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CISG CASE PRESENTATION

China 4 April 1997 CIETAC Arbitration proceeding (Black melon seeds case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/970404c1.html]

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

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Case identification

DATE OF DECISION: 19970404 (4 April 1997)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1997/04

CASE NAME: Unavailable

CASE HISTORY: Unavailable

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

BUYER'S COUNTRY: Hong Kong (claimant)

GOODS INVOLVED: Black melon seeds


Case abstract

PRC: China International Economic & Trade Arbitration Commission (CIETAC), Shanghai Commission, 4 April 1997

Case law on UNCITRAL texts (CLOUT) abstract no. 713

Reproduced with permission of UNCITRAL

Abstract prepared by Wei Xia YANG

This case deals with the definition of fundamental breach of contract and the foreseeability of damages.

A Hong Kong buyer and a Chinese seller concluded a contract for the sale of black melon seeds. The buyer performed its contractual obligation to make a down payment, but the seller failed to deliver the goods even after the buyer postponed the delivery dates several times. The buyer claimed loss of foreseeable profit arising from the seller's fundamental breach of contract. The seller asserted that the alteration of the quality requirements in the contract between the buyer and its Philippine clients caused the delayed delivery and the difficulties to perform the contract.

As to the applicable law, the Arbitration Tribunal noticed that both parties have applied the CISG rules even if there was no specific mention in the contract.

Concerning the substantive issues, the Arbitration Tribunal held that the seller's failure to deliver the goods within the time prescribed in the contract constituted a fundamental breach under Articles 25 and 30 CISG. The seller could reasonably foresee the buyer's losses of profits as consequence of its non-performance of the contract. The Arbitration Tribunal further observed that the alternation of the quality requirements in the contract between the buyer and its Philippine clients had nothing to do with the seller. The buyer did not request the seller to change the quality requirements and accordingly the validity of the original contract and the seller's liability under the original contract was not affected. The Arbitration Tribunal held that the buyer had the right to indemnity of the foreseeable profits, based on Articles 74 and 78 CISG. Furthermore, pursuant to Article 45 CISG, the Arbitration Tribunal upheld the buyer's claim for interest on the down payment.

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Classification of issues present

APPLICATION OF CISG: "The applicable law is not agreed in the Contract however, both parties have applied the CISG and the Economic Contract Law to establish their statements in the arbitration, and therefore, it can be regarded that the parties have agreed on the applicable law, i.e., China's law and the CISG."

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 25 ; 74 ; 76 [Also relevant: Articles 6 ; 30 ; 45 ; 78 ]

Classification of issues using UNCITRAL classification code numbers:

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

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

76B [Damages recoverable based on current price]

Descriptors: Fundamental breach ; Damages ; Profits, loss of ; Foreseeability of damages

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Editorial remarks

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

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) 1997 vol., pp. 1636-1641

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at nn.58, 169, 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. 84

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Case text (English translation)

Queen Mary Case Translation Programme

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

Black melon seeds case (4 April 1997)

Translation [*] by Zhan Changzheng [**]

Translation edited by Meihua Xu [***]

INTRODUCTION

China International Economic and Trade Arbitration Commission Shenzhen Commission (Arbitration Commission) accepted the Black melon seeds case on 19 August 1996 in accordance with the written application for arbitration submitted by Claimant [Buyer], Hong Kong ___ Company, and the arbitration clause in Sales Confirmation No. 95SINOE0220WB [the Contract] entered into by and between the [Buyer] and Respondent [Seller], Shenzhen ___ Company, on 20 February 1995.

Pursuant to the Arbitration Rules of the Arbitration Commission (effective 1 October 1995), the [Buyer] appointed Mr. A, and the [Seller] appointed Mr. D as members of the Arbitral Tribunal. Because the parties failed to jointly appoint the Presiding arbitrator or to authorize the Chairman of the Arbitration Commission to appoint the Presiding arbitrator, the Chairman of the Arbitration Commission appointed Mr. P as the Presiding Arbitrator according to Article 24 of the Arbitration Rules. The above three arbitrators establish the Arbitral Tribunal to hear the case on 9 October 1996.

The Arbitral Tribunal reviewed the Arbitration Application and the evidence submitted by the [Buyer], and held an oral hearing on 29 November 1996 at which the [Buyer], the [Buyer]'s representatives, and four representatives of the [Seller] were present. The Arbitral Tribunal heard the statements and arguments of both parties and undertook investigations into relevant facts. The [Seller] responded at the hearing and submitted written materials. After the hearing, the representative of the [Buyer] submitted an attorney's statements and relevant evidence within the prescribed time.

The Arbitration Tribunal rendered the award on 4 April 1997.

I. THE FACTS

The [Buyer] and the [Seller] entered into the Contract on 20 February 1995 under which the [Seller] shall sell to the [Buyer] black melon seeds. Relevant clauses contained in the Contract are:

   -    Goods and specification: Black melon seeds; faq (fair average quality), above 9.5cm; impurity and white seeds not exceeding 3%, water not exceeding 7%.
   -    Quantity: 300 mts.
   -    Unit price: C&F Manila US $985 /mt.
   -    Total amount: US $295,500.
   -    Shipment date: 45 days upon receipt of L/C.
   -    Terms of payment: 100% confirmed irrevocable sight Letter of Credit (L/C), valid for negotiation in China within 15 days after ship date; L/C must be opened prior to 7 March 1995 and marked with relevant sales confirmation number.
   -    Arbitration: "Any dispute arising from or in connection with this Contract shall be resolved through friendly negotiation, and in case of failure of such negotiation, it shall be submitted to China International Economic and Trade Arbitration Commission for arbitration in accordance with the Arbitration Commission's arbitration rules in effect at the time of applying for arbitration. The arbitral award is final and binding upon both parties."

II. POSITION OF THE PARTIES

[Buyer]'s position

The [Buyer] stated that, after conclusion of the Contract, the [Buyer] requested to modify the terms of payment on 23 February 1995: 50% of the amount to be settled by L/C, the other half to be settled by cashier's check, the amount of the L/C to be changed to US $150,000. The [Seller] agreed to the above requests by fax on 27 February, and asked the [Buyer] to pay US $60,000 as a down payment at the same time. The [Buyer] agreed to make the down payment.

The [Buyer] authorized the opening of irrevocable L/C No. GP950557 in the amount of US $150,000 in favor of the [Seller] with Philippine Big City Trust Bank on 15 March 1995, effective until 30 May 1995.

The [Buyer] paid to the [Seller] US $60,000 by Tele-transfer via Dao Heng Bank, and the [Seller] gave the [Buyer] a receipt on 20 March.

The [Buyer] performed its contractual obligation, but the [Seller] failed to deliver the goods within the time prescribed in the Contract. Through consultation, the [Buyer] consented to postpone the delivery date, and as requested by the [Seller], the [Buyer] consented to extend the validity period of the L/C to 30 August 1995. The [Seller] notified the [Buyer]'s client in the letter of 6 June 1995 that the goods can be delivered in August.

On 23 August 1995, the [Seller] requested the client of the [Buyer] to extend the validity period of the L/C to 30 November 1995 and promised to deliver the goods in November. Although the [Buyer] extended the validity period to 30 November 1995, the [Seller] failed to deliver the goods again, which constitutes a breach of contract.

The [Buyer] alleges that the Contract is valid and should be protected by law. Due to the [Seller]'s failure to deliver the goods within the prescribed time, the [Buyer] extended the delivery date for 6 months, though the [Seller] still cannot deliver the goods, which resulted in impossible performance of the [Buyer]'s contract with its client. The [Buyer] thus incurred the loss of foreseen profits amounting to US $64,500, and breached the contract with its client. The [Buyer]'s client claimed for damages against the [Buyer], which has a bad influence on the [Buyer]'s reputation.

The [Buyer] has negotiated with the [Seller] several times and claimed for damages. The [Seller] refunded only the US $60,000 down payment on 2 February 1996.

The [Buyer] alleges that the [Seller] failed to perform the contractual obligation, which not only violated Article 25 and Article 30 of United Nations Convention on Contracts for the International Sale of Goods (CISG), but also Article 16 of Law of the People's Republic of China on Economic Contracts involving Foreign Interest (Economic Contract Law). Therefore, the [Buyer] applied for arbitration in accordance with the arbitration clause contained in the Contract, requesting the [Seller] to bear the arbitration fee and indemnify the [Buyer for the following economic losses pursuant to Article 74 of the CISG and Article 18 of the Economic Contract Law.

1) L/C issuance fee: US $4,500.
2) Handling charge for two extensions of validity period of L/C: US $2,000.
3) Interest on US $60,000 of down payment (for ten months from 15 March 1995 to 31 January 1996): US $4,020.
4) Expense on business trip for the purpose of the Contract: HK $11,200.
5) Telephone fee: HK $3,200.
6) Loss of foreseeable profit: US $64,500.

[Seller]'s position

1. The impossible performance of the Contract was induced by the [Buyer]'s altering the quality requirement without consulting the [Seller]. Upon conclusion of the Contract, the [Seller] had been actively preparing for delivery of the goods. However, the [Buyer] and its Philippine clients altered their quality requirements of black melon seeds from over 9.5cm to over 10cm, which violated Article 16 of the Economic Contract Law:

"A contract shall be legally binding as soon as it is established in accordance with law. The parties shall perform their obligations as stipulated in the contract. No party shall unilaterally modify or rescind the contract."

The [Seller] therefore could not deliver the goods on time and suffered certain economic loss.

2. No new contract was entered into by and between the [Buyer] and the [Seller]. The alteration of the quality requirements affects price as well as date of delivery, etc., which resulted in impossible performance of the Contract, and rendered the Contract invalid. The down payment of US $60,000 has been refunded since the parties failed to conclude a new contract. No "contract" binds the [Seller], and therefore, the [Seller] is not be liable for any breach of contract.

3. There are many mistakes in the Arbitration Application of the [Buyer], such as:

     (1) The [Buyer] has no base for claiming six categories of damages simultaneously. Should the [Buyer] be entitled to loss of profit of US $64,500, then no interest should be paid for the down payment of US $60,000. Items 1), 2) , 4), and 5) are requisite expenses paid by the [Buyer] for the business; the [Buyer] has no grounds to request the [Seller] to bear these expenses.

     (2) The [Buyer] is confused about the difference between "deposit" and "down payment". The [Seller] indicated in all the notes that the US $60,000 received by the [Seller] was a "down payment", not a "deposit".

     (3) It is not reasonable to base the claims on the quality requirements,10.5cm of black melon seeds, agreed by the [Buyer] and its Philippine client.

     (4) Calculation based on prices agreed by the [Buyer] and its Philippine client is not in compliance with international usages, and violates Article 76 of CISG. Even if the [Buyer]'s claims for damages are rational, the [Buyer] should produce evidence of the market price of goods of same type and same quality in Manila.

[Buyer]'s response

After the hearing, the [Buyer]'s representative submitted its attorney's statement on 6 December 1996 within the prescribed time. The statement is briefed as follows:

1. The [Seller]'s allegation that the [Buyer] altered the quality clause of the Contract should not be sustained.

     (1) Article 7 of the Economic Contract Law provides that the conclusion of a contract shall be in writing. Alteration or rescission of a contract therefore shall also be in writing. In the present case, the [Seller] should produce evidence to establish its allegation that the [Buyer] altered the quality clause of the Contract, but the [Seller] failed to do so.

     (2) After conclusion of the Contract, the [Buyer] has never asked the [Seller] for alteration of the quality clause. On the contrary, the [Buyer] extended the validity period of the L/C twice to enable the [Seller] to perform the obligation of delivery according to the Contract.

     (3) The [Buyer] submitted as evidence a fax which was sent to the [Buyer]'s Philippine client by Mr. Wei ___, a salesman of the [Seller]. The fax evidences that the black melon seeds prepared by the [Seller] are only 8cm wide every 10 pieces of black melon seeds placed abreast, and fail to meet the 9.5cm requirement stipulated by the Contract. The [Seller] failed to deliver the goods on time and asked to postpone the delivery date to August 1995. As to the standard of 10.5cm, it is a matter between the [Buyer] and its Philippine client, and has nothing to do with the [Seller].

     (4) The [Buyer]'s client has opened the L/C, and has extended the validity period of the L/C twice, which supports the Contract entered into by the [Buyer] and the [Seller] on 20 February 1995.

2. The [Seller] should be held liable for breach of contract and damages. The evidence submitted by the [Buyer] fully establishes that the [Seller] failed to deliver the goods according to the Contract. The [Seller] therefore is liable for breach of the Contract in accordance with Article 18 of the Economic Contract Law. The [Seller] should be held responsible for indemnifying for the damage incurred by the [Buyer] as a result of the [Seller]'s breach of the Contract.

3. The [Buyer] suffered the following economic loss caused by the [Seller]'s breach of the Contract.

     (1) Foreseeable profit. The [Buyer] has submitted the sales contract between the [Buyer] and its Philippine client. The term of payment stipulated by the Contract is C&F Manila, and an L/C has been issued by a bank of Manila. Therefore, the Contract between the [Buyer] and its Philippine client is real and valid. The sales contract between the [Buyer] and its Philippine client provides that the price is US $1,200 per mt. In addition, the [Buyer] also mentioned in the fax of 21 February 1995 that "the price is US $1,200 per mt". Had the [Seller] performed the obligation of delivery stipulated by the Contract, the [Buyer] would have gained US $64,500 of foreseeable profit.

     (2) Interest on the US $60,000 down payment. The [Seller] breached the Contract and has held [Buyer]'s US $60,000 for ten month; the [Seller] therefore should indemnify for the loss of interest. The calculation should based on 8% of coterminous rate promulgated by Hong Kong Bank, i.e., US $60,000 X 0.0067 (monthly rate) X 10 months = US $4,020.

     (3) US $4,500 L/C issuance fee and US $2,000 handling charge for two extensions of validity period of the L/C. The L/C under the Contract was established by the [Buyer]'s Philippine client with Philippine Big City Trust Bank. It was agreed that the [Buyer] was responsible for the US $4,500 L/C issuance fee charged by 3% of the amount of L/C and the US $2,000 handing charge for two extensions of validity period of L/C, US $1,000 for each extension.

     (4) HK $11,200 of expense on business trip and HK $3,200 of telephone fee amount to US $1,863 (at the exchange rate of 7.73).

The above economic loss incurred by the [Buyer] amounts to US $76,883. The [Seller] should indemnify for the loss caused by its breach of contract.

III. OPINION OF THE TRIBUNAL

In accordance with the evidence submitted by the parties and the hearing investigation undertaken, the Arbitral Tribunal decides on the applicable law as follows:

The applicable law is not agreed in Contract No. 95SINOE0220WB1, however, both parties have applied the CISG and the Economic Contract Law to establish their statements in the arbitration, and therefore, it can be regarded that the parties have agreed on the applicable law, i.e., China's law and the CISG.

The Arbitral Tribunal finds the facts of the case as follows:

1. The parties entered into Sales Confirmation No. 95SINOE0220WB [the Contract] on 20 February 1995 in Shenzhen, China. The Contract is lawful and binding upon the parties according to China's law and the CISG.

2. The quality requirements in the Contract is more than 9.5cm wide every 10 pieces of black melon seeds placed abreast, and the quality requirement in the contract between the [Buyer] and its client that was signed on 27 January 1995 calls for more than 10.5cm wide every ten pieces placed abreast. The [Buyer] faxed the Contract to its client on 21 February 1995. The [Buyer]'s client accepted the quality requirements stipulated in the Contract, and opened the L/C in favor of the [Seller]. The [Seller] knows about the [Buyer]'s client and has had correspondence with the client.

3. After conclusion of the Contract, on 27 February 1995, the parties amended the terms of payment through negotiation from "100% confirmed irrevocable sight Letter of Credit (L/C)" to "the [Buyer] should pay US $60,000 as down payment; US $150,000 to be settled by L/C, and the rest to be settled by cashier's check after the [Seller] transports the prepared goods to Shenzhen." The amendment is valid.

4. The [Buyer] authorized the opening of No. GP950557 irrevocable L/C in the amount of US $150,000 in favor of the [Seller] with Philippine Big City Trust Bank on 1 March 1995, effective until 30 May 1995. The [Seller] confirmed this fact. The [Buyer] paid to the [Seller] US $60,000 by Tele-transfer via Dao Heng Bank on 15 March 1995, and the [Seller] confirmed the receipt of this money. The [Buyer] thus has paid the first two payments for goods according to the amended terms of payment. The [Buyer] has performed the obligation of payment stipulated by the Contract.

5. Because the [Seller] cannot deliver the goods on time, through the parties' negotiation, the [Seller] promised to deliver the goods in August, and the [Buyer] extended the validity period of the L/C to 30 August 1995. The [Seller] however could not deliver the goods within the prescribed time. The buyer spent US $1,000 for the amendment of the L/C. After that, the parties agreed to extend the validity period of L/C to 30 November 1995. It cost US $1,000 for the amendment of the L/C. The [Seller] again failed to deliver the goods.

6. No existing evidence can establish that the [Buyer] requested the [Seller] to change the quality requirements from 9.5cm to 10 cm. Whether the Philippine client requested a change of the quality requirements does not affect the validity of the original Contract and the [Seller]'s liability under the original Contract because the parties in the present case have not accepted such a request and have not altered the quality clause therefore either. It cannot be established that the [Seller] failed to perform the Contract because of the alteration of quality clause made by the [Buyer] and the Philippine client. The [Seller]'s failure to deliver the goods as stipulated by the Contract, constitutes a fundamental breach of contract.

The delivery date has been extended twice because of the [Seller]'s breach of contract, the [Buyer] therefore lost the opportunity to take other remedies and incurred loss as a result of the [Seller]'s acts. The evidence establishes that the [Seller] knew that the goods purchased by the [Buyer] were to be used for the contract between the [Buyer] and its Philippine client. The price difference between the two contracts is US $64,500.

Article 19 of the Economic Contract Law provides that the liability of a party to pay compensation for breach of contract shall be equal to the damages incurred by the other party. However, such compensation may not exceed the loss, which the party responsible for the breach ought to have foreseen at the time of the conclusion of the contract as a possible consequence of a breach of contract.

Article 74 of CISG provides that damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract

Based on the above laws, the Arbitral Tribunal sustains the [Buyer]'s request for the [Seller]'s indemnification of US $64,500 of foreseeable profit.

7. Regarding the other requests of the [Buyer], the Arbitral Tribunal holds that:

   -    The US $4,500 L/C issuance fee is normal expense for gaining the foreseen profit, and is contained by the foreseen profits, the [Buyer] therefore cannot request the [Seller] to pay the L/C issuance fee while the [Buyer] requests from the [Seller]'s compensation of the foreseen profit.
 
   -    Regarding the loss of interest for US $60,000 of the down payment, the Arbitral Tribunal finds that, the [Buyer] established the L/C in favor of the [Seller] on 1 March 1995 and paid the US $60,000 down payment on 15 March 1995; the [Seller] failed to deliver the goods prior to 30 May 1995 - time of shipment specified in the L/C; after that, the [Buyer] made two extensions of the validity period of L/C as requested by the [Seller], the [Seller] however failed to deliver the goods again at the expiry of the L/C. Article 45 of CISG provides that "If the seller fails to perform any of his obligations under the contract or this Convention, the buyer may exercise other remedies. The buyer is not deprived of any right he may have to claim damages by exercising his right to other remedies." Based on the above provision, the [Seller] shall indemnify the [Buyer] for the interest on the US $60,000 down payment at the annual rate of 4% incurred from 30 May 1995 to the date of actual refunding, i.e., US $1,600.
 
   -    Because the [Seller] failed to deliver the goods and the [Buyer] paid US $2,000 of handling charge for the two extensions of the validity period of the L/C which should not have been paid by the [Buyer] for gaining the foreseen profit, the [Seller] shall indemnify for that expense.
 
   -    However, the [Buyer] has not provided sufficient evidence to establish its request that the [Seller] compensate HK $11,200 of expense on a business trip and HK $3,200 of telephone fee; moreover, the business trip fees for performing the Contract are normal expenses paid by the [Buyer] for the purpose of the foreseen profit. Hence, the Arbitral Tribunal does not sustain the [Buyer]'s request with regard to US $4,500 of L/C issuance fee, HK $11,200 of expense on the business trip, and HK $3,200 of telephone fee.

IV. THE AWARD

Based on the above, the Arbitral Tribunal renders the following award:

   1)    The [Seller] shall pay to the [Buyer] US $64,500 of loss of foreseen profit, US $2,000 of handling charge for the two extensions of the validity period of the L/C, and US $1,600 of interest on the down payment, which sums up to US $68,100, within 30 days upon the award. Interest at the annual rate of 8% shall be paid on any overdue payment.
   2) All other claims of the [Buyer] shall be rejected.
   3) The arbitration fee and handling charge amounts to RMB___. The [Buyer shall pay RMB ____, and the [Seller] shall pay RMB ___. the [Buyer] has paid RMB___ for Arbitration fee and handling charge, and the [Seller] has paid RMB for handling charge. The [Seller] shall pay to the [Buyer] RMB ___ within 30 days upon the award. Interest at the annual rate of 12% shall be paid on any overdue payment.

The award shall be final and binding.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of Hong Kong is referred to as [Buyer] and Respondent of the People's Republic of China 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]; amounts in the currency of Hong Kong (dollars) are indicated as [HK $].

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

*** 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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