China 23 April 1995 CIETAC Arbitration proceeding (Australian raw wool case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/950423c1.html]
DATE OF DECISION:
DATABASE ASSIGNED DOCKET NUMBER: CISG/1995/07
CASE HISTORY: Unavailable
SELLER'S COUNTRY: Australia (respondent and claimant in cross action)
BUYER'S COUNTRY: People's Republic of China (claimant and respondent in cross action)
GOODS INVOLVED: Australian raw woll
APPLICATION OF CISG: Yes
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
9B [Implied agreement on international usages, standards]; 25B [Definition of fundamental breach: substantial deprivation of expectation, etc.]; 49A [Buyer's right to avoid contract: grounds for avoidance]; 54A1 [Obligation to pay price includes enabling steps (common example): arranging for letter of credit]; 64A [Seller's right to avoid contract: grounds for avoidance]; 74A [General rules for measuring damages: loss suffered as consequence of breach]; 76B [Damages recoverable based on current price]
9B [Implied agreement on international usages, standards];
25B [Definition of fundamental breach: substantial deprivation of expectation, etc.];
49A [Buyer's right to avoid contract: grounds for avoidance];
54A1 [Obligation to pay price includes enabling steps (common example): arranging for letter of credit];
64A [Seller's right to avoid contract: grounds for avoidance];
74A [General rules for measuring damages: loss suffered as consequence of breach];
76B [Damages recoverable based on current price]
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., p. 1446-1450
Translation (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
English: Dong WU, CIETAC's Practice on the CISG, at nn.46, 96, 114, 151, Nordic Journal of Commercial Law (2/2005)Go to Case Table of Contents
|Case text (English translation)|
Australian raw wool case (23 April 1995)
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 according to the arbitration clauses, which was cited from General Trading Terms of Buying Wool and Wool Top of ChinaTex Raw Materials Trading International Corporation, in three contracts No. 93YWZC87/33154AU, 93YWZC87/33155AU, 93YWZC87/33156AU, executed by Claimant (Respondent in the cross action) Jiangsu XX Trade Joint-Stock Company (hereafter, [Buyer]) and Respondent (Claimant in the cross action) XX Company, Australia (hereafter, [Seller]) on 31 August 1993 and the written arbitration application submitted by [Buyer] on 3 May 1994.
After receiving the arbitration notice sent by the Arbitration Commission, [Seller] filed counterclaims on ten contracts with [Buyer] and prepaid the arbitration fee for the counterclaims. The arbitration Tribunal accepted counterclaims on three of the contracts, Contracts No. 93YWZC87/33154AU, 93YWZC87/33155AU, 93YWZC87/33156AU, and denied [Seller]ís other counterclaims ruling that they were beyond the Arbitration Tribunalís hearing scope of this case.
The Arbitrator A appointed by [Buyer], the Arbitrator D appointed by [Seller] and the Presiding Arbitrator P appointed by the Chairman of the Arbitration Commission form the Arbitration Tribunal to hear the case.
The Arbitration Tribunal thoroughly examined the written documents submitted by the parties and held a court session in Beijing on 24 October 1994. [Buyer]'s and [Seller]'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.
On 31 August 1993, [Buyer] and [Seller] signed three contracts.
|-||Contract No. 93YWZC87/33154AU stipulates that [Buyer] will import Australian raw wool T55FNF from [Seller]. Net weight: 50,000kg; Price: US $3.35 per kg; Total contract price: US $167,500.|
|-||Contract No. 93YWZC87/33155AU stipulates that [Buyer] will import Australian raw wool T55FNF from [Seller]. Net weight: 50,000kg; Price: US $3.30 per kg; Total contract price: US $165,000.|
|-||Contract No. 93YWZC87/33156AU stipulates that [Buyer] will import Australian raw wool T56FNF from [Seller]. Net weight: 50,000kg; Price: US $2.98 per kg; Total contract price: US $149,000.|
All three contracts provide:
|-||Time of Shipment: Before 15 November 1993;|
|-||Price Term: CNF Shanghai;|
|-||Term of Payment: Letter of Credit with the expiration date after 30 days after loading the goods.|
All three contracts stipulate that:
General Trading Terms of Buying Wool and Wool Top of ChinaTex Raw Materials Trading International Corporation (hereafter, Terms of ChinaTex) apply. This provides that, before loading, Buyer shall open an irrevocable L/C through Bank of China or its branch with Seller as beneficiary.
After signing the contracts, on 3 November 1993, [Buyer] issued three L/Cs. [Seller] asserted that [Buyer] opened the contract too late, so it resold the goods. The parties then negotiated many times about the price of the goods and the time of delivery, but did not reach any agreement. On 3 May 1994, [Buyer] submitted application for arbitration to the Arbitration Commission.
[Buyer] asserts that:
On 22 October 1993, [Seller] faxed to [Buyer] and required it to execute three L/Cs before the end of the month. On 25 October, [Buyer] replied by fax and stated that the three L/Cs would be opened before 10 November; [Seller] did not reply to this fax. On 3 November, the three L/Cs were opened.
|-||However, at the same day, [Seller] faxed to [Buyer] and stated that the goods were under another arrangement, and if [Buyer] wanted them delivered, the price of raw wool T55FNF was increased to US $4.05 per Kg, the price of T56FNF was increased to US $3.70 per Kg, and the earliest delivery date was 15 December 1993.|
|-||[Seller] then altered the price of T55FN to US $4 per Kg and FT56FNF to US $3.65 per Kg.|
In response, [Buyer] expressed that [Seller] should perform strictly complying with the contract, and meanwhile agreed that [Seller] could deliver the goods in December. However, [Seller] refused to perform. [Buyer] asserts that when it opened the L/Cs within the time stipulated in the contract, [Seller] resold the goods under the three contracts to others before the time of delivery, which is an intentional fundamental breach of contract that caused [Buyer] to suffer heavy loss. [Buyer] asks the Arbitration Tribunal to hand down an award providing that award:
Although the Terms of ChinaTex that apply to the three contracts do not provide a specific stipulation about the date to open a L/C, according to Article 9 of United Nations Convention on Contracts for the International Sale of Goods (hereafter, CISG), the usage of trade that the parties should know is used for interpretation. According to the rules of Terms of ChinaTex, Buyer shall open the L/C fourteen days or four weeks before sailing. The Vice President of ChinaTex Raw Materials Trading International Corporation substantiates this. Thus, [Seller] alleges [Buyer] should have opened the L/Cs before 18 October 1993 (four weeks before) or at least before 31 October 1993 (fifteen days before). [Buyer] admits that the three L/Cs were not opened until 3 November 1993 and received by [Seller] on 8 November, so [Buyer] breached the contract.
The purpose of a seller signing a contract is to receive the price of the contract from the buyer, and the L/C is the guarantee for the payment. [Buyer] did not timely open the L/Cs in accordance with the stipulation of the contract and international custom, which constitutes a fundamental breach of contract according to Article 25 of CISG. [Seller] has right to declare the contract avoided according to Article 64(1)(a) of CISG.
[Seller] files a counterclaim based on the three contracts and asks the Arbitration Tribunal to make the following award:
|-||US $16,750 for Contract No. 93YWZC87/33154AU;|
|-||US $16,500 for Contract No. No. 93YWZC87/33155AU; and|
|-||US $14,950 for Contract No. 93YWZC87/33156AU.|
[Buyer]' counter defense is:
International custom is binding only if the parties agree to use it. However, the only international custom used in the three contracts is CNF, and there is no stipulation that the L/Cs must be opened within two weeks before loading.
[Buyer] asserts that international custom must be expressed in the documents issued by international or national business community, industry union or academic group, such as Incoterms, or expressed in the interpretation in the rulings and awards of each country's courts, international trade arbitration commission and maritime arbitration commission. Any expression in other documents, provisions or practice cannot be regarded as international custom.
Furthermore, as far as the course of dealing between [Buyer] and [Seller] is concerned, [Buyer] issued L/Cs within two weeks before loading many times before. For example, in Contracts No. 93YWZC87/33108AU and 93YWZC87/33147AU between [Buyer] and [Seller] signed in 1993, the periods between the date of issuing L/C and the time of loading were four days and eight days, respectively.
[Buyer] asserts that there are many ships sailing from east cities of Australia to East Asia each month. Even if [Seller] received the L/Cs in 8 November 1993 as it states, there were at least two ships sailing directly to Shanghai between 8 November and 15 November, and it only needs half a day or one day to book space. [Seller] could therefore ship the goods. When [Buyer] opened the L/Cs on 3 November 1993, this breached neither the contract nor international custom.
[Buyer] states that the true reason for [Seller]'s non-delivery is that the price of wool increased at the time of delivery, and the high profits attracted [Seller] who chooses to breach the comparatively low price contracts.
[Seller]'s counter response
To [Buyer]'s statements, [Seller] replies:
All three contracts provide that the expiration date of the L/C is after thirty days after loading the goods, and the time of loading is before 15 November 1993, so the expiration date must be no earlier than 15 December 1993. However, the expiration dates of the three L/C were all on 30 November 1993, so [Buyer] obviously breached the contract. In addition, the dates when [Buyer] opened the L/C were not in conformity with international custom, so [Seller] has the right to cancel the contract.
The periods between the time of loading and the time of opening the L/C for the two 1993 Contracts No. 93YWZC87/33108AU and No. 93YWZC87/33147 are four days and eight days, respectively. However, [Seller] asserts those two contract do not represent normal practice.
Moreover, [Seller] states that the two ships that [Buyer] refers to as sailing from Moerben Australia to Shanghai are one and the same ship, i.e., Qiu He. Furthermore, according to the parties' agreement, the goods should not be shipped from East Australia, but from West Australia. From 8 to 15 November 1993, there was only one ship, Bunka Delima, sailing from Fremantle, the port for loading wool at West Australia on 11 November. According to shipping company's rules, wool must be ordered before ten business days when the ship arrives at the port. Thus, when [Seller] received the L/C on 8 November 1993, it was impossible to finish preparing and loading the goods before the time of shipping.
THE TRIBUNAL'S OPINION
1. Applicable law
According to Article 1 of United Nations Convention on Contracts for the International Sale of Goods (CISG), the Convention applies to contracts of sale of goods between parties whose places of business are in different States. In the present case, [Buyer]'s place of business is in the People's Republic of China, and [Seller]'s place of business is in Australia. These two countries are parties of CISG. Thus when the contract does not stipulate the applicable law, CISG shall be applied.
2. International industry custom on the time of opening a L/C in the wool trade
The Arbitration Tribunal holds that an industry custom is a practice that persons in such industry know and follow, or they ought to know and follow, as Article 9(2) of CISG. provides:
"The parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned."
In the present case, if there is an international usage of trade which provides that [Buyer] shall open a L/C at least fifteen days before the time of shipping, the parties shall be bound by such usage unless otherwise agreed.
In addition, the Arbitration Tribunal states that if a trade usage is known and observed widely in the related same kind of contracts of international trade, such usage shall be binding to the parties. However, CISG does not stipulate any specific terms of usage of trade. Thus, in the present case, [Seller] must prove that it is an international trade usage that Buyer must execute the L/C at least fifteen days before the time of shipping, and that this is known and observed.
The Tribunal decides that the [Seller]'s evidence that this is ChinaTex Raw Materials Trading Corporation's practice when doing international trade of wool, cannot prove that it is a widely known and observed practice in the international wool industry.
3. The reasonable time for [Seller] to execute the L/C
The Arbitration Tribunal holds that when the parties agreed to use a L/C as the term of payment, [Buyer] has a duty to open the L/C in a reasonable time before the time of shipping. However, in the present case:
|-||It is not an important issue whether the [Buyer] executed the L/C twelve days before the time of shipping, provided that [Seller] had enough time to prepare the goods and book a space.
|-||Even if [Buyer] executed the L/C some days later than the time the L/C should have been opened, i.e., twelve days in advance - or three days later than the time (fifteen days in advance) stipulated as the trade usage that [Seller] asserts - this is not a fundamental breach.|
[Seller] has no right to avoid the contract and refuse to deliver the goods.
4. Avoidance and under the CISG
According to CISG, a party has right to avoid the contract only when the other party has fundamentally breached the contract. The Arbitration Tribunal decides that fundamental breach stipulated in CISG is an action which materially breaches the contract. In the present case, even if [Buyer] executed the L/C some days later, this does not constitute a fundamental breach, so [Seller] does not have the right to avoid the contract and refuse to deliver the goods. As far as the issue that the duration of the L/C issued by [Buyer] does not comply with the contract, [Seller] can request [Buyer] to alter it according to the contact and international custom about L/C. [Seller] has no right to avoid the contract unless [Buyer] insisted on not altering the L/C when [Seller] requested that, which would have led to [Seller] not receiving the payment within the duration of validity of the L/C and would have constituted a fundamental breach, with [Seller] having the right to claim for damages. However, in the present case, [Seller] did not make any request to alter the L/C, so it is wrong for [Seller] to avoid the contract unilaterally, the result of which [Seller] shall be liable for.
5. [Buyer]'s right to damages
As analyzed above, in the present case [Seller] mistakenly thought [Buyer] fundamentally breached the contract, so wrongfully avoided it. Such action deprives [Buyer]'s expectation according to the contract, which is a fundamental breach to [Buyer]. Thus, [Buyer] has right to claim for damages because of [Seller]'s non-delivery.
[Buyer] requests [Seller] to indemnify the price difference between the market price of the same type of raw wool in the beginning of November 1993 and the contract price. [Buyer] asserts that the price in the new contract which it by fax suggested to execute in 3 November 1993 should be used as the basis to decide the market price of the same type of raw wool in the beginning of November. The Arbitration Tribunal holds that the above date to decide market price is basically in conformity with the time (before 15 November 1993) of delivery stipulated in the contract, so it admits the claim for the price difference.
The price difference is calculated on the basis of T55FNF US $4 and T56FNF US $3.65 in the fax sent by [Seller] on 4 November 1993. Thus, [Seller] shall indemnify [Buyer] (US $4 per Kg - US $3.35 per Kg) × 50,000 Kg + (US $4 per Kg - US $3.30 per Kg) × 50,000 Kg + (US $3.65 per Kg - US $2.98 per Kg) × 50,000 Kg = US $101,000.
6. [Seller]'s counterclaims
As stated above, the Arbitration Commission accepts the application for counterclaim related to the three contracts No. 93YWZC87/33154AU, 93YWZC87/33155AU, 93YWZC87/33156AU, and dismisses [Seller]'s other counterclaims. Because [Seller] has prepaid the arbitration fee US $3,666.91, and the arbitration fee for counterclaim of this case is US $2,203.94. US $1,462.97, the amount in excess, shall be returned to [Seller]. As far as [Seller]'s counterclaim on the three contracts is concerned, the Arbitration Tribunal holds that because [Seller] fundamentally breached the contracts, and [Buyer] did not open the L/C late, the Arbitration Tribunal does not support this claim.
7. Arbitration fees
[Seller] shall pay all of the arbitration fee and the fee for the counterclaim.
The Arbitration Tribunal hands down the following award:
This is the final award.
* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant and Respondent in the cross action of the People's Republic of China is referred to as [Buyer]; Respondent and Claimant in the cross action of Australia is referred to as [Seller]. Amounts in the currency of the United States (dollars) are indicated as [US $]; amounts in the currency of the People's Republic of China (renminbi) are indicated as [RMB].
** Zheng Xie, LL.M. Washington University in St. Louis, LL.M., BA in Economics, University of International Business and Economics, Beijing.
*** Meihua Xu, LL.M. University of Pittsburgh School of Law on an Alcoa Scholarship. She received her Bachelor of Law degree, with the receipt of Scholarship granted by the Ministry of Education, Japan, from Waseda University, Tokyo, Japan. Her focus is on International Business Law and International Business related case study.Go to Case Table of Contents