Go to Database Directory || Go to CISG Table of Contents || Go to Case Search Form || Go to Bibliography
Search the entire CISG Database (case data + other data)

CISG CASE PRESENTATION

China 23 July 1997 CIETAC Arbitration proceeding (Polypropylene case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/970723c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 19970723 (23 July 1997)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1997/23

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Japan (respondent)

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

GOODS INVOLVED: Polypropylene


Case abstract

PEOPLE'S REPUBLIC OF CHINA: China International Economic & Trade
Arbitration Commission 23 July 1997 (Polypropylene case)

Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/85],
CLOUT abstract no. 862

Reproduced with permission of UNCITRAL

Abstract prepared by Li Ke

A Chinese buyer entered into a contract with a Japanese firm for the sale and purchase of polypropylene. The contract contained detailed provisions as to the packaging and the destination port where the inspection would be conducted. The Inspection Bureau found that a large amount of goods was damaged due to defective packaging. The buyer contended that the seller had breached the contract and should compensate its losses. The seller argued that the buyer did not have the goods inspected at the destination port in accordance with the terms of the contract.

The Arbitration Tribunal ruled that the buyer could have the goods inspected either at the destination port or at the new destination pursuant to article 38 CISG, which expressly allows for the examination to be deferred until after the goods have arrived at the new destination.

As for the losses the buyer suffered, the Arbitration Tribunal held that since the seller had breached the contract because of non-conforming packaging, it should have foreseen that the breach could cause severe economic loss to the buyer. Therefore, as per article 74 CISG, the seller should compensate the loss suffered by the buyer including loss of goods, part of the loss of profits, interests and other reasonable costs.

Go to Case Table of Contents

Classification of issues present

APPLICATION OF CISG: Yes, both parties relied on the CISG to present their case

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 35 ; 36 ; 38 ; 74 ; 78

Classification of issues using UNCITRAL classification code numbers:

35A ; 35B4 [Quality, quantity and description required by contract; Packaging to protect goods in usual manner for similar goods];

36A2 [Conformity determined as of time when risk passes: seller responsible when lack of conformity becomes apparent later];

38C [Time for examining goods: deferral of examination in case of redirection or redispatch];

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

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

Descriptors: Conformity of goods ; Examination of goods ; Damages ; Foreseeability of damages ; Profits, loss of ; Interest

Go to Case Table of Contents

Editorial remarks

Go to Case Table of Contents

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., p. 2229-2237

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at nn.20, 83, 144, Nordic Journal of Commercial Law (2/2005)

Go to Case Table of Contents
Case text (English translation)

Queen Mary Case Translation Programme

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

Polypropylene case (23 July 1997)

Translated [*] by Yan Tianhuai [**]

Edited by Li Ke [***]

China International Economic and Trade Arbitration Commission (original name: Foreign Trade Arbitration Committee of China Council for the Promotion of International Trade; hereinafter, "Arbitration Commission") accepted this case according to:

   -    The arbitration clause in the contract for sale and purchase of polypropylene signed by Claimant, a Chinese Company (hereinafter, "[Buyer]"), and Respondent, a Japanese Company (hereinafter, "[Seller]"), on 10 November 1995; and
 
   -    The written arbitration application submitted by the [Buyer] on 27 September 1996.

The [Buyer] appointed Mr. A as an arbitrator; the [Seller] appointed Mr. D as an arbitrator; and the Chairman of the Arbitration Commission appointed Mr. P as the presiding arbitrator in accordance with the Arbitration Rules. The three arbitrators formed an arbitration tribunal (hereinafter, "Arbitration Tribunal") on 27 December 1996 to hear this case.

After examining the [Buyer]'s arbitration application, the [Seller]'s written defense, and other relevant evidence, the Arbitration Tribunal held a hearing on 10 March 1997. The [Buyer]'s representative and attorney as well as the [Seller]'s attorney attended. During the hearing, each party stated the facts, presented argument, and answered the Arbitration Tribunal's questions. After the hearing, both parties submitted supplementary material and written legal opinions to the Arbitration Tribunal.

After deliberation, the Arbitration Tribunal renders this arbitral award as of the date hereof.

The following are the facts and the Tribunal's opinion and award.

I. FACTS

On 10 November 1995, the [Buyer] and the [Seller] entered into a contract numbered AMM95-008 (hereinafter, the "Contract") for sale and purchase of polypropylene. The Contract contains, inter alia, the following provisions:

   -    Quantity: 300 tons;
   -    Unit price: US $735.00 per tons, CFR Shanghai port, China;
   -    Total value: US $220,500.00;
   -    Packing: 25 kilograms each bag, packed with one-layer brown paper lined with PE film; the packing shall be strong enough to be suitable for sea, land, and inland waterway transportation; and each 15 tons of the goods shall be loaded in a 120 foot container;
   -    Country of origin: Japan;
   -    Manufacturer: Japanese [__] Company Ltd.;
   -    Shipment date: Before 3 December 1995;
   -    Inspection: The inspection shall be conducted by the China Commodity Inspection Bureau within 90 days after the arrival of the goods at the destination port; if the goods are found to be not in conformity with the Contract in quality, quantity, or weight, except where the insurance company or carrier is liable, the [Buyer] shall be entitled to reject the goods or/and to lodge a claim for damages against the [Seller] by the inspection certificate.

On 11 December 1995, the goods arrived at Shanghai port. On 12 December 1995, the [Buyer] sent a letter to the [Seller], stating:

"Since you shipped the goods through a bulk vessel rather than a container ship, the containers on the vessel could not be discharged directly onto land and an additional cost has been incurred for discharging the goods."

On 13 December 1995, the goods were unloaded from the vessel. On 19 December 1995, China Ocean Shipping Company Anhui Branch, which was entrusted by the [Buyer] to take delivery of the goods, sent a letter to the [Seller] asking for the payment of additional port charges in the amount of renminbi [RMB] 15,000. Thereafter, the goods were transshipped to Hefei port and Tongling port, Anhui province of China. On 9 January 1996, the [Buyer] applied to China Commodity Inspection Bureau Anhui Branch (hereinafter, "Inspection Bureau") to inspect the goods.

On 16 January 1996, the [Buyer] sent a letter to the [Seller], stating:

"The goods have arrived at our clients' warehouse. After they were inspected by the Inspection Bureau as well as examined on-site by our company and our client, it was found that a large amount of the goods was damaged due to defective packing, which is inconsistent with the Contract. We hereby ask you to compensate our losses. The inspection certificate and other documents will be mailed to you later."

On 18 January 1996, the [Seller] replied to the [Buyer] by fax, stating:

"We want to know in which way the packing of the goods is non-conforming and what the current condition of the packing is. It is clear that we are not liable for any damage that occurred during the transportation or in your warehouse."

On 22 January 1996, the [Buyer] responded to the [Seller] by fax, stating:

"The packing paper is of poor quality and was not lined with PE film. Please refer to the inspection certificate for details. We have made great efforts to mitigate the losses. We hope that you pay careful attention to our claim and provide us a satisfactory solution."

On 15 February 1996, the Inspection Bureau issued an inspection certificate for the goods under the Contract. On 17 February 1996, it issued an inspection result report on the same goods. The inspection result was stated as follows:

"The quantity of the goods should be 300 tons/12,000 bags, but only 257.38 tons/10,295 bags were received. The other 1,705 bags were damaged, out of which, 4.9 tons of the goods were retrieved; 19.2 tons were contaminated; and the remaining 18.52 tons were lost. The goods were packed with three-layer brown paper, 25 kilograms each bag; the packing is very poor."

On 4 March 1996, the [Buyer] informed the [Seller] of the inspection result by fax and lodged a claim for damages again, stating that "it suffered direct losses amounting to US $56,000.00 as well as substantial consequential damages." On 20 March 1996, the [Buyer] sent a letter to the [Seller], listing in detail that the direct losses it suffered was US $59,003.35 and consequential damage was US $47, 950.69, totaling US $106,954.04.

On 21 March 1996, the [Seller] replied to the [Buyer] by fax, stating:

"Our company, with an active and responsible attitude toward our client, hopes to find a reasonable solution to your question. However, we are not going to bear any cost that should not be borne by us. ... Under the term CFR, we are released from any obligation after the goods arrived at the destination port, that is, Shanghai port. Thereafter, with respect to how and at what price you sell the goods and how you transship the goods, we bear no responsibility. If there were problems, you should have lodged your claim against us when the goods arrived at Shanghai port. We do not understand why you did not do so until the goods arrived at the warehouse. Had you lodged your claim in time, there would have been very little damage."

On 1 April 1996, the [Buyer] sent a fax to the [Seller], stating:

"If our claim is not settled, the sale of the goods will be negatively affected and more cost will be incurred. We hope you put forward your compensation schedule and settle our claim as soon as possible in order to mitigate further losses."

On 24 May 1996, the [Seller] responded to the [Buyer] by fax, stating:

"According to international trade practices and custom, the property in the goods and the risk of loss or damage to the goods had been transferred to the seller from the time they passed the ship's rail at the port of shipment, and our obligation for arranging the transportation terminated when the goods arrived at the destination port. In other words, after you took delivery of the goods without any objection at Shanghai port, we were released from any obligation. ... However, in order to show our sincerity and good faith and in view of future cooperation with your company, we have decided to compensate your company US $20,000.00 as a final settlement for your claim."

On 24 September 1996, the Inspection Bureau issued another inspection result report on the goods under the Contract, stating:

"Upon the client's request, on 5 May, 26 August, and 2 September 1996, our inspectors reinspected the weight/quantity and the damage of the goods under Contract AMM-008 on site. ... It was found that another 1,435 bags, weighing 35.875 tons, were broken, out of which, 523 bags/13.075 tons of the goods were retrieved; 861 bags/21.525 tons were contaminated; the remaining 1.275 tons were lost. The new breakage of the bags and the contamination for the goods resulted from the inferior quality of the packing paper, a kind of three-layer brown paper that is neither strong enough nor sufficiently humidity-proof for the polypropylene to be transported for a long distance and stored for a long time."

On 28 September 1996, the [Buyer] sent the new inspection result report to the [Seller] together with a letter, stating:

"Because the packing of the goods was not in conformity with the Contract and the packing paper was not strong enough, the bags of the goods were continually breaking during the disposing process. We hereby send you the new inspection result report and ask for compensation of all the damages. "

The parties failed to reach a consensus on compensation for the [Buyer]'s damages. On 27 September 1996, the [Buyer] applied to the Arbitration Commission for arbitration.

[POSITION OF THE PARTIES]

[Buyer]'s claim

The [Buyer] claims that due to the [Seller]'s breach of the Contract in packing the goods, it suffered the following losses:

1. Loss of goods: 55.97 tons/US $41,138.00

From the two inspection reports, it was found that 3,140 bags were broken, out of which, 17.975 tons of the goods were retrieved; 40.725 tons were contaminated; and 19.795 tons were lost. The retrieved goods were sold at 80 percent of the original price, resulting in a loss equivalent to loss of the goods 3.595 tons. The contaminated goods were sold at 20 percent of the original price, resulting in a loss equivalent to loss of the goods 32.58 tons. The total loss of the goods amounted to 55.97 tons in weight and US $ 41,138.00 in value.

2. Related costs: US $16,949.00

     (1) Taxes and duties

     The customs duties and VAT levied on the 300 tons of goods, respectively, amounted to RMB 280,449.00 and RMB 365,518.53, that is, RMB 2,153.23 per ton for taxes and duties. So, the total loss resulting from the taxes and duties was RMB 120,516.28 (RMB 2,153.23/ton 55.97 tons), equivalent to US $14.520.00.

     (2) Inland freight

     The inland freight for 300 tons of the goods was RMB 90,000.00. The loss of freight for 55.97 tons of the goods was RMB 16,791, equivalent to US $2,023.00.

     (3) Inspection fee

     The first inspection fee was RMB 4,665.00. The inspection fee allocated to 55.97 tons of the goods was RMB 870.33, equivalent to US $105.00.

     (4) Insurance fee

     The total insurance fee for 300 tons of the goods was RMB 10,121.19. Accordingly, the insurance fee for 55.97 tons of the goods was RMB 1,888.28, equivalent to US $228.00.

     (5) L/C issuance fee and bank charges

     The L/C issuance fee was RMB 500.00 and bank charges were US $330.75. The fee and charges allocated to 55.97 tons of the goods were US $73.00.

The total sum of the related costs was US $16,949.00

3. Additional expenditure: US $7,379.00

     (1) Expenditure on purchasing new bags: US $ 1,765.00

     In order to strengthen the packing or repack the goods to mitigate further damages, the [Buyer] bought about 9,000 new bags, costing RMB 14,650.00, equivalent to US $1,765.00.

     (2) Labor costs: US $1,476.00

Labor cost in strengthening the packing or repacking the bags was RMB 7,000.00, equivalent to US $843.00.

An additional short distance freight (from port to the warehouse), in the amount of RMB 5,258.00, equivalent to US $633.00, was also incurred due to the client's refusal of the goods because of broken packing.

     (3) Storage fee: US $ 1,849.00

     Due to the clients' refusal of the goods for broken packing, the goods had to be stored in the warehouse and a storage fee, in the amount of RMB 15,351.00, equivalent to US $1,849.00 was thus incurred.

     (4) The second inspection fee : US $482.00

     Had the packing of the goods conformed to the Contract and no severe damages occurred, a second inspection of the goods would have been unnecessary. It was the [Seller]'s breach of the Contract that necessitated the second inspection of the goods, which cost the [Buyer] RMB 4,002.00, equivalent to US $ 482.00.

In addition, because the [Seller] shipped the goods via the CHENGWEI Vessel, for which no berth was available in Shanghai port, the [Buyer] suffered additional cost for discharging the goods in the amount of RMB 15,000, equivalent to US $1,807.00.

The above totaled US $7,379.00.

4. Loss of price difference : US $81,917.00

The goods under the Contract were imported by the [Buyer] as an agent on behalf of Anhui [__] Company. The end-users of the goods were Anhui [__] Computer Manufacturing Factory and Tongling [__] Company. The resale price of the goods that Anhui [__] Company originally agreed with the end-users was RMB 9,000 per ton. Due to the severe breakage of the bags resulting from non-conforming packing, the goods were refused by the end-users and had to be stored in warehouse. Since then, the market price of the goods dropped every month. The [Seller]'s delay in settling the [Buyer]'s claim caused Anhui [__] Company to fail to sell the goods at a favorable time. The current market price of the goods is RMB 6,733.63 on average. The [Buyer] incurred a loss of price difference of RMB 2,266.40 per ton, and RMB 679,911.00 in total, equivalent to US $81,917.00.

5. Loss of interest : US $33,037.00

If the [Seller] had not breached the Contract, the end-users would have taken delivery of the goods and paid at the originally agreed price. Then the [Buyer] could have gotten back the capital and repaid the loan. However, the [Seller]'s breach of contract resulted in the goods having to be kept stored in the warehouse. The [Buyer] therefore suffered a tie-up of capital tied-up and had to pay extra interest that was thus incurred. This amounted to US $33,037 during the period from 1 February 1998 to 8 September 1998.

In sum, the [Buyer] suffered a loss in the total amount of US $180,420.00 from the [Seller]'s breach of the Contract.

6. Attorneys' fee and traveling fee: [Buyer] incurred about US $5,000 in total (RMB 35,538 for attorneys' fee)

7. Price difference for packing bags: US $1,402.00

In addition, the [Seller] should pay the [Buyer] the price difference for packing bags. In the Chinese market, the unit price of a PE bag is RMB 1.55 per piece; while the unit price of three-layer brown paper is only RMB 0.58 per piece. The price difference for the packing bags totaled RMB 11,640.00, equivalent to US $1,402.00.

[Buyer]'s increase in amount of compensation claimed

On 11 April 1997, the [Buyer] modified its application and increased the amount of the compensation claimed against the [Seller]:

1. The [Buyer] originally estimated that the goods could be sold at a total price of RMB 2,700,000.00 (RMB 9,000/ ton 300 ton = RMB 2,700,000). In fact, the actual sales volume was RMB 1,886,764.00. So, the total loss of price difference was RMB 813,236.00, equivalent to US $97,980.00.

2. The [Buyer] originally estimated that the attorneys' traveling fee would be around RMB 6,000.00. In fact, by the end of March 1997, based on the incomplete figures, the attorneys' traveling fee had amounted to RMB 57,293.55. The sum of the attorneys' fee and attorneys' traveling fee was US $11,184.00.

Accordingly, the [Buyer] claims for US $209,069.00 (including attorneys' fee and attorneys' traveling fee) instead of the original amount of US $181,822.00 (excluding attorneys' fee and attorneys' traveling fee).

[Seller]'s defense

The [Seller] raises the following defenses:

1. Pursuant to the United Nations Convention on Contracts for the International Sale of Goods (hereinafter, the "CISG"), "a breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract." It was true that the [Seller] breached the Contract by failing to pack the goods in accordance with the Contract. However, the [Seller]'s breach of the Contract was not fundamental. The quality and quantity of the goods delivered by the [Seller] was completely in conformity with the Contract.

2. The [Buyer] failed to have the goods inspected in due time and at the due place. According to the inspection term of the Contract and the CFR term, the goods should be inspected at the time they arrived at Shanghai port. The polypropylene is on the List of Import and Export Commodities Subject to Inspection by the Commodity Inspection Authorities. According to the Regulations for the Implementation of the Law of the People's Republic of China on Import and Export Commodity Inspection, the polypropylene is subject to statutory inspection and the consignee must register the import commodities with the commodity inspection authorities located at the port of discharge or the station of arrival, and the inspection authority shall affix a stamp indicating "registration accepted" on the Customs declarations. The commodities shall be checked and released by the Customs against that stamp on the Customs declaration. Therefore, pursuant to the inspection law of the People's Republic of China, the Contract, and international customs and practices, the inspection place of the goods should be Shanghai, but the inspection certificate provided by the [Buyer] proves otherwise. The [Buyer]'s failure to inspect the goods in due time and at the due place violated the law, the Contract, and international customs and practices, and the inspection certificate provided by the [Buyer] failed to reflect the actual status of the goods when they arrived at the Shanghai port. At the same time, the [Buyer] failed to provide evidence to prove that the damages to the goods did not occur during the transit from Shanghai to Hefei or Tongling.

3. The [Buyer] failed to take appropriate measures to mitigate the damages to the goods. The material presented by the [Buyer] shows that the damages to the goods have been aggravating since the [Buyer] took delivery. However, the same goods were shipped to another buyer on the same vessel. They did not conform to the contract either because of the three-layer brown paper packing. Due to that buyer's timely inspection of the goods, the parties were able to reach an agreement promptly to resolve their dispute and to prevent the damages from aggravating. Therefore, pursuant to Article 21 and 23 of the Foreign Economic Contract Law of the People's Republic of China, the increased damages should be borne by the [Buyer] itself.

4. The damages claimed in the [Buyer]'s arbitration application is US $181,822.00, accounting for 82.40 percent of the total Contract price; while the quantity of the damaged goods is 55.97 tons, accounting for only 20 percent of the total Contract quantity. The damages claimed by the [Buyer] exceed the loss which the [Seller] could foresee when concluding the contract. Pursuant to Article 19 of the Foreign Economic Contract Law of People's Republic of China, the [Seller] is not liable for the excessive loss.

5. Pursuant to Article 10 of the Measures for the Inspection of Damages of Imported Goods by Sea Transportation issued by China's Import and Export Commodities Inspection Bureau, the imported goods with broken packages shall be applied for verification with the inspection bureau at the discharging port. The material submitted by the [Buyer] indicates that the [Buyer]'s agent noticed the broken packing when unloading the goods at Shanghai port. This kind of damages was not a "hidden default". However, the [Buyer]'s agent neither sent a report to the [Buyer] nor applied for verification with the inspection bureau at Shanghai port.

6. The direct loss caused by non-conforming packing should be the cost the [Buyer] incurred in strengthening the packing of the goods and re-packing the goods. The seller calculated the loss and agrees to bear US $5,463.09.

7. As to the additional port charge the [Buyer] incurred due to the unavailability of the berth for the CHENGWEI Vessel in Shanghai port, the [Seller] had expressly agreed to pay it at the commencement of the hearing.

[Buyer]'s rebuttal

The [Buyer] rebutted the [Seller]'s defenses in its written supplementary material submitted to the Arbitration Tribunal:

1. Pursuant to Article 19 of the Foreign Economic Contract Law of the People's Republic of China, "the compensation amount for breach of the contract by one party shall equal to the loss suffered by the other party as a consequence of the breach." The loss shall consist of the direct loss of assets as well as the loss of profit. Whether the loss referred in article 19 is direct or indirect is not specified. It should be the actual loss, which means, the compensation by the delinquent party shall be equal to the loss the other party suffered. Though the [Buyer] took active measures to mitigate the damage, the loss is still severe. Article 74 of the CISG also provides that "damages for breach of contract by one party consist of a sum equal to the loss, including the loss of profit, suffered by the other party as a consequence of the breach." The compensation amount the [Seller] agreed to pay is far from the actual loss suffered by the [Buyer].

2. The [Seller]'s allegation that the loss suffered by the [Buyer] was unforeseeable pursuant to Article 19 of the Foreign Economic Contract Law is unjustifiable. Such an allegation may be acceptable if the goods were damaged under the circumstance that the packing of the goods was conforming. However, the packing of the goods did not conform to the Contract which required the packing to be strong enough for sea, land, and inland waterway transportation. What is more, the description of the packing in the invoice provided by the [Seller] was inconsistent with the real condition.

3. Neither the Chinese version nor the English version of the Contract stipulated that the place of inspection should be in Shanghai. Although Article 13 of the Regulations for the Implementation of the Law of the People's Republic of China on Import and Export Commodity Inspection requires that "For import commodities subject to statutory inspection, the consignees must make registration for the import commodities with the commodity inspection authorities located at the port of discharge or the station of arrival, which shall affix a stamp indicating "registration accepted" on the Customs declarations", Article 14 provides that "in the event that no place of inspection is specified in the contract, the imported goods may be inspected at the discharge port, destination place or other place designated by the inspection bureau." The [Buyer] acted in compliance with the law by registering the goods with the inspection bureau in Shanghai and applying for inspection with the inspection bureau in Anhui. Also, there is no such international custom as alleged by the [Seller] that under the CFR term the inspection place should be at the destination port. In fact, Article 38 of the CISG provides that:

"If the contract involves carriage of the goods, examination may be deferred until after the goods have arrived at their destination; if the goods are redirected in transit or redispatched by the buyer without a reasonable opportunity for examination by him and at the time of the conclusion of the contract the seller knew or ought to have known of the possibility of such redirection or redispatch, examination may be deferred until after the goods have arrived at the new destination."

The evidence provided by the [Buyer] shows that the [Buyer] applied for inspection in time in accordance with the law. The [Seller]'s allegation that the [Buyer] failed to have the goods inspected in due time and at the due place is totally untrue.

4. The fundamental reason causing the enlargement of the loss was the [Seller]'s breach of the Contract. The [Seller]'s delay in responding to the [Buyer]'s claim also contributed to the enlargement of the loss. The evidence presented by both parties shows that the [Seller] not only lacked willingness to resolve the dispute between the parties but also tried to evade its liabilities. The [Seller] insisted that the title as well as the risk of loss or damage to the goods had transferred to the [Buyer] when the goods passed the ship's rail at the loading port. However, the [Seller]'s allegation was incorrect under Article 36 of the CISG, which provides that the seller is liable in accordance with the contract and the Convention for any lack of conformity which exists at the time when the risk passes to the buyer, even though the lack of conformity becomes apparent only after that time; the seller is also liable for any lack of conformity which occurs after the time when the risk passes to the buyer and which is due to a breach of any of its obligations. What is more, the price difference was caused because of the [Seller]'s breach in packing and delay in handling the disputes.

5. The [Seller] mentioned another buyer, who purchased the same goods from the [Seller] with the same packing as the [Buyer]'s, to prove that due to that buyer's timely inspection of the goods, the both parties reached a settlement of their dispute in time and avoided the aggravation of the loss. The fact is that the buyer suffered a substantial loss of about US $170,000.00 and the loss is still increasing, but the [Seller] only compensated US $30,000.00 and that the [Buyer] still suffered a loss of US $140,000.00. A timely settlement is dependent on timely action by both parties. The [Buyer] sent its claim to the [Seller] as early as on 16 January 1996, but the [Seller] did not come to Hefei until 22 September 1996 to negotiate with the [Buyer].

6. The [Seller]'s allegation that the [Buyer] failed to take measures to mitigate the loss is groundless. In fact, as soon as the [Buyer] found the packing of the goods was severely damaged upon the goods arriving at Anhui, [Buyer] bought new bags to repack the goods and to collect the scattered goods. After the goods were stored in the warehouse, the [Buyer] took further measures to prevent more breakage. Thus, it prevented the lost of 75.8 tons of goods in 3,140 broken bags. Had the [Seller] informed the [Buyer] in time that the goods were packed with three-layer brown paper, the [Buyer] would have made necessary preparation to avoid part of the loss. However, the shipping documents provided by the [Seller] failed to reflect the actual packing of the goods; even when the goods arrived at Shanghai port, the [Seller] still pretended that it did not know of the lack of conformity in packing.

7. The [Seller], based on the letter the shipping company sent to Anhui [__] Company, asserted that the [Buyer] had known of the breakage of the packing when the goods arrived at Shanghai port. The [Seller]'s assertion is groundless. Actually, the shipping company made the statement in its letter upon investigating the facts after the goods arrived at Hefei. Before the goods were loaded on board to Hefei, the shipping documents provided by the [Seller] indicated that the goods were packed with brown paper lined with PE film as the Contract required. The [Buyer] found that the packing was severely damaged after the goods arrived at Hefei and then lodged a claim against the shipping company and the insurance company. After investigation, it was found that the damages were caused by the non-conforming packing. When applying Article 10 of the Measures for the Inspection of Damages of Imported Goods by Sea Transportation, the [Seller] did not mentioned Article 10(2) of the same, which provides that "the applications could be filed with the administration at the place of delivery if the packages of goods are complete or the goods have hidden defects." In the instant case, both the Contract and the shipping documents indicated that the packing of the goods should be brown paper lined with PE film. However, the goods were actually packed with three-layer brown paper. The similarity of the two kinds of packing made the "hidden defect" hard to detect. So, Article 10(2) shall be applied to the instant case.

II. OPINION OF ARBITRATION TRIBUNAL

1. The applicable law. Both the [Buyer] and the [Seller] analyzed the rights and responsibilities based on the law of People's Republic of China and the CISG. Accordingly, the Arbitration Tribunal holds that the law of People's Republic of China as well as the CISG shall be the applicable law to this case.

2. The packing clause of the Contract as well as the correspondence between the [Buyer] and the [Seller] indicates that the parties reached a very clear agreement that the packing of the goods should be one-layer brown paper lined with PE film and should be strong enough to be suitable for sea, land, and inland waterway transportation. Moreover, the [Seller] had engaged in international trade with Chinese companies for a long time and had sufficient knowledge of Chinese foreign trade practices and inland transportation information. It should have known that the [Buyer], an inland Chinese trading company, would resell the goods and that the goods probably would be transshipped more than once after they arrived at Shanghai port. However, the [Seller] failed to pay sufficient attention to the packing of the goods. The goods were packed with three-layer brown paper which was not in conformity with the Contract, but the [Seller] had indicated in the commercial invoice that the packing of the goods was one-layer brown paper lined with PE film. The direct causation of the damages to the goods was the nonconforming packing which was three-layer brown paper without PE film and strong tensile fibers. The packing could easily be broken and was not waterproofing. So, the [Seller] shall be liable for the damages caused to the [Buyer].

3. The [Seller] acknowledged that the additional port charges were incurred due to the unavailability of a berth in Shanghai port for the CHENGWEI Vessel chartered by the [Seller]. So, the [Seller] shall take the responsibility and bear the additional port charges.

4. As to the place of inspection, according to the inspection clause of the contract and the Chinese inspection law, the goods shall be reinspected by China Import & Export Commodity Inspection Bureau (hereinafter, CCIB) within 90 days after unloading at the destination port. It is legal to have the goods inspected by the Anhui Branch of CCIB. Furthermore, the [Seller] knew or ought to have known that the goods would be redispatched at Shanghai port, and, under such circumstances, Article 38 of the CISG expressly allows that "examination may be deferred until after the goods have arrived at the new destination." So, the Arbitration Tribunal holds that the inspection of the goods could be done either at Shanghai port or at the new destination, and that the [Seller]'s assertion that the goods should have been inspected at Shanghai port is groundless.

5. The [Seller] claimed that according to the Measures for the Inspection of Damages of Imported Goods by Sea Transportation, the [Buyer] should have had the goods inspected in Shanghai because its agent found the damages in Shanghai. The [Buyer] denied the [Seller]'s claim. The Arbitration Tribunal rejects this claim of the [Seller] for the following reasons:

     (1) The packing of the goods delivered by the [Buyer] did not conform to the Contract, and was not suitable for repeated moves. As time went by, the damages caused by the poor packing became more and more apparent.

     (2) Based on the reason mentioned in paragraph 4 above, the [Buyer] was entitled to have the goods inspected at the final destination; and pursuant to the Measures for the Inspection of Damages of Imported Goods by Sea Transportation, goods with integral packaging or with hidden defects may be inspected at the destination by the local inspection bureau.

     (3) According to exhibit 8-B of the [Buyer]'s arbitration application attachment, before the goods were redispatched at Shanghai port, they were packed in containers and could not be severely damaged.

     (4) The [Seller] is a credible Japanese company and the invoice it issued showed that the goods were packed with one-layer brown paper lined with PE film. Based on the [Buyer]'s trust of the [Seller], it was reasonable for the [Buyer] and its agent to not have a great concern even if a small quantity was damaged at Shanghai port.

6. The [Seller] argued that the [Buyer] did not take proper measures in time to prevent further damages to the goods. The Arbitration Tribunal holds, that based on the facts and evidence of the instant case, the [Seller]'s argument is unjustified.

7. Article 19 of the Foreign Economic Contract Law of the People's Republic of China provides that "the compensation amount for breach of the contract by one party shall be equal to the loss suffered by the other party as a consequence of the breach but shall not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract." Article 74 of the CISG also stipulates that "damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach." The [Seller] contended that the alleged amount of the loss by the [Buyer] was unforeseeable when concluding the contract. The Arbitration Tribunal holds that the [Seller]'s allegation is not supported because it is obvious that severe breach of the contract could cause huge damages for the non-breaching party.

In addition, the [Seller] defended against the [Buyer]'s claim and stated its objection to the [Buyer]'s claim, however, the [Seller] neither specified its reasons for the compensation nor raised any objection to the evidence the [Buyer] provided. So, based on the above analysis, the Arbitration Tribunal rules as follows:

     (1) The Arbitration Tribunal grants the [Buyer]'s claim 1 of US $41,138.00 for loss of 55.97 tons of goods.

     (2) The Arbitration Tribunal dismisses the [Buyer]'s claim 2 of US $16,949.00 for related costs. Refer to (4) below for the reason.

     (3) The Arbitration Tribunal grants the [Buyer]'s claim 3 of US $7,379.00 for additional expenditure, including additional port charges.

     (4) If the packing of the goods had conformed to the Contract, the [Buyer] would have obtained profit from the deal. Due to the [Seller]'s breach of contract, the [Buyer] had to reduce the resale price and also missed the sales season. As a consequence, the [Buyer] suffered a loss of price difference totaling US $97,980.00. The Arbitration Tribunal deems that, because the Contract related to international transactions, the loss of business profit should be calculated according to both the Chinese domestic market condition and the international market condition. Also, the quality of the goods under the Contract was conforming and the [Buyer] had accepted the goods. Thus, the [Buyer] could control the time for resale as well as the profit margin to some extent. Based on the actual conditions of the instant case, the Arbitration Tribunal holds that the [Seller] shall pay half of the profit loss alleged by the [Buyer], that is, US $48,990.00. After being compensated, the [Buyer] will get the profit it would have had if the Contract had been perfectly performed by the [Seller]. Accordingly, the costs of US $16,969 specified in [Buyer]'s claim 2, is the necessary import cost the [Buyer] should bear and shall not be compensated.

     (5) Due to the [Seller]'s breach of the Contract, the [Buyer] cannot get back its capital and suffered a loss of interest in the amount of US $33,037.00. After reviewing the relevant evidence, the Arbitration Tribunal holds that the [Buyer]'s calculation of the loss of interest from 1 February 1996 to 8 September 1996 is reasonable and its claim for the loss of interest shall be granted.

     (6) In item 3 listed above, the Arbitration Tribunal grants the additional expenditure for taking remedial measures, including the expenditure for purchase of new packing bags. Therefore, the Arbitration Tribunal dismisses the [Buyer]'s claim for the price difference between the PE bags and the three-layer brown paper bags.

     (7) The Arbitration Tribunal holds that the [Buyer]'s claim for attorneys' fee and attorneys' traveling fee in the amount of US $11,184.00 is reasonable. According to article 59 of Chinese Arbitration Rule, it shall be granted.

In total, the [Seller] shall compensate the [Buyer] US $141,728.00 for the loss.

8. The arbitration fee is RMB 72,058, 20% of which shall be borne by the [Buyer] and 80% of which shall be borne by the [Seller].

III. AWARD

The Arbitration Tribunal rules that:

1. The [Seller] shall compensate the [Buyer] for the loss in the amount of US $141,728.00;

2. The [Buyer] shall bear 20% of the arbitration fee and the [Seller] shall bear 80%. The [Buyer] has paid US $__ in advance, which offsets the arbitration fee; therefore, the [Seller] shall pay back US $__ to the [Buyer];

The [Seller] shall pay the [Buyer] the above amount within 45 days after this award. For any late payment of the amount denominated in US dollars, an 8% annual interest shall be added; and for any late payment of the amount denominated in RMB, a 12% annual interest rate shall 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 the People's Republic of China is referred to as [Buyer] and Respondent of Japan is referred to as [Seller].

** Yan Tianhuai, 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.

*** Li Ke is in her fourth year in SHISU Law School (Shanghai International Studies University). Her major if International Economic Law and she also took a minor BA degree in International Trade. Her field of interest is International Business Transactions.

Go to Case Table of Contents
Pace Law School Institute of International Commercial Law - Last updated July 22, 2009
Comments/Contributions
Go to Database Directory || Go to CISG Table of Contents || Go to Case Search Form || Go to Bibliography