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CISG CASE PRESENTATION

China 30 November 1997 CIETAC Arbitration proceeding (Canned oranges case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/971130c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 19971130 (30 November 1997)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1997/33

CASE NAME: Unavailable

CASE HISTORY: Unavailable

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

BUYER'S COUNTRY: Germany (claimant)

GOODS INVOLVED: Canned oranges


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 74 ; 75 ; 76 ; 77 ; 79 [Also cited: 72 ]

Classification of issues using UNCITRAL classification code numbers:

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];

75A2 ; 75B1 [Damages established by substitute transaction after avoidance: repurchase by aggrieved buyer; Relationship between avoidance and substitute transaction: reasonable substitute transaction];

76B ; 76C [Damages recoverable based on current price; Reference-point as to place];

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

79B [Impediments excusing party from damages]

Descriptors: Damages ; Profits, loss of ; Foreseeability of damages ; Cover transactions ; Substitute goods ; Mitigation of loss ; Exemptions or impediments

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Editorial remarks

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Zhong Guo Guo Ji Jing Mao Yi Zhong Cai Wei Yuan Hui Cai Jue Shu Hui Bian [Compilation of CIETAC Arbitration Awards] (May 2004) 1997 vol., pp. 2729-2741

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at nn.57, 145, 156, 177, 242, 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

Canned oranges case (30 November 1997)

Translation [*] by Meihua Xu [**]

Edited by John Zhu [***]

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

   -    The arbitration clauses in Sales Contracts No. 94AF001 (hereafter, "Contract No. 1") and No. HA-Y95001 (hereafter, "Contract No. 2") signed by Claimant [Buyer], Germany __ Company, and Respondent [Seller], China Hunan Province __ Import & Export Company on 18 October 1994 and in December 1994, respectively; and
 
   -    The written arbitration application submitted by [Buyer] on 14 May 1996.

Since the parties failed to jointly appoint or ask the Chairman of the Arbitration Commission to appoint the Presiding Arbitrator, according to Article 24 of the Arbitration Rules, the Chairman of the Arbitration Commission appointed Mr. P as the Presiding Arbitrator. Mr. P, Mr. A, the arbitrator appointed by the [Buyer], and Mr. D, the arbitrator appointed by the [Seller], formed the Arbitration Tribunal on 31 January 1997, to hear this case. Later, for some reasons, Mr. P was unable to perform as the Presiding Arbitrator; therefore, the Chairman of the Arbitration Commission reappointed Ms. Y as the Presiding Arbitrator to process this case.

After receiving the arbitration notice and the attachment to it sent by the Secretariat of the Arbitration Commission, the [Seller] submitted to the Arbitration Commission "objections to the effectiveness of the arbitration agreement and jurisdiction", and the [Buyer] counter argued accordingly. After examining the parties' arguments, the Arbitration Tribunal issued its "decision on arbitration jurisdiction" on 31 October 1996, confirming that the Arbitration Commission had jurisdiction over this case. After the Arbitration Commission made the aforesaid decision, the [Seller] submitted its defense.

The Arbitration Tribunal examined the [Buyer]'s arbitration application, the [Seller]'s defense, and the evidence submitted by them, and held a court session in Beijing on 14 April 1997. The parties sent arbitration agents to the court session. They made statements on the facts of the case and answered the Arbitration Tribunal's questions. They also presented arguments on the facts and legal issues under the supervision of the Arbitration Tribunal. After the court session, the parties submitted supplementary documents within the stipulated time.

Due to the complexity of this case, the Secretariat of the Arbitration Commission postponed the deadline for making decision to 30 November 1997 based on Article 52 of the Arbitration Rules as requested by the Arbitration Tribunal.

This case has been concluded. The Arbitration Tribunal handed down its award within the aforesaid time limit.

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

I. FACTS

On 18 October 1994 and in December 1994, the [Buyer] and the [Seller] signed Contract No. 1 and Contract No. 2, respectively.

      Contract No. 1

      Under Contract No. 1, the [Buyer] was to purchase thirty containers of canned oranges (30,000 cases) at a unit price of US $11.30/case, C&F Hamburg, totaling US $339,000; the shipping period was from December 1994 to April 1995.

      Contract No. 2

      Under Contract No. 2, the [Buyer] was to purchase ten containers of canned oranges (9,900 cases) at a unit price of US $12/case CIF Hamburg, totaling US $118,800; the shipping period was from January 1995 to March 1995.

After the conclusion of these two contracts, the parties had a dispute over the delivery of the goods, and the [Buyer] filed its arbitration application after failure to settle the dispute by negotiation.

[POSITION OF THE PARTIES]

[Buyer]'s position

The [Buyer] alleges that:

      (1) Contract No. 1

      After signing this contract, the [Seller] sent a letter to the [Buyer] on 16 November 1994, alleging that it could only deliver nine containers of goods instead of thirty containers as stipulated in the contract because the situation for the production of canned oranges was not good, and that the cost for the material was increasing rapidly, which caused the manufacturer to be unable to perform the contract that had been signed.

On 1 December 1994, the [Seller] alleged that the price for canned oranges was too high, and the quantity of the goods was limited, and asked to increase the contract price. The [Buyer] agreed to increase the price for the goods (which was irrelevant to this case) under the condition that the entire goods under the contract must be loaded. However, the [Seller] did not deliver the goods.

On 12 September 1995, the [Seller] sent a letter to the [Buyer], saying that there was a flood in Hunan Province causing severe damage in orange production, with the result that the orange production decreased, which infected the performance of the contracts between the two parties. Therefore, the [Seller] asked to postpone the performance of the contracts.

The [Buyer] replied on the same day, stating that even though there was a shortage of the contract goods at Chinese market, they were still being supplied. On 26 September 1995, the [Seller] sent a letter to the [Buyer], alleging that its producer was unable to provide the goods due to the poor orange production in 1994. The [Buyer] replied on 27 September 1995, explaining that it was the [Seller] who has concluded the contract with the [Buyer] and that the [Seller] could get the contract goods not just from one producer, a couple of producers, or producers in Hunan province; therefore, when the producer was unable to provide the goods, the [Seller] had no reason not to perform its obligations under the contract.

In January 1995, during his visit in Germany, a representative of the [Seller] stated that the [Seller] was unable to perform the contract.

      (2) Contract No. 2

      After the conclusion of this contract, the [Seller] failed to deliver the ten containers of goods in accordance with the contract, but only delivered two containers, and the [Seller] has never explained its non-performance of the contract, but only sent one letter to the [Buyer] regarding this issue on 6 March 1995, stating that "we are very sorry to notify you that we can only deliver 2 20FCLs of goods during this season, which were secured by us from Guangxi Province ..." The [Buyer] alleges that the [Seller]'s aforesaid allegation cannot be the reason for its non-delivery of goods.

      (3) [Seller]'s contract violation

      Article 18 of the Law of the PRC on Economic Contracts Involving Foreign Interest stipulates that:

"A party is entitled to compensation if the other party fails to perform the contract, which constitutes a contract violation."

Article 19 of the same law stipulates that:

"The liability of a party to pay compensation for its breach of a contract shall be equal to the loss suffered by the other party as a consequence of such breach."

Articles 111 and 112 of the General Principles of the Civil Law of the PRC stipulate that:

"A party which does not perform its contract obligations shall be liable for contract violation, which is equal to the loss suffered by the other party."

Article 74 of the United Nations Convention on Contracts for the International Sales of Goods (hereafter, the "CISG") states that damages for breach of contract should be foreseeable losses, and the party suffering damages may claim loss of profit from the party in breach. In the instant case, the [Seller] should have foreseen the [Buyer]'s loss of profit.

The [Buyer] asserts that the changing market is not a justifiable reason for the [Seller]'s refusal to perform in accordance with the contract. The [Seller] has violated the contract and should bear the responsibility.

      (4) Damages suffered by the [Buyer]

      The [Buyer] alleges that it suffered severe damages due to the [Seller]'s breach of contract, for which the [Seller] should be liable.

The following are the losses of the [Buyer]:

      A. Loss of price difference

      On 18 November 1994, the [Buyer] signed Contract No. 4499 with Markant H. u. S. GmbH Company (hereafter, "Markant Company") in Hamburg, by which the [Buyer] was to sell forty containers of canned oranges to Markant Company. The [Buyer] planned to perform this contract by providing the forty containers of canned oranges under the two contracts it entered into with the [Seller]. However, after the [Seller] declared that it was unable to deliver the goods, the [Buyer] had to purchase two batches of goods in replacement in order to perform Contract No. 4499.

      - The first batch of substitute goods

      The first twenty-five containers of substitute canned Spanish oranges under Contract No. 4679 signed on 24 February were purchased from Perez Escamez S. A Company (hereafter, "P Company"). The following are the losses suffered by the [Buyer] by purchasing these twenty-five containers of substitute goods:

FOB price for each case was 2.175 Spanish pesetas [ESP]; the exchanging rate was 100 ESP = 1.1708 Deutsch Mark [DM], therefore:

   -    FOB price: 25.46 DM/case
   -    Sea transportation fee: 1.00 DM
   -    1% insurance fee, document fee: 0.26 DM
   -    Transportation fee and storage fee at [Buyer]'s warehouse: 0.96 DM/case
   -    "Green Dot" fee (the cost for recycling based on German Law): 0.0367 DM/can, i.e., 1.762 DM/case

The above totals 29.442 DM/case, i.e., 0.6133 DM/can

The price under Contract No. 4499 was 0.56 DM/can (price for delivery to the warehouse at Hamburg), including the Customs charge and "Green Dot" fee. However, this contract was for the purchase of canned mandarin oranges. In order to perform this contract, the [Buyer] had to purchase canned oranges of normal grade from Spain with a 20% ~ 25% debris rate; however, the mandarin oranges which the [Buyer] could not get had only a 7% debris rate, with the result, the [Buyer] had to sell the Spanish oranges with poor quality at a 5% discounted price, i.e., 0.532 DM/can (price for delivery to warehouse in Hamburg).

The price difference between the price for replacement goods (0.6133 DM/can) and the price under Contract No. 4499 is US $0.0813, i.e., 3.9024 DM/case. Therefore, the [Buyer]'s loss for the purchase of twenty-five containers of goods under Contract No. 4679 is:

28,750 cases 3.9024 DM/case = 112,194 DM

      - The second batch of substitute goods

      The second batch of thirty containers of substitute goods was under Contract No. 4605 signed by the [Buyer] and Comunas. A. Company (hereafter, "C Company") on 9 January 1995. The following are the losses suffered by the [Buyer] due to the purchase of these thirty containers of substitute goods:

The FOB price for each case was 2.070 ESP; the exchange rate was 100 ESP = 1.1708 DM, therefore:

   -    FOB price: 24.24 DM/case
   -    Sea transportation fee: 1.00 DM
   -    1% insurance fee, document fee: 0.25 DM
   -    Transportation fee and storage fee at [Buyer]'s warehouse: 0.96 DM/case
   -    "Green Dot" fee (the cost for recycling based on German Law): 0.0367DM/can, i.e., 1.762 DM/case

The above totals 26.212 DM/case, i.e., 0.588 DM/can

The aforesaid goods were also purchased for the replacement of the goods under Contract No. 4499. The [Buyer] had to sell the goods at a 5% discounted price, i.e., 0.5208 DM/can (price for delivery to the warehouse in Hamburg).

The price difference between the price for replacement goods (0.588DM/can) [Translator's note: This was mistakenly written as 0.6133DM/can in the original text.] and the price under Contract No. 4499 (0.5208 DM) is US $0.0672, i.e., 3.2256 DM/case.

Based on the loss of 3.2256 DM/case, the total loss under Contract No. 4605 for 9,150 cases of canned oranges was 29,514.25 DM.

The [Buyer] purchased a total of 39,900 cases of goods under the two contracts in this case. The [Seller] delivered 2,000 cases under Contract No. 2 with 37,900 cases remaining undelivered and, in order to obtain substitute goods, the [Buyer] purchased 28,750 cases of goods under Contract No. 4679 and 9,150 cases under Contract No. 4605, totaling 37,900 cases.

The [Buyer]'s total losses due to the [Seller]'s breach of contract are as follows:

   -    Losses under Contract No. 4679: 28,750 cases 3.9024 DM/case = 112,194.00 DM;
   -    Losses under Contract No. 4605: 9,150 cases 3.2256 DM/case = 29,514.24 DM.

The above totals 141,708.24 DM.

Based on the exchange rate of US $1 = 1.5622 DM, the total loss suffered by the [Buyer] was US $90,710.69.

      B. Loss of profit

      Due to the [Seller]'s non-delivery of goods, the [Buyer] suffered loss of profit which it should have received.

            (a) Loss of profit under Contract No. 1

            The market price for the contract goods at that time was US $12.15/case, and the [Buyer] should have received the price difference between this price and the price under Contract No. 1, i.e., US $11.30/case; therefore, the total loss of profit for 30,000 cases of goods suffered by the [Buyer] is US $25,500.

             (b) Loss of profit under Contract No. 2

            The [Seller] delivered 2,000 cases of goods under this contract with 7,900 cases of goods remaining undelivered. The contract price for these goods was US $12.00/case; thus, the loss of profit is US $1,185.00 based on the aforesaid market price, i.e., US $12.15/case.

Therefore, the total loss of profit suffered by the [Buyer] is US $26,685.

Based on the aforesaid facts, the [Buyer] asks the Arbitration Tribunal to rule that:

1. [Seller] shall pay to the [Buyer] the loss of price difference of US $90,710.69;

2. [Seller] shall pay to the [Buyer] the loss of profit of US $26,685;

3. [Seller] shall pay the [Buyer]'s attorneys' fee of US $42,765.68;

4. [Seller] shall bear the entire arbitration fee.

[Seller]'s defense

The [Seller] counter argues that:

(I) The [Seller] could not perform the contract obligations due to "force majeure", for which the [Seller] is not liable.

The [Seller] was actively preparing the goods after signing the contract with the [Buyer], however, the rainfall in China in 1994 was very high and there were three floods in Hunan Province. Many orange groves were destroyed. Oranges like a dry climate, and too much rain severely affected the growth of the oranges, with the result, the orange production of 1994 decreased tremendously. In addition, the oranges of that year had high water content, which were not suitable for storage, with the result, the cost for canned oranges increased and the production decreased.

Some manufacturers of canned oranges were unable to produce goods. The [Seller] did its best and performed part of the contract, however, due to unavoidable and uncontrollable reasons, the [Seller] failed to perform the entire contract, which was not an intentional contract violation. Meanwhile, the [Seller] informed the [Buyer] of the aforesaid reasons, asking for exemption from performing the contract obligations, which was rejected by the [Buyer].

The [Seller] suggested increasing the contract price to settle the problem, which was also rejected by the [Buyer] and put the [Seller] in an extremely unfair situation. Article 3 of the contract, the force majeure clause, signed by the [Buyer] and the [Seller] stipulated that:

"If the [Seller] fails to perform part or entire contract obligations due to force majeure, the shipping period should be postponed reasonably or the contract could be cancelled partially or entirely, and the [Seller] should be exempted from liability if it provides to the [Buyer] evidence of force majeure."

And Article 24 of the Law of the PRC on Economic Contract Involving Foreign Interest stipulates that:

"A party who cannot perform part or the entire contract due to force majeure should be exempted from bearing part or the entire responsibility."

Therefore, it is the [Seller]'s position that force majeure caused the [Seller] to be unable to fulfill the contract obligations, that the [Seller] should be exempt from liability, and that the Arbitration Tribunal should not accept the [Buyer]'s claims.

(II) The [Buyer]'s purchase of goods from Spain was unreasonable and was not foreseeable by the [Seller].

Based on the evidence submitted by the [Buyer], it signed Contract No. 4499 on 18 November 1994 to sell the goods purchased from the [Seller] to a third party (there was only the [Buyer]'s signature on this contract). After being informed that the [Seller] was unable to deliver the goods, the [Buyer] purchased two batches of goods in replacement from Spain on 9 January 1995 and 24 February 1995, respectively. The [Seller] argues that the goods purchased from Spain had nothing to do with the contract in this case and that this purchase was unreasonable for the following reasons:

      (a) The [Buyer] failed to provide evidence showing that the goods purchased from Spain were to be sold to the purchaser under Contract No. 4499 (including contract, B/L, the Customs application, bank payment document). The [Buyer] could not prove that there was any connection between the goods purchased from Spain and the goods that were not delivered under Contract No. 1 and Contract No. 2, which was essential to the dispute in this case.

      (b) The [Buyer] had not cancelled Contract No. 1 and No. 2 by any means until the date of filing the application for arbitration. On 5 January 1995, the [Buyer] refused to cancel the contract, asking the [Seller] to deliver the goods. On 1 November 1995 or even on 20 September 1996, the [Buyer] was still urging the [Seller] to deliver the goods.

      (c) Articles 39 and 46 of the CISG stipulate that the buyer must give notice to the seller before purchasing substitute goods. The [Buyer] purchased substitute goods without informing the [Seller] or canceling or avoiding the contract by any means, which was not in accordance with the aforesaid two articles.

      (d) The goods purchased by the [Buyer] from Spain should not be deemed as substitute goods. The [Buyer] admitted in the arbitration application that the goods purchased from Spain were normal grade with 20% ~25% debris rate; however, the goods undelivered by the [Seller] had only 7% debris rate (actually it was only 5%). The goods in replacement must be the ones with quantity and quality which could substitute for the goods in the original contract; otherwise, they are not substitute goods.

      (e) The delivery period in Contract No. 4499 was January ~ April 1995, and the [Buyer] was unable to provide the goods to its client on time due to the [Seller]'s non-delivery of the goods. The delivery dates in the two contracts for substitute goods provided by the [Buyer] were January ~ June 1995; however, the [Buyer] failed to provide evidence showing that it had reached an agreement with its client on the delay in delivery.

      (f) The [Buyer] purchased "substitute goods" from Spain. This was not foreseeable by the [Seller], because the [Buyer] had alleged that it could get the goods at US $11.7 ~ US $11.8/case from other places in China everyday. The [Seller] believed that the [Buyer] would actually do so since as a famous company in the canned oranges business, the [Buyer] had such an ability.

In addition, the [Buyer] could have found the goods in other Provinces in China with the same quality as the contract goods at a reasonable price. Moreover, the [Buyer] [Translator's note: This was mistakenly written as "the seller" in the original text.] had never declared that the contract was void or the avoidance of the contract, and failed to inform the [Seller] that it was to purchase "substitute goods" of a different grade than the contract goods. If the [Buyer] had informed the [Seller] that it was to purchase goods in normal grade from Spain and was to claim the price difference if the [Seller] failed to deliver the goods on time, the [Seller] would have considered taking reasonable measures to mitigate the loss. It was not until receiving the arbitration application that the [Seller] knew about the "substitute goods".

Article 75 of the CISG stipulates that:

"If the contract is avoided and if, in a reasonable manner and within a reasonable time after avoidance, the buyer has bought goods in replacement ... the party claiming damages may recover the difference between the contract price and the price in the substitute transaction as well as any further damages recoverable under Article 74."

This provision requires that:

A. The buyer must avoid the contract;

B. The buyer may purchase substitute goods within a reasonable time after the avoidance of the contract;

C. The buyer must purchase the substitute goods in a reasonable manner;

D. The [Buyer] must purchase "substitute goods".

However, the [Buyer] in this case:

A. Failed to avoid the contract by any means; instead, it was urging the [Seller] to deliver the goods even on 20 September 1996;

B. Had purchased the "substitute goods" before the avoidance of the contract;

C. Failed to purchase the substitute goods from China reasonably (the [Buyer] had the ability and the price to contract for the goods in China);

D. Purchased goods from Spain at a high price with poor quality, which were not real substitute goods; therefore, the [Seller] alleges that the goods the [Buyer] purchased from Spain were unreasonable and had nothing to do with the contracts between the [Buyer] and the [Seller], and were beyond the scope of foreseeability by the [Seller].

(III) The basis for the [Buyer]'s compensation claims is not sufficient and the damage calculation is not reasonable.

      (a) As stated above, the [Buyer] failed to provide evidence showing that the goods purchased from Spain were to be sold to the purchaser under Contract No. 4499.

      (b) The [Buyer] should not ask the insurance fee, storage fee, and "Green Dot" fee from the [Seller], but should bear them by itself;

      (c) The [Buyer] alleged that it purchased goods from Spain with poor quality and had to sell them at a 5% discounted price; therefore, the [Buyer] should ask for compensation from the Spanish supplier, and should not shift the responsibility to the [Seller];

      (d) The [Buyer] calculated the loss of profit based on the price in the original contract, i.e., US $11.3/case; however, the [Buyer] had increased the price to US $11.8/case in the L/C, which should be the basis to calculate the loss of profit;

      (e) The price term in the original contract between the [Buyer] and the [Seller] was CNF Hamburg; however, the goods purchased from Spain were under an FOB Cacrtarna term. The [Buyer] calculated the price difference without changing them into the same price term, therefore, the calculation is confusing.

(IV) The [Buyer] has no right to ask compensation for enlarged damages.

On 1 November 1994, the [Seller] informed the [Buyer] that it could only provide nine containers of goods, however, on 18 November 1994, the [Buyer] sold forty containers of goods to its client, which was a big mistake on the part of the [Buyer]. Article 22 of the Law on Economic Contracts Involving Foreign Interest and Article 114 of the General Principles of the Civil Law stipulate that:

"A party who suffered losses due to the other party's contract violation should take reasonable measures to mitigate the loss, otherwise, it loses the right to ask for compensation."

The [Buyer] did not take reasonable action to mitigate the loss; therefore, it should bear the entire losses occurred thereof.

(V) The [Seller] did not violate Contract No. 2, and it should not be liable for the [Buyer]'s losses under this contract.

After the conclusion of Contract No. 2, because there were no goods available in Hunan Province, the [Seller] had to purchase two containers of goods from another Province and informed the [Buyer] of the supply of the goods and the quality of the goods via faxes and telephones, especially when the [Buyer] was visiting Hunan, the [Seller] negotiated this issue with the [Buyer]. The two parties finally agreed that the [Seller] only needed to deliver two containers of goods. After delivery of these goods, the [Seller] fulfilled but did not violate Contract No. 2; therefore, the [Seller] should not be liable for the [Buyer]'s losses.

[Buyer]'s counter argument

Regarding these allegations of the [Seller], the [Buyer] counter argues that:

      (1) The [Seller]'s defense of force majeure has no legal basis and is contrary to the facts.

       The contracts in this case were signed between October and November 1994. From this period to the present even to the negotiation after the dispute arose, the [Seller] had never raised force majeure as one of the reasons for its non-performance of the contract. It was not until 20 December 1996, which was two years after the conclusion of the contract that the [Seller] first alleged that its non-delivery of the contract goods was caused by natural disaster. However, the [Seller] has not provided any factual evidence to prove that there was a disaster and that this disaster directly caused its incapacity to perform the contract.

Moreover, the [Seller] failed to raise force majeure by the means stipulated in the contract. Article 3 of the contract, the force majeure clause, signed by the [Buyer] and the [Seller] stipulated that:

"If the [Seller] fails to perform part or the entire contract obligations due to force majeure, the shipping period should be postponed reasonably or the contract could be cancelled partially or entirely, and the [Seller] should be exempted from liability if it provides evidence to the [Buyer]".

However, the [Seller] has not provided any such evidence.

      (2) [Seller]'s allegation that the [Buyer] rejected its suggestion to settle the dispute by increasing the price of the goods is incorrect.

       The [Buyer] suggested increasing the price to US $12.50 ~ US $12.70 CFR Hamburg, to which the [Seller] did not agree.

On 17 January 1995, the two parties met. Ms. Liu of the [Seller] stated that the [Seller] could provide contract goods, but was not sure about the quantity of the goods. Mr. Stelter of the [Buyer] suggested that the [Seller] formally declare its inability to perform the contract which would enable the [Buyer] to calculate the loss based on the market price on that day.

On the contrary, Zhang __, the vice president of the [Seller], indicated that the [Seller] would deliver part of the goods under the two contracts which met the shipping deadline and the other part of the goods would be procured from other Provinces. Zhang __ also asked the [Buyer] to pay the expenses incurred by securing goods in other provinces, or to postpone the delivery to the next season.

Mr. Stelter suggested that the two contracts could be cancelled if the [Seller] paid US $85,000 (39,000 cases, based on the market price of US $13.50/case at that time) as the compensation. The representative of the [Seller] indicated that the [Seller] would make response after the delivery deadlines for the two contracts expired.

      (3) The [Buyer] signed a contract to sell the goods not delivered by the [Seller], and had to purchase substitute goods.

      As stated above, the [Buyer] agreed to sell forty containers of canned mandarin oranges under Contract No. 4499 to Markant Company. The [Buyer] planned to provide the forty containers of goods under the contract it signed with the [Seller] to fulfill Contract No. 4499. After the [Seller] alleged that it could not perform the contract, the [Buyer] had to conclude Contracts No. 4679 and No. 4605, purchasing canned Spanish oranges as the substitute goods to provide to Markant Company and to perform its obligations to other clients.

The quantity of the goods under Contract No. 4499 was not changed; however, the [Buyer] mitigated the losses by persuading its client to accept canned Spanish oranges instead of canned mandarin oranges as stipulated in the contract. On 18 January 1995, the client sent a fax to Mr. Stelter, indicating that based on the new Contract No. 4614 ("in umstellung gegen thren Contract 4499"), the origin of the goods to be delivered was changed from China to Spain.

At the court session, the [Seller] questioned whether the [Buyer] should sign a contract to resell the goods which the [Seller] had difficulty to provide. The [Buyer] needs to mention that when the [Buyer] agreed to provide goods to Markant Company, the [Seller] did not state clearly that it would not deliver the goods, but only asked for a higher price; therefore, the [Buyer] had sufficient reason to agree to provide canned mandarin oranges to Markant company in November 1994.

As a major client of the [Buyer], Markant Company needed a prompt response, and it would not wait until the [Seller] alleged difficulties in delivery and the [Seller]'s request for a higher price is satisfied.

After concluding Contract No. 4605 for substitute goods, the [Buyer] still needed five containers of goods. However, if the [Buyer] only purchased five containers of goods, which was a small quantity and would not be deemed as part of one delivery of goods, it would be difficult and expensive. [Buyer]'s purchasing twenty-five containers of goods was the cheapest and reasonable way to substitute for the five containers of shortage.

      (4) [Buyer]'s purchase of Spanish oranges to substitute for the goods undelivered by the [Seller] was reasonable.

      The [Seller] questioned the [Buyer]'s purchase of Spanish oranges (and not mandarin oranges) to substitute for the undelivered goods; however, the CISG does not require the substitute goods to be the same as the goods stipulated in the original contract. At that time, the [Seller] informed the [Buyer] that it was unable to deliver canned mandarin oranges; therefore, under this circumstance, [Buyer]'s purchase of replacement oranges from Spain was reasonable.

      (5) [Seller]'s defense on the avoidance of the contract.

      The [Seller] defended that the [Buyer] failed to inform the [Seller] of the avoidance of the contract; therefore, it was not entitled for compensation based on law. Article 72(2) CISG stipulates that:

"If time allows, the party intending to declare the contract avoided must give reasonable notice to the other party in order to permit him to provide adequate assurance of his performance".

The corresponding letters and meetings indicated that the [Buyer] was willing to accept the goods; however, the [Seller] was asking for a higher price using all sorts of excuses. The [Buyer] did not declare the contract avoided because it was trying to receive the goods from the [Seller]; therefore, it would be unreasonable if the [Buyer]'s right for compensation were denied due to the aforesaid reason. Moreover, the [Seller] has not claimed any losses due to the [Buyer]'s non-action.

In addition, the [Buyer] had the responsibility for its international business, and could not wait to see when the [Seller] would perform its contract obligations. [Seller]'s raising the force majeure issue seemed to imply to the [Buyer] that it would have been better for [Buyer] to have broken the contract with its client than to purchase replacement goods for those which should have been delivered by the [Seller]. If the [Buyer] had acted like this, the losses would have been increased, not decreased; therefore, the [Seller]'s defense is irrational.

If the [Seller] had asked for postponement of delivery, it would have received the formal notice for contract avoidance; however, the [Seller] has never made such request. Article 75 of the CISG states that the substitute transaction should be made in a reasonable manner, which need not necessarily have the same terms as those in the original contract.

It is the [Buyer]'s position that if the Arbitration Tribunal decides that the [Buyer] is not entitled to compensation based on Article 75 of the CISG (which is applicable for an avoided contract), the [Buyer] still should receive compensation based on Article 74 of the CISG since the damages were caused by the [Seller]'s breach of contract.

      (6) For Contract No. 2

      The [Seller] defended that Contract No. 2 was signed after the conclusion of the contract reselling the goods under it. As an international trade company, the [Buyer] often sold out goods without any goods in stock, and expects to receive goods in time to deliver to its client. In the instant case, after selling out the goods, the [Buyer] signed Contract No. 2 and relied on it. The [Buyer] had reason to do so; therefore, it does not matter that the [Buyer]'s signed the resale contract at a "earlier time".

Moreover, the [Buyer] noted that it signed Contract No. 1 and Contract No. 2 with different departments of the [Seller]. The department that signed Contract No. 2 indicated that they could deliver the goods, and the [Buyer] believed it. The [Buyer] should not bear the losses resulting from the conflicting statements made by the two different departments of the same company.

The [Buyer] has proved that the [Seller] had violated the contract, and provided documents showing the damages caused by the [Seller]. However, the [Seller] was wrongfully relying on the defense of force majeure. The [Seller] had never mentioned or submitted evidence to prove force majeure until defending the issues raised in the arbitration application during the arbitration process. The mistakes of the [Seller] have been proved and the [Seller] should compensate the loss of the [Buyer].

[Seller]'s counter argument

Regarding the [Buyer]'s aforesaid assertions, the [Seller] makes the following counter argument.

      (1) The allegation that the [Buyer] forged evidence

      Contracts No. 4605, No. 4499, and No. 4679 provided by the [Buyer] after the court session had obvious differences from those it submitted to the Arbitration Tribunal for the first time, such as the number of lines increased and the space between the lines was different. The aforesaid differences indicated that the [Buyer] submitted evidence to the Arbitration Tribunal for the second time after discovering that the evidence submitted earlier was insufficient and incorrect, and that in order to ask compensation from the [Seller], the [Buyer] forged evidence violating Chinese law. The [Seller] asserts that the Arbitration Tribunal should not accept this evidence.

The [Buyer] did not provide the Customs application for purchasing goods from Spain, the B/L, the invoice from the Spanish supplier, and the packing list as requested by the Arbitration Tribunal; therefore, the [Buyer]'s evidence is incomplete and insufficient, which could not prove that the [Buyer] had purchased substitute goods. And the documents submitted by the [Buyer] had no relevant bank's seal, which could not prove that the [Buyer] has made payment to the Spanish supplier, therefore, they cannot be deemed as evidence;

      (2) The [Seller] argues that even assuming the [Buyer] has submitted evidence proving its purchase of goods from Spain, the purchase was unreasonable and was not foreseeable by the [Seller]; therefore, the [Buyer] should bear the losses (if there were any) by itself;

      (3) The Contract No. 4616 mentioned in the [Buyer]'s supplementary opinions had never been mentioned before, and the [Buyer] has never provided any evidence for this.

[Buyer]'s defense

The [Buyer] makes the following defense to the [Seller]'s aforesaid statement.

The [Seller]'s allegation that the [Buyer] forged evidence has no factual basis. The contract submitted to the Arbitration Tribunal was the copy of the original contract signed by three parties, i.e., the [Buyer], Spanish [supplier], and the [Buyer]'s final client in Germany. The [Buyer] has explained that the reason why the signatures of all three parties were not on the original contract was that pursuant to trade usage on contracts signed by German parties, there is no need to have it signed by all the parties. In order to provide evidence showing the existence of the contract and to satisfy the Arbitration Tribunal's request to obtain sufficient evidence for the contract, the three parties affixed their signatures to the original contract and the contract in duplicate.

The contract terms and the contract number in the contract in duplicate were the same as those in the original contract (the [Buyer] changed the office address after signing the original contract; therefore, the address on the duplicated contract was the new address. Except for this, the other terms were the same as those in the original contract). In fact, the [Seller] has never pointed out any severe difference between the original contract and the attachment to the supplementary opinions submitted recently, which indicated that the [Seller] did not question the form of the contract in good faith. [Seller]'s purpose was to shift the Arbitration Tribunal's attention to disguise its unconvincing defense on non-performance of the contract.

As to the Customs document mentioned by the [Seller], no document was necessary for goods being produced and transported within Europe.

II. OPINION OF THE ARBITRATION TRIBUNAL

I. The applicable law

The Arbitration Tribunal notes that the places of business of the [Buyer] and [Seller], Germany and China, are Contracting States of the CISG. Since the dispute in this case is for the international sales of goods, the Arbitration Tribunal, therefore, deems that the CISG shall be the applicable law.

II. Force majeure

As stated above, the two parties disagree on the reason for the non-performance of the contract. The [Seller] alleges that the non-performance of the contract was caused by unavoidable and uncontrollable reasons. The [Buyer] disagrees with that. Based on Article 79(1), (2), (3), (4) of the CISG and force majeure clause in the contract, the Arbitration Tribunal rules that the [Seller]'s force majeure defense is not acceptable for the following reasons:

1. The Arbitration Tribunal examined the entire materials especially the "Summary of the summer weather in Hunan Province in 1994" submitted by the [Seller], which indicated that the weather in Hunan Province had become abnormal from April and May of 1994; in other words, natural disaster had occurred before the conclusion of the contract. Therefore, the [Seller] could have foreseen the possibility that it might not be able to perform the contract. The [Seller] could have foreseen but did not foresee and could have avoided but failed to avoid; therefore, it has no rights to raise force majeure or to avoid responsibility;

2. The [Seller] had never provided any valid evidence showing force majeure during the entire performance of the contract;

3. The two parties did not stipulate in the contract that the contract goods must be Hunan oranges; therefore, even though there was flood in Hunan Province, which caused a shortage of canned mandarin oranges production, it should not be a barrier for the [Seller] to get contract goods from other provinces.

Above all, the Arbitration Tribunal does not accept the [Seller]'s assertion of force majeure. The [Seller] failed to fulfill its obligation to deliver the goods, which has constituted a contract violation, and the [Seller] shall be liable.

III. Basis for calculating damages

The Arbitration Tribunal examined and confirmed the evidence submitted by the [Buyer], discovering that on 18 November 1994, the [Buyer] signed Contract No. 4499 with Markant Company at Hamburg within a short period of time after the conclusion of Contract No. 1. This contract was written in German with the following terms:

   -    Contract goods: Canned mandarin oranges; forty containers with 1,000 cases/container and forty-eight cans/case;
   -    Price term: 0.56DM/can CIF Hamburg, including taxes and "Green Dot" fee;
   -    Delivery term: The goods should be delivered January ~ April 1995 with ten containers/shipment/month.

Regarding this, the Arbitration Tribunal holds that the contract between the [Buyer] and the [Seller] and the contract between the [Buyer] and its client can be connected, and that the [Seller] shall be liable for the [Buyer]'s inability to deliver the goods to its client due to [Seller]'s breach of contract.

However, based on the evidence provided by the [Buyer], the contracts the [Buyer] signed with C Company and P Company for purchase of Spanish oranges on 9 January 1995 and 24 February 1995, respectively, could not be connected with the Contract No. 4499 it entered into with its client. Therefore, the Arbitration Tribunal does not accept [Buyer]'s assertions that the aforesaid two shipments of goods purchased from Spain were substitute goods and that they should be the basis for calculating loss of price difference and loss of profit for the following reasons:

1. The names, specifications, origins, and manufacturing date of the goods in Contract No. 4605 that the [Buyer] entered into with C Company and Contract No. 4679 that the [Buyer] entered into with P Company were different from those in Contract No. 4499 that the [Buyer] signed with its client; therefore, the qualities of the goods are not comparable;

2. The quantity of the goods under the aforesaid contract was different from the quantity under Contract No. 4499. There were only forty containers of goods under Contract No. 4499, i.e., 40,000 cases; however, the [Buyer] purchased a total of fifty-five containers under two contracts, which was 63,250 cases based on the contracts provided by the [Buyer], and that is far beyond the stipulation under Contract No. 4499;

3. The delivery dates in Contracts No. 4605 and No. 4679 were different from that in Contract No. 4499. The delivery date under Contract No. 4499 was January ~ April 1995 with ten containers/month, i.e., 10,000 cases. The delivery date under Contract No. 4605 was January ~ June 1995 with five containers /month; the delivery date under Contract No. 4679 was March ~ April 1995 with average quantity/month.

Based on the above reasons, the Arbitration Tribunal does not accept [Buyer]'s assertions that the aforesaid two shipments of goods purchased from Spain were the substitute goods and that they should be the basis for calculating loss of price difference and loss of profit.

However, the Arbitration Tribunal notes that [Seller] still shall bear the loss of price difference caused by its breach of contract. The Arbitration Tribunal notes that in September 1995, the [Seller] had already indicated that it was unable to deliver the goods as stipulated in the contract, which meant that it had asked for avoidance of the contract unilaterally. Therefore, loss of price difference should be calculated based on the market price in China at that time; however, the Arbitration Tribunal has never received any evidence showing the market price of the contract goods at that time. The Arbitration Tribunal notes that on 1 November 1995, the [Buyer] sent a letter to the [Seller], agreeing to increase the price for the goods to US $12.50 ~ US $12.70/case C&F Hamburg. The Arbitration Tribunal deems that this price should be the [Buyer]'s acceptable price for canned oranges in the Chinese market at that time. Based on this, it is reasonable to calculate the loss of price difference based on the higher price agreed by the [Buyer], i.e., US $12.70/case C&F Hamburg, and this is reasonable for the [Seller] as well.

IV. Price for the goods under Contract No. 1

The price term under Contract No. 1 was US $11.30/case C&F Hamburg. Later, the two parties agreed to increase the price to US $11.8/case, and the [Buyer] modified the L/C based on this price, which indicated that the [Buyer] accepted this change in the price for the goods under Contract No. 1 from US $11.30/case to US $11.80/case.

V. Calculation on losses of the [Buyer]

     (1) For Contract No. 1

     The [Seller] failed to fulfill its obligation to deliver the goods under this contract, which caused damages to the [Buyer]. Article 74 of the CISG states 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."

Therefore, the losses of the [Buyer] shall be divided into two parts, i.e., loss of price difference and loss of profit.

           A. Formula for calculation of loss of price difference

           US $12.70 - contract price in this case, i.e., US $11.8 quantity which should have been delivered.

Calculation in detail: 12.70 - 11.80 30,000 = US $27,000.

           B. Formula for calculation of loss of profit

           The Arbitration Tribunal deems that DM was adopted as the monetary unit and the goods were calculated by can under Contract No.4499; therefore, they should be modified into price in US $/case. In addition, the Customs tax and "Green Dot" fee were included in the contract price under Contract No. 4499, which should be deducted from profit.

Calculation formula: [(Price in US $ /case under Contract No. 4499 - the Customs tax - "Green Dot" fee) - US $11.80] quantity which should have been delivered.

   -    Calculation in detail: Price in DM /case: 0.56 DM 48 = 26.88 DM (a)
   -    The Customs tax/case: the Customs tax rate was 22%, therefore, 26.88 DM 0.22 = 5.9136 DM (b)
   -    "Green Dot" fee per case: 1.762 DM (c)
   -    (b) + (c) = 5.9136 + 1.762 = 7.6756 DM (d)
   -    (a) - (d) = 26.88 DM - 7.6756 DM = 19.2044 DM (e)

The exchanging rate in September 1994 was US $1 = 1.5605 DM

   -    19.2044 DM 1.5605 DM/US $ = US $12.30
   -    (US $12.30 - US $11.80) 30,000 = US $15,000

     (2) Losses under Contract No. 2

     The Arbitration Tribunal further examined the evidence submitted by the two parties, discovering that after the conclusion of Contract No. 2, because there was a shortage of supply in Hunan Province, in order to perform the contract within the stipulated time, the [Seller] found resource for part of the goods from Guangxi Province, totaling 2,000 cases. The two parties had discussed the quantity of the goods via letters and telephones. On 21 February 1995, the [Seller] sent a letter to the [Buyer], stating that

   -    "We have tried our best to get 2 2FCLs canned mandarin oranges from Guangxi ... if you agree with us, please confirm it before 20th, Feb 95; so that we can ship them to you promptly."

Regarding this, the [Buyer] faxed to the [Seller] on 3 March 1995, asking the [Seller] about the quantity of the goods it could deliver, and on 6 March 1995, the [Seller] replied that it could only provide 2 2FCLs goods and asked the [Buyer] to modify the L/C. The [Buyer] responded on 6 March 1995, alleging that it agreed to the modification of the L/C, indicating clearly "so that no trouble for you any more to ship at least those 2,000 cases"; therefore, the Arbitration Tribunal holds that the two parties reached agreement on the quantity of the goods after the [Seller] made such a request; therefore, the [Seller]'s assertion that it should not be liable for the [Buyer]'s damages under Contract No. 2 is acceptable.

(VI) [Buyer]'s attorneys' fee

The Arbitration Tribunal deems that the attorney's fee incurred by the [Buyer] was caused by the [Seller]'s contract violation, which should be borne by the [Seller]. However, as to the amount in detail, pursuant to Article 59 of the Arbitration Rules, 8% of the [Buyer]'s winning amount is reasonable, i.e., US $3,360. The [Seller] shall pay the aforesaid amount to the [Buyer].

(VII) The [Buyer] shall bear 30% of the arbitration fee and the [Seller] shall bear 70%;

(VIII) The two parties shall bear the costs incurred by non-local arbitrators on their own.

III. THE AWARD

The Arbitration Tribunal rules that:

1. [Seller] shall pay loss of price difference of US $27,000 and loss of profit of US $15,000 to the [Buyer];

2. [Seller] shall pay the [Buyer]'s attorneys' fee for this case of US $3,360;

3. [Buyer]'s other arbitration claims are dismissed;

4. [Buyer] shall bear 30% of the arbitration fee and the [Seller] shall bear 70%; the [Buyer] has paid US $ __ in advance, which offsets the aforesaid amount, therefore, the [Seller] shall pay back US $__ to the [Buyer];

5. The actual cost incurred by non-local arbitrators shall be borne by the two parties themselves;

The [Seller] shall pay the aforesaid items 1, 2, and 4 within 45 days of this award, otherwise, 8% annual interest shall be added.

This is the final award


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of Germany is referred to as [Buyer] and Respondent of the Peoples' Republic of China is referred to as [Seller]. Amounts in the currency of the United States (dollars) are indicated as [US $]; amounts in the currency of Germany (Deutsch Marks) are indicated as [DM].

** 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 a 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.

*** John Zhu, LL.M. China University of Political Science and Law (National Graduate Scholarship); Bachelor of Law, Southwest University of Political Science and Law; Double Degree, English Literature, Sichuan International Studies University, Chongqing, China. Focus: International Economic Law.

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Pace Law School Institute of International Commercial Law - Last updated April 23, 2007
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