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CISG CASE PRESENTATION

China, Arbitration award of June 1999 (Peanut kernel case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/990600c1.html]

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

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Case identification

DATE OF DECISION: 19990600 [June 1999] [date of a PRC publication of award]

JURISDICTION: Arbitration ; P.R. China

TRIBUNAL: Unavailable

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1999/03

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Peoples' Republic of China (claimant)

BUYER'S COUNTRY: Netherlands (respondent)

GOODS INVOLVED: Peanut kernels


Case abstract

PRC: China International Economic & Trade Arbitration Commission,
Peanut kernel case of June 1999

Case law on UNCITRAL texts (CLOUT) abstract no. 685

Reproduced with permission of UNCITRAL

Abstract prepared by Jean Ho

The parties entered into a sales contract for peanut kernels. The contract stipulated the quality standard, the shipment, FOB and the approximate time for shipment. Further, the contract foresaw that the buyer should make payment by a Letter of Credit (L/C) within 15 days prior to the date of shipment. The buyer inspected the goods on four occasions with the seller. After the last inspection, however, it declared that it would not open the L/C alleging nonconformity of the goods with the contract standard. When negotiations to settle the issue failed, the seller informed the buyer via fax that it was treating the contract as terminated and claimed damages for losses from the buyer before an arbitration tribunal.

The buyer argued that it had been the business practice during the parties' long-term trading relationship that the buyer was only bound to open the L/C after both parties had agreed on the eligibility of the goods after their inspection. As the seller did not prepare the goods in conformity with the contract standard, the buyer was under no obligation to open the L/C.

The tribunal held that the contract provision on the opening of the L/C prevailed over the business practice of the parties alleged by the buyer [Art. 9 CISG]. Therefore, the buyer's failure to open the L/C and to arrange for transportation constituted a fundamental breach of contract [Art. 25 CISG]. The buyer was, thus, liable for the seller's loss of profits pursuant to [Art. 74 CISG]. However, the tribunal noted that the seller should mitigate its loss according to Art. 77 CISG by taking reasonable measures to resell the goods at the prevailing market price [CISG Article 76(1)].

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Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 8 ; 9 ; 25 ; 74 ; 76 ; 77

Classification of issues using UNCITRAL classification code numbers:

8A [Intent of parties: written contract condition vs. prior practice];

9C [Practices established by the parties];

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

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: Intent ; Usages and practices ; Fundamental breach ; Avoidance ; Damages ; Mitigation of loss

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Editorial remarks

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Arbitration Research Institute of China Chamber of International Commerce (CCOIC) (ed): Commentary on Typical Arbitration Cases of International Economy and Trade, Beijing: Law Press (1999.6) 3-6

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at nn.44, 219, Nordic Journal of Commercial Law (2/2005)

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Case text (English translation)

Queen Mary Case Translation Programme

Arbitration Award, People's Republic of China

Peanut kernel case (June 1999)
[date of a PRC publication of the award]

Translation [*] by JIANG Xueyan [**]

Reviewed by LIU Ping [***]

[PROCEEDINGS]

CAUSE OF ACTION

Dispute on payment in international sale of goods.

PARTIES

Claimant: A company registered in P.R. China [Seller]. Respondent: A company registered in Netherlands [Buyer].

[FACTS]

[Seller] and [Buyer] entered into a contract for the purchase and sale of peanut kernels on 23 March 1994 (hereinafter: the "Contract"). They agreed that [Buyer] would purchase 5,000 ton of peanut kernels (hereinafter: the "goods") from [Seller] and that the peanut kernels should be 40/50 standard grains per ounce, at the price of US $715 per ton, FOB Tian Jin [People's Republic of China]. The total price was US $3,575,000, to be paid by irrevocable and negotiable Letter of Credit [L/C] within 15 days prior to the time of shipment. The time of shipment was from April to May 1994.

[Seller]'s position

After concluding the Contract, [Seller] actively prepared the goods as required by the Contract. In order for [Buyer] to open the L/C as early as possible, [Seller] went with [Buyer] to inspect the goods jointly on 24 and 25 March and on 13 and 14 May of 1994, but [Buyer] had not yet opened the L/C. On 31 May 1994, [Buyer] declared that it was discharging its obligations under the Contract simply because there was not enough time left [for Buyer] to arrange for the shipment. However, [Seller] still expected [Buyer] to perform the Contract and continued to contact [Buyer] until 13 June 1994 when the negotiation between the parties eventually failed. On 16 June, [Seller] claimed damages against [Buyer] via fax, and declared the Contract terminated.

[Seller] submits that under an FOB contract [Seller] is obliged to guarantee the quality and specifications of the goods in accordance with the Contract at the time of shipment, but [Seller] is not bound to perform this obligation in the situation where [Buyer] does not perform its obligations to open the L/C and arrange transportation. [Buyer]'s failure to open the L/C and arrange transportation constitutes a fundamental breach of the Contract. Since [Buyer] did not open the L/C, [Seller] had to convert the peanut kernels to peanut oil and sell it, which resulted in great losses to [Seller]. [Buyer] should compensate [Seller] for all of the consequent loss of profits and other losses.

[Buyer]'s position

After the conclusion of the Contract, [Buyer] urged [Seller], again and again, to prepare the goods before the date of shipment provided by the Contract, so that [Buyer] could open the L/C after both parties inspected the goods. On 24 and 25 March and on 13 and 14 May 1994, [Seller] and [Buyer] inspected the goods jointly. However, the goods were not in conformity with the standards specified in the Contract.

The fact that on 30 May [Seller] asked [Buyer] to inspect the goods once more shows that a practice had been established between [Buyer] and [Seller] during their long-term trading relationship that the time when [Buyer] is bound to open the L/C should be a reasonable time after both parties had inspected the goods and agreed on the eligibility of the goods. This practice was expressed when the Contract was concluded and has been followed by both parties as an implied condition during their long-term cooperation.

[Seller] did not prepare goods in conformity with the Contract, and this led to the result that [Buyer] did not open the L/C. Therefore, [Buyer] did not breach the Contract.

AWARD

[Buyer] shall compensate [Seller] for [Seller]'s reasonable losses US $52,200, caused by [Buyer]'s fundamental breach.

[Seller]'s other claims are dismissed.

COMMENTS

1. The customary practices of the parties do not overturn a provision expressly written in the contract

The parties have no disputes about the fact that [Buyer] did not open the L/C under the Contract. The dispute between the parties is:

     [Seller] claims that under an FOB contract [Seller] is bound to guarantee the quality and specifications of the goods as specified in the Contract at the time of shipment, but the precondition is [Buyer]'s fulfillment of its obligations to open the L/C and arrange transportation. [Buyer]'s failure to open the L/C and arrange transportation constitutes a fundamental breach of contract.

     [Buyer] takes the position that the parties have established the practice during their long-term trading relationship that the time when [Buyer] is bound to apply for the L/C should be a reasonable time after both parties inspect the goods and agree on the goods' eligibility. This practice was expressed when the Contract was concluded and had been followed by the parties as an implied condition in their long-term cooperation. Therefore [Buyer]'s failure to open the L/C was caused by [Seller]'s failure to prepare goods in conformity with the Contract, and [Buyer] did not breach the Contract.

The price term stipulated in Contract was FOB Tian Jin. Moreover, the Contract provided in writing that [Buyer] should open the L/C within 15 days prior to the time of shipment, and did not stipulate that [Buyer] could open the L/C within a reasonable time after both parties inspected the goods and agreed on the eligibility of the goods. Regardless of whether during their long-term cooperation both parties have established the practice of inspecting the goods first and opening the L/C thereafter, a provision to the contrary expressly agreed in the Contract shall naturally prevail over an implied inference [i.e., the practice alleged by Buyer]. Therefore, [Buyer] is bound to open the L/C within 15 days prior to the time of shipment. [Buyer]'s failure to perform its obligations under the Contract and its declaration to terminate the Contract via the fax on 31 May 1994 constitute a fundamental breach of contract. [Buyer] should be liable for its breach.

2. The reasonable loss of profits should be the difference between contract price and the current market price

According to Article 77 of the United Nations Convention on Contracts for the International Sale of Goods (hereinafter: the CISG):[1]

"A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated."

[Seller] should take reasonable measures to resell the goods at the current market price to mitigate its loss. [Seller]'s reasonable and direct loss of profits should be the difference between the contract price and the current market price. [Seller] shows, in evidence submitted by it, that in June 1994 the current market price for FOB Tian Jin 40/50 peanut kernels was US $700 per ton. [Buyer] did not argue against this price, and it is proper to apply the current market price. [Seller]'s reasonable loss should be calculated as follows: 3,480 tons [2] x [US $715/ton (contract price) - US $700/ton (current market price)] = US $52,200. [Buyer] shall compensate [Seller] for this loss.


FOOTNOTES

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

** JIANG Xueyan, LL.M. candidate, Peking University Law School, Beijing, P.R. China, 2002 to present; LL.B. Peking University Law School, 2000.

*** LIU Ping, Lawyer, Baker & McKenzie, Beijing, People's Republic of China; LL.M., Harvard Law School (2003-2004); Master of Civil and Commercial Law, Tsinghua University Law School (2000-2003).

1. Note by Reviewer: The Chinese resource does not provide how the CISG is applied: by express choice of both parties, or by Article 1(1)(a) of the CISG.

2. Note by Reviewer: The Contract provides for "5,000 tons" of peanut kernels. The Chinese resource does not explain why "3,480 tons" is used to calculate [Seller]'s damages.

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