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CISG CASE PRESENTATION

China 2 April 1999 CIETAC Arbitration proceeding (Gray cloths case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/990402c1.html]

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

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Case identification

DATE OF DECISION: 19990402 (2 April 1999)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1999/18

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Mainland China (respondent)

BUYER'S COUNTRY: Hong Kong (claimant)

GOODS INVOLVED: Gray cloths


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Article 49

Classification of issues using UNCITRAL classification code numbers:

Unavailable

Descriptors: Unavailable

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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. 1761-1766

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at nn.23, 59, 223, 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. 95

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Case text (English translation)

Queen Mary Case Translation Programme

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

Gray cloths case (2 April 1999)

Translation [*] by Meihua Xu [**]

Edited by LIN Zhongming [***]

The China International Trade and Economic Arbitration Commission, Shenzhen Commission (hereafter, the "Shenzhen Commission") accepted the case on 18 December 1998 according to:

   -    The arbitration clause in Export Contract No. SQE97-021 signed by Claimant [Buyer], Hong Kong __ Company, and Respondent [Seller], China Shenzhen __ Commodity Supply Company; and
 
   -    The written arbitration application submitted by [Buyer].

The Arbitration Rules of the China International Economic & Trade Arbitration Commission (hereafter, "CIETAC"), which became effective on 10 May 1998, are applicable to this case, and since the amount in dispute is less than renminbi [RMB] 500,000, this case is qualified to use summary procedure.

Because the parties failed to jointly appoint a sole arbitrator, pursuant to Article 65 of the Arbitration Rules, on 20 January 1999, the Chairman of the Arbitration Commission appointed Mr. P as the sole arbitrator to form the Arbitration Tribunal to hear this case.

The Secretariat Office of the Shenzhen Commission scheduled a court session on 4 March 1999. The two parties sent representatives to the court session. Neither party raised objection on the formation of the Arbitration Tribunal.

After presenting an oral defense at the court session, the [Seller] submitted a written defense and evidence. [Seller] also raised a counterclaim. However, the Arbitration Tribunal held that the counterclaim was not raised within the stipulated time, and the [Seller] agreed to abandon its counterclaim.

The Arbitration Tribunal heard the parties' statements, arguments, and testimonies, and investigated the relevant facts. Before the court session ended, the parties made final statements. After the court session, both parties submitted documents including representation statements within the stipulated time (11 March 1999).

On 2 April 1999, the Arbitration Tribunal handed down this award. The following are the facts, the Tribunal's opinion and award.

I. FACTS

On 28 February 1997, the [Buyer] and the [Seller] signed Export Contract No. SQE97-021, by which they agreed on the following terms:

   -    Goods and price: No. 1 gray cloths, 10 + 10 10 + 109,144 meters, at a unit price of US $1.627/meter, FOB Huizhou; No. 2 gray cloths, 7 + 7 7 + 78,229.6 meters, at a unit price of US $1.747/meter, FOB Huizhou; totaling US $29,254.40 (Article 1 of the contract);
 
   -    Shipping route: From Huizhou to Hong Kong (Article 5 of the contract);
 
   -    Shipping period: Before the first ten days of April 1997 (Article 7 of the contract);
 
   -    Payment term: The [Buyer] shall pay the entire price for the goods by money order no later than applying to customs and the delivery of the goods;
 
   -    Dispute resolution: Any dispute arising from or related to this contract shall be submitted to CIETAC, and shall be arbitrated according to the Arbitration Rules. The arbitration shall take place is in Shenzhen, and the award shall be final and have binding effect on the two parties (Article 14 of the contract);
 
   -    Applicable law: Chinese law shall be applied when the contract place or the place where the goods are located when a dispute arises is in China, or when the defendant is a Chinese juridical person; otherwise, the United Nations Convention on Contracts for the International Sales of Goods (hereafter, the "CISG") shall be applied. The term FOB used in this contract is based on Incoterms 1990 (Article 15 of the contract).

The parties had disputes during the performance of the contract, and the [Buyer] filed an arbitration application to the Shenzhen Commission, asking the Arbitration Commission to rule that:

1. [Seller] shall return the price of the goods of Hong Kong dollars [HK $] 146,000 and the interest on it;

2. [Seller] shall bear the entire arbitration fee.

[POSITION OF THE PARTIES]

[Buyer]'s position

The [Buyer] alleges that:

After signing the contract, the [Buyer] paid a total of HK $146,000 to the [Seller] in two payments. The representative of the [Seller] received the payments and issued two receipts, however, the [Seller] failed to deliver the goods. The [Buyer] has been urging the [Seller] to deliver the goods, but with no result.

The [Buyer] alleges that the [Seller] violated the contract by not delivering the goods after receiving payment, and should bear liability for this.

At the court session, the [Buyer] submitted evidence item number 7 and another item of evidence without number, referred to as an "entrustment letter", which indicated that there was deception associated with the goods to be delivered to the [Buyer] and that the [Seller] entrusted the [Buyer] to recover the goods.

[Seller]'s defense

The [Seller] submits the following statement, defense, and argument on the facts in its defense and the representation statement.

1. The progress of this case

On 28 February 1997, the parties signed Export Contract No. SQE97-021. Meanwhile, the [Seller] signed another sales contract with a supplier appointed by the [Buyer], Tongling __ Spinning Company, with the same terms on contract goods, specification, quantity, delivery place as in the contract in this case.

On 2 April, as stipulated in the Contract, the [Seller] delivered the goods to Huizhou. After receiving the goods, the [Buyer] issued a quality certificate and receipt for the goods. On 23 October, after settling an account, the legal representative of the [Buyer], Zhang __, issued an IOU and asked for return of the receipt for the goods, which was returned by the [Seller].

The goods needed by the [Buyer] were color cloths, not gray cloths; therefore, after receiving the goods, the [Buyer] asked Huizhou Huisheng Printing and Dying Company (hereafter, "Printing and Dying Company") to process the goods into color cloths. This is a key point for determining the place of contract performance.

After printing and dying the cloths, the [Buyer] did not ask the [Seller] to make arrangements for exporting color cloths, nor did it re-conclude a color cloths export contract (which would be needed since a gray cloths export contract cannot be used to apply to Customs to export color cloths).

Zhang __ of the [Buyer] is the brother of the [Seller]'s vice president. After being urged by the [Seller], Zhang __ paid HK $56,000 on 9 May 1997 and stated reasons for the delay in payment. In order to prove his statement was reliable, Zhang __ also submitted the second page of a compensation claim letter issued to a third party (evidence 7), asking for the [Seller]'s understanding and promising to pay the remaining amount several days later. On 27 May 1997, Zhang __ paid HK $90,000. With this, the [Buyer] paid a total of HK $146,000.

On 23 October 1997, Zhang __ went to the [Seller]'s place. After settling the account, the [Buyer] still owed the [Seller] the remainder of the price for gray cloths in the amount of HK $63,313. The [Buyer] promised to pay this amount before 30 October and issued an IOU. However, the [Buyer] has not paid this amount. The [Seller] has been urging the [Buyer], and the [Buyer] promised to make payment as soon as possible, and never stated that it would not pay.

2. The [Buyer] is now asking for refund of the HK $146,000 payment alleging that the [Seller] failed to deliver the goods after receiving the payment. There is no factual basis for this claim; therefore, it should be dismissed.

      (1) The quality certificate issued by the [Buyer] is an indication that [Buyer] approved of the [Seller]'s performance of its contract obligations. The quality certificate issued by the [Buyer] on 2 April 1997 indicated that the [Seller] had in fact delivered the goods to the [Buyer]. The [Seller] purchased the goods from Tongling __ Spinning Company as requested by the [Buyer], which was also to perform the contract between the [Buyer] and the [Seller]. Since the quality of the goods had been approved, the [Seller] had no reason not to deliver the goods.

      (2) The [Buyer] issued the receipt for the goods due to the nature of the contract goods. The [Buyer] purchased gray cloths from the [Seller], but was to export color cloths, and in order to convert gray cloth into color cloth, printing and dying was necessary. Therefore, after receiving the goods from the [Seller], the [Buyer] had to issue a receipt, otherwise, after printing and dying process, the goods would be changed not only on legal aspect, but also on the nature and quantity. When the goods were transporting to the Printing and Dying Company, the [Buyer] and the Printing and Dying Company established an entrustment relationship; gray cloths were processed into color cloths, with the printing and dying process causing changes in the quality and quantity of gray cloths. If there was any dispute, no evidence could be found; therefore, it was appropriate for the [Buyer] to issue the receipt.

      (3) [Buyer]'s payment of a total of HK $146,000 on 9 May 1997 and 27 May 1997 separately was a performance of its contract obligation, and the IOU issued by the [Buyer] on 23 October was evidence showing the [Buyer]'s breach of contract, which was the delay in payment. With these three items of evidence, the [Buyer]'s assertion that the [Seller] did not deliver the goods cannot be established either from the content of the contract, or the performance of the contract.

The payment term in the contract stipulated that 100% of the price of the goods shall be paid before applying to Customs, which meant before the [Seller] filed the application for color cloths to Customs. The [Buyer] paid the price for the goods, because the contract goods were under the control of the [Buyer] before the [Seller] applied to Customs.

After receiving the goods from the [Seller] at Huizhou, the [Buyer] asked Printing and Dying Company to process gray cloths into color cloths, and applied to Customs for the export of the color cloths without the [Seller]'s help. On 9 May 1997 and 27 May 1997, the [Buyer] paid the contract price to the [Seller].

The IOU issued by the [Buyer] indicated that the [Seller] had fulfilled its contract obligations, but has not executed its contract rights, and it also reflected the [Buyer]'s attitude toward its failure to perform its obligations completely, which was a "promise to make payment before 30 October."

The factual basis for the [Seller]'s receiving HK $146,000 and an IOU of HK $63,313 was that the [Buyer] had received the contract goods. These three items of evidence were the monetary forms of the receipt of the goods.

3. Opinions on the facts and reasons stated by the [Buyer] at the court session.

      (1) The [Buyer] argued that the contract performance place was in Hong Kong, which conflicted with the contract.

The price determined in the contract is FOB (departure price), and the departure place is Huizhou.

      (2) The [Buyer] argued that the quality certificate issued by it did not prove [Buyer]'s receipt of the goods, but could only prove that the goods purchased by the [Seller] for the contract conformed to the contract requirement. This is an irrational argument on the part of the [Buyer]. The contract performance place is in Huizhou, and the goods purchased by the [Seller] were delivered to Huizhou. The [Buyer] inspected and confirmed the quality of the goods. What reason did the [Seller] have not to deliver the goods? And what reason did the [Buyer] have to refuse to take delivery of the goods?

      (3) The [Buyer] argued that the IOU and the document promising to make payment issued by Zhang __ were forced. This has no basis.

      (4) The [Buyer] alleged that the entrustment letter submitted by the [Buyer] on 1 July 1997 to the Arbitration Tribunal was issued by the [Seller] to Zhang __ to entrust the [Buyer] __ to go to Hong Kong to recover the goods that were a subject of deception. The [Seller] defended that this explanation is inconsistent with the content in the entrustment letter. In fact, except for their connection with the [Buyer] in Huizhou, the goods had no connection with anyone else, and there is no fact of being deceived, how come there is a necessity to recover the goods, or to entrust the [Buyer] to recover the goods?

The fact is that after receiving the contract goods, and after printing and dying the goods, the [Buyer] arranged to apply to Customs without the [Seller]'s help. The [Buyer] asked the entrustment of taking care of issues related to the contract goods from the [Seller]. The [Seller] asserts that the entrustment letter had no legal effect at that time (after 1 July 1997), because the contract goods in the entrustment letter issued on 1 July 1997 had been processed into color cloths. The entrustment letter was issued as requested by the [Buyer] since the [Buyer] did not ask the [Seller] to apply to Customs for color cloths.

      (5) The [Buyer] accepted evidence item number 7 submitted by the [Seller] to the Arbitration Tribunal (which was provided from the [Buyer] to the [Seller] in order to prove the reason for its delay in payment), which proved that the explanation for the [Seller]'s issuing the entrustment letter to Zhang __ given by the [Buyer] was false, because:

Suppose the [Seller] issued the entrustment letter to Zhang __ "in order to recover deceived goods":

   -    First of all, Zhang __ definitely would not make payment to the [Buyer];
 
   -    Second, the subject raising compensation in evidence 7 must be the [Seller];
 
   -    Third, it is impossible that there is no mention of [Seller] in the compensation claim letter;
 
   -    Fourth, after Zhang __ was entrusted and before the recovery of the deceived goods, he issued the IOU and payment guarantee letter on 23 October 1997.

All of the above indicated that the [Buyer]'s explanation of falsehood on the entrustment letter cannot be established.

      (6) The [Buyer] asserted that the [Seller]'s inability to provide the Customs application for the goods indicated that the [Seller] did not deliver the goods. However, the [Seller] alleged that the Customs application can only prove whether the contract goods were exported legally, but cannot prove whether the [Seller] delivered the goods. The contract goods no longer exist since the [Buyer] had asked a third party to do the printing and dying. This was why the [Buyer] issued the receipt for the goods, which was also the reason for the [Buyer] to pay the contract price, and issue the IOU and the payment guarantee letter. If the [Buyer] needed the [Seller] to apply to Customs after printing and dying process, it should have notified the [Seller], and determined the loading date and place in detail, otherwise, the [Seller] could not apply to Customs.

The above facts and evidence indicate that the [Buyer]'s claims have no factual basis.

II. OPINION OF THE ARBITRATION TRIBUNAL

The Arbitration Tribunal examined the written materials and evidence submitted by the two parties, heard the parties' statements, arguments, testimonies on the evidence, and their final opinions, and made investigations at the court session. The following are the facts as determined by the Tribunal and the Tribunal's analysis and judgment.

1. The effectiveness of the contract

Export Contract No. SQE97-021 was signed with the agreement of the two parties. It does not violate the applicable law and international trade usages and has binding effect on the parties.

2. Applicable law

The parties agreed in Article 15 of the contract that Chinese law and the CISG apply to disputes, and that the price term in the contract is based on Incoterms 1990. The Arbitration Tribunal respects the parties' mutual agreement.

3. The performance of the contract

The [Buyer] argued that the [Seller] failed to perform its obligation to deliver the goods, but the [Seller] asserted that it delivered the goods to Huizhou on 2 April 1997 as stipulated in the contract. The [Buyer] issued a quality certificate and receipt for the goods, and on 23 October 1997, after settling the account, the [Buyer] issued an IOU and took back the receipt of the goods.

The quality certificate issued by the [Buyer] indicated that the [Buyer] would accept the goods as long as their quality basically conforms to the sample goods. The [Buyer] did not dispute the existence of the quality certificate, but asserted that it was only a confirmation of the quality of the goods. According to the contract, the delivery place of the goods should be in Hong Kong, and the [Seller] shall apply to the Customs; otherwise, the contract should not be called an export contract. The [Seller] counter argued that the [Buyer] needed color cloths, not gray cloths; therefore, after receiving the goods at Huizhou, the [Buyer] asked the Printing and Dying Company to process the contract goods into color cloths. The Customs application should have been made; however, the actual performance of the contract did not conform to the contract stipulations.

The [Buyer] performed its payment obligation by paying HK $56,000 to the [Seller] on 9 May 1997. This is not in dispute. On 28 May 1997, the [Buyer] paid an additional HK $90,000 to the [Seller], which is also not in dispute. The [Buyer] has paid a total of HK $146,000. The [Buyer] alleged that it did this based on the stipulation in the contract that the payment shall be made before the [Seller] applies to the Customs.

On 23 October 1997, the [Buyer] issued an IOU to the [Seller], indicating that it would perform the contract and that there was still HK $63,313 in arrears, which the [Buyer] promised to pay before 30 October. The two parties had no dispute on this fact. However, the [Buyer] alleged that the IOU was forced, and that it could not prove that the [Seller] has delivered the goods. The two parties also confirm that there was only one transaction between the parties in 1997.

The [Seller] alleged that the [Buyer]'s payment of a total of HK $146,000 on 9 May and 27 May 1997, respectively, was a contract performance, and the IOU issued on 23 October was evidence showing the [Buyer] violated the contract by delaying making payment. [Seller] alleges that these three items of evidence prove that the [Buyer] has received the contract goods delivered by the [Seller], that they are monetary evidence of the receipt of the goods.

The Arbitration Tribunal accepts the [Seller]'s position that it has delivered the goods. It is understandable that the [Buyer] alleged that [Seller] had not delivered of the goods if the [Seller] had not delivered the goods before the [Buyer] made payments on 9 May and 27 May, which were beyond the delivery date stipulated in the contract. The [Buyer] alleged that it had not received the goods on 23 October 1997, which was five months later, and the delivery date had expired for six months,. However, the [Buyer] could not provide any written evidence showing it had urged the [Seller] to deliver the goods. The [Buyer] alleged that it issued the IOU as forced by the [Seller], but with no evidence, which is irrational and cannot be accepted by the Arbitration Tribunal. The IOU issued by the [Buyer] on 23 October 1997 indicated that the [Seller] had delivered the goods and that the [Buyer] still owed to the [Seller] the remainder of the price for the goods.

According to the CISG, the [Buyer] may declare the contract avoided if the [Seller] did not perform its obligations, or did not deliver the goods (even after given an additional period of time). However, the [Buyer] has no written evidence to show that it had urged the [Seller] to deliver the goods, but issued an IOU six months after the delivery date, by which the [Buyer] tried to prove that the [Seller] failed to deliver the goods. The Arbitration Tribunal holds that the IOU cannot prove the [Seller]'s non-delivery of the goods.

Based on FOB Incoterms 1990 stipulated in the contract, the [Seller] should have delivered the goods onto the ship specified by the [Buyer] at the designated port pursuant to port practices on or before the stipulated time and should have completed the procedures for exporting the goods, and the [Buyer] should have informed the [Seller] of the ship's name and the delivery time. The [Seller] delivered the goods to the [Buyer] in China and the [Buyer] received the goods in China. The contract was not performed following international trade usages, for which the two parties shall be responsible.

4. Evidence 7 and the entrustment letter

Evidence 7 was the second page of the letter the [Buyer] sent to a Company. The [Buyer] did not provide the first page of the letter, therefore, the receiving party of the letter is unknown. The [Buyer] mentioned the specification, the size, and the price for the goods the [Buyer] should pay to the [Seller] in this letter, which the [Buyer] argues that it explained the reason for the [Buyer] being unable to make payment to the [Seller] on time.

The contents of the entrustment letter the [Seller] issued to Zhang __ are as follows:

"Regarding 7+77+7 and 10+1010+10 gray cloths, we entrust you to handle all matters."

The [Buyer] alleges that evidence 7 and the entrustment letter prove that there was deception associated with the contract goods. The [Seller] entrusted the [Buyer] to recover the price of the goods. The [Seller] defends that the contract goods were never deceived. The [Buyer] printed and dyed the gray cloths after receiving them and made arrangement for the Customs application without the [Seller]'s help, that was why the [Seller] issued the entrustment letter.

The Arbitration Tribunal holds that evidence 7 and the entrustment letter cannot be regarded as evidence proving that the [Seller] did not deliver the goods.

III. THE AWARD

Based on the aforesaid facts and analysis, the Arbitration Tribunal rules that:

   (1)    [Buyer]'s claim that the [Seller] shall return the price for the goods of HK $146,000 is dismissed;
 
   (2)    [Buyer] shall bear the entire arbitration fee of RMB __, which has been paid by the [Buyer] in advance.

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 [Buyer] and Respondent of the People's Republic of China 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 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.

*** LIN Zhongming, LL.M. China University of Political Science and law. Major: International Economic Law.

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