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CISG CASE PRESENTATION

China 25 September 1998 CIETAC Arbitration proceeding (Health supplement case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/980925c1.html]

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

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Case identification

DATE OF DECISION: 19980925 (25 September 1998)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1998/12

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: United States (claimant)

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

GOODS INVOLVED: Health supplements


Classification of issues present

APPLICATION OF CISG: The opinion is not entirely clear. The relevant language of the award reads:

"The Applicable Law clause in the Contract stipulates that when the place of signing the Contract, or the place where the goods are when a dispute arises, is in China or Respondent is a Chinese entity, the law of the PRC applies; in addition, the United Nations Convention on Contracts for the International Sales of Goods applies. The Arbitration Tribunal holds that because the Contract was signed in Shenzhen, China, and the goods disputed in this arbitration are in China, and the Respondent is a Chinese legal entity, the law of the PRC shall apply to this case."

No provisions of the CISG are cited in the award. If such provisions were in fact applied, they would appear to be those identified below.

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 25 ; 35 ; 50 ; 74 ; 78 ; 82

Classification of issues using UNCITRAL classification code numbers:

25B [Definition of fundamental breach: substantial deprivation of expectation, etc.];

35A [Conformity of goods to contract: quality, quantity and description required by contract];

50A [Buyer's right to reduce price for non-conforming goods];

74A [General rules for measuring damages: loss suffered as consequence of breach];

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

82A1 [Buyer loses right to avoid due to inability to return goods in same condition]

Descriptors: Fundamental breach ; Conformity of the goods ; Reduction of price, remedy of ; Damages ; Interest ; Restitution

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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): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

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

Health supplement case (25 September 1998)

Translation [*] by Zheng Xie [**]

Edited by Meihua Xu [***]

-   Particulars of the proceeding
-   Facts
-   Position of the parties
-   Opinion of the Arbitration Tribunal
-   Award

PARTICULARS OF THE PROCEEDING

The China International Economic and Trade Arbitration Commission Shenzhen Sub-Commission (hereafter, the "Shenzhen Sub-Commission") accepted the case on 21 April 1998 according to:

   -    The arbitration clause in Contract No __ (hereafter, the "Contract") signed by Claimant [Seller] and Respondent [Buyer]; and
 
   -    The written arbitration application submitted by the [Seller].

On 18 May 1998, the arbitrator appointed by the [Seller], the arbitrator appointed by the [Buyer], and the Presiding Arbitrator appointed by the Chairman of the Shenzhen Sub-Commission (because the parties did not jointly appoint the Presiding Arbitrator within the stipulated time) formed the Arbitration Tribunal to hear this case.

On 26 June 1998, the Arbitration Tribunal opened the court session in Shenzhen. Both parties were present. The Tribunal heard the parties' statements and arguments, and investigated the relevant facts. After the court session, both parties submitted supplementary material.

On 5 August 1998, the Arbitration Tribunal opened the second court session in Shenzhen. Both parties were also present at this court session. The Tribunal investigated the relevant facts.

On 25 September 1998, the Arbitration Tribunal handed down the award. The following are the facts, and the Arbitration Tribunal's opinion and award.

FACTS

On 18 June 1997, the [Seller] and the [Buyer] signed Import Contract No.__ (hereafter, the "Contract") which stipulates:

   -    Goods and price. The [Buyer] shall purchase 15,600 bottles of Alaska fish oil at the price of US $5.1/bottle, 2,000 bottles of shark cartilage at the price of US $8.1/bottle, 1,000 bottles of lecithin at the price of US $5.1, and 500 bottles of high intelligence quotient supplement for children at the price of US $5.6/bottle; the total contract price is US $103,660.
 
   -    Loading port. JFK airport, New York, U.S.; Destination port. Hong Kong; Delivery term. CIF; Loading period. Within three weeks after the L/C is issued;
 
   -    Payment terms. The [Buyer] shall issue a sight L/C through City Bank in the U.S. with the [Seller] as the beneficiary before 20 June 1997.
 
   -    Warranty of quality. The quality and specification of the goods must comply with the Contract; and the Quality Certificate; the warranty period is 36 months from the date when the goods arrive at the destination port; within the warranty period, loss caused by design or manufacturing defects shall be compensated by the [Seller].
 
   -    Inspection and claims. The [Seller] shall entrust WBGI to inspect the goods and issue the inspection certificate three days before the goods are loaded. After the goods arrive at the destination port, the [Buyer] shall entrust China __ Commodities Inspection Agency to re-inspect the goods. If China __ Commodities Inspection Agency finds any damages, shortage, or non-conformity of the name, specification or quantity with the Contract and the quality certificate, the [Buyer] has the right to claim for damages from the [Seller] with the inspection certificate issued by China __ Commodities Inspection Agency within 15 days after the goods arrive at the destination port; if the above period is inconsistent with the warranty period, the [Buyer] is still entitled to claim against the [Seller] for damages within the warranty period.
 
   -    Arbitration. Any dispute arising from or related to the Contract shall be submitted to the China International Economic and Trade Arbitration Commission for arbitration, and the Arbitration Rules of this Arbitration Commission shall apply. The arbitration place is in Shenzhen. The arbitration award is final and binding on both parties.

During the performance of the Contract, disputes arose between the parties. On 21 April 1998, the [Seller] filed the arbitration application with the Shenzhen Sub-Commission.

POSITION OF THE PARTIES

[Seller]'s position

The [Seller] alleges that:

After signing the Contract, the [Buyer] did not issue the L/C before 20 June 1997 as stipulated in the Contract; the [Buyer] did not entrust the issuing bank, __ Commercial Bank, to issue a sight L/C with the [Seller] as the beneficiary until 28 August 1997, and the [Seller] transported the goods by air to Hong Kong. On 23 September, Shenzhen __ Health Supplement Ltd, which, with the [Buyer], was jointly responsible to sell the goods under the Contract, faxed a proof to the [Seller] confirming that the goods were accepted and in compliance with the Contract. On 26 September, the issuing bank, __ Commercial Bank, received the full set of documents, which the notifying bank, City Bank in the U.S., sent to the [Buyer] by express mail, and on 9 October, thirteen days later, it claimed there were five items of non-conformity among the documents. Regarding the non-conformity which the __ Commercial Bank claimed, City Bank in the U.S. responded by correspondence alleging that according to international customs, no non-conformity existed among the documents, and the [Buyer] should make the payment after accepting all goods. However, the [Buyer] did not make any payment. In order to protect its legitimate interest, and according to the arbitration clause in the Contract, the [Seller] requests the Shenzhen Sub-Commission to make the following award:

   (1)  The [Buyer] shall pay the [Seller] the contract price, US $103,660, plus interest (from 26 September 1997 and at the annual rate of 10%);
 
   (2)  The [Buyer] shall compensate the [Seller] for the loss of US $8,183 (5% of the contract price as liquidated damages, and the international traveling expenses of US $3,000);
 
   (3)  The [Buyer] shall bear the arbitration fee and other relevant expenses.

[Buyer]'s response

In response, the [Buyer] alleged:

1. The [Seller] sold four kinds of health supplement products made in the U.S. to the [Buyer]. The products are Alaska fish oil, shark cartilage, lecithin, and high intelligence quotient supplement for children. After the inspection, the People's Republic of China __ Import Food Sanitary Supervision and Inspection Agency announced that the first three products were unqualified and should not be used, and suggested return of the goods. The high intelligence quotient supplement for children had no instruction in Chinese, so it failed to pass the Customs inspection, and is still stored in Hong Kong. When receiving the Sanitary Certificate issued by the People's Republic of China __ Import Food Sanitary Supervision and Inspection Agency, on the same day, the [Buyer] faxed the Sanitary Certificate to the [Seller], and request the [Seller] to negotiate the issues on return of the goods; in the following two months, the [Buyer] requested the [Seller] to negotiate and arrange return of the goods in a considerable volume of correspondence, but the [Seller] did not respond at all. Shenzhen __ Health Supplement Ltd. is an independent entity and is not affiliated with the [Buyer], so it lacks the basis for the [Seller] to allege that the proof issued by Shenzhen __ Health Supplement Ltd. can show that the [Buyer] accepted the goods.

2. The [Buyer] had requested the [Seller] to translate the English instructions in the tags of the products to Chinese, and also requested [Seller] to add "The distributors in China: Shenzhen __ Industry Ltd; Address: 17th Floor, __ Building, __ District, __ City, China; Beijing __ Pharmacy Center: 198__ Beijing, etc." on the tags. In addition, before signing the Contract, the parties via many faxes negotiated the details regarding sales of the imported health supplement products under the Contract; the faxes between the parties and "The Contract Price Quoted for __ Pharmacy Center's Order," which the [Seller] sent to the [Buyer], described the correct names of the four kinds of health supplement products and the standardized Chinese names. However, the tags of the four health supplement products delivered by the [Seller] were inconsistent with the stipulations in the Contract and the faxes between the parties.

3. Before signing the Contract, the [Buyer] negotiated by phone with the [Seller] and requested the [Seller] to change the packaging bottles of Alaska fish oil to wide-neck bottles, and agreed to pay an additional 40 cents for each bottle; however, the [Seller] still delivered the goods in simple packaging bottles, but increased the price by 40 cents for each bottle. Furthermore, the [Buyer] requested the [Seller] to pack 60 bottles per box, but the [Seller] only packed 24 bottles per box.

[Seller]'s response

The [Seller] alleged:

1. The Sanitary Certificate issued by __ Sanitary Supervision and Inspection Agency concluded that "the goods do not conform to the Uniform Standard of Food Tags and The Health Supplement Management Rules of the People's Republic of China," because the [Buyer] did not apply for import sanitary inspection for the goods under the Contract, and thus it did not obtain the import approval and tags in Chinese stipulated by the Ministry of Sanitary. The Sanitary Certificate did not mean the goods delivered by the [Seller] had any defects. The goods delivered by the [Seller] had passed strict quality inspection in the U.S. before they were approved for sale; even before signing the Contract, the [Seller] provided to the [Buyer] the product introduction and the Sanitary Certificate issued by New Jersey State Bureau of Sanitary Management to show the products were qualified and were approved to be sold. If the [Buyer] had any doubt as to the quality of the products, it should have applied for the Approval Certificate for imported food in advance in accordance with the relevant rules of the Ministry of Sanitary of the PRC, because the [Seller] provided the [Buyer] the samples and material as early as at the end of May 1997. In addition, within 15 days after the goods were imported, according to Article 17 of the Contract, the [Buyer] should have applied to the __ Import and Export Commodities Inspection Bureau for commodities inspection or applied to the __ Food Inspection Agency for Sanitary Inspection; if any quality problem was found, the [Buyer] had the right to claim for damages with the [Seller] by presenting the above original certificate. However, the [Buyer] violated Article 17 of the Contract, and did not apply for commodities inspection or sanitary inspection. Because the [Buyer] violated the stipulations of inspection time and agency, the [Buyer]'s allegation that the goods were not complying is invalid.

2. Regarding the packaging, the Contract stipulates 60 bottles per box, but the [Seller] packed 24 bottles per small box, and six small boxes per large box. When packing the goods, the [Seller] noted that the cost was lower if it packed 60 bottles per box, but the packaging was thin and not stable. In order to guarantee that the packages were not broken during the transportation and loading, the [Seller] changed the packaging to 24 bottles per small box, and six small boxes per large box with an increased packaging cost and air transportation charges. The [Buyer] did not raise any objection until when the goods were almost sold out, and its objection lacks basis. Regarding the packaging specification, the Contract stipulates that the Alaska fish oil shall be packed in wide-neck bottles, not golden mushroom-shaped bottles as the [Buyer] alleged. The golden mushroom-shaped bottles are easy to break; the [Seller] packed the goods in wide-neck bottles with white caps, which are not easy to break and are also clean. Why did not the [Buyer] amend the above terms in the Contract when reviewing it? Since the parties had signed the Contract, they should perform strictly in accordance with it.

3. Any request or material made either before or after signing the Contract, which is not involved in the Contract or the Appendix, cannot represent the Contract and is invalid.

[Buyer]'s rebuttal

The [Buyer] alleged:

On 18 June 1997, the [Seller] and the [Buyer] signed the Import Contract. The [Seller] alleged that at the end of May it sent the 200 bottles of samples to Ms. Xiu __ to submit for approval of imports of food. How could the [Buyer] obtain the "Certificate" of Approval within only 20 days, and how could the [Seller] print the approval number on the tags of the bottles? In addition, the minimum expenses for obtaining the approval for one kind of product is renminbi [RMB] 160,000, but the total price of the Contract signed by the [Seller] and the [Buyer] is only US $103,660, i.e., RMB 830,000. If the [Seller]'s allegation that the [Buyer] should be liable for applying for the "Certificate" of Approval at its own expenses, is true, the [Buyer] would spend no less than RMB 160,000 for the approval of the goods with the total value of RMB 830,000, which is inconsistent with business principles.

The "Certificate" is not essential for the goods not to be sold; the essential cause is that tags of the goods violated the relevant stipulations of the Uniform Standards of Tags of Food, and the food was not edible. The [Seller] should be completely liable for the consequences.

OPINION OF THE ARBITRATION TRIBUNAL

1. The Applicable Law clause in the Contract stipulates that when the place of signing the Contract, or the place where the goods are when a dispute arises, is in China, or Respondent is a Chinese entity, the law of the PRC applies; in addition, the United Nations Convention on Contracts for International Sales of Goods (CISG) applies. The Arbitration Tribunal holds that because the Contract was signed in Shenzhen, China, and the goods disputed in this arbitration are in China, and the Respondent is a Chinese legal entity, the law of the PRC shall apply to this case.

2. According to the evidentiary material submitted by the parties, and the situation at the court sessions, the Arbitration Tribunal confirmed the following facts and gave the following opinions.

      (1) The evidence shows that after signing the Contract, on 28 August 1997, the [Buyer] entrusted __ Commercial Bank to issue an irrevocable sight L/C with the [Seller] as the beneficiary. On 10 September 1997, the goods under the Contract were transported by air and delivered to the [Buyer] in Hong Kong. The three kinds of products, fish oil, shark cartilage, lecithin were declared for import with China __ Customs on 16 September 1997; on 9 October 1997, the issuing bank, __ Commercial Bank, alleged that there was a non-conformity among the documents submitted by the [Seller]; on 14 October 1997 City Bank in the U.S. responded and provided an explanation. Within the valid period of the L/C, the [Seller] could not negotiate the amount under the L/C. The [Buyer] had disposed of part of the goods under the Contract.

      (2) The [Buyer] submitted three Sanitary Certificates issued by __ Import Food Sanitary Supervision and Inspection Agency on 24 December 1997. Regarding the 2,052 bottles of oil fish, 88 bottles of lecithin, and 850 bottles of shark cartilage that had not been sold by the [Buyer]. These three Certificates concluded that the products did not comply with the Health Supplement Management Rules and the Uniform Standards of Tags of Food of the PRC, and were not edible.

      (3) After reviewing the facts, the Arbitration Tribunal notes that the above three kinds of products were imported and declared as health supplement food. According to the Health Supplement Management Rules issued by the Ministry of Sanitary of the PRC:

   -    The import of food as health supplement food shall obtain the approval of Ministry of Sanitary before the goods are imported;
   -    The Ministry of Sanitary issues the Certificate of Approval of Import of Health Supplement Food after inspection;
   -    After the Certificate is granted, the approval number and the label of health supplement food stipulated by the Ministry of Sanitary, shall be printed in tags of the imported goods.

The [Buyer] neither applied to the Ministry of Sanitary for approval of import of the goods under the Contract, nor obtained the Certificate of Approval of Import of Health Supplement Food, so it was impossible to print the approval number and the label of health supplement food stipulated by Ministry of Sanitary on tags of the goods. In addition, according to the Uniform Standards of Tags of Food of the PRC, the manufacturer, distributor, and address shall be printed on the tags; and the tags shall be printed in standardized Chinese. Among the fish oil, shark cartilage, and lecithin delivered by the [Seller], only the fish oil and lecithin contain Chinese-English tags, but do not note the distributor and address in China, and the shark cartilage has only English tags. It was based on the above reasons that the __ Import Food Sanitary Supervision and Inspection Agency issued the Sanitary Certificates concluding that the goods "did not comply with the Health Supplement Management Rules and the Uniform Standards of Tags of Food." These three Sanitary Certificates cannot prove that the quality of the goods which the [Seller] delivered did not conform to the Contract or the relevant sanitary standard of the PRC. Therefore, the Arbitration Tribunal should not sustain the [Buyer]'s allegation that the quality of the goods delivered by the [Seller] is not compliance with the Contract based on the three Sanitary Certificates.

The Arbitration Tribunal notes that the delivery term stipulated in the Contract is CIF; according to international customs, under this term the [Buyer] is liable for the import procedure. The Arbitration Tribunal holds that in this case the [Buyer] should have applied to the Ministry of Sanitary for approval of import of the goods under the Contract, and obtained the Certificate of Approval. Therefore, the [Buyer] shall be liable for the consequences because it did not apply for the approval of import.

The Arbitration Tribunal notes that the Contract stipulates that the [Seller] shall provide Chinese-English tags according to the [Buyer]'s request. On 17 June 1997, the [Buyer] corresponded with the [Seller] requesting that it print the following information in Chinese on the tags:

The distributors:

-    Shenzhen __ Industry Ltd.
Address: 17 Floor, __ Building,
__ District, __ City, China.
Tel: ___
-    Beijing __Pharmacy Center
Address: 198__, Beijing.
Tel: ___

The [Seller] did not provide Chinese-English tags as the [Buyer] requested. The evidence shows that on 1 December 1997, the [Buyer] corresponded with the [Seller] alleging that the packaging and Chinese tags of the goods are not in compliance with the Contract. On the same day, the [Seller] responded stating:

"We will provide Chinese-English Tags for the 15,600 bottles of fish oil and 1,000 bottles of lecithin; we await your request for the 2,000 bottles of shark cartilage and 500 bottles of high intelligence quotient supplement for children; if you request, we will send Chinese-English tags by express mail."

However, the Arbitration Tribunal notes that no evidence shows that the [Buyer] requested the [Seller] to provide Chinese-English tags until __ Import Food Sanitary Supervision Agency issued the above three Sanitary Certificate on 24 December 1997.

Considering that the [Buyer] did not obtain the Certificate of Approval of import of health supplement food, the Arbitration Tribunal holds that the [Buyer] shall be held primarily liable for the above three Sanitary Certificates issued by __ Import Food Sanitary Supervision and Inspection Agency. The [Seller] did not provide the tags in accordance with the parties' agreement, so it shall also be held liable. Therefore, the contract price which the [Buyer] shall pay to the [Seller] shall be duly reduced by US $3,000.

      (4) Regarding the [Buyer]'s allegation that the [Seller] changed the wide-neck packaging of bottles of fish oil to simple packaging, the evidence shows that:

   -    On 6 June 1997 the [Seller] sent a fax to the [Buyer] providing the contract prices for __ Pharmacy Center's order; the unit price of the fish oil is US $4.70 CIF Hong Kong;
 
   -    On 14 June 1997, the [Buyer] sent correspondence to the [Seller] agreeing that the price for wide-neck packaging is 40 cents more than that of simple packaging which the parties had negotiated during the phone conversation, i.e., the unit price of the fish oil in wide-neck packaging is US $5.10, and requesting the [Seller] to draft the Contract according to the price of wide-neck packaged fish oil.

The Arbitration Tribunal notes that although the Contract does not definitely stipulate the fish oil shall be packed in wide-neck packages of bottled oil, the unit price stipulated in the Contract is US $5.10 CIF Hong Kong. Therefore, the Arbitration Tribunal holds that the fish oil shall be packed in wide-neck bottles. The evidence shows that the fish oil delivered by the [Seller] is not packed in wide-neck bottles. Thus, the Arbitration Tribunal holds that the contract price of fish oil which the [Buyer] shall pay to the [Seller] shall be reduced by US $0.40 per bottle, totaling US $6,240. Regarding the [Buyer]'s allegation that the Contract stipulates that the packaging shall be 60 bottles per box, but the goods delivered by the [Seller] were packed as 24 bottles per box, The Arbitration Tribunal holds that although the packaging of goods delivered by the [Seller] is 24 bottles per box, which did not conform to the Contract, the Arbitration Tribunal notes that the [Buyer] did not submit any evidence to prove its loss caused by such packaging.

      (5) Based on the above facts and reasons, the Arbitration Tribunal holds that during the performance of the Contract, although the [Seller] breached the Contract, it did not constitute a fundamental breach of contract; in addition, the [Buyer] had disposed of part of the goods, so it cannot request to return the goods and refuse to make the payment. After the above amount which the [Seller] shall bear is deducted, the [Buyer] shall pay the [Seller] the contract price of US $94,420 plus interest from October 1997 to the date when the payment is actually made, at the annual interest rate of 8%. [Translator's note: There is an inconsistency: here the interest rate is listed as 8%; in paragraph 1 of the Award (see below) it is listed as 6%.]

Regarding the [Seller]'s claim for the loss of US $8,183 -- 5% of the contract price as liquidated damages and the international traveling expenses of US $3,000 -- the Arbitration Tribunal notes that the Contract does not stipulate liquidated damages when the [Buyer] fails to make the payment, so the [Seller]'s claim for 5% of the contract price as liquidated damage shall not be sustained. The [Seller] did not submit any evidence to prove its claim for the international traveling expenses of US $3,000.

      (6) The arbitration fee shall be paid by the [Seller] and the [Buyer] in the proportion of 2:8.

AWARD

1.  The [Buyer] shall pay to the [Seller] US $94,420 plus interest at the annual rate of 6% from October 1997 to the date when the payment is actually made within 30 days after this award is handed down.

2.  The [Seller]'s other claims are dismissed;

3.  The arbitration fee shall be paid by the [Seller] and the [Buyer] in the proportion of 2:8.


FOOTNOTES

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

** Zheng Xie, LL.M. Washington University in St. Louis, LL.M., BA in Economics, University of International Business and Economics, Beijing.

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

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