Source: http://cisgw3.law.pace.edu/cisg/wais/db/cases2/970818c1.html
Timestamp: 2019-02-22 10:26:56
Document Index: 150867643

Matched Legal Cases: ['Art. 26', 'Art. 76', 'Art. 78', 'Art. 77', 'Art. 74', 'Art. 1', 'Art. 25', 'Art. 45', 'Art. 31', 'Art. 78', 'Art. 76']

China 18 August 1997 CIETAC Arbitration proceeding (Vitamin C case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/970818c1.html]
DATE OF DECISION: 19970818 (18 August 1997)
DATABASE ASSIGNED DOCKET NUMBER: CISG/1997/26
GOODS INVOLVED: Vitamin C
Vitamin C case of 18 August 1997
Case law on UNCITRAL texts (CLOUT) abstract no. 681
The buyer, a German company, entered into a contract with a Chinese company, the seller, for the purchase of Vitamin C. The shipment should take place from Dalian port, China, to Hamburg, Germany. Upon request of the buyer, the shipping date was extended. Shortly before the extension date, the seller requested a higher price, asserting that the price in the domestic market was increasing. The buyer rejected the seller's request, and the seller subsequently did not deliver the goods on the specified date. Two days later, the buyer declared the contract avoided [Art. 26 CISG] and asked its Hong Kong sister company to make a substitute purchase for half of the goods, which it needed urgently. The substitute purchase price was higher than the original contract price. After fruitless attempts to settle the issue, the buyer sought compensation for damages before an arbitral tribunal, including the price difference (Art. 76(1) CISG) calculated for all goods and the interest on it (Art. 78 CISG).
The seller argued that the buyer failed to mitigate the loss within a reasonable time (Art. 77 CISG), stating that the date in issue should be when it requested a price increase for its performance. The seller further alleged that the buyer did not make the cover transaction in a reasonable manner, since it used two intermediary companies and did not buy directly from China, but Hong Kong. In addition, the seller maintained that the losses it could have foreseen were on a selling price range below the actual paid price by the seller (Art. 74 CISG).
The arbitral tribunal held that, in absence of a contract clause, the applicable law to be Chinese law according to the principle of closest connection. Additionally, the CISG should apply [Art. 1(1)(a) CISG], since China and Germany were both State parties to the CISG. The tribunal noted that the seller's non-delivery of the goods was a fundamental breach of the contract [Art. 25 CISG], and that Art. 45(1), 74, 75, 76(1) CISG applied. The tribunal noted that the buyer's substitute transaction was made in a timely manner, since the decisive date was the declaration of avoidance by the buyer, and not the seller's request for a higher price. The use of and purchase from the Hong Kong intermediate was reasonable from the thencurrent situation. The tribunal further dismissed the seller's assertion that there was no ground for the buyer to use the cover purchase price as a basis to calculate the loss for the uncovered goods according to Art. 31(a) and 76(2) CISG, ruling that the seller failed to specify the then-current price at Dalian. The Tribunal thus accepted the buyer's claim for loss of price difference, reasoning that there were contracts and receipts evidencing the substitute transaction, and that the increase of the price, from the contract to the cover transaction's price, could have been foreseen by the seller. Pursuant to Art. 78 CISG, the tribunal ruled that the loss of price difference for the covered goods was an "other sum that is in arrears", while the other half was not. Consequently, the seller should only pay interest on the price difference for the cover transaction (half of the goods).
Key CISG provisions at issue: Articles 25 ; 26 ; 74 ; 75 ; 76 ; 77 ; 78 [Also cited: Articles 31(a) ; 45(1) ; 49(1)(b) ; 67(2) ]
25A [Definition of fundamental breach: substantial deprivation of expectation, etc.];
74A ; 74B [General rules for measuring damages: Loss suffered as consequence of breach; Outer limits of damages; foreseeability of loss];
75B ; 75C1 [Damages established by substitute transaction: relationship between avoidance and substitute transaction; Damages recoverable: Difference between contract price and price in substitute transaction];
76B ; 76C [Damages recoverable based on current price; Reference-point as to place (Art. 76(2))];
Descriptors: Fundamental breach ; Damages ; Foreseeability of damages ; Cover transactions ; Substitute goods ; Mitigation of loss ; Interest
Original language (Chinese): Zhong Guo Guo Ji Jing Ji Mao Yi Zhong Cai Wei Yuan Hui Cai Jue Shu Hui Bian [Compilation of CIETAC Arbitration Awards] (May 2004) 1997 vol., pp. 2380-2386
English: Dong WU, CIETAC's Practice on the CISG, at nn.58, 91, 147, 183, 221, Nordic Journal of Commercial Law (2/2005)
Vitamin C case (18 August 1997)
Translation by [*] by LIU Ping [**]
On 26 July 1996, Claimant [Buyer] of Germany and Respondent [Seller] of the People's Republic of China concluded a contract for [Buyer] to purchase 30 tons of Vitamin C from [Seller]. The unit price was US $5.15 per kilogram CIF Hamburg; the total contract price was US $154,500. The shipping date was August 1996. The shipping harbor was Dalian harbor of the People's Republic of China, and the destination harbor was Hamburg, Germany.
On 12 August and 20 August 1996, [Buyer] reminded [Seller] twice of the shipping obligation.
On 21 August 1996, in its reply to [Buyer] via fax, [Seller] stated that "we will by all means ship the goods to you by 30 August 1996."
On 28 August 1996, [Buyer] again reminded [Seller] of the shipping obligation. On 29 August 1996, in its fax reply, [Seller] asked for an extension of the shipping date to 15 September 1996. On 30 August 1996, [Buyer] sent a fax to [Seller], giving its consent to the extension.
On 6 September 1996, [Seller] sent a fax to [Buyer], requesting an increase of the unit price from US $5.15 per kg to US $5.50 per kg. The reason given by [Seller] was that "as you know, the domestic market price [of Vitamin C] has increased; and the current market price is between US $5.70 to US $5.80 per kg". On the same day, [Buyer] rejected [Seller]'s request by fax.
[Seller] did not ship the goods on 15 September 1996.
On 17 September 1996, [Buyer] declared the contract avoided by a fax to [Seller]. [Buyer] calculated its losses caused by [Seller]'s breach in accordance with Articles 75 and 76 of the United Nations Convention on Contracts for the International Sale of Goods (1980) (hereinafter: "CISG"). At the same time, [Buyer] asked its Hong Kong sister company (hereinafter: "[Buyer]'s Sister Company") to purchase 15 tons of vitamin C under available most-favored conditions. The unit price of this transaction was US $5.90 per kg, as evidenced by a confirmation letter dated 20 September 1996 and the relevant invoice.
With respect to the remaining 15 tons, [Buyer] claimed that at the time of declaration of avoidance, i.e., 17 September 1996, the CIF Hamburg price should be at least US $5.90 per kg or even above.
From the date of declaration of avoidance (17 September 1996) to the date when [Buyer] requested arbitration (17 February 1997), [Buyer] tried several times to resolve the dispute with [Seller]. The parties' last attempt to resolve the dispute was on 8 December 1996, when [Seller] faxed to [Buyer]'s Sister Company, stating that it would deliver the goods to [Buyer] at a unit price of US $5.40 per kg, emphasizing that "this is because the market price is still US $5.85 per kg, as you know."
On 10 December 1996, [Buyer] gave [Seller] a last chance to resolve the dispute, requesting that [Seller] should deliver the goods under the original contract price (US $5.15 per kg) by 31 December 1996.
However, [Seller] has never delivered any goods to [Buyer]. [Buyer] therefore initiated this arbitration proceeding with the following requests:
For [Seller] to pay [Buyer] US $22,500, the difference between the contract price and the price paid by [Buyer] to buy cover goods, plus interest at the annual rate of 9% from 17 September 1996 to the date of actual payment;
For [Seller] to bear the arbitration fees.
[Seller]'s reply
1. [Seller] requested to join Jilin ** Food Industry Company as a third party in this arbitration proceeding.
[Seller] concluded an agency agreement with Jilin** Food Industry Company (hereinafter: "Jilin Company") on 29 July 1996. Under Article 2(1) of the agency agreement, Jilin Company should arrange for production and packing of the goods in accordance with the relevant requirements in [Seller]'s supply contract, rent shipping space, apply for the relevant license, prepare the customs report forms and report to the customs for export. Based on this agency agreement, [Seller] concluded a supply contract with [Buyer]. Therefore, [Seller] should be an anonymous agent, with Jilin Company being the principal. It was due to Jilin Company's breach [of the agency agreement] that [Seller] failed to perform the supply contract [with Buyer]. To avoid the trouble of various arbitrations/litigations, [Seller] requested to join Jilin Company as a third party to this arbitration proceeding.
2. [Buyer] failed to take timely measures to mitigate its losses and therefore should bear part of its losses by itself.
On 9 September and 13 September 1996, [Seller] clearly notified the intermediate company (hereinafter: B Company) and [Buyer] that [Seller] would not perform the contract [with Buyer] if its request [for price increase] was not accepted [by Buyer]. [Buyer] should have made a substitute transaction at that time, and should not have delayed until 20 September.
3. [Buyer] did not make the cover transaction in a reasonable manner.
[Buyer] used two intermediate companies, namely H Company and [Buyer]'s Sister Company, to purchase 15 tons of Vitamin C at US $5.90 per kg. The place of origin of the goods was Shi Jia Zhuang [of the PRC]. There was no basis for [Buyer] not to purchase directly from China or entrust its sister company to purchase from China, but instead to repurchase at US $5.90 per kg through H Company. [Buyer] bears the burden to prove this [price of US $5.90 per kg], and should not merely take advantage of [Seller]'s reference to the domestic market price in its faxes [dated 6 September 1996 and 8 December 1996] -- apparently, [Seller] exaggerated the domestic market price in its fax(es), and this is easily understandable. According to [Seller]'s estimation, H Company purchased the goods from Shi Jia Zhuang at US $5.40-5.50 per kg; and [Buyer] could have repurchased the goods at the same price, while it repurchased at US $5.90 per kg. This is unacceptable to [Seller]. In addition, [Seller] cannot accept [Buyer]'s evidence regarding the repurchase. For example, it is not clear from [Buyer]'s exhibit whether the price [for the repurchase] is a CIF price or a C&F price. As shown by [Buyer]'s exhibit, [Buyer] did not confirm the purchase upon the request of [Buyer]'s Sister Company. And [Buyer] has provided neither the Bill of Lading nor any payment certificate regarding the repurchase.
4. There is not sufficient evidence in support of the usage of US $5.90 per kg as the basis to calculate the price difference.
[Buyer] intended to use US $5.90 per kg to calculate its losses for both the 15 tons cover purchase and the remaining 15 tons. According to Article 31(a) and 76(2) of the CISG, the price at the place of delivery (Dalian, PRC) on 9 September 1996, rather than the price at Hong Kong on 20 September 1996, should be the current price. The then-current market sale prices [on 9 September 1996] of domestic producers were all between US $5.40 to 5.50 per kg.
5. It is apparently unfair to use US $ 5.90 per kg to calculate the price difference.
As shown by [Seller]'s exhibit, [Seller] signed the agency agreement at US $4.85 per kg. The price difference between the agency agreement and the supply contract with [Buyer] is only US $0.30 per kg, and the contract price difference is only US $9,000. In normal situations, [Buyer] would purchase the goods at US $5.15 per kg, and sell out at most at US $5.40 - 5.50 per kg. [Buyer]'s gross profits would not exceed US $0.35 per kg and [Buyer]'s gross profits for 30 tons would be no more than US $10,500. [Seller], at the time of conclusion of the contract, foresaw losses caused by its breach of no more than US $10,500. [Seller] could by no means foresee losses of US $22,500 as requested by [Buyer]. Under Article 74 of the CISG, [Buyer]'s request for US $22,500 is groundless in law.
6. [Buyer]'s notice of declaration of avoidance was not sent to [Seller].
Most business communications between [Buyer] and [Seller] were through the intermediate B Company. As shown by [Buyer]'s exhibit, transmission of the [avoidance] information was quite complicated, including transfer by [Buyer]'s Sister Company. [Buyer]'s notice of declaration of avoidance was not sent to [Seller] and therefore the declaration was not effective.
7. [Buyer]'s request for interest is groundless.
[Buyer] requests interest at the rate of 9% from 17 September 1996. According to Article 78 of the CISG, there was no failure [by Seller] "to pay the price or any other sum that is in arrears" in this case.
1. [Seller] submitted that a third party Jilin Company should be liable to [Seller]. [Buyer] does not object to [Seller]'s raising this issue. However, this cannot change [Seller]'s legal status, that to [Buyer] in this case, [Seller] should be the liable entity.
2. [Seller]'s accusation that [Buyer] failed to purchase cover goods earlier to mitigate its losses is without justification. On 29 August 1996, [Seller] requested to postpone the shipping date to 15 September 1996. Therefore, [Buyer] had reason not to buy any cover goods before 15 September 1996. The contents of [Seller]'s faxes dated 9 September and 13 September 1996 were not quite clear. The two faxes cannot be interpreted as [Seller]'s final refusal to perform the whole contract. As understood by [Buyer], the main contents of the two faxes were [Seller]'s request to increase the price of the goods.
3. [Buyer] purchased the cover goods, i.e., 15 tons of Vitamin C, in a reasonable manner. At that time, [Buyer] needed this amount [e.g., 15 tons of Vitamin C] urgently, and the best means for [Buyer] to obtain Chinese goods was to purchase through its Hong Kong sister company. It should be noted that [Buyer]'s Sister Company had no profit at all in this [cover] transaction - it purchased from H Company at US $5.90 per kg and sold to [Buyer] at the same price.
4. Firstly, with respect to the first 15 tons of goods, [Buyer] is entitled to the price difference calculated on the basis of US $5.90 per kg, because [Buyer] purchased the cover goods under such price. Secondly, [Buyer] is also entitled to the price difference for the uncovered 15 tons of goods calculated under US $5.90 per kg, because [Buyer] could easily sell out these goods under such price.
5. It is not unfair to use US $5.90 per kg as a basis to calculate the price difference. When calculating [Buyer]'s losses, [Seller] forgot the fact that then the market price was increasing.
6. [Seller]'s statement that it did not receive [Buyer]'s fax of 17 September 1996 is not very convincing. [Buyer] attaches the dispatch record of its 17 September 1996 fax as evidence. The dispatch record shows the number of ***, which is the then-current fax number of [Seller], including the national code of China and the regional code. The fax was sent from Germany. In addition, according to Article 49(1)(b) of the CISG, [Buyer]'s request for arbitration dated 17 February 1997 can also be regarded as [Buyer]'s declaration of avoidance.
7. Article 78 of the CISG does not expressly provide for any interest rate for sums in arrears. The 9% interest rate is the rate that [Buyer] must pay to its bank for its letter of credit in US dollars. As compared with other countries, the 9% interest rate is quite reasonable.
1. [Buyer] and [Seller] have no agreement on the applicable substantive law in this case. The place of contract performance and the forum of arbitration are both in China. According to the principle that "the law of the State with the closest connection to the contract applies", the applicable substantive law in this case should be Chinese law. Because China and Germany are both signatories to the CISG, the CISG should also apply in this case.[1]
2. The Arbitral Tribunal does not uphold [Seller]'s request to join Jilin Company as a third party in this case. This is because there is no arbitration agreement between Jilin Company and any party in this case. In addition, the contract between [Buyer] and [Seller] clearly stated that [Buyer] was the buyer and [Seller] was the seller. [Seller]'s claim that it is an anonymous agent but not the seller is not established.
3. [Seller] did not ship the goods in accordance with the contract and the [shipping] date of 15 September 1996 as later agreed by [Buyer] and [Seller], and requested to increase the price. [Buyer] did not accept [Seller]'s request for price increase. After the expiry of the final shipping date of 15 September 1996, [Buyer] declared the contract avoided on 17 September 1996. Thereafter, [Buyer] and [Seller] failed to resolve the dispute by negotiation. Since the negotiation was fruitless, [Seller] should have delivered the goods to [Buyer] in accordance with the contract. However, [Seller] did not deliver any goods. This constituted a fundamental breach of contract. Article 18 of the Foreign Economic Contract Law of People's Republic of China provides that:
"[W]here one party does not perform the contract ... that is, breaches the contract, the other party has the right to claim compensation for damages or take other reasonable remedial measures."[2]
Article 45(1)(b) of the CISG provides that:
"[I]f the seller fails to perform any of his obligations under the contract or this Convention, the buyer may ... claim damages as provided in articles 74 to 77."
Under Article 74 of the CISG:
"[D]amages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach ..."
Under Article 75 of the CISG:
"[I]f the contract is avoided and if, in a reasonable manner and within a reasonable time after avoidance, the buyer has bought goods in replacement or the seller has resold the goods, the party claiming damages may recover the difference between the contract price and the price in the substitute transaction as well as any further damages recoverable under article 74."
According to Article 76 [(1)] of the CISG:
"[I]f the contract is avoided and there is a current price for the goods, the party claiming damages may, if he has not made a purchase or resale under article 75, recover the difference between the price fixed by the contract and the current price at the time of avoidance as well as any further damages recoverable under article 74. ..."
In accordance with these provisions, the Arbitral Tribunal upholds [Buyer]'s request for damages. The total damages due to [Buyer] are US $22,500, with the calculation as follows:
Total amount of the goods (Vitamin C) under the contract: 30 tons
- Unit price [under the contract]: US $5.15
- Total price [under the contract]: US $154,500
(1) 15 tons of cover goods
Unit price for cover purchase: US $5.90
Total price for cover purchase: US $88,500
Price for 15 tons under the contract: US $77,250
Price difference: US $11,250
(2) 15 tons of un-repurchased goods
Current price [at the time of avoidance]: US $5.90
(3) Price difference for 30 tons: US $22,500
The Arbitral Tribunal sustains [Buyer]'s request for US $22,500, because [Buyer]'s cover purchase at Hong Kong for 15 tons is supported and evidenced by the relevant contract and invoice, and the price is reasonable given the then-current international market situation. [Buyer]'s use of US $5.90 as the current price to calculate the difference between the contract price for the remaining un-repurchased 15 tons and the current price [at the time of avoidance] is also reasonable and practical.
In regard to [Buyer]'s request for interest, the Arbitral Tribunal notes the provision of Article 78 of the CISG:
The Arbitral Tribunal holds that one-half of US $22,500 is an "other sum that is in arrears", that is, the losses caused by the price difference [between the contract and the cover purchase] in the amount of US $11,250 is an "other sum that is in arrears", while the other half, calculated on the basis of the current price [at the time of avoidance], in the amount of US $11,250, does not constitute an "other sum that is in arrears". Therefore, [Seller] should only pay interest on US $11,250 at the annual rate of 9% from 15 November 1996 to the date of actual payment, but not any interest on the other US $11,250.
4. [Seller] submits that [Buyer] did not take timely measures to mitigate its losses and therefore should bear part of its losses by itself. [Seller] claims that the cover purchase by [Buyer] on 20 September 1996 is not timely. The Arbitral Tribunal cannot sustain [Seller]'s submission and claim. The final shipping date as agreed by [Buyer] and [Seller] was 15 September 1996, [Seller] did not ship the goods on 15 September, and [Buyer] declared the contract avoided on 17 September 1996 and immediately purchased cover goods on 20 September 1996. This is timely.
5. [Seller] states that [Buyer] did not purchase cover goods in a reasonable manner, that is, [Buyer] should have purchased from the place of origin Shi Jia Zhuang, rather than from any Hong Kong intermediate, to reduce the purchase price. The Arbitral Tribunal disagrees with [Seller]. Judging from the then-current actual situations, it was practical and reasonable for [Buyer] to purchase from a Hong Kong intermediate; and according to the then-current market price, the purchase price through the Hong Kong intermediate was also reasonable and practical. In addition, it is not practical and feasible to request that [Buyer] must purchase directly from the Chinese producer.
6. [Seller] claims that it is ungrounded for [Buyer] to use US $5.90 per kg as a basis to calculate the price difference because, according to Articles 31(a) and 67(2) of the CISG, the price at the place of delivery (Dalian) on 9 September should be the current price, rather than the price at Hong Kong on 20 September, and that the then-current market sale prices of domestic producers in China were all between US $5.40 to 5.50 per kg. The Arbitral Tribunal cannot uphold [Seller]'s claims. Firstly, [Buyer] has purchased cover goods. Secondly, [Seller] did not specify the then-current market price at Dalian. [Seller] only stated that "the then-current market sale prices of domestic producers in China were all between US $5.40 to 5.50 per kg". It is questionable whether there existed any current price at Dalian at that time. Thirdly, given the international and domestic market situations together, it was reasonable for [Buyer] to purchase cover goods at US $5.90 per kg.
7. [Seller] claims that it is unfair for [Buyer] to calculate the price difference at US $5.90 per kg, because at the time of conclusion of the contract [Seller] foresaw possible losses being no more than US $10,500; and under Article 74 of the CISG, [Buyer]'s request for US $22,500 was groundless in law. The Arbitral Tribunal cannot support [Seller]'s claim. Firstly, [Seller]'s statement that the losses that it could foresee were no more than US $10,500 is based on [Seller]'s own possible profits as foreseen by it, but not what is provided by Article 74 of the CISG:
"... [S]uch damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract."
Secondly, the domestic market price was increasing at that time, and it is not abnormal for the price to increase from US $5.15 per kg to US $5.90 per kg. Thirdly, [Buyer]'s evidence of its cover purchase at US $5.90 per kg is conclusive, and this price is reasonable.
8. [Seller] submits that [Buyer]'s notice of declaration of avoidance was not sent to [Seller] and therefore the declaration of avoidance was not effective. As investigated, [Buyer]'s notice was sent to [Seller] by fax at ** p.m. on 17 September 1996. Therefore, the Arbitral Tribunal cannot agree with [Seller]'s submission.
9. [Seller] should bear all arbitration fees in this case.
10. [Buyer] and [Seller] should each respectively bear its other expenses in relation to this case.
[Seller]'s request to join Jilin Company as a third party in this arbitral proceeding is rejected.
[Seller] should pay [Buyer] US $22,500, plus interest on half of this amount (US $11,250) from 15 November 1996 to the date of actual payment, at an annual interest rate of 9%.
All other submissions and requests of [Seller] are rejected.
[Seller] should bear all arbitration fees. [Buyer] has paid US$___ in advance. Therefore, [Seller] shall pay back US$___ to [Buyer].
[Buyer] and [Seller] should each respectively bear its other expenses in relation to this case.
The payments due from [Seller] to [Buyer] under items 2 and 4 above should both be paid by 10 October 1997. Otherwise, [Seller] should pay interest from 11 October 1997 to the date of actual payment at a monthly interest rate of 0.84%.
This arbitral award is final.
* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of Germany is referred to as [Buyer]; Respondent of the People's Republic of China is referred to as [Seller]. Amounts in the currency of the United States (dollars) are indicated as [US $].
** LIU Ping, Lawyer, Baker & McKenzie, Beijing, People's Republic of China, LL.M., Harvard Law School, 2003-2004; Master of Civil nd Commercial Law, Tsinghua University Law School, 2000-2003.
1. Note by translator: In this case, the Arbitral Tribunal applied both Chinese substantive law and the CISG.
2. Note by translator: The Foreign Economic Contract Law of People's Republic of China was superseded by the Contract Law of the People's Republic of China (effective 1 October 1999).
Article 18 of the Foreign Economic Contract law provides that:
"[W]here one party does not perform the contract or does not perform the obligations of the contract in accordance with the conditions agreed on, that is, breaches the contract, the other party has the right to claim compensation for damages or take other reasonable remedial measures. If after other remedial measures have been taken the other party cannot be completely compensated for the damages it has sustained, the other party still has the right to claim compensation for damages."
The relevant provision under the Contract Law is Article 112, which provides:
"If a party fails to perform his contractual obligations or performs his contractual obligations in a way other than agreed upon and, after such party has performed his obligations or remedied the failure to perform or the non-conformity of the performance, the other party has suffered other loss, the first-mentioned party shall compensate therefor."