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CISG CASE PRESENTATION

China 16 July 1996 CIETAC Arbitration proceeding (Hot-rolled steel plates case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/960716c1.html]

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

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Case identification

DATE OF DECISION: 19960716 (16 July 1996)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1996/31

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Austria (respondent)

BUYER'S COUNTRY: People's Republic of China (claimant)

GOODS INVOLVED: Hot-rolled steel plates


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 35 ; 36 ; 74 [Also cited: Articles 38(1) ; 39 ; 78 ]

Classification of issues using UNCITRAL classification code numbers:

35A [Conformity of goods to contract: quality, quantity and description required by contract];

36A2 [Time for assessing conformity of goods (conformity determined as of time when risk passes to buyer): seller responsible when lack of conformity becomes apparent later];

74A [General rules for measuring damages: loss suffered as consequence of breach]

Descriptors: Conformity of goods ; Passage of risk ; 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) 1996 vol., pp. 1519-1525

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at n.73, Nordic Journal of Commercial Law (2/2005)

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Case text (English translation)

Queen Mary Case Translation Programme

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

Hot-rolled steel plates case (16 July 1996)

Translation [*] by Kejie Zhang [**]

Edited by Howard Yinghao Yang [***]

Procedural Issues
Facts and Position of the Parties
1.  The timeliness of the claim
     -   Buyer position
     -   Seller defense
2.  Quality of the goods and risk of loss
     -   Buyer position
     -   Seller defense
3.  Amount of damages
     -   Buyer position
     -    Seller defense
Opinion of the Arbitral Tribunal
1.  Applicable law
2.  Time limit of the claim
3.  Quality of the goods and transfer of the risk of loss
4.  Damages
     (1)  Shortage in quantity
     (2)  Loss of profit
5.  Cost of arbitration
Award

PROCEDURAL ISSUES

China International Trade and Economic Arbitration Commission (CIETAC) (hereafter, the Arbitration Commission or the Commission grants jurisdiction over the present dispute according to the arbitration agreement found in Contract No. 4NRSH0476006AT for the sale of hot-rolled steel plates. The contract is between Claimant XX Project and Material Company of China [Buyer] and Respondent YY Company of Austria [Seller]. The Arbitration Commission accepted the petition for arbitration filed by [Buyer] on 28 December 1994 and agreed to hear the dispute arising out of this contract.

[Buyer] appointed Mr. F as arbitrator. [Seller] appointed Mr. D. The Arbitration Commission appointed Mr. C as the presiding arbitrator, in accordance with the Arbitration Rules of CIETAC (revised and adopted on 17 March 1994 by the China Council for the Promotion of International Trade). Together, Mr. C, Mr. D and Mr. F formed the three-member tribunal as the presiding body of this arbitration proceeding (hereafter, the Tribunal) on 19 April 1995. According to Article 58 of the Arbitration Rules of CIETAC, the final award should have been made before 19 January 1996.

Due to the death of Mr. F and the subsequent withdrawal of Mr. C from the proceeding, in their replacement [Buyer] appointed Mr. A, and the Commission appointed Mr. P. The arbitration proceeding recommenced with Mr. A, Mr. D and Mr. P presiding.

On 28 December 1995, after carefully reviewing the complaint and answers to the complaint, the Arbitration Tribunal held the proceeding in Beijing. Representatives from both sides appeared before the panel of arbitrators. Each side presented its arguments, rebuttal, and answered questions from the Tribunal. Near the end of the proceeding, after consulting with each party, the Tribunal granted a forty-day extension starting from the date of the proceeding in order to allow the parties to submit supplemental documents. The Tribunal, in turn, requested a six-month extension of the time allowed to render an arbitration award, to before 19 July 1996. The Commission approved the extension according to Article 58 of the Arbitration Rules, and notified the parties of the extension on 9 January 1996.

Based on the facts and evidence presented, the Arbitration Tribunal made the following decision. The factual issues, opinion, and award are as follows:

FACTS AND POSTION OF THE PARTIES

On 11 March 1994, [Buyer] and [Seller] entered into Contract No. 4NRSH0476006AT, for the sale of hot-rolled steel plates. The contract provided for:

   -    Quantity. Sale of 10,216.651 tons of hot-rolled steel plates;
   -    Specification. Goods that meet the GOST 380-88 ST 3 SP/PS industrial standard;
   -    Price. US $251/MT CIF FO Port of Zhangjiagang: total contract price, US $2,564,379.40;
   -    Delivery date. On or before 20 April 1994;
   -    Payment. By Letter of Credit (L/C) opened by [Buyer].

Subsequently, by agreement, the parties decided to change the destination port to the Port of Shanghai. Unloading of the goods was completed on 14 April 1994. On 16 April, [Buyer] faxed a letter to [Seller]'s agent Beco International (hereafter Beco), who represented [Seller] in the transaction, asking Beco to inform [Seller] that there were certain defects in the goods delivered. On 18 May 1995, the State Administration of Commodity Inspection issued an inspection report on the goods. On 25 May, [Buyer] sent a formal letter of claim to Beco. Beco forwarded the letter to [Seller] on 27 May. On 9 June, [Buyer] faxed the amount of claims to [Seller] via Beco. While the State Administration of Commodity Inspection inspected the goods, [Seller] hired the SGS Branch in Shanghai also to inspect the goods, and a separate inspection report was prepared. On 27 July, [Seller] offered to pay damages in the amount of US $50,000. In a letter dated 14 November, [Buyer] informed [Seller] that the offer was unacceptable. Subsequently, the parties failed to resolve the dispute through settlement negotiations. On 28 December 1994, [Buyer] petitioned to the Commission for arbitration.

The central issues in dispute are:

1. Whether [Buyer] made its claim within the time limit(s) recited in the contract clauses: Item 13 (inspection and claim) and Item 18 (added clause)

-  [Buyer]'s position

[Buyer] contentions are:

      (1) The added clause of Item 18 and the inspection and claim of damages clause of Item 13 address two separate aspects of the same issue. The thirty-day time limit under the added clause of Item 18 refers to the period within which [Buyer] is to informally notify [Seller] of its intent to claim for damages, whereas the time limit under the inspection and claim of damages clause of Item 13 refers to the time frame during which [Buyer] can make a formal claim upon issuance of the certificate of inspection by the State Administration of Import and Export Commodity Inspection.

      (2) Based on a report prepared by [Buyer]'s subsidiary import-export company in the Province of Fujian, [Buyer] has in fact notified Beco in regards to the non-conformity of the goods on 16 April 1994. [Seller] has unequivocally admitted during the proceeding that Beco was acting as its agent. Therefore, by notifying Beco, [Buyer]'s act should be interpreted as a sufficient notice to [Seller] of the non-conformity of the goods. It is because of the notice that [Seller] undertook to have the goods inspected by the SCG Branch in Shanghai on 20 April 1994. A facsimile sent to Beco on 9 June 1994 by [Buyer]'s subsidiary company in Fujian further proves that [Buyer] has notified [Seller] of the non-conformity of the goods as early as around April 1994.

      (3) As soon as the certificate of inspection was issued by the State Administration of Import and Export Commodity Inspection on 18 May 1994, [Buyer] sent a formal claim of damages to [Seller] on 25 May 1994. This act is consistent with the terms of the contract, as well as Article 38(1) of the United Nations Convention on Contracts for the International Sale of Goods (hereafter referred to as he CISG).

      (4) Before the commencement of the arbitration proceeding, the parties had, on numerous occasions, negotiated over the loss incurred by [Buyer] as a result of [Seller]'s breach. During the negotiation sessions, [Seller] never suggested that the contractual time limit during which [Buyer] may bring its claim had expired. On the contrary, in a facsimile sent by [Seller] on 26 July 1994, [Seller] agreed to compensate [Buyer] US $50,000 for its loss.

-  [Seller]'s defense

[Seller] alleges that Item 18 was added in with a typewriter at the time the contract was signed, whereas the inspection and claim of damages clause in Item 13 was a standard form clause. Therefore, the former should be given more weight. The unloading of the hot-rolled steel plates was completed on 14 April 1994 at the Port of Shanghai. According to Item 18, which provides that Buyer] has to give a pre-advise about intentions of claims within thirty days after completion of discharge, [Buyer] should have sent [Seller] notice of the claim before 14 May 1994. [Seller] never received any such notice before that date. Therefore, [Buyer] is precluded from seeking damages based on the non-conformity of the goods.

2. Quality of the goods and risk of loss

-  [Buyer]'s position

Item 13 of the contract concerning inspection and claims of damages stipulates that [Buyer] has the right to claim damages with respect to any defects documented in the inspection report by the State Administration of Commodity Inspection. According to this provision, that inspection report should be the basis of determination of any non-conformity. As indicated by the inspection report, the goods were of irregular standards, loosely packaged in bulks. According to the report, the steel plates do not comply with the GOST380-88 ST3SP/PS industry standard as required by the contract. The magnesium content in Sample No. 9 reached 1.56 percent, grossly deviating from the 3SP/PS industry standard which limits the Mg content within the 0.40-0.65 percent range. This error in chemical composition results in a fundamental change in the useful value of the goods. They are no longer fit for the intended use indicated by the contract. In other words, [Seller] mixed steel plates of a different model into the shipment of the 3SP/PS hot-rolled steel plates. Because it is difficult to distinguish between the two models based on physical appearance, and because the goods were poorly packaged without proper labels and cannot be used the same way, [Buyer] was placed in an impossible situation of having to separate the two types of steel plates. As a result, [Buyer] was unable to fulfill its original obligations under a separate contract for the resale of the goods, and had to resell the goods at a discount. Incoterms 1990 provides that seller must supply goods in conformity with the contract. The central claim by [Buyer] is that [Seller] has violated the Incoterms provision. Therefore, the transfer of the risk of loss is irrelevant here. In addition, according to Articles 35 and 36 of the CISG, because [Seller] has tendered non-conforming goods, [Buyer] has the right to claim damages.

-  [Seller]'s defense

      (1) The contract is CISG. According to Incoterms 1990, the buyer must bear all risks of loss or damages to the goods from the time they passed the ship rail at the named port of shipment. In this case, [Seller] leased the vessel Richmond Hill for shipment of the goods. On 3 March 1994, a total of 10,216.651 tons of hot-rolled steel plate were loaded onto this vessel at the Port of Illichevsk. The carrier issued a clean Bill of Lading, according to which the total weight of the goods received was 10,261.651 tons, and the goods appeared to be in good condition. Based on the trade custom outlined above, any loss of or damages to the goods - such as a decrease in weight, or rust in the steel plates - occurred after they passed the rail of the vessel Richmond Hill and should be borne by [Buyer].

      (2) The State Administration of Commodity Inspection certificate provided by [Buyer] indicates that the applicant for inspection was an import-export company in Tibet. [Buyer] never explained what interests the Tibetan company had in the inspection, nor did [Buyer] demonstrate why the method used by the State Administration of Commodity Inspection was more scientific or more reliable than that used by the Independent Surveyor before the goods were loaded onto the vessel. The inspection report prepared by the Independent Surveyor indicates that the goods comply with the relevant standard of quality set by the former Soviet Union. According to the inspection report by the Chinese administration, only the No. 9 Sample contains a higher magnesium content than industry standard. However, both the No. 14 and the No. 9 samples are 14mm steel; if the magnesium content of the former complies with industry standard, there is no reason why the latter would not comply with the same standard.

2. The amount of claim and its basis

-  [Buyer]'s position

      (1) [Buyer] received 12,305 parcels of the goods, consistent with the record contained in the Bill of Lading. However, a weighing of the goods by the Chinese State Administration of Commodity Inspection revealed that the total weight of the goods was only 9,970 tons, 246.651 tons short of the 10,216.651 tons indicated by the Bill of Lading. Under Item 13 of the contract, with respect to the missing portion of the goods, [Buyer] has the right to request a partial return of the payment in the amount of US $61,909.401, a partial reimbursement of the customs tax paid, in the amount of US $7,429.128, reimbursement of the appreciation tax paid by [Buyer] in the amount of US $11,787.55, and interest payment in the amount of US $81,126.079 on the sum of the above items totaling US $12,980.17, over a twenty-month period, based on a 0.8 monthly percentage rate.

      (2) [Buyer] planned to resell the steel plates. The contract for the resale of the goods had already been concluded at a unit price of US $2,726.29 per ton. The resale purchaser rejected the goods due to the defects. As a result, [Buyer] was forced to liquidate the goods at a discount, at US $2,176 per ton. [Buyer] incurred a loss of profit exceeding US $600,000.

      (3) Despite the total loss to [Buyer], all that [Buyer] claims is US $500,000 in damages.

-  [Seller]'s defense

Seller contends that [Buyer] did not furnish sufficient evidence to support the amount of claim, US $500,000, and requests that the Arbitration Tribunal dismiss [Buyer]'s claim.

OPINION OF THE ARBITRAL TRIBUNAL

1. Applicable law

During the 18 December 1995 proceeding, both [Buyer] and [Seller] agreed to the 1980 CISG as the applicable law. By this agreement, the Tribunal holds that the CISG will govern the current dispute.

2. Timeliness of the claim

The parties have different views with respect to the applicable time period within which a claim must be raised. The differences involve the interpretation of Item 13 (Inspection and Claim) and Item 18 (added clause) under Contract No. 4NRSH0476006AT.

Item 18 requires [Buyer] to give advance notice to [Seller] of any intent to claim damages within a period of thirty days from the unloading of the goods. Item 13 does not address the issue of advance notice, but gives [Buyer] the right to claim damages, based on the inspection report from the import-export commodity inspection agency, within ninety days from the time the goods are unloaded at destination. Obviously, Items 18 and 13 are not in conflict. The former governs the notice of a claim, while the latter governs the claim itself. The contention by [Seller] that [Buyer] must lodge a formal claim based on the report by the inspection agency within thirty days from the time the goods are unloaded is groundless.

The goods were unloaded on 14 April 1994 at Port of Shanghai, the destination port. Under Items 13 and 18, [Buyer] must give notice of claim to [Seller] before 14 May 1994, and make a formal claim before 14 July 1994.

Evidence submitted by [Buyer] proves that on 14 April 1994, [Buyer] sent a facsimile to [Seller]'s agent, Mr. L at Beco International, reporting problems with respect to the quality, packaging, and specifications of the goods, asking Mr. L to forward the message to [Seller], in order for [Seller] to send representatives to Shanghai to inspect the goods and to discuss possible solutions to the problem. From the perspective of a reasonable merchant, the Tribunal finds that the facsimile served as sufficient notice of [Buyer] intent to claim damages. Upon the receipt of the facsimile, [Seller] immediately appointed the SGC branch located in Shanghai to inspect the goods. The inspection was completed on 11 May 1994, after the thirty day period from the time of unloading had expired. Additional evidence indicates that, during June and July 1994, [Seller] sent several correspondences to [Buyer] via Beco, expressing its willingness to pay damages, even though the parties were unable to reach an agreement over the exact amount of the damages.

In light of the above circumstances, the Arbitral Tribunal rejects [Seller] claim that [Buyer] failed to make a claim within the contractual time limit.

With respect to the formal claim, [Buyer] sent the claim letter, along with the inspection report issued by the State Administration of Commodity Inspection, to [Seller] via Beco before 25 May 1994. Under Item 13 of the Contract, [Buyer] has complied with the ninety-day requirement. [Seller]'s claim that it never received written notice of the claim is untenable.

3. Conformity of [Seller]'s tender and transfer of the risk of loss

Item 13 provides that [Buyer] is entitled to rely on the inspection reports in making the claim for damages. The Administration of Import-Export Commodity Inspection of Shanghai issued an inspection report on the quality of the goods on 18 May 1994, and a report on the weight of the goods on 6 July 1994.

[Seller] contends that because the applicant for inspection is the Tibetan company rather than the [Buyer], the inspection reports mentioned above should not be admissible. The Tribunal's investigation reveals that the Tibetan company is [Buyer]'s authorized agent for customs clearing. It is not unreasonable for [Buyer]'s agent to arrange for inspection of the goods at [Buyer]'s request. More importantly, the goods inspected are in fact the goods identified by the Contract. The inspection reports contain clear records of the name of the consigner, description of the goods, name of the cargo vessel, the receipt number, the contract number and other information identifying the goods under the disputed contract. [Seller]'s arguments as to the validity of the inspection reports cannot be sustained.

According to the inspection reports, the net weight of the goods delivered was 9,970 tons or 246.651 tons short of the 10,216.651 tons stipulated in the Contract. The reports also indicate that the chemical composition of the goods does not comply with the GOST380-88ST3SP/PS industry standard required by the Contract.

[Seller] contends that because [Buyer] has already negotiated the Bill of Lading under the Letter of Credit, and because risk of loss transferred to [Buyer] at the time the goods passed the ship rail at the loading dock, [Seller] is not liable to any of the damages claimed by [Buyer].

In the Tribunal's opinion, because the Letter of Credit transaction is by nature separate and independent of the underlying contractual transaction, [Buyer]'s agreed upon documents and subsequent payment under the Letter of Credit do not evidence that [Seller] has performed all its obligations under the contract. According to Articles 35 and 36 of the CISG, [Seller] is required to deliver goods which are of conforming quantity, quality, and description required by the contract. [Seller] is liable for any non-conformity even after the risk of loss has passed to the buyer. In this case, [Seller] failed to provide any evidence proving that [Seller] was excused from liability.

4. Damages

      (1) [Buyer]'s damage claims based on taxes paid, with interest, on the missing quantity totaling US $94,106.249

The Tribunal holds that based on the inspection report of the inspection agency in Shanghai, dated 6 July 1994, [Seller]'s delivery of the goods was 246.651 tons short of the quantity required by the contract. [Seller] should be held liable for the missing portion. Under the contract, the unit price of the goods is US $251 per ton. [Buyer]'s payment was tendered over twenty months ago. Based on [Buyer]'s request, [Seller] should compensate [Buyer]'s loss resulting from the shortage in the quantity delivered in the amount of US $61,909.40 (246.651 tons @ US $215 / ton = US $61.909.40), plus interest on the payment over a twenty-month period at a 0.8 percent monthly rate, equaling US $9,905.50 (US $61,909.40 x 20 x 0.8%).

[Buyer]'s claims of customs and valued-added-taxes are not supported by sufficient evidence and therefore denied.

      (2) [Buyer]'s damage claim based on loss of profit totaling US $661,611.60

The Tribunal believes that because the chemical content of the goods delivered by [Seller] failed to comply with the Contract, [Buyer] was forced to resell the goods at a discount. Under Article 74 of the CISG, [Seller] is liable for [Buyer]'s loss resulting from the resale of the goods. Of the 9,970 tons actually delivered, [Buyer] only provided evidence documenting the amount of loss from the resale price difference on 1,172 tons of the goods. [Buyer] failed to furnish evidence proving that the remaining 8,797.81 tons were resold at the same price difference, resulting in a proportional loss. Therefore, the Tribunal can only award damages based on the resale of 1,172 tons. The difference between the original contracted resale price and the actual resale price is US $66.26 per ton. The total loss of profit on 1,172 tons is US $77,669.309. [Buyer]'s claim of loss of profit on the remaining 8,797.81 tons is denied.

5. Cost of arbitration

Item 16 of the Contract provides that, the cost of arbitration will be borne by the losing party, unless the Arbitration Commission holds otherwise. Considering the circumstances of the dispute, the Tribunal finds it appropriate for [Buyer] to pay 30 percent of the cost of arbitration, and the [Seller] 70 percent.

AWARD

The Arbitration Tribunal awards the following:

1. [Seller] shall pay [Buyer] damages resulting from the non-conformity of the goods amounting to US $61,909.40, plus interest in the amount of US $9,905.50.

2. [Seller] shall compensate for [Buyer] loss of profit in the amount of US $77,669.309.

3. All other damages claimed by [Buyer] are denied.

4. [Seller] shall bear 70 percent of the cost of the arbitration proceeding, [Buyer] shall bear 30 percent of the cost. The parties have submitted deposit payments before the arbitration proceeding. [Seller] submitted US $XXX; [Buyer] submitted RMB XXX. [Buyer] should pay [Seller] US $XXX; [Seller] should pay [Buyer] RMB XXX.

[Seller] shall render the payment in full in accordance to items 1, 2 and 4 above. After the mutual set-off in arbitration costs, [Seller] remains liable to [Buyer] for US $147,984.20 and RMB 45,832.50. [Seller] must render the payments in full before 30 August 1996.

This award is final


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, The Chinese claimant is referred to as [Buyer]; The Austrian respondent 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 Republic of China (Chinese Yuan Renminbi) are indicated as [RMB].

** Kejie Zhang, Third Year Student at Rutgers School of Law, Camden, New Jersey; BA in Economics, University of California, Berkeley, California.

*** Howard Yinghao Yang, Associate with New York office of Debevoise & Plimpton, LLP.

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