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CISG CASE PRESENTATION

China 29 December 1999 CIETAC Arbitration proceeding Shenzhen No. 1138-1 (Indonesian round logs case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/991229c1.html]

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

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Case identification

DATE OF DECISION: 19991229 (29 December 1999)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Mme. Liang (presiding arbitrator), Mr. Huang and Mr. Zhou

DATABASE ASSIGNED DOCKET NUMBER: CISG/1999/33

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Singapore (respondent)

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

GOODS INVOLVED: Indonesian Merbau round logs


Case abstract

PRC: Award of China International Economic & Trade Arbitration Commission [CIETAC] 29 December 1999 (Indonesian round logs case)

Case law on UNCITRAL texts (CLOUT) abstract no. 806

Reproduced with permission of UNCITRAL

Abstract prepared by John Zhu

The buyer and the seller entered into a contract for the purchase of Indonesian Merbau round logs. The contract provided a clear and detailed description of the specifications of the goods. The buyer paid the price through a letter of credit as required by the contract. Upon arrival of the goods at the destination port, the buyer had them inspected. However, the inspection discovered that the quantity, specification, volume and quality of the goods were not conforming with the contract and concluded that the shortage of volume resulted from inaccurate measurement before shipment, and that severe quality defects existed at the time of the shipment.

Following the inspection, the buyer sent a statement of claims to the seller alleging shortage of quantity and volume and quality defects. The seller sent two experts for a second inspection of the goods in order to verify whether the inspection certificate truly reflected the condition of the goods. Based on the data collected by its experts, the seller considered that the goods were in compliance with the contract. It then informed the buyer that it was ready to accept the rejection of the goods and to return the payment received. While the parties were still discussing over the circumstances of the goods the buyer disposed of them. Despite the proposal of the seller, it also sold some of the goods without even replying to the seller's proposal. Later on, the buyer filed for arbitration alleging shortage and defects of goods and claiming damages, arbitration fee and other costs incurred.

As the parties had not chosen the applicable law to their contract, the Arbitral Tribunal held that, according to the Chinese Law on Economic Contracts Involving Foreign Interest, Chinese law should be applied since the place of contracting and the place of performance of the contract were in China. Moreover, the Tribunal also held that since the places of business of the parties were in two Contracting States of the CISG, and the parties had not opted out of the CISG, the Convention should also apply.

After examining the facts, the Arbitral Tribunal held that the buyer had acted properly and reasonably under the contract in promptly having the goods inspected after their arrival at the port of destination and immediately informing the seller of the inspection result. However, the buyer should be held liable for not responding to the seller's fax. Furthermore, the buyer, prior to giving any reply to the seller, had unilaterally disposed of a large portion of the logs. This measure not only violated the relevant provision of Article 86 (1) CISG, but was also contrary to international practices. Therefore, the buyer should be deemed as having accepted the goods and waived the right to claim for damages. All claims raised by the buyer were dismissed accordingly.

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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 35 ; 38 ; 48(2) ; 86(1)

Classification of issues using UNCITRAL classification code numbers:

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

38A [Buyer's obligation to examine goods];

48B1 [Cure by seller after date for delivery (seller inquires: will buyer accept performance?): consequences of buyer's failure to reply];

86D [Buyer's obligation to preserve goods]

Descriptors: Conformity of goods ; Examination of goods ; Cure ; Preservation of goods ; Estoppel ; Waiver

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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): Click here for presentation of Chinese text

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Case commentary presented below

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Case text (English translation)

Queen Mary Case Translation Programme

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

Indonesian round logs case (29 December 1999)

Translated [*] by Yan Tianhuai [**]

Edited by John W. Zhu [***]

The China International Economic and Trade Arbitration Commission (hereinafter, "Arbitration Commission") Shenzhen Sub-Commission (hereinafter, "Shenzhen Sub-Commission") accepted this case on 29 June 1999 (Docket No. SHEN R99051), according to:

   -    The arbitration clause in Sales Contract No. 98CLI-053 (hereinafter, the "Contract") signed by and between Claimant, a Chinese Company (hereinafter, "[Buyer]"), and Respondent, a Singapore Company (hereinafter, "[Seller]"), on 11 November 1998; and
 
   -    The written arbitration application submitted by the [Buyer].

The arbitration was conducted in accordance with the Arbitration Rules which were promulgated by the Arbitration Commission and came into effect as of 10 May 1998.

The [Buyer] entrusted its right to select an arbitrator to the Director of the Arbitration Commission, who appointed Mr. Huang as one of the arbitrators. The [Seller] selected Mr. Zhou as an arbitrator. The parties failed to jointly appoint a third arbitrator, so, the Director of the Arbitration Commission appointed Ms. Liang as the third arbitrator, who acted as the presiding arbitrator. The aforesaid three arbitrators formed the Arbitration Tribunal on 8 September 1999 to hear this case.

After examining the [Buyer]'s arbitration application and the attached evidence as well as the [Seller]'s defense and attached evidence, the Arbitration Tribunal held a hearing of this case in Shenzhen on 20 October 1999, at which the [Buyer]'s attorney and the [Seller]'s attorney and legal representative were present. During the hearing, the Arbitration Tribunal heard both parties' statements and arguments and investigated the facts of the case. After the hearing, both parties submitted supplementary material to the Arbitration Tribunal within the time limit set by the Tribunal. The Secretariat Office of the Shenzhen Sub-Commission promptly forwarded each party's supplementary material to the other party. After the Arbitration Tribunal's second deliberation of the case, at the Arbitration Tribunal's request, the Secretariat Office of the Shenzhen Sub-Commission informed both parties by mail of the need to submit their supplementary material and additional evidence as soon as possible so as to enable the Arbitration Tribunal to render the award on time. In the middle of November 1999, both parties furnished the Arbitration Tribunal with additional and supplementary materials.

The case has been concluded. The Arbitration Tribunal has rendered this arbitral award on 29 December 1999. The facts and the Arbitration Tribunal's opinion and award are as follows.

I. FACTS

On 11 November 1998, the [Buyer] entered into Contract No. 98CLI-053 with the [Seller] to purchase 7,000 cubic meters (M3) Indonesian Merbau round logs (10% more or less allowed). The Contract provided a clear and detailed description of the specifications of the goods, unit price, packing, payment term, and shipping time. The provisions closely related to the dispute are (excerpted from the Contract):

"Article 12: Quality

The logs shall be freshly cut, free from decay and erosion caused by longhorn beetle and marine borers and without apparent bending, knots, big splits, and big holes (holes shall be less than 10 percent of the diameter of the log in size and less than 10 percent of the length of the log in depth).

"Volume Calculation

(1) Diameter measurement: The diameter of a log shall be the average calculated by dividing the sum of the diameters of the two ends of the log measured by using cross measurement method by 4; it shall be denominated in centimeters (CM), and the decimal of the average greater than or equal to 0.5CM shall be rounded up to 1CM and less than 0.5CM shall be omitted.

(2) Length measurement: The length shall be the actual measurement denominated in meters (M), and the decimal of the measurement greater than 0.1M but less than 0.2M shall be rounded up to 0.2M and less than 0.1M shall be omitted. The volume calculation formula is as follows:

V  = 0.7854D 2 * L*1/10000
D  = Diameter (CM)
L  = Length (M)
V  = Volume (M3)
1/10000 is a conversion coefficient.

"Article 13: Inspection

The species, quality, specifications, and quantity of the goods will be inspected by China Commodity Inspection Bureau located in the destination port and the inspection result shall be final. In the event of any discrepancies between the inspection results and that provided in this Contract, the [Buyer] shall have the right to claim for damage against the [Seller] based on the inspection certificate.

"Article 14: Claim Period

Within 45 days after the arrival of the goods at the destination.

"Article 16: Arbitration

All disputes arising from performance of this Contract shall be settled through amicable negotiation. In case no settlement can be reached, the dispute shall be submitted to China International Economic and Trade Arbitration Commission for arbitration which shall be conducted in accordance with its arbitration rules in effect at the time of applying for arbitration. The arbitral award is final and binding upon both parties. The arbitration fee shall be borne by the losing party or otherwise be determined by the arbitration tribunal."

After the Contract was concluded, the [Buyer] paid the price through a letter of credit as required by the Contact. Upon the arrival of the goods at the destination port, the [Buyer] applied to the China Commodity Inspection Bureau for inspection of the goods. The Guangdong Provincial Import and Export Commodities Inspection Bureau ("Inspection Bureau") inspected the goods and issued an inspection certificate ("Inspection Certificate") on 2 March 1999. The Inspection Certificate contained the following inspection results:

"After inspection of the aforesaid goods according to the Contract as well as relevant rules governing inspection of Indonesian hard round logs, it is found:

Description of goods: The goods are Indonesian Merbau round logs;

Quantity: The goods total 832 pieces, of which, the logs numbered 537, 539, and 540 were cut into part A and part B; the log numbered 537B is missing, its volume is 8.925 M3;

Specification: The length of each piece of the logs is greater than 4M and the diameter is greater than 60CM, both are consistent with the Contract;

Volume: After a random sampling measurement, the volume of the 262 pieces of the logs randomly sampled is 2,137.810M3; in comparison with the same indicated in the log list, the shortage of volume is 101.734M3, and the shortage rate is 4.54%;

Quality: In not less than 15% of the logs, there are serious quality defects such as sap rot, heart rot, ringed shake, crack and split (some severe splits are 1-2.5M in length), which are not allowed under the Contract;

Conclusion: The shortage of volume resulted from inaccurate measurement before shipment, and the severe quality defects existed at the time of shipment."

[Buyer]'s claims

Based on the Inspection Certificate, the [Buyer] sent a statement of claims to the [Seller] on 8 March 1999, alleging:

1.       (1) Shortage in quantity: 8.925M3 of the logs were missing.
 
  (2) Shortage of volume: After a sampling measurement, it was concluded that the shortage rate of the volume of the 262 pieces of logs randomly sampled was 4.54%; calculated at this rate, the total shortage of volume was 305.413M3;
 
  (3) Quality defects: According to statistics, there were severe defects in more than 15% of the logs, such as inside decay, cracks, and splits, which would severely affect the sale of the goods. The goods had to be sold at a lower grade with a discount. Calculated at a 30% discount, the [Buyer] would suffer a loss in volume totaling 302.722M3.

In total, the [Buyer] would suffer a loss in volume of 617.06M3 and a loss in value of US $123,412.00.

2. The inspection fee was renminbi [RMB] 31,214.00, equivalent to US $3,777.36, which should be reimbursed to the [Buyer] by the [Seller].

3. The extra Value Added Tax paid by the [Buyer] was RMB 132,803.65 (RMB 215.22 / M3 * 617.06 M3 = RMB 132,803.65), which is equivalent to US $16,000.44.

In sum, the [Buyer] would suffer a total loss of US $143,186.80 for which the [Seller] should compensate the [Buyer].

In response to the [Buyer]'s claim for damages, the [Seller] sent to the [Buyer] a fax on 9 March 1999, stating:

"We cannot accept your opinion. If you consider that the quality and quantity of the goods are inconsistent with the Contract, we are willing to take back the goods and return the price to you. Mr. Liang, a representative of our company, is currently in Hong Kong. He will contact you for the details of taking back the goods."

The [Buyer] made no response to the [Seller]'s aforesaid fax.

Because there was great disagreement between both parties over the quantity and quality of the goods, which was not settled through preliminary negotiation, the [Buyer] filed an application for arbitration to Shenzhen Sub-Commission on June 4, 1999, claiming that:

1. The [Seller] should compensate the [Buyer] for damages in the amount of US $143,186.80; and

2. The [Seller] should bear the arbitration fee of the instant case and all other costs incurred thereunder.

[Seller]'s defense

With regard to the [Buyer]'s claims, the [Seller] raised the following defenses:

1. The Inspection Certificate failed to fully reflect the condition of the goods.

After receipt of the copy of the Inspection Certificate from the [Buyer], the [Seller] sent two experts to YZ Timber Mill ("YZ Company") to inspect the remaining goods stored in YZ Company's cargo yard in order to verify whether the Inspection Certificate truly reflected the condition of the goods. The two experts carefully examined all the remaining goods totaling 556 pieces one-by-one and recorded the relevant data from the [Buyer]'s cargo receipt list. In addition, for the sake of veracity, they had each piece of the logs photographed.

      (1) Quantity: Based on the data collected by the two experts, the [Seller] produced an invoice list in comparison with the [Buyer]'s cargo receipt list. After comparing the length, diameter, and volume shown in the two lists, the [Seller] found that the volume of the 556 pieces of the logs measured by the two experts was 4,840.976M3, that is, 366.172 M3 more than the 4,474.804 M3 recorded in the [Buyer]'s cargo receipt list, which meant that the [Seller] actually delivered 8.18% more goods than required by the Contract. This finding proved that the conclusion stated in the Inspection Certificate that 8.925M3 of the logs were missing and the volume shortage rate of the goods was 4.54% was obviously incorrect.

      (2) Quality: The [Seller] pointed out, for the following reasons, that the Inspection Certificate, based on only nine photos, was insufficient evidence to prove that more than 15% of the goods are defective:

            (i) In addition to 366.172M3 extra volume with respect to the 556 pieces logs, the [Seller] had deducted the volume of the logs with natural defects at the time of shipment of the goods, and the volume the [Seller] deducted amounted to 11.629M3; and

            (ii) According to the [Buyer]'s cargo receipt list, the volume of the defective parts of the logs shown in the nine photos, which were attached to the Inspection Certificate as evidence, was not counted in the volume of the goods; it had been deducted by the [Seller] from the total volume of the goods.

2. The foregoing facts and analysis showed that the [Seller] had fulfilled its obligation under the Contract. The [Seller] had no intent to deliver goods with defects or in a lesser quantity, nor did it actually cause damage to the [Buyer]. In addition, the [Seller]'s fax dated 9 March 1999 clearly stated that, although it refused the [Buyer]'s claim for damages, it was willing to take back the goods and return the price to the [Buyer] if the [Buyer] considered that the quality and quantity of the goods were inconsistent with the Contract. However, the [Buyer] not only made no response after receipt of the fax, but sold 270 pieces of the logs without notifying the [Seller].

For the above reasons, the [Seller] asked the Arbitration Tribunal to rule that:

1.  The [Buyer]'s claim should be dismissed;
2.  The arbitration fee should be borne by the [Buyer]; and
3.  The [Buyer] should compensate the [Seller] for its attorneys' fee and other cost incurred in dealing with the instant case.

[Buyer]'s response

After the hearing, the [Buyer]'s attorney submitted to the Arbitration Tribunal written testimony by YZ Company, stating that there was a big difference between the Malaysian measurement method (Sabah) and the Indonesian measurement method (i.e., cross measurement method) regarding the measurement of the woods' length and diameter; therefore, the measurement results conducted according to these two different methods are incomparable. During the time period from 10 to 12 February 1999, YZ Company measured the logs shipped by the [Seller] via PERFECT TANS VESSEL by using the Malaysian measurement method instead of the Indonesian Measurement method and made the cargo receipt list accordingly. The Arbitration Tribunal asked the [Buyer] to provide the measurement list made by the Inspection Bureau and other supporting materials. The [Buyer] responded with a letter, explaining that

(1) The measurement method used by the Inspection Bureau in inspecting the goods, as clearly indicated in the Inspection Certificate, was the Indonesian measurement method (commonly known as cross measurement method) as required by the Contract; and

(2) The measurement list made by the Inspection Bureau for the 262 pieces logs randomly sampled and other relevant materials had been kept in file and should be requested for directly by the Arbitration Tribunal with the Inspection Bureau.

The [Buyer] also failed to present to the Arbitration Tribunal the documents proving its sale of a portion of the logs, alleging that such documents were unavailable due to the fact that its accountant was on a business trip abroad. As to the applicable law, the [Buyer]'s attorney insisted that the law of the place of inspection or arbitration shall be applied, i.e., that the law of People's Republic of China, shall be the governing law of the instant case.

[Seller]'s response

The [Seller], after the hearing, submitted to the Arbitration Tribunal a written statement titled "Explanation and Several Opinions on the Supplementary Evidence" together with four attachments, which contained the following content:

1. Explanation of supplementary evidence

      (1) Commercial invoice.

      The [Seller] issued to the [Buyer] a formal commercial invoice on 30 January 1999, confirming receipt of the price of the goods in the amount of US $1,345,432.60.

      (2) YZ Company's measurement method.

      YZ Company stated in its testimony that:

"The measurement standard was determined by the client. The inspectors were trained, tested, and licensed by the Forest and Timber Industry Department of Guangdong Province. The inspection was conducted at the cargo yard and most of the logs were measured by using Malaysia measurement method (Sabah). The length of each piece of the logs was the actual measurement with 20CM as the smallest unit, the remainder less than 20CM but greater than 10CM was rounded up to 20CM and less than 10CM was omitted. The diameter of each piece of the logs was the average of the diameters of two ends with 1CM as the smallest unit, the remainder less than 1CM was omitted."

The foregoing measurement method employed by YZ Company was the same as the one provided by the Contract, as the volumes of the goods should be calculated according to such measurements. In the [Seller]'s opinion, the [Buyer]'s effort to rely on the entry of the volumes in the cargo receipt list made by YZ Company based on the measurements obtained by using a measurement method different from the one provided in the Contract could not reflect the real status of the goods.

      (3) Certificate issued by Indonesian Forest and Timber Industry Bureau.

      The certificate issued by the Indonesian Forest and Timber Industry Bureau, the administration in charge of supervision of the export of Indonesian timber, stated that the goods, after inspection, were recognized as having A class quality suitable for export.

      (4) Verified Inspection Report

      PT.AGODA RIMBA IRIANC (known as "PARI" for short), a well-known timber company in Indonesia, issued a verified inspection report to the [Seller] on 20 April 1999, stating:

            (i) The 830 pieces of logs were inspected first by PARI's inspectors in the timber yard and were inspected again piece-by-piece jointly by the [Seller]'s and PARI's inspectors four weeks prior to shipment. The volume of the defective parts of the logs which had been growing in the tropical forest for more than one century was deducted from the total volume of the goods.

            (ii) The certificate issued by Indonesian Forest and Timber Industry Bureau showed that the goods were of first class quality.

            (iii) In order to prove that the [Buyer]'s claim that the goods were non-conforming was wrong, PARI sent two qualified inspectors to YZ Company's cargo yard on 18 March 1999. They inspected and photographed 556 pieces of the logs one-by-one, confirming that there was no shortage of volume, that the volume of the defective parts of the logs had been deducted from the total volume of the goods, and that the goods were completely in conformity with the Contract.

2. Applicable law

The Contract was a typical one for the international sale of goods. It contained an arbitration clause but lacked a choice of law clause. The [Seller] argued that, because both China, where the [Buyer]'s place of business is situated, and Singapore, where the [Seller]'s place of business is situated, are Contracting States of the United Nations Convention on Contracts for International Sale of Goods (hereafter, the "CISG"), therefore, the CISG shall be applied in the instant case.

II. OPINON OF ARBITRATION TRIBUNAL

1. Applicable law

The parties failed to make a choice of the applicable law in the Contract. According to Article 5 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest, in the absence of an effective choice of law by the parties, the doctrine of the most significant relationship shall be adopted to determine the applicable law. The Arbitration Tribunal holds that, because the place of contracting and the place of performance of the Contract are in Guangdong Province of China, Chinese law shall be applied to the dispute first. The Arbitration Tribunal further notes that the places of business of the parties are located, respectively, in two Contracting States of the CISG and that the parties did not exclude the CISG in the Contract; therefore, it holds that the CISG shall also be applied.

2. The main issue of the dispute

The main issue of the dispute between the parties is whether the quality and quantity of the goods delivered by the [Seller] are in conformity with the Contract.

The [Buyer] alleges that according to the Contract, the goods, after arrival at the destination port, should be inspected by the Inspection Bureau, and if the goods are found non-conforming, the [Buyer] is entitled to claim damages against the [Seller] by presenting the Inspection Certificate. The Inspection Certificate issued by the Inspection Bureau showed that there existed a shortage in volume and serious defects in the quality of the goods. It is, therefore, [Buyer]'s position that the [Seller] should compensate the [Buyer] for the damages it suffered.

The [Seller] argues that the Inspection Certificate failed to fully reflect the status of the goods, and it has challenged the objectivity of the contents of the Inspection Certificate and refused the [Buyer]'s claim for damage in its fax to the [Buyer].

After carefully examining the documents and evidence submitted by the parties as well as inquiring into important issues during the hearing, the Arbitration Tribunal holds:

   -    On the one hand, the [Buyer] acted properly and reasonably under the Contract in promptly having the goods inspected by the Inspection Bureau after the arrival of the goods at the destination port and promptly informing the [Seller] of the inspection result and claiming for damages;
 
   -    On the other hand, the [Buyer] should be liable for not solving the dispute promptly and properly due to its failure to exercise its right when it became aware that both parties were in great disagreement with respect to the quantity and quality of the goods upon receipt of the [Seller]'s fax refusing its claim for damage and expressing the will to take back the goods and to return the total price.

The Arbitration Tribunal made the following further analyses and rulings:

      (1) After received the [Seller]'s fax refusing its claim for damage and agreeing to take back the goods and to return the total price, the [Buyer] should have informed the [Seller] of its opinion and attitude; instead, it failed to make any response to the [Seller]. In international trade, "silence" is frequently deemed as an expression of "approval." Pursuant to Article 48(2) of CISG:

"If the seller requests the buyer to make known whether he will accept performance and the buyer does not comply with the request within a reasonable time, the seller may perform within the time indicated in his request. The buyer may not, during that period of time, resort to any remedy which is inconsistent with performance by the seller."

This provision clearly indicates the consequence of the buyer's failure to respond to the seller's proposal for remedy. In the instant case, the [Buyer], after receipt of the goods, asserted that the goods were non-conforming and claimed for damages; while the [Seller] denied that the goods were non-conforming and at the same time expressed its willingness to accept the rejection of the goods as a remedy if the [Seller] insisted that the goods were non-conforming. If the [Buyer] did not make response to the [Seller]'s request within a reasonable time, the [Seller] might perform its obligation as it requested. So, when the [Seller] put forward a remedy different from the one the [Buyer] claimed for, the [Buyer] should have given a prompt reply, stating whether to accept such remedy. The [Buyer]'s failure to provide such a response meant that it had waived its right to claim for damages.

      (2) After the goods arrived at the destination port, the [Buyer] took delivery of the goods and transported them to YZ Company's cargo yard. Prior to acceptance of the storage of the goods, YZ Company did a measurement. For some unknown reasons, the [Buyer] failed to ask YZ Company to measure the goods according to the cross measurement method prescribed in the Contract. In a statement issued by YZ Company, YZ Company mentioned that "our company, during the time period from 10 to 12 February 1999, did a measurement of the Indonesian Merbau round logs shipped via the PERFECT TRANS Vessel and the measurement was conducted according to the Malaysian measurement method." In another statement, YZ Company said that "the measurement method was decided by the client." The client mentioned by YZ Company was the [Buyer]. So, it was very obvious that if the [Buyer] wanted to know the quality and quantity of the goods delivered by the [Seller], it should have asked YZ Company to measure the goods according to the measurement method provided in the Contract rather than a different method, and then apply for inspection with the Inspection Bureau. However, the [Buyer] acted beyond normal practices in asking YZ Company to measure the goods with a measurement method different from the one provided in the Contract, which undoubtedly resulted in a different measurement result. As a consequence, the [Buyer] not only failed to effectively verify the quantity and quality of the goods as it intended, but also caused the [Seller] to send experts to do another measurement, which was conducted with the cross measurement method required by the Contract and produced a result showing that there existed a surplus in the volume of the goods rather than a shortage as claimed by the [Buyer]. Therefore, the [Buyer] shall be liable for causing an unnecessary additional dispute between the parties.

      (3) While the parties were disputing over the quantity and quality of the goods delivered by the [Seller], the [Buyer], nevertheless, disposed of the goods. After received the [Seller]'s fax refusing the [Buyer]'s claim for damage, denying that the goods were non-conforming, and promising to accept the [Buyer]'s rejection of the goods, the [Buyer] not only failed to make any response but sold 270 pieces of the logs before 11 March 1999. On 18 March 1999, when the [Seller] sent experts to reinspect the goods, there were only 556 pieces of the goods left in the cargo yard. During the hearing, the Arbitration Tribunal asked the [Buyer] to provide information about its sale of the goods, and the [Buyer] replied in its supplementary material submitted to the Arbitration Tribunal that such information was temporarily unavailable because its accountant was on a business trip abroad. Upon the Arbitration Tribunal's second demand, the [Buyer] finally presented to the Arbitration Tribunal a written statement saying that it had sold 470 pieces of the logs with a total volume 3,724.89M3, but still failed to provide the sales contracts and invoices, nor did it submit the measurement list made by the Inspection Bureau and other supporting materials. Until now, the Arbitration Tribunal has no idea when and to whom the [Buyer] sold the logs and the quantity, quality, and prices of the logs sold by the [Buyer], so it is unable to determine whether the goods sold by the [Buyer] were non-conforming and how much damage the [Buyer] suffered. According to Article 21 of the Regulations on the Implementation of the Law of the People's Republic of China on Import and Export Commodities Inspection ("Chinese Commodities Inspection Regulations"), "with regard to import commodities which have been found to be non-conforming upon inspection or random inspection by the inspection institution, if a claim for damage has been lodged, the consignee shall retain a certain quantity of them or samples, provided that he has no intention to reject them or request substitutes for them; with regard to the commodities which have been rejected or for which substitutes have been requested, the consignee shall take proper care of them and shall not use or otherwise dispose of them until the claim is finally settled." Similar provision is found in Article 86(1) of the CISG, which provides:

"If the buyer has received the goods and intends to exercise any right under the contract or this Convention to reject them, he must take such steps to preserve them as are reasonable in the circumstance. He is entitled to retain them until he has been reimbursed his reasonable expenses by the seller."

In the instant case, the [Seller] had explicitly expressed its willingness to accept the [Buyer]'s rejection of the goods in its fax to the [Buyer]. The [Buyer], however, prior to giving any reply to the [Seller], unilaterally disposed of a large portion of the logs. The measure taken by the [Buyer] not only violated the relevant provisions of CISG but also was contrary to international practices. The [Buyer] shall be held having accepted the goods and waived the rights to claim for damages. Moreover, the logs are not perishable goods; even if they are, pursuant to the CISG, one party is bound to give a notice to other party at the same time when it sells them.

Based on the above analyses, the Arbitration Tribunal holds that the [Buyer], during the time period after receiving the goods and before filing arbitration, acted in violation of international practices and customs as well as relevant provisions of the CISG and Chinese Commodities Inspection Regulations, except that it promptly applied for inspection of the goods; [Buyer]'s claim for compensation against the [Seller] is not based on sufficient facts and the law and shall be dismissed; and all of the arbitration fee shall be borne by the [Buyer].

III. AWARD

1. All claims raised by the [Buyer] are dismissed;

2. The [Buyer] shall bear the entire arbitration fee of RMB 65,650, of which, RMB 60,650 has been prepaid by the [Buyer] and RMB 5,000 by the [Seller]. The [Buyer] shall reimburse the [Seller] RMB 5,000 within 30 days after this award takes effect.

This is the final award.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, the Claimant of the People's Republic of China is referred to as [Buyer] and the Respondent of Singapore 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 (renmimbi) are indicated as [RMB].

** Tianhuai Yan, LL.M., Golden Gate University Law School; LL.M. Nanjing University Law School; Becon, Nanjing University Business School. Attorney at Law, admitted in P.R. China and California, USA; Partner, G & D Law Firm, Nanjing, China.

*** 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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Case commentary

Published at 17 Mealey's International Arbitration Report (August 2002) 1-24. Reproduced with permission of the author.

Grasp the Key to the Case

Yanming Huang [*]

  1. Introduction
  2. The Parties and Terms & Conditions
    A. The parties to the sales contract
    B. Some terms and conditions that closely related to the dispute
  3. The Claims and Grounds of the Buyer
    A. The main contents of the application for arbitration
    B. The three attachments to the application for arbitration
  4. The Actions and Measures Taken by the Seller upon Receiving The Inspection Certificate and the March 8 Letter of the Buyer
    A. Some facts
    B. Two Merbau graders checked the goods at the destination
    C. About the quantity
    D. About the quality
  5. Some Other Issues Raised or Argued by the Parties
    A. About the proper law
    B. About inspection of the goods
    C. About the proposal of returning the goods
    D. About the selling of the goods by the buyer
  6. Points the Parties Emphasized in the Course of the Arbitration
    A. The points the Claimant [Buyer] emphasized
    B. The points the Respondent [Seller] emphasized
  7. The Opinions of the Tribunal
    A. About the proper law
    B. Quantity and quality of the goods
  8. Brief Comments on Some Issues
    A. The contract itself
    B. About the professional knowledge of the persons in handling the deal
    C. About the regular functioning of the Respondent [Seller]
  9. Re-examining the Key Issues from Different Angles
    A. From the angle and stand[point] of the Claimant [Buyer] and its attorney
    B. From the angle and stand[point] of the Respondent [Seller] and its attorney
  10. Review of Some Issues of the Case from the Angle of an Arbitrator
    A. Grasp the key of the case
    B. Law application
    C. Some comments about applying the CISG by Chinese arbitrators and lawyers
    D. Could the Commodity Inspection Law apply to the instant case together with the CISG?
  11. Conclusion

    Abstract: A dispute arising from an international sale contract of goods was referred to CIETAC, Shenzhen for arbitration. The buyer had the goods inspected at the destination and informed the seller of the result. The seller made a prompt response, expressing to accept the rejection of the goods and return the payment. The buyer disposed of part of the goods after receiving the response from the seller and then sold some part more but without making any reply to the suggestion of the seller. Later the buyer made claims on the grounds of shortage and defects of goods. The author recalls the course of the arbitration, analyzing what the key to the case was and how to grasp it, arguing the application of law and the CISG.

I. Introduction

With the help or following the advice of some attorney, a party to a contract intends to lodge some claims against the other party with an arbitration institution, the attorney and his/her principal must be convinced that the other party is in breach of the contract and their party is in an advantage position.

An attorney could not be ever victorious. His competency, experience, skills, etc. could not be only judged from some isolated cases. But being an attorney to a claimant, if you advice and even incite your principal to initiate arbitration proceedings, you should have a deep and through understanding of the case at least within the scope of the documents and comparatively detailed and objective account provided by your principal. Your knowledge and experience would enable you to make a judgment whether the account is objective or reasonable. If you are not sure, or you have no certainty of success, you should not rashly urge your principal to refer the dispute to arbitration. But I have now and then come across such lawyers who do not study cases carefully from the beginning to the end of arbitrations.

It is provided in the United Nations Convention on Contracts for the International Sale of Goods ("CISG") that a buyer has the right to re-examine the goods or cause them to be re-examined at [page 1] the destination of the goods within as short a period as is practicable in the circumstances.[1] Then within a reasonable time after he has discovered a lack of conformity of the goods, he should give notice to the seller specifying the nature of the lack of conformity.[2]

What principle an international commercial arbitrator should abide by when in applying law and the CISG?

Is the result or conclusion of the examination at destination is final, no matter how quick a response the seller makes and what suggestion or way of remedy he puts forward? Does the buyer have the last say when he has got an inspection certificate showing that the goods are not in conformity with the provisions in the contract, though the seller challenges the accuracy of the inspection and at the same time explicitly states that he would accept the rejection of the goods and promises to return the payment he has received? What option does the buyer have after he has informed the seller of the inspection result?

Professionals or practitioners in the field of international trade and commercial arbitration might think that what silly questions I have raised.

Let's study the following case.

II. The Parties And Terms & Conditions

A. The Parties to the Sales Contract

On November 11, 1998, a light (industry products) import and export corporation located in G city as buyer entered into a sales contract (hereinafter referred to as "the Sales Contract" or "the Contract") numbered XXCLI-053 in G city with a trading PTE LTD is, on and from the October X, 1983, incorporated under the Companies Act, Cap. 185 (of Singapore), as seller. The Contract was in Chinese. The buyer was a company in the line of commodities of light industry.

The goods were Indonesian Merbau Round Logs of 7000m3 (10% more or less allowed).

B. Some Terms and Conditions that Closely Related to the Dispute

The terms and conditions closely related to the dispute are as follows:

   -    Specification: Diameter:
          60cm-79cm 30% or less;
          80cm & up 70% or more.
          Length: 6m & up, 4m-5.9m less than 5% (2)
   -    Price: US $200/m3 CIF Huangpu, China (4).
   -    Total Price: US $1,420,000.00 (5).
   -    Package: Bulk packing (6).
   -    Shipping Mark: Decided by the seller (7).
   -    Shipment: Before December 1998 (8).
   -    Loading Port and Discharging Port: From an Indonesia main port to Huangpu Port (9).
   -    Insurance: The insurance shall be effected by the seller for 110% of invoice value covering all risks, war risk, strike risk (10).
   -    Payment: The buyer shall before December 15, 1998 with the China Construction Bank, G Branch open an irrevocable Letter of Credit in favor of the seller (11).
   -    Quality: Fresh cut, no rot, no visible bending, free from insects decay, no dead knots, no big holes and large splits. The diameter of big holes must not excess 10% of the surface, depth does not over 10% of the length.
   -    The Calculation of the Log Volume: Diameter Measurement: Cross method, measuring the diameters of both ends, plus the two figures and then divide it by four and take an average. The calculation formula:
          V=0.7854D2XLXI/10000 [page 2]
          D=Diameter CM
          L=Length M
          V=Volume m3
          1/1000 ... Conversion coefficient (12).
   -    Inspection: The buyer has right to make a re-inspection at the destination port. The species, quality, specifications and quantity will be determined by the China Commodity Inspection Bureau (CCIB). Should any discrepancies arise, the buyer would deliver the inspection certificate issued by the CCIB to the seller for compensation (13).
   -    Compensation period: within 45 days after arrival at the destination port (14).
   -    Force Majeure: omitted (15).
   -    Arbitration: All disputes arising from the execution of this contract shall be settled through amicable negotiation. In case no settlement can be reached, the case shall then be submitted to the China International Economic and Trade Arbitration Commission for arbitration which shall be conducted in accordance with the Commission's arbitration rules. The arbitral award is final and binding upon both parties. The arbitration fees shall be borne by the losing party (16).

III. The Claims and Grounds of the Buyer

The buyer referred the dispute arising from the Sales Contract to the China International Economic and Trade Arbitration Commission, Shenzhen Commission (CIETAC, Shenzhen) in June 1999. And the latter took cognizance of the case on June 29 by issuing a Notice of Arbitration numbered SHEN R990XX.[3] The 1998 Arbitration Rules of CIETAC (effective as from May 10, 1998) applied to the procedures of the case.

A. The Main Contents of the Application for Arbitration

The Application for Arbitration was very brief, consisting of two pages (A4) leaving great margin.

The [Buyer] requested that the [Seller] be arbitrated: to pay the damages of US $143186.80; to bear the arbitration fees and all the expenses incurred relating to the arbitration.

The [Buyer] stated that after the conclusion of the Contract, it on schedule had a L/C opened in favor of the seller. The seller delayed in discharging the Contract, the goods arrived at Huangpu on February 10, 1999. The inspection by CCIB, G revealed that the quantity (the volume of the logs) of the goods was short and there were grave defects in quality. The losses of that amounted to US $143186.80 (please refer to Attachment 2). The [Buyer] by letter to the [Seller] claimed the damages on March 8, 1999 (please refer to Attachment 3). The [Seller] made a reply on the next day, lacking sincerity in compensation (please refer to Attachment 4). So the dispute could not be settled. Therefore, pursuant to the arbitration clause in the Contract, the [Buyer] submitted the Application for Arbitration to CIETAC, Shenzhen.

B. The Three Attachments to the Application for Arbitration

Attachment 2 was an Inspection Certificate ("the Inspection Certificate") dated March 2, 1999 and numbered XX0000/ZZ80092 by CCIB, G. As the Contract was in Chinese, so CCIB, G issued it in Chinese. I have the main contents of the Inspection Certificate turned into English:

   -    The Quantity and Volume of the Logs: 830 Piece of logs 6727.163m3
   -    Shipment: From Babo, Indonesia loaded on the Mv. P T (the name of a ship) to Huangpu (G city, China)
   -    Unloading Date: February 14, 1999; Invoice No: CXX990117
   -    Contract No: XXCLI-053; Mark and Number: N/M [page 3]
   -    Result of Inspection: Following the provisions of the Contract and the stipulations of Indonesia relating to hard logs, the inspection is conducted and the results are of the following:
  • Commodity: The goods are Indonesia Merbau Logs
  • Quantity: 832 pieces (parts). Among them the No 537, No 539 and No 540 are cut into two parts. There is No. 537B part missing (the volume is 8.925m3).
  • Specifications: Length 4 meter and up, diameter 60cm and up that are in conformity with the stipulations of the Contract.
  • Volume: The inspection is conducted on random sampling of 262 pieces of logs and the volume is 2137.810m3. The volume of the logs sampling in the Log List [4] is 2239.544m3, the volume inspected is short of 101.734m3 and the shortage rate is 4.54%.
  • Quality: Not less than 15% of the logs' surfaces and inner parts are rotten and with splits (the serious splits with length 1-2.5 meter). These defects are not allowed according to the Contract.
  • Opinions: The shortage of above logs is because of the inaccurate of the inspection before consigning; the defects have been existed at the loading.
  • Remarks:  (1) Attached there are nine photos.
                      (2) Inspection Fee: RMB 31,214.00.

Attachment 3 was a letter dated March 8, 1999 by the buyer to the seller ("the Letter of March 8"). It was sent to the seller together with the Inspection Certificate initially by fax. The main contents were of the follows:

In accordance with the Inspection Certificate, we raise the following claiming opinions:

  1. Shortage of Quantity. The real volume is short of 8.925m3.

  2. Shortage of Volume. The Inspection Certificate was conducted on random sampling 262 pieces of logs and the shortage rate was 4.54%. Calculating on the rate, the real volume of the lot is short of 305.413m3.

  3. The Grave Defects of the Goods. More than 15% of the logs are rotten or with splits, etc. That would seriously infect the marketing of the goods. We have to sell then at 30% discount. The losses of volume would be 302.722m3. The above items added up, the losses of the log volume would be 617.06m3 and that would amount to US $123,412.00.

  4. To convert the inspection fee RMB 31,214.00 and that equals to US $3,774.36.

  5. The value added tax RMB 215.22/m3 multiplied 617.06 (m3) is RMB 132,803.65. To convert the figure into US currency, the figure is US $16,000.44.

To sum up, your company should compensate us the losses above, amounting to US $143,186.80.

Wish that you reply soon and send some representative to talk the matter over.

Attachment 4 was a reply in Chinese by hand dated March 9, 1999 (Letter of March 9) by the seller to the buyer. The main ideas are as follows:

Referring to your fax of today, I believe that Mr. L has called you up. we could not accept your opinions. If you think that the quantity and quality are not in conformity with the stipulations in the Contract, we are willing to take back the goods and return you the payment. Mr. L of our company nowadays in Hong Kong. He will talk with you over the details of taking back of the goods. His mobile phone is 96xxxxxx. Please directly contact him on the phone. [page 4]

IV. The Actions and Measures Taken by the Seller upon Receiving the Inspection Certificate and the Letter of March 8 of the Buyer

A. Some Facts

The [Seller] stated in the Defense, saying that they had delivered 830 pieces of Merbau Round Logs to the [Buyer], the net volume was 6727.163m3 and the gross volume was 6738.793m3.

Upon receiving the letter (the aforesaid Attachment 3, the Letter of March 8) and the Inspection Certificate (the aforesaid Attachment 2), the seller immediately made a reply (the aforesaid Attachment 4, the Letter of March 9), stating its stance: unable to accept the conclusion of the inspection and the claims of the [Buyer], willing to take back the goods and returning the payment. Furthermore the seller on March 18, 1999 sent two experts, qualified Indonesian Merbau Graders, to G city to check the goods. The goods were stored at a log yard of YZ Timber Mill in G city. There were only 556 pieces at that time. The [Buyer] had sold out 270 pieces.

B. Two Merbau Graders Checked the Goods at the Destination

The two experts spent one week over there, checking the 556 pieces of logs one by one, recording the measurement of every piece in the Log List attached to the Invoice and comparing that with the Measurement marked on the logs by YZ Timber Mill on behalf of the [Buyer]. In addition, they had each piece of the log photographed with its log number and the log measurement on length and diameter clearly marked.

C. About the Quantity

Based on the data collected by the two experts, the seller made another Log List with the Invoice Measurement (length, diameter, volume of the 556 pieces) and the Measurement (length, diameter and volume of the 556 pieces) made by the YZ Timber Mill coded as G Measurement. The contrast between the two measurements showed that calculating the measurement of the 556 pieces of logs made by the buyer, the volume was 4840.976m3. Originally, the volume of the 556 pieces of logs calculated on the measurement in the Log List to the Invoice made by the seller was only 4474.804m3. The difference of the two figures of volume was 366.172m3. The difference showed that the seller had dispatched 8.18% more than the figure of the volume (of the 556 pieces) of which the price had been calculated.

D. About the Quality

The [Seller] held that the nine photos attached to the Inspection Certificate could not reflect the real quality. The two reasons the [Seller] adduced in the Defense are as follows:

  1. With regard to the 556 pieces of logs, there is an extra volume of 366.1712m3. At the time of dispatching the goods, the [Seller] had deducted the volume of the nature defects (please refer to the Log List Nos. 31, 87, 105, 289, 65, 398, 415, 418, 423, 432, 506, 533, 546 ... 821 pieces -- 26 pieces in all, the recording of the deducted volume). The [Seller] had deducted total volume 11.629m3.

  2. The volume of the defective part shown in the nine photos had been deducted, i.e that volume had not been included in the net volume.

    The Inspection Certificate mentioned that 262 pieces of logs had been sampled but without referring to the numbers in the Log List. So that could not be checked against the original data recorded in the Log List and confirmed. Nine photos of nine pieces of logs were 1.0 8% of the total 830 pieces. That amount should not lead to the conclusion that 15% of the total were of grave defects. Therefore the [page 5] [Seller] believed that the [Buyer] had not provided the inspection institute with enough information, such as the Log List. Without sufficient information, the institute could not get a correct conclusion. Therefore the [Seller] requested the Tribunal:

    To turn down the claims of the [Buyer]; the arbitration fees be borne by the [Buyer] and the [Buyer] compensate the [Seller] for the expenses incurred in dealing with the case including the legal fees paid for the lawyer.

The [Seller] never provided to the Tribunal with any information such as the concrete amount, the calculation method etc, with the third request.

V. Some Other Issues Raised or Argued by the Parties

The parties argued over the issues of measuring methods, proper law. At the oral hearing on October 20, 1999, the three-member tribunal inquired into some matters.

A. About the Proper Law

The attorney of the [Buyer] held that as the Contract was concluded in G city, China, the venue of arbitration was in China as well; the proper law should be Chinese law.

The attorney of the [Seller] was of the following view:

There was no stipulation of proper law in the Contract; the Contract was of international trade. China and Singapore were Contracting States to the CISG; hence the CISG should apply to the case.

B. About Inspections of the Goods

At the oral hearing the attorney of the [Buyer] could not tell whether the Log List and the Commercial Invoice (CXX990117) had been provided to the inspector with CCIB, stressing that the [Buyer] took the Inspection Certificate as the conclusion, which should be accept by the parties. After the oral hearing, in her brief written submission, around 300 Chinese characters, she said that the numbers of the 262 pieces of logs and other relating information had been on file at the inspection bureau, if they were needed, the Tribunal might directly ask the bureau for that.

A shareholder of the [Seller] Mr. L, who was the representative to sign the Contract, at the hearing said that the [Buyer] had not be informed of the inspection by the two Indonesian Merbau Graders at the log-yard of YZ Timber Mill in G city.

The [Seller] submitted a copy of a letter dated April 20, 1999 to the [Seller] titled Indonesian Merbau Logs Loaded on Mv. P T January 28, 1999 rendered by a timber company of Indonesia PT. AGODA RIMBA IRIAN ("PARI")[5] to whom the [Seller] had bought the batch of the logs, recalling the inspection of that lot of 830 pieces of logs conducted by their team of log graders and two of the graders from the [Seller] (the buyer to the timber company) four weeks prior loading; stating Deduction on volume was made on certain pieces thus compensating the buyer's recovery loss on wood defects bound to exist from trees, many grown for more than a century in the Tropical Rain Forest; confirming that documents of the Indonesian Forestry were prepared for their inspections to obtain approval from the Indonesian Authority to load and the Merbau Logs had been classified on the Mv. P T as Grade A or Prime Quality.

The last two paragraphs of the letter also revealed that two experts of PART were sent to check the goods in G city. The paragraph reads: [page 6]

"To dispel false allegations from your buyers, we have on the March, 18, 1999 sent two qualified Indonesian Merbau Graders Mr. T and Mr. Z to G city, China to check altogether a total of 556 pieces of Merbau Logs which could be found in YZ's log-yard. Each peach of log was photograph(ed) with its log number and YZ's log measurement on length and diameter clearly marked. Both graders confirmed there was no shortage in our measurement to them. Appropriate volume deduction was compensated for log defects on certain pieces.

"Relevant information found on 556 photos taken by them was self-explanatory."

C. About the Proposal of Returning the Goods

The attorney of the [Buyer] commented on the Letter of March 9, holding there were no details for the return of the goods reflecting no sincerity of the [Seller]. As the [Buyer] had paid the total price of the Contract, there was no guarantee that there would be no loss if we accepted the proposal of return of the goods. Moreover, it would be complicated, as the [Buyer] had paid some interest for the sum in the L/C, the goods had been declared and duties on them paid.

At the hearing the attorney of the [Buyer] could not confirmed that her principal had mad any response to the Letter of March 9.

The shareholder of the [Seller] Mr. L said that the [Buyer] did not make any response to the letter of March 9. The [Seller] proposed that the goods be returned. The seller could resell the goods to some other clients. Therefore neither party would suffer any losses.

D. About the Selling of the Goods by the Buyer

The attorney of the [Buyer] said that before March 11, 1999 (ten days after the issuing of the Inspection Certificate by CCIB, G, and three days after it had informed the seller of the inspection result by fax and two days after it received the Letter of March 9 by fax) it had sold 81 pieces of the logs; around the oral hearing it had sold 470 pieces, the remainder figure was 362.

VI. Points the Parties Emphasized in the Course of the Arbitration

A. The Points the [Buyer] Emphasized

The attorney at the oral hearing stated that the [Buyer] had kept control over the goods and it had got the right to dispose of the goods. It was unnecessary for it to sell the goods until the claims were settled. It was provided in the Contract that the result of the inspection certificate issued by the CCIB should be taken as conclusion and the buyer could make claims based on it.[6]

In the written statement (submission) of the attorney,[7] she reiterated that as both parties had had that provided in the Contract that the result of the Inspection Certificate issued by the CCIB would be taken as the conclusion, and the CCIB conducted the inspection under the Law of PRC On Import and Export Commodity Inspection ("the Commodity Inspection Law"). Therefore the Chinese law was lex fori, the Chinese law should apply to the instant case. She did not quote any provisions of Chinese law.

B. The Points the [Seller] Emphasized

To counter to the aforesaid viewpoints of the attorney of the [Buyer], the attorney of the [Seller] claimed that the Inspection Certificate of the CCIB did not reflected the real conditions of the goods. There was no shortage of quantity and no problem in quality.[8] In the additional [page 7] statement of the attorney,[9] he stressed that the seller even had a certificate, issued by the Forestry Administration of Indonesia, which confirmed that the cargo of the Merbau Logs during the loading had been checked, the quality as Grade A Export Quality in accordance with Indonesia Forestry Regulations.[10] The attorney emphasized the significance of the PARI's letter, showing that there was no such problem as shortage of volume and poor quality. About the proper law, he repeated what he had said at the oral hearing, holding, as both China and Singapore were Contracting States to the CISG, so the CISG should apply to the instant case. But he stated without elaboration, i.e. without referring to any provision of the CISG.

VII. The Opinions of the Tribunal

A. About the Proper Law

There was no provision of law in the Contract. It is provided in the Article 5 of the Law of P. R.

C. on Economic Contracts Involving Foreign Interest ("the Foreign Contracts Law") that in the absence of such a choice by the parties, the law of the country which has the closest connection with the contract shall apply. The Contract was concluded and performed in Guangdong Province, China. Pursuant to the principle of closest connection, the law of the People's Republic of China should first apply. And the Tribunal is aware of that the parties whose places of business are in the two Contracting States of the CISG, they did not exclude the application of the convention, therefore the CIAG applies to the instant case too.

B. Quantity and Quality of the Goods

There are two main issues in the case: whether the volume and the quality of the goods were in conformity with the stipulations of the Contract.

The [Buyer] held that according to the Contract, after the goods arrived at the destination, the result of the inspection of CCIB should be taken as final. If it revealed that there was non-conformity, the buyer had the right to make claims. The Inspection Certificate by the CCIB, G proved that there was a shortage of volume and grave defects in quality. So the [Seller] should compensate the [Buyer] for the losses it suffered.

However the [Seller] held that the Inspection Certificate "was unable to reflect the real conditions of the goods", challenging the objectivity of the contents of the Inspection Certificate; and declared in the Letter of March 9 that it could not accept the claims.

The Tribunal confirms that in line with the stipulations in the Contract, the [Buyer] timely applied to the CCIB, G for conducting the inspection of the goods and then promptly informed the [Seller] of the result of the inspection and made claims. All those acts themselves of the [Buyer] were reasonable. However the Tribunal is aware that the [Seller] made response by fax, stating that it could not accept the claims and would accept the return of the goods and it would return the [Buyer] the payment. When there was divergence over the quality and quality of the goods, the [Buyer] was aware of that but failed to properly execute its right. That led to the unsettlement of the dispute. The Tribunal holds that the [Buyer] was responsible for the dispute. The Tribunal has further analyses and opinions in the following:

  1. Upon receiving the reply (the Letter of March 9) in which the [Seller] turned down the compensation claims but expressed to accept the return of the goods and to return the payment to the [Buyer], the Claimant never made further response. In international trade, "silence" would be regarded as "approval." Article 48(2) of the CISG reads:

    That provision also indicates what would be the result if the seller explicitly puts forward some way of remedy but meet with no response from the buyer. The [Buyer] received the goods and held that there were defects in them, therefore claimed damages. But the [Seller] believed that there was no shortage in volume and defects in quality and at the same time expressed to accept the rejection of the goods, i.e. the remedy was to accept the return of the goods. If the [Buyer] did not make response within a reasonable time, the seller might perform the obligations as it requested previously. When the [Seller] put forward different remedy, the [Buyer] should have made prompt replay, expressing to accept it or not. The [Buyer] made no response, the act of omission, meant that it gave up its rights to claim.

  2. When the batch of logs reached the destination, the [Buyer] had the logs carried from the Huangpu Port to the log-yard of YZ Timber Mill. YZ Timber Mill, upon accepting the store of the goods, did measure the logs. For some reason which the Tribunal has no idea, the [Buyer] did not ask YZ Timber Mill to follow the stipulation in the Contract, the latter adopted another measurement method other then the "Cross Method." The different measurement method adopted by YZ Timber Mill led to a different result. So the result of the inspection by the CCIB was not in conformity with the result of the inspection before loading.

  3. When there was divergence over the quantity and quality of the goods, the [Buyer] disposed of the goods. The [Buyer] sold 270 pieces of logs before March 11, 1999. When the [Seller] sent two experts to re-examined the goods on March 18, there were 556 pieces of logs. At the oral hearing, the Tribunal requested that the attorney of the [Buyer] to provide the arbitrators with the information of the selling of the logs. The attorney was unable to do so, but excused herself, saying that some clerk of the buyer in handling of the affairs was not available abroad. The Secretariat of CIETAC, Shenzhen, urged it for the second time that the attorney had to state in writing that 470 pieces of logs, the volume of 3724.89m3, had been sold. But she still failed to hand any copies of sales contracts or invoices. She did not submit any log list and related materials connecting to the random sampling logs in the inspection by the CCIB.

    Article 21 of the Regulations for the Implementation of the Law of the PRC on Import and Export Commodity Inspection ("Regulations on Commodity Inspection") reads:

    Similar provision could be found in Article 86(1) of the CISG, which reads: [page 9]

    In the instant case, the [Seller] explicitly expressed to accept the rejection of the goods. Without making any response, the [Buyer] unilaterally disposed of most part of the goods. That was not only against the provision concerned in the CISG but also the international practice. What the [Buyer] had done should be regarded as accepting the goods and giving up the rights to compensation. Moreover, the logs were not perished goods. Even if they were perished goods, according to the CISG, a party must take reasonable measures to sell them and meanwhile to the extent possible he must give notice to the other party of his intention to sell.

    Based on the analyses and opinions aforesaid, the Tribunal holds that in the period after receiving the goods and then to turning the dispute to arbitration, excepting for applying for inspection of the goods according to the provision of the Contract, what the [Buyer] had done was against the international commercial practice, the provisions of the CISG and the Commodity Inspection Law. The Tribunal denies the [Buyer]'s claims as they are supported by no sufficient facts and based on no law grounds. All the arbitration fees shall be borne by the [Buyer].

VIII. Brief Comments on Some Issues

A. The Contract Itself

According to the [Seller], the Contract was a form contract provided by the [Buyer], the [Buyer] didn't deny the fact. The Contract was very brief with only 16 short terms and conditions in all in two pieces of paper of A4. I do hold that this kind of contract should be some more detailed or with some terms and conditions more. For instance, as the payment was by L/C, then it should have provided what documents were required, as the duties of a seller under CIF contract are, inter alia, to make out an invoice of the goods, to tender, within a reasonable time after shipment, the bill of lading, the policy or certificate of insurance and the invoice to the buyer would enable the buyer to obtain delivery of the goods, if the goods arrive at the destination, or recover for the loss of the goods, if they are lost on the voyage. People might argue that that those documents should have been included in the obligations of the seller under a CIF contract. I have not objection in this regard. But I still persist that, as this was the first deal between the parties. Parties should have been more cautious. In this particular case some certificate of origin, some certificate of phytosanity issued in Indonesia should have been included. What is more, a deal of importing logs is a trading under license. The buyer should have shown its seller that it had been authorized to deal with such transactions. I had doubt whether the buyer had got the license. Being a member of the three-member tribunal, I did not find any of them, and the parties did mentioned those certificates and license, and certificate of phytosanity, though they might have nothing to do with the merits of this case. We all know that plant quarantine is very important, authorities concerned of the country to which the logs imported would always pay great attention to that imported goods including the wooden packing materials. The bill of lading tendered must correctly state the date of shipment; otherwise the buyer can reject the good. Under a CIF contract, the buyer has a right to reject the documents and also a right to reject the goods; later delivery and penalty should not have been omitted, as they would enable the buyer to have a more reliable protection. A clause of notice would facilitate the burden of proving that what the parties had properly done. The clause of inspection should have been more detailed, at least it should have provided that an [page 10] inspection certificate issued by some authorities before the shipment, showing that following the stipulation in the Contract the seller had the "cross method" adopted and the goods were in conformity with the provision of the Contract. Then at the destination, an inspection institute should conduct the re-inspection with the "cross method." It would be better to have it provided that the CIF the terms in the Contract were based on INCOTERMS 1990 of the International Chamber of Commerce, etc.

B. About the Professional Knowledge of the Persons in Handling the Deal

As this matter had no relationship with the factors in deciding with the merits of the instant case, I did not inquire into it. But I did believe it was one of the reasons that led to the result of the deal.

The form contract was provided by the [Buyer], I suppose it might have been copied by some one with the [Buyer] form other company. From the name of the [Buyer], one could judge that its staff members were familiar with the deals of light industry products. But a question remained unsettled. If the person in handling the deal was a qualified and experienced one in international trade, why didn't s/he see to it that the prompt response, the Letter of March 9 of the [Seller], met with timely reply? I thought that s/he should have kept an eye to the deal from the beginning to the end, following the development of it, having all the questions related to it handled properly. Disputes, especially the small or initial ones might have been removed or settled by and between the parties themselves.

At the hearing, the [Seller] impressed me that the merchants of it cherished their credit, they were eager to settle the case by prompt response to accept the rejection. I had no idea of the operation of the [Buyer] and should not be too arbitrary to say more. Something that I did know or even could not imagine that might have prevented some staff member from handling the deal properly.

C. About the Regular Functioning of the [Seller]

I have written down my thoughts on some issues of this case relating to the [Buyer] as it has been of my habit or also one of the small aspects in the commercial arbitration that have attracted my intention, focusing on some issues emerged in the practice and reflections on them.

I have mention that the [Seller]'s business integrity, their ability to meet their obligations impressed me. They did say and provided with some written document that they had had the inspection conducted before shipment at Indonesia, stating that the "Documents of the Indonesian Forestry were prepared for their inspections to obtain approval from the Indonesian Authority to load. They have classified out Merbau Logs On Mv. PT as Grade A or Prime Quality." But they did not confirm with evidence that they had sent the inspection certificate to the [Buyer], though this certificate itself after the [Buyer] accepted the goods would be of no significance in deciding the case by the arbitrators. But still, I felt puzzled over the irregular ways that the businessmen of it adopted in handling the "dispute." They did promptly make a response to the letter of March 8 by the [Buyer]. As they did send the letter of March 9 to the [Buyer], inter alia, suggesting that the buyer return the goods back and they return the payment. Thereafter they could wait for further response form the [Buyer] before taking any measure. They on March 28, 1999 sent two qualified Indonesian Merbau Graders to G city to check the logs in YZ's logyard. But it was strange that they had neither officially informed the [Buyer] of it beforehand and nor had formerly informed the [Buyer] of the result of the re-check thereafter. What on earth the purpose, meaning and value of that act were? As they did re-checked the goods, normally they should have informed the [Buyer] of the result and simultaneously expressed their viewpoint, for instance, saying that in fact the [Buyer] had accept the goods as there were only 556 pieces over there, 274 pieces of logs had been sold, etc. [page 11]

IX. Re-Examining the Key Issue from Different Angles

A. From the Angle and Standpoint of the [Buyer] and Its Attorney

The [Buyer] is a state-operated enterprise, a legal entity in the line of import and export, mainly in light industry products in China.

Its professional staff members should have known what was to receive goods and what was to accept goods.

The [Buyer] did within the period of 45 days inform the [Seller] of the result of the reinspection at the destination. But the staff members with the [Buyer] in handling the transaction should have known that there was divergence over the volume and quality of the goods. Under such conditions, they were not in a position to dispose of the goods.

Dealing with acceptance, a scholar said:

Without further steps forward in dealing with the divergence, instead, the [Buyer] sold part of the goods. People might think that the buyer changed its mind or gave up its ideas formerly expressed in the Letter of March 8. The buyer did exercise the right of an owner over the goods in question. If I had been in the shoes of the manager of the buyer, I would have asked the staff members in handling the transaction to give an account of it to the attorney and then asked her to analysis the case: what the key issue was, what claims we could raised, what reasons we would be based on and what advantage we would have over the seller. In a word, I would have asked the attorney to estimate the result based on the objective analysis of case.

The attorney of the [Buyer] should have been aware of the nature and consequence of the act by the buyer in disposing of the goods just some days after it sent the Letter of March 8. If I had been her, I would have enlighten the buyer, telling its executives and the persons in handling the deal that they had no advantage over the seller. I would have inquired into the matter whether markets for the Merbau Logs were coming down. Even if that was the case, I, as a professional should have advised the executives not to refer the case to arbitration.

If the attorney was retained after the [Seller] had referred the case to CIETAC, it was not a bad tactics to draw the attention of the Tribunal and the opponent to the stipulation of the Clause 13 of the Contract and the result of the inspection conducted at the destination as she got little room to maneuver. Though her arguments could not bring some arbitrator over, it doesn't mean that that would not work under any circumstances, or influence the decision of any arbitrators. Anyway the question of having the remains of the goods re-inspected according to the Commodity Inspection Law and its Regulations for the Commodity Inspection was raised in the discussion within the three members of the Tribunal. In fact the attorney of the [Seller] had to passively cope with her arguments. Or on the whole the attorney of the [Seller] fell under the [Buyer]'s influence.

When I was appointed as an arbitrator and had access to the file of the case, reading it, my initial impress was that the claims of the [Buyer] might not gain support from the Tribunal. It was [page 12] quite strange, the attorney at the oral hearing argued that as the buyer had kept control of the goods so it had got the right to depose of the goods. It was unnecessary for the buyer to sell the goods until the claims were settled. Did she get no option?

B. From the Angle and Standpoint of the [Seller] and Its Attorney

I have mentioned the points the [Seller] emphasized. Its attorney stressed that the points of quality and volume were in conformity with the stipulations of the Contract. For that purpose, he even explained it in detail, saying that by checking the original Log List the two experts (Merbau Graders) had found out that the No.537 piece of log was cut into two parts at the destination, it was in the log-yard of the YZ Timber Mill.

Moreover, he suggested that the three arbitrators visit the site of the log-yard of the YZ Timber Mill in G city or to another log-yard at a wharf of the Shenzhen Port, some clients of the [Seller] had Merbau Logs stored over there, wishing that the arbitrators would familiarize with the distinguish features of the Merbau Logs. Then the Tribunal would be aware that the Inspection Certificate did not mirror the real conditions of the goods. He said if the Tribunal held that it was necessary, the [Seller] would dispatch the two Merbau Graders who had re-checked the logs in the log-yard of YZ Timber Mill to appear at the second oral hearing to give testimony.

It was understandable to have one's submission to cover as more points and issues as possible. It would at least be more reliable not to omit or miss some points that the [Buyer] had raised and the Tribunal might think important.

If I had been in the position of the attorney of the [Seller], I should first have coped with the questions and arguments raised by the opponent and then actively dealt with the key issue to the case, focusing on the point and elaborating that the [Buyer] had accepted the goods. The Latter of March 9 from the seller had met with no response. Selling part of the goods on March 11, 1999 showed that the buyer accepted the goods and it did exercised the right as an owner over the goods. In a word I would have tried to draw the attention of the Tribunal to it.

If the attorney had grasped the key to the case and if he had been sure that the claims of the [Buyer] would be denied, he would have stressed the third request of the [Seller] by providing to the Tribunal with some data, showing the amount of the travel expenses and fees for employing a lawyer.[12] The expenses of the [Seller] in this case mainly consisted of two sums of money, one was the fees it paid to the attorney it retained and the other was the travel and boarding expenses the attorney and the representative, who signed the Contract on behalf of the seller, appeared at the oral hearing.

X. Review Some Issues of the Case from the Angle of an Arbitrator

A. Grasp the Key of the Case

What was the key of this case? I suppose that I have made it clear. Now recalling the course of the case, I won't say I was wise then. In the files,[13] written record shows that at the discussion of the Tribunal on November 18, 1999, I said that the [Seller] had a right to challenge the result of the Inspection Certificate, namely the result was not final yet. The [Buyer] should have known about that. But without coming to a conclusion on the matter, the [Buyer] had sold 220 pieces of logs, that should be regarded that it had accept the goods, i.e, the quality and the volume of the goods. On the one hand the [Buyer] should tell us the facts of the selling with somewhat elaboration upon request; on the other hand, when the facts was confirmed that the [Buyer] had disposed of part of the goods, the case could be decided.

At the second discussion of the three arbitrators on December 13, 1999, I stressed that there was a distinction between "receiving" and "acceptance." The parties diverged over the matter of the [page 13] quality and volume of the goods; the [Buyer] had sold part of the goods without the consent of the [Seller]. The act of acceptance could be established when the buyer exercise the right of an owner over the goods in question, that is to say that act should be regarded as the acceptance of the goods, it had lost the right to claim on the shortage and defects in quality of the goods. What is more, when the seller had received the Letter of March 8 concerning the shortage and defects in quality of the goods, in the prompt reply the Letter of March 9, the seller explicitly expressed that it would accept the rejection of the goods. The [Buyer] had made no response; instead, it had sold most part of the logs. No doubt that act should be regarded that it had accept the goods, thus it would enjoy no right to damages at all.[14]

I know what I copy down above is not well organized but quite redundant. But I have to be faithful to the original records by the secretary who was assigned to help the Tribunal with arbitration affairs. Anyway, I believe the main idea is clear. So, briefly, confirming or not the establishment of acceptance of the goods by the [Buyer] was the key to the instant case. So the attorneys of both parties should have focused on it, trying to bring home to the arbitrators their respect views or arguments on the established or not of the acceptance of goods. Finding it out and focusing on it, the Tribunal could decide the case.

B. Law Application

I have quoted the opinion about the matter of proper law. Frankly, when the opinion was put forward by one of my co-arbitrators, the presiding arbitrator at the discussion on December 13, 1999, I did second it.[15] But on second thoughts, I changed my mind and had my idea written with red ink on page 10 of the draft of the award,[16] explaining as follows:

"We had better first apply the CISG to the case. The reason is that among the many connecting factors of this Contract, the characteristic performance is clearly that of the delivery of goods by the seller, the act of payment by the buyer is not the characteristic performance. Therefore, usually under such circumstances, that a contract is governed by the law of the state with which it is most closely connected which in turn is determined by the habitual residence of the party providing the 'characteristic performance.'[17]

"That was to say that it might be more appropriate to apply the law of Singapore but not that of China because of 'characteristic performance'."

My formal opinion on this matter was:

"China and Singapore are the Contracting States to CISG, the parties did not exclude the application of this Convention, and so the CISG applies to the Contract."[18]

That idea of mine was not accepted by my co-arbitrators.

About the characteristic performance, a distinguished arbitrator dealt with the methods of determination of the proper law, inter alia, he expounded the determination of the proper law without reference to any national law:[19]

"This method is becoming increasingly commonplace. By its application, the arbitrators determine which country is most closely connected to the transaction and then directly apply that country's substantive laws."[20] [page 14]

"In ICC case No. 4237, reported in S Jarvin & Y Derains supra, 167, it is stated:

"In view of the international character of the present arbitration, the arbitrator deemed it appropriate to apply those conflict rules which are generally followed in international arbitration of this kind under consideration. The decided international awards published so far show a preference for the conflict rule according to which the contract is governedby the law of the country with which it had the closest connection. The country with which it has its closest connection is the country where the party who has to carryout the most characteristic performance has its head office.

"A similar approach was taken in Saudi Arabia v American Oil Co (Aramco) (1963) 27 ILR. Chukwumerjie, at 309, not 24, with reference to this method says:

"The direct approach is best suited for eradicating the confusion the confusion which this area of arbitration has become. If generally accepted, it would enable arbitrators to directly select the applicable law without the rigours of deciding which conflict rule to apply. An arbitrator faced with a problem of determining the governing law in the absence of the parties' agreement would directly apply the law most closely connected to the contract. It is to be hoped that the next international project on arbitration will adopt this straight-forward approach to choice of law by arbitrators."[21]

I guess by adopting the direct approach, the CISG should be applied in the instant case, otherwise the Singapore law would be chosen as the proper law out of the most characteristic performance.

I in the course of reviewing the case and writing this article consult some books by my colleagues. The following expression is quite good:

"Even before the adoption of the most recent ICC rules, ICC arbitrators had taken the position that an arbitrator should not be compared to a state court judge in the choice of law process since arbitrators have no obligation to apply the law of the seat as an assimilated lex fori (emphasis added). For example, an ICC arbitral award of 1970 held:

"'The Rules determining the applicable law vary from one country to the next. State judges derive them from their own national legislation, the lex fori. But an arbitral tribunal has no lex fori in the strict sense of the word, particularly when the arbitration case is of an international nature by virtue of the object of the dispute, the choice of the arbitrators, and the organization itself which supervises the arbitration (emphasis added),in this instance the International Chamber of Commerce.'"[22]

We arbitrators at CIETAC, though claim that CIETAC has been an international commercial arbitration organ, in practice some of us have not been free from the influence of the factors relating to the seat of arbitration yet. Ideology is closely related to practice. I believe most of the arbitrators in the international commercial circle would accept this idea after they know more about the [page 15] modern trend in this regard, having some chances more to exchange ideas with counterparts the world over, handling cases of both foreign parties and co-arbitrating cases with foreign arbitrators rather than only those of the same nationalities of the parties, abandoning the sense that CIETAC as a Chinese Arbitration institution chosen by the parties but not mainly for its credit and repudiation established in its long history. An arbitration institution chosen by parties not mainly for its nationality, even the advantageous geography, speedy transportation and convenient communication are not the most important factors involving the determination of choice by parties, as now, most arbitration institutions are located in those cities enjoying those conditions.

Some scholar said:

"In the past, the arbitrators would probably have felt bound to apply the conflicts rules of the forum. It now appears that arbitrators, like parties, are possessed of free will. They are not even required to reconstruct a fictitious 'common intention of the parties.'"[23]

Re-examining the opinions of my co-arbitrators and mine on the matter of choice of substantive law in the award, I think it was not so appropriate as it should have been, though it was not wrong, i.e. the rights of the parties were not deprived or damaged. Though there were some defects in the discussion and applying governing laws, the decisions were not incorrect in this particularly case.

Some of our colleagues with the International Chamber of Commerce (ICC) dealing with the matter of free choice by arbitrator without reference to any system of conflicts, i.e., direct choice, said:

"[I]n the absence of party choice, the arbitral tribunal may apply the rules of law 'which it determines to be appropriate' is the choice by the arbitrator of the applicable law (or rules of law) without passing through any system of conflicts whatsoever. This possibility of direct choice of the applicable law permits arbitrators to choose rules of law appropriate for the very case before them, without concern for whether the same principles could be applied in another case. One of the factors which weighs on whether a law would be deemed appropriate is whether it would recognize and give force to the agreement between the parties. Where parties have entered into an agreement and entrusted its interpretation and enforcement to arbitrators it goes without saying that the arbitrators will favor the application of a law which permits its enforcement over one that will invalidated it."[24]

C. Some Comments about the Applying of the CISG by Chinese Arbitrators and Lawyers

I had better to review the CISG, in case I am not so familiar with it as I should be. Article 1 of it does provide the basic rules of applicability. Under it, the CISG should apply to an international sale of goods contract when the parties have their places of business in different states and: (a) each party's respective state is a signatory to the CISG, or (b) the conflicts rules of private international law would lead to the application of the law of a state that is a signatory to the CISG. Frankly I did not try to persuade my co-arbitrators by invoking this provision of the CISG. I did not draw the attention of my co-operation to that fact that China has made Article 95 reservation and based on that and the 'characteristic performance' of the instant case hence we had more reason to have the case to be governed by the CISG. If I had done so, the opinion in this regard in the award might have been more appropriate. [page 16]

In fact, quite a few foreign colleagues, who are interested in the CIETAC arbitration, have paid great attention to the development or trend of CIETAC and been keen on the materials of it. One of them an American scholar pointed out similar mistakes or shortcomings in the application of the CISG.[25] He got access to some CIETAC awards translated from an official collection of CIETAC awards published by CIETAC itself.[26] He mentioned two cases and analyzed them in his article. He said the translation was completed by some one, a member of the bar (Association of Lawyers) of China, while participating in the international L. L. M. program at the University of Pittsburgh School of Law during the 1998-1999 academic year.[27]

The data about the cases he furnished in his article:

"Case 1 is an arbitration award from China's international commercial arbitration organ, China International Economic and Trade Arbitration Commission (CIETAC), date October 31, 1991, translated from an official collection of CIETAC awards published by CIETAC itself. Case 2 concerns an arbitration under China's forerunner of CIETAC and consists of an arbitration award dated March 2, 1988, the seller's statement of defense, a supplementary submission by the buyer in answer to seller's statement of defense, and commentary by an officer of the China Legal Affairs Center."[28]

According to the above data, if I have not made any mistake, I believe I have located the cases. Case 1 is as Case 75 in the Selected Arbitration Awards of CIETAC (1989-1995).[29] In the original, the date of the award is October 31, 1991. Case 2 is as Case 44 in the Selected Arbitration of CIETAC (1963-1988).[30]

In the Introduction, the scholar argued:

"[T]hat Chinese arbitrators and lawyers are applying the CISG in an idiosyncratic way, out of step with the plain meaning of the CISG's provisions, and thus poses a threat to a uniform international practice."[31]31

I have to quote some paragraphs from the article, so that people might be better aware of his arguments.

"Case I involves a dispute arising from contracts for the sale of aluminum materials to be used in the manufacture of aluminum cans. The first contract was partially performed in that a portion of the goods were shipped and they arrived in China, but were at that time found to be non-conforming. Buyer then requested that seller take back that portion of the goods. Subsequently, the seller failed to deliver a second portion of the goods, and, after a failed attempt at resolution through friendly negotiations, seller attempted to cancel the contract applicable to the undelivered goods. The buyer then brought the case before CIETAC in accordance with an arbitration clause in both contracts.

"Case 1 was chosen for translation because, although the identities of the parties and their nationalities have been concealed, the goods relating to the contract in dispute are certain aluminum materials manufactured in the United States, shipped from a United states port to a Chinese port for use in the manufacture of aluminum can by a Chinese manufacturer. This, combined with the arbitration tribunal's application of the CISG, leads to the inference that [page 17] the buyer was a Chinese company and the seller a U. S. company, both from nations that are Contracting States under the CISG. This reasoning is admittedly circular in that any conclusion that the CISG should apply to the contract in dispute must be based on the fact that the parties are from Contracting States under the CISG, and that such a conclusion in this case is based on an inference partially informed by the fact that the CIETAC arbitrators applied the CISG. Nevertheless, the inference is a strong one because in this case the arbitration tribunal applied the CISG according to Article 6 of the FECL (the Foreign Contract Law of China -- the author), which only requires the application of an international treaty which China has participated in if such international treaty 'relates' to the contract in dispute. Therefore, it seems to be safe to infer that the parties are from Contracting States because there would otherwise be no legitimate reason for the arbitrators to conclude that the CISG relates to their contract."[32]

The seller was an American company and the buyer was a Chinese company. The identities of the parties were concealed in the original but their nationalities were not.[33] I have no idea why the scholar had to draw this inference from the data of the case.[34] Did the translators omit or miss some lines?

The scholar held that a dispute arising from a contract for the international sale of goods between parties from different Contract States should be governed by the CISG.[35]

Pertaining to Case 1, I believe the parties did not specify the applicable law in their contracts as the scholar inferred.[36]

The tribunal in the Part of the Arbitrators' Opinions of the award concluded:

"Because the contracts in dispute were all signed in Beijing, and because the material problems related to the disputes are connected with China, hence the Chinese law applies to the instant case.

"According to Article 6 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest the Foreign Contracts Law (the Foreign Contract Law -- the author), therefore the United Nations Convention on Contracts for the International Sale of Goods is also applicable."[37]

The American scholar believed that the conclusion was totally untenable according to the terms of CISG Article 1.[38]38 He argued:

"Nowhere in CISG Article 1 is there a provision for the combined use of the CISG and any nation's domestic law (emphasis added). Only CISG Article 7, which covers matters not expressly settled by the CISG would give an arbitral tribunal the authority to apply the domestic law of the place in which it sits, and this only if the matter is not covered by the CISG, it cannot be settled in conformity with the CISG's general principles, and the rules of private international law point to the domestic law of the place where the tribunal sits. In contrast, The CIETAC tribunal in Case 1 is applying the CISG to a dispute between parties from Contracting States, but only to the extent that the CISG's provisions 'different from the law of the People's Republic of China.'"[39] [page 18]

That scholar said:

"The tribunal does not elaborate on the reasoning behind its decision to apply the CISG and the FECL (Foreign Contract Law -- the author) in tandem, but the questions raised by such a decision are numerous. For instance, just how does a tribunal decide when CISG's provisions differ from China's domestic laws? After our discussion concerning the need for uniformity in application of the CISG, it seems impracticable that a tribunal would or could do the research necessary to discover how the CISG is being applied around the globe, compare it to China's domestic law, and then use CISG's provisions only when they would lead to a different outcome than would occur under China's domestic law."[40]

He put forwarded many questions:

"Should the tribunal rely on the lawyers appearing before it to point out the differences? Is it possible for a lawyer to predict which provisions of the CISG a tribunal find different? How is the tribunal to decide between differing interpretations of the CISG? Should it interpret the CISG without regard to international practice, interpreting it anew each case? Or should it follow a strictly Chinese interpretation, giving a unique interpretation to the official Mandarin version of the CISG? If Chinese arbitrators follow a strict Chinese construction of the official Mandarin version of the CISG (after all, who else is going to interpret it?), how will it affect internationaluniformity?"[41]

The scholar was of the view that:

"For practitioners, predictability of application was the key consideration and arguing form the general principle of uniformity in international trade embodied in CISG Article 7, and therefore insisted that the CISG be applied without reference to any nation's domestic contract law (emphasis added)."[42]

As for Case 2, I suppose that I have located it. But what the information I get form reading the original is different from that contained in that scholar's article. For example, he said:

"For our discussion, the pertinent aspect of this case concerns the application, or lack thereof, of the CISG. It is quite clear that the seller in Case 2 was from the People's Republic of China. However, we are left without a clue, other than the final shipping destination of Saudi Arabia, as to the nationality of the buyer. Saudi Arabia is not a Contracting State under the CISG. If the buyer was indeed a Saudi national, then there would be no reason to apply the CISG. If the buyer was not a Saudi national, and was in fact from a Contracting State, then only the CISG should have been applied. Unfortunately, the arbitration award itself does not cite to either the FECL (the Foreign Contract Law -- the author) of the CISG. To determine the law on which the tribunal relied, we must look to the statement of defense of the seller and the reply made by the buyer."[43] [page 19]

In the Chinese original, it is quite clear that the buyer was a company coded GSO from Lebanon. So far as I know Lebanon was not a member country of CISG before July 1999. The transaction was concluded in September 1985.[44] And what is more, I could not find the facts he retold about the case in the original.[45] If I did not made any mistake in locating Case 2, then the cause for the different information in the original and in the article of that scholar might shows the gap of two languages could not be easy to bridge over.

Though it seems to me that the discussion of the colleague was somewhat satirical, I suppose sometimes a satire comment is more vivid but does no harm. I could see that the American scholar meant no harm to CIETAC and its abitrators. I have been enlightened from reading this article. Re-examining this case as I have often done has led me to peruse the files of the case and read more. Consulting some books and articles by my colleague enabled me to have a deeper understanding of the CISG and the application of law.

Now apart form the main work of administrating the arbitrations, CIETAC has been engaged in many jobs. One of them is to compile the awards in the past years and have them published by the Law Publishing House, Beijing, China as it has done in the last two decades of the 20th century.

Why not summarizing up our experience including to finding out mistakes and analyzing the causes of them so that our capacity might be improved? That would at least as valuable as publishing awards. On the road, we had better to stop occasionally for a while to look back upon what we have done. If we find out some mistakes, errors or even serious blunders we made in the past that would show we have gained some progress now. I don't think that we should cover up our errors or deficiency if there are some. "I believe mistakes are the cost on the road forward."[46] We should try not to have the mistakes repeated too many times or have the cost doubled or tripled.

D. Could the Commodity Inspection Law Apply to the Instant Case Together with the CISG?

The America colleague I have mentioned above said that CISG be applied without reference to any nation's domestic law except for the matter is not covered by CISG. He insisted at the end of his article, "that the CISG be applied without reference to any nation's domestic contract law."

I am not sure whether what he first said "national domestic law" is equally to "national domestic contract law." One of my colleagues said in one of his books:

"[2.7] Whether or not the application of the Convention is compulsory in a member country, once the conditions for its application are satisfied, is an issue subject to debate (emphasis added). On one hand, previsions of the Convention imply that the application of the Convention is compulsory, unless any restriction or deviation from the whole or part of the Convention has been agreed expressly by the parties to a contract, in pursuance of art 6 of the Convention. On the other hand, there is nothing in the Convention decides that the Convention is not applicable, for whatever reasons justified under the relevant domestic law.

"In GPI. Treatment Ltd v Louisiana-Pacific Corp 914 Pacific Reports (2nd Series) 682; 323 Oregon Reports 116, the Canadian sellers sued the US buyer for breach of the contract for the sale of cedar shakes. The sellers commenced their case under the Uniform Commercial Code (UCC) of US. During the trial, the sellers attempted to raise the issue of whether the Convention, rather than UCC, should apply. [page 20] The trial judge denied the motion on the ground that it was too late for the sellers to rely on the Convention to proceed with their case. The sellers won their case all the way against the buyer, and thus whether the Convention should apply appeared to be only a technical question. A dissenting judge of the intermediate appellate court questioned the rationale of the trial judge's denial of the application of the Convention, but the Supreme Court did not address this issue at all.

"Though this case decided largely on the basis of UCC, it may suggest that the application of the Convention may be denied by the implied agreement of the parties, which can be inferred from the acquiescence of the parties to proceed with proceedings at the beginning of a trial without raising the issue of Convention. This proposition, if it were what the trial judge meant in GPI. Treatment Ltd v Louisiana-Pacific Corp, is inconsistent with art 6 of the Convention. In addition, the court of each member of the Convention must answer the question as to whether or not its country has an international obligation to implement the Convention within its own territory. In light of these arguments, the scale will learn heavily towards the conclusion that the court of a member of the Convention probably has an obligation to apply the Convention, once the condition for its application have been established, and its application has not been excluded in pursuance of the provisions of the Convention."[47]

My impressions of reading this quotation are that on the whole the conclusion of this scholar is the same of that of the America scholar except for the some lines I have underlined: (1) The court of a member of the CISG has an obligation to apply it, once the conditions for the application have been established. (2) Sometimes whether the CISG should apply appeared to be only a technical question, not always so serious as some one held. (3) The case GPI. Treatment Ltd v Louisiana-Pacific Corp is an eye-opener for me. If I had been one of the judges in handling the case, if the parties had not been excluded the application of the CISG, when the sellers raised the issue of the application of the CISG, I might have not denied it on the ground it was too late. Because under such circumstances, no matter what the opinions of the two sides, if I, as an arbitrator, believed the CISG should apply, I would decide. It has been my practice. (4) If the American scholar takes notice of this case, he might have different opinions with the judges of the case, his countrymen?

I have to quote some more paragraphs from the book:

"The application of the Convention in any particular circumstance has been inevitably affected by the legal tradition concerned (emphasis added). In a French case, Societe Sacovini v SARI, Les Fils de Henri Ramel, decided on 23 January 1996 by the Court of Cassation (1st Civil Division), the Montpellier Court of Appear of France applied the Convention, in particular art 35, to dismiss an appeal by the Italian wine seller against a decision of the Sete Commercial Court in favor of the French buyers, despite the fact that the trial court did not apply the Convention to adjudicate the dispute in the first instance. This case is interesting, in the sense that at the trial the dispute was settled under the French domestic law, but at the appeal, the Court of Appeal brought in the Convention by its own initiative to dismiss a claim formulated on the basis of the French domestic law."[48] [page 21]

France and Italy both are the Contracting States of the CISG. The judges of France did not apply the CISG in dealing with a case arising from an international sale of goods. Instead, they applied the domestic law of France. Was it a serious problem? Just now I have mentioned no matter what the parties' opinions were on the matter of the application law, if I were a private judge in handling a case, I would decide if I believe the application of the CISG is correct. I have no idea how many claims put forward by the parties in the case, as I have got access to the case secondhand. I guess there must be more than one claim. The Court of Appeal brought in the CISG by its own initiative. Our views happened to coincide. Furthermore, it seems to me, the judges with the Court of Appeal did not deny the application of the French national domestic law combined with the application of the CISG, did they?

In my opinion different with my co-arbitrators mentioned above, "We had better first apply CISG to the case." And in fact, "shouxian" that means "first of all" or "firstly" was used in the Opinion of the Tribunal of the award.

In the award, we did apply the Commodity Inspection Law in the case. Was it wrong? Is the application of law a question of simple substance (I am not sure whether it is a correct collocation and whether my colleagues could guess what I mean)? Is any domestic law excluded when CISG applies?

Let me recall the consideration in the application of Commodity Inspection Law in the instant case. The CISG does provide that the buyer has the right to re-examine the goods at the destination. Does it mean that the result of the inspection at the destination is final? It seems to me that issue is not dealt with in the CISG. For the purpose of safeguarding the smooth international transactions, in this particular case, we the three arbitrators did believe that judging the particular matter of the inspection at the destination, the Commodity Inspection Law, including the Regulations on Commodity Inspection, should be applied. It is provided in the Regulations on Commodity Inspection Article 49, the result of the inspection is not final; party concerned could apply to the higher inspection authority for re-inspection. And what is more, we do believe that Article 21 of the Regulations on Commodity Inspection is in conformity with that of CISG Article 86(2) and is even more explicit.

XI Conclusion

Any party with his/her attorneys to a case should try to grasp the key to a case if they want to have their claims sustained. The defense of other party with his/her attorneys should be directed against the claims and the grounds the claims on. But what the respondent and his/her attorneys should not follow the claimant step by step. They should from their stance and angle grasp the key to the case.

Arbitrators should be able to quickly find out the key to a case. That is the crux of the matter. Experienced arbitrators could with less time grasp the key to a case. Being an attorney or an arbitrator in handling dispute of international sale of goods, some basic qualifications you should have. You should be able to read the English versions of INCOTERMS and the CISG and have read some articles on various aspects of international trade including on the application of law and the CISG.

Though nowhere in CISG Article 1 is there a provision for the combined use of the CISG and any national domestic law, I don't think that the application of the CISG would absolutely be excluded the application of any national domestic law. I prefer to accept the view, that as the CISG is a contract law in nature, it should be applied without reference to any national domestic contract law. [page 22]


ENDNOTES

* Yanming Huang is an attorney-at-law of China, associate research fellow of law and arbitrator with the China International Economic and Trade Arbitration Commission (CIETAC), Shenzhen. He is also a conciliator with the Conciliation Center of China Council for the Promotion of International Trade (CCPID) the China Chamber of International Commerce (CCOIC). Thanks are due to Mr. Marcus S. Jacobs, one of her Majesty's Council for the State of New South Wales of Australia, Senior Advocate of the Supreme Court of South Africa, Mr. Robert Morgan, assistant professor with Faculty of Law, University of Hong Kong and Dr. John Shijian Mo, Associate Professor with School of Law, City University of Hong Kong for the books and reference materials given me as gifts or sent to me which enabled me to have a better understanding of some issues in relation with this article. All the views in this article are the authors' own and do not necessarily represent those of any body or institute. Copyright 2002 by the author. Replies to this commentary are welcome.

1. See Article 38(1) of CISG.

2. See Article 39(1) of CISG.

3. See Files of CIETAC, Shenzhen No. 1138-1, p.022.

4. The Log List consists of 11 pages, carrying the log number, length, diameter, gross volume, defect volume and net volume of every log and part.

5. See supra note 3, p.180.

6. See supra note 3, p.040, the recording of the oral hearing.

7. See supra note 3, p.080.

8. See supra note 3, p.041, the recording of the oral hearing.

9. See supra note 3, pp.173-175

10. See supra note 3, p.179.

11. Mo, John Shijian, International Commercial Law, 2nd ed, Butterworths, 2000, p.49.

12. Please refer to Article 59 of the 1998 Arbitration Rules of CIETAC.

13. See supra note 3, p.011 of the supplement.

14. Id., p.014.

15. Id., p.013.

16. Id., p.026.

17. Please refer to Article 117 of the Swiss Private International Act.

18. See supra note 13, p.026 of the supplement.

19. Marcus S Jacobs, International Commercial Arbitration in Arbitration Law and Practice, The Law Book Company Limited, 2001, Vol. 1, p.2819.

20. Id.

21. Id., pp.2819-2820

22. W. Laurence Craig, William W. Park, Jan Paulsson, International Chamber of Commerce Arbitration, 3rd ed., Ocean Publications Inc/ Dobbs Ferry, NY, pp.322-323.

23. Stephen J Toope, Mixed International Arbitration: Studies in Arbitration between States and Private Persons, Jrotius Publications Limited, 1990, p.49.

24. W. Laurence Craig, William W. Park, Jan Paulsson, International Chamber of Commerce Arbitration, 3rd ed., Ocean Publications Inc/ Dobbs Ferry, NY, p329.

25. Frank N. Fisanich, Note & Comment: Application of the U. N. Sales Convention in Chinese International Commercial Arbitration: Implications for International Uniformity, 10 Am. Rev. Int'l Arb. 1999.

26. Id., p.116

27. Id. See note 90 to the text.

28. Id., see supra note 25, p.116.

29. Selected Awards of the China International Economic and Trade Arbitration Commission (1989- 1995), China Foreign Economic and Trade Publishing House, September, 1997, pp.429-438.

30. Selected Awards of the China International Economic and Trade Arbitration Commission (1963- 1988), The Publishing House of the Renmin University of China, May, 1993, pp.144-148.

31. See supra note 25, p.102.

32. Id., p.117.

33. See supra note 29, p.430.

34. See supra note 25, p.117.

35. Id., p. 118.

36. Id., pp. 117-118.

37. See supra note 29, p.434. My translation is in line with the literal meaning, taken literally. Mr. Fisanich's reflects the real meaning in p.118 of his article.

38. See supra note 25, pp.118.

39. Id.

40. Id.

41. Id., pp.118-119.

42. Id., pp.122-123.

43. Id., pp.119-120.

44. See supra note 30, pp.144-145.

45. See supra note 25, p.120; supra note 331, p.p145-146.

46. Yanming Huang, An Arbitrator Looks Back: Did CIETAC Have Jurisdiction Over Foshan Jiadian Lighting Co., Ltd and Prestige Lighting Co., Ltd? Mealey's: International Arbitration Report, Vol. 16, Issue 9 (9/01) at p.52.

47. See supra note 11, pp.59-60.

48. Id., p.60.

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