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CISG CASE PRESENTATION

China 11 April 1997 CIETAC Arbitration proceeding (Silicon metal case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/970411c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 19970411 (11 April 1997)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1997/05

CASE NAME: Unavailable

CASE HISTORY: Unavailable

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

BUYER'S COUNTRY: Hong Kong (claimant)

GOODS INVOLVED: Silicon metal


Case abstract

PEOPLE'S REPUBLIC OF CHINA: China International Economic & Trade
Arbitration Commission 11 April 1997 (Silicon metal case)

Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/84],
CLOUT abstract no. 852

Reproduced with permission of UNCITRAL

Abstract prepared by Wei Xia YANG

A Chinese seller (respondent) and a Hong Kong buyer (claimant) concluded a contract to export silicon metal. Since the goods did not conform with the contract, the buyer resold them at a reduced price and claimed damages to the seller.

Ruling on the substantive issues, the Arbitration Tribunal noted that the buyer had requested a further inspection at the earliest possible time and had informed the seller of the unacceptable quality of the goods within reasonable time in accordance with articles 38 and 39 CISG. As to article 40 CISG, referred to by the buyer, the Tribunal held that the seller was deprived of the rights granted by the contract because of the modifications it had made in the documents and therefore could not take the buyer's violation of the limitation period as a defence.

The Tribunal stated that the buyer was entitled to a substitute delivery of goods as part of compensation. The Tribunal also found that the seller had not replied to the buyer within a reasonable time, and that the measures taken by the buyer to enter into an agreement with its own customer were reasonable measures to mitigate losses under articles 74 and 77 CISG. The Tribunal stated that the seller should be held responsible to indemnify the damage incurred by the buyer as a result of the seller's breach of contract, including interest, pursuant to articles 78 and 84 of the Convention.

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Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 38 ; 39 ; 74 ; 75 ; 77 ; 78 ; 84 [Also cited: Articles 40 ; 45 ; 46 ]

Classification of issues using UNCITRAL classification code numbers:

38A [Buyer's obligation to examine goods: time for examining goods];

39A [Requirement to notify seller of lack of conformity: buyer must notify seller within reasonable time];

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

75A [Damages established by substitute transaction];

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

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

84A [Seller bound to refund price must pay interest]

Descriptors: Examination of goods ; Lack of conformity notice, timeliness ; Damages ; Cover transactions ; Mitigation of loss ; Interest

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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. 1676-1687

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at nn.23, 27, 145, 158, 167, 210, 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 metal case (11 April 1997)

Translation [*] by Ning Zhao [**]

Translation edited by Meihua Xu [***]

Based on the arbitration clause written in Export Contract CMIT-950108, signed by Claimant Hong Kong XX Investment Company (hereinafter referred to as [Buyer]) and Respondent Shen Zhen XX Limited Company (hereinafter referred to as [Seller]) on 26 September 1995, and the arbitration application submitted by [Buyer], the China International Economic & Trade Arbitration Commission- Shen Zhen Branch (hereinafter referred to as Arbitration Commission), on 18 June 1996, accepted the above mentioned case.

The Arbitration Commission shared with the [Seller] the arbitration application and evidence provided by [Buyer]. After receiving these documents, [Seller] submitted its defense and documentary evidence. The Arbitration Commission shared these documents with [Buyer].

According to the Arbitration Rules of the China International Economic & Trade Arbitration Commission (hereinafter referred to as Arbitration Rules, which entered into effect on 1 October 1995), Arbitrator A, appointed by [Buyer], Arbitrator D, appointed by [Seller], and Presiding Arbitrator P, appointed by the Chairman of the Arbitration Commission, formed the Arbitration Tribunal (hereinafter referred to as the Tribunal) on 22 August 1996. The Secretariat Office of the Arbitration Commission, Shenzhen Commission, sent the notice of formation of the Tribunal and the Court Session notice to the two parties.

On 14 October 1996, the Tribunal commenced hearing the case in Shen Zhen. Both parties attended the hearing and presented their statements. The Tribunal did questioning and investigation. After the hearing, both parties submitted the supplementary statements. The Tribunal transferred these statements to the counter party, respectively. On 11 April 1997, the Tribunal handed down its award.

The followings are the facts, the Tribunal's opinions and the award.

FACTS

[The Contract]

On 26 September 1995, [Buyer] and [Seller] concluded Export Contract CMIT-950108 (hereinafter referred to as the Contract). The Contract states that:

   -    The [Buyer] purchases 300 MT SILICON METAL from the [Seller].
   -    The price of the goods is US $1,045 per MT, FOB ST, total price: US $313,500.
   -    The specifications of the goods are: SI 98.5% MIN, AL 0.50% MAX, FE 0.50% MAX, CA 0.30% MAX, SIZE 10-100mm 90% MIN.
   -    The Contract allows a 5% shortage;
   -    The packaging should be: Plastic woven bags of about 1,000kgs net each;
   -    Departure from Da Lian, China; transshipment and part shipment are not allowed;
   -    The loading date should be before 30 September 1995;
   -    The payment terms are: Before 29 September 1995, the [Buyer] shall open an irrevocable spot Letter of Credit (L/C) in the [Seller]'s favor, the L/C should be valid for payment within 15 days after the loading date;
   -    For the L/C to be honored for payment, the [Seller] should produce to the bank the complete set clean Bill of Lading, duplicated commercial receipts, duplicated loading bills, duplicated Inspection Certificates on quality and quantity issued by China Commodity Inspection Bureau (hereinafter referred as CCIB), and Certificate of the Origin of the Goods.

In regard to inspection and compensation, the Contract states,

   -    The buyer should, concerning the quality of the goods, claim compensation within 30 days after the goods reach the Port; regarding to the quantity of the goods, the buyer should claim compensation within 16 days after the date of the goods arriving at the Port.

On arbitration and governing law, the Contract states:

   -    Any dispute arising from the Contract or relating to the Contract should be submitted to CIETAC and the Arbitration Rules of CIETAC will be applied. The place of arbitration shall be in Shen Zhen, China. The arbitration award shall be final and binding on both parties. When the place of concluding the Contract or the place of dispute is in the territory of China or the respondent is a legal person incorporated under the Chinese law, the Chinese law is applicable, apart from that, the United Nations Convention on Contracts for the International Sales of Goods (hereinafter referred to as CISG) applies.

[The dispute]

A dispute arose when the parties were performing the Contract. [Buyer] started the arbitration application and requested [Seller] to pay damages in total of Hong Kong dollars [HKD] 1,507,997.50. On the day of hearing, 14 October 1996, [Buyer] adjusted the previous claim of HKD 1,507,997.50 to the principal of HKD 1,288,601.26 and RMB 73,407.00, with interest calculated from the date of damage arising to the date of actual payment from [Seller].

The detailed calculation follows: (the exchange rate of US $ to HKD is 1 : 7.8)

  1. Price discount: US $350/MT x 296.691MT = US $103,841.85 = HKD 809,966.43 plus shortage damages: US $1,045/MT x (300.86 - 296.691) = US $4,356.60 = HKD 33,981.48 plus attorneys' fee: US $1,000.00 = HKD 7,800.

  2. Rent for warehouse (from 2 February 1996 to 3 April 1996): Dutch currency [DFL] 2,566.76 (1 US $ = 1.7002 DFL), i.e., HKD 11,775.51.

  3. SGS inspection cost: US $5,132.09, i.e., HKD 40,030.30 4`T/R interest (bank interest from 18 December 1995 to 14 April 1996).

  4. T/R interest (bank interest from 18 December 1995 to 14 April 1996): US $7,915.10 = HKD 53,989.104.

  5. L/C charge: HKD 7,618.60.

  6. Package cost (repacking cost for damaged bags and extra cost): DFL 6,842.00 = HKD 31,389.01. US $5,733.44 = HKD 44,720.83.

  7. Attorney consultancy fee: HKD 97,330.00.

  8. Arbitration cost: RMB 73,407.00.

  9. Attorneys' fee (in Shen Zhen): HKD 50,000.00.

  10. Administration cost: HKD 100,000.00.

  11. Interest on the damages claimed (from the date the damages occurred to the date of actual payment made).

    Total: HKD 1,288,601.264; RMB 73,407.00.

[ISSUES IN DISPUTE]

1. Quality and quantity of the goods

-   [Buyer]'s position

The [Buyer] states:

   -    On 26 September 1995, [Buyer] and [Seller] signed an Export Contract, which stipulates that [Buyer] purchases 300MT SILICON METAL from [Seller], the total contract price is US $313,500, payment will be made by L/C. The documents required for the L/C are the Inspection Certificate of the quantity (weight) and quality of the goods, which shall be issued by CCIB.
 
   -    Liao Ning CCIB issued Inspection Certificates on quantity and quality of the goods on 29 November 1995. [Seller] modified both certificates. On the basis of the modified certificates, [Seller] claimed for the payment under the L/C from the bank. After discovering the changed certificates, [Buyer], immediately contacted [Seller] and sent a letter stating its opinion. Meanwhile, [Buyer] confirmed with Liao Ning CCIB with the result that both certificates were forged. Liao Ning CCIB, again, investigated the remaining samples and found out that the quality of the goods does not conform to the contract standard.
 
   -    Due to the disqualified goods delivered by [Seller], [Buyer], as a way of compensation, agreed to a price reduction of US $350/MT with its customers. Apart from the profit loss, [Buyer] had to bear the attorneys' fee, interest, inspection cost, rent for warehouse and so on. All losses were due to [Seller]'s breach of the Contract, therefore, [Seller] should be held liable for the losses.

-   [Seller]'s response

[Seller] alleges:

   -    After concluding the Contract, [Seller], in compliance with the Contract, applied for the inspection of 300MT SILICON METAL from Liao Ning CCIB, where certificates of quality and quantity of the goods were issued on 29 November 1995. The result of the quality inspection shows: CA: 0.30%; FE: 0.50%; AL: 0.50%; SI: 98.7%; SIZE: 10-100mm90% min. These results comply with the requirements stated in the Contract. Hence, [Seller] loaded the goods on the ship "DSR Beijing" before 30 November, and received the complete set clean Bill of Lading from the owner of the ship. Afterward, [Seller] held the required documents and claimed the payment from Guang Dong Development Bank Shen Zhen Branch. Based on the above facts, the goods delivered by [Seller] comply with the standards in the Contract, therefore, [Seller] did not breach the Contract.
 
   -    [Seller] admitted that it has added MAX, MIN and other descriptive words on the Inspection Certificate, however, it cannot be concluded that the goods provided by [Seller] do not conform to the Contract.
 
   -    The customs agent and the application for inspection are appointed by [Buyer]. Out of [Seller]'s expectation, the application procedure was not smooth. Miss Wan, an inspection agent, delayed the application. The inspection report was not produced until 29 November 1995. [Seller] faxed the report to Mr. Bai, the representative of [Buyer], while Mr. Bai pointed out that the results of the inspection are all whole numbers, and doubted whether Liao Ning CCIB committed a fraud. Subsequently, Mr. Bai telephoned [Seller] that its customers might not make a payment, then, [Seller] might encounter a forced litigation. At the same time, a clerk from the bank informed that the format of the certificates is probably not compliant with the L/C. Due to the misunderstanding of the rules and the lack of knowledge of L/C, the employee of [Seller] added the words of "MAX", "MIN", "CCIB HAVE PERFORMED SAMPLING AND ANALYSIS AND THE FINDING OF EXACT ANALYSIS OF ALL ELEMENTS" and "CCIB have performed weighting and the finding of exact weight". However, as a matter of fact, adding the above-mentioned words will neither influence the validity of certificates, nor constitute a substantive change of the quality of the goods. It is well known that the higher percentage of silicon in Silicon Metal, the higher industrial value. Therefore, the Contract states that the content of silicon should not be lower than 98.5%, the other AL, FE, CA should not exceed 0.50%, 0.50% and 0.30%, respectively. The current result shows SI: 98.7%, which is higher than the lowest standard in the Contract and complies with the requirement of not less than 98.5% of silicon stated in the Contract; AL: 0.50%, FE: 0.50%, CA: 0.30% do not exceed the contract maximum standard. After adding "MAX" and "MIN", the above results did not change. In fact, it is only repeating an objective fact by using "MAX" "MIN". Additionally, the words "CCIB HAVE PERFORMED SAMPLING AND ANALYSIS AND THE FINDING OF EXACT ANALYSIS OF ALL ELEMENTS" added on to the certificate of quality and the words "CCIB have performed weighting and the finding of exact weight" added on the certificate of quantity did not make any sense, and did not affect the conclusion of inspections.
 
   -    In regard to the reply to [Buyer]'s consultation, in which the Inspection Department of Liao Ning CCIB states that the contained FE is 0.51%, [Buyer] held that the consultation result of FE did not comply with the one shown in the original certificate of quality, which is 0.50%, and alleged that the goods delivered by [Seller] did not conform to the contract standard. [Seller] forwarded the question to Liao Ning CCIB Mining Center and Liao Ning CCIB Central Laboratory. Liao Ning CCIB Mining Center and Liao Ning CCIB Central Laboratory explained the difference between the second result of FE 0.51% and the original result of FE 0.50%: from the technology point of view, both results are the same, and the analysis allows error of 0.03%. So the original result of 0.50% is genuine. It is evidential that the quality of the goods is in conformity to the standard written in the Contract, and that the [Buyer]'s claim cannot be supported.
 
   -    Investigation of the quality and quantity of the goods by CCIB is a provision in the Contract, which has been agreed by both parties. Therefore, concerning the quality and quantity of the goods, the inspection result of CCIB shall be considered the unique, legal evidence in the case at hand.

-   [Buyer]'s counter argument

In response to the [Seller]'s argument, [Buyer] alleges:

In regard to the quality of the goods, the Contract explicitly states: SI 98.5% MIN;
AL 0.50% MAX; FE 0.50% MAX; CA 0.30% MAX; SIZE 10-100mm 90% MIN.

The L/C opened by [Buyer] on 31 October 1995 stipulates that the Inspection Certificates shall explain "the exact content of all elements". On 29 November 1995, Liao Ning CCIB produced a set of certificates, which do not explain the exact contents of main elements, SI and the other elements. After the goods reached the port, [Buyer] appointed SGS to investigate the goods. The inspection report from SGS, on 19 February 1996, shows:

AL 0.70%, CA 0.92%, FE 0.57%, SI 97.67%, which is not conforming to the contract standards at all.

SGS reinvestigated Lot 2, Lot 5 and Lot 9 of the goods on 19 February 1996. The reinvestigation report proved that the contents of SI and CA seriously breached the Contract, the content of AL in Lot 5 complies with the Contract, and only the content of FE conforms to the contract standard. On 16 January 1996, the Inspection Department of Liao Ning CCIB re-inspected the remaining example, in which the content of FE also exceeded the standard. [Seller] submitted a copy of the explanation of FE content on the day of the hearing, 14 October 1996. This document cannot prove that [Seller] did not breach its contractual obligations.

   -    First, the proof of the quality of the goods shall be the inspection report of SGS, rather than some other documents.
 
   -    Second, according to Art. 21 of the "China Inspection Act on Importing and Exporting Commodities", the re-inspection place shall be the original inspection place, i.e., Liao Ning CCIB, or a specialized inspection group or a group of experts, which is organized by CCIB. However, the copy submitted by [Seller] is from "Liao Ning Investigation Bureau Mining Center", and yet one of the stamps is from Da Lian, the other is from a laboratory, (the stamp cannot be read precisely due to the copy). In no way do the above-mentioned departments have the right to prove the quality of the goods.
 
   -    Third, the said document is subject to [Buyer]'s review, however, [Buyer] did not receive it, in fact, [Seller] holds such a document, which does not mention that it is subject to [Seller]. Obviously, this document was produced in an illegal way. It is, therefore, evident that [Seller] colluded with the personnel of the Investigation Bureau and made a false document.
 
   -    Fourth, regarding the contents of the document, it allows 0.3% of error, but where is the legal basis to uphold this opinion? [Buyer] asserts that the Contract stipulates not to have 0.1% error. [Seller], as a contracting party, should perform its contractual obligation seriously, otherwise, it constitutes a breach of contract. Therefore, it is undoubted that the quality of the goods is not in conformity to the Contract.

In the documentary credit payment system, seller has the obligation of transferring the bills and documents. The CISG obligates the seller to fulfill this obligation. In the case at hand, the [Seller] itself modified one of the documents - the Inspection Certificate - and transferred the non-conforming documents to the bank. [Seller] admitted this in its defense. Therefore, it is unarguable that [Seller] breached its obligation to transfer the documents. It is worth analyzing further the causes of such behavior. According to [Seller]'s arguments, there are two reasons:

   -    One, "due to the misunderstanding of the rules and the lack of knowledge of L/C";
   -    Two, "Miss. Wan delayed the application of inspection".

It is obvious that these two reasons are not convincing. First, misunderstanding rules cannot constitute an exemption of the laws, and it is also difficult to judge whether such behavior resulted from misunderstanding of laws. [Seller] cannot be exempted from its obligation, in regard to the lack of knowledge of L/C. As a trading company, it is not convincing that the employee does not have knowledge of L/C, especially, when there are supervisors inside the company. Second, Miss. Wan was appointed by [Seller], so [Seller] should be responsible for her mistakes. [Seller] alleged that Mr. Bai recommended Miss. Wan, however, this is not the fact. Miss. Wan was selected and appointed by [Seller]. This allegation of [Seller] is not worth arguing.

As far as the references to MAX and MIN in the Contract are concerned, the accurate understanding is: MAX and MIN mentioned in the Contract means the maximum and minimum standard of the whole bulk of the goods. As long as the goods do not exceed the standard, the goods conform to the Contract. It does not mean to simply write these two words on the inspection report, because the accurate contents of metal cannot be interpreted by using these two words. The inspection, by sampling test, is subject to the concrete and existing goods, therefore, the inspection report should show the exact data of the tested goods, rather than showing "MAX" "MIN" only. Strictly speaking, assuming [Seller] did not modify the certificates, the Inspection Certificates are still not valid; [Buyer] has a right to apply for a re-investigation.

It has to be pointed out that [Seller] not only breached its obligation of transferring conforming documents, but also this breach was resulted from modifying the documents. It is a fraud. Therefore, [Seller] should not only be held liable for the consequences caused, but should also be deprived of rights granted by the Contract. Art. 40 of CISG states:

"The seller is not entitled to rely on the provision of articles 38 and 39 if the lack of conformity relates to facts of which he knew or could not have been unaware and which he did not disclose to the buyer."

That is to say, although the buyer raises the question beyond the time limit mentioned in the contract, the seller cannot hold this against the buyer where the seller knew or could not have been unaware of the quality and quantity of the goods. The representatives of [Seller] admitted this point during the hearing.

2. The question of changing bags of the goods

[Seller] states:

   -    The goods which have been inspected by SGS are not the ones exported by [Seller].
 
   -    The goods exported by [Seller] were packed in 300 pieces of plastic woven bags, 1,000kg per bag, which were checked by CCIB. Liao Ning CCIB, subject to these 300 pieces of plastic woven bags, issued an inspection letter on the package function, numbered as 5101406, on which it states the number of packing bags is 21930.110.301. Comparing to the inspection report of SGS, the number of packing bags is 90200 (Black), 2193130246 (Blue). The above-mentioned packing numbers are different from the packing number of the goods exported by [Seller]; thus, it is obvious that the goods checked by SGS do not belong to [Seller].

[Buyer] asserts:

[Seller] alleges that the goods have been changed and produced an inspection letter as proof. [Buyer] believes there is no legal basis to support [Seller]'s opinion.

   -    First, the Contract does not require any numbering of the goods. To disprove the goods by numbers cannot itself be supported on the contract basis.
 
   -    Second, the SGS inspection report does not fully describe the packing numbers, instead of showing parts of numbers.
 
   -    Third, the inspection letter held by [Seller] is dated 28 December 1995; in fact, by this date, the goods has been loaded on the ship, so it is possible that the mistake happened to the inspection letter, rather than the SGS inspection report.
 
   -    Fourth, assuming that [Buyer] planed to change bags, at least there should be spare bags available to be changed, in other words, [Buyer] should have another bulk of the same quantity of SILICON METAL at the destination port, in fact, there is nothing.
 
   -    Fifth, the shipping company can prove that there is only one bulk of the same quantity and quality of goods at that ship.

Therefore, [Seller]'s allegations of changing bag do not make any sense.

3. The question of obligations

[Seller] argues:

The letter claiming damages from LML Company states the reasons of damages:

THE MATERIAL TO BE SO GRADE TO SUCH A DEGREE THAT WE WILL FIND IT EXTREMELY DIFFICULTY TO FIND A BUYER/CONSUMER TO PURCHASE SUCH LOW GRADE SILICON METAL.

However, the goods exported by [Seller] have been proved both by the original certificates issued by Liao Ning CCIB and the reinvestigation report issued by CCIB Investigation Department, and the contents of SI achieve 98.7%, which are higher than the contracting standard 98.5%.

It is clear that the damages claimed by LML do not relate to the quality of the goods provided by [Seller]. Therefore, the damages claimed by [Buyer], including the attorneys' fee, loss of profit, rent for warehouse and inspection cost occurred between [Buyer] and LML lost their legal basis.

[Seller] should not be involved in disputes between [Buyer] and its customers over damage claims and renegotiation where [Buyer] raised a claim for damages on such a ground. [Seller] believes that [Buyer]'s claims do not have a legal basis. Moreover, the content and scope of the [Buyer]'s claims are repetitive, unreasonable, and parts of them are false.

   -    First, in regard to the loaded 300 MT SILICON METAL, CCIB issued the Certificate of Quantity on which it states that the total net weight is 300.860MT and the total gross weight is 301.760MT. The original Bill of Lading also shows 301.760MT. So, there is no evidence to prove the shortage of the goods. Even though, at the destination port, the weight of the unloaded goods differs from the above weight, the consignor shall not be held liable for the shortage of the goods, provided that the carrier did not notify it on the Bill of Lading; under this circumstance, the shortage of the goods could only be claimed against the carrier. Additionally, the Contract allows a 5% shortage, namely, as long as the shortage is within 5% of the goods, it is still in conformity of the Contract, and [Seller] will not breach the Contract on this basis.
 
   -    Second, US $1,000 is the claimed attorney fee that occurred in two disputes with LML (120MT and 300MT), it is certain that the attorney fee regarding to 120MT is not relevant to [Seller].
 
   -    Third, [Buyer] received and sold the goods. There is no reason to require [Seller] to pay the cost (including transportation, warehouse, L/C, inspection, packing and administration cost, and so on).
 
   -    Fourth, [Buyer] claimed the damages of discounted price, so it should not have the right to claim the profit losses. Obviously, the damages claimed by [Buyer] are repetitive and unreasonable.

[Buyer] asserts:

According to the SGS report, the net weight of the goods is 296.691MT, which is 4.169MT less than the weight written in the receipt from the [Seller], 300.86MT. In [Seller]'s defense, [Seller] tries to exempt from its obligation by applying the provision of allowed shortage in the Contract; however, it cannot be upheld, since [Seller] misunderstood the concept of the provision of allowing shortage. In fact, the provision of allowing shortage, where 5% of the amount difference is allowed, only states that the amount of the goods is acceptable (does not constitute a breach of contract) within this scope, but it does not mean that the payment will not be made on the actual amount delivered.

Art.18 of Chinese Foreign Economic Contract Law states:

"A breach of contract is committed if one of the parties failed to perform the contract or the performance of the contract did not comply with the agreed condition, the other party is entitled to claim the damages or make other reasonable remedies. After remedies, the other party still can claim damages if the loss of the other party could not be covered."

Art. 45 of CISG also explicitly states the rights the buyer can excise when the seller breaches the contract. Therefore, the above-mentioned breaches can establish the grounds for [Buyer] claiming damages from [Seller].

There are two facts that need to be clarified.

   -    First, the forced discount selling by [Buyer] is a remedy, which aims to mitigate the losses. The reason for the forced discount selling is that the English buyer, before the SGS report was published, noticed the modification on the CCIB certificates and refused to make the payment. After the SGS report, the English customer of the [Buyer] refused to accept the goods and required [Buyer] to provide the qualified goods within the original contract period. After trying to persuade several times, [Buyer] was informed that the goods were sealed up by a Dutch court on 14 March. Even so, [Buyer] still persuaded the English customer to accept the goods. However, the customer threatened to make an alternative purchase from the local market if [Buyer] cannot provide the qualified goods. Under the circumstances, [Buyer] agreed to reduce US $130/MT, the [Buyer]'s customer, however, bargained to US $420 to 450/MT, at the end, both parties agreed to reduce US $350/MT. The reason for "aiming to mitigate the losses" is that the English buyer would probably make a substitute purchase at the local market if [Buyer] did not reduce the price. If this is the case, [Buyer] has to bear the compensation for price difference of more than US $700/MT. What is more, [Buyer] negotiated with the customer and reduced the attorneys' fee from US $3,000 to US $1,000.
 
   -    Second, in respect of the calculation of the period for raising complaints. The Contract states that the question period for the quality and quantity of the good is 30 days and 16 days, respectively. In this aspect, [Buyer] did comply with the Contract. The goods arrived at the port on 31 January and were transferred to the warehouse on 2 February On the same day, SGS started inspecting. The inspections were done on 2, 5 and 6 February, the analysis was finished on 16 February, and the inspection report was published on 19 February, which was the Chinese New Year. Since the report disadvantaged [Buyer], [Buyer] requested SGS to start a more detailed inspection. On 29 February, SGS produced another report. The day when [Buyer] received the report was on the weekend, so [Buyer] formally informed [Seller] of the disqualified goods on 5 March. It clearly shows that, except the public holidays and the necessary time for SGS conducting its analysis, [Buyer] raised the question at its earliest time, which conforms to the requirements of the Contract.

In respect of the scope of damages. Art. 74 of CISG states:

"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 ..."

Art.19 of Chinese Foreign Economic Contract Law stipulates the same principle. Art. 22 of Chinese Foreign Economic Contract Law also states:

"The party who relies on a breach of contract shall take necessary measures to prevent the extension of damages; failure to take such measures, the party is not entitled to claim damages to the extent of extension of damages."

[Buyer] kept contacting [Seller] from the moment of noticing the modified certificates to finally confirming the disqualified goods. Especially, after the goods arrived at the destination port, [Seller], being informed of the disqualified goods, still took an irresponsible and negative attitude. To prevent the extension of damages, [Buyer] had to sell out the goods at a discounted price, even though, [Buyer] still suffered from huge economic losses.

THE TRIBUNAL'S OPINION

1. Contract CMIT-950108 dated 26 September 1996 was signed on an equal and voluntary basis, therefore, this contract is valid. According to both parties' agreement, the place of concluding the Contract is in Shen Zhen, [Seller] is a legal person incorporated under Chinese law, hence, Chinese law is applicable to this dispute. Both parties also agreed that CISG applies when there is no certain regulation in Chinese law.

2. On the basis of the evidence submitted by both parties and the hearing, the Tribunal confirms the following facts:

     (1) [Buyer] established a L/C whereby [Seller] received US $314,398.70 by providing receipts and a Bill of Lading, which states 300.86 MT.

     (2) The China Commodity Inspection Bureau Liao Ning branch issued Quality Inspection Certificate No. 3BI5266 on 29 November 1995. The inspection report shows: CA: 0.30%, FE: 0.50%, AL: 0.50%, SI: 98.7%, SIZE: 10-100mm 90% min. The same bureau also issued a Quantity Inspection Certificate on the same day which shows:

Packing: packed in big plastic woven bags of about 1MT. Net each; Total 300 bags; Total gross wt. 301.760MT; Total tare wt. 0.900MT; Total net wt. 300.860MT.

When claiming payment from the bank, [Seller] modified the above two certificates. On the Quality Inspection Certificate, [Seller] added "MAX" after the contents of CA, FE, AL and added "MIN" after the content of SI. Meanwhile, it also added "CCIB HAVE PERFORMED SAMPLING AND ANALYSIS AND THE FINDING OF EXACT ANALYSIS OF ALL ELEMENTS". To the Quantity Inspection Certificate, [Seller] added "CCIB have performed weighting and the finding of exact weight".

3. On 2 January 1996, [Buyer] sent a letter to [Seller], which states that the Hong Kong Charter Bank noticed that the documents were not in conformity and suspected that the CCIB certificates were forged, since to the CCIB certificates have been added "MAX" "MIN" and other descriptive words were added to the CCIB certificates and asked [Seller] to provide an explanation. On 4 January 1996, [Buyer] sent a letter again to [Seller] stating that the final users doubted the CCIB certificates and complaining of [Seller]'s non-response. The letter also states:

"My company cannot accept the inspection results, according to the data from the CCIB certificates. Since the goods have not yet arrived at the port, [Seller] is required to confirm: SGS will conduct a re-investigation once the goods arrive at the port. [Seller] will be liable to all obligations and damages if the goods do not comply with the contract standards."

[Seller] was also required to return 30% of the payment, i.e., US $94,505 as a quality guarantee for [Buyer].

On 5 March 1996, [Buyer] stated in a letter to [Seller] that, for quick resolution of the dispute, [Buyer] prefers to return the goods with [Seller] bearing the interest and damages resulting from its improper performance of the Contract. [Buyer] set as a requirement, a reply to this letter by [Seller] within the week. On 8 March 1996, [Buyer] indicated in another letter to [Seller] that [Buyer] has requested [Seller]'s response several times, including by fax on 5 March, however, [Seller] still has not replied. Under the circumstances, [Buyer] is under pressure to sell the goods at a discounted price. The resultant damages will, therefore, be claimed against [Seller].

On 29 March 1996, [Buyer] announced in a letter to [Seller] that the SGS Inspection Report (done at the destination port), proves that the results deviate much from the contract standards. Nevertheless, [Seller] still has not replied to [Buyer]. As mentioned in [Buyer]'s letters of 5 and 8 March, if [Seller] does not provide any response, [Buyer] will discount the goods and the damages that occur will be claimed against [Seller]. After difficult negotiations with English clients, an agreement has been reached.

On 9 April 1996, [Seller] sent a letter to [Buyer] stating that:

   -    The dispute was caused by the irresponsible conduct of Miss Wan, who was recommended by Mr. Bai and was hinted, also by Mr. Bai to make modifications both on the agency fee and the Inspection Certificates, so Mr. Bai should be responsible for the dispute;
 
   -    Liao Ning CCIB has seriously inspected the 300 MT SILICON METAL and produced the report thereof, which shows that the goods are in conformity with the contract standards. However, due to the doubts about the inspection report, [Seller] agrees to have SGS reinvestigate the goods and requests [Buyer] to decide the reinvestigation amount together.
 
   -    If [Buyer] is reluctant to accept the goods, [Seller] agrees to take them back and refund the payment, provided that the 300 MT of SILICON METAL are to be confirmed from Dan Dong. The reply to this letter shall be done before 15 April 1996.

Upon receiving [Seller]'s letter of 9 April 1996, [Buyer] replied on the same day that SGS reinvestigation was legal and the result was genuine. [Seller] did not reply to [Buyer]'s requiring letters. When [Buyer] requested [Seller] to respond to the dispute, [Seller] kept silent. Now, when [Buyer] has made arrangements to discount the goods, [Seller] generates its response. This behavior is unreasonable.

On 11 April 1996, [Seller] (Mr. Zhirong Zhang) replied to [Buyer] expressing his agreement to commence the SGS re-investigation and his hope to discuss what would be a reasonable amount of goods to be re-investigated. In respect of the re-inspection report, [Seller] will be responsible for disqualified goods, and bear certain re-investigation costs.

In response to [Seller]'s letter of 11 April, [Buyer], on 12 April, replied that [Seller] has been informed of the SGS inspection report both orally and in writing; [Seller] should have been aware of the quality of the goods and responded to the claim of damages raised by [Buyer].

4. On 19 February 1996, SGS, located in Rotterdam, the Netherlands, had published the results of its weight and sampling test and an analysis report, stating:

Parcel: 296.691kgs net
Product: Silicon Metal
Packed in: Big Bags
Packing: Parcel was found to be packed in white polypropylene Big Bags, part of them found to be marked with 90200 (in Black) 2193130246 (blue).
Analysis: One such average sealed quality sample has been send to an SGS laboratory for chemical assay, resulting in:
AL: 0.70% ___________ CA: 0.92%
FE: 0.57% ____________ SI: 97.67%
The contracting standard showing in the Contract:
AL: 0.50% Max ____________ CA: 0.30% Max
FE: 0.50% Max ____________ SI: 98.5% Min

5. 20-21 October 1995, [Buyer] concluded a contract of sale of 300MT SILICON METAL with its customer Lazarus Metals Limited Company (hereinafter referred to as LML). LML established an irrevocable L/C, which lists [Buyer] as a beneficiary on 30 October 1995. 29 March 1996. Due to the quality of SILICON METAL, on 29 March 1996 [Buyer] agreed with LML that 300 MT SILICON METAL will be sold less US $350/MT, US $1,000 for attorney fees.

The Tribunal believes,

1. In regard to the dispute over the quality and quantity of the goods:

     (1) The conduct of [Seller] adding "MIN" "MAX" and other descriptive words to the Quality and Quantity Inspection Certificates No. BI5266, issued by Liao Ning CCIB on 29 November 1996, is a fraud.

     (2) The inspection of goods is an important segment in international trade. To receive the goods by the buyer does not mean the buyer accepts the goods; in fact, the buyer still has a reasonable period to inspect the goods.

Art.12(2) of the Contract states:

"After the goods arrive at the destination port, the buyer may assign the local commodity inspection bureau to reinvestigate the goods."

Art.12(3) states:

   -    "If the buyer claims damages concerning the quality of the goods, the buyer must raise the claim within 30 days after the goods reach the port; concerning the quantity of the goods, the buyer must raise the claim within 16 days after the goods reach the port."

In the case in hand, since [Buyer] discovered the modifications on the Inspection Certificates, [Buyer] is entitled to request a reinvestigation at SGS (which is located at the destination port) after receiving the goods. [Seller] explicitly agreed to conduct an inspection by SGS.

The results of the SGS investigation show that the quality of the goods does not comply with the standards in the Contract, since the contents of AL, CA, FE and SI are not in conformity with the standards. The results also show that the net weight of the goods is 296.691MT, which is 3.309MT less than the contract weight of 300MT and 4.169MT less than the amount of 300MT, which [Buyer] has actually paid for.

All the evidence also proved that the goods arrived at the port on 31 January 1996, and were transferred to the warehouse on 2 February. SGS did the inspection on 2 February, 5 February and 6 February. The inspection report was issued by SGS on 19 February 1996. Upon the request of [Buyer], SGS re-investigated lot 2, lot 5 and lot 9 of the goods, the results of those re-investigations still do not conform to the contract standard.

In accordance with the CISG, [Buyer] requested an SGS inspection at the earliest possible time and informed [Seller] of the non-conforming goods within a reasonable period. [Buyer] has a right to acknowledge the non-conforming goods. In addition, after becoming aware of the modified certificates, [Buyer], on 4 January 1996, sent a letter to [Seller] stating that the goods will be inspected by SGS at the destination port, and that if the goods do not conform to the contracting standards, [Seller] shall be liable for all damages. As [Seller] did modify the CCIB certificates, and two SGS inspection reports proved that the goods are not in conformity with the Contract, it cannot be considered that the claim for damages from [Buyer] violated the dispute-raising period mentioned in the Contract.

In accordance with CISG, [Buyer] is entitled to require [Seller] to deliver substitute goods. However, the evidence shows that [Seller] did not reply to [Buyer] within a month after being informed. During that period, the goods were detained by a Dutch court upon the request of [Buyer]'s customer. According to the Chinese Foreign Economic Contract Law and the CISG, a party who relies on a breach of contract must take reasonable measures in the circumstances to mitigate the loss that was caused by the party in breach. If he fails to do so, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated. Since [Seller] did not reply in a reasonable time, the goods were detained by a Dutch court, [Buyer], after negotiation with its customer, bargained the deducting price from US $420 to 450/MT, originally claimed by customers, to US $350/MT, the attorney fee from US $3,000 to US $1,000, and reached a compensation agreement with customers on 28 March 1996. [Seller] did not respond to [Buyer] until [Buyer] had reached an agreement with its customer, and only afterwards did [Seller] agree to draw back the goods. The Tribunal believes [Seller] did not reply to [Buyer] within a reasonable time, and that the measures taken by [Buyer] to enter into an agreement with its customer are reasonable measures to mitigate losses. However, the Tribunal also notes that part of the attorney fee claimed by [Buyer] relates to another 120MT SILICON METAL transaction, which is not relevant to [Seller] in this case.

2. The question of changing bags of the goods

The SGS inspection report states: "part of them (indicates white polypropylene big bags----referred by the Tribunal) found to be marked with 90200 (in black) 2193130246 (blue)". The Tribunal notes that the Contract does not require the numbering of the goods. It is not convincing that, as claimed by [Seller], the goods investigated by SGS are not the goods which were provided by the [Seller], merely on the basis of the packing numbers.

[Seller] showed a Packing Function Investigation letter, which was issued by Liao Ning CCIB about the function of the 300 plastic woven bags, and tried to prove that the goods inspected by SGS are not [Seller]'s goods, because the packing numbers of the goods investigated by SGS are different from the ones on the bags which [Seller] provided. However, the Tribunal notes that the numbers shown on the letter cannot prove the same numbers presented on the bags. Additionally, the verification record on the Investigation letter indicates that the date shown on the Investigation letter is 28 December 1995, however, the tested 300 packing bags were only used 160 pieces in May 1996, the goods involved in this case were loaded on the ship on 30 December 1995 and arrived at the Rotterdam Port on 31 January 1996. The reply letter from Liao Ning CCIB Mining Center, submitted by [Seller] afterwards, could merely indicate that the center allows producing the packing bag numbers as a series number, and could not prove that the packing bags actually used by [Seller] belong to this series number. Therefore, the Tribunal believes that the evidence produced by [Seller] is insufficient and [Seller]'s allegation that the goods inspected by SGS are not the goods [Seller] delivered cannot be sustained.

3. To sum up, the Tribunal holds:

Due to the quality of the goods, [Buyer], after receiving them, discounted the goods. The price difference suffered by [Buyer], i.e., US $350 x 296.691 = US $103,841.85 shall be compensated by [Seller].

Since [Seller] received payment for 300.86MT SILICON METAL (the quantity agreed by both parties in the Contract was 300MT), while the actual weight of the goods was 296.691MT, the shortage is 3.309MT, which is about 1% of the contract weight and within 5% of the allowed shortage range. In accordance with general practice in international trade, both parties shall, within the allowed shortage range, make the payment on the basis of the exact amount of goods. Therefore, [Seller] shall refund to [Buyer] the overpaid amount of money, which is US $1,045 x (300.86 - 296.61) = US $4,356.60.

The evidence shows that the goods were delivered to the warehouse on 2 February 1996 and were transferred to [Buyer]'s customer on 3 April 1996, and had to be warehoused due to the quality of the goods. Therefore, the warehouse cost, DFL 2,566.76, equal to HKD 11,775.51, shall be paid by [Seller].

[Seller] shall bear the re-investigation cost of US $1,099, done by SGS, since it is due to the quality of the goods.

The attorney cost of US $1,000 is also involved with another 120MT SILICON METAL transaction, which is not relevant to [Seller]. [Seller] should only bear part of the attorney cost. The Tribunal thinks US $712 is reasonable.

In respect of the bank interest, part of it was caused by the delay due to the quality problem. The interest calculating period shall start from 10 February 1996 to 14 April 1996, in total US $4,251.83. [Seller] should be held liable for this amount of interest.

The first SGS inspection cost, the cost of establishing the L/C and the cost of packing the goods are normal costs in international trade; since the profit losses and damages suffered by [Buyer] are confirmed and to be compensated, the requests for the above costs claimed by [Buyer] cannot be granted.

The administration fee of HKD 100,000 claimed by [Buyer] lacks supporting evidence; the Tribunal decides not to support it.

There is evidence proving that [Buyer] paid HKD 97,330 for the consulting attorneys in relation to the current case. However, there is no evidence to show that [Buyer] paid HKD 50,000 for attorney fee (Shen Zhen). In accordance with Art. 59 of the Arbitration Rules, [Seller] shall compensate [Buyer] part of the costs which result from processing the dispute, at a reasonable amount of HKD 73,000.

Due to the lack of evidence, the Tribunal will not uphold [Buyer]'s request for interest on the damages claimed..

AWARD

1. [Seller] shall, within 40 days after the date of this award, pay [Buyer] damages in the amount of US $103,841.85, due to the discounted selling, the overpaid goods price US $4,356.60, attorneys' fee US $712, inspection fee US $1,099 and bank interest US $4,251.83, in total US $114,261.28. For late payment, 8% interest will be added.

2. [Seller] shall, within 40 days after the date of this award, compensate [Buyer] part of costs which result from processing the dispute, at a reasonable amount of HKD 73,000. For late payment, 10% interest will be added 10%.

3. [Buyer]'s other claims are rejected.

4. The arbitration fee and case procedure fee is RMB ____, of which RMB ____ shall be borne by [Buyer], and RMB ____ shall be borne by [Seller]. The deposit for the arbitration fee and case procedure fee paid by [Buyer] will be included in the part of arbitration cost. The amount of the case procedure fee not yet paid by [Seller] shall be paid to the CIETAC Shen Zhen branch within 15 days after this award being given. [Seller] shall pay [Buyer] RMB ____ within 40 days after the date of this award. For late payment, 10% interest will be added.

This award is final.


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 [HKD]; Dutch currency is indicated as [DFL].

** Ning Zhao, LL.M. (cum laude) Groningen University, Netherlands; LL.B., Nan Kai University, Tianjin, P.R. China.

*** 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 June 4, 2009
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