China 31 December 1999 CIETAC Arbitration proceeding (Steel coil case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/991231c1.html]
DATE OF DECISION:
DATABASE ASSIGNED DOCKET NUMBER: CISG/1999/32
CASE HISTORY: Unavailable
SELLER'S COUNTRY: P.R. China (claimant)
BUYER'S COUNTRY: Switzerland (respondent)
GOODS INVOLVED: Hot rolled steel sheets in coil
PRC: Award of China International Economic & Trade Arbitration Commission [CIETAC] 31 December 1999 (Steel coil case)
Case law on UNCITRAL texts (CLOUT) abstract no. 805
Reproduced with permission of UNCITRAL
A Chinese seller and a Swiss buyer entered into a contract for the sale of prime hot rolled steel sheets in coil in China. The standard form of contract included a clause on the terms of payment which was replaced by the parties with new terms of payment, typed on the form. However, the original and pre-printed provision of the contract standard form was only partially deleted.
In order to perform the contract, the seller concluded a separate supply contract and a shipping contract. Because of the different understanding of the payment clause in the purchase contract, the buyer did not apply for issuance of the L/C as stated by the contract. Eventually, the seller cancelled its order of goods from its supplier and the shipping order. It then filed for arbitration claiming damages for loss of profit, contract cancellation fees, other expenses incurred and interest.
The parties had not chosen any governing law in their contract. However, since their places of business were in Contracting States of the CISG, and both acknowledged in their arguments that the CISG should be the applicable law, the Arbitral Tribunal ruled for the application of the Convention.
The Tribunal held that where the parties adopt a standard form contract for their transaction but negotiate and reach a special agreement on specific issues, the individually negotiated terms shall prevail over the original terms in the standard form contract. The Tribunal also stated that, since the payment provisions in the original pre-printed form contract (both in English and in Chinese) failed to convey a full meaning, the pre-printed payment clause was to be considered as completely replaced by the new payment clause typed on the form as per the agreement between the seller and the buyer.
The Tribunal recognized that the timely issuance of the L/C was of the essence for the contract and that, since the buyer had failed to request the issuing bank to issue the L/C in accordance with the typed-in payment clause, this constituted a fundamental breach of contract. Accordingly, the buyer should compensate the seller for the loss of profit, the fees paid because of cancellation of the supply and shipping orders, and the other expenses incurred due to the buyer's breach of contract. The Tribunal further stated that there was no evidence that the seller had clearly informed the buyer of its loss prior to filing for arbitration and concluded that, therefore, while the buyer should pay interest on the above, the interest should only be calculated from the date of filing for arbitration.
The Tribunal, however, did not support the buyer's argument that the seller had not taken reasonable efforts to mitigate the loss and that the buyer could not reasonably foresee the loss or that the loss exceeded the amount the buyer foresaw or ought to have foreseen at the time when the contract was concluded. In the Tribunal's view the buyer had failed to provide sufficient evidence to prove this argument.Go to Case Table of Contents
APPLICATION OF CISG: Yes
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
8A [Intent of party making statement or engaging in conduct]; 9A [International usages]; 25B [Definition of fundmental breach (substantial deprivation of expectations, etc): time for opening of L/C held to be "of the essence for the contract"]; 59B [Payment due without need for request by seller or other formality]; 74A ; 74B [General rules for measuring damages: loss suffered as consequence of breach; Outer limits of damages: foreseeability of loss]; 77A [Obligation to take reasonable measures to mitigate damages]; 78B [Rate of interest]
8A [Intent of party making statement or engaging in conduct];
9A [International usages];
25B [Definition of fundmental breach (substantial deprivation of expectations, etc): time for opening of L/C held to be "of the essence for the contract"];
59B [Payment due without need for request by seller or other formality];
74A ; 74B [General rules for measuring damages: loss suffered as consequence of breach; Outer limits of damages: foreseeability of loss];
77A [Obligation to take reasonable measures to mitigate damages];
78B [Rate of interest]
CITATIONS TO OTHER ABSTRACTS OF DECISION
CITATIONS TO TEXT OF DECISION
Original language (Chinese): <http://www.cietac-sz.org.cn/cietac/Y99/99-2.htm>; see also Zhongguo Guoji Jingji Maoyi Zhongcai Caijueshu Xuanbian [Selected Compilation of Awards of CIETAC] (1995-2002), Law Press, at pages 410-421
Translation (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
English: Dong WU, CIETAC's Practice on the CISG, at nn.108, 158, 166, Nordic Journal of Commercial Law (2/2005)Go to Case Table of Contents
|Case text (English translation)|
Steel coil case (31 December 1999)
Translation [*] by YUAN Xiaotong [**]
Edited by Howard Yinghao YANG [***]
Claimant [Seller] and Respondent [Buyer] entered into an international sales contract for prime hot rolled steel sheets in coil. Disputes arose between the parties. [Seller] claimed damages for loss of profit, loss for withdrawing the order, loss for other expenses and interest. The Arbitration Tribunal decided that, since the obligations of performance under the contract were never cancelled by agreement between the parties, [Buyer] should compensate [Seller] for the loss of profit, loss for supply and shipping order cancellation, as well as other expenses arising out of [Buyer]'s breach such as failure to open the letter of credit [L/C].
In accordance with the arbitration clause contained in Contract No. 6XXXXX462028 between Claimant [Seller] and Respondent [Buyer] and Claimant's Application for Arbitration, the China International Economic & Trade Arbitration Commission, Shenzhen Commission ("CIETAC Shenzhen Commission") accepted this arbitration case on 8 January 1999.
The arbitration observed the procedure set forth under the Arbitration Rules of China International Economic & Trade Arbitration Commission ("Arbitration Rules of CIETAC") effective 10 May 1998.
Both Claimant [Seller] and Respondent [Buyer] appointed their respective arbitrators. But the two parties did not jointly appoint nor jointly entrust the Chairman of the Arbitration Commission to appoint the third arbitrator within the time limitation. The third arbitrator was appointed by the Chairman of the Arbitration Commission as the presiding arbitrator. The presiding arbitrator and the two appointed arbitrators formed an arbitration tribunal on [(the "Arbitration Tribunal")] 8 April 1999 to jointly hear the case.
The Tribunal held oral hearings at 9 a.m., 14 August 1999. [Seller] and [Buyer] attended the hearings. The Arbitration Tribunal heard the arguments of both parties and undertook investigations into relevant facts.
On 31 December 1999, the Tribunal rendered the arbitral award. The facts of the case, the opinions of the Arbitration Tribunal and the award are presented as follows.
I. FACTS OF THE CASE
On 18 March 1996, [Buyer] signed Contract "No. 6XXXXX462028" with [Seller] at XX China (the place of contract) to purchase prime hot rolled steel sheets in coil.
Disputes arose between the parties during the performance of the contract. On 5 December 1998, [Seller] filed an application for arbitration to the CIETAC Shenzhen Commission in accordance with the arbitration clause in the contract and claimed damages for the loss arising out of [Buyer]'s failure of performance, including:
During the arbitration proceeding, [Seller] and [Buyer] submitted relevant documents and presented their arguments. The issues of the case are as follows.
II. ARGUMENTS OF THE PARTIES
1. Has the contract been cancelled through agreement?
(1) [Buyer]'s argument
[Buyer] alleged that the two parties, shortly after the conclusion of the contract, through the negotiations between [Buyer] and the representative of [Seller], agreed orally to cancel the contract.
(2) [Seller]'s argument
[Seller] argued: (1) The cancellation of the contract must be in writing; (2) No evidence was provided by [Buyer] to prove its assertion that the both parties orally agreed to cancel the contract; (3) [Buyer] did not specify the date of the alleged contract cancellation, the way in which the parties reached the alleged agreement to cancel the contract, and the reason for the cancellation. Lack of evidence and explanation suggests that Buyer's allegation that the contract was cancelled, was totally unfounded. Moreover, even if the parties did agree to cancel, failure to do so in writing would render such an agreement void.
2. Opening the Letter of Credit
(1) [Buyer]'s argument
[Buyer] gave its statements on the issue of the [L/C] as follows.
Terms of Payment
[Buyer] alleged that Article 8 on the standard contract was only partially removed when the two parties reached their agreement. Its clause, which reads "upon receipt from setter of the advice as to the time and quantity expected ready for shipment, [Buyer] shall open, 20 days before shipment, with the Bank of China XX Branch, an irrevocable letter of credit [L/C] in favor of [Seller]", was not expunged from the contract.
The clause, which reads "Payment: By ire-L/C At 150 days after B/L Interest rate 7 pct p.a. at seller's account. The L/C to be opened before Mar. 28, 96", was only intended as a supplement to the Terms of Payment.
It should be noted that the 7% annual interest rate provision in the above clause suggests this L/C has the nature of a financing instrument.
Performance of the Contract
In accordance with the aforesaid stipulations of the contract, the practice of international trade as well as the rules and usages for letter of credit transactions, [Seller] should implement its duty of advice regarding the preparation of goods. [Buyer]'s duty to open the [L/C] does not arise until after [Seller] gives the notice that goods are ready for shipment. As is asserted above, the contract was cancelled and [Buyer] did not receive any notice, so its duty to open the [L/C] did not arise.
For purpose of argument, even assuming the contract was in full force, [Buyer] was not in any breach. [Seller] failed to give notice about the preparation of the goods and details relating to the opening of the [L/C], such as the name of the negotiating bank; therefore, Buyer's duty to open the [L/C] never arose.
Evidence of the contract cancellation
[Seller] alleged that the contract had not been cancelled and that the initial Article 8 of the standard contract, i.e., terms of payment, was entirely removed from the final contract. These assertions explain why [Seller] never informed [Buyer] of the important information related to the opening of the [L/C], such as the name of the negotiating bank and the valid term of the [L/C]. Without this information, [Buyer] would not be able to open the [L/C]. Moreover, [Seller] had never discussed with [Buyer] about the method of payment for the 7% annual interest, such as the direct deduction from [L/C] amount for payment of interest.
From 28 March 1996, the date of issuing the [L/C] stipulated in the contract, through 19 January 1998, the effective date of an arbitration award of another dispute between [Seller] and [Buyer] (referred as Award I hereinafter), [Seller] made no contact with [Buyer] about the contract subject to this arbitration. The sole purpose for [Seller]'s claim against [Buyer] under the contract involved in this arbitration was to set off its liability under Award I.
(2) [Seller]'s argument
Article 8, the terms of payment, in the standard contract was wholly removed and replaced by the clause which reads:
"Payment: By ire-L/C At 150 days after B/L Interest rate 7 pct p.a. at seller's account. The L/C to be opened before Mar. 28, 96."
To substitute the standard clause with the negotiated one is a common practice in the course of dealings between the two parties. Here, the terms of payment in the standard contract was modified to the effect that [Buyer] shall open the [L/C] before 28 March 1996, with this duty not dependent on [Seller]'s notice to [Buyer] of shipment. Article 59 of the United Nations Convention on Contracts for the International Sale of Goods ("CISG") provides that "[t]he buyer must pay the price on the date fixed by or determinable from the contract and this Convention without the need for any request or compliance with any formality on the part of the seller." In light of this, [Buyer] had breached the contract for its failure to issue the [L/C] before the deadline agreed upon in the contract.
3. The loss of profit, loss for cancellation of supply order and shipping order
(1) [Buyer]'s argument
A. Given the fact that the contract at issue had been cancelled, [Seller] suffered no loss of profit, or loss for order cancellation.
B. Between the time of contract conclusion and the date of performance (from February to June/July 1996), the FOB price for hot rolled steel sheets in coil at the main ports of the European continent and China remained stable and kept going upward. As a European company with office in China, [Seller] is in the steel trade and knows the market situation very well. Although [Seller] did not receive the [L/C] from [Buyer] because [Seller] provided no advice about preparation of the goods and opening details of the [L/C], Seller still had reasonable opportunities to resell the hot rolled steel sheets in the European or Chinese market. But [Seller] directly cancelled the order which caused the loss of profits. In the booming market as described above, [Seller]'s order cancellation and the consequent loss of profit was unforeseeable to [Buyer]. According to Articles 74 and 78 of CISG, if [Seller] fails to take reasonable measures to mitigate the loss, [Seller]'s claim for damages should be reduced in the amount by which the loss should have been mitigated. Moreover, [Seller]'s claim here for loss of profit exceeds the loss which [Buyer] foresaw or ought to have foreseen at the time of the conclusion of the contract, so [Buyer] should not bear the liability of compensation.
C. For purpose of argument, assuming the contract was in existence, [Buyer] made further arguments:
|a.||Since [Seller] did not give notice that the goods were ready and did not give [Buyer] details to open the [L/C], [Buyer] thereby had reasons to believe, according to the practice and customs of international trade, that the goods under the contract had not been produced. Even if [Buyer] had not issued the [L/C], [Seller] still had opportunities to resell the goods under the contract. It was impossible for [Seller] to order shipment without first giving notice of preparation of the goods and details for issuing the [L/C]. [Seller] should not be regarded as suffering any loss for cancellation of the shipping order.|
|b.||Even if the goods were ready to be delivered, the law requires [Seller] to inform [Buyer] of the resale plan and the possible loss related to it so that [Buyer] could foresee the possible damages. But [Seller] failed to perform this obligation. Any loss resulting from [Seller]'s compensation to its upstream supplier (XXX Mill) should be borne by [Seller] itself.|
|c.||As to the shipping contract, [Seller] did not give notice of either the order placement or its cancellation. [Buyer] did not know of either the shipping dates or the loss related to order cancellation, so all of the loss was not reasonably foreseeable to [Buyer] and [Seller] should bear the loss itself.|
D. [Seller] did not provide evidence that it had paid compensation to XXX Mill for the supply order cancellation. Neither did [Seller] provide any evidence to prove it had paid for the shipping order cancellation.
E. Based on arguments above, if [Seller] had made reasonable efforts to mitigate possible loss, cancellation of the supply and shipping order would not have caused any losses to [Seller].
(2) [Seller]'s argument
A. The market price of hot rolled steel sheet was on decline during the period between February and June/July 1996. The usual price of hot rolled steel sheet stipulated in the previous contracts between the two parties before 3 January 1996 was US $290.50 per ton. While in the contract concluded on 18 March 1996 by [Seller] and [Buyer], the price slipped to US $285 per ton. Between the times when XXX Mill's contract (Notes of the Arbitration Tribunal: XXX Mill was the supplier to the [Seller]) was signed and the contract was cancelled, the market price fell. Therefore, [Seller] had to compensate the XXX Mill for the price difference of US $20 for each ton of steel sheets.
B. The importation of hot rolled steel sheet was subject to strict quota restriction. For example, the import quota of hot rolled steel sheets in XX Country was no more than 33,000 tons. Moreover, the import of materials into the European Union requires special license. Therefore, it was impossible to resell the goods in Europe.
C. In light of these circumstances, [Seller]'s settlement with XXX Mill for US $20 per ton of the cancellation fee was a reasonable mitigation effort. The payment of the cancellation fee was evidenced by the certificate issued from XXX Mill on 19 December 1997. [Buyer] clearly knew that [Seller] would suffer significant losses from cancellation of the supply order, but still made no response to [Seller]'s warning in the correspondences between the two parties. (The warnings were raised in the faxes dated 16 and 23 April 1996.)
D. In conclusion, [Buyer] should compensate [Seller] for the loss of profit in the amount of US $210,000, the loss for cancellation of the supply order in the amount of US $200,000 and the loss for shipping order cancellation in the amount of US $135,000. (The cancellation fee was 50% of the freight cost.)
4. Interest, communication fees, arbitration fees and attorneys' fees
Based on the arguments above, [Buyer] should not be responsible for the losses of profits or the loss for supply and shipping order cancellation.
In conclusion, [Buyer] stated:
A. [Buyer] is not responsible for the interest or damages;
B. [Seller] should bear the arbitration fees;
C. [Seller] should also bear the attorneys' fees, communication fees and other expenses.
[Seller] should be responsible for all the fees and expenses as described above.
III. OPINION OF THE ARBITRAL TRIBUNAL
1. Applicable law
The Arbitration Tribunal finds the two parties did not choose the governing law in their contract. Since [Seller]'s and [Buyer]'s places of business are, respectively, in P.R. China and Switzerland, both of which are Contracting States of the United Nations Convention on Contracts for the International Sale of Goods ("CISG"). Both parties acknowledged in their arguments that CISG should be the applicable law for this arbitration case, so the CISG shall govern this case.
2. Whether the contract was cancelled
[Buyer] alleged that the contract was orally cancelled, but did not present any evidence to support this. The Arbitration Tribunal therefore holds [Buyer] failed to prove the point.
The Arbitration Tribunal finds the major terms of the contract between [Seller] and [Buyer] as follows:
|A. Quality:||Standards: GOST 1050-08KP and/or GOST380-88 3PS
and/or GOST 380-88 2KP|
|Specification:||3.0mm × 1 250mm roll||2,000 mt|
|4.0mm × 1 250mm roll||3,500 mt|
|4.5mm × 1 250mm roll||2,500 mt|
|5.0mm × 1 250mm roll||2,000 mt|
|5% more or less is allowed for each item. |
Weight of roll: 5-12 mt per roll.
Packing: standard export packing of the producer.
Place of origin: CIS
|C. Price Term:||US $285/mt CFR FO CQD Port XX|
|D. Sum of Price:||US $2,850,000|
|E. Date of Shipment:||April to May 1996, installment is allowed.|
|F. Port of Shipment:||Port XX|
|G. Port of Destination:||Port XX, China|
|H. Payment:||By irre-L/C At 150 days after B/L Interest rate 7 pct p.a. |
at sellers account. The L/C to be opened before Mar 28, 96.
|The parties also stipulated other terms in the contract.|
One issue of the dispute between the parties is related to the terms of payment. The Arbitration Tribunal finds the parties in this case used the [Buyer]'s pre-printed standard form contract. In the final agreement, the original Article 8 of the standard contract was replaced with a new term of payment, which reads
"By irre-L/C At 150 days after B/L Interest rate 7 pct p.a. at sellers account. The L/C to be opened before Mar 28, 96."
This sentence was typed and its meaning is clear and unambiguous; it represents the true intention of the parties in the transaction.
The Arbitration Tribunal finds the Chinese text of Article 8 in the standard contract provided by [Buyer] which says "[...]" was not deleted from the final contract for some technical reasons. [Notes of translator: the Arbitration Tribunal made a comparison between the Chinese and English texts. The Chinese text is quoted here for the purpose of reference.] Neither was the corresponding part in the English text deleted which says "Terms of payment: upon receipt from setter of the advice as to the time and quality expected ready for shipment, the buyers shall open, 20 days before shipment, with the Bank of China XXX." The expressions in both versions fail to convey complete meaning, especially the English text.
When the parties adopt a standard contract in their transactions but undertake particular negotiations and reach peculiar agreements for certain items in their contract, the individually negotiated terms shall prevail over the terms in the standard contract. Although, physically, Article 8 in the standard contract was not entirely erased from the final text of the contract, it was in effect fully replaced by the negotiated term, which reads "By irre-L/C at 150 days after B/L Interest rate 7 pct p.a. at sellers account. The L/C to be opened before Mar 28, 96". This new term does not attach any condition precedent to opening the [L/C], nor does it require any advice before opening the [L/C]. Since the time for opening the [L/C] is a term that is of the essence for the contract, [Buyer]'s failure to comply, even after it received the notice from [Seller] which urged [Buyer] to open the [L/C], constituted a fundamental breach of the contract. The Arbitration Tribunal dismisses [Buyer]'s allegation that [Buyer] was unable to perform its obligation of opening the [L/C] because [Seller] gave no advice to [Buyer] to open the [L/C].
3. The loss of profit, loss for cancellation of supply order and shipping order
(1) The loss of profit
The Arbitration Tribunal finds, through investigations, that [Seller] entered into the supply contract with XXX Mill (No. 12 exp/006-96, hereinafter "Supply Contract"), whose major terms are:
|Product||Quantity (mt.)||Terms of Shipment||Price (per mt.)||Amount of the Contract||Destination||Date of Shipment|
|Hot rolled steel sheets GOST 380-88||10,000||FOB Port XXX||US $230||US $2,300,000||P.R.China||March to April, 1996|
Quantity: +/-5% permitted.
Order No. 67880
|Specification (mm)||Quantity (mt)|
Deflection permitted: common precision for rolled steel sheets at the port of destination.
2. Packing: four belts for vertical binding and two belts for horizontal binding.
(Other items are omitted).
[Seller] stated that if [Buyer] had performed the contract in dispute, [Seller] should have gained US $2,850,000 in 150 days, which equaled US $2,780,000 in current value. After paying US $2,300,000 to XXX Mill and US $270,000 for shipping, [Seller] should be able to earn the profit of US $210,000. Therefore, the loss of profit [Seller] suffered from the non-performance of [Buyer] was US $210,000.
[Seller] has provided evidence to prove that [Seller] sent faxes to [Buyer] on dates 16 and 23 of April 1996 to request [Buyer] to open the [L/C] and warned that [Buyer] would be responsible for any consequential loss arising from the order cancellation.
[Buyer] raised the defense that [Seller] did not take reasonable efforts to mitigate the loss, and [Buyer] could not reasonably foresee the loss. [Buyer] also stated that the loss claimed by [Seller] exceeded the amount [Buyer] foresaw or ought to have foreseen at the time when the contract was concluded. The Arbitration Tribunal holds that [Buyer] provided insufficient evidence and rejects these arguments.
(2) Loss for supply order cancellation
Seller provided a certificate issued by XXX Mill, which reads:
"We hereby verify, according to Purchase Order No. 67880, 10,000 tons of hot rolled steel sheets had been produced in April 1996 for XXX Company. The quality standard of the production is GOST 380-88 3PS with detailed specification below:
Specification (mm) Quantity (mt) 3.00×1,250 2,000 4.0×1,250 3,500 4.5×1,250 2,500 5.00×1,250 2,000
XXX Company requested to cancel the above order. We shall accept this request only if XXX Company pays the difference between the contract price and resale price, which is US $20 per ton."
(3) Loss for cancellation of shipping order
[Seller] presented evidence of a shipping contract with XXX Company concluded on 27 March 1996 and an invoice for cancellation of this order in the amount of US $135,000 issued by XXX Company on 15 May 1996. Given that the steel coil contract was concluded on 18 March 1996 and the delivery time was April/May 1996, the urgency reasonably required [Seller] to arrange the shipment promptly after the contract was concluded. The Arbitration Tribunal supports Seller's claim for the loss for cancellation of the shipping order.
In conclusion, the Arbitration Tribunal rules that [Buyer] shall compensate [Seller] for the loss of profit: US $210,000; for the loss for cancellation of the supply order: US $200,000; and for the loss for cancellation of the shipping order: US $135,000. The total sum is US $545,000.
3. Interest, expenses of communication and travel, arbitration and attorneys' fees and other expenses
Based on the above analysis, the Tribunal concludes that [Buyer] shall pay interest on the price in arrears. But the Arbitration Tribunal notes that no evidence shows [Seller] had clearly informed [Buyer] of its loss before the arbitration was filed. [Buyer] was unable to get the definite amount it should bear and unable to pay damages to [Seller]. Accordingly, the Arbitration Tribunal concludes it is reasonable that the interest should be calculated from the filing date of this arbitration and at the annual rate of 7%.
In accordance with the above reasoning, the Arbitration Tribunal concludes that [Buyer] shall bear communication and travel expenses as well as the arbitration and attorneys' fees of [Seller]. [Seller] claimed US $67,794.46 for these items. In the light of Article 59 of the Arbitration Rules of CIETAC, the Arbitration Tribunal decides the reasonable amount should be US $50,000.
IV. THE AWARD
The Arbitration Tribunal hereby decides:
This award is final.
* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of China is referred to as [Seller]; Respondent of Switzerland is referred to as [Buyer]. Amounts in the currency of the United States (dollars) are indicated as [US $]. Weight unit appears as mt. (metric ton) or ton.
** YUAN Xiaotong, LL.M. candidate, Faculty of Law McGill University, Montreal Canada, 2001 to present; LL.B. Renmin University of China Law School, 2001.
*** Howard Yinghao YANG is an Associate with the New York office of Debevoise & Plimpton LLP, New York.Go to Case Table of Contents