China 22 March 1995 CIETAC Arbitration proceeding (Down jacket and winter coat case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/950322c1.html]
DATE OF DECISION:
DATABASE ASSIGNED DOCKET NUMBER: CISG/1995/05
CASE HISTORY: Unavailable
SELLER'S COUNTRY: People's Republic of China (respondent)
BUYER'S COUNTRY: Czech Republic (claimant)
GOODS INVOLVED: Down jackets and winter coats
APPLICATION OF CISG: Yes
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
8C [Interpretation of party's statements or other conduct: interpretation in light of surrounding circumstances]; 25B [Definition of fundamental breach: substantial deprivation of expectation, etc.]; 26A [Notification of avoidance: effective declaration of avoidance]; 35A [Conformity of goods to contract: quality, quantity and description required by contract] 50A [Reduction of price: buyer's right to reduce price for non-conforming goods]; 74A ; 74B1 [General rules for measuring damages: loss suffered as consequence of breach; Outer limits of damages: foreseeability of loss]; 77A [Obligation to take reasonable measures to mitigate damages]
8C [Interpretation of party's statements or other conduct: interpretation in light of surrounding circumstances];
25B [Definition of fundamental breach: substantial deprivation of expectation, etc.];
26A [Notification of avoidance: effective declaration of avoidance];
35A [Conformity of goods to contract: quality, quantity and description required by contract]
50A [Reduction of price: buyer's right to reduce price for non-conforming goods];
74A ; 74B1 [General rules for measuring damages: loss suffered as consequence of breach; Outer limits of damages: foreseeability of loss];
77A [Obligation to take reasonable measures to mitigate damages]
CITATIONS TO ABSTRACTS OF DECISION
(a) UNCITRAL abstract: Unavailable
(b) Other abstracts
CITATIONS TO TEXT OF DECISION
Original language (Chinese): Zhong Guo Guo Ji Jing Ji Mao Yi Zhong Cai Wei Yuan Hui Cai Jue Shu Hui Bian [Compilation of CIETAC Arbitration Awards] (May 2004) 1995 vol., pp. 1329-1335
Translation (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
English: Dong WU, CIETAC's Practice on the CISG, at nn.65, 92, 95, 223, Nordic Journal of Commercial Law (2/2005)Go to Case Table of Contents
|Case text (English translation)|
Down jacket and winter coat case (22 March 1995)
Translation [*] by Kejie Zhang [**]
Translation edited by Meihua Xu [***]
China's International Trade and Economic Arbitration Commission (hereafter referred to as "the Arbitration Commission", "the Commission", or "CIETAC") accepts the present case according to the arbitration agreement found in Contract No. GF930706A and Contract No. GF930706B, entered into by Claimant [Buyer] XX Company of the Czech Republic and Respondent [Seller] YY Textile and Clothing LLC of Beijing, China. The Arbitration Commission accepted the petition for arbitration filed by [Buyer] and agreed to hear the dispute arising out of the aforementioned contracts.
In accordance with Arbitration Rules of CIETAC, the Commission formed a three-member Tribunal as the presiding body of this arbitration proceeding. The Tribunal consists of Mr. P as the presiding arbitrator, Mr. A as the arbitrator appointed by [Buyer], and Mr. D by [Seller].
On 13 December 1994, after carefully reviewing the complaint and answers to complaint, the Arbitration Tribunal held the proceeding in Beijing. Representatives from both sides appeared and argued before the panel of arbitrators. Each side was allowed sufficient time to present their arguments, rebuttal, and to answer questions by the Tribunal. The Tribunal forwarded to each representative supplemental filings from the opposing side.
Based on evidence at hand and facts presented at the arbitration proceeding, the Arbitration Tribunal entered the following decision. The factual issues, opinion, and arbitral award are detailed as follows:
FACTS AND POSITIONS OF THE PARTIES
On 6 July 1993, [Buyer] and [Seller] entered into Contract No. GF930706A (hereafter referred to as "Contract A") and Contract No. GF930706B (hereafter referred to as "Contract B"). Under Contract A, Respondent [Seller] was to sell to Claimant [Buyer] 1,000 down jackets at the price of Yuan Renminbi [RMB] 117 per unit, giving a total contract price of RMB 117,000. Under Contract B, [Seller] was to sell to [Buyer] 1,000 leather accessorized winter coats, at the unit price of RMB 84, thus giving a total contract price of RMB 84,000. Both contracts contain the following terms:
|-||Shipment date:||15 August 1993|
|-||Loading dock:||Port of China|
|-||Terms of payment||30% of the contract price as initial payment
Remaining payment due 15 days upon the issuance of the bill of lading after [Buyer] receives the inspection certificate, all necessary documents of the transaction, and a copy of the bill of lading.
|-||Upon payment,||[Seller] will deliver the original bill of lading, otherwise [Seller] has a right to dispose of the goods|
|-||Inspection of the goods||[Seller] will obtain a certificate of inspection certifying quantity and quality from the State Administration of Import and Export Commodity Inspection for the goods, but [Buyer] retains the right to a second inspection upon receipt of the goods. Fees for the second inspection will be borne by [Buyer].|
[Buyer] made the initial deposit of US $7,000 on 8 July 1993, and the remaining balance of RMB 141,500 on 27 September 1993. The sum of both payments by [Buyer] amounts to RMB 201,000. On 4 October 1993, [Seller] delivered the goods to Prague. Later, a dispute arose between the two parties over the quality of the goods. Unable to resolve the dispute through negotiation, [Buyer] petitioned to the Commission for arbitration.
POSITION OF THE PARTIES
[Buyer] alleges that the goods delivered by [Seller] were non-conforming. After the goods arrived in Prague on 4 October, [Buyer]'s inspection of the goods revealed that the measurements of the down jackets were disproportionate and did not conform to the terms of the contract. The colors of the down jackets and of the winter coats did not match the coloring charts in the contracts. Due to [Seller]'s alleged breach, [Buyer] was unable to fulfill its obligations under the contract between [Buyer] and [Buyer]'s client Feroz Company for the resale of the goods. Feroz Company sought to return all goods accepted and claimed money damages. On 18 October 1993, [Buyer] paid Feroz 850,000 Koruna [CZK] in damages, the equivalent of US $28,333. On 20 October 1993, [Buyer] communicated with [Seller] via facsimile, seeking return of the goods and money damages. [Seller] did not respond. Because the goods are seasonal, in an attempt to mitigate, and on account of the lack of response from [Seller], [Buyer] sold all but 300 units of the goods at a discounted price in a nationwide liquidation sale. On 12 May 1994, a report was issued by the Beijing Department of Quality Control and Inspection of the Clothing Industry, which found that the down jackets delivered by [Seller] were "below-grade." [Buyer] demanded compensation from [Seller] for the damages. [Seller] refused. [Buyer] hereby requests that this Arbitral Tribunal direct [Seller] to:
In its defense, [Seller] contends that it has duly produced and tendered all goods within the contracted time. Thus, it has fully performed all obligations under the contracts, including compliance with governmental regulation that all exported goods must pass the inspection of certain governmental inspection agencies in order to pass the Chinese customs.
Clause Five of the contracts provides:
[Buyer] did not obtain an inspection report from the destination country, nor did it claim any damages within 30 days after the arrival of the goods. Hence, [Buyer]'s claim of damages during the arbitration proceeding is invalid. In addition, under the contracts the inspection organization should be the State Administration of Import and Export Commodity Inspection for the Goods, or a national inspection organization of the destination country. The inspection report [Buyer] was able to obtain from the regional quality control and inspection organization of Beijing, by sending three of the jackets it received to the Beijing organization seven months after their receipt, is also invalid.
Based on the above reasoning, [Seller] requests that this Arbitral Tribunal deny [Buyer]'s arbitration claim.
OPINION OF THE ARBITRAL TRIBUNAL
1. The Right of [Buyer] to Seek Damages
The resolution of this issue centers on the following factual inquiries: (1) What are the consequences of the fact that [Seller] failed to provide an inspection report from the State Administration of Import and Export Commodity Inspection? (2) In the absence of the inspection report from the State Administration of Import and Export Commodity Inspection, must [Buyer] deliver the inspection report from the destination country in order to seek damages? (3) Has [Buyer] sought its claim within the time period during which damages can be sought?
With respect to inquiry (1), [Buyer] claims that because [Seller] did not provide the inspection report under the terms of the contract, it failed to prove that the quality of the goods conformed to the contractual standard. In response to this, [Seller] contends that because of the governmental regulation which stipulates that only goods that pass inspection could be exported, the fact that the goods passed the Chinese customs was proof in itself that the goods were duly inspected and was deemed satisfactory; [Seller] has also submitted to the Tribunal a letter issued by the State Administration of Import and Export Commodity Inspection which provided further proof on this issue.
The Arbitral Tribunal believes that it is insufficient for [Seller] to simply prove that it had applied for inspection by the designated agency. The Tribunal must be able to review the contents of the report in order to determine whether the report is sufficient proof that the quality of the goods conformed to the contracts. Since [Seller] failed to provide the requisite inspection report, [Seller] has not met its burden of proving that the goods tendered conformed to the contractual requirements.
With respect to inquiries (2) and (3), [Seller] contends that because [Buyer] has not furnished an inspection report issued by an agency of the destination country and thus did not seek damages according to the report within the permissible time period under the contracts, [Buyer] lost its right to claim damages.
The Tribunal found that Clause Five of the contracts provided that Clause Nine controlled in the event that [Seller] failed to provide an inspection report from the State Administration of Import and Export Commodity Inspection. According to Clause Nine, [Buyer] has the right to seek damages within 30 days after the goods reached the port of destination. The Arbitration Tribunal notes that based on the aforesaid two clauses, in the event that [Seller] failed to provide an inspection report from the State, as long as [Buyer] seeks damages within thirty days after the goods reached the destination port, [Buyer] retains its right to claim damages. A report by the inspection agency of the destination country is not a condition for [Buyer]'s right of recovery in this situation.
The goods reached their destination on 4 October 1993. [Buyer] asserts that it had on two occasions sent notifications via facsimile to [Seller], notifying the latter of the non-conformance of the goods and its intention to seek damages. The two facsimiles were sent on 20 and 25 October, respectively. [Seller] denied having received either facsimile from [Buyer]. However, the voice recordings submitted into evidence by [Buyer] of the subsequent negotiations between the two indicated that [Seller] had in fact received the above mentioned facsimiles. [Seller] did not furnish any rebuttal evidence with respect to the recordings.
Based on the facts and reasons stated above, the Tribunal finds that [Buyer] has a right to seek damages from [Seller].
2. The Quality of the Goods Tendered
(1) The Style of the Down Jackets
[Buyer] alleges that both parties agreed that the jackets should be European style, and consistent with the sample supplied by [Buyer]. The actual measurements of the jackets delivered did not match the sample, and were disproportionate, which constituted a breach.
The Tribunal finds no provision in the contracts specifying the style and measurements of the jackets. According to the audio recording submitted by [Buyer], [Seller] admitted to certain "problems" with the style of the jackets. However, [Buyer] failed to prove to the Tribunal the existence of an objective, internationally recognized definition of "European style." Meanwhile, neither party kept a record of the sample jacket provided by [Buyer]. Therefore, the Tribunal holds that [Buyer] has not met its burden of proving the degree of non-conformance of the goods delivered due to the absence of a workable definition of "European style."
(2) The Down Content of the Jackets
[Buyer] contends that the down contents of the jackets are only 20%, well below the normal standard of 30%. This claim is unsupported due to the following reasons.
The contract does not impose a minimum requirement for the content of the down. The Tribunal must take into account all facts and surrounding circumstances, to determine the intent of the parties at the time of contracting, from the perspective of a reasonable third party in a like situation. [Buyer] proposes that the customary 30% be used as the standard. However, it should be plain that different down contents correspond with different price levels. The unit price of the jackets under the contract is RMB 117, yet the sample jackets submitted as evidence by [Buyer] cost at least several times more per unit. At the price range indicated by the contract, the content of the down should be low. The low price is indicative of the parties' intent at the time of their agreement, as a reasonable person in [Buyer] or [Seller]'s situation could not have reasonably expected that jackets sold at such a low price should contain the standard 30% of down. Therefore, the lower down content does not constitute a defect in quality.
(3) The Processing of the Down Jackets
[Buyer] claims that the fillings of the jackets leak both on the inside and out, a result of poor workmanship. [Buyer] submitted one of the jackets into evidence. The jacket is branded with [Seller]'s trademark and [Seller] does not deny that it was one of the jackets delivered. After examining the evidence, the Tribunal confirmed that the defects are indeed apparent as [Buyer] claims. The Arbitration Tribunal holds that even though the contract price was low, and the quality of the goods could not be determined based on the sample goods provided by [Buyer], however, as long as the goods were for sale, especially for exporting, this kind of defects should not occur. Thus these are defects in goods delivered by [Seller].
(4) The Coloring of the Down Jackets and Winter Coats
[Buyer] claims that the colors of the jackets do not conform to contract. The problem exists in all of the down jackets and 72 percent of the winter coats. [Buyer] further contends that the coloring chart supplied by [Buyer] to [Seller] supplemented and formed part of the contract.
The defects can be proved by comparing the colors on the chart and the colors on the packing list. [Seller] does not dispute this issue. The Tribunal therefore confirms [Buyer]'s claim with respect to the colors of the goods.
3. Remedies Available to [Buyer]
(1) Declare the Contract Avoided
On a facsimile sent on October 20, 1993, [Buyer] notified [Seller] that it wished to return the goods. The Tribunal finds this to be sufficient notification to [Seller] of [Buyer]'s intention to avoid the contract. The issue is whether [Buyer] has the right to declare the contract avoided on grounds stated above. This issue is controlled by the United Nations Convention on Contracts for the International Sale of Goods (hereafter referred to as "CISG"), of which both China and the Czech Republic are signatories.
According to Article 49(a) of the CISG, a buyer may declare the contract avoided "if the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract." Under Article 25, a breach of contract is fundamental "if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract." The key inquiry therefore is what [Buyer] is "entitled to expect under the contract" in this instance.
The Tribunal believes that what [Buyer] is entitled to expect are goods that conform to the contract. In other words, [Buyer] had a right to expect the profit it would have derived from the goods had the goods conformed to the contract. The question is, what type of goods was contemplated by the contract? With respect to the down jackets, should they be consistent with [Buyer]'s sample submitted into evidence during the arbitration proceeding or with the unit price specified by the contract? As stated above, because neither party kept record of the actual sample supplied by [Buyer] at the time of contracting, which [Buyer] alleges to be part of contract, and based on the low unit price at which the goods were sold, [Buyer] is only entitled to goods similar to ones sold at the specified price level.
Another question is whether [Seller]'s breach "substantially" deprived [Buyer] of what it is entitled to expect under the contract. The Tribunal concludes that in this instance, to "substantially deprive" should be understood as to "basically" or "grossly" deprive of [Buyer]'s rights under the contract. This understanding is in keeping with the purpose of Article 25 of the CISG, to limit this remedy only to those instances in which the degree of breach is so severe, that injustice will result unless the contract is declared avoided. Only such interpretation can achieve the furtherance of the policy to safeguard the continuance and fulfillment of contractual obligations as long as it is feasible to do so, and to facilitate the successful expansion of international trade.
Although the quality and color of the goods amount to a breach of contract by the [Seller], such defects do not rise to the level of "fundamental breach" which results in substantial deprivation of what [Buyer] is entitled to expect under the contract.
In sum, considering the fact that the difference between the down jackets [Seller] should have delivered and those [Seller] actually delivered was not severe, and [Seller]ís breach did not substantially deprive [Buyer] of what it is entitled to expect under the contract, [Seller]ís breach is not fundamental; therefore, [Buyer] had no right to avoid the contract.
With regard to the winter coats, since [Buyer] did not ask for return of the goods after it received them, therefore, according to Article 26 of CISG, which stipulates that "a declaration of avoidance of the contract is effective only if made by notice to the other party", [Buyer] loses it right to avoid the contract for those goods.
(2) Price Reduction
Although [Buyer] has never demanded a price reduction from [Seller], the Tribunal believes that it is an appropriate remedy based on the following reasons. Firstly, although [Buyer] is not entitled to declare the contract avoided and to return and seek a refund of the goods purchased, it did suffer a loss as a result of [Seller]'s breach. It has a right to be compensated for such loss. Secondly, as explained in the following section, because the computational method proposed by [Buyer] with regards to damage calculation is wrong, and the explanation offered unclear, and because there is insufficient proof, the damage calculation advanced by [Buyer] cannot be sustained.
With respect to the down jackets, the Tribunal holds that a 35 percent reduction in the contract price is appropriate based on the quality and contractual price level of the goods. [Buyer] has already paid the contract price in full, in the amount of RMB 117,000. [Seller] must refund [Buyer] 35 percent of the total payment, in the amount of RMB 40,950.
With respect to the winter coats, [Buyer] failed to prove that the defect in color resulted in any loss to it. [Buyer] is not entitled to a price reduction on the winter coats.
(i) Cost of Import
The cost of import includes fees incurred in inspection, certification, transport, and customs, totaling RMB 5,517, US $3,850, Deutsche Mark [DM] 300, and CZK 91,853. Because [Buyer] is precluded from declaring the contract avoided and because the Tribunal has awarded a 35 percent price reduction as the appropriate remedy, [Buyer] should be compensated 35 percent of the total expense incurred in the import of the down jackets. However, [Buyer] failed to submit into evidence records documenting these costs, or any supplemental statement of explanation or a detailed accounting statement, certain Czech documents were not translated into Chinese or English. [Buyer]'s request to be reimbursed for cost of import is denied.
(ii) Breach of Resale Contract
[Buyer] contends that it entered into a contract with Czech company Feroz for the resale of the goods purchased. Feroz rejected the goods because of the defects. In the meanwhile, [Buyer] had to pay Feroz CZK 850,000, equaling US $28,333, in accordance with the damage clause under that contract.
Based on the following reasons, this request is denied:
[Buyer] failed to prove that at the time of contracting, [Seller] could have reasonably foreseen that in the event of a breach by [Seller], [Buyer] would be required to pay damage to the re-purchaser of the goods. According to Article 74 of the CISG, damages for breach of contract "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."
(iii) Disposal of the Goods
[Buyer] claimed expenses incurred in disposal of the goods, including truck rental, gasoline price, labor cost, and storage, totaling US $2,566.57 and DM 1,300. However, [Buyer] did not state any reasons as to why these costs were necessary as a result of [Seller]'s breach. Therefore, this request is denied.
(iv) Traveling Costs Incurred in Litigation
[Buyer] seeks to be reimbursed for traveling between Czech and China on three separate occasions, totaling US $700 and DM 2,470. But [Buyer] failed to state the reasons as to why it must make three separate trips to China in order to resolve the current dispute. The Tribunal deems it appropriate to award the cost of one round trip ticket in the amount of US $700.
(v) Loss of Profit
[Buyer] contends that it has suffered a loss of CZK 31.7 million, equaling US $56,666.67, in profit as a result of [Seller]'s breach, and that it is entitled to an award in the said amount in damages. This claim is unfounded based on the following reasons:
First of all, the total price of the contract between [Buyer] and Feroz is CZK 1.7 million, equaling US $56,666.67 based on the exchange rate suggested by [Buyer]. The total price of the contract between [Buyer] and [Seller] is RMB 201,000, approximately US $23,647.06, based on an exchange rate of 8.5 : 1. The difference between the two contract prices is US $33,019.61. This is the highest possible gross profit [Buyer] could have obtained based on the facts available. After accounting for base costs, the net profit would be even lower. According to the administrative overhead statement prepared by [Buyer], the net profit should be roughly US $26,000 [$33,091.61 in gross profit - $7,077 (based on the exchange rates of 1 : 8.5 US/RMB and 1 : 1.8 US/DM)].
Secondly, [Buyer] did not disclose how much of the loss it was able to mitigate by disposing the goods through other channels. [Buyer] claims that it had liquidated the goods at a substantial discount in its effort to mitigate the damages. But with regards to the winter coats, other than the fact that the colors of 59 percent of them failed to comply with the contractually agreed terms, no other breach existed. [Buyer] never explained why the rest of the 41 percent of the winter coats were also rejected by the subsequent buyer. Nor did [Buyer] disclose how much it was able to profit when these coats were sold.
Thirdly, [Buyer] failed to come forth with convincing evidence supporting its claim that the sole reason for rejection of the goods by Feroz was because of [Seller]'s breach. With respect to the down jackets, the sample jacket submitted into evidence by [Buyer] as a model of a conforming unit suggests that [Buyer] had rather high expectations for the goods. But in light of the facts that [Buyer] failed to keep a record of the sample, failed to provide in express terms in the contract a description of the jackets, and that the contracting price is much lower than market price for goods of the same quality, the Tribunal finds that [Buyer]'s expectations in terms of the quality of the down jackets was unreasonably high. In the Tribunal's opinion, there are two possible reasons why the jackets were later rejected by the second buyer. One possibly reason could be that the goods were defective. The other reason would be that the other contract set an even higher or a different standard for the quality of the same goods. For example, perhaps the first contract failed to stipulate "European style", whereas the second contract contained such stipulation; or perhaps the first contract stipulated goods of a lower quality in accordance with its price, while the second contract contemplated goods of an average quality in accordance with the higher unit price as specified. [Buyer] should be held liable for some of the apparent discrepancies.
Finally, because the damage figure was derived from erroneous calculation, accompanied by insufficient explanation, and unsupported by proper evidence, the Tribunal awarded a reduction of the contract price as the appropriate remedy. Under such circumstances, the price reduction is an adequate substitute for a direct award of damages. A damage amount in excess of it is not only unnecessary but unreasonable.
(vi) Attorneys' Fee
Because certain claims by [Buyer] are denied, [Buyer] should bear the cost of its own attorney.
(vii) Cost of Arbitration
Each party should bear 50 percent of the cost of this arbitration proceeding.
The Arbitration Tribunal awards the following:
[Seller] shall render the payment in full in accordance to items 1, 2 and 4 above within thirty days from the issuance of this award. [Seller] shall be liable for interests on any late payment at a 5.8/1,000 monthly percentage rate.
This award is final
* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of the Czech Republic is referred to as [Buyer]; Respondent of the People's Republic of China is referred to as [Seller]. Amounts in the currency of the People's Republic of China (Chinese Yuan Renminbi) are indicated as [RMB]; Amounts in the currency of the United States (Dollars) are indicated as [US $]; Amounts in the currency of the Czech Republic (Koruna) are indicated as [CZK]; Amounts in the currency of Germany (Deutsch Mark) are indicated as [DM].
** Kejie Zhang, Third Year Student at Rutgers School of Law, Camden, New Jersey; BA in Economics, University of California, Berkeley, Berkeley, California.
*** Meihua Xu, LL.M. University of Pittsburgh School of Law on an Alcoa Scholarship. She received her Bachelor of Law degree, with the receipt of Scholarship granted by the Ministry of Education, Japan, from Waseda University, Tokyo, Japan. Her focus is on International Business Law and International Business related case study.Go to Case Table of Contents