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CISG CASE PRESENTATION

China 19 December 1997 CIETAC Arbitration proceeding (Steel case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/971219c1.html]

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

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Case identification

DATE OF DECISION: 19971219 (19 December 1997)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1997/36

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Austria (respondent)

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

GOODS INVOLVED: Steel


UNCITRAL case abstract

PEOPLE'S REPUBLIC OF CHINA: China International Economic & Trade
Arbitration Commission (CIETAC) 19 December 1997 (Steel case)

Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/99],
CLOUT abstract no. 990

Reproduced with permission of UNCITRAL

Abstract prepared by Aaron Bogatin

This case deals primarily with modification of the contract and anticipatory breach.

The parties concluded a contract for the sale of steel manufactured by a third party. The parties agreed upon a delivery period, and payment by irrevocable letter of credit (L/C) issued by a certain date. During the delivery period the seller indicated that it was unable to deliver the goods on time and asked for postponement of the delivery date and extension of the expiry date of the L/C. The buyer did not accept modification of the delivery date and shortly thereafter the seller instructed the third-party manufacturer to stop production.

The seller first argued that the limitation period had run out on the claim. It further argued that the contract in dispute was in fact a modification of a former contract that was breached by the buyer, and the new contract was entered into to protect the buyer's reputation. Under this new contract, the delivery date was within a very short period of time which the seller sought to extend. The buyer's representative stated that, for convenience, the contract would keep the same wording and the delivery date could be extended if necessary. The seller argued that the buyer first orally agreed to extend the delivery date, then sent a letter that the contract was to be terminated. Therefore, the seller argued, that it did not commit an anticipatory breach of the contract under article 72(1) CISG because there was no indication that it would, in the future, fundamentally breach the contract under article 25 CISG since the delivery date was effectively modified under article 29(1) CISG. According to the seller, under article 51(2) CISG, the buyer may not declare the contract avoided in its entirety because delivery of almost half of the goods ordered does not amount to fundamental breach by the seller. Therefore, the buyer has not suffered any loss because the contract was terminated by agreement between the parties.

The buyer objected that if the goods had been loaded at the new extended date, they would have reached China at the earliest by the end of the year. In China, business around the Chinese New Year is out of season and, therefore, the price for steel would be unpredictable. Consequently, the buyer claimed that the seller's breach was fundamental.

The arbitral tribunal held that the CISG is silent on the limitation period, and under Chinese law the limitation period had not yet run out. The tribunal found that the buyer had no legal basis to claim compensation. Under the contract it was agreed that, if needed, the L/C could be extended, and therefore the buyer, if wanting to avoid the contract under article 49 CISG, would first have had to grant an additional time for delivery in accordance with article 47 CISG. Instead, the buyer refused to extend the L/C or to postpone the delivery deadline, which violated the contractual terms and the CISG. The tribunal held that the buyer's request to avoid the contract prior to performance was in fact a request to terminate the contract. This termination request was accepted by the seller in accordance with article 29(1) CISG. Therefore, the contract was terminated legally by agreement of the parties and neither party was entitled to compensation.

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Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 4 ; 25 ; 29(1) ; 47 ; 49 ; 51 ; 72 ; 81

Classification of issues using UNCITRAL classification code numbers:

4B [Scope of Convention (issues excluded): statute of limitations];

25A [Effect of a fundamental breach: avoidance of contract; Definition of fundamental breach];

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

47A [Buyer's right to fix additional final period for performance]

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

51A [Delivery or non-conformity of only part of goods;

72A [Avoidance prior to date for performance: when clear that other party will commit fundamental breach];

81A [Effect of avoidance on obligations: obligations of both parties under Convention]

Descriptors: Scope of Convention ; Statute of limitations ; Modification of contract ; Fundamental breach ; Avoidance ; Nachfrist ; Anticipatory breach

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Editorial remarks

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Zhong Guo Guo Ji Jing Ji Mao Yi Zhong Cai Wei Yuan Hui Cai Jue Shu Hui Bian [Compilation of CIETAC Arbitration Awards] (May 2004) 1997 vol., pp. 2853-2861

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at n.91, 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

Steel case (19 December 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 clause in Sales Contract No. 92NNT - SUN0002 signed by Claimant [Buyer], China __ Trade Company, and Respondent [Seller], Austria __ Company, on 20 July 1993; and
 
   -    The written arbitration application submitted by [Buyer] on 4 November 1996.

The [Buyer] appointed Mr. A as its arbitrator, and the [Seller] appointed Mr. D as its arbitrator. Since the two parties failed to jointly appoint or ask the Chairman of the Arbitration Commission to appoint the Presiding Arbitrator within the time limit as required, according to Article 24 of the Arbitration Rules, the Chairman of the Arbitration Commission appointed Mr. P as the Presiding Arbitrator. The aforesaid three arbitrators formed the Arbitration Tribunal to hear this case.

The Arbitration Tribunal examined the [Buyer]'s arbitration application and the attached evidence and the [Seller]'s defense and the evidence, and held a court session in Beijing on 10 July 1997. The arbitration agent of the [Buyer] and the legal representative and arbitration agent of the [Seller] attended the court session. They made statements and answered the Arbitration Tribunal's questions. After the court session, the parties submitted supplementary documents.

This case has been concluded. After deliberation, the Arbitration Tribunal handed down this award by consent based on the written material submitted by the parties and the court session.

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

I. FACTS

On 20 July 1993, the [Buyer] and the [Seller] signed Contract No. 92NNT - SUN0002 for the sale of steel with the following terms.

   -    Products and pricing: 5,500 tons of Steel made in Romania; totaling US $1,885,500;
   -    Shipment period: The goods shall be loaded in August 1993 and no later than 15 September 1993;
   -    Payment: The payment shall be made by L/C; and the L/C shall be issued no later than 4 August 1993.

After the conclusion of the contract, the parties had a dispute during the performance of the contract. After failing to settle the dispute by negotiation, the [Buyer] filed an arbitration application with the Arbitration Commission on 4 November 1996.

[POSITION OF THE PARTIES]

[Buyer]'s position

The [Buyer] alleges that:

Within the delivery period, the [Seller] indicated that it was unable to deliver the goods on time, and asked whether it could postpone the delivery deadline and extend the expiration date of the L/C. The [Buyer] clearly stated that it would not accept modification of the performance date of the contract. Later, the [Seller] informed the [Buyer] that it had notified the manufacturer to stop production, and asked the bank to return the L/C. The [Buyer] had to terminate the contract and notified the bank to withdraw the L/C.

The aforesaid facts indicated that the [Seller] has committed an anticipatory fundamental breach of contract, and based on related international trade usages and laws, the [Seller] is liable for compensation.

The [Buyer] asked the [Seller] for compensation. However, [Buyer]'s request was rejected by the [Seller] without any reason. The [Buyer] asks the Arbitration Tribunal to rule that [Seller] should pay:

   1.    The [Buyer]'s loss of profit of US $482,456.14;
   2.    The [Buyer]'s loss of interest on the price for the goods of US $343,318.13; and
   3.    The entire arbitration fee and attorneys' fee.

[Seller]'s defense

The [Seller] defends that:

(1) The limitation period for arbitration has lapsed

      1. The contract in this case was signed by the [Buyer] and the [Seller] in July 1993 at different places. The [Seller] signed and sealed on the contract on 26 July 1993 after receiving the contract form sent by the [Buyer] via fax and confirming the contract terms which had been filled out by the [Buyer] in advance. The contract stipulated that the goods should be loaded in a third country, i.e., Romania. The contract did not stipulate the applicable law, and it was terminated by the agreement of the two parties on 13 August 1993.

      2. The places of business of the [Seller] and the [Buyer], Austria and China, are in Contracting States of the United Nations Convention on Contracts for the International Sales of Goods (hereafter, "the CISG"), therefore, the CISG should be applied to this case. The limitation period for arbitration should be decided based on the provisions of China's private international law.

      3. According to the General Principles of the Civil Law of China and the Judicial Interpretations of the Contract Law Involving Foreign Interest issued by the Supreme People's Court of the PRC, if the parties do not stipulate the applicable law in an international sales contract, the law of the place of business of the [Seller] at the conclusion of the contract shall be applied. According to the facts of this case, the limitation period for arbitration shall be decided based on Austrian law.

      4. Pursuant to Austrian law, the limitation period for filing a lawsuit is three years, calculated from the time the legal right was violated. The limitation period for the [Buyer] to file a lawsuit should be from 13 September 1993 to 12 September 1996; therefore, the [Buyer]'s arbitration application filed in November 1996 was void, and the Arbitration Tribunal should dismiss the [Buyer]'s arbitration claim.

(2) The facts of the case

In fact, the contract in this case was concluded under a special situation. It can be seen from the corresponding faxes between the two parties that:

      1. The agreement in this case, Contract No. 93NNT - SUN0002 (hereafter, "the new contract"), was a modification based on Contract No. 93NT - 0509G0112 (hereafter, "the old contract") which had been signed by the two parties earlier. The modification was made as requested by the [Buyer]. The reasons for the modification were that the steel market in China was in a slump, and the [Buyer] was unable to find domestic clients. The issuance of L/C was delayed for more than twenty days, and the [Buyer] was facing the risk of contract violation and a US $94,275.00 loss under the guarantee letter. Considering the good business relationship with the [Buyer], the [Seller] accepted the [Buyer]'s request to have the L/C issued later without accusing the [Buyer] of responsibility for violating the contract or asking the [Buyer]'s guarantee bank to take responsibility.

      2. The new contract in this case was signed under the situation that the [Buyer] was short of foreign currency and that the domestic market was worsening. The [Buyer] signed the new contract, trying to avoid responsibility for violating the old contract and the loss under the guarantee letter. The new contract was still a burden to the [Buyer]. And terminating the contract could mitigate the loss of the [Buyer].

      3. The [Buyer] had typed some terms including the delivery time in the contract form sent to the [Seller]. Since the delivery deadline decided by the [Buyer] was within a very short period of time, on 21 July 1993, the [Seller] sent a letter to the [Buyer], stating that:

"We confirm the new contract, however, the delivery date should be modified to September ~ the middle of October (we will try to deliver in August, September)."

      4. On 26 July 1993, the two parties discussed the delivery date for the new contract. In order to avoid inconvenience on the issuance of the L/C, Mr. Lu of Guolida Company asked the [Seller] to accept the delivery date which had been pre-printed on the form, i.e., "August 1993 latest 15 September 1993." Mr. Lu was aware that the goods could not be delivered on the aforesaid date, expressing that if necessary, the [Buyer] would extend the L/C. After reaching an agreement, the [Seller] signed the contract on the same day.

      5. On 6 September 1993, Mr. Lu and Mr. Woegerer, the representative of the [Seller], had a meeting at [Seller]'s office in Beijing. The [Seller] alleged that 2,500 tons of angle steel could be delivered before 15 September 1993, however, it could not 100% guarantee that 3,000 tons of IPN steel could be delivered within the aforesaid time, and asked the [Buyer] to extend the L/C. Mr. Lu first agreed orally, then sent a letter to the [Seller] on the same day, asking for the return of the L/C, the termination of the contract, and the [Seller]'s cooperation. At that time, there were still nine days to the expiration date of the L/C.

      6. The [Seller] replied on the same day, agreeing to terminate the contract and return the L/C, and stating "this matter is now finished and no further discussion", which indicated that the two parties would not ask for compensation from each other.

      7. On 6 June 1996, the [Seller] asked enforcement of the (96) Mao Zhong Cai Zi No. __ decision made by Chinese court against the [Buyer], and on 11 October 1996, the Chinese court dismissed the [Buyer]'s petition to reverse the aforesaid decision, restored the enforcement, and withdrew remminbi [RMB] 150,0,000 from the [Buyer]'s bank by enforcement. The [Buyer] filed this arbitration application with the Arbitration Commission on 1 November 1996 in order to prolong the time for performing its legal obligation.

(3) The [Seller] did not "anticipatorily and fundamentally breach the contract"

      1. Article 25 of the CISG stipulates that:

"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."

Article 72(1) of the CISG stipulates that:

"If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoided."

In this case, on 21 July 1993, the [Seller] confirmed the delivery date as "between September to the middle of October" and "trying to deliver in August ~ September", but did not promise that it would deliver the goods before 15 September. "No later than 15 September" was written by the [Buyer] unilaterally prior to the conclusion of the contract. The [Seller] agreed on this for the convenience of issuing the L/C after being requested by the [Buyer] and after reaching agreement that the [Buyer] could extend the L/C.

Later, the [Seller] asked for extension of the L/C, explaining that part of the goods (not the entire goods) might be delivered later than 15 September, which did not mean that the [Seller] would not deliver them. However, the [Buyer] refused to extend the L/C notwithstanding its promise made on 6 September 1993, and asked for cancellation of the L/C and the termination of the contract, which could only be deemed that the [Buyer] wanted to give up the contract voluntarily.

Based on the facts stated aforesaid, the [Buyer] asked to conclude a new contract for the same goods with a very short delivery period, and asked for termination of this contract in a hurry prior to the expiration date of the contract. It is obvious that the [Buyer] did not really want to receive the contract goods in this case. Terminating the contract was the [Buyer]'s real purpose. The [Buyer] concluded a new contract to avoid responsibility and damages under the circumstances that the domestic steel market was decreasing and that the old contract and the guarantee letter were held by other party. Once the opportunity arose, the [Buyer] would immediately terminate the contract.

On 6 September 1993, under precisely the aforesaid circumstances, the [Buyer] asked to terminate the contract, hoping the [Seller] would cooperate. It could be said that the [Buyer] was expecting that the [Seller] would agree to termination of the contract.

Neither before the termination of the contract, nor at the time of the termination, nor within a long period of time after the termination of the contract, had the [Buyer] ever asked for compensation from the [Seller]. In addition, the termination of the contract did not cause the [Buyer] to suffer any damages; instead, the [Buyer] avoided damages.

      2. Article 51(2) of the CISG states that:

"The [Buyer] may declare the contract avoided in its entirely only if the failure to make delivery completely or in conformity with the contract amounts to a fundamental breach of the contract."

The contract goods in this case included 2,500 tons of angle steel and 3,000 tons of IPN steel. The [Seller] indicated that it could deliver the 2,500 tons of angle steel as required by the [Buyer], but could not guarantee that the 3,000 tons of IPN steel could be delivered within the same time. Therefore, even though the [Buyer] wanted to avoid the contract, it should not have avoided it entirely when the contract was still valid or nine days prior to the expiration date of the L/C.

To sum up, the contract was avoided by the agreement of the two parties. There are no facts or evidence to show that the [Seller] violated the contract unilaterally.

(4) The [Buyer] is not entitled to compensation

      1. The compensation obligation stipulated in Article 81 of the CISG is the legal consequence of the avoidance of the contract. According to Article 29(1) of the CISG, "a contract may be modified or terminated by the mere agreement of the parties" without involving any compensation obligation. Therefore, there is no compensation issue in this case since the contract was terminated by the agreement of the two parties;

      2. The L/C issued by the [Buyer] has been returned after the avoidance of the contract, and there was no damage occurred. The [Buyer]'s claim for loss of interest on the price for the goods has no basis. Since the two parties agreed to avoid the contract, and the two parties did not ask for compensation from each other, therefore, the [Buyer] should bear the L/C issuing fee by itself;

      3. The [Buyer] has no right to ask for loss of profit. Moreover, there is no loss of profit at all.

[Buyer]'s counter argument

The [Buyer] counter argues that:

(1) The [Seller] has committed an anticipatory breach of contract.

The [Seller] anticipatorily breached the contract because it was unable to load the goods within the stipulated time. Under this circumstance, it is in accordance with international trade usage that the [Buyer] informed the [Seller] of the suspension of the contract. In addition, the [Buyer] had the right to suspend the contract when the contract was still valid, and also had the right to declare the avoidance of the contract or terminate the contract immediately under the circumstances that the [Seller] failed to indicate that it would continue to perform the contract or provide any guarantee for the performance of the contract.

(2) The loading date in the contract was before 15 September 1993. However, as arranged by the [Seller], the goods were to be loaded in the middle of October and arrive in China at earliest by the end of that year. In China, business around the Chinese New Year is out of season. It was difficult to anticipate the steel market at that time. Under this circumstance, it was reasonable for the [Buyer] to avoid the contract. Moreover, the [Buyer] had financial difficulty at that time, and had to borrow the price for the goods and the L/C issuance fee at a 20% ~ 30% high annual interest rate. It was difficult for the [Buyer] to bear the extra burden due to the [Seller]'s delay in delivery. Therefore, it was rational that the [Buyer] avoided the contract. Meanwhile, in accordance with the CISG and international trade usages, when one party commits an anticipatory breach of contract, the performing party may suspend the contract, but if the party committing the anticipatory breach provides sufficient guarantee to perform its obligation, the performing party must continue to perform the contract.

In the instant case, when the [Buyer] informed the [Seller] of the suspension of the contract due to the [Seller]'s anticipatory breach, the [Seller] replied that it had asked the manufacturer to stop production without providing any guarantee to perform the contract. The [Seller]'s confirmation of the suspension of the contract had no legal meaning. Since the [Seller] failed to provide any guarantee to perform the contract, the [Buyer] was entitled to avoid the contract unilaterally without considering whether the party in breach agreed to that. Therefore, the [Seller]'s agreement on the termination of the contract should not be deemed as " an agreement of the two parties." In addition, the avoidance of the contract by the [Buyer] did not affect the [Buyer]'s right to ask for compensation from the [Seller].

(3) The provisions of Chinese law should be applied to the limitation period.

Article 2 of the Judicial Interpretation of the Supreme People's Court of the PRC on Several Issues Concerning the Application of the Contract Law Involving Foreign Interest (hereinafter the "Judical Interpretation"), the provision on the law applicable to economic contract involving foreign interest, stipulates that:

"For international sales contracts, the applicable law shall be decided based on the principle of proximate connection. Normally, the law of the [Seller]'s place of business at the conclusion of the contract shall be applied. However, the law of the [Buyer]'s place of business shall be applied where the contract was signed at the [Buyer]'s place of business, or the contract was signed based on the terms made by the [Buyer] and the [Buyer]'s bid, or the contract stipulated that the [Seller] shall deliver the goods to the place of business of the [Buyer]."

The [Buyer] argues that the contract was signed at the place of business of the [Buyer], China. The contract adopted the [Buyer]'s company's contract form, and the [Buyer] even printed the contract form and sent it to the [Seller]'s Beijing Office. The contract was concluded when the [Seller] signed it. The [Buyer] further argues that the "bid" mentioned in the aforesaid interpretation should be construed broadly without limiting to constructional bid, and that it should include "offer" in international business. Therefore, it could be concluded that the contract in this case was concluded based on the [Buyer]'s terms and the [Buyer]'s offer and that Chinese law shall apply to the limitation period.

In addition, the CNF price term was adopted in this case, which included the transportation fee from the place of business of the [Seller] to that of the [Buyer]; therefore, it could be deemed that the [Seller] should perform its delivery obligation at the [Buyer]'s place of business. Based on this, Chinese law should be applied to the limitation period.

(4) In the instant case, Mr. Lu's position as an agent of the [Buyer] is not deniable. In fact, Mr. Lu was contacting the [Seller] on behalf of the [Buyer], and the [Seller] accepted this. From a legal perspective, the [Seller] should not avoid its legal responsibility by denying the [Buyer]'s agent's capacity after confirming it.

[Buyer]'s revised claim

Based on above, the [Buyer] changed its arbitration claim as follows:

(1) Actual losses

      1. L/C issuance fee on 4 August 1993: US $4,327.

Loss of interest on the price for the goods mortgaged for L/C issuance: US $23,568.75 (US $1,885,500 10% 1.5/12 = US $23,568.75)

      2. Permission certificate charge and commission: US $75,902

(2) Expectation profit

      1. Price for angle steel after a 10% decrease: US $484.17/MT;

      2. Price for IPN steel after a 10% decrease: US $620.26/MT;

      3. Average price for the goods under the contract: (484.17 + 620.26) 2 = US $552.215/MT;

      4. Cost for the contract goods: (339 + 346) 2 1.262 + 200/7.11 = US $460.365/MT.

Therefore, the expectation profit for the contract goods is: (552.215 - 460.365) 5,500 = US $91.85/MT 5,500 = US $505.175.

(3) Loss of interest

(4,327 + 23,568.75 + 75,902 + 505,175) 10% 23/6 = US $233,439.55

The above totals US $842,412.30

(4) The entire arbitration fee and the [Buyer]'s attorneys' fee

[Seller]'s further defense

The [Seller] further defended that:

(1) Before the delivery deadline and the ten-week grace period had been met, the [Buyer] asked to avoid the contract first, which was avoided by the agreement of the two parties afterwards; therefore, no party violated the contract.

(2) The applicable law and the period of limitation on compensation claim.

      1. The [Buyer]'s place of business is in China, and the [Seller]'s place of business is in Austria, both of which are Contracting States of the CISG. Before and after the conclusion of the contract, the two parties failed to stipulate the applicable law based on autonomous principle, and did not exclude the application of the CISG; therefore, the CISG should be the applicable law.

      2. Since there is no stipulation on time limitation in the CISG, and both China and Austria are Contracting Sates of the Convention on the Limitation Period in the International Sale of Goods, therefore, the applicable law for limitation period shall be decided based on international private law.

      3. Article 19 of the contract, the arbitration clause, stipulates that the Arbitration Tribunal should arbitrate the dispute based on the Arbitration Rules; therefore, the applicable law for limitation period should be decided based on private international law of China.

      4. According to Article 146 of the General Principles of the Civil Law, "If the parties failed to stipulate the applicable law, it should be decided based on the principle of proximate connection." Article 2(6) of the Judicial Interpretation states that "The People's Courts shall decide the applicable law based on the principle of proximate connection." Usually, for contracts for international sales of goods, the law of the [Seller]'s place of business shall be applied; however, if the contract was negotiated and concluded at the [Buyer]'s place of business … the law of the [Buyer]'s place of business shall be applied."

      5. Contract formation in this case:

            (1) The [Seller] signed the contract in Austria, and Mr. J. Bokesch, the Chief Representative of the [Seller]'s Beijing Office, has never signed the contract. As to the [Buyer]'s question raised at the court session, it can be distinguished by checking the handwriting. Other employees at [Seller]'s Beijing Office are Chinese, who have no authorization to sign contract, nor does Mr. J. Bokesch.

            (2) Based on the above facts, the contract was signed through negotiation from different places. The final place of signing the contract, where the contract was formed, was in Austria.

      6. Based on the aforesaid facts, the time limitation should be decided based on Austrian law. Article 1489 of the Civil Law of Austria stipulates that:

"The time limitation for any compensation or compensation or damages claim is three years, which should be calculated from the day that the aggrieved party (natural person or company) was aware of the damages or the party who caused the damages, no matter the damages were caused by contract violation or by torts (without contractual relationship)."

Therefore, the time limitation for compensation in this case is three years.

      7. On 6 September 1993, the [Buyer] sent a letter to the [Seller], asking to terminate the contract, and there is no stipulation in Austrian law regarding the suspension or termination of time limitation; therefore, the time limitation should be calculated from 6 September 1993 to 6 September 1996. However, the [Buyer] filed its arbitration application on 1 November 1996, which was beyond the time limitation; therefore, the [Buyer] had no right to file an arbitration claim.

(3) The [Buyer] has no right to ask for compensation,

      1. The [Buyer] filed the arbitration application beyond the time limitation; therefore, it has lost the right to ask for compensation based on arbitration procedure.

      2. In addition, the [Buyer] has no right to accuse the [Seller] of responsibility for contract violation.

            (a) As stated above, the [Buyer] did not indicate that it intended to accuse the [Seller]'s liability for contract violation upon the avoidance of the contract. Moreover, the avoidance of the contract occurred before the delivery deadline or the period for performance of contract obligation had expired; therefore, there was no issue of contract violation.

            (b) Based on all of the facts regarding the delivery issue, there was no issue of so-called "anticipatory breach" as alleged by [Buyer]. In addition, Article 18 of the contract, entitled "Delay in delivery and penalty" clause, states that the [Seller] had ten weeks of grace period. This provision states that:

"If the [Seller] fails to deliver the goods within the time stipulated in the contract, except for the reason of force majeure, the [Buyer] shall extend the delivery period provided that the [Seller] pays the penalty as stipulated in this article, however, this penalty shall not exceed 5% of the price for the delayed goods. The interest on the penalty is 0.5%/day; less than seven days shall be calculated as seven days. If the [Seller] fails to deliver the goods within the additional ten weeks, the [Buyer] is entitled to terminate the contract. Even though the contract has been terminated, the [Seller] still needs to pay the aforesaid amount with no delay."

            (c) The [Buyer] asked to avoid the contract before the delivery date as stipulated in the contract, ignoring the grace period provision in the contract; therefore, it has no right to accuse [Seller] of liability for contract violation.

      3. Moreover, the compensation amount claimed by the [Buyer] has no basis.

            (1) As to the [Buyer]'s actual losses, the [Seller] alleges that from the aspect of time limitation, since the [Seller] did not violate the contract, and the two parties had no agreement on apportioning the damages, therefore, the L/C issuance fee and commission should be deemed as reasonable costs that should be borne by the [Buyer] itself. This is the same as that the [Seller] did not ask compensation for the damages it suffered from the [Buyer]; therefore, the [Seller] has no obligation to make compensation.

            (2) US $505,175 of loss of expectation profit is contrary to the facts.

                  (a) The [Buyer] did not mention the compensation issue when the contract was avoided or within one year and five months after the avoidance, but alleged that there were damages in this case only after the [Seller] asked for compensation based on the enforcement of No. R___ case (96) __ arbitration award;

                  (b) The supply-demand information in 1993 for calculating expectation profit provided by the [Buyer] was just a price without a market. Based on this, the [Buyer] alleges that it has suffered a loss of profit of US $91.85/ton, totaling US $505,175. This is an unbelievable number. In the steel business, the average profit is US $5/ton, therefore, this amount claimed by the [Buyer] is not reliable.

            (3) Since [Buyer]'s claims on actual loss and loss of profit lack legal and factual basis, the [Buyer] is not entitled interest on them.

Based on the above, since the limitation period for a compensation claim has lapsed, the [Buyer] has lost its right for compensation. In addition, the [Seller] did not violate the contract, and the [Buyer] had no basis for raising its compensation claim. Moreover, the [Buyer] has no evidence showing the existence of its losses, and its compensation claim lacks credibility. The only purpose for the [Buyer]'s filing this arbitration application was to delay the enforcement of the (96) Mao Zhong Zi No. __ decision in another case. Therefore, the [Seller] restates its assertions in its defense and counter argument, asking the Arbitration Tribunal to rule on this case with justice based on the facts and law.

II. OPINION OF THE ARBITRATION TRIBUNAL

(1) The applicable law and the time limitation for the arbitration claim

      1. The places of business of the [Buyer] and the [Seller], China and Austria, are Contracting States of the CISG, and the two parties did not exclude the application of the CISG in the contract, therefore, the CISG shall be applied.

      2. There is no stipulation in the CISG regarding the time limitation on an arbitration claim, and the two parties failed to stipulate the applicable law in the contract; therefore, the time limitation on the arbitration claim shall be decided based on the principle of proximate connection. The Arbitration Tribunal deems that the time limitation on arbitration claim has the closest connection with the location of the arbitration organization, or the place of arbitration process; therefore, the law of the location of the Arbitration Commission, Chinese law, shall be applied.

(2) Whether the time limitation for arbitration has lapsed

According to Chinese law, time limitation on arbitration is an issue governed by substantive law; therefore, substantive law but not procedure law shall be applied. Article 39 of the Law of the PRC on Economic Contracts Involving Foreign Interest stipulates that:

"The time limitation for a lawsuit or arbitration claim on an international sales contract is four years, which should be calculated from the day the aggrieved party knew or ought to have known that its right had been violated."

Therefore, the time limitation for arbitration in this case is four years.

After examination, the Arbitration Tribunal notes that the two parties were aware that __ Overseas Company was the final client of the contract goods in this case, and the [Buyer] was its foreign trade agent. The [Seller] was contacting __ Overseas Company during the entire performance of the contract. After the contract was avoided on 6 September 1993, __ Overseas Company was asking for compensation from the [Seller] from 18 February 1995 to 2 September 1996. The [Seller] refused __ Overseas Company's claim, raising that it had no right to ask for compensation because it was not a party in this case and it had no authorization letter from the [Buyer]. __ Overseas Company provided the [Buyer]'s authorization letter to the [Seller] on 26 September 1996, and the [Buyer] filed the arbitration application on 4 November 1996.

The Arbitration Tribunal holds that without considering whether __ Overseas Company had the right to ask for compensation from the [Seller] on behalf of the [Buyer] from 6 September 1993, when the contract was avoided, to 4 November 1996, when the [Buyer] filed the arbitration application, the [Buyer] field the arbitration application within the four-year time limitation; therefore, the [Buyer] had the right to file the arbitration application and claim damages based on arbitration procedure.

(3) [Buyer]'s compensation claims

The Arbitration Tribunal notes that Article 51(2) of the CISG stipulates that:

"The [Buyer] may declare the contract avoided in its entirety only if the failure to make delivery completely or in conformity with the contract amounts to a fundamental breach of the contract."

The Arbitration Tribunal also notes that Article 72 of the CISG stipulates the avoidance of the contract prior to the date for performance of the contract; Article 47 of the CISG stipulates that the [Buyer] may fix an additional period of time for performance by the [Seller] of his obligations; Article 49 of the CISG states the buyer's right to declare the contract avoided; and Article 25 of the CISG defines fundamental breach of the contract.

The Arbitration Tribunal further notes that Article 18 of the contract has clear stipulations on "Delay in delivery and penalty." The Arbitration Tribunal holds that the [Seller]'s informing the [Buyer] that it might deliver part of the 3,000 tons of IPN steel late did not constitute a fundamental breach of the contract. No matter based on the CISG or the contract stipulation, if the [Buyer] wanted to avoid the contract, the [Buyer] should have given the [Seller] an additional period of time. The [Seller]'s requests to extend the L/C and postpone the delivery period when informing the [Buyer] of its delay in delivery were in accordance with the contract and the CISG. However, the [Buyer]'s refusal to extend the L/C or to postpone the delivery deadline violated the contract and the CISG.

The [Buyer] asked for the avoidance of the contract prior to the date for performance of the contract, which was not an execution of a right to avoid the contract, but was a suggestion to terminate the contract at an early time. The [Seller] accepted this suggestion, which indicated that the two parties had agreed to avoid the contract by negotiations via written documents. Article 29(1) of the CISG states that "a contract may be modified or terminated by the … agreement of the parties."

The contract in this case was terminated by the agreement of the parties, and the [Buyer] did not raise any objection to the [Seller]'s statement that "this matter is now finished and no further discussion", nor did it state that it reserved the right for a compensation claim. Moreover, for a long period of time after the avoidance of the contract, the [Buyer] had never asked for compensation. Therefore, the Arbitration Tribunal deems that the [Buyer]'s claims for actual losses, loss of profit, and the interest on them lack legal and factual basis, and are not acceptable.

(4) Arbitration fee and attorneys' fee

The [Buyer] shall bear the entire arbitration fee and its own attorneys' fee.

III. THE AWARD

The Arbitration Tribunal rules that:

   1.   All of [Buyer]'s arbitration claims are dismissed;
 
   2.   [Buyer] shall bear the entire arbitration fee of RMB __ , which has been paid by the [Buyer] in advance;
 
   3.   [Buyer] shall bear the attorneys' fee by itself.

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 the Peoples' Republic of China is referred to as [Buyer] and Respondent of Austria is referred to as [Seller]. Amounts in the currency of the United States (dollars) are indicated as [US $]; amounts in the currency of the People's Republic of China (renminbi) are indicated as [RMB].

** Meihua Xu, LL.M. University of Pittsburgh School of Law on an Alcoa Scholarship. She received her Bachelor of Law degree, with the receipt of 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 October 22, 2010
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