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CISG CASE PRESENTATION

China 1 March 1999 CIETAC Arbitration proceeding (Canned mandarin oranges case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/990301c1.html]

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

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Case identification

DATE OF DECISION: 19990301 (1 March 1999)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1999/12

CASE NAME: Unavailable

CASE HISTORY: Unavailable

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

BUYER'S COUNTRY: Germany (respondent)

GOODS INVOLVED: Canned mandarin oranges


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 25 ; 35 ; 63 ; 64(1)(a) ; 71 ; 74 ; 76 ; 77 [Also cited: Articles 30 ; 60 ; 75 ]

Classification of issues using UNCITRAL classification code numbers:

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

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

63A [Notice fixing additional final period for buyer's performance];

64A [Buyer's right to avoid contract: grounds for avoidance];

71A1 [Anticipatory breach: grounds for suspension of performance];

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

76B [Damages recoverable based on current price];

77A [Obligation to take reasonable measures to mitigate damages]

Descriptors: Fundamental breach ; Letters of credit ; Nachfrist ; Conformity of goods ; Avoidance ; Damages ; Mitigation of loss

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Editorial remarks

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Zhong Guo Guo Ji Jing Mao Yi Zhong Cai Wei Yuan Hui Cai Jue Shu Hui Bian [Compilation of CIETAC Arbitration Awards] (May 2004) 1999 vol., pp. 1585-1589

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at nn.108, 125, 156, 158, 178, Nordic Journal of Commercial Law (2/2005)

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Case text (English translation) [second draft]

Queen Mary Case Translation Programme

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

Canned mandarin oranges case (1 March 1999)

Translation [*] by Ning Zhao [**]

Based on the arbitration clause in Contract HYC-1051 (hereinafter referred as the Contract), signed by Claimant Hu Nan XX Import and Export Company, China (hereinafter referred to as [Seller]) and Respondent XX Company, Germany (hereinafter referred to as [Buyer]) on 5 September 1997, and the written arbitration application submitted by [Seller] on 16 March 1998, China International Economic & Trade Arbitration Commission (hereinafter referred to as Arbitration Commission) accepts the above mentioned case in regard to the dispute arising from the sale of canned mandarin oranges.

[Seller] has requested the Arbitration Commission to apply the simplified procedure of the Arbitration Commission Arbitral Rules (hereinafter referred as Arbitration Rules, which had taken effect on 1 October 1995) to this case if [Buyer] agrees, but [Buyer] did not agree to apply the simplified procedure. Therefore, the general procedure of the Arbitration Rules applies.

Arbitrator A appointed by [Seller], Arbitrator D appointed by [Buyer], and Presiding Arbitrator P appointed by the Chairman of the Arbitration Commission, according to Art. 24 of the Arbitration Rules, form the Arbitration Tribunal (hereinafter referred as the Tribunal) to hear this case.

On 20 July 1998, the Tribunal held a hearing in Beijing. Representatives of [Seller] and [Buyer] attended the hearing, presented the case, answered questions from the Tribunal, and argued the facts and legal issues involved. After the hearing, both parties submitted supplementary statements and evidence.

[Buyer] has contested the jurisdiction of the Tribunal, meanwhile, it submitted its substantive argument. The Tribunal ruled on the jurisdiction issue on 31 December 1998, as follows: [Seller] has the right to request arbitration before the Arbitration Commission; the Arbitration Commission has the right to consider this case. The arbitral procedure involved the case continued.

The case has been concluded. On the basis of the written materials, evidence and the hearing, the Tribunal handed down the award by consent. The followings are the facts, the Tribunal's opinions and the award.

FACTS

On 5 September 1997, [Seller] and [Buyer] signed Contract HYC-1051 by fax. The Contract states that:

   -    [Seller] shall provide [Buyer] 28,000 boxes of canned mandarin oranges, and that they should be whole piece, peeled and with the maximum damage rate of 7%;
   -    Each package should be 312 grams with 48 cans per box;
   -    The sales price is US $12.20 per box, and the total contract price for 28,000 boxes is US $341,600;
   -    The delivery will be in November or December of 1997;
   -    The payment terms are: Before 30 September 1997, the [Buyer] should issue to the [Seller] an exchangeable, transferable, dividable and irrevocable immediate Letter of Credit (hereinafter referred to as L/C), which should be valid until 21 days after the above-mentioned delivery period in China.

A dispute arose on issuance of the L/C and claims for damages. Negotiation failed and [Seller] submitted an arbitration application to the Arbitration Commission.

[POSITION OF THE PARTIES]

[Seller]'s position

[Seller] states:

After concluding Contract HYC-1051, [Seller] signed purchasing contracts with two domestic factories and paid the deposit. However, [Buyer] did not open a L/C before 30 September 1997, which is the date a L/C was supposed to be issued according to the Contract, nor before the end of December 1997, which is the last delivery period mentioned in the Contract.

As an excuse for its nonperformance, [Buyer] alleged that the goods have quality problem, that they do not conform to German standards, and refused to accept the goods. Meanwhile, [Buyer] also stated that it would establish a L/C immediately if [Seller] agreed to lower the price. In response to [Buyer]'s attitude and behavior, [Seller] reiterated by post and clarified:

   -   Firstly, wishing [Buyer] could fulfill the Contract seriously;
 
   -   Secondly, it is not reasonable for [Buyer] to allege that the goods have quality and quantity problems before receiving them from [Seller] and holding that as a reason for not issuing the L/C.
 
   -   As a matter of fact, the exact reason for [Buyer] refusing to issue a L/C is the poor market situation and decreased price.

With the purposes of fulfilling the Contract quickly and avoiding disputes, [Seller] agreed to discount the goods conditionally, in order to press [Buyer] to issue a L/C soon. However, [Buyer] asked not only for further discounting and prolonging of the delivery date, but also required [Seller] to provide quality and quantity guarantees on the goods; meanwhile, the payment would also be done by way of T/T after sending the goods, etc. [Seller], of course, refused to accept such requests. On 25 November and December 1997, [Seller] again clarified and again asked [Buyer] to fulfill the Contract unconditionally, otherwise [Seller] would be forced to avoid the Contract and sell the goods to other customers' [Buyer], therefore, will be held liable for all damages that might be incurred.

Finally, as [Buyer] did not issue a L/C, [Seller] sold the contract goods to another party, Hu Nan Food Trading Company, at a price of renminbi [RMB] 4,300 per ton.

[Seller] holds that [Buyer] breached Contract HYC-1051, and did not fulfill its obligation to issue a L/C, which constituted a fundamental breach of contract and resulted in huge financial losses for [Seller]. According to the CISG and relevant Chinese law, [Buyer] should be held liable for all damages.

[Seller] submitted a modified arbitration claim, to require [Buyer]:

1. To pay [Seller] the sum of US $91,268.50, the difference between the contract price and the alternative-goods trading price;

2. To pay [Seller] the sum of US $34,160, the lost profits resulting from [Buyer]'s non-performance;

3. To pay traveling costs as well as attorneys' fee incurred by [Seller] at a sum of RMB 30,000;

4. To pay the costs of the arbitration.

After the hearing, [Seller] presented supplementary statements and evidence on the international market price of canned mandarin oranges, the cost of export transportation from a Chinese port to Hamburg, and the calculation of anticipated profits.

[Buyer]'s response

[Buyer] argues:

1. There is no [Seller] company stamp on Contract HYC-1051. However, the [Seller]'s company stamp has been used in Contract HYC-1059, which was signed with Hong Kong P Trading Company, and the Agent Agreement, which was signed with Hu Nan XX Law Firm. Therefore, [Buyer] holds that the signature person in Contract HYC-1051 is not authorized to represent [Seller].

2. Although having agreed on the issuing date of before 30 September 1997, upon both parties confirmation during and after concluding the contract, [Buyer] believed a L/C could be issued shortly before the delivery date (according to the custom, 3-4 weeks before the anticipated delivery date), and [Seller] accepted this practice. Until 5 November 1977, [Seller] still indicated that the issuing date could be postponed to the end of December 1997. Since [Buyer] was informed that the net weight of the goods provided by [Seller] is not compliant to the German standard of 175 grams per can, [Buyer] required that the goods conform to the German standard. As a German company, [Buyer] must obey the German regulations, otherwise, it has to bear administrative and criminal punishment, and this issue has been tacitly accepted by both parties. [Seller] is aware of the requirement from the [Buyer]'s fax of 23 February 1997.

3. Regarding the price, [Buyer] suggested that [Seller] reduce the price to US $11.20 per box. [Seller] did not accept this proposal and suggested US $11.80 per box. Afterward, [Buyer] did not require any further price reduction, instead asked for US $11.40 per box, which is higher than the previous US $11.20 per box. In fact, the suggested price given by [Buyer] could not cover the losses which [Buyer] might suffer. With regard to the price issue, [Buyer] has done its utmost to enter into an agreement with [Seller], thus [Buyer] gave a higher price.

4. The goods involved in the Contract will be sold only in the German market, rather than in the eastern European market. [Buyer] informed [Seller] by fax on 20 November 1997; [Seller] should be fully aware of this. The new German standard was accepted by both parties, therefore, as a new agreement in this transaction, the price should be renegotiated as well.

5. [Buyer] was willing to continue the Contract. Due to having reasonable doubt about the net weight of the goods, [Buyer] had to insist on examining them before payment. [Buyer] held enough evidence to prove that [Seller] did not fulfill the Contract, that the net weight of the goods did not reach the German standard. Therefore, according to Art. 71 of CISG, [Buyer] has right not to issue a L/C temporarily.

6. [Seller] resold the goods to a third party and claimed the price difference as damages according to Art. 75 of CISG. However, Art.75 is premised on avoidance of the Contract, and [Seller] merely claimed that it might avoid the Contract in the future. Additionally, [Seller] did not have right to avoid the Contract, since not issuing a L/C did not constitute a fundamental breach. In accordance with Art. 64 of CISG, [Seller] could declare the avoidance of the Contract provided that an additional period of time was given to [Buyer] and [Buyer] still failed to fulfill its obligation. [Buyer] did not breach the Contract before or after 31 December 1997, therefore, [Buyer] should not be held liable for losses suffered by [Seller].

7. In regard to [Seller]'s arbitration application, [Buyer] believes that [Seller] did not comply with Art. 77 of CISG and did not try to take reasonable measure to mitigate the losses. [Seller] should have accepted the price of US $11.40 per ton suggested by [Buyer], rather than resell the goods under the cost price.

Assuming that [Seller] has right to claim damages, the maximum amount of compensation should be limited to the difference between the contract price and the price suggested by [Buyer], which means US $0.80/ton x 280,000 tons = US $22,400 [sic].

The loss of profit of US $34,160 claimed by [Seller] cannot be supported by any evidence. [Seller] will make profit of US $12.20 per ton from the contract price, which has been included in the total contract price, so [Seller] should not claim it again.

[Seller] said in the fax on 1 November 1997 that it expected the losses could be US $50,000, which contradicts the amount [Seller] requested in the arbitration application.

[Buyer] requests the Tribunal:

1. To reject [Seller]'s arbitration application; and

2. To require [Seller] to pay all the arbitration costs, which are not limited to the arbitration application fee and [Buyer]'s attorneys' fee.

OPINION OF THE TRIBUNAL

Applicable law

In the present case, the parties' registered places and central business places are located in P.R. China and Germany, respectively. China and Germany are parties to the United Nations Convention on Contracts for the International Sale of Goods (1980), (hereinafter referred to as CISG), so CISG applies to this case.

Capacity to conclude the contract

Whether the representative of [Seller] "Li XX" was qualified to conclude the Contract, has to do with the question of the legal capacity of a natural person. According to general principles of private international law, the capacity of a natural person should be decided by the national law of the person, in this case it is Chinese law. Art. 7 of the Chinese Foreign Economic Contract Law states that "the contract shall be concluded when contracting parties agree on the contract clauses in a written form and put signature upon". Art. 43 of Chinese Civil Code also states "a company shall be liable for the activities of its representatives and employees." Therefore, in order to conclude a foreign contract, it is not necessary to put the company's stamp on it as long as an authorized representatives signs the contract. Li XX is the employee of [Seller], his signature has binding force on [Seller]. In fact, in the present case, [Seller] accepted and performed the Contract which was signed by its employee. Until the arbitration hearing, [Buyer] did not contest the legal capability of representatives and the validity of the Contract.

Whether [Buyer]'s failure to issue a L/C constituted a breach of contract

The Tribunal believes Contract HYC-1051 is a legal valid contract, which has binding force on both parties. Both contracting parties have the obligations to fulfill the Contract. For [Seller], its obligation is to deliver goods and transfer documents; for [Buyer], its obligation is to accept the goods and make the payment.

The Contract indicates two different periods, which are the period of issuing a L/C and the period of delivery. According to the Contract, [Buyer] should, before 30 September 1997, issue an exchangeable, irrevocable, transferable, dividable L/C, valid until the period of delivery and even afterwards, [Buyer] did not issue a L/C. There is no law or contractual basis to support the argument claimed by [Buyer] that "a L/C could be issued 3-4 weeks before the delivery period", and there is still no L/C. Consequently, the [Buyer]'s opinion could not exempt it from not issuing a L/C. In respect of [Buyer]'s doubt about the non-qualified goods, the Tribunal believes that the accusation of anticipatory breach by [Seller] cannot be supported, since [Buyer] could not present any evidence to prove that the goods could not reach the German standard. [Buyer] argued that requiring the price reduction is a modification of the original contract, but it could be the case only when both parties reach an agreement on the new price, otherwise, the original contract price shall still be followed.

After 30 September 1997, [Seller] gave [Buyer] additional time to issue a L/C and continue fulfilling the contact, however, [Buyer] still did not perform its obligation. Under this circumstance, it is reasonable that [Seller] avoided the Contract and resold the goods to third parities.

Art. 64(1)(a) of CISG states that:

"The seller may declare the contract avoided if the failure by the buyer to perform any of his obligation under the contract or this Convention amounts to a fundamental breach of contract."

In the current case, [Buyer] did not issue a L/C without proving that [Seller] would not perform its contract obligation. This constitutes a fundamental breach of contract. [Buyer] should be held liable.

[Seller]'s claim for damages

Art.74 of CISG states:

"Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract."

In the present case, based on the fact that [Buyer] did not issue a L/C, [Seller] resold the goods to Hu Nan XX Trading Company on 26 May 1998 at the price of RMB 4,300 per ton, which equals US $519,95 per ton or US $7.79 per box.

The Tribunal believes that the German average German price for canned mandarin oranges produced by [Seller] for the period January to June 1998 and the Chinese marketing price submitted by [Buyer] could be the reference in deciding the resale price, but could not be the final evidence to confirm the price difference. Therefore, the Tribunal holds, considering the contract price, the trend of the marketing price and the contract delivery time, a reasonable resale price should be US $10.40 per ton, which means the price difference claimed by [Seller] should be (US $12.20 - 10.40) x 28,000 = US $50,400.

The anticipated profit claimed by [Seller] has been included in the damages of price difference, so the Tribunal holds not to support this application.

In accordance with Art. 59 of the Arbitration Rules, [Buyer] should pay [Seller] the traveling costs and attorneys' fee of RMB 30,000. And [Seller] should pay 20% of the arbitration cost, while [Buyer] should pay 80% of it.

AWARD

1. [Buyer] shall pay [Seller] the price difference caused by the resale, US $50,400.

2. [Buyer] shall pay [Seller] the traveling cost and attorneys' fee of RMB 30,000.

3. [Seller] shall pay 20% of the arbitration cost; [Buyer] shall pay 80% of the arbitration cost.

4. [Seller]'s arbitration applications are rejected.

5. [Buyer] shall pay [Seller] the amount of US $50,400 and RMB 50,296.80 within 45 days after this award being given, with 7% interest added to late payments.

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

** Ning Zhao, LL.M. (cum laude) Groningen University, Netherlands; LL.B., Nan Kai University, Tianjin, P.R. China.

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