China 8 March 1996 CIETAC Arbitration proceeding (Old boxboard corrugated cartons case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/960308c1.html]
DATE OF DECISION:
DATABASE ASSIGNED DOCKET NUMBER: CISG/1996/12
CASE HISTORY: Unavailable
SELLER'S COUNTRY: Netherlands (respondent)
BUYER'S COUNTRY: People's Republic of China (claimant)
GOODS INVOLVED: Old boxboard corrugated cartons
APPLICATION OF CISG: Yes [Article 1(1)(a)]
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
35A ; 35D [Conformity of goods to contract: quality, quantity and description required by contract; Other issues concerning conformity of goods: burden of proof]; 74A ; 74B [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]; 78A ; 78B [Interest on delay in receiving price or any other sum in arrears: interest on damages; Rate of interest]; 88B3 [Resale of goods: reasonable measures for sale]
35A ; 35D [Conformity of goods to contract: quality, quantity and description required by contract; Other issues concerning conformity of goods: burden of proof];
74A ; 74B [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];
78A ; 78B [Interest on delay in receiving price or any other sum in arrears: interest on damages; Rate of interest];
88B3 [Resale of goods: reasonable measures for sale]
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 Mao Yi Zhong Cai Wei Yuan Hui Cai Jue Shu Hui Bian [Compilation of CIETAC Arbitration Awards] (May 2004) 1996 vol., p. 951-957
Translation (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
English: Dong WU, CIETAC's Practice on the CISG, at nn.70, 173, 199, 217, Nordic Journal of Commercial Law (2/2005)Go to Case Table of Contents
|Case text (English translation)|
Old corrugated cartons case (8 March 1996)
Translation [*] by Zheng Xie [**]
Edited by Howard Yinghao Yang [***]
China's International Trade and Economic Arbitration Commission (hereafter, "the Arbitration Commission") accepts the present case according to the arbitration clause in Contract of Sale No. CPBJ861.C003 signed by Claimant China XX Design Corporation ( the "Buyer") and Respondent XX Company, Netherlands, (the "Seller") on 30 March 1994 and the written arbitration application submitted by the Buyer on 11 January 1995.
The Arbitration Tribunal consisted of Presiding Arbitrator P, appointed by the Chairman of the Arbitration Commission according to the Arbitration Rules (effective on 1 June 1994), Arbitrator Mr. A, appointed by The Buyer, and Arbitrator Mr. D, appointed by the Chairman of the Arbitration Commission for the Seller according to Article 26 of the Arbitration Rules.
On 18 September 1995, the Arbitration Commission sent a notice of arbitration to the parties informing them that the Arbitration Tribunal would hold a hearing session on 2 December 1995. On 17 October 1995, the Arbitration Commission sent the parties a notice that the hearing session would be delayed to 27 November 1995. On 22 November 1995, the Seller made a motion for further postponing the hearing session. The Arbitration Tribunal denied the motion on the ground that it is unreasonable and not consistent with the Arbitration Rules. According to Article 33 of the Arbitration Rules, the hearing was conducted, as scheduled, on 27 November 1995.
The Arbitration Tribunal thoroughly examined the Buyer's application and its evidence, and held the hearing session on 27 November 1995. Both the Buyer's and the Seller's representatives and counsel were present, made oral statements and arguments on the issues of fact and law and answered the Arbitration Tribunal's questions. After the session, both parties submitted supplementary written materials.
The Arbitration Tribunal, based on the written materials and the facts ascertained during the oral hearing, has decided the case and rendered the award.
The facts, opinion and arbitral award are presented as follows:
On 30 March 1994, the Buyer and the Seller executed Contract for Sale No. CPBJ861.C003 ("Contract"). The Contract stipulates that the Seller will provide 500 tons European old corrugated cartons -- EURO OCC -- on the following major terms:
Specification: European Old Corrugated Cartons: 85%-90%;
Other contents: 10%-15%;
Prohibited contents: MAX 1%;
All goods shall be made of 100% wood pulp other than straw.
Price term: US $40 per ton FOB Rotterdam
Total price: US $20,000
Payment term: Sight Letter of Credit (L/C)
Time of shipment: Middle of April 1994
In addition, the contract stipulates, according to the law of the Seller's country, the Buyer shall inform the Seller of the address of the end user. At the same time, the Buyer signed a contract to resell the goods at the price of RMB 1,500 to the end user -- XX Jie Shou Paper Products Corporation under the Ministry of Water Resources -- and subsequently informed the Seller the name and address thereof. Thereafter, the Seller shipped the goods and, on 10 June 1994, the goods arrived at Shanghai port. On 13 June 1994, the Buyer received the notice of arrival and applied to China Anhui Import and Export Commodity Inspection Bureau for inspection of the goods. The inspection report revealed that only 51.4% of the goods are European Old Corrugated Cartons (OCC), that the "other contents" are 48%, and that the quality of the goods does not comply with the requirements of the contract and the L/C. On 5 July 1994, the Buyer sent a letter to claim compensation from the Seller and asserted that the goods have the following defects:
On 11 July 1994, the Seller responded to the Buyer asserting that the goods may contain less than 80% OCC, but in any event not less than 70%. On 21 July 1994, the Seller faxed a letter to the Buyer expressing objections to the Buyer's claim, stating that:
On 28 July 1994, the Buyer faxed a letter to the Seller, pointing out that because the goods contain only 50% of OCC and they could not be used to produce any type of paper, the Buyer's client refused to accept the goods, and few clients would buy such goods. On 26 August 1994, the Buyer and its original client executed a new contract to sell the goods at RMB 600 per ton. The Buyer asserts that it has informed the Seller of the end user's name and address, therefore the Seller knew that the goods were purchased for resale and the Seller could foresee that non-conforming goods might result in the end user's refusal to take delivery and the loss in connection with resale at reduced price. The Seller should be fully liable for these consequences. The Buyer has contacted the Seller a number of times to claim damages, but all were refused. As a result of the foregoing, the Buyer files application for arbitration.
THE POSITION OF THE PARTIES
The Buyer claims:
The Seller requests the Arbitration Tribunal to dismiss all of the Buyer's claim and order it to pay all of the Seller's legal fee and related expenditure.
THE MAJOR ISSUES
The major issues of this case are:
1. The inspection report and the quality standard
- The Seller's position
The Seller asserts that, according to the Contract, the inspection report, issued by China Import and Export Commodity Inspection Bureau, shall be the ground for the Buyer's claim for non-conforming quality and quantity of the goods. However, the inspection report provided by the Buyer has no conclusions on the issues at dispute, such as, weight shortage, proportion of prohibited contents and the materials for OCC. Thus, the Arbitration Tribunal should not support the Buyer's claim for weight shortage, proportion of prohibited contents and the materials for OCC.
The Seller states that, according to the Detailed Rules for Implementation of Law of the People's Republic of China on Import and Export Commodity Inspection, OCC is not a commodity for which mandatory inspection is required. And no Chinese law imposes any mandatory inspection standard for OCC, so the inspection bureau should use the quality and quantity requirements mutually agreed on by the parties as the standard for inspection. Under European industry standard, "OCC" includes not only cartons, but also the marginal materials which are not made into cartons. However, the inspection report did not indicate which standard it used to calculate the contents of OCC. According to the principle "he who asserts, shall prove", the Buyer should bear the burden of proof for the fact that the inspection report adopted the European standard as agreed by the parties. If the Buyer cannot prove this point, the inspection report shall not be used as the ground for the Buyer's claim.
- The Buyer's position
The Buyer pointed out that its claim is not based on weight shortage or raw materials. Rather, the claim is made only because the contents level of OCC in the goods fell below the standard.
The Buyer agreed with the Seller in that the inspection bureau should determine the contents level of OCC in accordance with the standard agreed by the parties, and it further pointed out that such standard shall be the specifications as provided in the Contract. The Seller's statement is illogical that "under European industry standard, OCC includes not only cartons but also marginal materials" and "the Inspection Bureau did not make inspection in accordance with the European standard". Inspection Certificate No. 0162522 issued by China Anhui Import and Export Commodity Bureau reads:
- "THIS LOT OF GOODS IS NOT IN CONFORMITY WITH THE REQUIREMENTS OF CONTRACT NO. CPBJ 861.C003 AND L/C NO. LCC09400178".
This report did not say that the Inspection Bureau did not adopt European industry standard; rather, it proved that the quality of the goods was not in conformity with the requirements of the Contract and the L/C. If the standard in the Contract and the L/C is European standard, this inspection report shall be understood as stating that the quality of the goods did not comply with European standard, and this report is the prima facie evidence that European standard has been incorporated in the inspection.
2. The amount of damages
- The Seller's position
The following rules of damages shall be applied if the Arbitration Tribunal decides that the Seller shall be liable for the damages:
Based upon the above rules, the Seller asserts that:
- The Buyer's rebuttal
The Buyer alleges that these assertions of the Seller are groundless for the following reasons:
1. The scope of damages
The Seller states, and the Buyer agrees, that the purpose of damages is to put the aggrieved party in the position as if the contract not been breached. Had the Seller delivered conforming goods, the Buyer could have resold the goods to the end user at the price of RMB 1,500 per ton. However, because the goods delivered by the Seller were non-conforming, the Buyer had to resell them at RMB 600 per ton. The price difference of RMB 900 per ton is completely caused by the non-conforming goods delivered by the Seller, so the Seller should be liable for this loss.
2. The foreseeability of the damages
The Seller states that the profits from resale at RMB 1,500 per ton are excessive profits, which could not have been foreseen. The Buyer does not agree. Given that the goods -- waste paper -- are in large size but low value and their shipping cost is twice the value of the goods themselves, and that the loading fee, customs declaration fee and sanitary inspection fee are all very expensive, the actual cost amounted to RMB 1,280 per ton. Because the resale price is RMB 1,500, the profit margin, before tax, was only about 20%. The Seller's assertion, that the buyer had excessive profits of US $50 per ton, was based on the comparison between US $120-US $130 per ton for market price and RMB 1,500 per ton for resale price. This calculation formula failed to consider items such as the port handling fee. To calculate profits without including all the costs is obviously wrong. Moreover, even the profit of US $50 per ton, at a profit margin of about 40%, is not an excessive profit in the waste paper industry. Thus, when the Contract was concluded, it was fully foreseeable to the Seller that the Buyer would resell the goods at a price of RMB 1,500 with a profit margin of 20%.
The Buyer asserts that the causation between its loss and the defects of the goods is direct and obvious.
4. Reasonable measures to mitigate damages
The Seller criticized the Buyer for not reselling the goods at higher price when the price in international market was rising. Although this criticism sounds reasonable, it is not practicable. The Buyer had informed the Seller of the end user's name and address and the goods were immediately forwarded to the address of this end user -- Jieshou, Anhui -- in order to avoid contaminating the environment after the goods arrived at Shanghai port. If the Buyer wanted to resell the goods to another end user, it would have to get the goods out from that inconvenient place which is located in the mountains. Moreover, 500 tons of paper is in huge size, the transportation of which needs twenty trucks. The Buyer agrees that the aggrieved party should take reasonable measures to mitigate damages. However, according to the United Nations Convention on Contracts for the International Sale of Goods ("CISG") and China's related laws, the measures taken by the aggrieved party shall be reasonable under the circumstances and shall not cause the aggrieved party unreasonable inconvenience. It is impracticable in this case to urge the Buyer to resell the goods at the market price. Even if the Buyer got the goods out and resold at "market price", given the increased costs, the Buyer might end up with even more losses.
The Seller stated that the resale at reduced price deprived the Seller of its right to deliver substitute goods. It shall be noted, in the first place, that the Seller never offered to deliver substitute goods after the dispute arose. And even if the Seller delivered substitute goods, the Seller would still have to pay all the costs for transportation, loading, inspection, etc. In addition, the Seller would have to bear the cost to get the delivered goods out from the mountains. The total expenditure would have exceeded the present damages suffered.
In conclusion, resale of the goods at the reduced price, under such circumstances, was a reasonable measure. If, as the Seller suggested, the Buyer resold the goods at the market price elsewhere or let the Seller deliver substitute goods, the damages would have been greater; these alternatives would be impracticable. Thus, the Seller's assertion that the Buyer did not take reasonable measure to avoid enlarging the damages is groundless.
1. The applicable law
The parties did not stipulate the applicable law in the Contract. The P.R. China, where the Buyer's place of business is located, and Netherlands, where the Seller's place of business is located, are signatories to the United Nations Convention on Contracts for the International Sale of Goods (1980), so the CISG shall be the applicable law in this case.
2. The quality of the goods and the damages
1. OCC, as old corrugated cartons is called in the paper industry, has no uniform international standard of quality. However, the parties, in this case, agreed in the Contract on the following quality standard:
Article 15 of the Contract provides "if the Buyer finds that the quality, specifications and quantity are not conforming to the Contract within 90 days after the goods arrive … it has the right to claim damages based on the inspection certificate issued by China Import and Export Commodity Inspection Bureau."
The Arbitration Tribunal notes that Inspection Certificate No. 0162552 issued by China Anhui Import and Export Commodity Inspection Bureau indicates that the OCC level of the goods are 51.4% and other contents are 48%, which are not conforming to the requirements of Contract No. CPBJ861.C003 and L/C No. L/C09400178. The Arbitration Tribunal concludes that China Anhui Import and Export Commodity Inspection Bureau inspected the goods in accordance with the requirements of the Contract, and the inspection results demonstrates that the content level of OCC in the goods is not in conformity with the specifications of the Contract, so the Buyer can use this Inspection Certificate issued by China Anhui Import and Export Commodity Inspection Bureau as proof for the quality of goods.
2. According to Article 45 of the CISG, if one party breaches the contract, the other party may claim damages including loss of profit, and such damages 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, in light of the facts and matters of which he then knew or ought to have foreseen as a possible consequence of the breach of contract. The Arbitration Tribunal notes that the Buyer informed the Seller of the name and address of the end user, so the Seller knew or ought to have known that the purpose for which the Buyer bought the goods was to resell them to its client for a profit. The Arbitration Tribunal further notes that when the Seller received the Buyer's claim for damages, the Seller faxed a letter urging the Buyer to find another end user to mitigate the damages. On the issue whether it was reasonable for the Buyer to have resold the goods at the reduced price, the Arbitration Tribunal holds that since the Seller did not prove otherwise, the following arguments of the Buyer shall be regarded as sufficient to support its position: 500 tons of waste paper is in a huge size, the transportation of which needs twenty trucks; the mountain area makes the transportation even more inconvenient; and the costs would be extremely high had the goods been transported to another place, such as Shanghai, or returned to the Netherlands. Because the Seller did not provide evidence to show the China's market price of the defective goods at the time of delivery, the Arbitration Tribunal decides that the measures taken by the Buyer to resell the goods at the reduced price were reasonable. The Buyer shall have the right to claim for damages. The amount of damages shall be the difference between the Contract price of RMB 1,500 and the actual resale price of RMB 600. The total damages will be: 500 tons x (RMB 1,500 per ton - RMB 600 per ton) = RMB 450,000. If the Seller makes this payment in US dollars, the conversion shall be made on the basis of the exchange rate published by Bank of China on the date when payment is made.
3. As to the Buyer's claim of RMB 45,001 for expenditures including the inspection fee (RMB 838), the sanitary inspection fee (RMB 16,143) and the loading fee (RMB 28,000), the Arbitration Tribunal decides that, according to international custom, such expenditures are regularly borne by the Buyer in the transaction, and were not caused by the Seller's breach, so the Seller shall not be liable for them.
4. As to the Buyer's claim of US $1,351 for interest on the damages and expenditures, the Arbitration Tribunal holds that since the Seller did not timely pay the RMB 450,000 damages, the Seller shall pay the interest thereupon. However, the interest shall be accrued from 11 July 1994, the date when the Seller made a reply to the Buyer's letter of claims, till 8 March 1996. The Arbitration Tribunal rules that the annual interest rate shall be 6.5%.
5. The Arbitration Tribunal does not sustain the Buyer's claim of US $3,000 for attorneys' fee and travel expenses because the Buyer has not submitted any supporting evidence.
6. The Arbitration Tribunal does not sustain the Seller's claim for counsel's cost and other legal expenditures because the Seller has not submitted any supporting evidence.
7. The Arbitration Tribunal holds that the Seller shall pay the entire arbitration cost, because it is fully liable for the breach.
The Seller shall pay the above amounts to the Buyer within 45 days after the date of this award. If the time limit is exceeded, the interest thereupon shall be accrued based on 10% annual 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 People's Republic of China is referred to as The Buyer; Respondent of Netherlands is referred to as The 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.
*** Howard Yinghao Yang, J.D. University of Michigan in Ann Arbor, is an associate of Debevoise & Plimpton LLP, New York.Go to Case Table of Contents