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CISG CASE PRESENTATION

China 6 February 1997 CIETAC Arbitration Proceeding (Silicon-carbide case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/970206c1.html]

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

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Case identification

DATE OF DECISION: 19970206 (6 February 1997)

JURISDICTION: Arbitration ; P.R. China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1997/38

CASE NAME: Unavailable

CASE HISTORY: Unavailable

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

BUYER'S COUNTRY: United States (claimant)

GOODS INVOLVED: Silicon-carbide


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 4 ; 9 ; 25

Classification of issues using UNCITRAL classification code numbers:

4B [Scope of Convention (issues excluded): penalty clauses];

9A [Implied agreement on international usages];

25B [Definition of fundmental breach: failure to deliver]

Descriptors: Scope of Convention ; Penalty clauses ; Usages and pratices ; Fundmental breach

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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): Zhongguo Guoji Jingji Maojy Zhongcai Caijueshu Xuanbian [Selected Compilation of Awards of CIETAC] (1995-2002), Law Press at 20-24

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at nn.160, 176, 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

Silicon-carbide case (6 February 1997)

Translation [*] by JIANG Chi [**]

Translation edited by Meihua Xu [***]

    [Abstract]
    [Introduction]
  1. Facts of the case
  2. Opinion of the Arbitration Tribunal
  3. The Arbitration Award

[ABSTRACT]

The Claimant [Buyer] and the Respondent [Seller] entered into two sales contracts, under which [Seller] agreed to sell silicon-carbide to the [Buyer]. [Buyer] opened letters of credit according to the contracts, but [Seller] failed to deliver the goods as agreed. [Buyer] claimed liquidated damages in an amount equal to 20% of the total contract price pursuant to the contracts. [Seller] argued that the actual performance of the contracts was not conducted by it but by AAA Industrial Trading Co., Ltd., and that [Seller] was merely entrusted by AAA Industrial Trading Co., Ltd. to conclude the contracts with [Buyer] because AAA Industrial Trading Co., Ltd. did not have an import and export license. Afterwards, AAA Industrial Trading Co., Ltd. was defrauded by its supplier, HeNan AnYang BBB Equipment Co., Ltd., and as a result, it failed to perform these contracts. Although [Seller] did not deny its liabilities incurred thereof, it argued that the liquidated damages in an amount of 20% of the total contract price was unreasonably high, and asked the Arbitration Tribunal to take the particular circumstances of this case into consideration. The Arbitration Tribunal ruled that the dispute between [Seller] and AAA Industrial Trading Co., Ltd. was beyond the scope of this case, and that according to the terms of the contracts, [Seller] had fundamentally breached the contracts and shall therefore pay the liquidated damages. However, in accordance with the Law of the People's Republic of China on Economic Contact Involving Foreign Interests, if the contractual liquidated damages are obviously higher than the actual loss, the Arbitration Tribunal is entitled to reasonably reduce the amount of liquidated damages upon the request of a party. According to the customs and practices of international trade, the 20% liquidated damages are obviously too high, and [Buyer] failed to provide adequate evidence to prove that the loss it suffered was in proportion to the amount of the liquidated damages that it claimed. The Arbitration Tribunal therefore believed that 50% of the claimed liquidated damages was an appropriate amount.

[INTRODUCTION]

In accordance with the arbitration clauses contained in the sales contracts executed between [Buyer] CCC Corp., an American company, and [Seller] Shanxi DDD Import & Export Co., Ltd., a Chinese firm, respectively dated 27 December 1995 [Contract No. GT-P032-SH037] and 18 January 1996 [Contract No. GT-P032-SH042], as well as [Buyer]'s Application for Arbitration submitted to the Shanghai Sub-commission, China International Economic & Trade Arbitration Commission, Shanghai Sub-Commission ("CIETAC Shanghai Sub-Commission") accepted this arbitration case with regard to the dispute under the aforesaid contracts on 2 July 1996.

[Buyer] selected Mr. X as arbitrator; [Seller] failed to select an arbitrator within the time limit. In accordance Article 26 of the Arbitration Rules, the Director of CIETAC designated Mr. Y as the arbitrator selected on behalf of [Seller]. Further, since both parties failed to jointly select or entrust the Director of CIETAC to designate the chief arbitrator, the Director designated Mr. Z as the chief arbitrator according to Article 24 of the Arbitration Rules. The above three arbitrators formed the Arbitration Tribunal on 14 August 1996 to jointly hear this case.

Upon receipt of the arbitration notice of CIETAC Shanghai Sub-Commission, [Seller] neither submitted a written defense nor raised any counterclaim. After receiving the Arbitration Application and the evidence materials submitted by the [Buyer], the Arbitration Tribunal originally planned to hear the case on 24 September 1996 in Shanghai. However, due to [Seller]'s request to postpone the hearing, the Arbitration Tribunal, after discussion, approved a postponement of the hearing to 8 October 1996. The representatives of both [Buyer] and [Seller] attended the hearing, made their respective statements, answered the questions of the Arbitration Tribunal and debated with one another. The Arbitration Tribunal sought to mediate the dispute with the consent of both parties but they failed to reach any settlement. After the hearing, neither [Buyer] nor [Seller] submitted any supplemental materials.

The hearing of this case is now completed. The Arbitration Tribunal renders the arbitral award on the basis of its factual investigation.

The facts of the case, the opinions of the Arbitration Tribunal and the award are presented as follows:

I. FACTS OF THE CASE

On 27 December 1995 and 18 January 1996, [Buyer] and [Seller] entered into two international sales contracts by fax, Contracts No. GT-P032-SH037 and GT-P032-SH042 respectively, and afterwards they signed the original contracts. These contracts provided that [Seller] would sell silicon-carbide to [Buyer].

   -    Contract No. GT-P032-SH037 set forth that the quantity of silicon-carbide was 1,500 tons; the price term was US $415 per ton C&F New Orleans, Louisiana, United States; the shipment period was before 29 February 1996; and the payment term was irrevocable letter of credit.
 
   -    Contract No. GT-P032-SH042 set forth that the quantity of silicon-carbide to be sold was 1,500 tons; the price term was US $425 per ton C&F New Orleans, Louisiana, United States; the shipment period was on or before 30 March 1996; and the payment term was irrevocable letter of credit.

Under both contracts, if either party failed to perform the contract, the breaching party should pay to the non-breaching party liquidated damages in an amount equal to 20% of the total contract price. In February 1996, [Buyer] and [Seller] amended Contract No. GT-P032-SH042 to change the original shipment deadline to between 30 March 1996 and 5 April 1996. Thereafter, [Buyer] opened the letters of credit pursuant to the contracts but [Seller] failed to deliver the goods pursuant to the contracts. A dispute arose and no settlement could be reached after their negotiation.

[Buyer]'s position

[Buyer] submitted the dispute for arbitration to CIETAC Shanghai Sub-Commission, claiming that:

  1. [Seller] should pay [Buyer] the liquidated damages of US $252,000; and

  2. [Seller] should pay all arbitration fees (including [Buyer]' s attorneys' fees).

The [Buyer] claimed that:

After the contracts took effect, [Buyer] promptly opened the irrevocable letters of credit according to the contracts. However, [Seller] had no goods to deliver. [Buyer] actively coordinated with [Seller], but [Seller] took no effective measures to remedy its failure to deliver; [Seller]'s excuse was that it was defrauded by its supplier.

[Buyer] experienced a huge economic loss because of [Seller]'s failure to perform its contractual obligations. [Buyer] alleges that that [Seller]'s conduct constituted a fundamental breach of contract, and as such, according to the terms of the contracts, the provisions of the United Nations, Convention on International Sales of Goods and the Law of the People's Republic of China on Economic Contact Involving Foreign Interests, [Seller] should be economically liable for its breach.

[Seller]'s position

[Seller] made no written defense against [Buyer]'s Application for Arbitration, but the representative of [Seller] made oral statements to the Arbitration Tribunal, the major opinions of which are the following:

Although the two contracts were entered into by [Buyer] and [Seller], [Seller] was not involved in the actual performance of the contracts. Instead, the contracts were performed by AAA Industrial Trading Co., Ltd. AAA Industrial Trading Co., Ltd. entrusted the [Seller] to sign the contracts with [Buyer] because it had no import and export license. AAA Industrial Trading Co., Ltd., in turn, ordered the goods from HeNan AnYang BBB Equipment Co., Ltd. However, due to the fraud of HeNan company, AAA Industrial Trading Co., Ltd. did not receive any goods and lost more than renminbi [RMB] two million. The case had been reported to the police department. [Seller] argued that this was the most direct reason that caused its failure of performance. As soon as [Seller] became aware of the facts, it immediately returned the letters of credit to [Buyer] upon the request of [Buyer]. Neither AAA Industrial Trading Co., Ltd. nor [Seller] benefited from the contracts.

[Seller] stated that it would not deny the liabilities arising out thereof, but would like the Arbitration Tribunal to take the specific circumstances into consideration. And [Seller] argued that it was improper for [Buyer] to ask for liquidated damages as high as 20% of the total contract price, since such demand was unreasonably high. Under Chinese laws, liquidated damages shall only be granted for compensation purpose, but not as a punishment, and typically liquidated damages are set in the range of between 3% and 5% of the contract price. Furthermore, [Seller] argued that its failure of performance was not caused by its negligence or intention.

II. OPINION OF THE ARBITRATION TRIBUNAL

After hearing both parties' statements and carefully reviewing the relevant written evidence, the Arbitration Tribunal reached the following opinions through joint discussion:

      1. Contract No. GT-P032-SH037 dated 27 December 1995 and Contract No. GT-P032-SH042 dated 18 January 1996 and the February 1996 amendment to Contract No. GT-P032-SH042 between [Buyer] and [Seller] were all duly signed by the authorized representatives of the parties and sealed with [Seller]'s company chop. Neither [Buyer] nor [Seller] had raised any objection to the effectiveness and authentication of the two contracts or of the amendment to Contract No. GT-P032-SH042. Therefore, the two contracts and the amendment to Contract No. GT-P032-SH042 contract are lawful and effective. Both parties shall perform their respective obligations in strict compliance with the contracts. With regard to [Seller]'s argument that it was not involved in the performance of the contracts and that it was AAA Industrial Trading Co., Ltd. that actually dealt with [Buyer], the Arbitration Tribunal holds that this cannot justify [Seller]'s exemption of liabilities because AAA Industrial Trading Co., Ltd. is not the party in the current case. The dispute between [Seller] and AAA Industrial Trading Co., Ltd. is beyond the scope of this case.

      2. The Arbitration Tribunal found that [Buyer] issued two irrevocable letters of credit on 24 January 1996 and 13 March 1996 respectively to [Seller] according to their contracts. However, the Tribunal also found that [Seller] failed to deliver the goods under the contracts despite repeated demands by [Buyer]. Therefore, [Seller] had fundamentally breached the contracts and shall be liable thereof. According to the contracts, if either party fails to perform the contracts, the breaching party should pay to the non-breaching party liquidated damages in an amount equal to 20% of the total contract price. The total contract price of the two contracts is US $1,260,000; accordingly, the liquidated damages should be US $252,000. The Arbitration Tribunal recognizes, however, that Article 20 of the Law of the People's Republic of China on Economic Contact Involving Foreign Interests provides that:

"The liquidated damages agreed in a contract shall be deemed as compensation for breach of the contract. However, in cases in which the contractual liquidated damages are unreasonably higher or lower than the actual loss caused by the breach, either party may apply to the arbitration institute or the court for proper reduction or increase."

It is true that, under the contracts, [Buyer] is entitled to demand that [Seller] pay liquidated damages. However, [Seller] also argued that the claimed amount was overly high. The Arbitration Tribunal holds that, in light of the customs and practices of international trade, liquidated damages in the amount of 20% of the total contract price is obviously too high. In addition, [Buyer] failed to provide any evidence to establish that due to the [Seller]'s breach, the damages paid by [Buyer] to its contractual party was in proportion to those as agreed hereunder or that it had paid the balance between them. Therefore, the Arbitration Tribunal reduces the amount of liquidated damages to half of the claimed amount, i.e., US $126,000.

      3. The Arbitration Tribunal dismissed [Buyer]'s claim for its attorneys' fees, because [Buyer] had neither specified the exact amount nor provided any evidence thereof to the Arbitration Tribunal. Considering that the dispute arising out of this case was caused by [Seller]'s failure to deliver goods according to the contracts, and [Buyer]'s claims are not fully recognized by the Tribunal, the Arbitration Tribunal holds that the RMB 88,000 arbitration fees of this case shall be shared by both parties, 10% of which, i.e., RMB 8,800, shall be borne by [Buyer], and 90% of which, i.e., RMB 79,200, shall be borne by [Seller].

III. THE ARBITRATION AWARD

  1. [Seller] shall pay liquidated damages in the amount of US $126,000 to [Buyer];

  2. [Buyer]'s claim for its attorneys' fees shall be dismissed;

  3. The arbitration fees for this case shall be RMB 88,000, 10% of which (i.e., RMB 8,800) shall be borne by the [Buyer], and 90% of which (i.e., RMB 79,200) shall be borne by the [Seller]. Since [Buyer] has paid RMB [XXX] in advance, [Seller] should reimburse [Buyer] arbitration fees in the amount of RMB [XXX]; and

  4. [Seller] shall pay the aforesaid amounts under Clause 1 and Clause 3 to [Buyer] within thirty (30) days after this award is issued.

The award is final.


FOOTNOTES

* For purposes of this translation, the Claimant is referred to as [Buyer] and the Respondent is referred to as [Seller]. Currency of the United States (dollars) is indicated as [US $]; currency of the People's Republic of China (renminbi) is indicated as [RMB]

** JIANG Chi is an Associates with the New York office of Debevoise & Plimpton.

*** Meihua Xu, LL.M. University of Pittsburgh School of Law on an Alcoa Scholarship. She received her Bachelor of Law degree, with the receipt of Scholarship granted by the Ministry of Education, Japan, from Waseda University, Tokyo, Japan. Her focus is on International Business Law and International Business related case study.

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Pace Law School Institute of International Commercial Law - Last updated August 29, 2006
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