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CISG CASE PRESENTATION

China 28 November 1996 CIETAC Arbitration proceeding (Moly-oxide case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/961128c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 19961129 (28 November 1996)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1996/54

CASE NAME: Unavailable

CASE HISTORY: Unavailable

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

BUYER'S COUNTRY: United States (respondent)

GOODS INVOLVED: Moly-oxide


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 4 ; 74 ; 77 ; 78 [Also cited: Articles 39 ; 49 ; 64 [Also relevant: Article 25 ]

Classification of issues using UNCITRAL classification code numbers:

4B [Scope of Convention (issues excluded): validity, agency];

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

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

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

Descriptors: Scope of Convention ; Validity ; Agency issues ; Damages ; Foreseeability of damages ; 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 Ji Mao Yi Zhong Cai Wei Yuan Hui Cai Jue Shu Hui Bian [Compilation of CIETAC Arbitration Awards] (May 2004) 1996 vol., p. 2145

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at nn.124, 144, 195, 203, 222, 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) Arbitration Award

Moly oxide case (28 November 1996)

Translation [*] by Zhan Changzheng [**] and Wei Xia, Yang [***]

INTRODUCTION

The China International Economic & Trade Arbitration Commission (Arbitration Commission, originally named the Foreign Trade Arbitration Commission of the China Council for the Promotion of International Trade) accepted this case on 4 August 1995 in accordance with:

   -    The arbitration clause contained in Contract No. 95DEX002 entered into between Claimant [Seller], ___ (Shenzhen) Industrial Co., Ltd. of the People's Republic of China, and Respondent [Buyer], American ___ Company; and
 
   -    The written application for arbitration submitted by [Seller].

After accepting the case, on 5 August 1995, the Arbitration Commission sent an arbitration notice to [Buyer] asking [Buyer] to appoint an arbitrator and to submit its defense within the prescribed time. On 25 September 1995, [Buyer] sent to the Arbitration Commission a fax, appointing Mr. D as a member of the Arbitral Tribunal.

On 23 October 1995, [Buyer] submitted to the Arbitration Commission a defense together with a challenge to the Arbitration Commission's jurisdiction. [Seller] submitted a statement opposing this challenge, expressing its consent to the jurisdiction of the Tribunal. The Arbitration Commission reviewed the written material on this issue and on 21 November 1995 ruled that the Arbitration Commission has jurisdiction over the case.

The parties failed to jointly appoint the Presiding Arbitrator pursuant to the Arbitration Law of the People's Republic of China. The Chairman of the Arbitration Commission therefore made this appointment, appointing Mr. P as the Presiding Arbitrator according to the Arbitration Rules. On 14 December 1995, Mr. P, Mr. A, appointed by [Seller], and Mr. D, appointed by [Buyer], established the Arbitral Tribunal to hear the case.

The Arbitral Tribunal reviewed the Arbitration Application and the defense and announced that it would hear the case on 6 February 1996 in Beijing. [Buyer] twice requested deferrals of the hearing, on 24 and 29 January 1996. The Arbitral Tribunal approved the [Buyer]'s request and scheduled a hearing for 11 March 1996. Because Mr. A, the arbitrator appointed by [Seller], could not attend the hearing of 11 March 1996 due to an urgent official duty, [Seller] appointed Mr. C as a substitute for Mr. A. [Buyer] raised no objection to this. On 11 March 1996, the Arbitral Tribunal consisting of Mr. P, the Presiding Arbitrator, Mr. C, appointed by [Seller], and Mr. D, appointed by [Buyer], held an oral hearing in Beijing. The representatives of the parties were present. They had no challenge to the establishment of the Tribunal. The parties made oral statements and answered the Tribunal's questions. After the hearing, both parties submitted supplementary material.

On 29 August 1996, the Arbitral Tribunal concluded that further discussions were needed because of the complexity of the case and asked the Arbitration Commission for authorization to defer the award. The Arbitration Commission consented to postponement of the award until 14 December 1996.

The case has now been concluded. The Arbitral Tribunal concluded the case on the basis of the written materials and the court session and handed down its award. The facts, opinion, and the award of the Tribunal are as follows:

I. THE FACTS

On 17 January 1995, [Buyer] and [Seller] entered into Contract No. 95DEX002 (the "Contract").The Contract provides:

Goods: [Buyer] purchases 16.5 metric tons [MT] Moly oxide from [Seller], the minimum content of oxide should be 51.68%

Unit price: US $12.90 per pound

Total amount: US $259,632.20

Date of shipment: Prior to 10 February 1995

Port of shipment: Tianjin port, China

Payment: [Buyer] shall establish an irrevocable sight Letter of Credit (L/C) in favor of [Seller] within three days upon arrival of the goods at Tianjin Port which should be negotiated within fifteen days upon loading of the goods. 95% should be negotiable against documents, and the remaining 5% should be paid within thirty days after arrival of the goods at the destination port.

After conclusion of the Contract, [Seller] shipped 16.25 MT Moly oxide to Tianjin Port, China on 19 January 1995 and on the same day notified the [Buyer]'s Representative office.

   -    On 21 January 1995, [Seller] sent a fax to [Buyer]'s headquarters, asking for establishment of a L/C. On 26 January 1995, [Buyer] faxed a copy of the L/C to [Seller].
 
   -    Then, on 8 February 1995, [Buyer] notified [Seller] that the contract for the purchase of 16.25 MT Moly oxide was terminated because [Buyer] found that there are problems in quality and quantity in Moly products from other Chinese suppliers.
 
   -    On 21 February 1995, [Seller] indicated to [Buyer] the legal consequence of the breach. On 22 February 1995, [Buyer] sent to [Seller] a fax, stating that [Buyer] would indemnify the [Seller]'s damages after the [Buyer] receives compensation from its faulty Chinese supplier.
 
   -    On 10 March 1995, [Seller] asked [Buyer] to continue to perform the Contract. On 31 March 1995, [Buyer] informed [Seller] that its person in charge of the matter, Michael, was out of office and would reply to [Seller] later. Although [Seller] pressed [Buyer] twice again to give a reply, [Buyer] failed to reply.
 
   -    On 10 May 1995, [Seller] made formal claims against [Buyer]. On 6 June 1995, [Buyer] delegated a representative to negotiate with [Seller] over the claims. They met in the Great Wall Hotel in Beijing, but did not reach an agreement. The [Buyer]'s representative, Mr. Luo, indicated that he would provide a reply after he was back to the United States.
 
   -    At the end of June 1995, [Seller] returned the goods to the original supplier, Shenzhen___ Industrial Co., Ltd., after storing the goods for half a year. On 13 July 1995, [Buyer] sent a letter to [Seller], stating that the Contract was invalid because it had been concluded without appropriate authorization.

II. POSITION OF THE PARTIES

[Seller]'s claims:

[Seller] filed for arbitration, requesting the Tribunal to rule that:

1. [Buyer] should indemnify the [Seller]'s economic loss, including:

      a) Loss due to price difference: US $151,333.40;

Calculation: US $259,632.20 (the total price of the Contract) - US $106,398.8 (the total resale price) - US $1,900 (Freight and Insurance fee) = Loss of US $151,333.40 due to price difference.

      b) Loss of tax refund for export: US $39,351.85

According to China's tax policies, a company can enjoy a value-added-tax refund for exported commodities. [Seller] suffered the loss of this tax refund because [Seller] was unable to export the goods due to [Buyer]'s failure to perform the contract.

Calculation: 16.25 MT (quantity of goods to be exported) × RMB 140,000 (purchase price) × 0.17 (value-added-tax rate) ÷ 1.17 = RMB 330,555.56, amounting to a loss of tax refund of US $39,351.85 at the exchange rate 8.4

      c) Loss of interest

            1) The loss of interest between 25 February 1995 (the final negotiable day, i.e., the final day of the L/C validity period stipulated in Article 7 of the Contract) and 20 June (the day of resale) is RMB 125,402.35, amounting to US $14,928.85.

US $259,632.20 × 8.4 (exchange rate) × 1.5% (monthly rate) × 115 (days) ÷ 30 = RMB 125,402.35.

            2) The loss of interest between 21 June 1995 and 11 March 1996 is RMB 165,256.06, amounting to US $19,673.

US $151,333.40 × 8.4 (exchange rate) × 1.5% (monthly rate) × 260 (days) ÷ 30 = RMB 165,256.06. The loss of interest should be calculated until the actual payment date.

      d) Customs and port charges: US $313.53

Due to [Buyer]'s violation of the contract, [Seller] had to deregister the customs clearance and store the goods. The goods were stored at the Tianjin Jinfeng Warehouse for half a year. The warehouse charge is RMB 2,596, amounting to US $313.53.

      e) Attorneys' fee and other expenses: US $11,000

2. [Buyer] should pay the arbitration fees.

THE MAJOR ISSUES IN THE DISPUTE

1. THE VALIDITY OF THE CONTRACT

[Buyer]'s position

[Buyer] alleged that there was no legally binding contract between the parties. The Contract was signed by and between [Seller] and Mr. Luo. It is [Buyer]'s position that:

      a) Ms. Luo signed the Contract on her own behalf. There was no seal of [Buyer] on the Contract. There was no evidence to show that Ms. Luo signed the Contract on behalf of [Buyer] or for the benefit of [Buyer].

      b) Ms. Luo was not authorized by [Buyer] to sign the Contract. Ms. Luo did not indicate in the Contract that she signed the Contract as [Buyer]'s agent. Therefore, pursuant to China's law, Ms. Luo did not sign the Contract as [Buyer]'s agent.

      c) Ms. Luo did not get the consent of [Buyer]'s authorized representatives and Ms. Luo herself was not an authorized representative of [Buyer].

      d) [Buyer] has not explicitly or implicitly approved the Contract after Ms. Luo signed it.

[Seller]'s position

[Seller] alleged that this is a legally binding international sales contract between the parties for the following reasons:

      a) The law applicable to the validity of the Contract.

The United Nations Convention on Contracts for the International Sale of goods (the CISG) does not govern issues relating to validity of contract. Therefore, the domestic law should be applied to decide on the validity of the Contract. In its objection to the Tribunal's jurisdiction and in the substantial response, [Buyer] applied the General Principles of Civil Law of the People's Republic of China (the General Principles of Civil Law) and the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest (the Foreign Economic Contract Law) as the basis for judging the validity of the Contract's validity. [Seller] also agreed thereto in its response regarding the issue of jurisdiction. [Seller] agrees with the application of China's law, in this case as the law applicable to the validity of the Contract between the parties.

      b) Ms. Luo signed the Contract on behalf of the [Buyer].

On 28 December 1994, 4 January 1995, and 13 January 1995, [Seller] sent offers to [Buyer] offers three times. [Buyer] replied to the third offer of [Seller] on 14 January 1995. On 16 January 1995, [Buyer] sent a telex to [Seller], offering a proposal in respect to term of payment. The contents indicated that the proposal was offered by Ms. Luo, the representative of [Buyer], on behalf of [Buyer]. The above documents fully established that Ms. Luo had signed the Contract on behalf [Buyer]. [Buyer]'s statement in its defense that at the time of conclusion of the contract, Ms. Luo had not had a written Power of Attorney required by Article 65 of the General Principles of Civil Law misinterprets the Chinese law. As a matter of fact, Article 65 provides that a civil juristic act may be entrusted to an agent in writing or orally. If legal provisions require the entrustment to be written, it shall be effected in writing. Furthermore, the Foreign Economic Contract Law does not require a written Power of Attorney at the time of conclusion of a foreign economic contract. In other words, an authorizing party can authorize in writing or orally the other party to conclude a foreign economic contract in its name.

      c) The Contract also became legally binding on [Buyer] because [Seller] recognized the Contract retroactively.

            1) Article 66.1 of the General Principle of Civil Law states that "if a principal is aware that a civil act is being executed in his name but fails to repudiate it, his consent shall be deemed to have been given." On 19 October 1987, the People's Supreme Court of the People's Republic of China issued an explanation with regard to the Foreign Economic Contract Law, according to which, "The principal shall bear civil liability for an act performed by an actor with no power of agency, beyond the scope of his power of agency or after his power of agency has expired, only if he recognizes the act retroactively." The facts of this case are:

- [Seller] notified [Buyer] of the establishment of a L/C on 19 January 1995. On 20 and 21 January, [Seller] sent telexes, respectively, to [Buyer]'s Beijing Representative Office and [Buyer], pressing [Buyer] to establish a L/C as soon as possible.

- Through 13 July 1995, [Buyer] never indicated to [Seller] that the Contract had been concluded without [Buyer]'s authorization. For the half a year after conclusion of the Contract, [Buyer] was aware that Ms. Luo had represented [Buyer] in entering into the Contract, but did not deny the Contract.

This should be regarded as an acceptance of the representation by [Buyer].

            2) The [Buyer]'s action indicated that [Buyer] accepted that the Contract had been concluded by Ms. Luo on behalf of [Buyer] and that the Contract was legally binding upon [Buyer] and [Seller]. [Buyer]'s actions during contract performance and indemnity negotiation proved that [Buyer] recognized the Contract as valid.

2. THE Pb CONTENT OF THE GOODS DELIVERED BY [SELLER]

[Buyer]'s position

[Buyer] alleged that the lack of conformity of the [Seller]'s goods with the Contract was also one of the main reasons that [Seller] did not open a L/C. As to the quality of the goods, the Contract specifies that the Pb content of Moly oxide should not exceed 0.045%, but the Pb content of the goods prepared by [Seller] exceeds 0.046%. Although [Seller] asked [Buyer] to accept the goods with 0.046% Pb contents and to establish a L/C, [Buyer] insisted that the Pb content be 0.045 in the application for issuance of L/C. This showed that [Buyer] had not consented to the amendment of the index of the goods and [Seller] should deliver the goods in accordance with the Contract. [Seller] has made no response to this issue.

Based on the above, [Buyer] alleged that [Seller] breached the Contract at first and should not be entitled to claim against [Buyer] without remedying its fault.

[Seller]'s position

[Seller], however, alleges that [Buyer] had not brought objections to the Pb content to [Seller]'s attention during the performance of the Contract. Had [Buyer] registered such objections, [Seller] could have lowered the Pb content. In accordance with Article 39 of the CISG, [Buyer] was deprived of the right to claim in respect to the lack of compliance of the goods because [Buyer] failed to notify [Seller] of the lack of compliance of the goods within a reasonable time. In addition, pursuant to Article 49 of the CISG, [Buyer] would not be entitled to terminate [avoid] the Contract by reason of 0.01% difference of Pb contents. Actually, the real reason [Buyer] did not perform the Contract is that there are problems in quality and quantity in Moly products [Buyer] bought from other Chinese suppliers, but not because of the lack compliance of the goods under the Contract.

3. DID [SELLER] TAKE SUFFICIENT MEASURES TO MITIGATE THE LOSS?

[Buyer]'s position

[Buyer] alleged that:

      a) On 19 January 1995, [Seller] shipped the goods to Tianjin Port. In accordance with the Contract, [Buyer] was to open a L/C around 22 January 1995, but [Buyer] failed to do so. Article 10 of the Contract reads that "in case [Buyer] fails to open a L/C within the prescribed time by the Contract or the L/C established by [Buyer] fails to conform with the Contractor and is not timely amended upon notification of [Seller], [Seller] should be entitled to avoid the Contract or to postpone the delivery of the goods and to claim for damages. On 8 February 1995, [Buyer] clearly informed [Seller] that [Buyer] would not accept the goods, therefore, the Contract had been avoided since 8 February 1995, and [Seller] was obligated to take measures to mitigate the loss.

      b) Since 8 February 1995, the price of Moly oxide in the international market had been stable for a long period, the trading of Moly oxide made in China had been very active and there were many export opportunities. [Seller] had considerable time and reasonable opportunities to resell and export the goods. Pursuant to the CISG, [Buyer] should not bear the loss caused by [Seller]'s failure to resell the goods in a timely manner. [Buyer] alleges that a reasonable price difference should be calculated based on the average international market price of February and March 1995, and that the loss of the price difference should be limited to US $31,296.79.

      c) [Seller] failed to reasonably endeavor to resell the goods. [Seller] did not produce evidence indicating its dealings with other companies, such as faxes of offer and acceptance. [Seller], as the subsidiary of the largest exporting company in China, [Seller] had the capacity find another buyer and resell the goods.

Altogether, [Buyer] alleged that the loss of price difference was caused by the [Seller]'s own fault. [Seller] failed to mitigate the loss; [Seller] should therefore be responsible for the loss by itself.

[Seller]'s position

[Seller] alleged that:

      a) On 8 February 1995, [Buyer] notified [Seller] that [Buyer would not take the goods did not open the L/C. By doing that, the [Buyer] breached the contract, not just avoided the Contract. According to Article 49 and Article 64 of the CISG, a party may declare the contract avoided if the failure by the other party to perform any of its obligations under the Contract or the CISG amounts to a fundamental breach of contract; or if the other party does not, within AN additional period of time fixed by the party, perform its obligations.

In this case, [Buyer], as the breaching party, has no right to declare the Contract avoided. [Buyer] should not be allowed to twist its breaches of contract into declaration of the avoidance of the Contract. [Seller] has never accepted the [Buyer]'s breaches of contract. On the contrary, before [Seller] officially claimed against [Buyer] on 11 May 1995, [Seller] had requested [Buyer] to continue to perform the Contract several times. [Seller] declared the Contract avoided on 11 May 1995.

      b) [Seller] does not accept [Buyer]'s opinion that "Since 8 February 1995, the price of Moly oxide in the international market had been stable for a long period, the trading of Moly oxide made in China had been very active and the export quantity was very large."

            1) The truth is that the price of Moly oxide had been decreasing since 8 February 1995, as clearly indicated by the annexes to the [Buyer]'s defense. [Buyer] should not reverse its own previous statement and evidence by its later statement.

            2) The market for Chinese Moly oxide had been on the downswing. [Buyer]'s evidence shows that transactions that were active cannot be used to reflect the trade situation after 8 February 1995. The evidence lodged by [Buyer] is neither consistent nor persuasive.

            3) As to the price difference, [Seller]'s claim for the loss of price difference, US $151,333.40, has legal and factual basis. Article 75 of the CISG provides that

"If the contract is avoided and if, in a reasonable manner and within a reasonable time after avoidance ... 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."

In this case, [Seller] declared the Contract avoided on 11 May 1995, and within a reasonable time after the avoidance, on 20 June, [Seller] resold the goods in a reasonable manner (at the price of US $5.29 per pound), [Buyer] therefore should be entitled to claim the loss of price difference, US $151,333.40. Moreover, on 12 June, before the resale, [Seller] notified the [Buyer] of the resale price and [Buyer] raised no objection, which also justified the reasonableness of the resale. Hence, [Seller] alleges that [Seller] has tried the best efforts to mitigate the loss at a time when the market price of Moly oxide had been decreasing and it was very difficult to resell the goods. [Seller] should be entitled to the compensation for the loss of price difference.

      c) [Seller] has exerted its best efforts to resell the goods. [Seller] developed extensive liaisons and asked other companies to sell the goods. [Buyer] contested that no evidence indicated the process of a quotation or a counter-quotation. [Seller] alleges that the laws do not require that a quotation or counter-quotation should be in writing; a quotation or a counter-quotation is just an interlink occurring among offers, counter-offer, and final acceptance before the official conclusion of the contract; it is normal to negotiate by phone in international sales, and the [Seller]'s efforts to resell the goods cannot be denied by excuse of lacking of written documents of quotations or counter-quotation. Moreover, many companies filed witness statements showing that [Seller] had contacted them in respect to the resale of Moly oxide. Article 77 of the CISG provides that a party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss. [Seller] referred to a senior scholar's viewpoint that reasonable measures should not include excessive measures which would cause the damaged party to suffer more risks, more expenses or more insults. In order to mitigate the loss, [Seller] has exerted its best efforts and suffered excessive risks and insults beyond that called for under the CISG. Moreover, the CISG provides only that the damaged party should take reasonable measures to mitigate the loss, but does not state that the object of the mitigation must be achieved.

4. WHO SHOULD BE RESPONSIBLE FOR LOSS OF TAX REFUNDS FOR EXPORT?

[Buyer]'s position

[Buyer] alleged that the [Buyer] should not be held responsible for the tax refund claim because this is not a loss which [Buyer] foresaw or ought to have foreseen at the time of the conclusion of the contract as stipulated by Article 74 of the CISG. [Buyer] could not foresee the Chinese policy of tax refund for export and could not foresee that [Seller] would not export the goods again in case of [Buyer]'s breach.

[Seller]'s position

[Seller] alleged that, subject to the Provisional Regulations of the People's Republic of China on Value Added Tax and the Administrative Measures on Tax Refund for Export, [Seller] should be entitled to RMB 330,555.56 of tax refund as an export company. [Seller] has incurred this direct loss because of the [Buyer]'s breach. As to the reasonable foreseeability of this loss, [Seller] alleged that:

      a) The Chinese policy of tax refund for export has been published in newspapers with all kinds of regulations. Moreover, the policy is not executed only by China but by many countries for the purpose of promotion of export and maintenance of fair competition. The tax refund for export is a key factor influencing the price of export goods and is an important part of the profit that [Seller] should obtain in its dealings. Although [Buyer] is an American company, [Buyer] has done business with China for as long as ten years and thus should be familiar with the Chinese policy of tax refunds for export.

      b) Pursuant to Article 74 of the CISG, [Buyer] ought to have foreseen at the time of the conclusion of the Contract, in the light of the facts and matters of which [Buyer] then knew or ought to have known, that [Seller] would incur the loss of tax refund for export, as a possible consequence of the [Buyer]'s breach of contract.

      c) [Buyer], as a trading company doing business in the Moly oxide industry for a long period, ought to have foreseen that [Seller] might not have been able to find another buyer in the international market when the market price was decreasing and that [Seller] would incur the loss of tax refund because the goods could not be exported.

5. INTEREST

[Buyer]'s position

[Buyer] alleged that [Seller] failed to resell the goods in a timely manner, which resulted in overstock and return of the goods, and that [Buyer] should not be responsible for the loss caused thereby. In addition, according to the agreement on return of the goods submitted by [Seller], [Seller] did not pay the supplier for the goods before the conclusion of the agreement, therefore, no interest occurred. [Sellerer]'s claim for the interest has no basis.

[Seller]'s position

[Seller] alleged that:

      a) The claim for interest complies with Article 78 of the CISG.

      b) [Seller] has taken reasonable measures to mitigate the loss. The loss of interest was caused by the [Buyer]'s breach.

      c) It is reasonable and lawful to take the corresponding loan interest rate as the basis of calculating the interest. Pursuant to Announcement of the People's Bank of China on Further Reforming the Foreign Exchange Management System and Provisional Measures for Administration on Settlement and Sales of Foreign Exchange, the foreign exchange income of exporting goods by all enterprises within the territory of the People's Republic of China must be cleared and sold to authorized banks according to the pegged exchange rate. Moreover, the monthly rate of 1.5% reflects the actual loss of interest incurred by [Seller].

6. CUSTOMS AND STORAGE CHARGE, AND EXPENSES FOR THE ARBITRATION

[Buyer]'s position

[Buyer] alleged that:

      a) Because [Seller] could not provide goods in conformity with the Contract, [Buyer] did not open a L/C within the time prescribed time by the Contract. [Buyer] instead notified [Seller] that the Contract would not be performed, [Buyer] therefore should not bear the customs charge.

      b) [Seller] delayed reselling the goods, which resulted in overstock of the goods. The storage charge arising therefrom should not be borne by [Buyer].

      c) [Seller] failed to produce evidence to support the customs and storage charge.

      d) The attorneys' fee and the arbitration fee are normal business expenditures and should be borne by [Seller] itself.

[Seller]'s position

[Seller] alleged that the above expenses were caused by [Buyer]'s breach and should be borne by [Buyer].

III. OPINION OF THE TRIBUNAL

1. Applicable law

      a) The parties did not agree upon the law applicable to the dispute arising from the Contract. According to the general principal of international private law, the governing law shall be determined in accordance with the conflict law of the place of arbitration. Subject to Article 5 of the Foreign Economic Contract Law, where the parties fails to choose the proper law applicable to the settlement of contract disputes between the parties, the law of the country which has the closest connection with the contract shall apply.

      b) The CISG shall apply to the dispute because the places of business of [Seller] and [Buyer] are in China and USA, which are Contracting States of the CISG, and both parties agreed to apply the CISG to the substantive dispute in their arbitration application or defense.

      c) The CISG shall apply where the CISG is different from China's law, unless China has declared a reservation.

2. Validity of the Contract.

The Contract was concluded by the [Buyer]'s employee, Ms. Luo, but [Buyer] denied the validity of the Contract alleging that Ms. Luo did not have a written authorization. The Arbitral Tribunal holds that Ms. Luo is an employee of [Buyer] who communicated and negotiated with [Seller] in the [Buyer]'s name, and who appeared to be entitled to conclude the Contract on behalf of [Buyer]. Moreover, after conclusion of the Contract, [Buyer] did not deny the Contract in a timely manner, but actually performed the Contract. According to the Response of the Supreme Court to Certain Questions Concerning the Application of the Foreign Economic Contract Law:

"The principal shall bear civil liability for an act performed by an actor with no power of agency, beyond the scope of his poser of agency or after his power of agency has expired, only if he recognizes the at retroactively."

In this case, after conclusion of the Contract on 17 January 1995, [Buyer] faxed to [Seller] the application for issuance of a L/C and negotiated with [Seller] face to face in June 1996. These facts indicate that [Buyer] clearly knew about the conclusion and the performance of the Contract, but [Buyer] did not raise any objection to the conclusion of the Contract prior to 13 July 1995. The Arbitral Tribunal holds that because [Buyer], by its actions, ratified the authorization of Ms. Luo and her conclusion of the Contract, the Contract shall regarded as valid and binding upon the parties.

3. [Buyer]'s breach of contract

The Arbitral Tribunal, after hearing the parties' statements and reviewing the evidence, holds that [Buyer]'s failure to establish a L/C according to the Contract and [Buyer]'s notification dated 8 February 1995 that it would not purchase the goods under the Contract constituted breaches of contract. [Buyer] is liable for the breaches of contract.

[Buyer] submitted in its defense that the Pb content of Moly oxide indicated in the Certificate of Commodity Inspection is 0.046% which is not incompliance with the Pb content of Moly oxide stipulated in the Contract, and, due to this prior breach of contract by the [Seller], [Buyer] did not open the L/C. The Arbitral Tribunal researched the record in this regard, and did not find any evidence that [Buyer] had objected to the Ph content of the goods before the arbitration proceedings or that [Buyer] had advised [Seller] that his was the reason for its failure to open the L/C. The Tribunal therefore holds that the [Buyer]'s allegation that the [Seller] is the one that first breached the Contract is unfounded.

4. [Buyer]'s liability for breach of contract

      a) Loss of price difference

[Seller] claimed against [Buyer] for loss of price difference, US $151,333.40.

Although the Arbitral Tribunal holds that [Buyer] is responsible for the indemnification, [Buyer] should not bear all the loss of price difference caused by [Seller]'s returning the goods to the original supplier. Article 77 of the CISG provides that:

"A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated."

The Tribunal holds that, in this case, based on the international and domestic market performance of Moly oxide for a long period after [Buyer] declared that it would not perform the Contract, it would have been reasonable for [Seller] to have taken measures to mitigate the loss within three months. [Seller] was informed on 8 February 1995 that [Buyer] would not perform the Contract. Therefore, the Arbitral Tribunal holds that the [Buyer]'s breach of contract occurred on 8 February 1995 and [Seller] should have taken measures to mitigate the loss within three months after 8 February 1995.

The Arbitral Tribunal analyzed the international market performance of Moly oxide within that period. According to the metal prices published by Metal Bulletin (1995) issued by China's Nonferrous Metal Industry Corp., provided by [Buyer] and quoted by [Seller], the average price of Moly oxide on 6 February 1995 was US $16.50 per pound; by 8 May 1995 the average price was US $8.25 per pound: the average price had decreased by 50%. Based on the decrease, had [Seller] resold the goods under the Contract within three month after 8 February 1995, [Seller] could have retrieved 50% of the total Contract price, US $129,815.10. Therefore, the Arbitral Tribunal holds that [Buyer] shall indemnify [Seller] for the loss of price difference of only US $129,815.10. The loss of price difference exceeding US $129,815.10 caused by [Seller]'s return of the goods to the original supplier shall be borne by [Seller] itself.

      b) Loss of tax refund for export

[Seller] claimed against [Buyer] for the loss of tax refund, US $39,351.85 The Arbitral Tribunal holds that it was possible for [Seller] to have exported the goods again after [Seller] learned that [Buyer] would not perform the Contract. [Buyer] could not foresee that its breach of contract would result in [Seller]'s failure to resell and export the goods and would incur the loss of tax refund caused therefrom. Therefore, the Tribunal does not sustain the [Seller]'s claim for the loss of tax refund.

      c) Loss of interest

[Seller] claimed against [Buyer] for the interest loss on loans, US $14 928.85, and the interest loss on the price difference, US $19,673.

The Arbitral Tribunal holds that:

            1) As to the interest loss on loans, [Buyer] shall pay the interest at the annual rate of 9.6% on the total contract price between 25 February 1995 (the final negotiable day of the L/C) and 7 May 1995 (one day prior to when [Seller] should have resold the goods). The calculation is: US $259,632.20 × 9.6% (annual rate) × 70(days) ÷ 360 (days) = US $4,846.47.

            2) As to the interest loss on the price difference, [Buyer] shall pay the interest at the annual rate of 9.6% on the price difference of US $129,815.10. The calculation is: US $129,815.10 × 9.6% (annual rate) × 560(days) ÷ 360 (days) = US $19,385.72.

[Buyer] shall pay to [Seller] the above interest, US $24,232.19.

      d) Port and customs charges

[Seller] claimed against [Buyer] for port and customs charges, US $313.53. The Arbitral Tribunal sustained the [Seller]'s claim..

      e) Attorneys' fee and other expenses

[Seller] claimed against [Buyer] for attorneys' fee and other expenses, US $11,000. The Arbitral Tribunal sustained the [Seller]'s claim.

IV. THE AWARD

1. [Buyer] shall pay to [Seller] US $129,815.10 for the loss of price difference caused by resale of the goods.

2. [Buyer] shall pay to [Seller] US $24,232.19 for the loss of interest.

3. [Buyer] shall pay to [Seller] US $313.53 for port and customs charges.

4. [Buyer] shall pay to [Seller] US $11,000 for attorneys' fee and other expenses.

5. 80% of the arbitration fee of the case shall be borne by [Buyer], and 20% shall be borne by [Seller]. [Buyer] shall compensate [Seller] RMB ___ for the arbitration fee prepaid by the [Seller].

[Buyer] shall pay to [Seller] the above amounts, US $165,360.82 and RMB ___, within 45 days of the award, and interest at the rate of 10% shall be paid on any overdue payment.

The award shall final and binding


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] and Respondent of the United States 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].

** Zhan Changzheng is an Associate with Shanghai Haoliwen PRC Attorneys. He received his LL.M from Xiamen University. His focus is on company law, international commercial arbitration law, and international trade law.

*** Wei Xia Yang, Master of Business Law, Monash University, Australia; BA in English (Translation), Beijing Foreign Studies University.

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Pace Law School Institute of International Commercial Law - Last updated May 25, 2006
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