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CISG CASE PRESENTATION

China 4 September 1996 CIETAC Arbitration proceeding (Natural rubber case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/960904c1.html]

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

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Case identification

DATE OF DECISION: 19960904 (4 September 1996)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1996/41

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Macau (respondent)

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

GOODS INVOLVED: Natural rubber


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 74 ; 75 ; 76 ; 77 ; 78 [Also cited: Article 45 ]

Classification of issues using UNCITRAL classification code numbers:

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

75A2 ; 75B [Damages established by substitute transaction after avoidance: repurchase by aggrieved buyer; Relationship between avoidance and substitute transaction];

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

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

Descriptors: Damages ; Foreseeability of damages ; Cover transactions ; Substitute goods ; Profits, loss of

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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. 1780-1786

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at nn.36, 57, 150, 204, Nordic Journal of Commercial Law (2/2005); Fan Yang, The Application of the CISG in the Current PRC Law and CIETAC Arbitration Practice (December 2006) n. 98

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Case text (English translation) [second draft]

Queen Mary Case Translation Programme

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

Natural rubber case (4 September 1996)

Translation [*] by Zheng Xie [**]

China's International Trade and Economic Arbitration Commission, [hereafter, the Arbitration Commission] accepted the present case according to:

   -    The arbitration clause in Contract No. 94K-741856 TH signed by Claimant [Buyer], Chengdu __ Company, and Respondent [Seller], Macau ___ Company, and
 
   -    The written arbitration application submitted by [Buyer] on 9 July 1995.

According to the Arbitration Law of the People's Republic of China (hereafter, Arbitration Law), on 1 September 1995 the Secretariat of the Arbitration Commission sent the notice of arbitration requesting the parties to appoint jointly or to authorize the Chairman of the Arbitration Tribunal to appoint a presiding arbitrator. Because the parties did not do so, the Chairman appointed Mr. P as the presiding arbitrator. Mr. A, appointed by [Buyer], Ms. D, appointed for [Buyer] by the Chairman of the Arbitration Committee according to the Arbitration Rules, as [Buyer] did not appoint the arbitrator within the stipulated time, and the presiding arbitrator, Mr. P, formed the Arbitration Tribunal on 6 September 1995 to hear the case.

The Arbitration Tribunal held a court session on 3 April 1996 in Beijing. The parties sent their representatives to attend the session. The representatives made oral statements and answered the Arbitration Tribunal's questions. After the session, the parties submitted supplementary statements and appendices.

The Arbitration Tribunal has concluded the case. The following are the facts, the opinion of the Arbitration Tribunal and the award.

FACTS

On 30 June 1994, [Buyer] and [Seller] signed Contract No. 94K-741856 TH for the sale of 2,000 tons of natural rubber. The contract stipulates:

   -    Price and Delivery Term: CIF Fangcheng, China US $1,140/MT
   -    Total Price: US $2,280,000
   -    Payment: Irrevocable L/C at 30 days sight in favor of the [Seller], to be opened 60 days before time of shipment. If the L/C is not opened on time, then all losses incurred will be borne by the [Buyer].
   -    Time of Shipment and Loading Port: 1,000 MTs latest shipment 15 September 1994 from Thailand main port to Fangcheng, China; 1,000 MTs latest shipment 30 September 1994 from Thailand main port to Fangcheng, China.

On 15 July 1994, [Buyer] issued the first L/C. On 29 July 1994, [Seller] urged [Buyer] to execute the second L/C. [Buyer] issued the second L/C as requested by [Seller] and altered the first one. On 3 August 1994, [Seller] asked [Buyer] to alter the L/C a second time; [Buyer] agreed and altered it again on August 5. On 13 September 1994, [Buyer] urged [Seller] to deliver the goods as soon as possible. However, on 28 September 1994, [Seller] requested [Buyer] to postpone the time of shipment to 31 October 1994, and to make the relevant alteration to the L/C. In response to [Seller]'s request for later delivery, on 30 September 1994 [Buyer] altered the L/C and agreed to postpone the time of shipment to 31 October 1994.

On 11 October 1994, [Seller] stated that because the sources were in short supply, it could not ship the goods before the end of October. On October 25, [Seller] wrote to [Buyer] suggesting cancellation of Contract No. 94K-741856 TH. On 28 October 1994, [Buyer] requested [Seller] to indemnify US $500,000 as damages, and [Seller] agreed to make reasonable indemnification to [Seller], but did not do it. In order to perform its resale contract with its client, [Buyer] signed a contract with Hong Kong __ Trade Company to buy 2,300 tons natural rubber at a price of CIF US $1,812.25/t, which caused a price difference.

POSTION OF THE PARTIES

[Buyer]'s claim

[Buyer] filed the arbitration application to have [Seller] bear liability for breach of contract and to indemnify [Buyer] for the loss of the price difference created by a repurchase. [Buyer] sought to have [Seller] indemnify the following damages, remninbi [RMB] 15,757,887.65, or US $1,898,540.68.

1. To indemnify [Buyer] for the fee of issuing and altering the L/Cs, including:

  1. The issuing fee on 15 July 1994, RMB 14,934.50;
  2. The issuing fee on 30 July 1994, RMB 14,893.55;
  3. The altering fee on 10 August 1994, RMB 100;
  4. The altering fee on 5 September 1994, RMB 200;
  5. The altering fee on 30 September 1994, RMB 540.

2. To indemnify [Buyer] for interest on the issuing fee (at [Buyer]'s loan rate 1.098%), RMB 851,169.60.

  1. The issuing fee for L/C H 2900150 executed on 30 July 1994, RMB 14,893.55; (15 July 1994-21 November 1994) for 126 days, i.e., 1,140,000 x 8.5 x 1.098% x (126/30) = 446,864.04;
  2. The issuing fee for L/C H 2900156 (July 30 1994 - 21 November 1994) for 114 days, i.e., 1,140,000 x 8.5 x 1.098% x (114/30) = 404,305.56.

3. To indemnify [Buyer] for the normal profits lost, RMB 1,447,800 according to CISG.

  1. The interest rate difference: 2,280,000 x (9-8.5) = 1,140,000.
  2. [Buyer]'s agency fee 2,280,000 x 9.1 x 1.5% = 307,800.

4. To indemnify [Buyer] for the difference between the price of substitute-purchase Contract No. 95IMP23 signed with Hong Kong __ Trade Company in order to return double deposit and the price of Contract No. 94K-741856 TH, US $1,344,500, i.e., RMB 11,428,250, i.e., (US $91,812.25-1140) x 8.5 x 200 = RMB 11,428,250.

5. To indemnify [Buyer] for the loss of US $200,000,000. [Seller] delayed fulfilling its promise to give [Buyer] reasonable indemnification, so [Buyer] could not indemnify its client on time, which caused [Buyer]'s client not to make a payment of RMB 750,000,000. Even if [Buyer]'s client makes the payment after the dispute is resolved, it has affected [Buyer]'s sale and turnover of capital, which is a severe loss.

In addition, [Buyer] requested that [Seller] pay the arbitration fee, its attorneys' fee and traveling expenses, RMB 500,000.

[Seller]'s defenses

[Seller] alleges:

1. The L/C executed and altered by [Buyer] did not conform to the contract. The beneficiary's address was wrong in the L/Cs; therefore, [Seller] could not prepare the goods and in the end could not deliver the goods.

2. In its fax of 13 September 1994, [Buyer] mentioned that the market price of rubber was decreasing; under such circumstances, even if [Seller] did not deliver the goods, [Buyer] could buy the goods from the market at lower price than the contract price. Therefore, [Buyer] should not have suffered any loss.

3. On 11 October 1994, [Seller] notified [Buyer] that it could not ship the goods before the end of October, but on the same day, [Buyer] signed its agency agreement with Chengdu A Business Ltd. Company (hereafter, A Company) for importing the goods. If this transaction is true, the loss suffered by [Buyer] due to its agreement with A Company was caused by [Buyer] itself, and has nothing to do with [Seller].

4. The quantity in the agreement signed by [Buyer] and A Company is 2,000 tons. It is obvious that [Buyer]'s domestic client is only A company. [Buyer]'s assertion that it has many domestic clients does not conform to the facts.

5. When [Seller] notified [Buyer] to cancel the contract, the transaction between the parties ended. After that, [Seller] neither had a duty to deliver the goods to [Buyer], nor did it have the duty to predict the trend of the market. [Seller] alleges that because the contract in this case was cancelled, the agreement between [Buyer] and its client ended too. The contract between [Buyer] and Hong Kong __ Company is not related to the contract of this case.

6. Contract No. 95 IMP 23 between [Buyer] and Hong Kong __ Company is not the appropriate substitute because the goods under the contract of this case involved 2,000 tons natural rubber produced in Thailand, but the goods under Contract No. 95 IMP 23 involved 2,300 tons. The first installment of the goods under Contract No. 95 IMP 23, 1,000 tons, was shipped by a Thailand Company from Thailand port on 17 April 1995; the second installment was shipped on 20 July 1995 three months after the first installment was shipped from Singapore. Thus, these two contracts have no substitutive relationship.

7. [Buyer]'s claims have no legal basis

      (1) [Buyer]'s first claim for the L/C issuing fee: such fee should, in any event, be incurred when the contract is performed properly. [Buyer] is not entitled to normal expenses and so-called loss of profits at the same time.

      (2) [Buyer]'s second claim for "interest on capital for issuing the L/C: [Buyer] did not prove that because of issuance of the L/C, it used capital. This would have been the case even if the contract was properly performed. Thus, [Buyer] was not entitled to the loss of interest on this capital and loss of profits at the same time.

      (3) [Buyer]'s third claim for the loss of interest rate difference is not reasonable, and this could not foreseen by [Seller] at the time of signing the contract. Accordingly, [Seller] should not be liable for it.

      (4) The final time of shipment stipulated by the parties is 31 October 1994. However, Contract No. 95 IMP 23 was signed by [Buyer] and Hong Kong Company in March 1995, five months after the time of shipment. [Buyer]'s calculation of loss is not justifiable.

      (5) [Buyer] did not provide evidence to prove its fifth claim.

In conclusion, [Seller] asserts:

1. [Buyer] first severely breached the contract, and this relieved [Seller] of its obligation to deliver the goods.

2. Assuming [Seller] breached the contract, [Buyer] did not suffer any loss at all, so it is not entitled to indemnification.

3. Assuming [Buyer] suffered loss, such loss could have been avoided or mitigated, but [Buyer] did not avoid or mitigate the damages. Thus, [Buyer] is not entitled to the indemnification.

4. [Buyer] bears the duty to prove the reality of its loss, the relationship between its claims and [Seller]'s breach, the foreseeability of its loss, and [Buyer]'s fulfillment of the duty to mitigate the damages. However, [Buyer] did not prove any above items. [Buyer]'s claims should therefore be dismissed.

[Buyer]'s response

To [Seller]'s defense, [Buyer] objects:

1. [Seller]'s non-delivery is not related to whether [Buyer] issued conforming L/Cs or not. During the performance of the contract, [Seller] said that it could not deliver the goods on time because the source was in short supply. [Seller] never stated that it could not deliver the goods and perform the contract, because of the L/C issued and altered by [Buyer].

2. [Seller]'s assertion that [Buyer] could buy the goods in the market at a lower price than the contract price on the basis of [Buyer]'s fax of 13 September 1994 is not supported.

3. The increasing market price occurred from the middle of August 1994 to 13 September 1994, at a time when [Seller] had not suggested cancellation of the contract. [Buyer] had no reason to buy substitute goods at that time. To the agency agreement with A Company: before signing the agreement with A Company, [Buyer] had negotiated with A Company, and the October 11 date is coincidental. Although on 11 October, 1994, [Seller] notified [Buyer] it could not deliver the goods before the end of October, [Seller] did not state that it could not deliver the goods after that. [Seller] did not suggest cancelling the contract until 25 October 1994.

4. During the performance of the contract, [Buyer] in fact dealt with many companies, which were represented by one company which signed the contract with [Buyer]. This is the common practice in domestic trade.

5. To [Seller]'s sixth point in its defense, [Seller] alleges as a discrepancy, [Buyer]'s purchase of 2,000 tons of substitute goods, and at the same time an added 300 tons of goods. This is common business practice. [Buyer]'s claims are justifiable.

      (1) The L/C issuing fee and interest on capital used for the L/Cs were not normal expenses in [Buyer]'s claim as asserted by [Seller]. In order to avoid enlarging damages due to the non-performance of Contract No. 94K-741856 TH, [Buyer] signed Contract No.95 IMP 23 to purchase substitute goods, and paid a security deposit and issuing fee for the L/C. It caused the L/Cs to be issued twice for buying the goods of this case. The expense of the first L/C is additional expense to buy the goods. [Buyer] does not request [Seller] to indemnify the expense for the second L/C, which is normal expense.

      (2) The interest rate difference: according to the agreement between [Buyer] and A Company: [Buyer] bought goods at a set price under Contract No. 94K-741856 TH, and [Buyer] resold the goods to its clients at the price of US $1,140/t X 9 RMB/USD x 101.5% = RMB 10,413.9/t. However, [Buyer]'s client asserted that the exchange rate should be US $1 : RMB 8.5 due to [Buyer]'s late delivery, and refused to pay expenses; thus, [Buyer] suffered the loss of price difference:

[Buyer]'s actual reselling price: US $1,140/t x 8.5 RMB/USD = RMB 9690/t.
[Buyer]'s loss of price difference: 10,413.9 x 2,000 T - 9,690 x 2,000 T = RMB 1,447,800.

      (3) It is a reasonable measure for [Buyer] to buy the substitute goods. To avoid enlarging the damages, [Buyer] and [Seller] jointly analyzed the market and predicted the trend of the price. On 23 January 1995, [Seller] wrote to [Buyer] notifying that the current price was FOB US $1,740/t, and the market price would decrease a lot. The price equivalent to FOB US $1,725.36/t, is lower than [Seller]'s quotation. Accordingly, the price of [Buyer]'s substitute goods is reasonable.

      (4) The basis to calculate the loss asserted in [Buyer]'s fifth claim: because [Seller] postponed making reasonable indemnification many times, [Buyer] could not indemnify its client, which caused its client not to make payment of RMB 750,000,000 for eight months. [Buyer] had to suspend its business of aluminum foil. On the basis of its normal business, [Buyer] can make an RMB 750,000,000 turnover three times, and the profit is 10%, so the actual loss is RMB 750,000 x 3 x 10% = RM 225,000,000. [Buyer] requests [Seller] to indemnify for RMB 200,000,000.

[Buyer]'s claims are in accordance with international trade convention and custom.

OPINION OF THE ARBITRAL TRIBUNAL

1. Applicable law

The parties, (one is a Chinese company, and the other is a Macau Company) did not stipulate the applicable law in the contract. China and Portugal, which Macau at present belongs to, are parties to the United Nations Convention on Contracts for the International Sale of Goods (1980) (CISG). The contracting parties did not exclude the CISG. The Arbitration Tribunal decides that when the contract does not stipulate or does not clearly specify the applicable law, CISG is applied.

2. Liability for non-performance of the contract

[Buyer] issued the L/C. [Seller] asserts that the L/C did not conform to the contract; it contained omissions such as the beneficiary's address. However, when [Seller] requested alteration of the L/C, [Buyer] actively altered it. On 30 September 1994, [Buyer] finished the final alternation of the L/C. [Seller] did not raise any objection to the L/C altered on 30 September 1994. Accordingly, the Arbitration Tribunal holds that [Buyer] issued a conforming L/C.

To the time of issuing the L/C, [Seller] asserts that the non-conforming L/C led to [Seller] being unable to prepare the goods. The Arbitration Tribunal notes that on 3 August 1994, [Seller] asked [Buyer] to alter L/C for the second time, and [Buyer] altered the L/C as requested by [Seller] on 5 August 1994; it was two months to the time of shipment, 30 September 1994. On 26 September 1994, it was four days before the time of shipment, [Seller] requested to delay the delivery and asked [Buyer] to alter the L/C. Thus, [Buyer] altered the L/C on 30 September 1994 mainly because [Seller] requested a delay in delivery. In addition, on 13 September 1994, [Buyer] wrote to [Seller] requiring it to deliver as soon as possible and, at that time, [Seller] did not express doubts over the delivery. On 26 September, [Seller] requested authorization to deliver the goods late. For the above reasons, [Buyer] performed the obligation to execute the L/C. The Arbitration Tribunal does not support [Seller]'s assertion that because [Buyer] issued and altered an L/C, which is not conforming to the contract, [Seller] could not prepare the goods.

When [Buyer] executed the L/C, [Seller] was obligated to deliver the goods according to the contract and the later agreement. The parties agreed to delay the time of shipment from 30 September 1994 to 31 October 1994, and that [Seller] would load the goods before 31 October 1994 and perform the obligation of delivery. [Seller] did not perform its obligation of delivery and breached the contract. According to Articles 45 and 74 of CISG, [Seller] shall indemnify [Buyer] the damages caused by [Seller]'s breach.

3. [Buyer]'s claims

      (1) The price difference for the substitute goods

According to Article 75 of CISG, when [Seller] breached the contract, [Buyer], who took reasonable measures to buy substitute goods, is entitled to the price difference. However, [Seller] asserts that the goods [Buyer] bought were not substitute goods, and that the time of this purchase was not reasonable. To this question, the Arbitration Tribunal holds that Contract No. 95 IMPR23 signed by [Buyer] and Hong Kong __ Trade Company is for the substitute goods, natural rubber (No. 3 film), and that 2,000 tons of that purchase are for substitute goods. The reasonable time for buying substitute goods would be within two months of the date when [Seller] requested cancellation of the contract on 25 October 1994. Accordingly, [Buyer] should buy the substitute goods by December 1994. [Buyer] provided Singapore Commodity Exchange materials which show the international price in December 1994. After inspecting this material, the Arbitration Tribunal finds that the average price that month is FOB US $1,429/t, amounting to a CNF price plus freight of US $1,489/t. In sum, the Arbitration Tribunal holds that because [Seller] breached the contract, [Buyer] is entitled to the price difference between US $1,489 and US $1,140 for 2,000 tons goods, i.e., US $(1,489 - 1,140)/t x 2000 tons = US $698,000, i.e., RMB 5,983,000 (the exchange rate: 1 USD : RMB 8.5).

      (2) The loss of the fee for issuing the L/C

The Arbitration Tribunal holds this loss is caused by [Seller]'s non-delivery. [Buyer] bought the substitute goods, so it paid the fee for the additional L/C. Therefore, [Seller] shall pay the issuing fee of RMB 30,668.05.

      (3) The loss of interest on capital for the L/C

The Arbitration Tribunal holds that, according to international practice, a deposit is required for issuing an L/C. In this case, because [Seller] breached the contract, [Buyer] bought substitute goods, which caused the [Buyer] to issue an L/C twice. Interest on capital incurred amounted to RMB 851,169.6. [Seller] shall pay [Buyer] this amount.

      (4) The exchange rate difference

When [Buyer] signed the contract with its client, it stipulated the exchange rate of US $1: RMB 9, but its client only admitted the exchange rate of US $1: RMB 8.5. To [Buyer]'s claim to request [Seller] to pay the exchange rate difference, the Arbitration Tribunal holds it is not within the scope of the dispute in this case, and [Seller] could not foresee this dispute. Thus, the Arbitration Tribunal could not support it.

      (5) The loss of expenses of importing the goods in connection with [Buyer]'s agency arrangement

[Buyer] asserts such loss is part of its loss of profits. The Arbitration Tribunal holds the price difference has already included the loss of profits. In addition, the Arbitration Tribunal has calculated the price difference in the above 3(1). Thus, the Arbitration Tribunal does not support this claim.

      (6) The loss of payment not made by [Buyer]'s client

The Arbitration Tribunal holds such loss could not be foreseen, so does not support this claim.

      (7) Attorneys' fees and travel expenses

[Buyer] did not provide a certification to prove the attorneys' fee and traveling expenses for this case. The Arbitration Tribunal does not support [Buyer]'s claim for this amount.

      (8) The arbitration fee

[Seller] fails in this case, but not all of [Buyer]'s claims are supported. Thus, [Seller] shall pay 70% of the arbitration fee, and [Buyer] shall pay 30%.

AWARD

  1. [Seller] shall indemnify [Buyer] for the price difference, RMB 5,933,000.

  2. [Seller] shall indemnify [Buyer] for the fees for issuing the L/Cs, RMB 30,668.05.

  3. [Seller] shall indemnify [Buyer] for the interest on capital for issuing the L/C, RMB 851,169.6.

  4. [Buyer]'s other claims are dismissed.

  5. [Seller] shall pay 70% of the arbitration fee, and [Buyer] shall pay 30%.

The above amount RMB 7,047,642.95 shall be paid within 45 days of the date on which the award is handed down. If [Seller] pays beyond this time limit, 11% interest shall be added.

This is the final award.


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 [Buyer]; Respondent of Macau is referred to as [Seller]. Amounts in the currency of the United States (dollars) are indicated as [US $]; amounts in the currency of the People's Republic of China (renminbi) are indicated as [RMB].

** Zheng Xie, LL.M. Washington University in St. Louis, LL.M., BA in Economics, University of International Business and Economics, Beijing.

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