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CISG CASE PRESENTATION

China 23 February 1995 CIETAC Arbitration proceeding (Jasmine aldehyde case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/950223c1.html]

Primary source(s) for case presentation: Case text

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Case identification

DATE OF DECISION: 19950223 (23 February 1995)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Case report does not identify the arbitrators

DATABASE ASSIGNED DOCKET NUMBER: CISG/1995/01

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: China (respondent)

BUYER'S COUNTRY: United States (claimant)

GOODS INVOLVED: Jasmine aldehyde (jasminal)


Classification of issues present

APPLICATION OF CISG: Yes [Article 1(1)(a)]

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 38(2) ; 39(1) ; 66 ; 74 ; 78

Classification of issues using UNCITRAL classification code numbers:

38B [Buyer's obligation to examine goods (as soon as practicable in the circumstance): when contract involves carriage of goods postponement until after arrival at destination (goods arrived at port of destination and a few days later were shipped to the end user who rejected them. Buyer caused the goods to be examined on the same day. The examination was held timely.)];

39A [Requirement to notify seller of lack of conformity: buyer must notify seller within reasonable time];

66B12 [Loss or damage after risk has passed to buyer: buyer not relieved of obligation to pay unless damage due to seller's act or omission (seller failed to honor contract commitment)];

74A [Damages: loss suffered as consequence of breach (buyer claim for economic loss disallowed: failure to provide sufficient proof)];

78B [Rate of interest]

Descriptors: Examination of goods ; Lack of conformity notice, timeliness ; Passage of risk ; Damages ; 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

English: Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=210&step=Abstract> = CISG and China: Theory and Practice, Michael R. Will ed., Faculté de droit, Université de Genève (1999) 79-80

Italian: [1998] Diritto del Commercio Internazionale 1098-1099 No. 200

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Zhong Guo Guo Ji Jing Mao Yi Zhong Cai Wei Yuan Hui Cai Jue Shu Hui Bian [Compilation of CIETAC Arbitration Awards] (May 2004) 1995 vol., pp. 1272-1279

Translation (English): Text presented below; see also Zhongguo falü nianjian 1995/Law Yearbook of China (Beijing) 1995, 922-926 [excerpt of judgment]

CITATIONS TO COMMENTS ON DECISION

English: Honnold, Uniform Law for International Sales (1999) 397 [Art. 66 (failure to provide protection during shipment)]; Valioti, Passing of Risk under CISG and Incoterms (2003) n.97; CISG-AC advisory opinion on Examination of the Goods and Notice of Non-Conformity [7 June 2004] (this case and related cases cited in addendum to opinion); Article 78 and rate of interest: Mazzotta, Endless disagreement among commentators, much less among courts (2004) [citing this case and 275 other court and arbitral rulings]; Dong WU, CIETAC's Practice on the CISG, at nn.56, 71, 81, 186, 228, 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 Arbitration Award

Jasmine aldehyde case (23 February 1995)

Translation [*] by Fan YANG [**]

Edited by Howard Yinghao YANG [***]

THE FACTS

On 9 September 1992, contract numbered JSC92-024 was entered into between the parties whereby the Respondent [Seller], agreed to sell to the Claimant [Buyer], 10,000 kg of jasmine aldehyde, which was agreed to be no less than 99% purity, at the price of CIF New York US $21 per kg. The [Buyer] opened a letter of credit naming the [Seller] as the beneficiary on 14 September 1992. The cargo was shipped by the [Seller] from Shanghai on 30 September 1992 and arrived in New York on 18 November 1992. On 27 November, the cargo was found severely leaking and melted. The unloading finished on 30 November. The [Buyer]'s ultimate customer rejected the cargo on 4 December.

The [Buyer] notified the [Seller] and the Insurer of the damage to the cargo on 4 December. Worman & Co. Inc was subsequently appointed by the American agent of the Insurer to inspect the damage and submitted an initial inspection report on 10 December and a final inspection report on 22 December. The reports state that the damage to the cargo was caused by high temperature during carriage.

The [Buyer] sought compensation from the [Seller], who came to New York with the Insurer to inspect the damaged cargo in mid-May 1993. The three parties reached an agreement, called "Evaluation of Damaged Cargo and Indemnity Agreement", on 28 May 1993 which provides that:

   -    The [Buyer] and the Insurer's American agent should invite bidding and resell the cargo at its current location;
   -    The damaged cargo is evaluated at US $40,000 and the loss is evaluated to be US $170,000;
   -    The Insurer is to pay indemnity of US $110,000 directly to the [Buyer];
   -    The [Seller] is to pay the [Buyer] US $60,000 under separate arrangement with the [Buyer];
   -    The [Buyer] is entitled to the damaged cargo and will bear other loss and damage.

Accordingly, the Insurer indemnified the [Buyer] US $110,000 on 16 June 1993. The [Buyer] and the [Seller] entered into a separate compensation agreement on 19 June 1993 in Shenyang, P.R. China, which provides that the [Seller] agrees to remunerate the [Buyer] of US $60,000, in which US $20,000 shall be paid before 15 August 1993, and the remaining US $40,000 shall be paid in the form of commissions and rebates through the future course of trades between the parties . However, the [Seller] did not pay the US $20,000 to the [Buyer] before 15 August 1993, nor did the parties conclude any further deals. The [Buyer] resorted to the CIETAC for arbitration.

The [Buyer] claims:

A. The [Seller] is liable for the damage to the cargo

According to the inspection reports, the damage was mainly caused by the high temperature during carriage. Before the shipment, on 24 and 27 September 1992, the [Buyer] sent two faxes to remind the [Seller] of the fact that jasmine aldehyde melts and turns to yellow when exposed to high temperature. The [Buyer] asked the [Seller] to pay particular attention to avoid exposing the cargo to high temperature and to endeavor to use a direct shipping route, to which the [Seller] responded in a fax sent on 28 September 1992 that the current temperature at the port is proper and shall not affect the cargo. Nonetheless, the cargo melted due to high temperature. The [Seller] thus is liable for the damage to the cargo.

B. The two compensation agreements

The [Buyer] notified the [Seller] promptly and reached the three-party compensation agreement through a half year's efforts in negotiating with both the [Seller] and the Insurer, who both inspected the cargo later in New York whereby the [Seller] agreed to compensate the [Buyer] for US $60,000. The [Buyer] made concessions in the way of compensation by the [Seller], which was left to be dealt with separately between the [Seller] and the [Buyer].

On the basis of the first compensation agreement, the [Buyer] and the [Seller] reached the second compensation agreement. Considering mutual business cooperation in the future, the [Buyer] compromised and agreed that the [Seller] could pay US $20,000 before 15 August 1993 with the balance to be paid in future dealings through commissions and rebates, instead of insisting on one full payment by the [Seller]. However, the [Seller] did not pay the US $20,000, nor did the [Seller] fulfil its promise of compensation through trade. The [Buyer] suffered difficulty in cash flow due to the [Seller]'s non-payment. The [Buyer] believes that the [Seller] has not shown good faith for future business cooperation and that the prospective compensation through future business has become impossible.

Therefore, the [Buyer] claims that the [Seller] should be held liable for:

  1. US $60,000 and interest;
  2. Damages due to the non-payment of the US $60,000; and
  3. Arbitration fee and attorneys' fee.

The [Seller] responds:

A. The [Seller] is not liable for any damage to the cargo

      1. The [Seller] has delivered conforming goods to the [Buyer] in that the carrier issued a clean bill of lading and the Chinese Commodities Inspection Authority issued a Certificate of Inspection. Besides, the [Buyer] did not raise any objection as to the quality of the goods before the resale, nor did the [Buyer] claim compensation from the [Seller] after the [Buyer]'s customer rejected the goods. It is the Insurer against whom the [Buyer] has claimed compensation since the very beginning. The [Seller] has been asked to assist the [Buyer] in seeking compensation. The [Buyer] has accepted the goods duly delivered by the [Seller]. Therefore, according to the contract of sale and the CISG Article 30 and the PRC Foreign-Related Contract Law, the [Seller] has discharged its obligation under the contract.

      2. Under a CIF contract, the risks pass from the seller to the buyer when the goods pass the ship's rail at port of loading. The [Seller] is not liable for any damage to the goods after the shipment unless the [Buyer] can prove that the defect of the goods existed prior to shipment. The inspection report by Worman & Co., Inc states that the damage was due to high temperature in carriage. Further, the inspection report states, "in order to protect all interests, notice of claim should be filed against both the shipper and the vessel's agents." Therefore. the inspection company also held the view that the carrier should be liable for the damage. More importantly, the [Seller] is not liable in that it has procured the insurance policy for the [Buyer] as required under a CIF contract and all the correspondence between the [Seller] and the [Buyer] also shows that the [Buyer] intended to claim compensation from the insurer only.

      3. There are serious defects in the [Buyer]'s claim procedure for insurance indemnity, which adversely affect the result of its insurance indemnity payment. The [Buyer] did not abide by CISG Article 38 or any international convention which requires the inspection of the goods on arrival, but instead delivered the cargo to a third party first. The [Buyer] did not apply for inspection and insurance indemnity until after the cargo was rejected by the third party. The [Buyer] failed to obtain a certificate of damage to the goods from the carrier which left the liability issue undetermined and made the claim for insurance indemnity difficult.

B. The two compensation agreements have no effect or are invalid

      1. After the damage to the goods occured, the [Buyer] has insisted that the insurer should be liable for all of the damage. But due to the [Buyer]'s own fault in failing to provide a complete set of documents related to insurance indemnity, the insurer encountered difficulties in assessing liabilities and hence the insurance indemnity was delayed. The insurer also insisted on a three-party negotiation, otherwise, the insurer would not pay for any damage at all. Under such pressure from the insurer, the [Seller] entered into the first compensation agreement, i.e., the three-party evaluation and indemnity agreement, but the [Seller] always made it clear that the [Buyer] is entitled to insurance payment only. There shall be no room for any damages from the [Seller]. The [Seller] could have withdrawn from signing the evaluation and indemnity agreement, because the [Buyer] had no insurable interest at that time. The [Seller] has no legal capacity of entering the first compensation agreement. The [Seller]'s promise to undertake the obligation which it shall not have undertaken is not binding. The second compensation agreement which is based upon such a non-binding promise therefore has no effect or is invalid.

      2. The assertion that the [Seller] has not shown good faith to compensate through trade is not true. Despite the validity issue of the above two compensation agreements, the [Seller] has kept communicating with the [Buyer], who, however, pressures the [Seller] to make cash payment rather than to reach any business deals. The assertion that the [Seller] has not shown good faith for business is not acceptable.

The [Seller], therefore, moves to dismiss the [Buyer]'s claims.

The [Buyer]'s Supplemental Claims after the hearing:

A. The [Seller] is liable for the damage

      1. The [Seller] failed to direct the carrier's attention to the temperature during carriage as required in the faxes sent by the [Buyer]. Worman & Co., Inc's final inspection report dated 22 December 1992 states that the damage to goods is due to the improper instruction which the [Seller] gave to the carrier. There are two further faxes sent by the [Buyer] who mentioned the [Seller]'s liabilities in failing to direct the carrier to pay attention to the temperature during carriage, in response to which the [Seller] did not deny its liability. Although under CIF contract the risk has passed to the buyer, according to CISG Article 66, the seller is still liable if the loss of or damage to the goods is due to an act or omission of the seller.

      2. The [Seller] referred to Worman & Co., Inc's initial inspection report dated 10 December 1992, according to which "shipper" means the [Seller], thus the [Buyer] can claim damage directly from both "shipper" and "carrier".

      3. The [Seller]'s assertion that there are serious defects in the [Buyer]'s claim for insurance indemnity is groundless. It is also an international convention or custom for the [Buyer] to deliver the cargo directly to the ultimate customer upon its arrival. The customer rejected the cargo immediately and the [Buyer] notified both the [Seller] and the insurer's American agent of the damage on the same date. The [Buyer] also supplied a full set of documents related to claim insurance indemnity. The insurer appointed an inspection agent immediately and notified the [Seller] to participate in the inspection. The [Buyer]'s handling of the claim for the insurance indemnity is impeccable.

B. The two compensation agreements are valid and binding

      1. The first compensation agreement, i.e., the evaluation of damaged cargo and the compensation agreement dated 28 May 1993, was signed by the [Seller] after the inspection by the [Seller] together with the insurer after half a year's negotiation efforts of three parties. To dodge responsibility, the [Seller] asserted that the agreement was entered into under the pressure of the insurer. But the [Seller] was never able to specify what exactly the pressure is.

      2. The second compensation agreement dated 19 June 1993 is valid as well. At that time when the [Seller] and the [Buyer] reached this agreement, the insurer had indemnified the [Buyer], thus was not involved in the second compensation agreement. The [Buyer] urged the [Seller] many times to perform this agreement, to which the [Seller] responded with a willingness to compensate. The [Seller] has never stated that the two compensation agreements were entered into under the pressure of the insurer, contrary to the [Seller]'s own intention.

      3. It has been clear that the [Seller] has no sincerity to do further business with the [Buyer]. In particular, the [Seller] has not replied to any fax or returned any telephone call from the [Buyer] since 8 September 1993.

The [Seller]'s Supplemental Response after the hearing:

A. The [Seller] has no liability whatsoever for the damage of the goods

The [Seller] sent a fax to notify the [Buyer] that the temperature at the shipping port was appropriate at the time of loading. The [Seller] also telephoned the carrier regarding to the temperature requirement. Furthermore, neither the contract of sale, nor Chinese contract law, nor international custom or convention imposes such a duty upon the Seller to call the carrier's attention to the temperature. .

B. The [Buyer]'s claim is groundless.

      1. The [Buyer]'s claim is groundless, as the [Seller] is not liable for the damage and the two compensation agreements are not binding. Even if the agreements are valid, the [Buyer] can only claim for US $20,000, because the remaining US $40,000 can only be obtained in the form of commissions and rebates through future business transactions, which are not governed by any time requirements in the agreement. The claim for cash payment of $40,000 is contrary to the compensation agreement itself.

      2. The [Buyer] cannot prove any consequential loss suffered; therefore the claim for loss due to the non-payment is groundless and should be dismissed.

The Tribunal's opinion

      1. China and the US are both Contracting States of the CISG, which is applicable to the current dispute.

      2. With regard to the temperature, the Tribunal noticed that after entering into contract of sale no. JCS92-024, the [Buyer] stated in the two faxes sent to the [Seller] that the quality of jasmine aldehyde changes under high temperature, and that the [Seller] shall pay particular attention to control the temperature during carriage and storage keeping and the cargo shall be kept in cool places. The [Buyer] also asked the [Seller] to arrange a direct shipping route and that 10,000 kg of jasmine aldehyde be put in one 20-foot container, which is not a difficult task. The [Seller] did not object to such a request and replied to reassure the [Buyer] that the temperature at the port was all right. Thus, it is a separate promise that the [Seller] has made to pay particular attention to the temperature and instruct the carrier to place the goods in cool places, and to endeavor to arrange a direct shipping route.

The [Seller] contended in the defense that it had made telephone calls to notify the carrier of the temperature requirement. The Tribunal takes the view that mere telephone calls are not enough to direct the carrier to pay sufficient attention to control the temperature during carriage. And the [Seller] did not try its best to arrange a direct shipping route; as a result, the ship passed through Hong Kong where the temperature was relatively high. The [Seller] did not even provide evidence to prove that it had made the telephone calls. Therefore, there are defects in the [Seller]'s performance of its duty regarding the temperature.

      3. Under a CIF contract, the risks pass to the buyer when goods pass the ship's rail at the port of loading. If the parties have no stipulation on the temperature issue and the goods are damaged after shipment, the [Seller] has no liability whatsoever. However, here the parties in fact have reached an agreement and the [Seller] did not perform its obligation of directing the carrier to place the goods in proper places with due diligence. Therefore, according to CISG Article 66, if the damage to the goods is due to an act or omission of the seller, the seller is liable.

      4. Regarding the inspection of goods, CISG Article 38 provides that the buyer must examine the goods, or cause them to be examined; within as short a period as is practicable in the circumstances. In the current dispute, the goods were immediately delivered to customer upon arrival and the [Buyer] did not claim for insurance indemnity until the ultimate customer disputed the quality of the goods. The Tribunal finds that the 200 barrels of jasmine aldehyde were melted and adhered to the bottom of the container which made the unloading impossible. The fact that the [Buyer] did not discover the damage in time and thus failed to obtain any evidence for the cause of the damage has had some adverse influence on the subsequent claim for insurance indemnity from the insurer. Nonetheless, considering that the goods arrived on 27 November 1992, were unloaded on 30 November, and the issue of quality was raised on 4 December, the [Buyer]'s conduct cannot substantially alter its position in the insurance indemnity claim. More importantly, the key to determine this dispute lies in the analysis of the following two compensation agreements.

      5. The "Evaluation of the Damaged Cargo and Indemnity Agreement" was entered into by the three parties on 28 May 1993. Although the [Seller] contended that it entered into agreement was under the pressure of the insurer, it failed to provide any evidence to prove such pressure existed. On the contrary, the [Seller] entered into the second compensation agreement with the [Buyer] in Shenyang, P.R. China on 19 June 1993. Therefore, the contention that the two compensation agreements are invalid, as raised in the [Seller]'s initial defense, and that the two compensation agreements are non-binding as raised in the second defense, are groundless. The two compensation agreements are binding.

      6. The [Seller] contends in the complementary defense that even if the compensation agreements are valid, the [Buyer] can only claim US $20,000, with the remaining US $40,000 to be paid through commission and rebates in normal business transactions under market price. Therefore, the [Buyer] has no right to claim the remaining US $40,000, for which no time limit of performance was provided in the agreement. And the [Seller] argues that the [Buyer]'s claim for cash payment of the US $40,000 is in itself a breach of the compensation agreement. The Tribunal finds that the correspondence between parties shows that the [Seller] promised to repay both the US $20,000 in cash and the remaining US $40,000 through future transaction, from which it can be inferred that the [Seller] also acknowledges the existence of the two compensation agreements and has not questioned their validity. The [Seller] neither responded to nor provided any evidence to rebut the [Buyer]'s contentions that the [Seller] did not send samples in accordance with agreements, and quoted prices higher than the market, and that the [Seller] has declined to reply to any fax or telephone from the [Buyer] since 8 September 1993. It is established that the [Seller] has not yet repaid the [Buyer] US $20,000, and that the [Seller] does not have any real intention to pay the [Buyer] US $40,000 through future transactions. The [Seller] takes the view that unless the [Buyer] enters into new business transactions with the [Seller] by accepting all [Seller]'s terms, there is no time limit for the payment of the US $40,000, which is obviously unreasonable. Consequently, on the facts of the current dispute, the Tribunal holds that the [Seller] must repay the US $40,000 directly to the [Buyer] rather than through any transactions. Therefore, the [Seller] is liable for the payment of US $60,000 in total.

      7. With reference to interest on the US $60,000, the Tribunal holds that based on the second compensation agreement dated 19 June 1993, the [Seller] shall pay the [Buyer] US $20,000 before 15 August 1993; thus the [Seller] is liable for interest on the US $20,000 since 15 August 1993. On the other hand, there is no time limit for the repayment of the remaining US $40,000; therefore, the [Seller] shall have no liability for interest on it.

      8. There is no evidence on the loss and damage due to the [Seller]'s non-payment of the US $60,000; the Tribunal thus dismisses this claim.

      9. There is no evidence that the [Seller] shall bear the cost of [Buyer]'s attorneys' fee; the Tribunal thus dismisses this claim.

      10. The [Seller] shall bear the cost of the arbitration fee.

The Decision

Based on the above facts and analysis, the Tribunal rules:

  1. The [Seller] shall pay the [Buyer] US $60,000 for damages.
  2. The [Seller] shall pay the interest on the US $20,000 from 16 August 1993 to the date of actual payment at the rate of 5% per annum.
  3. The [Seller] shall bear the arbitration fee.
  4. The execution of the above decision shall finish within 45 days from the day on which this award becomes effective. Interest at the rate of 5 per month shall be imposed on payment exceeding the time limit till the date of actual payment made.

This decision is final.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, the Respondent of the P.R. China is referred to as [Seller]; the Claimant of United States is referred to as [Buyer].

** Fan YANG. Ph.D. (Eng), LL.M. (Eng), LL.B. (PRC). Researcher, School of International Arbitration, CCLS, Queen Mary, University of London.

*** Howard Yinghao YANG is an Associate with the New York office of Debevoise & Plimpton LLP.

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