court session, and handed down the award by consent.

The following are the facts, the Arbitration Tribunal's opinion and the award.

FACTS

On 5 September 1991, [Seller] and [Buyer] executed Sales Confirmation No. 91CQ-GX95. It stipulates that [Buyer] purchases 2,000kg AA cow's liver fungus from [Seller]. The terms of the contract are:

   -   Moisture: MAX 12%;
   -   Price term: US $35.00/kg CNF Hamburg , More or Less: 5%, Total Contract Price: US $70,000;
   -   Term of payment: 100% confirmed irrevocable L/C with Seller as beneficiary, sale by sample.

The contract does not stipulate package and shipping method.

On 10 September 1991, [Buyer] opened the Letter of Credit, which provides that the time of shipment shall be no later than 31 October 1991, and the validity of the L/C shall be until 15 November 1991. On 29 October, [Seller] shipped 2,100 Kg cow's liver fungus stored in refrigeration at -14C. After receiving full sets of clean bills of lading, on 10 November 1991 [Seller] sent all sets of documents to the bank for negotiation. On 29 November 1991, the issuing bank refused to pay asserting that the documents are not in conformity with the L/C. By mail, the [Seller] many times requested [Buyer] to receive the goods and make the payment, but [Buyer] refused to pay still asserting that the documents were not in conformity with the L/C. On 27 December 1994, [Buyer] mailed to [Seller] requesting it to instruct the notifying bank and the issuing bank to authorize [Buyer] to inspect the goods before making the payment. On 4 January 1992, [Seller] notified [Buyer] that the notifying bank would not intervene in the parties' dispute and refused to authorize inspection, but [Seller] agreed that [Buyer] should inspect the goods and requested that [Buyer] send it the inspection report as soon as possible. On 6 January 1992, [Buyer] replied to [Seller] insisting that it cannot inspect the goods unless the bank authorizes it. On 30 April 1992, the issuing bank after receiving China notifying bank's authorization notified [Buyer] to inspect the goods.

On 7 May 1992, [Buyer] inspected the goods and informed [Seller] that the goods did not comply with the sample, and requested the [Seller] to reduce the price to Deutsche Mark [DM] 18.5/kg, but [Buyer] did not provide any inspection report. The parties did not reach an agreement on reducing the price. [Buyer] refused to make the payment and receive the goods.

[Seller]'s claims

In the arbitration application that [Seller] then filed with the Arbitration Commission on 23 May 1992, [Seller] claimed:

  1. [Buyer] should pay [Seller] the price of the goods, US $73,500.00 and bank interest from 15 November 1991 to the date when payment is made;

  2. [Buyer] should pay the storage fee at the destination port;

  3. [Buyer] should pay the arbitration fee, attorneys' fee and other expenditure.

After applying for arbitration, in June 1992 [Seller] resold the goods under the contract at the price of US $11.00/kg, so altered the above No 1 claim for US $73,500.00 to US $50,400.00.

[Buyer]'s defenses

[Buyer] opposes [Seller]'s claim and alleges the following defenses:

  1. Because the documents for negotiation provided by [Seller] did not comply with the terms and conditions stipulated in the L/C, it was proper for the bank to dishonor the L/C, and [Buyer] is not liable for the dishonor by the bank. [Seller] should request, not the [Buyer], but the issuing bank, Deutsche Bank, to indemnify any damages due to the dishonor.

  2. [Seller] shipped the cow's liver fungus in frozen condition, which does not comply with the usage of trade and breaches Article 35 of the United Nations Convention on Contracts for the International Sale of Goods (CISG), which stipulates that the goods shall be contained or packaged in the manner usual for such goods. Thus, [Buyer] has adequate reasons to doubt the quality of the goods and the [Seller]'s capacity to perform its promise to deliver AA fungus. In accordance with Article 71(3) CISG, [Buyer] suspended its performance and requested the opportunity to inspect the goods before [Seller] made adequate assurance.

  3. [Seller] did not provide Bank of China with timely authorization, which delayed [Buyer]'s ability to inspect the goods.

  4. When [Buyer] eventually obtained the bank's authorization, [Buyer] inspected the goods. The inspection showed that the goods were materially not in conformity with the contract. On the basis of this, [Buyer] suggested that the price be reduced to DM 18.5/kg, but [Seller] refused. [Buyer] submitted to the Arbitration Tribunal the opinions of German and American exports, and of the China Fujian Native Produce and Animal By-Product Import and Export Company. Although the reports of the two experts emphasize different points, the two reports and the businessmen who run businesses of cow's liver fuguns import and export in Fujian, point out that it is harmful for cow's liver fungus to be stored in frozen condition. In addition, it can be inferred from the price at which [Seller] resold the goods that the goods are not AA. Because [Seller] provided the goods, the quality of which does not reach the standard of AA, and deprived [Buyer]'s expectation from the contract, this constitute a fundamental breach, which gave [Buyer] the right to declare the contract avoided

  5. Even if the Arbitration Tribunal were to decide that [Buyer] is liable according to the contract, [Seller] should not be awarded the full price of the contract and the storage fee, because [Seller] has a legal duty to preserve the goods and mitigate damages when [Buyer] delayed accepting the goods or making the payment. If the goods could not be resold, it shows that the value of the goods has declined. [Seller] should bear the storage fee due to its delaying of authorization for inspection.

[Seller]'s response

To [Buyer]'s points, [Seller] replies:

      1. [Buyer] unreasonably refused to pay the L/C, and did not accept the goods and make the payment in accordance with the contract. [Seller] states that in international trade, it is an issue of fact whether it constitutes "documents not in conformity with the L/C". In practice, non-conformity is classified either as an "irrelevant non-conformity" or a "real non-conformity". If it is only an irrelevant non-conformity, the issuing bank should not refuse to pay. In the present case, the bank pointed out two places which were not conforming. The second one does not exist at all. The first is only the non-conformity of one wrongfully spelled letter, which is not a legally non-conformity of documents and L/C. Thus, it is unjustifiable for the issuing bank and [Buyer] to refuse to pay on the basis of the L/C. Furthermore, the law and facts, which the bank relies on in making a payment in accordance with an L/C, are different with those on which Buyer makes the payment on the basis of the contract. The dishonor by the bank due to non-conformity of documents and the L/C does not excuse Buyer's duty to accept the goods and make the payment in accordance with the contract. In the present case, the term of payment is C&F, under which the law stipulates that Buyer shall make the payment after receiving the conforming documents, and the L/C is only the guarantee of payment under the contract. Thus, when the bank refused to pay, [Buyer] still had the duty to make the payment on the basis of the contract.

      2. Article 71 CISG is inapplicable because [Buyer] neither inspected the goods according to CISG nor proved that the quality of the goods was not conforming.

[Seller] asserts that under C&F in the present case, the right to refuse the goods occurs when the goods arrive at the destination port and the inspection shows the goods are not conforming. The goods must be inspected within the shortest time, according to Article 38(1) of CISG, after making the payment to get the documents and take the delivery. Because [Buyer] refused to perform its obligation under the contract and did not make the payment against the documents, but requested to inspect the goods, [Buyer] should bear the liability due to delayed inspection.

Although it is unreasonable that [Buyer] requested the right to inspect the goods before payment, [Seller] agreed on 4 January 1992. [Buyer] insisted that the bank authorize it to inspect the goods. Such request is neither in accordance with the relative stipulation of UCP 400, nor practicable, because before 7 January 1992 the carrier took charge of the goods and would not let [Buyer] only inspect goods and not take delivery. After 7 January, the goods were under the control of the issuing bank which took the goods by presenting the bill of lading. At that time, when the transaction under the L/C finished, the notifying bank has nothing to do with the transaction of documents, so [Buyer] need only get the issuing bank's approval for inspection, and need not get the authorization of the notifying bank. [Buyer] has no evidence to prove it had contacted the issuing bank about inspection. According to C&F, when the goods passed the rail, [Buyer] shall bear all of the risk including decline in the price of the goods, the change of quality, and the storage fee which occurred because the goods were stored at the destination port due to delaying of inspection.

To the issue whether the quality of cow's liver fungus was affected due to shipping in a frozen manner, [Seller] asserts that:

      1. Because the contract does not specially describe the manner of shipment, [Seller] shipped the goods in the cold container in accordance with Article 35(2)(d) of CISG, " in a manner adequate to preserve and protect the goods";

      2. The report of Chongqing Commodity Inspection Bureau shows refrigeration does not affect the quality of cow's liver fungus;

      3. [Buyer] did not provide any inspection report to support its assertion that the goods are not conforming. The reports of two experts analyze the issue theoretically, and are not inspection results, so they cannot be used as evidence. Furthermore, the two reports are not in conformity with each other. One demonstrates that refrigeration will damage cow's liver fungus, but the other says shipping in refrigeration may show cow's liver fungus was not dried properly. There is no theoretical agreement on whether refrigeration will damage fungus. Documents with no theoretical decision to support them cannot be used to evaluate the quality of the goods. Accordingly, [Buyer]'s position - asserting that the goods are not conforming, suspending its performance according to Article 71 of CISG, and then declaring the contract avoided stating that [Seller] fundamentally breached the contract - cannot be supported. [Buyer] shall bear the liability in the consequence of breach. In fact, [Buyer] did not notify of its intention to suspend the contract in a timely manner in accordance with Article 71 of CISG, so [Buyer] is not entitled to the right stipulated in Article 71 of CISG.

THE TRIBUNAL'S OPINION

      1. The applicable law

Contract No. 91CQ-GX95, signed by a Chinese company and a German company on 5 September 1991, does not stipulate the applicable law. Because both China and Germany are parties of United Nations Convention on Contracts for the International Sale of Goods (CISG), and CISG became effective in China and Germany on 1 January 1988 and 1 March 1990 respectively, CISG shall be applied to Contract No. 91CQ-GX95 of this case.

      2. The issue of non-conformity between documents and the L/C

The Arbitration Tribunal analyzed the fax sent by Deutsche Bank Hamburg Branch [DB/HB Bank] to Bank of China Chongqin Branch [BOC/CQ Bank] on 29 November 1991, and holds that the non-conformity of documents and the L/C asserted by DB/HB Bank and the dishonor due to the non-conformity are the bank's action according to custom of L/C, which is not within the scope of the Arbitration Tribunal's hearing, so the Arbitration Tribunal neither adjudicates nor comments on it. However, the Arbitration Tribunal notices that DB/HB Bank states, "We are holding documents at your risk and your disposal" and requested BOC/CQ Bank send instruction immediately.

Persons familiar with international trade know that it is not difficult to deal with the non-conformity pointed out by DB/HB Bank in the fax on 29 November 1991, when both the issuing bank and Buyer have right to dishonor. [Seller] can settle the matter soon through the bank. However, [Seller] did not carefully take proper measures, and instructed [Buyer] to ask the issuing bank to take sample for inspection and requested [Buyer] to make the payment at once instead of settling with the bank directly.

The Arbitration Tribunal notes that Contract No. 91CQ-GX95 is a CNF contract. A CNF contract is a transaction of documents at first, which is the same as a CIF contract. Because [Seller] negligently provided the wrong documents, DB/HB Bank held the documents at the risk and disposal right of COB/CQ Bank and did not give them to [Buyer]. In such circumstances, it is not in accordance with Article 58(1) of CISG, which stipulates that Buyer must make the payment when the seller places documents controlling the disposition of the goods at the buyer's disposal when [Seller] requested the [Buyer] to make the payment. Thus, [Seller]'s claims due to non-conformity of documents and the L/C cannot be supported. [Seller] itself shall bear the liability for the result caused by its improper action.

      3. The issue on [Buyer]'s request to inspect the goods

The Arbitration Tribunal notes that [Buyer] made the first request for inspection on 27 December 1991 when the goods were still at the quay and were not taken. At that time, DB/HB Bank held the documents for the disposal right of the goods, and BOC/CQ bank had the right to dispose the documents. Under such circumstances, it is proper for [Buyer] to require [Seller] to obtain BOC/CQ Bank's authorization to inspect the goods. However, [Seller] refused to do that asserting that the bank did not want to intervene, and asked [Buyer] to contact DB/HB Bank for inspection of the goods.

The Arbitration Tribunal noted that on 8 January 1992, BOC/CQ Bank instructed DB/HB Bank to take the delivery of the goods and store them in a warehouse. On 29 January 1992, BOC/CQ Bank addressed inquiry to DB/HB Bank objecting that without BOC/CQ Bank's authorization, DB/HB Bank let its client (the applicant of L/C) to inspect the goods. Although the fact described in the fax of 29 January 1992 sent by BOC/CQ was proved wrong later, and the question of intent about authorization is not within the hearing scope of this case, so the Arbitration Tribunal does not hear and comment on it. However, the Arbitration Tribunal must point out that BOC/CQ Bank's inquiry to DB/HB Bank on 29 January 1992 proves that it is not the fact as [Seller] stated that the bank did not want to intervene.

On one hand, [Seller] did not take reasonable measures to provide [Buyer] a reasonable opportunity to inspect the goods; on the other hand, [Seller] continually requested [Buyer] to make the payment, which is not in accordance with Article 58(3) of CISG, which stipulates that "The buyer is not bound to pay the price until he has had an opportunity to examine the goods ..."

Because [Seller] insisted on taking an impractical position, [Buyer]'s request to inspect the goods was postponed for more than four months. BOC/CQ Bank did not authorize and inform DB/HB Bank until 30 April 1992. [Seller] should bear any liability caused by such action.

      4. The issue on shipping the goods in refrigeration at -14 C and the quality of the goods

The Arbitration Tribunal notes that Contract No. 91CQ-GX95 does not refer to packing and containing, so according to CISG, [Seller] need only contain or package the goods in the manner usual for such goods. Thus, the dispute in this case is whether it is the usual manner for cow's liver fungus, which should be fully dried, to be shipped in refrigeration at -14 C. [Seller] and [Buyer] hold a totally contrary view on this question.

[Seller]'s evidence of "THE REPORT ABOUT THE EFFECT ON THE QUALITY OF COW'S LIVER FUNGUS SHIPPED IN REFRIGERATION", issued by Chongqing Commodity Import and Export Inspection Bureau, is obviously cited from some paper. However, [Seller] neither submitted the original paper nor explained the source of such evidence, so the Arbitration Tribunal cannot accept it.

[Buyer]'s evidence of the letter sent by Fujian Native Produce and Animal By-Product Import and Export Company to [Seller] can be used as a reference but not as evidence, because the Company did not sign it, although the Company has experience in the running the business of dry goods including cow's liver fungus import and export, and the letter is reasonable.

However, according to the assertion of the two experts, Dr. Nehring and Dr. York, it is not necessary for fully dried cow's liver fungus to be shipped in refrigeration at -14C, and [Seller] does not provide any evidence to sufficiently prove that the goods under the contract must be shipped in refrigeration at -14C. Thus, it is not the usual manner for cow's liver fungus to be shipped in refrigeration at -14C. According to Article 35(2) of CISG, [Seller] shall bear the liability of non-conformity of condition of the shipping and storing. However, the Arbitration Tribunal notes that alleging that shipment in refrigeration at 14C may possibly damage the goods is different from establishing that this has damaged the goods. Although [Buyer] asserted the goods were not in compliance with the sample and that the quality was damaged, it did not provide any evidence, such as inspection reports, photos and samples, etc. Thus, the Arbitration Tribunal cannot support [Buyer]'s claim that the goods were damaged.

      5. The issue of [Seller] reselling the goods at a reduced price

The Arbitration Tribunal concludes that on 30 April 1992 when obtaining authorization of BOC/CO Bank and later inspecting the goods, [Buyer] should have performed its obligation to take the goods and make the payment, with the right to claim for damages.

The Arbitration Tribunal notes that the market price of cow's liver fungus declined in April and May 1992. Because [Seller]'s unreasonable view and action about the non-conformity of documents and the L/C and about the request for BOC/CQ Bank's authorization for inspection of the goods wasted one half of a year, [Seller] should bear the loss caused by declining market price.

The Arbitration Tribunal notes that from the end of April to the middle of May, the parties negotiated many times, and the dispute focused on whether the price was US $18/kg or German Mark 18.50 according to [Seller]'s faxes of 13 and 16 May 1992. It was improper for [Buyer] not to have taken active measures to quickly settle the dispute, when it asserted the goods were not conforming but cannot provide any evidence. [Seller] had to resell the goods to the other buyer at the low price of US $11/kg. Thus, [Buyer] should be liable for the loss of price difference. The Arbitration Tribunal noted that [Seller] and [Buyer] respectively suggested that the price be US $18/kg and DM 18.50 according to the goods and the market condition, but did not reach an agreement. The Arbitration Tribunal decides that it is justifiable to take the middle price of the above two prices, so it is the difference between US $14.65 and US $11, i.e., US $3.65/kg, which is the reasonable compensation for [Seller]. Thus, the Arbitration Tribunal rules that [Buyer] shall pay [Seller] 3.65 2100 = US $7,665 and interest at 8% annual rate from 7 May 1992 to the date when this award is implemented.

      6. [Seller]'s other claims

The Arbitration Tribunal holds that it is [Seller]'s impractical action that caused about a half year delay, so the claim for DM 8,982.28, the storage fee at the destination port, cannot be supported.

The arbitration fee of this case shall mainly be paid by [Seller]. The Arbitration Tribunal decides that [Seller] shall pay 85% of the arbitration fee, and [Buyer] shall pay 15%.

THE AWARD

  1. [Buyer] shall pay [Seller] the price difference, US $7,665 with 8% of annual interest from 7 May 1992 to the date when this award is implemented.

  2. [Seller]'s other claims are dismissed.

  3. The arbitration fee of this case is RMB ___, of which [Seller] shall pay 85%, ___ and [Buyer] shall pay 15%, ___. [Seller] has prepaid the arbitration fee, so [Buyer] shall pay [Seller] RMB ___ within 45 days after this award takes effect. [Buyer] shall pay 10% of annual rate from the expiration date to the date when the payment is made, if it does not pay it on time.

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 Germany is referred to as [Buyer]. Amounts in the currency of the United States (dollars) are indicated as [US $]; amounts in the currency of Germany (Deutsche Mark) are indicated as [DM]; 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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