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CISG CASE PRESENTATION

China 5 August 1995 CIETAC Arbitration proceeding (Hot-rolled steel billets case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/950805c1.html]

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

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Case identification

DATE OF DECISION: 19950805 (5 August 1995)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1995/11

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: United States (respondent)

BUYERS' COUNTRY: People's Republic of China and United States (claimants)

GOODS INVOLVED: Hot-rolled steel billets


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Article 74

Classification of issues using UNCITRAL classification code numbers:

74A ; 74B [General rules for measuring damages: loss suffered as consequence of breach; Outer limits of damages: foreseeability of loss]

Descriptors: Damages ; Foreseeability of damages

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Editorial remarks

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Zhong Guo Guo Ji Jing Ji Mao Yi Zhong Cai Wei Yuan Hui Cai Jue Shu Hui Bian [Compilation of CIETAC Arbitration Awards] (May 2004) 1995 vol., pp. 2021-2026

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

China International Economic & Trade Arbitration Commission
CIETAC (PRC) Arbitration Award

Hot rolled steel billets case (5 August 1995)

Translation [*] by WEI Shu [**]

Translation edited by Meihua Xu [***]

The China International Economic and Trade Arbitration Commission (formerly known as the Foreign Trade Arbitration Committee of China International Trade Promotion Commission, renamed as the Foreign Economic Trade Arbitration Committee of China International Trade Promotion Commission, and renamed as the present name; hereafter "the Arbitration Commission") has accepted an arbitration contract dispute based on:

   -    The arbitration clause (Article 16) of both Contract No. 2EIOR22023HK (hereafter: "Contract No. 023") concluded on 1 December 1992 by "Claimant A", Hunan Province ___ Import & Export Company (hereafter: [Buyer A]) with the Respondent USA B Company (hereafter: [Seller]), and in Contract No. C&M-93001 (hereafter: "Contract No. 001") which were entered into on 15 February 1993 by "Claimant B" USA A Company (hereafter: [Buyer B]) with the [Seller]; and
 
   -    The written Arbitration Application jointly filed by [Buyer A] and [Buyer B] on 7 October 1993 with the Arbitration Commission.

[Buyer A] and [Buyer B] jointly applied for arbitration of the disputes under Contracts No. 023 and No. 001 and jointly authorized lawyers Wang *** and Liu *** of Beijing *** Law Firm, as their arbitration representatives. The Secretariat of CIETAC sent the Notice of Arbitration and the arbitration application to the [Seller]. The [Seller] did not put forward objections to the joint hearing.

When the [Seller] received the Notice of Arbitration sent by the Secretariat of Arbitration Commission, he submitted a written objection to the jurisdiction of CIETAC based on the facts that under the seller's signature column in Contracts No. 023 and No. 001 it was noted that:

"Subject to Buyer's Letter of Credit Beijing amended as requested. Terms in Letter of Credit prevail over Present Contract Terms. "

The [Seller] alleged that the foresaid contents proved that both Contracts No. 023 and No. 001 had a precondition that [Buyer A] and [Buyer B] amend the Letter of Credit as requested. As they did not amend the Letter of Credit as requested, Contracts No. 023 and No. 001 did not come into effect. Therefore, the Arbitration Commission had no jurisdiction on this case because of non-existence of the contracts.

After receiving the objection to jurisdiction, the Arbitration Commission rendered on 14 April 1994 a Decision on Jurisdiction of (94) Maozhongzi No. *** which was delivered to [Buyer A], [Buyer B] and [Seller] on the same day. It held in the Decision on Jurisdiction that, according to international arbitration principles, the Arbitration Clause contained in a contract shall be treated as a clause independent and separated from all other clauses of the contract. The validity of the Arbitration Clause shall therefore not be affected by the validity or non-existence of the contract. Whenever the parties signed on their contracts, they should be subject to the Arbitration Clause contained in them. Therefore, the Arbitration Clauses in this case were effective, and the Arbitration Commission has jurisdiction.

After receiving the Decision on Jurisdiction of the Arbitration Commission, [Buyer A] and [Buyer B] appointed Mr. A as the arbitrator, and the [Seller] designated Mr. F. The Chairman of the CIETAC designated Mr. P as the presiding arbitrator according to the Arbitration Rules. Mr. P, Mr. A and Mr. F jointly formed an Arbitration Tribunal to hear the case. Then, because Mr. F died on 18 June 1995, on 11 July 1995 the [Seller] appointed Mr. A to replace Mr. F.

The Arbitration Tribunal reviewed the written Arbitration Application, the Statement of Defense and other evidence materials submitted respectively by [Buyer A], [Buyer B] and [Seller], and held an oral hearing on 9 September 1994 in Beijing. The representatives of the parties all appeared before the Tribunal and responded to the questions of the Tribunal. After the court hearing, all of the parties submitted further supplementary materials.

After the [Seller] re-appointed the arbitrator, the Arbitration Tribunal delivered written notice on 12 July 1995 to [Buyer A] and [Buyer B] via the Secretariat of the Arbitration Commission, which read that:

"In light of the special situation in this case, the Arbitration Tribunal holds that the previous proceedings of the case shall not be repeated."

The Arbitration Tribunal held its deliberation and rendered an award based on the review of all the evidence and materials presented by the parties and the facts found in the court hearing.

The facts, and the Tribunal's opinions and award are as follows.

[A.] DETAILS OF THE CASE

[Buyer A] entered into Contract No. 023 with the [Seller] on 1 December 1992 to buy 10,000 tons of 200mm 200mm 6M hot rolled steel billets:

   -    Unit price: FOB ST. HANKO FINLAND, US $182 per ton;
 
   -    Total price: US $1,820,000;
 
   -    Delivery date: March 1993;
 
   -    Payment terms: Irrevocable Letter of Credit issued by [Buyer A] via Bank of China in Changsha, during the period after receiving the notice of shipment date and loading quantity, and 20 days before the shipment date, with the [Seller] as the beneficiary.

Contract No. 023 was signed by the representatives authorized by [Buyer A] and the [Seller] respectively. Below the signature column of the [Seller], it was noted:

"Subject to Buyer's Letter of Credit being amended as requested. Letter of Credit conditions prevail over present Contract conditions."

After conclusion of the Contract, [Buyer A] issued:

   -    Letter of Credit No. 9710018/93 with the [Seller] as the beneficiary on 16 February 1993;
   -    Total amount: US $1,820,000;
   -    Payment terms: FOB KOTKA;
   -    Shipment period: No later than 31 March 1993.

In this Letter of Credit, there were some amendment to negotiating instruments and other items which were originally stipulated by Contract No. 023. [Buyer A] arranged to rent a vessel and notified the [Seller] of the vessel's name.

Besides the aforesaid Contract No. 023, on 15 February 1993 the [Seller] entered into Contract No. 001 with USA A Company (i.e., Claimant [Buyer B]). Contact No. 001 provided that the [Seller] sold 10,000 tons steel billets to [Buyer B]:

   -    Unit price: FOB HANKO US $182 per ton;
 
   -    Total price: US $1,820,000;
 
   -    Shipment period: Before 31 March 1993;
 
   -    Payment terms: [Buyer B] shall issue an irrevocable and transferable Letter of Credit with the [Seller] as the beneficiary 20 days before the shipment period.

It was noted below the [Seller]'s signature column that:

"Subject to Buyer's Letter of Credit being amended as requested. Letter of Credit conditions prevail over present Contract conditions."

After the conclusion of the Contract, in order to perform Contract No. 001, on 17 March 1993 [Buyer B] transferred to the [Seller] Letter of Credit No. 23H006/93 with itself as the beneficiary, stating that the credit amount is US $1,820,000, the shipment period is no later than 15 April 1993, and the price term is FOB KOTKA. On 17 March 1993, the [Seller] asked to change the shipment port as HANKO, and the shipment period, etc. [Buyer B] agreed.

On 25 March 1993, the [Seller] sent a letter to [Buyer A] and [Buyer B], asking to have the two Letters of Credit amended again Through consultations, at last, the [Seller] sent a letter to both the [Buyer A] and [Buyer B], noting that he had agreed the condition that "shipment period is before 31 April 1993", and confirmed that:

"We agreed on all of the amendments of Letters of Credit No. 9710018/93 and No. 23H0006/93 mentioned in the fax on 25 March 1993 by our party."

The [Seller] further stated that:

"The telegrams on amendments of the Letters of Credit shall arrive at New York Branch of Bank of China no later than 29 March 1993, and get the formal confirmation of that bank in the meanwhile. If New York Branch does not receive the foresaid amendment telegrams before 29 March 1993, we would consider the two contracts as void."

On 29 March 1993, the New York Branch of Bank of China received amendment telegrams from [Buyer A] and [Buyer B], but did not inform the [Seller] until 30 March. On 30 March (New York time), the [Seller] telephoned [Buyer A] and the [Buyer B], stating that he had not received the notice amending the Letters of Credit, therefore he terminated [avoided] the two contracts and returned the Letters of Credit back.

[B. POSITION OF THE PARTIES]

[Buyers' position]

[Buyer A] and [Buyer B] claimed that they had sent the amendment telegrams, on which all parties had agreed on time, to the New York Branch of the Bank of China, so the [Seller] was not entitled to avoid the contracts and his unilateral avoidance of contract was a breach of the contracts. Therefore, the [Seller] must compensate the losses suffered by [Buyer A] and [Buyer B] due to his breach. [Buyer A] and [Buyer B], as joint claimants, then applied for arbitration, claiming that the [Seller] should:

  1. Make up to [Buyer A] for:
    1. Domestic penalty: US $337,846;
    2. Charges for implementing the contracts: US $98,760;
    3. Loss of goodwill: US $200,000;
    4. Loss of business: Renminbi [RMB] 100,000 yuan;
    5. Interest loss of loan: RMB 420,000 yuan;
    6. Arbitration fees: US $ ___ dollars.
  2. Compensate [Buyer B] for:
    1. Charges for issuing L/C: US $10,216.97;
    2. Communication charges: US $1,000;
    3. Penalty: US $125,000 paid to the customers;
    4. Loss of goodwill: US $100,000;
    5. Arbitration fees: US $50,000.

    The [Seller] should pay [Buyer A] and [Buyer B] in total US $1,072,822.97 and RMB 420,000 yuan to compensate the losses.

[Seller's position]

The [Seller] rebutted these claims of [Buyer A] and [Buyer B], arguing that because all the conditions of the contracts were not satisfied, the two contracts did not come into effect, and thus could not bind the contracting parties. [Buyer A] and [Buyer B] just performed ineffective contracts according to their own understanding, so they themselves should bear the risk, and they were not entitled to claim damages. The [Seller] insisted that the Arbitral Tribunal should reject [Buyer A] and [Buyer B]'s arbitration claim.

The [Seller] argued that it was clearly noted in both Contracts No. 023 and No. 001 that the effective conditions of both contracts were to amend the Letters of Credit as requested. The contracting parties had not gotten an agreement about the amendments of the Letters of Credit. To say the least, even though they had agreed as [Buyer A] and [Buyer B] alleged, [Buyer A] and [Buyer B] had not, as the [Seller] requested in the fax of 26 March 1993, informed the New York Branch of Bank of China before 29 March 1993 to revise the Letters of Credit, and not let the [Seller] receive the formal affirmation letter of that bank within his business time on the same day. However, the [Seller] noted exactly in the fax of 26 March 1993 that, the two contracts would be avoided if he did not receive the affirmation of the bank before the stipulated period.

The [Seller] pointed out that, in fact, the [Seller] did not receive the notification of amendments of Letter of Credit from the bank until 11:25 am on 30 March 1993; moreover, the terms of the revised Letters of Credit did not comply with the requests of the [Seller] in the fax of 25 March 1993. In other words, [Buyer A] and [Buyer B] had not amended the Letters of Credit as requested. The [Seller] listed several inconsistent items in the Letters of Credit:

   -    The fax of 26 March provides that the maturity date of No. 9710018/93 Letter of Credit is 21 May 1993; however, Article 6 of the Letter of Credit sets it forth as 21 March 1993;
 
   -    The fax of 26 March requires that the Letter of Credit should note that "if the Bill of Lading has a note "eroded by atmosphere ..." the Bill of Lading is still acceptable." However the Letter of Credit contains no such words.

Therefore, the [Seller] alleged that [Buyer A] and [Buyer B] had not revised the Letters of Credit as requested in terms of time and content.

The [Seller] further alleged that, even if the contracts were effective, the claims of [Buyer A] and t[Buyer B] were not reasonable.

     -  The [Seller] maintained that as to the penalty loss under Contract No. 023, he did not know the domestic customer of [Buyer A] nor did he know their contract relationship; the penalty loss was therefore unforeseeable for the [Seller], so he should not compensate for it. With regard to the claim of loss of reputation, the [Seller] argued that it was due to [Buyer A]'s own actions, not with business with the [Seller]; furthermore, this claim was not based on laws, and had no evidence to support it, so it should be rejected by the Tribunal. As to the loss of high interest loan, it not only breached the [Buyers]' duty of mitigating loss but also could not be foreseen by the [Seller], thus the claim should be refused. Moreover, the [Seller] did not know Tianjin Hua'an Company, so the loss suffered by it could not be foreseen by the [Seller], thus this claim should also be refused. In addition, the [Seller] pointed out that there was not sufficient evidence to establish the aforesaid claims of [Buyer A]'s business loss, performance loss, arbitration fees, etc, so the aforesaid claims under Contract 023 should all be rejected.

     -  As to the claims of compensation of [Buyer B], the [Seller] contended that the claim for the issuance fees for the Letter of Credit has no legal basis, since the Letter of Credit was not issued by [Buyer B] but by the China International Engineering and Material Co. Ltd., and [Buyer B] presented no evidence to establish his losses; with regard to the penalty paid by [Buyer B] to his domestic customer, the [Seller] did not know this contract relationship, and thus could not have foreseen it, furthermore, there was no effective evidence to support it, so this claim should be rejected too; as for the claim of reputation loss, it was caused by [Buyer B]'s own behavior without legal basis, therefore it could not be legally granted; in addition, the claims for the communication payment and arbitration fees should be refused because of no effective evidence.

In addition to the aforesaid arguments, the [Seller] filed a counterclaim, contending that [Buyer A] and [Buyer B] should compensate him respectively for his loss of profit, US $50,000. The reasons were as follows:

     -  If the contracts in this case had been effective, the [Seller] would have bought 20,000 tons of steel billets from H. Rudolph Robinson for US $177 per ton. When the [Seller] resold to [Buyer A] and [Buyer B] 10,000 tons respectively at a price of US 182 dollars per ton, he would have earned profits of US 50,000 dollars respectively, in total US 100,000 dollars. It was due to [Buyer A] and [Buyer B]' s defaults that the deals could not be performed, thus [Buyer A] and [Buyer B] should each make up to the [Seller] for the profit loss of US 50,000 dollars.

[C.] THE OPINION OF THE ARBITRATION TRIBUNAL

I. Applicable law

In this case, the parties have their places of business in China and the United States respectively, which are both Contracting Parties to United Nations Convention on Contracts for the International Sale of Goods (hereafter: "CISG"), thus this case is subject to CISG and refers to international practice.

II. The legal effects of the contracts

[Buyer A] and [Buyer B] entered into Contract 2EIOR22023HK and Contract C&M-93001 with the [Seller], respectively. All parties signed the corresponding contract, therefore the contracts came into effect. However, below each seller's signature column there were attached words that:

"Subject to Buyer's Letter of Credit being amended as requested; Letter of Credit conditions prevail over present contract conditions."

This indicated that the two contracts were subject to a condition precedent, that is, as long as the buyers amended the Letters of Credit as requested, then the seller would perform his duty to deliver the goods.

After conclusion of the contracts, [Buyer A] and [Buyer B] issued Letters of Credit No. 9710018/93 and No. 23H0006/93, respectively. After reception of them, the [Seller] asked many times for the Buyers to amend those Letters of Credit, and [Buyer A] and [Buyer B] made some amendments accordingly as requested. As last, [Buyer A], [Buyer B] and the [Seller] got common consent.

The [Seller] confirmed the following by sending a fax to [Buyer A] and [Buyer B] on 26 March, 1993:

"I accept that the shipment period is 30 April, 1993.

"We have known that all of the revision opinions in the fax on 25 March 1993 have been accepted.

"We request that the foresaid fax of amending the Letters of Credit should arrive at the New York Branch of Bank of China no later than 29 March 1993, and get the official confirmation of that bank.

"If the New York Branch of Bank of China does not receive the aforesaid faxes on 29 March, then we have to regard these two contracts as void."

The aforesaid facts indicated that the [Seller] imposed a more limited duty of delivery than had been agreed by the parties, namely, that "the two amendment faxes arrive at the New York Branch of Bank of China on 29 March 1993." [Buyer A] and [Buyer B] both amended the Letters of Credit according to the agreed terms set forth by themselves and the [Seller]. The two amendment faxes arrived on 29 March 1993 at the New York Branch of Bank of China, the Bank Branch which was designated by the [Seller]. According to the amendment faxes from [Buyer A] and [Buyer B] received by the New York Branch of Bank of China, the amendment fax for Letter of Credit No. 9710018/93 began to be telexed at 08:16 on 29 March 1993, and lasted for 37 seconds. The amendment fax for Letter of Credit No. 23H0006/93 was telexed at 04:12 on 29 March 1993, and lasted for 253 seconds. The New York Branch of Bank of China had affirmed that it received the notification amending the Letters of Credit on 29 March 1993. Therefore, the Arbitral Tribunal held that [Buyer A] and [Buyer B] had amended the Letters of Credit as requested, and that the amendment notifications had arrived at the appointed site in time as per the [Seller]'s request, so the [Seller] should perform his duty of delivering the goods immediately in compliance with Contracts No. 023 and No. 001 concluded by him. Thus, the Arbitral Tribunal held that the [Seller] should compensate for the losses suffered by [Buyer A] and [Buyer B] due to [Seller]'s unilateral termination of the contracts.

III. The amount of damages

[Buyer A] and [Buyer B] had applied a number of claims for damages, totaling US $1,072,822.97 and 420,000 RMB. The Arbitral Tribunal reviewed these claims and gave the following opinions.

     a. The damages claims of [Buyer A]

[Buyer A] Hunan Province ___ Import & Export Company had a contract relationship with its domestic client, and due to the breach of the [Seller], [Buyer A] was unable to deliver goods to its client, thus the [Seller] should pay US $300,000 for the deposit loss of renting a vessel due to [Seller]'s breach.

As to the claim of [Buyer A] that the [Seller] should pay for the penalty of US $337,846, implementation fees of US $98,760, and business loss of US $100,000, these claims were not supported by sufficient evidence and not well reasoned, therefore, the Arbitral Tribunal does not grant them.

As to the claim for the loss of high interest loan of RMB 420,000 yuan, the Arbitral Tribunal does not support it because it could not be foreseen at the time of conclusion of the contract.

Since the loss of the company's goodwill could not be proved, the Arbitral Tribunal refused this claim.

80% of the arbitration fees which were paid by [Buyer A] in advance should be borne by the [Seller], and the other 20% by [Buyer A].

     b. The damages claims of [Buyer B]

[Buyer B] had a contract with his domestic client. It was due to the [Seller]'s breach that [Buyer B] could not deliver goods to its client, therefore, the [Seller] should compensate [Buyer B] for the economic loss, including the penalty of US $125,000, which was the exact amount that [Buyer B] paid to its domestic client, and the Letter of Credit issuance fees of US $10,216.97.

There was not sufficient evidence to support the [Buyer B]'s communication fees for implementing the contract, so this claim could not be approved and the Arbitral Tribunal rejected it.

As to the claim of the loss of US $100,000 of business goodwill of the [Buyer B], the Arbitral Tribunal held this claim could not be approved.

[Buyer B] had paid the arbitration fees in advance, 80% of it should be borne by the [Seller], and the other 20% by [Buyer B].

IV. The cross action by the [Seller]

After review the case, the Arbitral Tribunal held that the reason for the non-performance of the contracts was the [Seller]'s unilateral termination of the contracts, and thus the [Seller] was not entitled to claim damages caused by his own default. Therefore, the Arbitral Tribunal rejected all of [Seller]'s counterclaims.

[D.] THE AWARD

The Arbitral Tribunal holds that:

1.    The [Seller] should pay US $300,000 to [Buyer A] to compensate his deposit loss of renting the vessel caused by the [Seller]'s breach.
 
2. The [Seller] should compensate US $135,216.97 for the penalty paid by [Buyer B] to his domestic client, and the loss of Letter of Credit issuance fees.
 
3. 10% of the arbitration fees should be borne by [Buyer A], 10% by [Buyer B], and 80% by the [Seller].
 
4. The other claims of [Buyer A] and [Buyer B] are rejected.
5. All of the counterclaims of the [Seller] are rejected.
6. The arbitration fees of the cross action and translation fees in the hearing are undertaken by the [Seller].
 
7. As to the aforesaid money in items 1, 2, and 3, the [Seller] should pay to [Buyer A] and [Buyer B] not later than 20 September 1995, with interest at the annual rate of 10% added for delay in payment.

The award is final.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, the Claimants of the People's Republic of China and United States are referred to as [Buyer A] and [Buyer B] and the Respondent of United States 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].

** Wei Shu, LL.M. Peking University School of Law, Beijing, P.R. China, 2004; LL.B. Peking University School of Law, 2000.

*** 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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