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CISG CASE PRESENTATION

China 28 January 1999 CIETAC Arbitration proceeding (Refrigeration equipment case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/990128c1.html]

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

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Case identification

DATE OF DECISION: 19990128 (28 January 1999)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1999/06

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Hong Kong (claimant)

BUYER'S COUNTRY: Mainland China (respondent)

GOODS INVOLVED: Refrigeration equipment


Classification of issues present

APPLICATION OF CISG: Yes, agreement of the parties

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Article 53

Classification of issues using UNCITRAL classification code numbers:

53A [Buyer's obligation to pay the price]

Descriptors: Price

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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 Ji Mao Yi Zhong Cai Wei Yuan Hui Cai Jue Shu Hui Bian [Compilation of CIETAC Arbitration Awards] (May 2004) 1999 vol., pp. 1500-1505

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at nn.23, 111, 123, 158, Nordic Journal of Commercial Law (2/2005); Fan Yang, The Application of the CISG in the Current PRC Law and CIETAC Arbitration Practice (December 2006) n. 94

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Case text (English translation)

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


 

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

Refrigeration equipment case (28 January 1999)

Translation [*] by Taotao Ling [**]

Translation edited by Meihua Xu [***]

China International Economic and Trade Arbitration Commission (hereinafter referred to as CIETAC) accepted this case according to:

   (1)    The arbitration clause in Contract No. WEDF971210/YHZ signed on 10 December 1997 by the Claimant [Seller] Hong Kong ___ International Company Ltd. and the Respondent [Buyer] Zhejiang ___ Import & Export Company; and
 
   (2) The written arbitration application submitted by the [Seller] to CIETAC.

On 25 November 1998, the Chairman of CIETAC appointed Mr. P as the sole arbitrator to form the Arbitration Tribunal and hear this case in accordance with the relevant provisions of the Arbitration Rules.

The Arbitration Tribunal reviewed the arbitration application and other attached materials submitted by the [Seller], and scheduled a court session on 8 January 1999 in Beijing. Both parties sent representatives to attend this session, presented oral statements of facts and arguments, and answered questions raised by the Arbitration Tribunal. The [Buyer] submitted a written defense and representation opinions during the court session. After the court session, the [Seller] submitted supplementary evidence within the required period.

This case has now been resolved. The Arbitration Tribunal hands down this arbitration award in accordance with the facts and law.

The following are the facts, the opinion of the Arbitration Tribunal and the award.

I. FACTS

The [Seller] and [Buyer] signed Contract No. WEDF971210/YHZ on 10 December 1997, setting forth that the [Buyer] purchases two sets of YORK Liquid Chiller Reciprocating Refrigeration Equipment, type YCWJ56EEO. The total price of the contract is US $90,000, CIF Wenzhou Port. Article 3 of the contract provides that, after the contract is signed and within five days, the [Buyer] shall issue a sight irrevocable letter of credit in the amount of 100% of the entire contract price, with the [Seller] as the beneficiary. The transfer of payment shall be subject to the documentation procedures required in Article 4, Items 1 to 7. The shipment port is the United States port and the destination port is the Wenzhou Port. The shipment dates required in the contract are, respectively, no later than seven days upon receipt of the letter of credit for the first set and within four months upon receipt of the letter of credit for the second set.

According to the [Seller], the [Seller] started to prepare the goods immediately after the contract was signed, and the [Buyer] issued a sight irrevocable letter of credit through Hainan ___ International Trust Investment Company in the amount of US $90,000 with the [Seller] as the beneficiary (No. HUT6389712307). After receiving the letter of credit, the [Seller] shipped the goods in two batches, respectively, on 29 December 1997 and 8 April 1998, and notified the [Buyer] of the shipments. The two shipments of goods arrived at the destination port, Wenzhou port, on 25 January 1998 and 30 April 1998.

Further, according to the [Seller], the price of the first shipment of equipment was US $45,000, the payment of which was received by the [Seller] on 5 February 1998, but [Seller] alleged that the payment for the second shipment of equipment, which was also US $45,000, was never made by the [Buyer]. Instead, on 21 May 1998, the [Seller] received a notice from the Hong Kong branch of the Bank of China, the bank in which it has a company account, notifying the [Seller] that the [Buyer]'s issuing bank requested by notice to defer the payment for three or six months. This request was not accepted by the [Seller] and the [Buyer] has not made the payment of the remaining amount.

Therefore, the [Seller] presented the following arbitration claims:

1. The [Buyer] should pay the price of the second shipment of goods in the amount of US $45,000 and overdue interest of US $2,000;

2. The [Buyer] should pay the arbitration costs and attorneys' fee in the amount of approximately renminbi [RMB] 20,000 Yuan.

The [Buyer] submitted the following response:

"Our company has made the payment to ___ International Trust Investment Company on 24 April 1998 for the second shipment of equipment, and that company will transfer the payment to Hainan ___ International Trust Investment Company.

"Our company, when performing Contract No. WEDF971210/YHZ, completely followed international trade custom and UCP 500, and made payment to and collected delivery instruments from the issuing bank (Hainan ___ International Trust Investment Company) immediately after the delivery instruments reached the issuing bank. It is the liability of the issuing bank that the [Seller] has not yet received payment."

Attorney Zhang, the [Buyer]'s representative, submitted the following related statement, on behalf of the [Buyer]:

First, the [Buyer] without fault and should not be held liable;

Second, the [Seller] is not entitled to request payment from the [Buyer] when it fails to perform its obligation under the letter of credit. "The issuing bank did not refuse to make payment but just requested to defer payment for six months, and the issuing bank would pay the interest loss incurred from the payment deferral. If the [Seller] does not agree with the payment deferral, it should discuss the matter with the issuing bank; and if the discussion reaches no mutually satisfactory result, the [Seller] may pursue a lawsuit; finally, if the payment still can not be obtained, the [Seller] may then to request the [Buyer] to make the payment" ... "It is not consistent with international trade custom and the contract that the [Seller], upon receiving the notice from the issuing bank to defer payment for six months, neither discussed with the issuing bank, nor filed a lawsuit against the issuing bank, but instead requested the [Buyer] to make payment."

Therefore, the [Buyer] requests the [Seller] to withdraw its arbitration request or that the Arbitration Tribunal dismiss this request.

After the court session, the [Seller] submitted supplemental evidence including a form setting forth a recalculation of overdue interest in the amount of US $2,358.18 (calculated from 29 April 1998 to 31 January 1999).

II. OPINION OF THE ARBITRATION TRIBUNAL

1. Applicable law

The parties did not provide for the applicable law in the contract. During the court session, when the Arbitration Tribunal asked the parties for their opinions, the parties unanimously agreed that the applicable laws of this case are:

     (1) The laws of the People's Republic of China (PRC); and

     (2) Although Hong Kong is not a party that subscribed to the United Nations Convention on Contracts for the International Sale of Goods (CISG), the parties agreed to apply CISG as well;

     (3) Since this case relates to letters of credit, the Uniform Customs and Practice for Documentary Credits (UCP 500), the International Chamber of Commerce's No. 500 publication, is also applicable.

The Arbitration Tribunal respects the mutual opinion of the parties.

According to Article 5 of the PRC Foreign Economic Contract Law, wherever PRC laws do not regulate, international custom may be adopted.

The modern documentary credit which is popular in the international trade has a history of more than 150 years, and there have formed in practice many widely recognized and accepted customs, some of which are written, e.g., UCP, others are reflected in leading cases and stated in outstanding books and teaching materials.

2. The dispute

After reviewing the written statements and relevant materials submitted by the parties and by hearing the oral statements made and responses to the questions raised by the Arbitration Tribunal during the court session, the Arbitration Tribunal clarified the following facts:

     (1) The [Buyer] issued a sight irrevocable letter of credit with Hainan __ International Trust Investment Company (Hainan Trust) as the issuing bank in the amount of US $90,000.

     (2) The [Seller] delivered the goods in two shipments, and transferred all delivery instruments to the notifying bank, the Hong Kong branch of the Bank of China, through which the delivery instruments should be transferred to the issuing bank, Hainan Trust;

     (3) The [Seller] has received the payment of US $45,000 for the first shipment equipment, but never received the payment of the same amount for the second shipment;

     (4) The [Buyer] has paid the price of the goods in full to Hainan Trust, obtained the delivery instruments from the issuing bank, timely picked up the goods with the delivery instruments, and has delivered the goods to the terminal user;

     (5) However, the issuing bank Hainan Trust did not make payment of the remaining purchase price of US $45,000 to the [Seller] in accordance with the requirement of the letter of credit, since its request of payment deferral for three to six months was not agreed to by the [Seller].

The [Seller] requested the [Buyer] to pay for the second shipment of equipment, but the [Buyer] thought it had completed all its contract obligations without fault and should not be liable for the payment.

Therefore, the dispute in this case focuses on:

When the issuing bank does not make payment in accordance with the letter of credit request, is the [Seller] entitled to claim payment of purchase price from the [Buyer]?

Both parties provided their reasons for their own claims, and presented legal arguments in the court session. The dispute relates to issues involving the credit business and the international sale of goods.

The Arbitration Tribunal analyzes the issues one by one in the following paragraphs.

3. Was [Buyer]'s contract obligation released when it issued the letter of credit?

The Arbitration Tribunal notes the following statements in the [Buyer]'s response:

"Our company, when performing Contract No. WEDF971210/YHZ, completely followed international trade custom and UCP 500, and made payment to and collected delivery instruments from the issuing bank (Hainan ___ International Trust Investment Company) immediately after the delivery instruments reached the issuing bank. It is the liability of the issuing bank that the [Seller] has not yet received payment."

The Arbitration Tribunal understands the [Buyer]'s position to be: Since the [Buyer] has issued the letter of credit and made payment to the issuing bank, the [Buyer] has completed its contract obligation to make payment, so it is the issuing bank's liability instead of the [Buyer]'s liability that the [Seller] has not yet received the payment.

Regarding the payment the [Buyer] made to the issuing bank mentioned in its statement, the Arbitration Tribunal will analyze it in Paragraph No. 5 hereunder. In this paragraph, the Arbitration Tribunal will only discuss whether the issuance of the letter of credit discharges the [Buyer]'s payment obligation.

The payment clause of the contract states that within five days after the contract is signed, the [Buyer] will issue a sight irrevocable letter of credit in the amount of 100% of the entire contract price with the [Seller] as the beneficiary, and that the transfer of payment shall be subject to the documentation procedures required in Article 4, Items 1 to 7.

Although the contract clause is not well written, it has a clear meaning, which is: The signals of the completion of the [Buyer]'s payment obligation in the contract are:

     (1) The Buyer issues a letter of credit;

     (2) The Seller delivers the documents required in Items 1 to 7; and the [Seller] should be able to obtain the above payment of the letter of credit unless due to its own fault.

Therefore, the [Buyer] finally completes its payment obligation when the [Seller] receives the purchase price with no fault on the part of the [Seller].

In fact, the [Buyer]'s representative is clear about this, and he made such statement in the court session: the [Buyer]'s issuing the letter of credit suspends its payment obligation, meaning the [Buyer]'s obligation is suspended instead of terminated. The [Buyer]'s representative accurately stated that, "in a contract for the international sale of goods, the [Buyer]'s payment obligation to the [Seller] is major; but this obligation is suspended during the period when the bank remits the money order and makes payment; and the [Buyer]'s obligation is reactivated only when the bank cannot remit the money order or make the payment." When the Arbitration Tribunal especially asked the representative of the [Buyer] whether his representative opinion was his personal opinion or an opinion representing his client (i.e., the [Buyer] in this case), the [Buyer]'s representative explicitly responded it was the [Buyer]'s opinion. Therefore, the Arbitration Tribunal takes the above statement as the [Buyer]'s true showing of mind.

The Arbitration Tribunal holds that, the [Buyer]'s issuing the letter of credit does not discharge its payment obligation under the contract, and that the [Buyer] is obligated to make payment when the payment of the letter of credit cannot be realized.

The Arbitration Tribunal notes that, the representative opinion submitted by the [Buyer]'s representative included the following statement as well:

"The reactivation of the obligation means when the [Seller] is not able to obtain payment from the bank, the [Seller] should resort to lawsuit as the remedy."

The Arbitration Tribunal will discuss this issue in the next paragraph.

4. The letter of credit and the issuing bank

Through questioning during the court session, the answer the Arbitration Tribunal received is that it is entirely the [Buyer]'s choice to have Hainan Trust as the issuing bank of the letter of credit in this case. The [Buyer] is obligated to provide a "reliable and capable payer" to the [Seller] when it issues the letter of credit. However, the fact is the [Seller] did not get payment from Hainan Trust, then whether Hainan Trust is a "reliable and capable payer" remains a question to prove.

Just as mentioned above, in the statement raised by the [Buyer]'s representative "the [Seller] should resort to lawsuit as the remedy", "lawsuit" here pertains to the [Buyer]'s position that the [Seller] should pursue a lawsuit against Hainan Trust first.

Regarding the question whether Hainan Trust is a "reliable and capable payer", the Arbitration Tribunal agrees it needs to be discussed and judged, but a lawsuit raised by the [Seller] against the issuing bank is not the only way to judge it.

In fact, Hainan Trust itself announced that it is not a "reliable and capable payer".

As the Arbitration Tribunal reads the telefax sent by Hainan Trust to the Hong Kong branch of Bank of China (the notifying bank) on 21 May 1998, the reason for the request that payment be deferred was because of "[Hainan Trust's] temporarily financial difficulties". The date of this telefax is 27 days after 24 April 1998, which was said by the [Buyer] to be the date of payment via __ International Trust Investment Company to Hainan Trust. After receiving the payment from the [Buyer], Hainan Trust not only did not make payment to the [Seller], but also made no payment even after the [Seller] refused to defer the payment via the notifying bank. Hainan Trust's request to defer payment is a modification to the letter of credit; according to UCP 500, a modification of the letter of credit must be agreed by the beneficiary. Since the [Seller], as the beneficiary of the letter of credit, did not agree with the payment deferral, Hainan Trust's not making payment in accordance with the requirement of the letter of credit is a refusal of payment. The allegation by [Buyer]'s representative that "the issuing bank did not refuse to make payment but just requested to defer payment for six months" is not appropriate. Afterward, on 4 August 1998, Hainan Trust requested again to defer payment for six months. The repeated request of the issuing bank was again not accepted by the [Seller]. The fact that Hainan Trust has not yet made payment or not even shown its willingness to make the payment proves that its financial difficulties are not merely temporary.

Since Hainan Trust is not a party to the dispute in this case, the Arbitration Tribunal does not look into Hainan Trust's acts or omissions or its obligations. As for the letter of credit in this case, Hainan Trust's "insolvency" has been self-announced by its "financial difficulties" as reflected in its acts and omissions. Insolvency is not equal to liquidation or bankruptcy, but means not being able to repay one's due debt in the normal course of business or has to do with its financial condition at a time when its debts are more than its assets. Hainan Trust itself announced it that it requested that payment of the letter of credit be deferred because of its financial difficulties. This is enough to establish that Hainan Trust has been in insolvent financial condition.

Therefore, the Arbitration Tribunal holds that, by Hainan Trust's self-announcement, the [Seller] is facing the problem of "insolvency of the issuing bank" in this case.

In this circumstance, the [Seller] may claim against the [Buyer] instead of filing a lawsuit against the issuing bank, Hainan Trust. Where there is "insolvency of issuing bank", the [Seller] is entitled to request payment from the [Buyer] without having to first file a lawsuit against the issuing bank.

5. The [Buyer]'s payment to the issuing bank

According to the [Buyer], the [Buyer] has made the payment of US $45,000 for the second delivery on 24 April 1998 via ___ International Trust Investment Company to Hainan Trust, and the [Buyer] also alleged was without fault in its performance of the contract.

The Arbitration Tribunal agrees the that [Buyer] was not at fault in making its payment to the issuing bank Hainan Trust, but the problem is such payment by the [Buyer] cannot be deemed the completion of the [Buyer]'s payment obligation to the [Seller]. As previously stated, the completion of the [Buyer]'s payment obligation in the contract is when the [Seller] obtains the payment for goods from the issuing bank. The payment by the [Buyer] to the issuing bank completes the obligations between the [Buyer] and the issuing bank but does not complete the obligations between the [Buyer] and the [Seller].

There are three contract relationships in relation to the letter of credit: the sales contract between the [Buyer] and [Seller]; the contract relationship between the [Buyer] as the applicant to issue the letter of credit and the issuing bank; and the contract relationship between the issuing bank and the [Seller] as the beneficiary of the letter of credit. There was no written requirement either in the contract or in the letter of credit regarding at what time the [Buyer] should make payment to the issuing bank, thus the payment made by the [Buyer] to the issuing bank has nothing to do with the [Seller] as the seller under the contract and as the beneficiary of the letter of credit. Therefore, when "insolvency of the issuing bank" occurs, the [Seller] is entitled to request payment for the goods from the [Buyer]. This right is not affected by whether the [Buyer] did or did not make payment to the issuing bank.

The Arbitration Tribunal hereby holds that the payment made by the [Buyer] to the issuing bank, Hainan Trust, does not release the [Buyer] from its obligation to make payment to the [Seller].

6. The [Seller]'s arbitration request

Based on the above analyses, and since the issuing bank chosen by the [Buyer] is not a "reliable and capable payer", in addition, the issuing bank has self-announced its insolvent financial situation, the Arbitration Tribunal supports the [Seller]'s arbitration request. Although the [Seller] submitted as evidence a recalculated overdue interest form, the Arbitration Tribunal will still award subject to its original request because the [Seller] did not formally modify the arbitration request in writing.

The Arbitration Tribunal holds that:

  1. The [Buyer] should pay to the [Seller] the uncollected purchase price for the second shipment of goods, US $45,000, to plus the overdue interest US $2,000;
  2. The [Buyer] should pay the entire arbitration fee of this case.

In addition, the [Buyer] should pay the [Seller]'s attorneys' fee RMB 20,000 in accordance with the Arbitration Rules.

III. THE AWARD

The Arbitration Tribunal renders the following award:

  1. The [Buyer] shall pay to the [Seller] the price of the goods in the amount of US $45,000 plus the overdue interest of US $2,000;
  2. The [Buyer] shall compensate the [Seller] for its attorneys' fee, RMB 20,000;
  3. The [Buyer] shall pay all of the arbitration fees of this case.

The total amount of the above items is US $50,614 and RMB 20,000. These payments should be made by the [Buyer] to the [Seller] within 30 days of the date of this award, with overdue annual interest rate at 8%.

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 Hong Kong is referred to as [Seller] and Respondent of Zhejiang Province, 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].

** Taotao Ling, LL.M. New York University School of Law on the Arthur T. Vanderbilt Scholarship. She received her Bachelor of Law degree and Bachelor of Economics degree from Peking University, Beijing, China. Her focus is on corporate and commercial law.

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

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