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CISG CASE PRESENTATION

China 25 June 1997 CIETAC Arbitration proceeding (Art paper case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/970625c1.html]

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

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Case identification

DATE OF DECISION: 19970625 (25 June 1997)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1997/16

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Republic of Korea (claimant)

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

GOODS INVOLVED: Art paper


Case abstract

PEOPLE'S REPUBLIC OF CHINA: China International Economic & Trade
Arbitration Commission 25 June 1997 (Art paper case)

Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/85],
CLOUT abstract no. 864

Reproduced with permission of UNCITRAL

Abstract prepared by Meihua Xu

The seller, a Korean company, entered into a contract with the buyer, a Chinese company, for the purchase of art paper. After issuing the letter of credit (L/C), the vessel carrying the goods sank and all goods were destroyed. Later, the seller's bank received a notice of rejection of payment stating that the documents provided by the seller were not in conformity with the L/C.

Pursuant to article 67 CISG, the Arbitration Tribunal concluded that the seller had fulfilled its obligation to deliver the goods, and that the risk of loss had passed to the buyer when the goods passed over the ship's rail. The Arbitration Tribunal noted that the L/C issued by the issuing bank was only a payment arrangement provided by the buyer. Even though the L/C expired and ceased to be effective before the seller was paid, the buyer was not discharged from its obligation to pay the price.

The Arbitration Tribunal deemed that according to articles 30 and 53 CISG, in the relationship between the buyer and the issuing bank, the buyer must pay the price of the goods before it can receive the documents. Therefore, the buyer cannot refuse to make the payment alleging that it did not receive the seller's bill of lading.

The Tribunal further noted that there was no evidence showing that the damage was due to the seller's omission. Therefore, pursuant to article 66 CISG, the buyer had the obligation to pay the price after the risk of loss or damage to the goods had passed to it.

The Arbitration Tribunal also ruled that, according to article 49(1) (a) CISG, the discrepancies found in the documents did not constitute a fundamental breach of contract. Therefore, it held that the buyer could not terminate the contract or discharge itself from the obligations under the contract.

The Tribunal, however, did not accept the seller's claim for the payment of penalty interests it had to pay to the bank, since the penalty resulted from the documents' discrepancies caused by the seller's own omission.

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Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 9 ; 25 ; 30 ; 49(1) ; 53 ; 60 ; 67 ; 74 ; 78 ; 79

Classification of issues using UNCITRAL classification code numbers:

9A [International usages: Convention applied as "international trade usage"];

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

30A [Seller's obligation to deliver the goods];

49A [Buyer's right to avoid contract: grounds for avoidance];

53A [Buyer's obligation to pay price of goods];

60A [Buyer's obligation to take delivery];

66A [Loss or damage after risk has passed to buyer: conformity of goods determined as of time risk passes];

67A [Risk when contract involves carriage of goods: risk passes on handing goods over to first carrier];

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

78B [Rate of interest]

79B [Impediments excusing party from damages]

Descriptors: Usages and practices ; Fundamental breach ; Avoidance ; Delivery ; Price ; Letters of credit ; Passage of risk ; Damages ; Interest ; Exemptions or impediments

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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. 2102-2110

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at nn.62, 94, 110, 160, 227, 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

Art paper case (25 June 1997)

Translation [*] by Meihua Xu [**]

Edited by Yan Tianhuai [***]

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

   -    The Contract SHI-951203-SW signed by Claimant [Seller], Korea XX Trading Company, and Respondent [Buyer], China Shantou Special Economic Zone XX (XX Group) Ltd., and
 
   -    The written arbitration application submitted by the [Seller] on 24 July 1996.

On 15 November 1996, the [Buyer] submitted an application for arbitration of its counterclaims. The Arbitration Commission decided to hear the claims together with the counterclaims, and gave notices to the [Seller] and the [Buyer] accordingly.

The [Seller] appointed Mr. A as an arbitrator, and the [Buyer] appointed Mr. D as an arbitrator. According to Article 25 of the Arbitration Rules, because the parties did not jointly appoint or authorize the Chairman of the Arbitration Commission to appoint the presiding arbitrator within the time limit prescribed by the Arbitration Rules, the Chairman appointed Mr. P as the presiding arbitrator. The three arbitrators formed an Arbitration Tribunal to hear the case on 6 January 1997.

On 12 March 1997, the Arbitral Tribunal held a court session in Beijing. The [Seller] and the [Buyer] attended the court session, made oral statements, answered the Arbitration Tribunal's questions, and made further oral statements. After the session, both parties submitted supplementary materials.

Based on the written documents submitted by the parties and the court hearing, the Arbitration Tribunal has concluded the case within the stipulated time under the Arbitration Rules. The following are the facts, the Tribunal's opinion and award.

I. FACTS

On 3 December 1995, the [Seller] and the [Buyer] concluded a Contract No. SHI-951203-SW (hereafter the "Contract"). The Contract provided for the sale of 600 tons of art paper and included the following terms:

   -    More or less: 5%;
   -    Price term: CNF FO Shantou;
   -    Price: $990/Ton;
   -    Total Contract price: US $594,000;
   -    Shipment: Before 15 December 1995;
   -    Term of payment: Letter of Credit [L/C].

The goods were destroyed en route. The [Buyer] refused to pay the price, and the [Seller] filed the arbitration application.

II. POSITION OF THE PARTIES

A. [Seller]'s position

After conclusion of the Contract, the [Buyer] delegated Hong Kong A Company (hereafter "A Company") to open an irrevocable L/C with the [Seller] as beneficiary, which was valid until 28 December 1995. At the same time, A Company insured the goods with Zhongyin Group Insurance Company. The [Seller] loaded 600,898 tons of goods on board on 15 December 1995. The total price of the goods is US $594,889.02. On 19 December 1995, the [Seller] sent all documents to the CHINA STATE BANK H. K., the issuing bank of the L/C, by means of OCS. On the same day, the vessel carrying the goods, M. V. Samsun Creator (belonging to SAMSUN Shipping Company), sank and all goods were destroyed.

SAMSUN Shipping Company notified the accident to the [Seller] on 19 as well as 20 December 1995, respectively. The [Seller] notified the [Buyer] on 19 December 1995 and asked the [Buyer] to take action to mitigate the damages. On 20 December 1995, the [Seller] notified A Company that the ship had sunk. On 29 December 1995, the [Seller]'s bank, Korea HANA Bank, received a notice of rejection of payment from the L/C issuing bank, which stated that that the documents provided by the [Seller] were not in conformity with the L/C. HANA Bank replied to the L/C issuing bank that the discrepancies between the documents and the L/C were not material enough to warrant the L/C issuing bank's refusal of the payment and repeatedly asked the L/C issuing bank to make the payment pursuant to the L/C immediately but was rejected. After that, the [Seller] wrote several letters to A Company and the [Buyer] urging them to make the payment and to seek recovery from the insurance company but was rejected by the [Buyer].

The [Seller] argues that it delivered the goods according to the Contract and the goods passed the rail of the ship during the loading, which means it has performed its obligation under the Contract and the risk of loss has passed to the [Buyer]. According to Article 66 of the United Nations Convention on International Sales of Goods (hereafter "the CISG") which provides:

"Loss or damage to the goods after the risk has passed to the buyer does not discharge him from his obligation to pay the price, unless the loss or damage is due to an act or omission of the seller",

the [Buyer] has no reason to refuse to pay the price. The [Seller] further argues that even though there are discrepancies between the documents and the L/C, it should not bar the [Seller] from receiving the price from the [Buyer] through other ways.

For the above reasons, the [Seller] asks the Arbitration Tribunal to rule that:

     1. The [Buyer] shall pay the [Seller] the Contract price US $594,889.02;

     2. The [Buyer] shall pay loss of interest US $135,503.88, which resulted from late payment and is divided into two parts:

          (1) From 18 December 1995 (the date of seller's delivery of the documents) to 28 July 1996, calculated at an annual interest rate 18.5%: US $594,889.02 18.5% 225/365 = US $67,841.79. This interest has already been paid by the [Seller] to HANA Bank as a penalty.

          (2) From 19 July 1996 (the date the [Seller] returned the payment to HANA Bank) to 12 April 1997, calculated at an annual interest rate 14.5% (the [Seller]'s internal interest rate): (US $594,889.02 + US $67,841.79) 14.5% 257/365 = US $67,662.09;

     3. The [Buyer] shall bear the [Seller]'s attorneys' fee US $18,000; and

     4. The [Buyer] shall bear the Arbitration fees of this case.

B. [Buyer]'s position

1. The [Buyer] has performed all of its obligations under the Contract.

The [Buyer] alleges that it delegated A Company to apply to the issuing bank for the issuance of the L/C with the [Seller] as the beneficiary on 14 December 1995. Upon the issuance of the L/C as well as the acceptance of the L/C by the [Seller], its obligation to pay the price has been performed. Therefore, there is no breach of the Contract by the [Buyer].

2. The [Seller] should take the responsibility for causing the L/C to become void.

The L/C issuing bank CHINA STATE BANK H. K. received all the documents mailed by the [Seller] and found serious discrepancies between the documents and the L/C. On 27 December 1995, the issuing bank notified the [Seller] of the discrepancies which was denied by the [Seller]. Thereafter, the issuing bank sent a notice of refusal of payment to the L/C advising bank, Korea HANA Bank. The issuing bank examined the documents and gave the notice within two business days allowed by the applicable law. So, it is the [Seller] who should take the responsibility for causing the L/C to become void by presenting discrepant documents.

3. An L/C is independent of the Contract. When the payment request under the L/C is rejected, the [Seller] has no right to ask for the price from the [Buyer].

According to the Uniform Customs and Practice for Documentary Credits (UCP), an L/C is a contract between the issuing bank and the beneficiary, independent from the sales contract or other contracts. The [Buyer] has no legal connection with the L/C. As a basic principle of L/C law, the documents provided by the seller must be in compliance with the terms and conditions of the L/C. Pursuant to the applicable law and UCP, when the L/C issuing bank finds any discrepancies between the L/C and the documents, it has the right to refuse to pay under the L/C. So, when the payment request under the L/C was rejected, the [Seller] lost the right to ask for payment from the [Buyer].

4. The [Seller]'s claim for payment based on the reason that the risk has been transferred to the [Buyer] contradicts international trade practices.

The [Buyer] does not agree that the risk has been transferred to itself. The [Buyer] argues that the reason why the [Seller] was not paid is that the documents provided by the [Seller] to the issuing bank did not conform to the L/C. According to the CISG and 1990 INCOTERMS, the [Seller] has the obligation to deliver the goods and to provide the documents. The issuing bank's rejection of documents showed that the [Seller] did not perform its obligation to provide documents (as to whether the [Seller] has delivered the goods, the [Seller] only stated that the ship had sunk, but no official maritime report of the accident was provided).

The payment under a L/C is made through the settlement between the issuing bank and the negotiating bank. Once the issuing bank issued the L/C and the beneficiary accepted it, the [Buyer]'s obligation to pay was fulfilled. Now, the [Seller] deviates from the L/C and demands payment from the [Buyer] directly. Such a situation is called an "L/C short circuit" in international trade, which could happen only when (1) the issuing bank goes into bankruptcy (this does not release the buyer from paying the price) or (2) when the issuing bank goes into bankruptcy and the negotiating bank exercises its recourse right to claim back the money from the seller; under these two situations, the seller may provide the documents to the buyer and ask the buyer to make the payment directly. However, in the instant case, the [Seller]'s request for payment under the L/C was rejected because of discrepancies in the documents it provided. Under such circumstance, the [Seller] has no right to ask for the payment from the [Buyer]. Based on the reasons stated above, the [Buyer] asserts that it has fulfilled its payment obligation.

The [Buyer] further argued that after the payment request under the L/C was rejected by the issuing bank and the documents were returned, the [Seller] did not take any action to transfer the title of the goods and the bill of lading of the goods was still in the [Seller]'s hands. According to the applicable laws, the bill of lading represents the title to the goods and the title changes following the transfer of the bill of lading. The [Buyer]'s non-receipt of the bill of lading shows that the [Seller] did not fulfill its obligation under the Contract. Therefore, the [Buyer] has no obligation to pay the price, nor does it have any obligation to pay interest for the delayed payment. On the contrary, the [Seller]'s violation of its obligation caused substantial economic loss to the [Buyer]. Therefore, the [Buyer] raises the following counterclaims.

C. [Buyer]'s counterclaims

     1. The [Seller] shall pay the [Buyer] the loss of profit renminbi [RMB] (Chinese currency) 915,000;

     2. The [Seller] shall pay the [Buyer] the damage RMB 600,000 resulting from the [Seller]'s breach of the Contract;

     3. The [Seller] shall pay the [Buyer] the cost of opening the L/C, RMB 30,000;

     4. The [Seller] shall pay the [Buyer] the attorneys' fee RMB 11,000; and

     5. The [Seller] shall bear the cost of the arbitration fee.

D. [Seller]'s replies

     1. According to the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest as well as the CISG, after a Contract is concluded, the fundamental obligation of the seller is to deliver the goods and for the buyer it is to pay the price. There are many ways to pay the price, L/C is one of them. The [Seller]'s right to receive payment was provided by the Contract; when the L/C cannot be used, the [Seller] still is entitled to demand payment from the [Buyer] after delivery of the goods.

     2. The [Seller] does not agree that it did not take actions to transfer the title of the goods. After being rejected by the issuing bank, the [Seller] and the advising bank urged the [Buyer] and the issuing bank to pay the price under the L/C. It also asked the [Buyer] and A Company to claim compensation from the insurance company, but all of these demands were rejected or ignored. The [Seller] loaded the goods on board within the time limit prescribed in the Contract and submitted the documents to the issuing bank. Therefore, it fulfilled its obligations, and that the documents were still held by it was not its own error.

     3. As to the [Buyer]'s claim for loss of profit and the cost to compensate its customers, the [Seller] argues that the [Buyer] should not ask these damages from it because:

     First, under the CISG and the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest, if the seller violates the Contract, it should pay the buyer the damage or loss which is foreseeable at the time when the Contract is concluded. The [Seller] had no idea that the [Buyer] was going to resell the goods and that if the [Buyer] failed to do so, it had to pay its customers twice the amount of the down payment. Therefore, such loss was unforeseeable.

     Second, the sinking of the ship was unforeseeable to the [Seller]. It was an act of God. It is international trade practice that a party is exempt from performance any of its obligations due to an impediment beyond its control. Therefore, there is no legal and factual ground for the [Buyer] to claim damages from the [Seller].

     Third, the Contract was formed on a CNF basis; the risk of loss was transferred to the [Buyer] after the goods were loaded on board. The [Buyer]'s demand for damages after the risk of loss has been transferred to it is groundless.

Above all, the [Seller] asks the Arbitration Tribunal to dismiss the [Buyer]'s counterclaims.

III. OPINION OF THE ARBITRATION TRIBUNAL

     1. Applicable law

The parties did not make a choice of the applicable law in the Contract. Based on the facts that the Contract was formed in China and the arbitration is performed in China, the Arbitration Tribunal decides that the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest shall be applied. According to article 5 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest, in case any issue is not covered by Chinese law, international trade customs and practices should be applied. The international trade customs and practices relevant to this case are deemed to be the 1990 International Chamber of Commerce Official Rules for the Interpretation of Trade Terms (hereinafter referred to as INCOTERMS 1990).

Both parties in this case mentioned the CISG (hereafter referred to as the 1980 United Nations Convention) in their statements and arguments. The [Seller]'s place of business is in the Republic of Korea, but Korea is not a Contracting State of the 1980 United Nations Convention. In addition, because of the two reservations China made when it signed the 1980 United Nations Convention, the CISG should not be the applicable law of this instant case. However, both the [Seller] and the [Buyer] mention the 1980 United Nations Convention in their arguments indicating that both parties acknowledged and accepted the CISG, therefore, the Arbitration Tribunal holds that the 1980 United Nations Convention should be applied as an international trade custom in this case.

     2. Dispute and scope of arbitration

According to the statements made by both parties, the Arbitration Tribunal decides that the disputes arising from the Contract are:

[Seller]'s position. The [Seller] asserts that it has delivered the goods as determined in the Contract. Because the goods were destroyed during the shipment, the [Buyer] should pay the price.

[Buyer]'s position. The [Buyer] rejects payment of the price based on the following reasons and counterclaims for damages as well as loss of profit:

          (1) The report of the sinking of the ship was only heard from the [Seller]; there is no official maritime report available from relevant agencies. The [Buyer] asks the Arbitration Tribunal to investigate the truth of this matter and to determine whether the [Seller] truly loaded the goods on board.

          (2) The [Seller] should take responsibility for the lapse of the L/C.

          (3) The [Seller]'s demand for payment based on the passing of the risk of loss is not in conformity with international trade customs and practice. The [Seller]'s failure to receive the payment was due to the fact that the documents provided by it through the negotiating bank were not in compliance with the Contract and the L/C. This was the only reason why the [Seller] was not paid.

          (4) The [Buyer] had entrusted A Company to open the L/C. Once the L/C was issued, the [Buyer]'s obligation to pay was fulfilled. Once the [Seller]'s request for payment under the L/C was rejected, the [Seller] lost the right to ask for payment directly from the [Buyer].

          (5) After its request for payment under the L/C was rejected by the issuing bank and the documents were returned, the [Seller] did not take any actions to transfer the title of the goods and the documents were still held by the [Seller]. According to the applicable law, the bill of lading represents the title to the goods and the title to the goods changes following the transfer of the bill of lading. The [Buyer] did not receive the bill of lading, so the [Seller] did not fulfill its obligation.

          (6) Claiming compensation from the Insurance Company has no legal connection with the payment.

          (7) The [Seller]'s breach of the Contract amounts to a fundamental breach which resulted in significant damages to the [Buyer], therefore, the counterclaim of the [Buyer] should be accepted.

     3. The delivery of the goods by the [Seller] and the passage of the risk

The key issue of this case is whether the risk of loss has passed to the [Buyer]. The Contract was formed on a CNF basis. According to Article A3 of CNF Part, INCOTERMS 1990, a seller has no obligation to enter into an insurance contract, and according to Article A5 and B5 of the same, the risk of loss passes to a buyer when the goods pass the rail of the ship. Pursuant to Article 67 of the 1980 United Nations Convention, "the risk passes to the buyer when the goods are handed over to the first carrier for transmission to the buyer in accordance with the contract of sale." Therefore, whether the goods were handed to the first carrier, that is, whether the [Seller] delivered the goods in accordance with the Contract, should be clarified first. According to INCOTERMS 1990, the [Seller]'s delivery of goods is to load the goods on board at the loading port within the time limit prescribed by the Contract. The Contract provides that the loading port should be a major port in Korea and the loading time should be no late than 15 December 1995. The [Seller] provided a copy of the bill of lading, which indicates that the loading port was PUSAN, Korea and the bill of lading was issued on 15 December 2005 with "CLEAN ON BOARD". The [Buyer] did not raise any objection to the truthfulness, legality, and effectiveness of the bill of lading. However, the [Buyer] did question whether the [Seller] actually delivered the goods based on the fact that no official maritime report of the sinking ship was provided.

The report of the sinking ship is an evidence of that accident; whether it was true or not or who should take the responsibility will be determined in the following Section 4. The Arbitration Tribunal points out that the same kind of sinking accident as in this case could only happen after the goods was loaded on board by the seller. Therefore, if the accident could be proved, then the delivery of the goods by the [Seller] could also be proved. However, the presumption that no sinking accident is proved means that the [Seller] did not deliver the goods is incorrect. This is a common sense. Therefore, the [Buyer] cannot use "no official maritime report of the sinking accident was provided" as a reason to question whether the [Seller] has delivered the goods or not.

Based on the above, the Arbitration Tribunal holds that the [Seller] has delivered the goods in accordance with the Contract and that the risk of loss has passed to the [Buyer] when the goods passed over the ship's rail on 15 December 1995.

     4. The destruction of the goods

According to the [Seller]'s statement, after the goods were loaded on board of the ship on 15 December 1995, the carrying ship MV Samsun Creator sank during the voyage and all goods were destroyed. On 19 as well as 20 December, the [Seller] notified the [Buyer] and the L/C issuing bank, respectively, of the accident heard from the carrier. The following are the documents the [Seller] forwarded to the [Buyer] and A Company:

          (1) The notice that Carrier Samsun sent to all clients titled "RE: NOTICE OF DISTRESS FOR MV SAMSUN CREATOR " ON 19 December 1995.

          (2) The notice that Carrier Samsun sent to all clients titled "RE: NOTICE OF VESSEL SINKING FOR MV SAMSUN CREATOR " ON 20 December 1995.

          (3) Translation of above No. 1 notice.

          (4) "STATEMENT OF FACTS" from Captain of MV Samsun Creator on 18 January, 1996 which was notarized by SAMDUK LAW & NOTARY OFFICE INC., PUSAN, KOREA.

The [Buyer] argues that all information about the sinking accident was heard from the [Seller]. It has never received the so-called notarized Captain's Statement of Facts, nor did it receive any official maritime report about this ship sinking accident.

The Arbitration Tribunal holds that the notices, which have been forwarded to the [Buyer] and A Company by the [Seller], indicate the accident was not the [Seller]'s excuse. The issue that no Captain's notarized report and official maritime report were received by the [Buyer] is only a matter of evidence.

The Arbitration Tribunal also points out that after the risk of loss passes to a buyer under a CNF (which is also called CFR) contract, it is entirely the buyer's responsibility to take measures to protect the goods. The buyer may at its sole discretion insure the goods with an insurance company. In the instant case, the [Buyer] asked A Company to insure the goods with an insurance company. After the goods have been destroyed or lost, the [Buyer] has the sole discretion to decide whether to seek compensation from the insurance company or not. If the [Buyer] decides to seek compensation from the insurance company, certainly it should get evidence. Of course, it may need the evidence for other purposes. As the risk has been passed to the [Buyer], and the [Buyer] or its representative has insured the goods, therefore, it is the [Buyer]'s responsibility to claim for compensation from the insurance company. In addition, after the delivery of the goods by the [Seller], the goods were under the custody of the carrier. The [Seller] should not bear the responsibility to present evidence regarding the destruction of the goods. Notwithstanding, the [Seller], as the shipper of the goods, if requested by the [Buyer], should do its best to provide assistance as required by the Article 10 of CFR Part, INCOTERMS 1990 "to provide all the information required by the buyer to contract for insurance," it has no obligation to get the evidence. The [Buyer] did not provide the information about when and what assistance it requested from the [Seller]. Failure to take action to request assistance from the [Seller] while claiming that no evidence or report was received, the [Buyer]'s argument is illogical and lacks legal support.

The Arbitration Tribunal also noted the [Buyer]'s statement that "after A Company's inquiry about the ship sinking accident, no record was heard from relevant agencies". However, except for this short statement, the [Buyer] provided no specific documents, materials or other information related to the accident, even the name of the relevant agencies, but asked the Arbitration Tribunal to investigate the truth of the accident. This request of the [Buyer] is not serious, therefore, should be dismissed.

     5. The obligation of the [Buyer] to pay the price

           (1) The fact that the payment under L/C was dishonored due to discrepant documents does not discharge the [Buyer] from the obligation to pay the price.

The Arbitration Tribunal noted that the [Buyer] stated in its Arbitration Statement that an L/C is a contract between the L/C issuing bank and the beneficiary, independent of the [Buyer]. The [Buyer]'s statement is correct. The Arbitration Tribunal also noted the facts that the documents presented to the bank by the [Seller], including the invoice and the bill of lading, were not in conformity with the L/C and were rejected by the issuing bank. An L/C is an independent contract, to which the [Seller] is not a party. So refusal of payment under an L/C by the issuing bank due to discrepancies in the documents presented by the beneficiary is an issue arising from the performance of the L/C contract by the issuing bank and the beneficiary, which has nothing to do with the [Buyer]. The [Buyer] has no right to take advantage of the relationship between the issuing bank and the beneficiary under the L/C for its own good. In the instant case, the L/C lapsed without payment being made under it. This means that the L/C, as an independent contract, ceased to be effective. However, the Contract between the [Seller] and the [Buyer] still stands effectively and the rights and obligations of the parties under the Contract still exist. Therefore, even though L/C cannot be used for payment, the [Buyer] is not discharged from the obligation to pay the price.

The [Buyer] asserts that upon the L/C being issued, its obligation of payment was fulfilled. The [Buyer] also provided copies from two books quoting some foreign cases to support its opinion. The Arbitration Tribunal opines that famous foreign cases are good references for dispute resolution but have no binding force. The [Buyer] did not provide the original texts of the cases mentioned by it, therefore, it is impossible for the Arbitration Tribunal to check the similarities between such cases and the instant case and to identify the authors as well as to make sure whether the [Buyer] understands such cases correctly or not. So, the [Buyer]'s assertion that its above opinion is supported by some foreign cases is disregarded.

The Arbitration Tribunal holds that the L/C issued by the issuing bank was only a payment arrangement provided by the [Buyer] with guarantee from the issuing bank. In the instant case, the payment under the L/C was dishonored and the L/C expired and ceased to be effective before the [Seller] was paid. Under such situation, the [Buyer] is not discharged from its obligation to pay the price.

           (2) Not receiving the document is not an excuse for the [Buyer] to refuse to pay

The Arbitration Tribunal noted that the [Buyer] quoted Article 30 of 1980 United Nations Convention to emphasize the [Seller]'s obligation to provide the documents. In the Arbitration Tribunal's opinion, the said Article 30 shall be considered together with Article 53 of 1980 United Nations Convention. Article 30 of 1980 United Nations Convention defines the seller's obligation; it says, "the seller must deliver the goods, hand over any documents relating to them and transfer the property in the goods, as required by the Contract and this Convention". Article 53 of the Convention defines the buyer's obligation; it says that: "the buyer must pay the price for the goods and take delivery of them as required by the Contract and this Convention".

The Arbitration Tribunal points out that during the performance of a sales contract under which the goods are transported by ship. as in this case, there must be a crossing point between the parties' performance of the obligations required by Article 30 and Article 53 - more specifically, that is, the seller's handing over the documents and the buyer's paying the price - which comes first. In the instant case, the parties agreed in the Contract that the payment should be made by L/C. This looks like a requirement that the [Seller] should provide the documents first and the issuing bank should pay the price thereafter. However, it is the way of performing the independent L/C contract by the issuing bank and the beneficiary. When the [Buyer] dealt with the issuing bank, it was the [Buyer] who should pay the issuing bank first and receive the documents thereafter. This is called purchase of the documents. In this case, the payment under the L/C could not be realized due to the reasons mentioned above, but the parties' performance sequence implied by employment of L/C as payment method was not changed, which was, as applied to the [Buyer], to pay the price first and to receive the documents thereafter. So it was putting the cart before the horse, so to speak, when the [Buyer] refused to pay the price by alleging that it did not receive the documents first.

           (3) The facts of this case show that the goods were destroyed because of the ship sinking accident, which happened after the risk of loss or damage to the goods had passed to the [Buyer].

Article 66 of the 1980 United Nations Convention provides:

"Loss of or damage to the goods after the risk has passed to the buyer does not discharge him from his obligation to pay the price, unless the loss or damage is due to an act or omission of the seller".

From the documents provided by the both parties, the Arbitration Tribunal did not find evidence showing that the loss of the goods was caused by any act or omission of the [Seller]. Therefore, the [Buyer] must pay the price to the [Seller].

     6. The arbitration claims by the [Seller] and the counterclaims by the [Buyer]

The Arbitration Tribunal, after checked the four discrepancies in the documents presented by the [Seller] under the L/C, holds that the [Seller] breached the Contract by presentation of discrepant documents and should be responsible for the liabilities arisen therefrom. However, whether the [Seller]'s breach of the Contract discharged the [Buyer] from the obligation to pay, or whether the [Buyer] had the right to terminate the Contract and discharge itself from the obligation under the Contract, should be decided pursuant to Article 29 Section 1 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest and with reference to Article 49(1) of the 1980 United Nations Convention, under which, if the [Seller]'s breach of the Contract materially impaired the interest reasonably anticipated by the [Buyer] at the time when the Contract was formed or if the failure by the [Seller] to perform any of its obligations under the Contract amounted to a fundamental breach of the Contract, the [Buyer] was entitled to terminate the Contract and was discharged from its obligation. After discussion, the Arbitration Tribunal holds that the four discrepancies that appeared in the documents presented by the [Seller] under the L/C did not materially impair the interest reasonably anticipated by the [Buyer] nor do they constituted a fundamental breach of the Contract; the [Buyer] cannot terminate the Contract or discharge itself from the obligations under the Contract. On the contrary, the [Buyer]'s refusing to pay the [Seller] the price constituted a fundamental breach. Therefore, the [Seller]'s claim should be accepted, and the [Buyer]'s counterclaim should be dismissed.

The [Buyer] shall pay the [Seller] the total Contract price of the goods, that is, US $594,889.02. The [Seller] also asks the [Buyer] to pay interest on this amount, which is divided into two parts: one part is the penalty interest paid to the HANA Bank; the other part is US $67,662.09, which is calculated according to its internal interest rate. The Arbitration Tribunal holds that the penalty interest paid to the issuing bank resulted from the document discrepancies caused by the [Seller]'s own omission, therefore shall be borne by the [Seller] itself. The interest loss for late payment should be calculated from 29 July 1996 (the date the [Seller] returned the price to HANA Bank) to 12 April 1997. The [Seller]'s calculation of the interest loss for late payment based on its internal interest rate has no legal and contractual ground, therefore, should not be accepted. As the current commercial loan interest rate for US dollars is less than 6%, the Arbitration Tribunal holds it is reasonable that the [Buyer] compensate the [Seller] the loss of interest at an annual rate of 8 percent. The total loss of interest is US $594,889.02 8% 257/365 = US $33,509.36.

The [Seller] also demands that the [Buyer] pay for its attorneys' fee, US $18,000. However, it did not provide evidence to prove that it paid such amount of attorneys' fee. Therefore, this claim is dismissed.

     7. The fee for the arbitration claim and the counterclaim

The arbitration fee for the claim as well as the counterclaim shall be borne by the [Buyer].

IV. THE AWARD

The Arbitration Tribunal rules:

  1. The [Buyer] shall pay the [Seller] the price of the goods US $594,889.02 and loss of interest US $33,509.36;
  2. The [Buyer]'s claim for attorneys' fee shall be dismissed.
  3. The [Buyer]'s counterclaims shall be dismissed.
  4. The Arbitration fee for the claim is US $ XXX and shall be borne by the [Buyer], which has been paid by the [Seller] in advance. Therefore, the [Buyer] shall pay US $ XXX to the [Seller].
  5. The Arbitration fee for the counterclaim shall be borne by the [Buyer] which has been paid by the [Buyer] in advance.

The payments mentioned in 1 and 4 above shall be made by the [Buyer] within 45 days following the issuance of this arbitral award.

This award is final.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of the Republic of Korea is referred to as [Seller] and Respondent of the People's Republic of China 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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Pace Law School Institute of International Commercial Law - Last updated July 22, 2009
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