China 20 January 1998 CIETAC Arbitration proceeding (Polyester thread case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/980120c1.html]
DATE OF DECISION:
DATABASE ASSIGNED DOCKET NUMBER: CISG/1998/01
CASE HISTORY: Unavailable
SELLER'S COUNTRY: P.R. China (respondent)
BUYER'S COUNTRY: United States (claimant)
GOODS INVOLVED: Polyester thread
APPLICATION OF CISG: Yes [Article 1(1)(a)]
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
45A [Remedies available to buyer]; 74A [General rules for measuring damages: loss suffered as consequence of breach]; 77A [Obligation to take reasonable measures to mitigate damages]
45A [Remedies available to buyer];
74A [General rules for measuring damages: loss suffered as consequence of breach];
77A [Obligation to take reasonable measures to mitigate damages]
CITATIONS TO ABSTRACTS OF DECISION
(a) UNCITRAL abstract: Unavailable
(b) Other abstracts
CITATIONS TO TEXT OF DECISION
Original language (Chinese): Chinalaw Retrieval System, Database of Arbitration Cases and Awards by Beijing Peking University Yinghua Technology Ltd. Co.; see also Zhongguo Guoji Jingji Maoyi Zhongcai Caijueshu Xuanbian [Selected Compilation of Awards of CIETAC] (1995-2002), Law Press, at page 43-48
Translation (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
English: Dong WU, CIETAC's Practice on the CISG, at nn.210, 216, Nordic Journal of Commercial Law (2/2005)Go to Case Table of Contents
|Case text (English translation)|
Polyester thread case (20 January 1998)
Translation [*] by YUAN Xiaotong [**]
Edited by Howard Yinghao YANG [***]
In accordance with the arbitration clause contained in the confirmation of sale (No. 94AG001) signed by Claimant [Buyer], a company of the United States, and Respondent [Seller], a company of China, on 24 December 1993 and the [Buyer]'s application for Arbitration, the China International Economic & Trade Arbitration Commission, Shanghai Commission ("CIETAC Shanghai Commission") accepted this arbitration case arising out of the disputes over the Contract.
In accordance with the Arbitration Rules of CIETAC, the presiding arbitrator and two arbitrators formed the Arbitration Tribunal to jointly hear this case.
The Tribunal held oral hearings on 4 March 1997 in Shanghai. Both parties attended. [Seller] and [Buyer] presented their oral statements and arguments, and also answered the questions raised by the Arbitration Tribunal. Since no agreement was reached through mediation, the Tribunal rendered this award based on the facts and applicable laws.
The facts of the case, the opinions of the Arbitration Tribunal and the award are as follows.
I. Facts of the Case
[Buyer] and [Seller] concluded a confirmation of sale (No. 94AG001) (hereinafter "Contract") by fax on 24 December 1993. The Contract provided that:
[Seller] should provide 315,000 cones of 100% polyester thread to [Buyer] at the price of US $1.72 /cone CIF New York. The sum amounted to US $541,800. [Buyer] should open a 100% confirmed and irrevocable letter of credit at sight before 31 January 1994. Within 60 days after receiving the [L/C], [Seller] should arrange the shipment of the goods. One container of goods should be shipped each month; the first container must be shipped in March 1994. It was noted in the remarks clause in the Contract that "the price will be according to the Quota price."
The Contract was not fully performed. Disputes about liability arose between the parties; no agreement was reached through negotiations. [Buyer] filed the arbitration application claiming that.
II. Positions of the parties
1. [Buyer]'s arguments
After the Contract was concluded, [Buyer] opened the [L/C] for the first installment of the goods on 18 January 1994 and applied to open the second [L/C] for the second installment on 3 February 1994. But in the middle of February 1994, [Seller] informed [Buyer] that it was unable to deliver on schedule due to quota trouble. By this time [Buyer] had entered into a contract with its downstream client reselling the goods under Contract and [Buyer] had received a deposit of US $176,400 from its client. If [Seller] did not ship the goods, [Buyer] would suffer economic loss and taints on its business reputation. Subsequently, [Buyer] informed [Seller] of these legal consequences and liabilities by letter. On 30 March 1994, [Seller] notified [Buyer] that the first installment of the goods was ready and asked [Buyer] to modify the related terms on the [L/C]. [Buyer] had to make changes to the [L/C] and signed another contract with a new supplier, XX Company. XX Company delivered 30,000 cones of polyester thread to [Buyer] on 12 April 1994. Later, [Buyer] communicated with [Seller] several times and required [Seller] to perform its obligations or to take other remedial measures. But [Seller] gave no response and there was no further delivery of the remaining goods. [Buyer] was consequently subject to legal actions raised by its downstream client and obliged to compensate US $159,600 for the deposit. [Buyer] also suffered a loss of profit which amounted to US $307,800.
(1) The Contract between the parties was legitimate and valid. [Seller] had asserted that [Buyer] had fraudulent intent by not communicating knowledge of the quota at the time the parties concluded the Contract. [Buyer] alleged that this assertion contradicted reality. It was [Seller] who initially made an offer and urged [Buyer] to reply;
(2) [Buyer] had performed its obligations under the Contract. Opening the [L/C] in installments was consistent with the delivery in installments as stipulated in the Contract. "100%" in the Contract referred to the assurance of payment from the confirmed [L/C] rather than the total amount of Contract;
(3) Except for the substitute 30,000 cones of polyester provided by XX Company, [Seller] did not deliver the remaining 285,000 cones. The transaction dealt with textiles and it is [Seller]'s obligation to secure the quota of the right category number and size for the Contract. The non-performance of the Contract resulted from [Seller]'s deficiency in the ability to perform the Contract. [Seller] was negligent in failing to discover its disability to provide the goods. [Seller] was not aware that it had made mistakes about the quota until the first installment of goods was soon to be delivered. Therefore, [Seller] might not take the quota as an excuse to escape liability;
(4) After the initial failure, [Seller] continued its attempt to escape its contractual obligations. Without the consent from [Buyer] and the guarantee from the XX Company, [Seller] single-sidedly delegated its obligations to deliver the goods to the XX Company which had expressly stated it had no ability to ensure future delivery.
In conclusion, [Seller]'s behavior constituted a fundamental breach of contract which caused economic loss to [Buyer]. According to the related articles of the United Nations Convention on Contracts for the International Sale of Goods (CISG), [Buyer] had legitimate reasons for its claims.
2. [Seller]'s defense
(1) The disputes arose out of a mutual mistake concerning the quota category of the goods. Both parties thought the goods belonged to the quota category 2 when they concluded the Contract. It was [Buyer] who should bear the main responsibility for the mistakes as the [Buyer] could have found the mistake from its experience in the trade and the low price of the goods. Under the common business practice, it was the importer's duty either to secure the quota or find out the right quota category. Here, [Buyer]'s statement that the goods were subject to category 2 misled the [Seller]. At the time when the Contract was concluded, [Seller] did not have the quota of category 1. As a large-scaled state-owned foreign trade company in China, [Seller] would not even have entered into a contract, let alone preparing the goods for delivery, if it had known such a contact was impossible to perform. Even if [Seller] had had the quota in category 1, it would have generally signed a contract for the goods of one container. After [Seller] found out the quota problem before delivery, it promptly informed [Buyer] of the situation for the purpose to honor the contractual obligation and seek remedial methods.
(2) [Buyer] lacked good faith and had fraudulent intent in concluding and performing the Contract, and also in the application for arbitration. [Buyer] was a specialized merchant in the thread trade and it had the ability to inform [Seller] of the right quota category, which it failed to do. [Seller] took remedial measures after it got to know the problems of the quota, that is, to assign the deal to XX Company upon [Buyer]'s consent.. [Buyer] could have accepted the offer from XX Company, the deal of which could yield profits and reduce the loss. But [Buyer] declined to do so, which consequently enlarged the unnecessary losses. [Buyer]'s claim for double compensation of the deposit to its downstream client lacks a ground in either law or international trade practice. And the profit claimed by [Buyer] was also excessive.
(3) It is [Buyer] who first breached the contract. [Buyer] did not open the [L/C] in accordance with the Contract. If [Buyer] did not want to accept the offer from XX Company, it should have notified [Seller] and continued to open the [L/C]s. But [Buyer] did not. The Contract gives [Seller] the right to cancel the contract without notice to [Buyer].
(4) The validity of the Contract and the behavior of the parties shall be determined by Law of the People's Republic of China on Economic Contracts Involving Foreign Interests, CISG and domestic and international customary practice. According to the Contract and laws, [Seller] had the right to cancel the Contract without any liability and [Buyer] should bear the liability for violating the Contract.
III. Opinion of the Arbitration Tribunal
According to the evidence provided by the parties and the investigations committed by the Arbitration Tribunal, the Tribunal concludes:
1. Applicable law
The contract contains no provisions on governing law. Since both the parties' places of business are within States that are Contracting States of CISG, the Arbitration Tribunal thereby decides that the CISG shall be the applicable law to this arbitration case. In addition, since this case is related to textile trade between a Chinese company and a US Company, the bilateral agreements between the China Government and the US Government regarding textile trade, the regulations on the textile exportation to the US and the international trade practice and usage stipulated in the Contract shall be also be applied in this case.
2. The validity of the Contract
[Seller] did not provide evidence for its assertions that [Buyer] had the intent of fraud and took deceptive measures to induce [Seller] to enter the Contract.. Based on the correspondence between the parties before the conclusion of the contract and the behavior of both parties after the conclusion of the contract, the Arbitration Tribunal finds no reason to support [Seller]'s assertion.
3. The quota
A quota, as the primary reason for the non-performance of the Contract, is the central issue of the current case. A quota is one type of license. According to Sino-US treaty on textile products, the quota at issue falls within the category of passive quota which requires a corresponding license when the goods are exported to the United States. Under the Administration Rules of Quota of Textile Products enacted by the Ministry of Foreign Trade and Economy Cooperation, [Seller] who has already obtained the quota should apply for an export license or other certificates from the authority with relevant documents before the goods are exported. The original export license should be transferred to the importer for the purpose of clearing customs or applying for the import license in importer's home State. As the parties chose CIF as the trade term, it means, under INCOTERMS 1990, that [Seller] not only needs to provide the conforming goods, but also has the obligations to bear the risks and fees, to obtain the export license or other authorized permit, and to complete all necessary custom procedures for the export. Therefore, the burden to obtain necessary quota for the goods under the Contract should be borne by [Seller] and this obligation is embodied as the obligation of transferring the documents during the performance. [Seller] acknowledged it did not have the necessary quota for the goods, but it alleged it is [Buyer]'s fault that caused the mistake. Such an allegation is not supported by any convincing evidence. [Seller]'s assertion that the purchase price includes the price of quota is does not have any legal ground and it cannot prove that [Seller]'s failure to obtain the quota was caused by [Buyer]'s faults. The Arbitration Tribunal thereby concludes the main liability for the failure to deliver the goods and the non-performance of the Contract should be attributed to [Seller].
4. The Letter of Credit
The Contract provided that the goods should be delivered in installments within the term of delivery. Taking into account the provision that "[Seller] should ship the goods within 60 days upon receipt of the [L/C]", [Buyer] properly opened separate [L/C]s according to the delivery in installments. When [Seller] informed [Buyer] that it was unable to deliver the remaining goods and asked [Buyer] to postpone opening the [L/C]s, the fact that [Buyer] did not continue to issue the [L/C]s does not constitute violation of the Contract.
5. [Buyer]'s claims
[Seller] did not perform its obligations under the Contract, which constituted breach of contract. According to Articles 45 and 74 of CISG, [Buyer]'s damages covers all the loss from the breach, which includes loss of profit. However, the Arbitration Tribunal finds that after [Seller] informed [Buyer] that it was unable to deliver the goods, [Seller] did not take reasonable remedial measure (for instance, to purchase substitute goods) to mitigate the loss arising out of the breach of contract by [Seller]. Therefore, in accordance with Article 77 of CISG, [Buyer], to some extent, should be responsible for the liability for the loss incurred. Based on the principle of fairness, the Arbitration Tribunal concludes [Seller] should compensate US $80,000 to [Buyer].
The Arbitration Tribunal hereby decides:
This award is final.
* All translations should be verified by cross-checking against the original text. For purposes of this translation, Respondent of China is referred to as [Seller]; Claimant of US is referred to as [Buyer]. Amounts in the currency of the United States (dollars) are indicated as [US $].
** YUAN Xiaotong, LL.M. candidate, Faculty of Law McGill University, Montreal Canada, 2001 to present; LL.B. Renmin University of China Law School, 2001.
*** Howard Yinghao YANG is an Associate with the New York office of Debevoise & Plimpton LLP.Go to Case Table of Contents