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CISG CASE PRESENTATION

China 10 August 1999 CIETAC Arbitration proceeding (Raincoat case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/990810c1.html]

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

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Case identification

DATE OF DECISION: 19990810 (10 August 1999)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1999/35

CASE NAME: Unavailable

CASE HISTORY: Unavailable

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

BUYER'S COUNTRY: Hong Kong (respondent)

GOODS INVOLVED: Raincoats


Classification of issues present

APPLICATION OF CISG: Yes, agreement of the parties

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 25 ; 50 ; 73(1) ; 74 ; 78 ; 80

Classification of issues using UNCITRAL classification code numbers:

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

50A [Buyer's right to reduce price for non-conforming goods];

73A1 [Avoidance in installment contracts (fundamental breach with respect to installment): declaration of avoidance with respect to defective installment];

74A1 [General rules for measuring damages (loss suffered as consequence of breach): includes loss of profit];

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

80A [Failure of performance caused by other party (party causing non-performance): loss of rights]

Descriptors: Fundamental breach ; Avoidance ; Installment contracts ; Reduction of price, remedy of ; Cumulation or election of remedies ; Damages ; Profits, loss of ; Interest ; Failure of performance, other party

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Editorial remarks

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CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

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

Raincoat case (10 August 1999)

Translation [*] by Zheng Xie [**]

Edited by John W. Zhu [***]

PARTICULARS OF THE PROCEEDING

The China International Economic and Trade Arbitration Commission Shanghai Sub-Commission (hereafter, the "Sub-Commission") accepted the case according to:

   -    The arbitration clause in the Contract signed by Claimant [Seller], __ Ltd., and Respondent [Buyer], Hong Kong __ Ltd., on 10 December 1997;
 
   -   The written arbitration application submitted by the [Seller] on 8 July 1998.

The Sub-Commission sent the Notice of Arbitration and relevant documents to the parties. On 9 October 1998, Arbitrator __, appointed by the [Seller], Arbitrator __, appointed by the Chairman of the Sub-Commission according to the Arbitration Rules of the CIETAC (taking effect on 5 May 1998, hereafter, the "Arbitration Rules") because the [Buyer] did not appoint an arbitrator within the time provided, and the Presiding Arbitrator, __, appointed by the Chairman because the parties failed to jointly appoint one, formed the Arbitration Tribunal to hear this case.

Before the court session, the [Buyer] did not submit any response material. The Arbitration Tribunal carefully reviewed the [Seller]'s application material and held the court session in Shanghai on 18 November 1998. The [Seller]'s agent for the arbitration was present at the court session, but the [Buyer] was not present. According to Article 42 of the Arbitration Rules, the Arbitration Tribunal heard this case by default.

The [Seller]'s agent presented statements to the Arbitration Tribunal and answered the tribunal's questions. Upon the end of the court session, the [Buyer]'s agent came to the Sub-Commission, submitted its response material and introduced its facts of this case to the Arbitration Tribunal. After the court session, the [Seller] submitted to the Arbitration Tribunal its "Petition to Change the Arbitration Claims" and relevant supplementary material. Since the [Buyer] was not present in the first court session and the [Seller] changed its claims, the Arbitration Tribunal agreed and determined to hold the second court session in Shanghai on 18 January 1999. The parties entrusted their agents to attend the court session, and made complete statements and arguments. After the court session, the parties submitted supplementary written statements and relevant evidentiary material. Because the supplementary evidence submitted after the court session needed to be cross-examined, the Arbitration Tribunal scheduled a third court session on 7 June 1999. The [Seller]'s and the [Buyer]'s agents were present at the court session. After this court session, the [Buyer] filed a petition to request the Arbitration Tribunal to hold a fourth court session, and the [Seller] sent a letter to the Tribunal requesting to hand down an arbitration award on time. The Arbitration Tribunal ruled that the parties had already been provided sufficient opportunities to present statements and submit evidence, so it did not agree to hold a fourth court session.

This case was closed. After deliberation, the Arbitration Tribunal handed down its award on the basis of the evidence and the court session.

The following are the facts, Tribunal's opinion and award.

FACTS

The parties signed Contract No. __ in 1997, and signed an order retroactively in December of the same year. The Contract included the following terms:

Goods: The [Seller] shall sell men's raincoats to the [Buyer];
Quantity: 100,000 raincoats;
Unit price: US $8.40/PC CIF GENAVA;
Total price: US $840,000;
Destination port: Genava, Italy;
Payment: Sight L/C. The [Buyer] shall issue a confirmed, irrevocable, negotiable and divisible sight L/C for 100% of the invoice amount 30 days before the shipping period. If the terms of the L/C are not acceptable and the [Seller] requires an amendment, the [Buyer] shall amend the L/C immediately upon receipt of the [Seller]'s notice; otherwise, the [Buyer] should bear all loss incurred therefor.
Claims: The parties agree that the quality and quantity/weight inspection certificate issued by China __ Import and Export Commodities Inspection Bureau will be the conclusive proof of the goods delivered to the [Buyer]. The [Buyer] should raise objection to the quality of the goods, if any, within 15 days after the goods arrive at the destination port described in the bill of lading; any objection to the packaging, quantity or specification should be raised within seven days after the goods arrive at the destination port. Reasonable differences of material, weight, size, design and color are permissible; claims based on the reasonable differences permissible above shall not be accepted.

POSITION OF THE PARTIES

[Seller]'s position

After the execution of the Contract, a dispute arose and the [Seller] filed its arbitration application. The [Seller] filed the following claims:

      (1) The [Buyer] should pay to the [Seller] the contract price of US $42,000 under Contract No. F816004, and interest of RMB 16,035 on the above amount (calculated to the day when the arbitration application was filed);

      (2) The [Buyer] should compensate the [Seller] for the loss of export tax return of RMB 26,559.83 under Contract No. F816004;

      (3) The [Buyer] should compensate the [Seller] for the loss of anticipated profits of RMB 292,620 on the sale of 31,000 raincoats;

      (4) The [Buyer] should compensate the [Seller] for the attorneys' fee of RMB 30,000;

      (5) The [Buyer] should bear the arbitration fee of this case.

After the [Seller] filed the arbitration application with the Sub-Commission, the [Buyer] paid the [Seller] US $42,000 of the contract price under Contract No. F816004. Therefore, at the court session, the [Seller] requested the opportunity to change its claims, and submitted its Petition to Change the Arbitration Claims thereafter. With the Arbitration Tribunal's approval, the [Seller] changed its claims to:

      (1) The [Buyer] should compensate the [Seller] for the loss of anticipated profits of US $35,255 for 31,000 raincoats;

      (2) The [Buyer] should bear the arbitration fee of this case (US $).

The [Seller] alleged:

      After signing the Contract, the [Seller] arranged all of its factories to produce 100,000 raincoats in accordance with the stipulated schedule, but the [Buyer] did not issue the revolving sight L/C according to the Contract, and only issued a single L/C for each shipment. From 2 January 1998 to the present, the [Buyer] issued in total five L/Cs; the [Seller] delivered in total 69,000 raincoats with the total value of US $596,600, which were accepted by the [Buyer]. The [Buyer] paid US $527,600 by L/C as of the day when the arbitration application was filed, and paid an additional US $42,000 thereafter.

      However, the [Buyer] refuse to issue the L/C for the remaining 31,000 raincoats. On 4 May 1998, the [Buyer] requested to change the unit price for the 31,000 raincoats from US $8.40/PC to US $7.40/PC, and to change the payment method to D/P. On 7 May 1998, the [Seller] confirmed the above modification and, on the same day, received the [Buyer]'s letter requesting shipment of the goods as soon as possible. However, on 11 May, the [Buyer] requested the [Seller] to re-pack and ship the 31,000 raincoats together with the goods under the other order; since at that time the [Buyer] could not determine the quantity under that order, the 31,000 raincoats could not be shipped on time. On 28 May 1998, the [Seller] sent another letter to the [Buyer] requesting to arrange the shipment, but on 29 May, the [Buyer] sent a responding letter rejecting the 31,000 raincoats. Because the goods were manufactured according to the [Buyer]'s special requirements, when the [Buyer] rejected the goods, the 31,000 raincoats were still stored in the warehouse and could not be resold in a short time.

      The [Buyer] unreasonably rejected the goods, and caused that the [Seller] to suffer the loss of anticipated profits for the 31,000 raincoats. The loss was calculated as follows:

The loss of anticipated profits = the contract price minus the purchase price =

RMB 1,904,020 minus RMB 1,611,400 = RMB 292,620 (equals US $35,255)

The contract price = US $7.4 31,000 raincoats 8.3 = RMB 1,904,020

The purchase price: RMB 1,611,400 including:

a. RMB 48.66 15,000 raincoats = RMB 729,900
b. RMB 51.50 6,000 raincoats = RMB 309,000
c. RMB 57.25 10,000 raincoats = RMB 572,500

According to Article 18 of the Law on Economic Contracts Involving Foreign Interest and Article 74 and Article 78 of the United Nations on Contracts for International Sales of Goods (CISG), the [Seller] requests the [Buyer] to compensate for all of its loss incurred due to the [Buyer]'s breach.

[Buyer]'s Response

In its response, the [Buyer] alleged that after signing the Contract, the [Seller] shipped six installments totaling 69,000 raincoats with the total value of US $569,600. The CCIC inspection certificates submitted by the [Seller] showed that the goods delivered by the [Seller] were not in compliance with the Contract; five inspection certificates showed that the goods delivered by the [Seller] were below the inspection standard. Because CCIC had no capacity to examine the fabric organization and factors, in order to examine the quality of the material of the goods, the [Buyer] had to submit the shipping samples (Jacket + Vest) to Intertek Testing Services (ITS) for material inspection before each shipment. Inspection Certificate No. __ dated 14 January 1998 proved that the materials were polymerase but not nylon; each inspection certificate showed that the fabric structure and waterproof layer of the goods delivered by the [Seller] did not satisfy the requirements stipulated in the Contract. According to Article 12 of the Contract, the [Buyer] notified the [Seller] of the quality defects via many facsimiles within the stipulated time. The [Seller] promised to improve the quality and continued requesting the [Buyer] to pay the contract price. The [Buyer] trusted the [Seller]'s promise and, by many written notices, informed the bank to pay the [Seller].

However, the quality of the goods delivered by the [Seller] was getting worse; the inspection certificate issued by ITS on 9 April 1998 showed that the waterproof layer of the goods delivered by the [Seller] was only 80 mm, which was only one-half of the requirement stipulated in the Contract, and the raincoats could not prevent water at all, and should not be called raincoats. Thereafter, the [Seller] shipped the sixth installment on 25 April 1998, but the quality of the goods was so bad that they cannot pass the relevant inspection. In order to avoid the bank's rejection to pay the contract price (because the quality was not in compliance with the stipulation in the L/C), the [Seller] did not provide the export permit and intended to threaten the [Buyer] to notice the bank to make the payment by this. For the above reason, the [Buyer] had to purchase an export permit in Hong Kong and incurred unnecessary loss. Under such circumstances, on 11 May 1998 the [Buyer] had to notify the [Seller] that if the quality of the goods could not satisfy the requirements, the [Buyer] would reject the remaining goods.

Thereafter, the [Buyer] did not receive the inspection report regarding the remaining 31,000 raincoats. Because the goods which had been received were not in compliance with the Contract, the [Buyer] sent a facsimile to the [Seller] stating that the [Buyer] rejected the remaining goods.

The [Buyer] alleged that the inspection certificates issued by CCIC and provided by the [Seller] during the performance showed that each installment of goods had some quality defects, and the [Buyer] had raised the objections to the quality within the stipulated time after ITS inspected the goods or samples. The evidence proved that the [Seller] did not deliver complying goods; specifically, none of the six installments of goods delivered by the [Seller] satisfied the requirements in the Contract. This adversely affected the economic profits that the [Buyer] anticipated when signing the Contract. According to Article 29(1) of the Law on Economic Contracts Involving Foreign Interest, the [Buyer] requested to declare the Contract avoided.

OPINION OF THE ARBITRATION TRIBUNAL

1. The applicable law

Article 16 of the Contract between the parties stipulated:

"The conclusion, effectiveness, construction, performance and disputes resolution of this Contract shall be governed by the laws of the People's Republic of China and the CISG; the price term shall be governed by INCOTERMS 1990."

The Arbitration Tribunal held that the [Seller] was registered in __ Province, China, and the [Buyer] was registered in Hong Kong SAR. Since 1 July 1997, Hong Kong SAR has kept its independent legal system; the trades between Mainland China and Hong Kong are still deemed to be imports and exports. Disputes arising out of a contract between a PRC company and a Hong Kong company should be governed by the Law on Economic Contracts Involving Foreign Interest, which took effect in 1985. According to this law, the parties have the right to select the applicable law. Therefore, the parties' determination that the Law on Economic Contracts Involving Foreign Interest was the applicable law in this case was consistent with the provisions of this law. Thus, the Arbitration Tribunal determines that the Law on Economic Contracts Involving Foreign Interest applies to this case.

The parties also selected the CISG as the applicable law. The People's Republic of China became a Contracting State of the CISG on 11 December 1986, and the CISG took effect in China on 1 January 1988. However, China's government did not announce that CISG also applies in Hong Kong. Accordingly, the CISG does not automatically apply to a sales contract between a company with its place of business in Hong Kong and a company with its places of business in other countries. Although a sales contract between a PRC company and a Hong Kong company is deemed a special contract involving foreign interest, the CISG does not automatically apply. However, the parties have expressly stipulated that CISG should apply to the Contract. The Arbitration Tribunal holds that this selection reflects the parties' true intent, and does not violate the relevant law of the PRC; in addition, regarding the determination of the parties' rights and obligations, and whether the parties breached the Contract, and the liability for breach, the CISG has more specific provisions than the Law of Economic Law on Contracts Involving Foreign Interest. Under such circumstances, the application of the CISG can be helpful in resolving the parties' dispute. Therefore, the Arbitration Tribunal holds that CISG should also apply to this case.

The parties agreed that "The price term shall be governed by INCOTERMS 1990." This was the parties' selection of international customs. According to Article 6 of the Law of Economic Contracts Involving Foreign Interest, if the laws of the PRC have no relevant provisions, international customs could apply. As to the parties' obligations under a price term in international trade, the laws of the PRC do not have any relevant provisions. Therefore, the parties' selection was consistent with the laws of the PRC. Accordingly, the Arbitration Tribunal holds that INCOTERMS 1990 should apply to this case.

2. The effectiveness of the Contract

The Arbitration Tribunal holds that Contract No. __ and Order No. __ are in compliance with the provisions of the Law of Economic Contracts Involving Foreign Interest. They are therefore valid and binding on the parties.

3. The scope of this case

After the [Seller] filed the arbitration application with the Sub-Commission, the [Buyer] paid the [Seller] US $42,000 before the first court session. This amount was a part of the first claim of the [Seller]'s original Complaint. [Seller] therefore changed its claims. [Seller] deleted the first claim for the contract price and interest, and the second claim for the loss of export tax return, and the fourth claim for the attorneys' fee. The scope of this case was thus limited to [Seller]'s claims for the loss of anticipated profits for the 31,000 raincoats and the arbitration fee.

4. Liability for the non-performance of the Contract

      (1) The Contract between the parties stipulated that the goods should be delivered by installments, therefore this Contract was categorized as an installment contract. The Arbitration Tribunal held that when the parties had already delivered some installments and made some payments, whether the [Seller]'s claim for anticipated profits should be sustained depends on whether the [Buyer] was entitled to reject the 31,000 raincoats:

   -    If the [Buyer] was entitled to avoid the contract and reject the 31,000 raincoats, the [Seller]'s claim should not be sustained;
 
   -    Otherwise, the [Buyer] should bear liability for the [Seller]'s loss caused by its rejection of the goods.

      (2) Based on the Contract, shipping documents, inspection certificates and payment certificates, etc., the Arbitration Tribunal found that when signing the Contract, the [Seller] had already delivered six installments totaling 69,000 raincoats with the total value of US $569,600; the [Buyer] paid US $569,600 of the contract price by an irrevocable L/C; however, the [Buyer] did not issue a revolving L/C according to the Contract, but issued an L/C for each installment. The [Seller] accepted the Letters of Credit issued by the [Buyer], so it was deemed that the [Seller] agreed on the change of payment method. The parties performed the 69,000 raincoat part of the contract, but did not perform the remaining 31,000 because the [Buyer] rejected the receipt of these goods.

The [Seller] alleged that:

   -    The [Buyer] unreasonably rejected the 31,000 raincoats, which constituted breach of the Contract;
 
   -    In addition, the goods were specially manufactured according to the [Buyer]'s requirements, and could not be resold to others within a short time, so the [Buyer] should compensate the [Seller] for the difference between the contract price and purchase price, i.e., the loss of anticipated profits.

The [Buyer] alleged that:

   -    It was entitled to reject the remaining goods, because the delivered installments totaling 69,000 raincoats had various defects, and
 
   -    The [Seller] did not provide an inspection certificate as to the remaining 31,000 raincoats to prove they can meet the requirements of quality.

The Arbitration Tribunal noted that the Contract and the Order stipulated that:

   -    The specification of goods was: Materials: 100% Nylon, 184 TIj300mm and painting: Fabric 44, 100% Nylon, Taslon 184TW/RPu Coating 300mm, and
 
   -    The inspection agency was __ Province Import and Export Commodities Inspection Bureau, and the parties agreed that the inspection certificate issued by this bureau would be the conclusive proof of the quality of the goods.

However, when the Contract was performed, the goods were inspected by the China Import and Export Commodities Inspection Corp. __ Branch, and the parties agreed to accept the inspection results.

   -    Regarding to the 69,000 raincoats which the [Seller] had already delivered, the China Import and Export Commodities Inspection Corp. __ Branch had issued an inspection certificate before each installment was shipped.
 
   -    The Arbitration Tribunal noted that five of the six inspection certificates showed that the defects of the goods were out of the required scope, and this proved that the quality of the goods was below the standard stipulated in the appendix of the Contract.

After receiving the goods, the [Buyer] entrusted ITS (Intertek Testing Services) to inspect the goods. However, because ITS was not the agency stipulated in the Contract, the Arbitration Tribunal holds that the ITS' inspection result could not be the conclusive proof of the quality of the goods.

As to the quality problems with the 69,000 raincoats, the [Buyer] raised objections to the [Seller] according to the Contract and, after negotiation, the parties agreed to solve the issue by reducing the unit price of the goods. Therefore, the Arbitration Tribunal holds that the contract obligations with respect to the 69,000 raincoats had been performed; even if the goods delivered had defects, the [Buyer] accepted the arrangement to reduce the price of the goods, which was a remedy to the defective goods delivered.

      (3) The Arbitration Tribunal noted that after performing the installments of 69,000 raincoats, the [Buyer] sent a facsimile to the [Seller] on 11 May 1998 requesting it to ship the remaining 31,000 raincoats. Thereafter, the parties negotiated the change of packaging requirements via facsimiles. The above evidence proved that before 29 May 1998, the [Buyer] intended to accept the remaining installment of 31,000 raincoats, which is the [Buyer]'s obligation under the Contract.

      (4) On 29 May 1998, the [Buyer] sent a facsimile to the [Seller] alleging that because the first 69,000 raincoats had defects, the [Buyer] rejected the remaining 31,000 raincoats. In the court session, the [Buyer] submitted an inspect certificate issued by the China Import and Export Commodities Inspection Corp. __ Province Branch on 21 July 1998. This inspection certificate stated that

"According to (AQL) LEVEL II stipulated in the Contract, 14 defects were allowable among every 10,000 raincoats, and there were 17 defects among the goods inspected."

This proved that the 31,000 raincoats had defects. The [Buyer] wanted to justify its avoidance of the 31,000 raincoat installment of the Contract for the above reason. The Arbitration Tribunal notes, however, that this inspection certificate was issued on 21 July 1998, but the [Buyer] had informed the [Seller] of its rejection of the goods on 29 May 1998. Obviously, when sending the 29 May 1998 notice rejecting the goods, the [Buyer] could not foresee the inspection result of 21 July 1998. Therefore, as to the [Buyer]'s above evidence, the Arbitration Tribunal held that it could be referred to, but could not be admitted as a valid evidence.

The Arbitration Tribunal holds that the [Buyer]'s rejection of the goods means that the Contract was avoided. According to the CISG, the condition for a party to avoid the contract is the other party's fundamental breach. In this case, if the [Buyer] wanted to avoid the installment of 31,000 raincoats, the precondition was that the [Seller] had fundamentally breached the Contract.

According to the CISG:

   -    Reduction of the contract price is a remedy available to a buyer when the goods are not in compliance with the contract; however, the buyer can resort to this remedy only to the extent that the non-compliance of the goods does not constitute a fundamental breach.
 
   -    In this case the [Buyer] accepted the remedy to reduce the price, to compensate for the loss caused by the defects of the goods; this means that the [Buyer] did not hold that the non-compliance of the goods constituted a fundamental breach.

Therefore, the defects of the first 69,000 raincoats are not sufficient for the [Buyer] to reject the remaining 31,000 raincoats. After accepting the remedial measure to reduce the contract price, the [Buyer] could not take other remedial measures which were inconsistent with this remedial measure, so the [Buyer] could not avoid the Contract.

The [Buyer] did not submit any evidence to prove that the [Seller] had fundamentally breached the Contract before 29 May 1998. The [Buyer] could not prove that it was reasonable and consistent with the stipulation of the CISG to send the notice to reject the goods on 29 May 1998. Thus, the Arbitration Tribunal held that the [Buyer]'s rejection of the 31,000 raincoats on 29 May 1998 was inconsistent with the CISG.

      (5) Based on the above Item 4, the Arbitration Tribunal holds that if the parties stopped the performance of the Contracts and the negotiation to take other measures upon the [Buyer]'s rejection of the remaining goods, the [Buyer] should bear all liabilities for the [Seller]'s failure to deliver the remaining 31,000 raincoats. However, although the [Buyer] expressly rejected the remaining goods via facsimile, as per the [Seller]'s many requests, the parties still negotiated delivery and inspection of the remaining goods. This proved that the [Buyer] gave up its rejection of the goods of 29 May 1998, and the [Seller] continued to arrange to ship the goods. However, when the [Seller] prepared to ship the goods, the dispute on the obligation to provide the inspection certificate arose.

The [Buyer] alleged that the [Seller] was obligated to provide a qualified inspection certificate; even after 29 May 1998, the [Buyer] still would like to receive the goods only if the [Seller] provided a qualified inspection certificate. Because the [Seller] did not provide a qualified inspection certificate, the last installment could not be shipped. The [Buyer]'s evidence showed that on 9 July 1998, the [Seller] filed an Application to Inspect Goods, and as an applicant, asked China Import and Export Commodities Inspection Corp. __ Province Branch to inspect the remaining 31,000 raincoats. Inspection Certificate No. __ issued by the above agency on 21 July 1998 indicated that the goods provided by the [Seller] had defects beyond the acceptable scope agreed by the parties; the [Seller] did not provide a qualified inspection certificate, so the goods could not be shipped; thus, the [Buyer] alleged that it should not be held liable. However, the [Seller] alleged that:

   -    Before each of the first six installments was loaded, although the [Seller] applied to the commodities inspection agency to inspect the goods, the applicant recorded in all of the inspection certificates was "as per [Buyer]'s request";
 
   -    The [Seller] applied for inspection, but it did not prove that the [Seller] had such obligation; the application for inspection was entrusted by the [Buyer].
 
   -  Obviously, the inspection of last installment of 31,000 raincoats before loading should be done by the [Buyer].

Based on the written evidence submitted by the parties, the Arbitration Tribunal noted that the inspection application forms for first six installments were filled by the [Seller], but the applicant recorded in the Inspection Certificates was "as per [Buyer]'s request." This evidence proved that the inspections were at the [Buyer]'s request, and that it was the [Seller] who applied for the inspections.

The Arbitration Tribunal noted that the [Buyer] submitted the [Seller]'s inspection application form dated 9 July 1998 and the inspection certificate dated 21 July 1998 in order to prove the inspection certificate issued on 21 July 1998 showed that the 31,000 raincoats were not qualified, which caused that the goods could not be shipped. However, the [Buyer]'s other evidence was inconsistent with this evidence. The letter sent by the commodities inspection agency on 21 September 1998 to the [Buyer] stated, "Per your request, we ask the clothing company (the [Seller]) to provide samples of goods. We have not received any samples until present." If the [Seller] did not provide any samples on or before 21 September 1998, the inspection certificate dated 21 July 1998 could not be established. On the contrary, if the [Seller] provided the samples, and the inspection agency issued the inspection certificate, this would be inconsistent with the [Buyer]'s allegation that the [Seller] did not provide any samples on or before 21 September 1998. The above facts showed great discrepancy on whether the [Seller] had provided samples, which had the obligation to provide the inspection certificates, etc. The [Buyer]'s allegations were inconsistent with the evidence it submitted.

In addition, the inspection certificate issued on 21 July 1998 indicated that the inspection agency only inspected 10,000 raincoats, not 31,000 raincoats. The price term under Contract No. __ was CIF Genava. According to A5 of CIF of INCOTERMS 1990, the [Seller] was obligated to provide inspection certificates for the goods exported. The parties determined their obligations under CIF according to international customs, and the international customs should apply. Under normal circumstances, the [Seller] should provide inspection certificates to prove that the goods were in compliance with the Contract. However, when the parties performed the 31,000 raincoat part of the Contract, the disputes on inspection and inspection certificates of the goods arose between the parties, and this caused that the goods could not be shipped.

The Arbitration Tribunal holds that both parties had fault regarding the result that the goods could not be shipped. Under CIF terms, the [Seller] should provide inspection certificates, but the inspection certificates proved that the 10,000 raincoats inspected out of the last 31,000 raincoats had defects beyond the acceptable scope stipulated in the Contract. After the [Seller], on behalf of the [Buyer], applied for inspection of the 31,000 raincoats and the 10,000 raincoats that were selected were found to have defects, the [Buyer] did not arrange to inspect the other 21,000 raincoats. These 21,000 raincoats were manufactured by different manufacturers, so the [Buyer] could not conclude that none of the 31,000 raincoats was qualified. Although part of the 31,000 raincoats had defects, neither party took active remedial measures as to the defective 10,000 raincoats, nor did they inspect the remaining goods; this caused that the goods could not be shipped.

The Arbitration Tribunal noted that the goods in this case were specially manufactured according to the [Buyer]'s requirements; the 31,000 raincoats could not be shipped or sold in China's market. They were stored in the warehouse and the loss was incurred. The [Seller] did not claim all loss, but only requested the [Buyer] to compensate for the anticipated loss for the goods which could not be shipped.

The Arbitration Tribunal holds that both parties had fault as to the consequence that the goods could not be shipped, so both parties should bear liability for the loss of anticipated profits. Therefore, the [Buyer] should compensate the [Seller] for 50% of the loss of anticipated profits, i.e., US $17,628.

      (5) The arbitration fee

      According to the above opinion, the Arbitration Tribunal held that the [Buyer] should bear 50% of the arbitration fee, and the [Seller] should bear the other 50%.

AWARD

1. The [Buyer] should compensate the [Seller] for one-half of the loss of anticipated profits for 31,000 raincoats, i.e., US $17,628.00;

2. The arbitration fee is RMB __, of which the [Seller] should bear 50%, i.e., RMB __, and the [Buyer] should bear the other 50%, RMB __. The [Seller] had prepaid the arbitration fee of RMB __, so the [Buyer] should pay the [Seller] RMB __.

The [Buyer] should pay the [Seller] the above Item 1 and Item 2 within 30 days of this award.

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 Hong Kong 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.

*** John W. Zhu, LL.M. China University of Political Science and Law (National Graduate Scholarship); Bachelor of Law, Southwest University of Political Science and Law; Double Degree, English Literature, Sichuan International Studies University, Chongqing, China. Focus: International Economic Law.

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Pace Law School Institute of International Commercial Law - Last updated May 6, 2008
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