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CISG CASE PRESENTATION

China 4 June 1999 CIETAC Arbitration proceeding (Industrial raw material case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/990604c1.html]

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

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Case identification

DATE OF DECISION: 19990604 (4 June 1999)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1999/28

CASE NAME: Unavailable

CASE HISTORY: Unavailable

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

BUYER'S COUNTRY: United States (respondent)

GOODS INVOLVED: Industrial raw material


Case abstract

PRC: Award of China International Economic & Trade Arbitration Commission [CIETAC] 4 June 1999 (Industrial raw material case)

Case law on UNCITRAL texts (CLOUT) abstract no. 808

Reproduced with permission of UNCITRAL

Abstract prepared by MAA - Jean Ho

A Chinese seller and an American buyer entered into a contract for the sale of industrial raw materials in April 1998. The buyer was requested to make payment by letter of credit ("L/C"). After the goods were shipped, the seller submitted the L/C to the paying bank but the L/C could not be honoured because the dates in the L/C and the bill of lading (B/L) did not correspond (the seller's carrier had written "1999" instead of "1998" in the B/L). The seller urged the buyer to redeem the B/L and pay the contract price. The buyer requested the seller to reduce the contract price on the basis that the disparity in dates was due to the seller's oversight. The seller refused and the buyer, in turn, did not take delivery of the goods or make payment. Eventually, the seller sold the goods to another company incurring a loss. It then commenced arbitration proceedings against the buyer claiming, among others, damages (Articles 74 and 75 CISG) and interest until the day payment is made by the buyer (Article 78 CISG).

The buyer argued that since the seller had submitted a document containing an error, the documents were not handed over to the buyer in the manner envisaged in Article 34 CISG, and that constituted a fundamental breach of contract. The seller's reselling of the goods without notifying the buyer amounted to unilateral avoidance of the contract and was also a fundamental breach. Finally, the buyer argued that its request to reduce the price of the goods was reasonable since the disparity in dates in the B/L and L/C would cause it to incur additional expenses if it wanted to resell the goods using the very same documents.

The Arbitral Tribunal rejected the buyer's arguments because not every instance of non-conformity in documents amounts to a fundamental breach of contract. In the present case, it was obvious that the error in question was merely typographical and the buyer should have acted in good faith and accepted delivery of the goods (Articles 7 and 25 CISG). Moreover, the buyer had no right to request a reduction in price because the typographical error in the B/L was not a barrier to reselling the goods. As the buyer had not manifested any intention to accept the goods within a reasonable time, this constituted an abandonment of contract and the seller was entitled to resell the goods without sending the buyer a written notice of avoidance of the contract.

Therefore, the tribunal upheld the seller's claims.

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Classification of issues present

APPLICATION OF CISG: Yes [Article 1(1)(a)]

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 7 ; 25 ; 26 ; 34 ; 49 ; 64 ; 74 ; 75 ; 77 ; 78

Classification of issues using UNCITRAL classification code numbers:

7A3 [Observance of good faith];

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

26A1 [Effective declaration of avoidance: notice to the other party required];

34A [Seller's obligation to hand over documents];

49A1 [Buyer's right to avoid contract (grounds for avoidance): fundamental breach of contract];

64A1 [Seller's right to avoid contract (grounds for avoidance): fundamental breach of contract];

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

75A1 [Damages established by substitute transaction after avoidance; resale by aggrieved seller];

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

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

Descriptors: Good faith ; Fundamental breach ; Avoidance ; Conformity of documents ; Letters of credit ; Damages ; Cover transactions ; Mitigation of loss ; Interest

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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): 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. 2051-2055

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at nn.40, 126, 129, 146, Nordic Journal of Commercial Law (2/2005)

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Case text (English translation)

Queen Mary Case Translation Programme

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

Industrial raw materials case (4 June 1999)

Translation [*] by Zheng Xie [**]

Reviewed by LIU Ping [***]

China International Trade and Economic Arbitration Commission [hereinafter: CIETAC] accepted this case according to:

   -    The arbitration clause in Contract No. 98MB102-043 signed on 20 April 1998 in Zhuhai [People's Republic of China], by Claimant [Seller] China ___ Import and Export Company, and Respondent [Buyer] US ___ Company; and
 
   -    The written arbitration application submitted by [Seller] to CIETAC on 29 October 1998.

Because the disputed amount in this case is less than RMB 500,000, according to Article 65 of the Arbitration Rules, summary procedure is applied to this case.

On 3 March 1999, according to the Arbitration Rules, the Chairman of CIETAC appointed Mr. P as the sole arbitrator to form the Arbitration Tribunal and hear this case.

The Arbitration Tribunal reviewed the application and the reply submitted by [Seller] and [Buyer], and held a hearing in Beijing on 6 May 1999. Both [Buyer] and [Seller] sent representatives to attend the hearing, and they presented statements and arguments, and answered the Arbitration Tribunal's questions.

Considering the written materials and the hearing, the Arbitration Tribunal has concluded the case and rendered its award by consent.

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

FACTS

On 20 April 1998, [Seller] and [Buyer] signed Contract No. 98MB102-043 (hereinafter: the Contract). The Contract provides for the purchase by [Buyer] from [Seller] of 17 tons of industrial raw materials for a contract price of US $239,761.46, with payment by Letter of Credit (hereinafter: L/C).

POSITION OF THE PARTIES

[Seller]'s Claim

After signing the Contract, [Buyer] issued the L/C. [Seller] shipped the goods according to the Contract. However, when [Seller] submitted the L/C to the paying bank for negotiation, the bank dishonored the L/C because the carrier mistakenly wrote 1999 as 1998 in the Bill of Lading (hereinafter: B/L). [Seller] notified [Buyer] about this disparity, and requested [Buyer] to perform the Contract, accept the disparity and redeem the B/L. However, [Buyer] did not redeem the B/L, but requested [Seller] to reduce the price due to this disparity. When [Seller] refused [Buyer]'s request, [Buyer] refused to make the payment. In order to mitigate the loss, [Seller] had to resell the goods to another company for US $204,719.40. [Seller]'s loss due to the price difference is US $35,042.06.

[Seller] applied for arbitration and made the following claims:

1.     [Buyer] should pay [Seller] the loss of price, US $35,042.06;
2. [Buyer] should pay [Seller] the loss of interest until the day [Buyer] makes the payment (to the end of 1998, the interest should be US $4,616.71);
3. [Buyer] should pay the demurrage, US $1,245.91 and bank interest, RMB 1,330;
4. [Buyer] should bear the entire arbitration fee of this case.

[Buyer]'s reply

1. [Buyer] issued the L/C in accordance with the Contract, but [Seller] did not deliver a complete set of documents as required by the L/C. This constitutes a breach of contract. [Buyer] has no duty to accept the disparity with the Contract, and did not breach the Contract. According to Article 34 of the United Nations Convention on Contracts for the International Sale of Goods (1980) (hereinafter: CISG), it is an important duty for [Seller] to deliver the documents to [Buyer]. [Seller] did not deliver the documents required by the L/C. Therefore, [Seller] breached the Contract. [Seller], in its correspondence, admitted that there was an "error" with respect to the year on the L/C, and this shows that the disparity was caused by [Seller]'s fault and that [Buyer] was not liable. When the documents do not comply with the L/C, the bank has sufficient reason to dishonor the L/C.

2. As to the disparity of the documents, [Seller] should revise it in order for the bank's negotiation, but [Seller] did not make the revision in a timely manner. Although, in its correspondence, [Seller] stated that the shipping company had taken some measures to deal with the disparity, [Seller] did not provide the revised B/L to the bank or [Buyer]. [Buyer], as a trader, signed this Contract in order to resell the goods to gain profits out of the price difference. Most international sales of goods are documentary transactions. [Seller] mistakenly wrote 1999 in the B/L, and this would cause severe trouble for [Buyer] to resell the documents and would also cause a large expense by [Buyer]. On 8 June 1998, [Buyer] wrote to [Seller], stating that because the year in the B/L was mistakenly written, [Buyer]'s client could not resell the goods to its downstream buyer, and [Buyer]'s client refused to accept all of the goods. Accordingly, [Buyer] proposed to reduce the price, and [Seller] has no right to make any claim on this basis.

3. [Buyer] never stated that it would refuse to accept the goods. However, without notifying [Buyer], [Seller] unilaterally avoided the Contract and resold the goods. This constitutes a fundamental breach of contract. [Buyer] tried to negotiate with [Seller] to mitigate the loss as much as possible. [Buyer] never expressed or implied that it would refuse to accept the goods or avoid the Contract. And [Seller] did not provide any evidence to prove that [Buyer] made such statement. According to the CISG, if one party wants to avoid the contract, he must send notice to the other party, and then the avoidance can take effect. [Seller] completely deprived [Buyer] of its economic interest because [Seller] avoided the Contract unilaterally without giving [Buyer] any notice. [Seller] fundamentally breached the Contract, and has no right to claim for damages against [Buyer].

After the hearing, [Buyer] made the following supplementary reply:

     1. In international sales of goods, the seller's duty to deliver the documents is a key to the performance of its duty of "delivery". This is because the B/L, one of the documents delivered by [Seller], is the certificate of ownership of the goods, and possession of the B/L represents possession of and control over the goods. In addition, from a commercial perspective, [Buyer], as a trader, cannot resell the goods after taking physical possession of the goods, but resells the relevant documents after obtaining the documents. Also, the documents are the basis for [Buyer] to claim against any third parties for damages. Because the shipping documents are very important to [Buyer], the documents delivered by [Seller] must be in strict compliance with the Contract. Although scholars have different opinions on strict compliance, the principle of strict compliance stipulated in the UCP 500 is binding. [Seller] did not provide the documents in strict compliance with the L/C, so it breached the Contract. [Buyer] may suffer loss if it is requested to accept the non-compliance or make payment.

     2. [Seller] asserts that if payment by the L/C is impossible, [Seller] still has the right to deliver the goods directly to [Buyer] instead of delivering the documents and that [Buyer] should pay [Seller] by other means. It is [Buyer]'s position that [Seller] is not entitled to require [Buyer] to make the payment directly to [Seller] except where (a). the bank is bankrupt; or (b) the bank wrongfully refused the documents. In this case, no such situations exist. Thus, [Seller] is not entitled to require [Buyer] to make the payment directly.

     3. A L/C has two functions: guarantee of safety and financing. The protection provided by the L/C to [Buyer] is that the documents and L/C must be in strict compliance. Because the documents presented by [Seller] are not in compliance with the L/C, if [Buyer] is required to accept the non-complying documents and make the payment, [Buyer] is deprived of the protection afforded by the L/C. In terms of financing, because [Buyer] has a good relationship with the issuing bank, the issuing bank can issue the L/C without a down payment, and [Buyer] actually gets financing from the bank. [Seller]'s current request for [Buyer] to make payment by other means will restrain [Buyer]'s ways of financing, cause [Buyer] to face great financial pressure, and affect [Buyer]'s anticipated economic interest.

     4. As stated above, because the documents submitted by [Seller] and the L/C are not in compliance, payment by L/C is impossible. [Seller] fundamentally breached the Contract, and [Buyer] has the right to avoid the Contract. Even if acts of [Seller] do not constitute fundamental breach and [Buyer] still has a duty to make the payment, according to the CISG, [Buyer] has no duty to make the payment before it has a reasonable opportunity to inspect the goods. [Buyer] may suffer unforeseeable losses, if it accepts the disparity of the relevant documents. Therefore, [Buyer]'s request to reduce the price is reasonable. A businessman's judgment is always based on his concern on profitability. [Buyer]'s action in response of the market price is therefore reasonable.

     5. The payment term stipulated in the Contract is by L/C. However, because the documents submitted by [Seller] are not in compliance, the payment by L/C is impossible. This shows that the payment clause in the Contract automatically terminated. The parties did not reach a new agreement on the payment term, so the original contract lacked a basic clause and was not validly established.

     6. Moreover, [Seller]'s resale price is unreasonable. First, the resale price is lower than the reduced price which [Buyer] suggested. Second, in July 1998, the high and low floating prices of the goods were US $6.407/LB [1] and US $5.983/LB, respectively, and the average price was US $6.047/LB. However, on 30 July 1998, [Seller]'s resale price was US $5.55/LB, which differs greatly from the average market price. The difference is US $0.497/LB [i.e., 6.047 - 5.55]. The total price difference is US $18,626.83438. In addition, [Seller]'s calculation of loss of interest is unreasonable. The date of [Seller]'s evidence for demurrage is later than the day when the goods were resold, so the evidence should not be admissible.

OPINION OF THE ARBITRATION TRIBUNAL

1. Applicable law

Because [Seller]'s place of business is in China and [Buyer]'s place of business is in the US, and these two countries are parties to the United Nations Convention on Contracts for the International Sale of Goods (1980) (hereinafter: the CISG), the Arbitration Tribunal holds that the CISG is applied to this case.

2. The disparity in the documents

Both [Seller] and [Buyer] acknowledge that the documents submitted by [Seller] for negotiation are not in compliance with the L/C, and that the disparity is the date of the B/L, which should be 1998 but was mistakenly typed as 1999. [Seller] asserts that [Buyer] should accept this lack of compliance and redeem the documents, but [Buyer] refused to do this and asked [Seller] to reduce the price.

The Arbitration Tribunal holds that:

     (1) The payment term stipulated in this Contract is by L/C, so after delivering the goods, [Seller] should deliver documents that are in compliance with the L/C in order to get the payment. Under the usual circumstances, the documents must strictly comply with the L/C, but not every non-compliance constitutes a breach. According to the facts acknowledged by both parties, the lack of compliance in this case is that the date of the B/L, which should be 1998, was mistakenly printed as 1999. The Contract in this case was signed and performed in 1998, and [Seller] presented the documents to the bank for negotiation in 1998, so it is easy for [Seller], [Buyer] or any person with international trade knowledge to know that this was obviously a typing error.

     (2) In contracts for the international sales of goods, it is the seller's duty to deliver the documents. However, in this case, the typing mistake of the date in the B/L would not affect [Buyer]'s taking delivery of the goods. [Buyer] should have given up its lack of compliance complaint, gotten the documents from the bank, and taken delivery of the goods.

     (3) The documents submitted by [Seller] have no other non-compliance, except for the typing mistake of the date in the B/L. On the basis of the documents, no one can conclude that the goods delivered by [Seller] are not those under the Contract, or that the goods are seriously defective. [Buyer], as a businessman, should perform its duty in good faith. Its assertion that the disparity between the documents submitted by [Seller] and the L/C constitutes a fundamental breach and therefore [Buyer] is entitled to avoid the Contract and refuse to take delivery of the goods cannot be upheld. The Arbitration Tribunal holds that [Buyer] should give up the disparity and accept the goods, and has no right to request a price reduction. In other words, when payment by L/C is impossible, [Buyer] should pay directly to [Seller] with its own credit, rather than the credit of the bank.

     (4) [Buyer] asserts that the disparity affects [Buyer]'s resale and financing. The Arbitration Tribunal holds that merely this typing mistake regarding the date in the B/L cannot constitute a barrier to [Buyer]'s resale.

To sum up, the Arbitration Tribunal holds that [Buyer] should accept the goods and has no right to request a price reduction.

3. [Seller]'s resale

[Seller] delivered the goods in accordance with the Contract and fulfilled its duty to deliver the goods. As stated above, [Buyer] should have accepted the goods and had no right to request a price reduction. [Buyer], however, requested a price reduction on the basis that the documents and the B/L were not in compliance. When [Seller] refused to reduce the price, [Buyer] did not, within a reasonable time, show its intention to accept the goods. The Arbitration Tribunal holds that such acts of [Buyer] constitute an abandonment of the Contract, and accordingly [Seller] had the right to resell the goods in order to mitigate its losses. Because [Buyer] abandoned the Contract, [Seller] was not obliged to send a written notice of avoidance to [Buyer] before [Seller] exercised its right [to resell].

4. [Seller]'s claims

As found by the Arbitration Tribunal, the total amount of the goods delivered by [Seller] is 17 tons (1 ton = 2,204.62 pounds), the content of V205 is 98.42%, the unit price under the Contract is US $6.5/pound, and the total contract price is US $6.5/pound * 2204.62 pounds * 17 * 98.42% = US $239,761.46.

[Seller] resold the goods at US $5.55/pound. The total resale price is US $5.55/pound * 2,204.62 pounds * 17 * 98.42% = US $204,719.40.

Accordingly, the loss caused by the price difference is US $239,761.46 - US $204,719.40 = US $35,042.06.

[Buyer]'s assertion that [Seller]'s resale price was lower than the then-current market price is unreasonable. The Arbitration Tribunal finds that, according to the evidence submitted by [Seller], the average then-current market price was US $6.047/pound, which only differs with [Seller]'s resale price by US $0.479/pound. The Arbitration Tribunal holds that because of [Buyer]'s refusal to accept the goods, [Seller]'s goods became goods backlogged at the port and were at a disadvantageous position to be resold. Accordingly, it is reasonable for the resale price to be slightly lower than the then-current market price. The Arbitration Tribunal upholds [Seller]'s claim for its loss caused by the price difference, in the amount of US $35,042.06. [Buyer] shall also pay interest on this amount at the annual rate of 8% from 16 May 1998 to the day when the payment is made.

[Buyer] shall pay for the demurrage caused by [Buyer]'s refusal to take the goods. Accordingly, the Arbitration Tribunal upholds [Seller]'s claim for the demurrage in the amount of US $1,245.91.

[Seller] also claims for its bank expenses in the amount of RMB 1,330. The Arbitration Tribunal finds that the delivery term in this Contract is C&F and [Seller] is liable for loading the goods. Because the shipping company arranged by [Seller] mistakenly typed the date in the B/L and this mistake caused the bank's refusal to pay, [Seller] shall bear the bank expenses RMB 1,330.

AWARD

The Arbitration Tribunal makes following award:

1.     [Buyer] shall compensate [Seller] for the loss caused by the price difference, US $35,042.06, and the interest on this amount at the annual rate of 8% from 16 May 1998 to the day when the payment is made.
2. [Buyer] shall compensate [Seller] for the demurrage, US $1,245.91.
3. [Buyer] shall bear the entire arbitration fee. [Seller] has paid the arbitration fee in advance. Thus, [Buyer] shall pay [Seller] RMB ___ .
4. [Seller]'s other claims are dismissed.

[Buyer] shall pay the above amount within 45 days after the date of this award. Otherwise, [Buyer] shall pay additional interests at an annual rate of 9%.

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]; Respondent of the United States 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.

*** 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: Given the context, there seems to be a typo here; the high floating price should be US $6.111/LB [6.047 * 2 - 5.983].

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Pace Law School Institute of International Commercial Law - Last updated October 27, 2008
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