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CISG CASE PRESENTATION

China 31 December 1996 CIETAC Arbitration proceeding (High carbon tool steel case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/961231c2.html]

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

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Case identification

DATE OF DECISION: 19961231 (31 December 1996)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1996/58

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Austria (claimant)

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

GOODS INVOLVED: High carbon tool steel


Classification of issues present

APPLICATION OF CISG: Yes [Article 1(1)(a)]

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 72 ; 75 ; 79

Classification of issues using UNCITRAL classification code numbers:

72B [Avoidance prior to date for performance: advance notice of intent to avoid];

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

79B [Impediments excusing party from damages]

Descriptors: Avoidance ; Anticipatory breach ; Damages ; Cover transactions ; Exemptions or impediments

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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. 2331-2336

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at n.243, 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

High carbon tool steel case (31 December 1996)

Translation [*] by Zizheng Tang [**]

Edited by Wei Xia, Yang [***]

China International Economic and Trade Arbitration Commission (hereinafter, "the Arbitration Commission") accepts the case according to:

   -    The arbitration clause in Sales Contract 4NRSD300602AT signed by Claimant (hereinafter, the "[Seller]"), Austria ___ International Trade Company, and Respondent (hereinafter, the "[Buyer]"), China ___ Project and Material Company on 18 February 1994; and
 
   -    The written arbitration application submitted by the [Seller] on 11 July 1995.

As the parties failed to jointly appoint or to jointly entrust the Chairman of the Arbitration Commission to appoint a presiding arbitrator, the Chairman of the Commission appointed Mr. P as presiding arbitrator. Mr. P, Mr. A, appointed by [Seller] and Mr. D, appointed by [Buyer], formed the Arbitration Tribunal and heard the case on 27 November 1995.

After having carefully examined the [Seller]'s application, the [Buyer]'s written defense and other related materials submitted by both parties, the Arbitration Tribunal held a hearing on 12 February 1996. The [Seller]'s and the [Buyer]'s representatives attended the hearing, made oral statements and arguments, and answered the Arbitration Tribunal's questions. After the hearing, each party submitted supplementary written material.

Due to the complexity of this case, as requested by the Arbitration Tribunal and approved by the Arbitration Commission, the award date of this case was postponed from 27 August 1996 to 7 February 1997.

The Arbitration Tribunal has concluded the case and rendered the award as follows based on the facts and the written material clarified by the Arbitration Tribunal.

FACTS

On 18 February 1994, the [Seller] and the [Buyer] entered into Contract No. 4NRSD300602AT (hereinafter the "Contract") which provided that the [Seller] would sell to the [Buyer] 10,000 tons of high carbon tool steel made in Argentina on the following terms:

   -    Price term: CNF main port of China, US $357/ton
   -    Total Contract price: US $3,570,000
   -    Time of shipment: April of 1994
   -    Payment terms: The [Buyer] shall make payment through an irrevocable letter of credit (hereinafter, the "L/C") payable 90 days following the issuance of bill of lading (hereinafter, the "B/L"). The L/C shall be opened 20 days before time of shipment. Destination port shall be specified in the L/C.

A dispute arose that could not be settled through negotiations. The [Seller] brought this arbitral application to the Arbitration Commission on 11 July 1995.

[POSITION OF THE PARTIES]

The [Seller]'s position

On 1 April 1994, the [Seller] asked the [Buyer] to open the L/C. On 19 April 1994, the [Seller] reminded the [Buyer] that the [Seller] would charter a ship only after making sure of the date on which the L/C would be opened. The [Buyer] responded on the same day that the L/C had been opened through the Agriculture Bank of China, and promised to provide the copy of the L/C. The [Buyer] provided a copy of a letter from the [Buyer] requesting the Agriculture Bank of China to open the L/C in favor of the [Seller], but in fact the [Buyer] never open the L/C.

During that period of time, the [Buyer] assured the [Seller] almost every day that the L/C would be opened. At last, on 5 May 1994 the [Seller] informed the [Buyer] that he would have to resell the Contract goods to another customer. The [Seller] made it clear that if the [Buyer] did not open the L/C forthwith, the [Seller] would sell the goods to the third party. The [Buyer] requested the [Seller] to keep the goods for the [Buyer] but, all the same, did not open the L/C. On 11 May 1994, the [Buyer] sold the goods to Hong Kong XXX company (hereinafter "XXX company") for a total price of US $3,469,000.

Nonetheless, the [Seller] was prepared to ship another parcel of same goods from the same factory to the [Buyer], and again asked the [Buyer] open the L/C. Considering the long term cooperation and friendship between the [Buyer] and the [Seller], the [Seller] even agree to postponed the shipping time to July 1994 if the [Buyer] could open the L/C before 18 June 1994. But the [Seller] did not receive any written response from the [Buyer]. The parties did not reach any new agreement.

The Contract goods were transported by the ship "FATHULKHAIR".

   -    3016.420 tons of the Contract goods were transported to Shanghai, at a price of US $350/ton, the total price was US $1,055,747. XXX Company's payment was effected on 28 June 1994.
 
   -    5003.079 tons of the Contract goods were transported to Shanghai at a price of US $343.80/ton, the payment of US $1,719,907.56 by XXX Company was effected on 14 July 1994.
 
   -    2020.68 tons of the Contract goods were transported to Shanghai/Zhangjiagang at a price of US $350/ton; the total price was US $707,239.75. XXX Company's payment was effected on 29 Sept. 1994.

The [Seller] required the [Buyer] to compensate the price difference between the Contract price and the resale price. The [Buyer] recognized the claims of the [Seller], but refused to pay on the ground that the [Buyer] could not claim any loss from the end user according to the Contract between them. Failing to solve the dispute through negotiations, the [Seller] submitted this arbitration application, requesting the [Buyer] to compensate US $132,952.34, plus interest accrued from 30 Sept. 1994 to the date of payment at the annual interest rate of 11.5% and to pay the total arbitration fees. The [Seller] itemized as follows:

   -    The total amount of delivered goods was 10,085.18 tons
   -    The price with the [Buyer] was US $357/ton
   -    The total price of the Contract with the [Buyer] was US $3,600,409.26
   -    Price difference. The payment of the XXX company was US $3,483,045.31; the price difference was US $117,363.95
   -    Interest. The price difference plus the third payment of XXX company was US $824,603.00; interest accrued from 31 July 1994 (90 days after the Contract shipment date of 30 April 1994) to 29 Sept. 1994 (the third payment day of XXX company) at the annual interest rate of 11.5% was US $15,588.39.
   -    Total loss. The total loss was: US $132,952.34

[Buyer]'s response

The [Buyer] alleges:

The [Seller] informed the [Buyer] to open the L/C on 19 April 1994. The [Buyer] requested the Agriculture Bank of China to open the L/C, but learned that a Provisional Measure of Automatically Registration on Imported Special Products (hereinafter the "Measure") had been jointly issued by five departments of the government: the National Plan Commission, Ministry of Foreign Trade and Economic Cooperation of the People's Republic of China, the People's Bank of China, General Administration of Customs, and the State Administration of Foreign Exchange.

According to Article 7 of the Measure, if one wants to import special products listed on the Measure, he must first get a Registered Certificate of Imported Special Products (hereinafter the "Certificate", or "four copies"), then he could entrust a foreign trade company to sign an import contract according to the Regulations on the Foreign Trade Deputy System. To get the Certificate ("four copies"), one should first submit an application to the Registry Administration. Only after getting approved and registered, could one entrust a foreign trade company, authorized to import this kind of products, to import. Article 3 of the Measure listed nine categories of products that need to be registered before they can be imported. Steel was on top of the list. According to Article 9 of the Measure, the Certification was one of the necessary documents for the Foreign Exchange Bank to make payment. In another words, the Bank will not open the L/C to make payment before a customer has registered and obtained the requisite Certification.

The issuance of the Measure mentioned above could not be foreseen or avoided by the [Buyer] and [Buyer]'s end user, and was beyond their control. It was a conduct of government that has to be complied with, also an impediment for the end user of the [Buyer] to open the L/C. Under this circumstance, the [Buyer] gave notice to the [Seller] without any delay and required postponing the time to open the L/C, at one hand, and, on the other hand, the [Buyer] urged and helped the end user to get the Certification.

It is common that it would take the end user a period of time to get the Certification due to inefficiency of the Registry Administration. The [Seller] ignoring all the difficulties that the [Buyer] faced and the situation of the country, expressed its intention to rescind the Contract and to resell the goods to a third party in the fax of 4 May 1994. At last, the [Seller] resold the goods to XXX Company on 11 May 1994.

As mentioned above, the end user of the [Buyer] did not open the L/C within the time limit stipulated in the Contract due to an impediment that was beyond his control.

Austria and China are Contracting States of the United Nation Convention on Contracts for International Sale of Goods (Vienna Convention 1980, hereinafter "CISG"). The parties have their places of business, respectively, in Austria and China and did not opt out of the application of CISG to the Contract; therefore, the relevant provisions of the CISG should be applied to this case. According to Article 79:

"A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences."

The [Buyer] asserted that the impediment causing the failure to open the L/C was an impediment of the type referred to in Article 79 of CISG that was beyond his control. Due to this impediment, the end user of the [Buyer] could not ask the Bank to open the L/C in time, although there was enough money in the foreign exchange account of the end user. The [Buyer] should be exempt under Article 79 of CISG. Therefore, the [Buyer] asks the Arbitration Tribunal to dismiss all claims of the [Seller], and that the arbitration fee be borne by the [Seller].

[Seller]'s rebuttal

1. The [Buyer] did mention in a telephone call that there were some difficulties in opening the L/C due to the new regulations, but the [Buyer] never mentioned the Measure, or informed the [Seller] that the time to open the L/C had to be postponed, or told the [Seller] that the L/C might not be opened at all. The [Buyer] never mentioned that he might not perform the Contract due to force majeure in any written form or in any telephone call.

Moreover, it was the end user rather than the [Buyer] that the Measure really affected. It would not be any problem for the [Buyer] to open the L/C according to the Contract. In any event, even if there was the Measure and the Measure really affected the [Buyer], the Measure would not prevent the [Buyer] from performing the obligation of the Contract, and the Measure would not affect the right of the [Seller] to claim damages as well.

2. The [Buyer] is not entitled to allege force majeure. Article 14 of the Contract provides:

"If the goods are delivered late or cannot be delivered at all due to force majeure, the [Seller] will be exempt from liability. But the [Seller] should give notice to the [Buyer] by fax and, through a registered letter, send the certification of the force majeure event issued by the government or a commerce association as evidence. If due to force majeure, the delay of the delivery of the goods is more then one month, the [Buyer] is entitled to rescind the Contract. The [Seller]'s failure to get an export license will not be deemed a force majeure event."

According to this article, the [Buyer] was not entitled to allege force majeure.

Based on the common practices of international trade, the reasons of force majeure could be war, strike or act of the God. The Measure could not be deemed a force majeure event.

The [Buyer] mentioned Article 79 of CISG. However, as there is a detailed definition of force majeure in the Contract, the relevant provisions of the CISG should not be applied in this case.

In addition, the [Buyer] neither gave notice to the [Seller] about the force majeure event promptly, nor did he sent the certification issued by the government or a commerce association by registered letter as evidence of the force majeure.

As mentioned above, the Measure could not be deemed a force majeure event and could not be an excuse of the [Buyer] to escape liability under the Contract.

[Buyer]'s supplementary defense

1. The [Seller] ignored Article 8 of the Contract and did not notify the [Buyer] of the estimated shipping date and quantity of the goods. The [Seller]'s breach of the contract at first was the main reason for the failure of the performance of the Contract.

2. The [Buyer] had done his best to prepare to open the L/C. The failure to open the L/C was due to an impediment beyond his control.

3. It was breach of the Contract of the [Seller] who resold the goods to a third party without first rescinding [avoiding] the Contract. The loss that occurred should be borne by the [Seller] himself. The [Seller] is not entitled to seek compensation from the [Buyer].

4. Once the goods were resold, the [Buyer] was released from the obligation of receiving the goods under the Contract. Therefore, the fax of 16 June in its nature was a new offer to establish new obligations of the parties, but the parties did not reach any new agreement on delivery of the goods.

5. The claim of the [Seller]: The payment mode of the Contract was an irrevocable letter of credit ("L/C") payable after 90 days following the issuance of bill of lading ("B/L"); the price was US $357/ton. The term of payment under the resale contract was payable at sight, the prices were US $350/ton and 343.8/ton, average price was US $346.9/ ton. As the term of payment was payable at sight, the resale did not do any harm to the [Seller] but gained more profit for him. The calculation is as follows:

      a. The annual interest on the loan that the [Buyer] got from the Bank was 11.5%, therefore, the price under the Contract would have been US $10.26/ton more if the payment term were "payable at sight" (US $357/ton * 11.5%÷360 * 90)

      b. Thus, the resale price was US $0.16/ton higher than the price of the Contract [US $0.16/ton = US $346.90 (resale price - US $357 (the Contract price) + US $10.26 (price difference between the payment by sight L/C and future payment L/C)]

Based on the above mentioned reasons, the [Buyer] requests the Arbitration Tribunal to dismiss the [Seller]'s claims.

OPINION OF THE ARBITRATION TRIBUNAL

1. Applicable law

The countries in which the places of business of the parties are located are Contracting States of the CISG. The CISG is applied in this case.

2. Enforceability of the Contract

As the Contract was signed by both parties, the Contract is enforceable and binding on both parties.

3. [Buyer]'s obligation to open the L/C

According to Article 8 of the Contract, the [Buyer] was obligated open the L/C after receiving the shipping notice from the [Seller]. The [Buyer] was not obligated to open the L/C before the [Seller] sent the shipping notice. However, the evidence shows that the [Seller] reminded the [Buyer] to open the L/C on 19 April 1994, and that the [Buyer] replied that the L/C had been opened by the China Agriculture Bank. Therefore, the Arbitration Tribunal deems that 19 April 1994 was the day on which both parties agreed to have the L/C opened. The [Buyer] was obligated to open the L/C on that day, but the facts show that the [Buyer] did not open the L/C; therefore, the [Buyer] breached of the contract and should bear liability so far.

4. Force majeure and the Provisional Measure on Automatically Registration of Imported Special Products

The Arbitration Tribunal noted that parties held different views on whether the Measure could be a force majeure event. The [Buyer] thought that the Measure was a conduct of government that was unforeseeable, unavoidable and insurmountable, while the [Seller] asserted that the Measure was not a force majeure event. The Arbitration Tribunal believes that the departments of the Chinese Government did issue the Measure, and that the goods of the Contract were one of the subjects of the Measure. But Article 7 of the Measure stipulates:

"To import the special products that need to be automatically registered, one must get the four copies of the Registered Certificate of Imported Special Products printed by National Plan Commission. The first copy is necessary for the appointed bank to make payment; the second copy serves as a warrant for Customs to discharge the special products; the third copy serves as a warrant for the foreign trade company which was authorized to import those kinds of products to sign an import contract; the fourth copy is kept by the Registry Administration."

Therefore, since 13 April 1994, any foreign trade company which had not signed the contract concerning the special products must hold the third copy of the Certificate as a warrant to sign the import contract. It would be hard for any foreign trade company to sign an import contract concerning the special products without this copy. In the case at hand, the Contract was signed and formed on 18 February 1994, so the Measure was not binding on the Contract. The reason that the [Buyer] did not open the L/C and failed to perform the obligation of the Contract was not because of the Measure. The Arbitration Tribunal does not agree that the [Buyer] should be exempt under Article 79 of CISG.

5. The resale of the Contract goods

According to the Contract, the time of shipment was April of 1994. After getting the shipping notice, the [Buyer] was obligated to open the L/C twenty days before the shipping time. Although the [Seller] did ask the [Buyer]'s end user to open the L/C on 1 April 1994, this instruction had nothing to do with the [Buyer]. On 19 April 1994, the [Seller] required the [Buyer] to open the L/C, and the [Buyer] wrote to the [Seller]: "…the L/C has been opened by the Agriculture Bank of China Zhangjiagang Branch, the copy will be mailed right away", but in fact the L/C was never opened. The [Buyer] asked the [Seller] to keep the goods for him on 5 May 1994, but did not open the L/C. On 11 May 1994, the [Seller] signed a contract with XXX Company, and resold all the goods to the XXX Company.

The Arbitration Tribunal deems that the [Buyer] did not open the L/C after having been urged to several times by the [Seller]; the [Buyer] breached the contract and should bear corresponding liabilities. However, the [Seller] neither informed the [Buyer] before or after the resale of the goods nor sought the [Buyer]'s opinion on the resale price; the [Seller] even asked the [Buyer] to open the L/C after [Seller]'s resale of the goods. The Arbitration Tribunal also holds the [Seller]'s conducts improper.

According to Article 72 of the CISG:

"(1) If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoided.

(2) If time allows, the party intending to declare the contract avoided must give reasonable notice to the other party in order to permit him to provide adequate assurance of his performance."

So, the [Seller] should bear the liabilities for failure to give the other party proper notice before reselling the goods.

Based on the above facts and analysis, the Arbitration Tribunal holds that the loss of the [Seller] due to resale of the goods should be split between the [Buyer] and the [Seller]. In other words, the [Buyer] should compensate the [Seller] for 50% of the price difference between the original contract and the resale contract: (US $3,570,000 - US $3,469,000)×50% = US $101,000 × 50% = US $50,500.

6. The arbitration fee

The arbitration fee shall be split between the [Buyer] and the [Seller].

AWARD

For the reasons stated above, the Arbitration Tribunal renders the following award:

1. The [Buyer] shall compensate the [Seller]'s loss of US $50,500 suffered from resale of the goods.

2. The [Seller]'s other claims are dismissed.

3. The [Buyer] and the [Seller] shall each bear 50 percent of the arbitration fee. The [Seller] prepaid the arbitration fee of RMB XXX; the [Buyer] shall reimburse the [Seller] RMB XXX.

Within 45 days of the date of this award, the [Buyer] shall pay the [Seller] RMB XXX, otherwise, interest calculated at an annual rate of 9% shall be imposed on any arrears.

This award is final.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For the purposes of this translation, the Claimant of Australia is referred to as the [Seller]; the Respondent of the P.R. China is referred to as [Buyer].

** Zizheng Tang, LL.M. Golden Gate University.

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

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