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CISG CASE PRESENTATION

China 7 May 1997 CIETAC Arbitration proceeding (Sanguinarine case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/970507c2.html]

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

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Case identification

DATE OF DECISION: 19970507 (7 May 1997)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1997/11

CASE NAME: Unavailable

CASE HISTORY: Unavailable

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

BUYER'S COUNTRY: United States (respondent)

GOODS INVOLVED: Sanguinarine


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Article 9 ; 77 ; 79(1)

Classification of issues using UNCITRAL classification code numbers:

9A [International usages];

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

79B [Impediments excusing party from damages]

Descriptors: Usages and practices ; Mitigation of loss ; Exemptions or impediments

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Editorial remarks

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Zhong Guo Guo Ji Jing Ji Mao Yi Zhong Cai Wei Yuan Hui Cai Jue Shu Hui Bian [Compilation of CIETAC Arbitration Awards] (May 2004) 1997 vol., pp. 1819-1824

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at n.241, 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

Sanguinarine case (7 May 1997)

Translation [*] by Meihua Xu [**]

Edited by Yan Tianhuai [***]

The China International Economic and Trade Arbitration Commission (hereafter, "Arbitration Commission") accepted this case according to:

   -    The arbitration clause in Contract No. 93JXD-115 and Contract No. 94 JXD-031 between Claimant, China Jiangxi Province ___ Import & Export Company (hereinafter, "[Seller]") and Respondent, America ___ Company (hereinafter, "[Buyer]"), on 11 May 1993 and 1 September 1994, respectively; and
 
   -    The written arbitration application submitted by the [Seller] on 13 November 1996.

As the total amount of the claim in this case is less than reminbi [RMB] 500,000, according to Article 64 of the Arbitration Rules (effective as of 1 October 1995), a summary arbitration procedure shall be applied herein.

Both parties failed to jointly appoint or jointly entrust the Chairman of the Arbitration Commission to appoint a sole arbitrator. According to Article 65 of the Arbitration Rules, the Chairman of the Arbitration Commission, at his discretion, appointed Mr. P as the sole arbitrator on 17 February 1997, who formed an Arbitration Tribunal to hear this case.

On 20 February 1997, the Arbitration Tribunal, through the Secretariat of the Arbitration Commission, asked both parties to deliver their opinions via fax before 28 February 1997 advising whether they want an oral hearing to be held. On 25 February 1997, the [Seller] sent a fax to the Arbitration Tribunal, stating that it preferred this case to be heard based only on written material. The [Buyer] gave no opinion before 28 February 1997.

According to Article 67 of the Arbitration Rules, the Arbitration Tribunal decided to hear this case based only on the written material and evidence, and informed both parties of the aforesaid decision through the Secretariat of the Arbitration Commission on 7 March 1997 and asked them to submit supplementary material and written opinions before 20 March 1997 according to the question sheet provided by the Arbitration Tribunal. Both parties submitted supplementary material and written opinions within the time limit. After receiving the other party's supplementary written opinion forwarded by the Secretariat of the Arbitration Commission, each party submitted written comment within the time limit prescribed by the Arbitration Tribunal.

This case has been concluded. The Arbitration Tribunal rendered this award based on the written material and evidence submitted by both parties. The following are the facts, the Arbitration Tribunal's opinion and award.

I. FACTS

On 5 November 1993, the [Buyer] and the [Seller] signed Contract 93JXD-115 (hereinafter, "Contract 115"), under which the [Buyer] was to purchase 50kg of Sanguinarine at a unit price of US $599/kg and a total price of US $29,950. On 15 March 1994, the [Buyer] caused its bank to issue a L/C for only 20kg of the goods, naming the [Seller] as the beneficiary. The [Seller] delivered 20kg of the goods in accordance with the L/C. The [Buyer] failed to cause another L/C to be issued for the remaining 30kg of the goods. On 1 September 1994, both parties signed Contract 94JXD-031 (hereinafter, "Contract 031) (Contract 115 and Contract 013 collectively hereinafter, "Contracts) for the same goods, under which the [Buyer] was to purchase 70kg of Sanguinarine at a unit price of US $593/kg and a total price of US $41,510. According to Contract 031, the delivery date should be no later than 31 October 1995, and the payment should be made through an L/C payable on the 21st day from the date of the first sight of the draft. On 2 September 1994, the [Buyer] signed and returned a copy of Contract 031, and asked the [Seller] to deliver 100kg of Sanguinarine, which consisted of 30kg under Contract 115 and 70kg under Contract 031.

On 31 August 1995, the [Buyer] sent a fax to the [Seller], asking the [Seller] to mail a sample package containing 30g to 50g of the goods to the [Buyer], and confirming that [Buyer] had not taken delivery of 30kg of the goods under Contract 115 and 70kg of the goods under Contract 031.

On 1 September 1995, the [Seller] sent a fax to the [Buyer], stating " the order for the remaining 30 + 70 = 100kg of goods is still valid, please open the L/C as soon as possible".

On 13 September 1995, the [Seller] sent the sample goods to the [Buyer] and urged the [Buyer] to open the L/C.

The [Buyer] failed to open the L/C by 31 October 1995, the deadline for delivery of the goods under Contract 031.

During the period from November 1995 to March 1996, the [Seller] had been continuously urging the [Buyer] to open the L/C.

On 1 March 1996, the [Buyer] sent a fax to the [Seller], stating that "because the use of Sanguinarine is not approved by the government, we cannot import the goods".

On 27 March 1996, the [Buyer] sent a fax to the [Seller], asserting that "due to force majeure, we cannot import the remaining 100kg of the goods".

Thereafter, the [Seller] and the [Buyer] negotiated the issues with respect to issuing the L/C and performing the Contracts, but failed to achieve any result.

On 13 November 1996, the [Seller] filed the arbitration application and asked the Arbitration Tribunal to rule that:

  1. The [Buyer] shall compensate the [Seller] for loss of price including US $17,970 for 30kg of goods under the Contract 115 and US $41,510 for 70kg of goods under Contract 031, totaling US $59,480; and
  2. The [Buyer] shall bear the entire cost for arbitration.

The main disputes between the two parties are as follows:

1. Text of Contract 115

The [Buyer] argues that: Contract 115 was concluded when Mr. Leng, a manager of the [Seller], was visiting the U.S. with three other members of the [Seller]'s company; Contract 115 provided that the goods shall be shipped in January or February 1994 or within 30 days after receiving the L/C, in whole or in two installments at the [Buyer]'s choice; and there was no arbitration clause or force majeure clause in that Contract 115.

The [Seller] counter argues that: the Contract 115 signed by Mr. Leng on behalf of the [Seller] in the U.S. was only a draft, and after Mr. Leng's return to China, he signed and sent a formal standard contract by fax to the [Buyer]; the draft contract and the formal contract were same as to the goods' name, quantity, price, and payment term, except that the latter contained an arbitration clause and a force majeure clause; and according to international trade customs and practices, the formal standard contract concluded later by both parties via fax should be the final text of Contract 115. superseding the prior draft contract.

2. Force majeure

The [Buyer] argues that its failure to perform Contract 031 was due to force majeure and it should be exempted from liabilities for the following reasons:

      (1) The goods purchased by the [Buyer] were to be sold to a research institute to manufacture insecticide. In 1993, the United Sates Congress enacted Federal Environmental Laws 1993, under which Sanguinarine was classified as an insecticide and the sale of insecticide in the U.S. was required to be approved by and be registered with the Environment Protection Agency (EPA). Because the [Buyer]'s customer failed to obtain approval from EPA for selling products containing Sanguinarine, the [Buyer]'s customer had to stop purchasing the goods from the [Buyer]. So, the [Buyer]'s failure to perform Contract 031 was due to governmental restriction, which could not be controlled by the [Buyer] and should be deemed as a force majeure event.

      (2) As an ordinary businessperson, the [Buyer] signed the Contracts with the [Seller] to purchase Sanguinarine in 1993 and 1994, respectively, without knowing of the enactment and enforcement of the law. Although the [Buyer] had tried every effort to obtain an approval from the EPA, the failure to get the approval was beyond its control. So, the [Buyer] should not be liable.

      (3) Although the force majeure clause of Contract 031 provides that the [Buyer]'s failure to get an import license should not be deemed as a force majeure event, governmental restriction is different from an import license. In addition, Contract 031 was unfair to the [Buyer] because it provided liability exemption in the event of force majeure only for the [Seller] rather than equally for both parties.

The [Seller] counter argues that the [Buyer] cannot avoid liabilities for breach of the Contracts by raising force majeure as an excuse, because:

      (1) The [Buyer]'s acceptance of 20kg of goods under Contract 115 in 1994 indicated that the U.S. Government did not prohibit importing Sanguinarine.

      (2) In October 1995, when the delivery deadline for the goods under Contract 031 was to expire, the [Seller] repeatedly urged the [Buyer] to open the L/C, but the [Buyer] never mentioned that the U.S. Government had prohibited importing Sanguinarien; on the contrary, it promised that Contract 031 was still valid and that it would try its best to perform it. It was not until October 1996 that the [Buyer] sent to the [Seller] the letters from its customer and attorney, stating that the Contract goods could not be sold in the U.S without first obtaining an approval from the EPA. However, the [Buyer] never provided the [Seller] with an official banning order issued by the U.S. Government.

      (3) The force majeure clause of the Contracts, which was agreed to by both parties and provided that the [Buyer]'s failure to get an import license should not be deemed as a force majeure event, was intended to prevent the [Buyer] from not performing the Contracts by citing force majeure as an excuse.

3. [Seller]'s claim for compensation

The [Seller] asks the [Buyer] to compensate for loss of prices including US $17,970 for 30kg of the goods under Contract 115 and US $41,510 for 70kg of the goods under Contract 031, in the aggregate amount of US $59,480 based on the following reasons:

The goods under the Contracts were specially manufactured and exclusively supplied for the [Buyer]. The [Seller] prepared 100kg (of which, 30kg was ready in December 1993) of the goods as early as August 1995, at which time the [Seller] had fulfilled its obligation under the Contracts, but the [Buyer] failed to open the L/C as required by the Contracts. The goods are currently stored in the [Seller]'s warehouse. The [Seller] could not find a new buyer for the goods, not could it determine the market value of the goods. Therefore, the [Seller] asks the [Buyer] to compensate for the full Contract prices of the goods.

The [Buyer] argues that the [Seller] has no legal ground to claim for the full Contract prices of 100kg of the goods, because:

      (1) The [Buyer] has never given up performing the Contracts, it is still trying every effort to import the goods. In order to do so, the [Buyer] had repeatedly asked the [Seller] to provide samples of the goods, but received no response from the [Seller]. The [Buyer] tried to convince the [Seller] that the performance of the Contracts was just a matter of time and asked the [Seller] to be patient, however, the [Seller] was not cooperative.

      (2) The [Buyer] has been doing business with China for twenty years, and has always performed contracts honestly. The [Buyer]'s failure to perform the Contracts on time was only due to the governmental restriction. As an honest and good-natured business person, the [Buyer] has been willing to maintain business relationship with the [Seller], and has repeatedly offered to buy other products from the [Seller] to compensate for the [Seller]'s loss. Regrettably, the [Seller] ignored the [Buyer]'s suggestion.

      (3) In the event that the [Buyer]'s defense based on force majeure is not accepted, the [Seller] should be entitled to claim for only the actual loss it suffered from the [Buyer]'s nonperformance of the Contracts instead of the full price of the Contracts. The goods have been in the [Seller]'s hands, it should have sold the goods at a market price to mitigate its loss. The compensation the [Seller] is entitled to should be the difference between the market price and the Contract prices. The [Seller] would be unjustly enriched if it is allowed to keep the goods while claiming for the full price of the goods under the Contracts. The [Seller] is entitled to compensation only for its actual loss.

II. OPINION OF THE ARBITRATION TRIBUNAL

1. Texts of the Contracts

The dispute in this case arose from Contract 115 and Contact 031. The [Buyer] raises no objection to the text of Contract 031, but argues that the text of Contract 115 should be the one signed by Mr. Leng, a manager of the [Seller], in America, which contains no arbitration clause and no force majeure clause.

After examined the evidence submitted by both parties, the Arbitration Tribunal noted that in 1993 Mr. Leng, on behalf of the [Seller], and Mr. Ben Zaricor, on behalf of the [Buyer], signed two contracts with the same contract number of 93JXD-115 and the same date of 5 November 1993 to purchase the same kind and same quantity of Sanguinarine. The [Seller] admitted that one of the contracts was signed by Mr. Leng in America, but after Mr. Leng returned to China, he faxed to the [Buyer] a formal standard contract with the same contract goods and contract number, which was signed by Mr. Leng and Mr. Ben Zaricor. The [Buyer] raises no objection to the fact that both parties signed the latter contract via fax.

The Arbitration Tribunal holds that because the latter contract bears the signatures of both parties' representatives, according to the trade practice that a later signed contract supersedes any prior contracts, the latter contract signed by both parties via fax should be the final text of the Contract 115, which contains an arbitration clause in article (5) and a force majeure clause in article (6).

2. Applicable law

The parties failed to make a choice of the applicable law in either Contract 115 or Contract 031; both are international sales contracts, and the places of business of the two parties are located, respectively, in China and in the United States of America; both are Contracting States of the United Nations Convention on Contracts for the International Sales of Goods (hereinafter, "CISG"); therefore, the CISG should be applied herein.

3. Force majeure

The quantity of the goods under Contract 115 is 50kg, of which 20kg was delivered to the [Buyer] while 30kg was not. The quantity of the goods under Contract 031 is 70kg, which was never performed. The [Seller] asserts that it prepared the goods according to the Contracts, but the [Buyer] refused to take delivery of the goods in bad faith; as a consequence, it suffered substantial economic loss. The [Buyer] argues that it should be exempted from the liabilities for nonperformance of the Contracts because its failure to take delivery of the goods was due to force majeure.

The [Buyer] provides the following reasons to support its force majeure argument:

      (1) The goods under the Contracts were purchased for an America research institute. Due to the U.S. Government's issuance of a banning order which prohibited importing the Contract goods into U.S., the research institute refused to accept the goods. This event was beyond the [Buyer]'s control, so it should fall within the scope of force majeure.

      (2) The government's prohibition of importing the Contract goods is different from what was provided in the Contract that "the [Buyer]'s failure to get an import license shall not be deemed as a force majeure event". In addition, it was obviously unfair to the [Buyer] that Article (5) of Contract 031 provided exemption from liability caused by force majeure only for the [Seller] rather than equally for both parties.

      (3) In 1993, the U.S Congress promulgated the Federal Environmental Laws 1993, under which Sanguinarine was classified as an insecticide, any sales of which were required to be approved by and be registered with the E.P.A. The [Buyer] has been making effort to apply to EPA for an approval, however, failure to obtain the approval is beyond the [Buyer]'s control.

The Arbitration Tribunal holds that the [Buyer]'s aforesaid defenses are not well established, because:

      (1) The Contracts contain force majeure clauses. Although the force majeure clauses provided liability exemption caused by force majeure only for the [Seller], it was nevertheless negotiated and agreed to by both parties, and actually did not deprive the [Buyer] of the right to rely on a force majeure exemption under the applicable law. So, the force clauses in the Contracts are not unfair.

      (2) The [Seller]'s sale of the goods and the [Buyer]'s purchase of the goods under the Contracts are commercial transactions between two business entities, so is the [Buyer]'s resale of the goods to the American research institute. Since the [Buyer] failed to provide evidence proving that the U.S. Government did issue a banning order, the rejection of the goods by the research institute or the [Buyer]'s other customer is a normal business risk which should be borne by the [Buyer] itself rather than the [Seller].

      (3) Article 79(1) of the CISG provides that force majeure is an impediment beyond one's control and that one "could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoid or overcome it or its consequences." The Arbitration Tribunal notes that the Federal Environmental Laws were enacted before the Contracts were concluded. As a prudent businessperson, the [Buyer] should be aware whether Sanguinarien was classified as an insecticide and whether the sale of Sanguinarien was required to be approved by and registered with the E.P.A.. Furthermore, the [Buyer] failed to take any action to avoid the damage caused to the [Seller] due to its fault. Pursuant to the CISG, the [Buyer]'s defense based on force majeure is unacceptable.

4. [Seller]'s arbitration claim

The Arbitration Tribunal noted that the [Buyer] had been maintaining a good reputation in doing business with China. However, in this case, the [Buyer]'s refusal to take delivery of the goods did constitute a fundamental breach of the Contracts. It should be liable for the loss suffered by the [Seller] therefrom.

The [Buyer] argues in its defense that if its force majeure defense is not accepted, it should be liable only for the actual loss suffered by the [Seller]. The Arbitration Tribunal agrees with the [Buyer] in this regard, that is, the [Seller] is entitled to compensation from the [Buyer] only for actual loss.

The Arbitration Tribunal notes that the [Seller] stated in its arbitration application that the goods were specially manufactured and exclusively supplied for the [Buyer], and that it is impossible for the [Seller] to find another buyer, nor is it possible for the [Seller] to determine the residual value of the goods. Under such circumstance, it will be neither reasonable nor practical to ask the [Seller] to sell the goods to other customers. Because the goods are stored in warehouse and cannot be sold out, the [Seller] has actually been deprived of the right to the full prices. So, the [Seller]'s actual loss is the total price for 100kg of the goods under Contract 115 and Contract 031, which is calculated as: 30kg US $599/kg + 70kg US $593/kg = US $59,480. The [Buyer] shall pay the aforesaid sum to the [Seller]. Within two months following the [Buyer]'s payment of the aforesaid sum to the [Seller], the [Buyer] may take delivery of the goods at its own cost; otherwise, the [Seller] may dispose of the goods at its discretion.

The [Buyer] shall bear the arbitration fee.

III. THE AWARD

The Arbitration Tribunal rules that

       1.     The [Buyer] shall compensate the [Seller] US $59,480 for the loss of price; and
       2. The [Buyer] shall bear the entire arbitration fee. The [Seller] has prepaid RMB XXX to the Arbitration Commission, so the [Buyer] shall reimburse the [Seller] US $XXX.

The above (1) and (2) totals US $63,094. The [Buyer] shall pay [Seller] the aforesaid sum within 45 days of the date of this award; otherwise, 10% annual interest shall be imposed.

This award is final.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of People's Republic of China is referred to as [Seller]; Respondents of the United States of America is referred to as [Buyer]. Amounts in the currency of the United States (dollars) are indicated as [US $]; amounts in the currency of the People's Republic of China (Renminbi) are indicated as [RMB].

** 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.

*** Tianhuai Yan, LL.M., Golden Gate University Law School. LL.M. Nanjing University Law School, BEcon, Nanjing University Business School. Attorney at Law, admitted in P.R. China and California, USA. Partner, G & D Law Firm, Nanjing, China.

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