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CISG CASE PRESENTATION

China 29 September 1997 CIETAC Arbitration proceeding (Aluminium oxide case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/970929c1.html]

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

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Case identification

DATE OF DECISION: 19970929 (29 September 1997)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1997/28

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Switzerland (claimant)

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

GOODS INVOLVED: Aluminium oxide


Case abstract

PEOPLE'S REPUBLIC OF CHINA: China International Economic & Trade
Arbitration Commission 29 September 1997 (Aluminium oxide case)

Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/85],
CLOUT abstract no. 861

Reproduced with permission of UNCITRAL

Abstract prepared by Aaron Bogatin

A contract for the purchase of aluminium oxide was concluded between a Swiss buyer and a Chinese seller. Payment was to be made by irrevocable letters of credit (L/C) issued by the buyer and delivery was to be made in three installments. Due to problems with the bank, the first L/C was not issued. The seller resold part of the goods to another company. It then went on to purchase aluminium oxide for the second installment. However, the buyer failed again to issue an L/C. The seller resold part of the goods to another company and initiated arbitration proceedings claiming for damages: according to the seller, failure to issue the L/C constituted a fundamental breach of contract, pursuant to article 25 CISG. Referring to article 79 CISG, the buyer argued that the bank's refusal to issue the L/C was beyond its control and therefore it could not be held responsible.

The Arbitration Tribunal noted that the bank's refusal to provide the L/C to the buyer was based on a history of previous failed business transactions of the buyer. As a result, the bank's denial was foreseeable and did not constitute force majeure. As per article 22 Law of the People's Republic of China on Economic Contracts Concerning Foreign Interest and article 77 CISG, the seller was entitled to damages. However, the Tribunal deemed that the seller was entitled to receive the price difference between the contract price and the substitute transaction only with regard to the first [failed] installment. As a matter of fact, in the case of the second [failed] installment, though the seller was aware that the buyer was not going to fulfil the contract yet it still purchased more material to sell to the buyer. This violated the seller's duty to mitigate the damages. Pursuant to article 76 CISG, the Arbitration Tribunal thus deemed that the seller should receive the price difference between the contract price and the international market price of early July 1996 (a reasonable period after the buyer wrote to the seller in late June expressing its unwillingness to perform the contract).

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Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 18 ; 29 ; 49 ; 73 ; 75 ; 76 ; 77 ; 79

Classification of issues using UNCITRAL classification code numbers:

18A3 [Criteria for acceptance of offer: silence or inactivity insufficient];

29A [Modification of termination of contract by agreement];

73C1 [Avoidance in installment contracts: avoidance for both past and future installments];

75A1 [Damages established by substitute transaction: resale by aggrieved seller];

76B [Avoidance: damages recoverable based on current price];

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

79B [Impediments excusing a party from liability for damages]

Descriptors: Acceptance of offer ; Modification of contract ; Avoidance ; Installment contracts ; Damages ; Cover transactions ; 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., p. 2542

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at nn.49, 54, 158, 238, 244, Nordic Journal of Commercial Law (2/2005)

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Case text (English translation)

Joint translation project:
New York University School of Law
and Pace University School of Law


 

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

Aluminium oxide case (29 September 1997)

Translation [*] by Kun Fan [**]

Translation edited by Meihua Xu [***]

China's International Economic and Trade Arbitration Commission (hereafter, "CIETAC") accepted the case, according to:

   -    The arbitration clause in Contract 0120-SC-AMNA-M signed by Claimant [Seller], Switzerland ____ Company and Respondent [Buyer], Baishan ___ Aluminium Company Limited on 3 May 1996; and
 
   -    The written arbitration application submitted by the [Seller] on 8 January 1997.

Ms. P, the presiding arbitrator appointed by the Chairman of the CIETAC following Article 24 of the Arbitration Rule because the [Seller] and the [Buyer] failed to jointly appoint or authorize the Chairman of the CIETAC to appoint the presiding arbitrator within the time limit stipulated, Mr. A, the arbitrator appointed by the [Seller], and Mr. D, the arbitrator appointed by the [Buyer] following the Arbitration Rule, formed the Arbitral Tribunal on 19 March 1997 to hear the case.

An oral hearing was held in Beijing on 3 June 1996 after the Arbitral Tribunal carefully examined the arbitration application submitted by the [Seller] and the defense materials submitted by the [Buyer]. The [Seller] and the [Buyer] sent representatives and (or) agents to the oral hearing. They made oral statements, answered the Arbitral Tribunal's questions and debated with each other.

After the hearing, the Arbitral Tribunal received supplementary materials from the [Seller] and the [Buyer] and shared them with the parties.

The Arbitral Tribunal has concluded the case based on the available materials and the facts found in the oral hearing, and made this award within the time limit as stipulated in the Arbitration Rules.

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

I. FACTS

On 3 May 1996, the [Seller] and the [Buyer] concluded Contract 0120-SC-AMNA-M. The Contract provides for the sale of 30,000 metric tons (5% plus or minus may be decided by the [Seller]) of aluminium oxide produced in Australia or India at the unit price of US $235 per metric ton. The goods are to be delivered in three installments: 10,000 metric tons in July 1996, 10,000 metric tons in September 1996 and 10,000 metric tons in December 1996. The [Buyer] is to issue an irrevocable L/C on the 20th day of the month before each delivery.

II. POSITION OF THE PARTIES

[Seller]'s position

The [Seller] alleged that:

After the conclusion of the Contract, the [Seller] actively prepared the goods for shipment and, on 5 June 1996 and also on 19 June 1996 (one day before the deadline for issuance of the first L/C) reminded the [Buyer] of the importance of issuing the L/C on schedule. However, the [Buyer] failed to issue the L/C on 20 June but wrote to the [Seller] on 21 June that the L/C could not be issued on schedule because the Bank of China Jilin Branch doubted the [Buyer]'s solvency. In order to ensure the performance of the Contract and to protect both parties' interests, the [Seller] wrote to the [Buyer] that if the [Buyer] could "issue the L/C within this week (from 23 to 29 June)", [Seller] would not hold [Buyer] responsible for the losses caused due to late issuance of the L/C. However, the [Buyer] did not issue the L/C. [Buyer] attributed its failure to issue the L/C to force majeure. [Seller] alleges that [Buyer] took that position in an effort to avoid liability for breach of contract.

The [Buyer]'s failure to issue the L/C constituted a fundamental breach of contract. The Contract could no longer be performed. As a result, the [Seller] incurred significant economic losses. The [Seller] alleged that after the conclusion of the Contract, it actively prepared the contract goods; [Seller] signed a contract with Alusuisse on 31 May 1996 to purchase 20,000/25,000 tons of aluminium oxide at the unit price of US $188 per ton. [Seller] then arranged for the goods to be shipped from COVE, Australia, to Qingdao, China, at ta cost of US $13.50 per ton. The actual weight of the goods arriving at the port was 21,000 metric tons. Since the [Buyer] refused to issue the L/C, clearly indicating that [Buyer] no longer intended to perform the Contract, [Seller], in order to avoid further losses, signed a contract with ___ Aluminium Company on 25 June 1996 and resold 10,500 metric tons of the aforesaid goods to ___ Aluminium Company at the unit price of US $188 per metric ton. Therefore, the [Seller] suffered a loss of the price difference between the payment due from [Buyer] and the return received from ___ Aluminium Company, calculated as follows:

US $235 × 10,500 metric tons -- US $188 × 10,500 metric tons = US $493,500

[The second delivery was due in September 1996.] The [Buyer] also did not issue an L/C within the time limit for that delivery. The [Seller] did not sign a contract with ___ Aluminium Company until 29 October 1996 and again resold to ___ Aluminium Company 5,000 metric tons of aluminium oxide that were to have been supplied to the [Buyer] in September and 10,000 metric tons that were to be supplied to the [Buyer] in November [for the third delivery]; these goods were resold at the unit price of US $165 per metric ton. A total of 15,238 metric tons of aluminium oxide were resold at this price. The [Seller] suffered a loss of the price difference between the payment due from [Buyer] and the return received, calculated as follows:

US $235 × 15,238 metric tons -- US $165 × 15,238 metric tons = US $1,066,660.

Out of the aforesaid 21,000 metric tons of aluminium oxide, 5,250 metric tons had been prepared for delivery to the [Buyer] in September. Since the goods under the contract signed between the [Seller] and ___ Aluminium Company on 29 October 1996 had to be produced in India, the 5,250 metric tons of aluminium oxide could not be resold to ___ Aluminium Company and were still stored in the warehouse. Therefore, with reference to the aforesaid reselling price of US $ 165 per ton, the losses suffered by the [Seller] are calculated as follows:

US $235 × 5,250 metric tons -- US $165 × 5,250 metric tons = US $367,500.

In sum, the [Seller] asked the Arbitral Tribunal to order the [Buyer] to pay:

      (1) US $1,927,660 ($493,500 + $1,066,660 + $367,500), the economic losses incurred by the [Seller]; and

      (2) US $20,000 for the attorneys' fee paid by the [Seller];

[Buyer]'s position

The [Buyer] counter argues:

1. After signing the Contract, the [Buyer] actively contacted the bank to issue the L/C. However, the [Buyer] was sued due to being behind in payment to a creditor for materials. The court attached the [Buyer]'s bank account and detained aluminium ingots that were to be exported. As a result, the bank was skeptical about the [Buyer]'s ability to pay its creditors and thus did not issue the L/C for the [Buyer]. For the purpose of performing the Contract, the [Buyer] asked the municipal government to coordinate with the bank. Since it could not be settled through coordination, the [Buyer] promptly notified the [Seller] of the difficulty in issuing the L/C. [Seller] was so notified during a meeting with the [Seller] in Changchun on 19 June 1996. The [Buyer] made further efforts to settle the issue but still failed. In order to avoid causing greater economic losses to the [Seller], the [Buyer] wrote to the [Seller] on 21 June 1996 asking for a modification of the contract. [Buyer] requested that [Seller] reply to this proposal before 25 June 1996, advising that otherwise, the Contract should be avoided. However, the [Seller] made no reply before the deadline. [Seller]'s allegation that it promptly wrote to [Buyer] upon receipt of the [Buyer]'s letter of 21 June 1996 is not true.

2. Paragraph 2, Article 8 of Regulations on the Contracts of Industrial and Mineral Product stipulates that, if a party requests to modify or cancel the contract, the original contract shall be valid till the conclusion of a new one. However, the party requesting modification or cancellation of the contract shall promptly notify the other party who shall make a reply within fifteen days upon the receipt of the notification. No reply within the time limit would be deemed as an implied approval. In accordance with the foregoing stipulations, the [Seller]'s failure to reply within the time limit should be deemed as an implied approval of the [Buyer]'s request to modify the Contract.

3. Article 11, the "force majeure clause" of the Contract stipulates that, if any of the following events causes any party to fail to perform all or part of the obligations under the Contract, including fire, storm, war, military operation and similar events, failure to export or import normally due to blockade or strike and any event beyond the control of any party, the time limit for performance shall be extended according to the duration of such event. If such event lasts for over four (4) months, the party shall be entitled not to perform the obligations under the Contract any longer and the other party shall not be entitled to ask the party alleging non-performance to compensate for the losses arising therefrom. However, the party that fails to perform shall notify the other party of the duration of such event as soon as possible.

Since the issuance of the L/C depends on the bank and whether the bank acts or does not act is beyond the control of the [Buyer], the bank's refusal to issue the L/C due to its doubt about the [Buyer]'s solvency conforms to the "force majeure clause" of the Contract. Furthermore, according to Article 79(1) CISG:

"A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences."

The [Buyer]'s failure to issue the L/C was caused by an impediment beyond its control; therefore, the [Buyer] should not be held responsible for any loss or liability arising therefrom.

4. In the middle of June 1996, the [Buyer] gave the [Seller] early notification -- orally and in writing -- of the bank's refusal to issue the L/C. Consequently, the [Seller] should have taken measures to avoid the losses. However, the [Seller] did not take reasonable measures to avoid the losses after the receipt of the written notification to modify the Contract. Since the [Seller] intentionally allowed greater losses to occur, the [Buyer] should not be held responsible for such losses.

[Seller]'s rebuttal

In its supplementary materials, the [Seller] responds to the [Buyer]'s defenses as follows:

1. First, the [Seller] promptly replied to [Buyer] upon receipt of the [Buyer]'s letter of 21 June, stating that the [Buyer]'s request was unreasonable and an indication of a unilateral repudiation of the Contract. Therefore, the [Buyer]'s allegation that the [Seller] failed to reply within the time limit is a distortion of fact. Second, once a contract is concluded in accordance with the law, it is legally binding and may not be modified by any one party without the consent of the other party. The [Buyer]'s unilateral claim to modify the Contract had no legal effect. Even if the [Seller] had made no reply, no legal consequence would follow from the [Seller]'s not replying.

2. The [Buyer] should and could foresee its own condition of credit and was able to overcome the adverse effect of its bad credit. Being of doubtful solvency due to falling behind in payments to creditors for materials is not a force majeure event. In fact, the [Buyer] issued a L/C of aluminium oxide valuing US $2 million on 26 June. Therefore, the [Buyer] had no good faith in performing the Contract and alleges "force majeure" simply as an excuse for its intentional breach of the Contract.

3. In order to reduce the losses as much as possible, as the Contract could not be performed due to the [Buyer]'s fundamental breach, the [Seller] successively signed contracts with ___ Aluminium Company in June and October 1996 to resell 25,000 tons out of the 30,000 tons of goods under the Contract, maximumly avoiding further losses.

III. OPINION OF THE ARBITRAL TRIBUNAL

      (1) Applicable law

Because Article 12 of the Contract stipulates that "any relation formed between the parties under the Contract shall be subject to Chinese laws and regulations", the laws and regulations of the People's Republic of China should be applied here. However, the Regulations on the Contracts of Industrial and Mineral Product claimed by the [Buyer] should not be applied to a dispute which involves a foreign party; instead, the Law of the People's Republic of China on Economic Contracts Concerning Foreign Interests may govern the settlement of the dispute. In addition, Both China and Switzerland are Contracting States of the CISG; therefore, the CISG should be applied here.

      (2) Determination of the force majeure event

Article 11, the "Force Majeure Clause" of the Contract, states that, if any of the following events causes any party to fail to perform all or part of the obligations under the Contract, including fire, storm, war, military operation and similar events, failure to export or import normally due to blockade or strike and any event beyond the control of any party, the time limit for performance shall be extended according to the duration of such event. If such event lasts for over four (4) months, the party shall be entitled not to perform the obligations under the Contract any longer and the other party shall not be entitled to ask the party alleging non-performance to compensate for the losses arising therefrom. However, the party that fails to perform shall notify the other party of the duration of such event as soon as possible.

The [Buyer], in accordance with the aforesaid, alleged that the bank's refusal to issue the L/C due to its doubt about the [Buyer]'s solvency was beyond the control of the [Buyer], which should be an event of force majeure. However, the Arbitral Tribunal deems that force majeure, subject to the Law of the People's Republic of China on Economic Contracts Concerning Foreign Interests, refers to any event that is unforeseeable for the parties when the contract is signed and whose occurrence and consequences are inevitable and unconquerable. The bank refused to issue the L/C because the [Buyer] had not done well in another business, which should be the [Buyer]'s own fault in its business operation. The bank's refusal to issue the L/C is something between the bank and the [Buyer], having nothing to do with the [Seller]. Therefore, the reason claimed by the [Buyer] should not be deemed an event of force majeure no matter in accordance with Chinese laws or the stipulations of the Contract. The Arbitral Tribunal dismissed the force majeure defense of the [Buyer].

      (3) Modification of contract and liabilities for breach and compensation

The [Buyer] alleged that he wrote to the [Seller] on 21 June 1996, requesting the [Seller] to reply before 25 June whether [Seller] consented to extend the time of delivery to the date of issuance of the L/C. [Buyer] advised that, in the event of no reply within the time limit, the Contract would be avoided. Since the [Seller] made no reply within the time limit after the receiving the [Buyer]'s aforesaid notification, the [Buyer] deemed that the [Seller] gave tacit approval of his request to modify the Contract.

As for the [Buyer]'s aforesaid claims, the Arbitral Tribunal deems that, in accordance with the Law of the People's Republic of China on Economic Contracts Concerning Foreign Interests, a modification of contract should be agreed by the parties through consultation and should be made in written. Therefore, even if the [Seller] did not reply within the time limit made by the [Buyer], the [Seller] should not be deemed to have agreed with the [Buyer]'s request to modify the contract. Since no agreement was made on the modification of the contract, the parties should perform their respective obligations under the contract. The [Buyer] should be held responsible for any loss caused due to his failure to issue the L/C in accordance with the contract. The [Seller] should be entitled to ask the [Buyer] to pay compensation for the actual losses arising therefrom.

      (4) Amount of compensation

           (i) The [Seller] bought 21,000 metric tons of aluminium oxide from Swiss Aluminium Limited at the unit price of US $188 per ton for the purpose of the contract. Because the [Buyer] failed to issue the L/C on schedule, the [Seller] had to resell 10,500 metric tons of aluminium oxide to ___ Aluminium Company at the unit price of US $188. Therefore, the [Seller] claimed compensation of US $493,500 for the 10,500 metric tons of aluminum oxide. The Arbitral Tribunal deems this claim reasonable.

           (ii) The [Seller] claimed the price difference of 15,000 metric tons of aluminium oxide (15,238 metric tons actually delivered) that were prepared for the [Buyer] but again resold to ___ Aluminium Company. The Arbitral Tribunal deems, that before the [Buyer] failed to issue the L/C within the time limit as stipulated in the contract which caused the first installment of the goods under the contract could not be delivered, the [Buyer] wrote to the [Seller] on 21 June 1996 requesting that "to extend the time of delivery to the date of issuance of the L/C ... in the event of no reply before 25 June, the Contract would be avoided", and the [Seller] deemed the aforesaid letter "unreasonable and an indication of the unilateral repudiation of the contract." It demonstrates that the [Seller] was aware of the [Buyer]'s inability to perform the contract and meanwhile there was no sign indicating that the [Buyer] will continue his performance. Under such circumstances, the [Seller] (the evidence furnished by the [Seller] is not clear and the date of delivery may be in October 1996) still successively bought aluminium oxide totaling 15,238 metric tons and resold the goods to ___ Aluminium Company on 29 October 1996. The Arbitral Tribunal deems that this behavior on the part of the [Seller]'s violates Article 22 of the Law of the People's Republic of China on Economic Contracts Concerning Foreign Interests, prescribing that "any party who suffers any loss due to the other party's breach of the contract shall promptly take proper measures to avoid further losses." The Tribunal regarded the contract signed between the [Seller] and ___ Aluminium Company as invalid evidence in favor of the [Seller]'s claim for compensation. Therefore, the Arbitral Tribunal dismissed the [Seller]'s claim for price difference in relation to the 15,238 metric tons of aluminium oxide between the payment in accordance with the contract signed on 29 October 1996 and the due payment calculated at the Contract price.

Though the Arbitral Tribunal dismissed the [Seller]'s aforesaid claim, the [Seller] is still entitled to claim damages. As for the economic losses in relation to the 20,000 metric tons of aluminium oxide under the contract, the Arbitral Tribunal deems that, subject to Article 76 of the CISG:

"If the contract is avoided and there is a current price for the goods, the party claiming damages may, if he has not made a purchase or resale under article 75, recover the difference between the price fixed by the contract and the current price at the time of avoidance as well as any further damages recoverable under article 74. If, however, the party claiming damages has avoided the contract after taking over the goods, the current price at the time of such taking over shall be applied instead of the current price at the time of avoidance",

the [Seller] is entitled to the price difference between the Contract price and the international market price of early July 1996 (a reasonable period after the [Buyer] wrote to the [Seller] on 21 June expressing its unwillingness to perform the Contract).

In accordance with the materials submitted by the [Seller], the Arbitral Tribunal decides the FOB international market price of early July 1996 to be US $170 per metric ton. Since the Contract price is CFR US $235 per ton, the freight from GOVE, Australia to Qingdao should be deducted from the Contract price during the calculation of the loss price difference suffered by the [Seller]. Based on the materials submitted by the [Seller], the freight from GOVE, Australia to Qingdao should be US $13.50 per ton.

The [Buyer] should pay the [Seller] the economic losses in relation to the 20,000 metric tons of aluminium oxide, calculated as follows:

(US $235-US $170-US $13.5) × 20,000 metric tons = US $1,030,000.

           (iii) As for the [Seller]'s claim for attorneys' fee of US $20,000, the Arbitral Tribunal rules that, in accordance with Article 59 of the Arbitration Rules:

"The Arbitral Tribunal has the power to decide in the arbitral award that the losing party shall pay the winning party as compensation a proportion of the expenses reasonably incurred by the winning party in dealing with the case. The amount of such compensation shall not in any case exceed 10% of the total amount awarded to the winning party."

The Tribunal rules that the [Buyer] shall pay US $10,000 to the [Seller] as compensation for [Seller]'s attorneys' fee.

In sum, the [Buyer] shall pay US $1,533,500 to the [Seller] as compensation for the economic losses incurred by the [Seller].

      (5) The [Seller] should bear 10% of the arbitration fee and the [Buyer] bear 90%.

IV. THE AWARD

The Arbitral Tribunal rules:

     (1)   The [Buyer] shall pay US $1,533,500 to the [Seller].
 
     (2) The [Buyer] shall bear 90% of the arbitration fee and the [Seller] shall bear 10%. The [Seller] has made advance payment of US $ ___, which offsets the arbitration fee. Therefore, the [Buyer] shall pay to the [Seller] US $___.

The [Buyer] shall pay the aforesaid sums within 45 days after this award takes effect, otherwise, 8% annual interest shall be added.

The award is final.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of the Switzerland 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].

** Kun Fan, LL.M. in Corporate Law, New York University, School of Law.

*** Meihua Xu, LL.M. University of Pittsburgh School of Law on an Alcoa Scholarship. She received her Bachelor of Law degree, with the receipt of Scholarship granted by the Ministry of Education, Japan, from Waseda University, Tokyo, Japan. Her focus is on International Business Law and International Business related case study.

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