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CISG CASE PRESENTATION

China 16 August 1996 CIETAC Arbitration proceeding (Dioctyl phthalate case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/960816c1.html]

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

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Case identification

DATE OF DECISION: 19960816 (16 August 1996)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1996/39

CASE NAME: Unavailable

CASE HISTORY: Unavailable

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

BUYER'S COUNTRY: Republic of Korea (respondent)

GOODS INVOLVED: Dioctyl phthalate


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 25 ; 74 ; 75 ; 77 ; 78 [Also cited: Articles 18 ; 35 ; 80 ]

Classification of issues using UNCITRAL classification code numbers:

25B [Definition of fundamental breach: substantial deprivation of expectation];

74A ; 74A1 ; 74B [General rule for measuring damages: loss suffered as consequence of breach; Includes loss of profit; Outer limits of damages: foreseeability of loss];

75A1 [Damages established by substitute transaction after avoidance: resale by aggrieved seller];

77A [Obligation to take reasonable measures to mitigate damages];

78A [Interest on delay in receiving price or any other sum in arrears]

Descriptors: Fundamental breach ; Damages ; Profits, loss of ; Foreseeability of damages ; Cover transactions ; Mitigation of loss ; Interest

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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 Mao Yi Zhong Cai Wei Yuan Hui Cai Jue Shu Hui Bian [Compilation of CIETAC Arbitration Awards] (May 2004) 1996 vol., pp. 1681-1691

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at nn.21, 120, 134, 135, 152, 182, 202, 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 Commission
CIETAC (PRC) Arbitral award

Dioctyl phthalate case (16 August 1996)

Translation [*] by Wei Xia, Yang [**]

Reviewed by LIU Ping [***]

China International Economic and Trade Arbitration Commission [hereinafter: CIETAC] accepted this case according to:

   -   The arbitration clause in Contract No. 95 QLD-006C [hereinafter: the Contract] signed on 17 April 1995 by Claimant, China ____ International Qilu Company [Seller], and Respondent, Korean ____ Company [Buyer], and
 
   -   The written arbitration application submitted by [Seller] to CIETAC on 28 November 1995.

The parties failed to appoint the presiding arbitrator within the time frame. Following Article 24 of the Arbitration rules, Mr. P appointed by the Chairman of CIETAC as the presiding arbitrator, Mr. A appointed by [Seller], and Mr. D appointed by [Buyer] formed the Arbitral Tribunal on 22 January 1996 and heard the case.

The Arbitral Tribunal examined [Seller]'s arbitration application, [Buyer]'s reply and the evidence. On 18 April 1996, the Arbitral Tribunal held a hearing in Beijing. Both parties sent representatives to the hearing, made oral statements of facts, presented arguments, and answered the Arbitral Tribunal's questions. After the hearing, both parties submitted supplementary materials.

The Arbitral Tribunal has concluded this case. According to the written materials and the result of the hearing, the Arbitral Tribunal rendered its award. The following are the facts, the Arbitral Tribunal's opinion and the award.

[I.] FACTS OF THE CASE

On 17 April 1995, [Seller] and [Buyer] signed the Contract, which stipulates that:

   -    [Buyer] purchases 768 tons DOP (dioctyl phthalate) at the price of FOB Qingdao [People's Republic of China] US $2,020 per ton.
 
   -    The first half of the goods (384 tons) shall be delivered in early May 1995 and the second half shall be delivered in late May 1995.
 
   -    [Buyer] shall make payment by documentary letter of credit [hereinafter: L/C].

[A.] [Seller]'s requests

After concluding the Contract, [Seller] transported the goods to Qingdao harbor and notified [Buyer] that the goods were ready for shipping. [Buyer] issued the L/C on 25 April 1995. However, after that, [Buyer] refused to arrange for a ship to take the goods.

[Buyer]'s refusal to take the goods constitutes a fundamental breach of the Contract and caused substantial economic losses by [Seller]. [Seller] therefore applies for arbitration with CIETAC and makes the following requests for [Buyer]:

     1. To compensate [Seller]'s losses of profit difference (i.e., expected profit) in the amount of US $112,005.21;

     2. To compensate [Seller]'s loss of price difference of resale in the amount of US $8,385.08, the transportation, storage and loading expenses for the resale, in the amount of US $33,707.23, and the port congestion charge and rehandling charge in the amount of US $16,313.25;

     3. To compensate [Seller] the following loss of interest:

1) Interest of US $49,367.99 on [Seller]'s occupied capital;

2) Interest on the profit difference, the transportation, storage and loading expenses, the port congestion charge and the rehandling charge;

     4. To bear the arbitration fees; and

     5. To bear [Seller]'s attorneys' fee.

[B.] [Seller]'s claims

     1. [Buyer] did not perform its contractual obligation to take the goods and this constitutes a fundamental breach of the Contract.

[Buyer] sent a fax to [Seller] on 28 April 1995 at the same time as it opened the L/C. The fax did not designate a destination port, and requested [Seller] to postpone the shipping date for the first installment of the goods.

Thereafter, [Buyer] sent several facsimiles to [Seller] on 8 May, 16 May and 19 May 1995 respectively, claiming that it could not ship on time and requesting [Seller] to send samples to [Buyer]'s clients in the Middle East.

In its later facsimiles of 24 May and 25 May 1995, [Buyer] stated that the then-current prices of DOP in the Hong Kong and Southeast Asia markets were decreasing rapidly and requested [Seller] to send samples to the Middle East as soon as possible.

On 9 June 1995, [Buyer] declared in its facsimile that it would not perform the Contract.

In a facsimile of 15 June 1995, [Buyer] refused to take the goods and stated that it would compensate [Seller].

[Seller] alleges that these actions by [Buyer] constituted a refusal to take the goods and a breach of the Contract and that [Buyer] caused [Seller] to incur huge economic losses and should compensate [Seller].

     2. [Seller]'s economic losses

          1) Losses of profit difference (expected profit)

The domestic supplier of the goods under the Contract was ** Industrial Trade Company, and the goods were produced by ** Plastic Products Factory. [Seller] purchased the goods [from ** Industrial Trade Company] at the price of RMB 18,200/ton, in which the [PRC] value-added tax [hereinafter: VAT] amounted to 17% of the price excluding VAT. The VAT was RMB 2,644.44/ton and the price excluding VAT was RMB 15,555.56/ton. According to the PRC policy on tax return for exports, the VAT will be refunded by the State to the exporting and foreign trade company. Therefore, the export cost price of the goods under the Contract was RMB 15,555.56/ton (equal to US $1,874.16/ton, calculated at the exchange rate of 8.3).

The contract price under which [Seller] sold the goods to [Buyer] was US $2,020/ton.

Therefore, if [Buyer] had performed the Contract, [Seller] would have gained from the difference (US $145.84/ton) between its purchase price (US $1,874.16/ton) and sale price (US $2,020/ton). The price difference for all the goods under the Contract was US $112,005.12 in total (US $145.84/ton x 768 ton). Due to [Buyer]'s breach, [Seller] lost all such profit difference (i.e., expected profit).

          2) Losses caused by [Seller]'s resale and port congestion

The goods had been transported to the shipping harbor (Qingdao harbor) when [Buyer] refused to take the goods. After [Buyer]'s refusal, [Seller] had to transport the goods to various locations and resell to its PRC domestic clients. As a result, the following expenses occurred:

               a. Loss due to price difference

As mentioned above, [Seller]'s purchase price for the goods under the Contract was RMB 18,200/ton. [Seller]'s resale income was RMB 13,908,000 in total. [Seller]'s average resale price was RMB 18,109.38/ton. [Seller] lost RMB 90.61/ton from its resale of the goods (i.e., RMB 18,200/ton - 18,109.38/ton). [Seller]'s loss due to the resale price difference was RMB 69,596.16 in total (i.e., RMB 90.61/ton x 768 ton), or US $8,385.08 (calculated at the exchange rate of 8.3).

               b. Transportation, storage and loading expenses

The goods were transported from Qingdao to various locations for resale to clients. Transportation, storage and loading fees occurred in the resale process were RMB 279,770 Yuan, i.e., US $33,707.23.

               c. Port congestion charge and rehandling charge

Due to [Buyer]'s refusal to take the goods in accordance with the Contract, the goods were retained at Qingdao port and the port congestion charge in the amount of RMB 125,800 was incurred as a result.

In order to resell the goods in China, the goods were taken out of the containers and the rehandling charge of RMB 9,600 was incurred.

          3) Loss of Interest

               a. Interest on the occupied capital

[Seller] took RMB 13,977,600, i.e., US $1,684,084.19, to purchase the goods,. [Seller] signed the resale contracts with its domestic clients, to resell the goods and recover its occupied capital, from middle June to middle October 1995. [Seller] actually received payments under the resale contracts more than one month after the execution of the resale contracts. If 15 September 1995 is taken as the average date when [Seller] received most of its payments under the resale contracts, the loss of interest suffered by [Seller] due to the occupancy of its capital should be calculated from 1 June 1995 (the latest shipping date [under the Contract]) to 15 September 1995, i.e., for a period of 107 days. The interest should be US $49,367.99 (i.e., US $1,684,048.19 x 107 days x 10% annual interest rate / 365 days).

               b. Interest on the expected profit

Had [Buyer] performed the Contract, [Seller] would have delivered the goods, processed the L/C negotiation procedure with the bank and received the expected profit of US $112,005.12 by the end of May 1995. The loss of interest on the expected profit, therefore, should be calculated from 1 June 1995 at the latest to the date when this arbitral award is given, at an annual interest rate of 10%.

               c. Interest on the transportation, storage and loading expenses

These expenses were US $33,707.23 in total. Most of them were incurred in early July 1995. Therefore, interest on these expenses should be calculated from 1 August 1995 at the latest to the date when this arbitral award is given, at an annual interest rate of 10%.

               d. Interest on the port congestion charge and rehandling charge

These two charges, totaling US $ 16,313.25, were incurred on 21 August 1995. The interest should be calculated from such date to the date when this arbitral award is given, at an annual interest rate of 10%.

[C.] [Buyer]'s responses

     1. After the execution of the Contract, [Buyer] issued the L/C on 26 April 1995 in accordance with the Contract and designated Hong Kong as the destination port. The Contract provided for FOB Qingdao price and [Seller] could choose any shipping date within a fixed period. According to general international trade custom, thirty days before the delivery date specified in the contract, a seller shall notify its buyer by telex of the contract number, name and quantity of the goods, departing port and estimated arrival date, for the buyer to arrange shipping space. In this case, however, [Buyer] had never received any notification before the expiry of the shipping date under the Contract that the goods were ready for shipment. Under this circumstance, it was impossible for [Buyer] to charter ship and book space.

     2. According to clause 2 of the Contract, [Buyer] has the right to decide the shipping mark. [Buyer] notified [Seller] on 28 April 1995 in writing that a neutral shipping mark should be used. But [Seller] insisted on using its own mark. [Buyer] requested [Seller] repeatedly to change the mark, as [Buyer] and its clients would not accept [Seller]'s mark. [Seller] just ignored [Buyer]'s requests. Therefore, [Buyer] was unable to sign the shipping contract with the carrier.

     3. [Seller]'s violations of the Contract as stated above delayed the delivery of the goods, and therefore [Buyer] was not able to arrange ship to take the goods and missed the best sale opportunity. Thereafter, the international market of the goods changed suddenly and the price decreased continuously. If [Buyer] had continued to perform the Contract, [Buyer] would have suffered huge economic losses. Under these circumstances, pursuant to the United Nation Convention on Contracts for the International Sale of Goods [hereinafter: CISG], [Buyer] notified [Seller] on 10 June 1995 that [Buyer] could not take the goods and terminated the Contract.

     4. Article 74 of CISG states that "damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach". By virtue of Article 19 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest [1] [hereinafter: PRC Foreign Economic Contracts Law], "the liability of a party to pay compensation for the breach of a contract shall be equal to the loss suffered by the other party as a consequence of the breach".

So-called loss of profit refers to the expected economic benefit that one party fails to gain from the contract because of the breach of contract by the other party. In this case, the unit price under the Contract was US $2,020/ton. And according to the "industrial and mineral product purchase and sale contract" executed by [Seller] and Shandong ** Industrial Trade Company on 19 April 1995, as provided by [Seller], the unit price under such contract was RMB 18,200, i.e., US $2,192.8/ton (calculated at the exchange rate of 8.3). [Seller]'s purchase price in the PRC is much higher than its export price. Had [Buyer] and [Seller] performed this Contract, [Seller] would have made no profit, not to mention any "loss of profit". Subjectively speaking, non-performance of the Contract reduced [Seller]'s loss.

Article 75 of CISG provides that:

"If the contract is avoided and if, in a reasonable manner and within a reasonable time after avoidance, the buyer has bought goods in replacement or the seller has resold the goods, the party claiming damages may recover the difference between the contract price and the price in the substitute transaction as well as any further damages recoverable under article 74."

This article establishes the principle that the damage for avoidance of contract should be determined by the difference between the contract price and the price in the substitute transaction. According to data provided by [Seller], its total resale income was RMB 13,908,000, and the average resale price was RMB 18,109.38 /ton, i.e., US $2,181.8 /ton. The original contract price was US $2,020/ton. The price difference is US $161.8/ton (US $2181.8/ton - US $2,020/ton). [Seller] resold all 768 ton goods and made profits of US $124,303.11 in total (US $ 161.8/ton x 768 ton).

According to the CISG and the PRC Foreign Economic Contracts Law, the basic principle to determine damages is that the party in breach of the contract shall be liable for "direct, actual and reasonable" damages. In this case, [Seller] has no direct or actual loss, but only direct and actual profits.

     5. According to Article 74 of CISG and Article 19 of the PRC Foreign Economic Contracts Law, two elements shall be considered in deciding the amount of damages: (1) damage shall be the direct and actual loss suffered by the non-breaching party; and (2) the amount of damages shall have a reasonable limitation of not exceeding the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract.

[Seller] claimed that in accordance with the PRC export tax return policy it could gain a profit of US $112,005.12 by exporting the goods. [Seller]'s claim exceeds the reasonable limitation set up by the laws. This is because the PRC export tax return policy is a domestic preferential policy made by the Chinese government to encourage Chinese foreign trade companies to export and earn foreign exchange. This policy is neither an international practice, nor widely known by various foreign countries. At the time of conclusion of the Contract with [Seller], [Buyer], as a foreign company, did not know nor was able to foresee that once it breached the Contract it would be liable for any loss caused by this PRC special export tax return policy. [Seller]'s request for this portion of expected profit is without any legal basis.

     6. [Seller] violated international custom by transporting the goods to port without notifying [Buyer] that the goods were ready and receiving [Buyer]'s confirmation of a shipping date. In addition, [Seller] violated the Contract by using its own shipping mark and packing and transporting the goods to the port. [Seller] should be responsible for all losses caused by its violations. Because the transportation, storage and loading fees and the rehandling charge were all incurred due to [Seller]'s improper transportation of the goods to the port, they are irrelevant to [Buyer]. In addition, [Seller] earned considerate profits out of its resale of the goods, and such fees and charge are normal business expenses.

     7. As to interest on [Seller]'s occupied capital, because of non-performance of the Contract, interest on short-term occupied capital was incurred. This loss of interest, however, is minimal as compared to [Seller]'s profits from its resale and is set off by such profits. Even if the Contract had been performed, [Seller] could not have earned any profit, not to mention any interest on profit, because [Seller]'s domestic purchase price was higher than its export price (i.e., the price under the Contract).

Other losses of interest were all caused by [Seller]'s improper actions and therefore were irrelevant to [Buyer].

To sum up, [Seller] violated the Contract first in its course of performance of the Contract and caused the Contract completely incapable for performance. However, non-performance of the Contract did not cause any economic loss by [Seller]. Therefore, according to the CISG and the PRC Foreign Economic Contracts Law, reasons for [Seller]'s requests for compensation do not stand.

[D.] [Seller]'s supplemental statement on its loss of profit in response to [Buyer]'s responses

     1. [Buyer] claimed, on the basis of Article 75 of CISG, that loss of profit by [Seller] should be the difference between the contract price and the resale price. The loss of profit requested by [Seller] in this case is separated into loss of expected profit and loss of resale. This request by [Seller] does not conflict with the calculation formula proposed by [Buyer].

     2. China's product VAT system has been in effect since 1 January 1994. Under this system, product VAT iss submitted to the State by the end-user of the product, and the seller of the product issued VAT invoice. If the product reached the end-users through various intermediate transfers, the buyer in the previous transaction should advance the product VAT, with reimbursement by the buyer in the following transaction at the same time as the latter pays the product price to the former. If the product is an exported product, the product export company should advance the product VAT and the State will refund the VAT to the export company after the export is completed. Therefore, no matter whether it is an exported product or a domestically-sold product, all product VATs paid by an intermediate merchant are advanced for others and should not be counted into the product's purchase cost. According to this VAT system, in this case, the VAT advanced by [Seller] when it purchased the goods should not be counted into [Seller]'s purchase cost, nor should it influence the calculation of the price difference. In calculating the price difference in this case, only the actual purchase price and resale price, both excluding VAT, should be considered.

     3. In this case, [Seller]'s resale prices under the resale contracts included both the actual resale price and the product VTAs advanced by [Seller]. As mentioned above, the actual resale price should be used in calculating the price difference. According to relevant PRC law, actual price = contract price/1.17. In this case, the average resale contract price is RMB 18,109.38/ton (i.e., US $2,181.95), including the actual resale price of US $1,864.83/ton (i.e., US $2,181.85/1.17) and the VAT of US $317.02/ton (i.e., US $2,181.85-1,864.83)

     4. According to the loss of profit calculation formula proposed by [Buyer], the unit price difference suffered by [Seller] due to [Buyer]'s refusal to take the goods is US $155.17 (i.e., contract price US $2,020/ton - actual resale price US $1,864.83), and the total price difference is US $119,1970.56 (i.e., US $155.17/ton x 768 ton).

Therefore, it is wrong for [Buyer] to deduct the resale contract price of US $2,181.85 from the contract price of US $2,020, and to claim that [Seller] had no loss at all, but only substantial profit. [Seller] hereby declares that for sake of calculation convenience, [Seller] adopts the price difference of US $119,170.56 as its claim of loss of price difference.

     5. The purpose of the PRC tax refund is only for the State to return the product VAT advanced by the export company, and no preference is gained by the export company therefrom. In this case, the legal relationship caused by the product VAT is between the Chinese government and [Seller], irrelevant with the transaction between [Buyer] and [Seller]. It does not affect [Buyer] and [Seller]'s rights and obligations. What is related to [Seller]'s claim for compensation is only the actual purchase price between [Seller] and its supplier and the actual resale price between [Seller] and its resale buyers. In this case, the loss of price difference suffered by [Seller] is a direct and natural result of [Buyer]'s refusal to take the goods, completely within the scope foreseeable by [Buyer]. According to the principle generally recognized by laws of various countries, loss caused by the market price change is a risk that a buyer has already assumed at the time of the conclusion of the contract. Therefore, [Buyer] cannot use any excuse to refuse to take the goods and avoid its liabilities to compensate [Seller].

[E.] [Seller]'s first supplemental statement after the hearing

     1. Both [Buyer] and [Seller] referred to the CISG as the legal basis for their respective positions. Therefore, the arbitral tribunal may apply the CISG as the law jointly and impliedly selected by both parties.

     2. Upon [Seller]'s final confirmation, the average resale contract price is RMB 18,157.08 /ton (i.e., US $2,187.60, calculated at the exchange rate of 8.3) and the actual resale price excluding VAT is US $1,869.74/ton (i.e., US $2,187.60/1.17). Therefore, under Article 75 of CISG, [Seller] is entitled to claim the difference (i.e., US $150.26/ton) between the contract price (i.e., US $2,020/ton) and the actual resale price (i.e., US $1869.74/ton) and the total price difference is US $115,399.68 (i.e., US $150.26/ton x 768 ton).

     3. [Buyer] alleged that its non-taking the goods was caused by [Seller]'s failure to pack the goods neutrally as requested by [Buyer]. However, [Buyer] did not present sufficient evidence to support its allegation.

One of the items of evidence submitted by [Buyer] is a facsimile, allegedly sent out by [Buyer] on 28 April 1995. This fax stated that "[D]ue to repeated requests from our clients, all 768 tons goods under the Contract will have neutral mark. We would appreciate your cooperation."[2] However, [Buyer] could not prove that this facsimile was actually sent out.

Another item of evidence submitted by [Buyer] is a facsimile from [Seller] to [Buyer], specifying [Seller]'s mark. [Buyer] tried to prove that this facsimile demonstrated that [Seller] had refused to adopt a neutral mark. However, read literally, the facsimile only explains the mark printed on the package of the goods, without showing [Seller]'s intention to reject [Buyer]'s suggestion on the mark. What actually happened was that [Buyer] made inquiries with [Seller] about the mark by phone, [Seller] faxed the explanation of its mark to [Buyer] after it received [Buyer]'s call, and after that both parties did not discuss the packing issue.

     4. According to the CISG and the PRC Foreign Economic Contract Law, a basic principle to determine which losses should be compensated is that the damaged party should be put into a position in which he would have been if the contract was performed, as long as such losses were foreseeable by the breaching party at the time of the conclusion of the contract.

The transportation, storage and loading expenses claimed by [Seller], totaling US $33,707.23, were incurred by [Seller], after [Buyer]'s clear declaration of refusal to take the goods, to mitigate its losses through authorizing Zibo ** International Cargo Transportation Co., Ltd. to transport the goods to various resale locations. These expenses were caused by [Buyer]'s failure to take the goods and were completely foreseeable by [Buyer]. Had [Buyer] taken the goods in accordance with the Contract, these expenses would never have occurred. [Buyer] was aware that the goods were transported to port for shipment when it notified [Seller] of its avoidance of the Contract on 8 June 1995.

In addition, [Seller] was supposed to recover 50% of its occupied capital around 25 May and another 50% around 10 June 1995. It is reasonable to calculate interest from 2 June 1995 (the average date between 25 May and 10 June 1995). When calculating [Seller]'s loss of interest on its occupied capital, the principal is the occupied capital in the amount of RMB 14,000,640, as proved by [Seller]'s purchase VAT invoice. Such principal should be reduced along with [Seller]'s resale of the goods and recovery of the capital. [Seller]'s all goods were resold in thirty-three installments from middle June to early October (with goods worthy of RMB 56,000 not sold out). The process of resale and occurrences of interest were as follows:

Year 1995 Principal Recovered Principal Interest (annual interest rate of 10%, RMB)
2 June 14,000,640 5,068,800 111,237.96 (14,000,640 x 19 days x 10% /365 days)
July 8,931,840 6,350,600 75,859.46 (8,931,840 x 31 days x10% / 365 days)
August 2,581,240 1,291,900 21,922.86 (2,581,240 x 31 days x 10% / 365 days)
September 1,289,340 840,740 10,597.32 (1,289,340 x 30 days x 10%% /365 days
October 448,600 392,600 3810.03 (448,600 x 31 days x 10% / 365 days
After November 56,000 0 Not applicable
Total     223,427.63

As indicated in the table above, [Seller] is entitled to claim the loss of interest of RMB 223,427.63 (i.e., US $26,918.99). Such claim can only compensate [Seller]'s loss of interest due to non-recovery of payments for resold goods on time, but not [Seller]'s loss of interest on the price difference from the payment date under the Contract to the actual payment dates under the resale contracts. Due to [Buyer]'s refusal to take the goods, [Seller] not only suffered losses in the price difference, but also loss of interest on the price difference. The principal of such interest was the price difference of US $115,399.68, and the interest should be calculated from 2 June 1995 till the date when this arbitral award is given.

     5. In this case, [Buyer]'s refusal to take the goods is an intentional breach of the Contract, for the purpose of transferring the risk of market price decrease, which should be borne by [Buyer], to [Seller].

[Seller] restates its requests as follows:

           a) [Buyer] to compensate [Seller]'s loss of price difference between the contract price and the resale price, in the amount of US $115,399.68;

           b) [Buyer] to compensate [Seller]'s transportation, storage and loading expenses, in the amount of US $33,707.23;

           c) [Buyer] to compensate [Seller]'s port congestion charge and rehandling charge, in the amount of US $16,313.25;

           d) [Buyer] to compensate [Seller]'s loss of interest on [Seller]'s occupied capital, in the amount of US $26,918.99;

           e) [Buyer] to compensate [Seller]'s interest on the price difference of US $115,399.68 from 2 June 1995 to the date when this arbitral award is given, at the annual rate of 10%;

           f) [Buyer] to compensate [Seller]'s interest on the transportation, storage and loading expenses of US $33,707.23 from 1 August 1995 to the date when this arbitral award is given, at the annual rate of 10%;

           g) [Buyer] to compensate [Seller]'s interest on the port congestion charge and rehandling charge of US $16,313.25 from 21 August 1995 to the date when this arbitral award is given, at the annual rate of 10%;

           h) [Buyer] to compensate [Seller]'s attorneys' fee, in the amount of RMB 60,000; and

           i) [Buyer] to bear all arbitration fees.

[F.] [Buyer]'s statement in its supplementary documents submitted after the hearing

     1. [Seller]'s violation of the Contract is the fundamental cause of non-performance of the Contract.

According to international trade custom, proper packaging is one of the material conditions for the delivery of goods. Article 35 of CISG states:

"[T]he seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract."

[Seller] committed a material breach of the Contract when the package (including the marking) of the delivered goods had a material non-conformity with the Contract. [Buyer] has the right to reject the goods and claim damages against [Seller].

In the hearing, [Seller] alleged that it had never received the mark designated by [Buyer]. This allegation is not consistent with the reality. [Buyer] designated the mark on 24 April 1995, and [Seller] sent a fax on 25 May 1995, refusing [Buyer]'s mark in writing. According to the Contract, [Buyer] has the right to decide the mark and [Seller] is obliged to accept [Buyer]'s designation and has no right to decide at its own will or object to [Buyer].

In the hearing, [Seller] also asserted that [Buyer] did not object to [Seller]'s mark and therefore implicitly agreed on [Seller]'s mark, and that the Contract was changed accordingly. This argument lacks legal ground. According to Article 18 of CISG,

"A statement made by or other conduct of the offeree indicating assent to an offer is an acceptance. Silence or inactivity does not in itself amount to acceptance."

After receiving the mark designated by [Seller], [Buyer] never accepted [Seller]'s mark under any circumstance or by any means. Instead, [Buyer] requested [Seller] to change the mark several times by telephone. Even if [Buyer] did not object to [Seller]'s mark, according to the CISG [Buyer]'s silence or inaction does not amount to acceptance, nor constitute an amendment to the Contract.

In the hearing, [Seller] claimed that in early May 1995 the goods were ready and transported to the port pending shipment. In fact, in early May 1995 [Seller] did not pack the goods according to the Contract ([Seller] did not pack the goods according to the Contract even when [Buyer] declared to avoid the Contract), nor did [Seller] transport the goods to the port pending shipment.

[Seller]'s failure to prepare the goods in accordance with the Contract led to [Buyer]'s inability to perform its obligation to take the goods. Article 80 of CISG states

"[A] party may not rely on a failure of the other party to perform, to the extent that such failure was caused by the first party's act or omission."

Therefore, [Seller] has no ground to accuse [Buyer] of breach of the Contract.

     2. [Seller]'s "expected profit" was not foreseeable by [Buyer].

[Seller]'s claim that, according to China's export tax return policy, it could receive the price difference of US $112,005.12 goes beyond the reasonable limitation under the law. The PRC export tax return policy is a domestic preferential policy made by the Chinese government to encourage domestic foreign trade companies to export and earn foreign exchange. This policy is neither an international practice, nor widely known by various foreign countries. Due to this policy's local nature and uncertainty, at the time of conclusion of the Contract with [Seller], [Buyer], as a foreign company, did not know nor was [Buyer] able to foresee that once it breached the Contract it would be liable for any loss caused by this PRC special export tax return policy.

In the hearing, [Seller] asserted that [Buyer] knew its domestic purchase price at the time of the conclusion of the Contract. It is contrary to the facts. The Contract was signed on 17 April 1995, while [Seller]'s purchase contract with its supplier was executed on 19 April 1995. It is impossible for [Buyer] to foresee [Seller]'s purchase price.

After the conclusion of the Contract, the international market price decreased dramatically and this was not foreseeable by [Buyer] at the time of the conclusion of the Contract. Any loss due to such change of market price is not compensable under Article 74 of CISG.

     3. [Seller]'s so-called losses of resale price difference were caused by its own improper commercial action and irrelevant to [Buyer]. In addition, [Seller]'s resale prices were higher than the price under the Contract.

     4. It is ridiculous for [Seller] to allege that [Buyer] "had never found any client" and made false statement of "[D]ue to repeated requests from our clients" in 28 April facsimile.

     5. The invoice for legal expenses in Beijing provided by [Seller] bears no seal and therefore is invalid evidence.

[G.] [Seller]'s restatement in its second supplementary document after the hearing

    1. [Seller] has fulfilled its obligations under the Contract. [Buyer]'s refusal to dispatch a ship and take the goods is a material breach of the Contract and leads to non-performance of the Contract, for which [Buyer] should be fully liable. The fax of 28 April 1995 submitted by [Buyer], in which it requested neutral shipping mark, is fabricated. [Buyer] had never requested [Seller] to pack the goods with neutral mark. In its fax(es), [Buyer] had never claimed that its refusal to take the goods was caused by the inconsistency of the mark.

     2. [Seller]'s losses are directly caused by [Buyer]'s refusal to ship and take the goods. [Seller]'s requests are in line with relevant Chinese laws, CISG and international custom and are reasonable and fair.

[H.] [Buyer]'s response to [Seller]'s restatement

On 28 April 1995, in accordance with the Contract, [Buyer] instructed [Seller] to adopt a neutral mark by fax. The report printed by [Buyer]'s fax machine shows that [Seller] received this fax. It is groundless for [Seller] to claim that [Buyer] fabricated the fax. The reality is that after [Buyer]'s request for a neutral mark, [Seller] did not want to increase its costs by changing the package which it had already been processing, and therefore faxed to [Buyer], emphasizing that the goods had had marks and refusing to use the mark instructed by [Buyer].

[II.] OPINION OF THE ARBITRAL TRIBUNAL

     1. Applicable law

Both parties cited the CISG and PRC Foreign Economic Contracts Law to state their positions. To respect both parties' willingness, the Arbitral Tribunal holds that the CISG and PRC Foreign Economic Contracts Law should apply in this case.

     2. Liability for breach of contract

The Contract clearly stipulates that (a) the [Seller] should provide 768 tons of goods in two installments, to be packed and shipped in the early half and latter half of May 1995, respectively; (b) the unit price is US $2,020/ton FOB Qingdao; and (c) [Buyer] should pay by documentary L/C and dispatch a ship to take the goods.

The Arbitral Tribunal finds that after the conclusion of the Contract, [Seller] prepared the goods ready for shipment in accordance with the Contract, but after issuing the L/C on 26 April 1995 [Buyer] still claimed in its fax of 16 May 1995 that

"[W]e regret to inform you. Because [our] end-user postponed its performance of the contract [with us], we cannot ship and transport the first installment in the early half of May."[3]

This shows that [Buyer] did not dispatch a ship to take the goods at the time provided by the Contract and that [Buyer]'s non-performance was caused by its end-user, rather than any other reason such as the shipping mark.

In [Buyer]'s fax to [Seller] on 25 May 1995, [Buyer] stated that:

"Many traders in Hong Kong and East Asia ordered large amounts of goods when the price was increasing, and the huge overstock caused a price slump. In addition, port charges in Hong Kong are surprisingly high. Therefore, we wish that you store the goods in Qingdao harbor, with us bearing port charges. We will try to take the goods as soon as possible. Given the soft international market for DOP currently, we wish that you can consider our huge losses and give us assistance to the extent possible."[4]

[Buyer] still did not mention the issue of neutral mark in this facsimile. [Buyer] only requested [Seller] to send samples to [Buyer]'s clients in the Middle East.

From the above-mentioned facts, [Buyer] has not produced sufficient evidence to support its claims that it did request a neutral mark and that the non-performance of the Contract was caused by [Seller]'s refusal to use the neutral mark. On the contrary, the real reason for the non-performance of the Contract is that the price in the international market decreased rapidly and [Buyer]'s users did not demand the goods. [Buyer]'s request for [Seller] to send samples to [Buyer]'s clients in the Middle East is an extra request beyond the provisions of the Contract that [Seller] had the right to reject. Therefore, [Buyer] has no legal and factual grounds to claim that it did not charter a ship and book space because before the expiry of the shipping date under the Contract it had never received notification from [Seller] that the goods were ready, and that it could not conclude a shipping contract with its carrier and missed its best selling opportunity because of [Seller] repeatedly refused to use the neutral mark requested by [Buyer]. [Buyer] committed a breach of the Contract by not taking the goods and should bear liability for its breach.

     3. Damages to [Seller]

     According to Article 74 of CISG:

"Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. 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 the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract."

Article 75 of CISG provides that:

"If the contract is avoided and if, in a reasonable manner and within a reasonable time after avoidance, the buyer has bought goods in replacement or the seller has resold the goods, the party claiming damages may recover the difference between the contract price and the price in the substitute transaction as well as any further damages recoverable under article 74."

Article 19 of the PRC Foreign Economic Contracts Law states:

"The liability of a party to pay compensation for the breach of a contract shall be equal to the loss suffered by the other party as a consequence of the breach."

Based on these articles, the Arbitral Tribunal holds that:

           1) [Buyer] shall compensate [Seller] the price difference between the contract price and the resale price caused by [Buyer]'s breach of the Contract.

When considering the contract price and resale price, the Arbitral Tribunal agrees with [Seller]'s claim that such two prices should be comparable. The Contract in dispute is an export contract. According to Article 2(3) of the PRC Temporary Regulations on Value-added Tax, the tax rate on exported goods is zero - namely, the price for exported goods does not include VAT. [Seller]'s domestic resale prices included VAT. Therefore, the VAT should be deducted from [Seller]'s resale prices when the price difference is calculated. The VAT is levied by the government and it is not profit recoverable by [Seller] through resale. The price under the Contract is US $2,020/ton, the resale price excluding VAT is US $1,869.74/ton (i.e., US $18,157.088.3 117), and the price difference suffered by [Seller] are US $115,399.68 in total (i.e., 768 ton (US $2,020/ton - US $1,869.74/ton)). [Buyer] should compensate such damages in full.

                2) As to [Seller]'s requests for the transportation, storage and loading expenses, upon the Arbitral Tribunal's examination, [Seller] spent RMB 269,850 for transportation, RMB 7,520 for storage and RMB 2,400 for loading. The total expenses are RMB 279,770 (i.e., US $ 33,707.23). These are actual loss suffered by [Seller] due to [Buyer]'s breach and [Buyer] should compensate.

                3) Due to [Buyer]'s breach, [Seller] paid the port congestion charge of RMB 125,800 and rehandling charge of RMB 9,600, totaling RMB 135,400 (i.e., US $16,313.25). Therefore, the Arbitral Tribunal upholds that [Seller]'s request for the port congestion charge and rehandling charge of US $16,313.25.

                4) With respect to [Seller]'s request for the loss of interest on its occupied capital, the Arbitral Tribunal holdss that [Buyer]'s compensation for [Seller]'s price difference would enable [Seller] to receive its profits under the Contract. Therefore, [Seller] does not have sufficient reason for this request and the Arbitral Tribunal does not support [Seller]'s claim.

                5) As to [Seller]'s request for interest on the price difference of US $115,399.68, calculated from 2 June 1995 to the date of this arbitral award under the annual rate of 10%, the Arbitral Tribunal holds that the price difference is uncertain before the Arbitral Tribunal hands down this arbitral award. In other words, before the issuance of this arbitral award, the price difference is not an ascertained debt owed by [Buyer] to [Seller]. Therefore, the Arbitral Tribunal does not support [Seller]'s claim.

                6) As to [Seller]'s request for interest on the transport, storage and loading fees of US $33,707.23, calculated from 1 August 1995 to the date of this arbitral award under the annual rate of 10%, because [Seller] actually incurred these expenses as a result of [Buyer]'s breach and [Buyer] promised to pay the storage fee back to [Seller] in its facsimile, the Arbitral Tribunal supports [Seller]'s claim. But the interest rate should be 8%, not 10%.

                7) For the same reason stated above, the Arbitral Tribunal supports [Seller]'s request for interest on the port congestion charge and rehandling charge of US $16,313.25, calculated from 21 August 1995 to the date of this arbitral award. But the interest rate should be 8%, not 10%.

                8) [Seller] did not submit a valid invoice for legal expenses and [Buyer] challenged the validity of [Seller]'s invoice. Therefore, the Arbitral Tribunal does not support [Seller]'s claim for its attorneys' fees of RMB 60,000.

                9) [Seller] should bear 20% of the arbitration fee, and [Buyer] should bear 80%.

[III.] AWARD

     1. [Buyer] should compensate [Seller]'s loss of the price difference, in the amount of US $115,399.68;

     2. [Buyer] should compensate [Seller]'s transportation, storage and loading charge, in the amount of US $33,707.23.

     3. [Buyer] should compensate [Seller]'s port congestion charge and rehandling charge, in the amount of US $16,313.25.

     4. [Seller]'s request for interest of US $26,918.99 on its occupied capital is dismissed.

     5. [Seller]'s request for interest on the price difference of US $115,399.68 calculated from 2 June 1995 to the date of this arbitral award at the annual rate of 10% is dismissed.

     6. [Buyer] should compensate [Seller]'s loss of interest on the transportation, storage and loading charge of US $33,707.23, calculated from 1 August 1995 to the date of this arbitral award at the annual rate of 8%.

     7. [Buyer] should compensate [Seller]'s loss of interest on the port congestion charge and rehandling charge of US $16,313.25, calculated from 21 August 1995 to the date of this arbitral award at the annual rate of 8%.

     8. [Seller]'s request for RMB 60,000 as attorneys' fees is dismissed.

     9. [Seller] should bear 20% of the arbitration fee, and [Buyer] should bear 80%.

[Buyers] shall pay [Seller] the above amount within forty-five days after the date of this award. Otherwise, interest at the annual rate of 10% shall be imposed.

This award is final.


FOOTNOTES

* 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 [Seller]; Respondent of South Korea is referred to as [Buyer]. 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 Xia Yang: Master of Business Law, Monash University, Australia; BA in English (Translation), Beijing Foreign Studies University.

*** LIU Ping: Lawyer, Baker & McKenzie, Beijing, People's Republic of China; LL.M., Harvard Law School, 2003-2004; Master of Civil and Commercial Law, Tsinghua University Law School, 2000-2003.

1. Note by Reviewer: The Law of the People's Republic of China on Economic Contracts Involving Foreign Interest was superseded by the Contract Law of the People's Republic of China on 1 October 1999.

2. Note by Reviewer: Original in Chinese.

3. Note by Reviewer: Original in Chinese.

4. Note by Reviewer: Original in Chinese.

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Pace Law School Institute of International Commercial Law - Last updated January 12, 2007
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