Case abstract and Case text (English translation)
Reproduced with permission of 19 Journal of Law & Commerce (2000) 283-293
Arbitration award of the China International Economic and Trade Arbitration Commission (CIETAC) for disputes concerning delivery and quality of roll aluminum and aluminum parts for the manufacture of cans, October 30, 1991 Beijing, People's Republic of China [*]
ABSTRACT
Claimant [buyer, a Chinese firm] and Respondent [seller, a United States firm] signed contracts No. 072 and No. 069, respectively. According to contract No. 072, [seller] was to deliver roll aluminum in the thickness of 0.0125 +/- 0.0001 inches to be used in the manufacture of aluminum can bodies. According to contract No. 069, [buyer] was to open a letter of credit on October 22, 1990, and [seller] was to deliver aluminum parts within seven (7) weeks after receiving [notice that] the letter of credit [had been opened]. Delivery of the roll material was made, and thereafter, [buyer] found that the thickness of the roll aluminum delivered under contract No. 072 was 0.0118 inches. [Buyer] opened the letter of credit under contract No. 069, but [seller] did not deliver the aluminum parts. [Buyer] thus applied for arbitration.
Regarding contract No. 072, the roll aluminum delivered by [seller] did not comply with the specifications stipulated in the contract due to fraud on the part of [seller's] supplier. However, [seller's] suggestion that it redeliver conforming goods was rejected by [buyer]. [Seller] therefore argued that it should not be held liable for any additional damages [page 283] that could have been avoided if [buyer] had taken positive steps to reduce losses.
Regarding contract No. 069, [buyer] had opened the letter of credit on October 22, 1990, but contract No. 069 became effective on December 3, 1990. [Seller] asked that [buyer] re-open the letter of credit, but [buyer] refused to do so.
The Arbitration Tribunal found: by agreement of the parties, the roll aluminum delivered under contract No. 072 was examined by the Commercial Examination Agency and it was found that its thickness did not conform to the requirements of the contract. The Arbitration Tribunal decided to settle this matter by ordering the return of the material to [seller] and return of the purchase price to [buyer]. Regarding contract No. 069, although the letter of credit was opened before contract No. 069 was signed by the parties, it appeared from the conduct of the parties that they had both begun performance. Therefore, the Arbitration Tribunal found that the letter of credit opened on October 22, 1990 complied with the contract, and according to CISG article 64, because [buyer] had repeatedly requested that [seller] deliver the goods, [seller] had no right to avoid the contract and must complete delivery. Thus, contract No. 069 shall continue to be performed. In addition, the Arbitration Tribunal ordered [seller] to compensate [buyer] for the actual economic damages resulting from the failure to deliver roll aluminum in conformity with contract No. 072.
STATEMENT OF ARBITRATION
In accordance with the arbitration clauses specified in contract No. 072 signed on August 3, 1990 and contract No. 069 signed on September 30, 1990 by and between [Buyer], […] Packing Technology & Trade Corp. and [Seller], American […] Corp., and with the written application for arbitration raised by [buyer] on December 29, 1990, the China International Economic and Trade Arbitration Commission (formerly China Council for the Promotion of International Trade Foreign Economic and Trade Arbitration Commission) (hereinafter "Arbitration Commission") accepted this arbitration case concerning the sale and purchase of roll aluminum and aluminum parts for the manufacture of cans under the above said contracts.
In accordance with the stipulation of the Arbitration Rules, the Arbitration Commission formed an arbitration tribunal consisting of […], Chief Arbitrator, and Arbitrators […] and […] to hear this case.
The Arbitration Tribunal reviewed the written Statement of Claim and Statement of Defense (including Counterclaim) and the evidence raised by [page 284] [buyer] and [seller] and heard this case on June 11, 1991 in Beijing, People's Republic of China (PRC). The representatives of [buyer] and [seller] appeared at the hearing.
In accordance with the circumstances of the hearing, the Arbitration Tribunal made a preliminary award on June 20, 1991 (No. 1740) which has not been fully performed. Now, the case is closed. After discussion, the Arbitration Tribunal issued this award. The introduction to the case, the opinion of the Arbitration Tribunal and the final award are as follows:
Introduction
[Buyer] and [seller] signed two contracts on August 3, 1990 and September 30, 1990 respectively.
1. Contract No. 072 was for the purchase of 120 tons of roll aluminum for use in the manufacture of can bodies to the standard of AA3004H19, a thickness of 0.0125 +1- 0.0001 inches, and a width of 390.0 mm for the total price of $313,800.00. The roll aluminum was to be produced in the United States. The roll aluminum was to be shipped from an American port. The port of destination was Dalian, PRC. The goods were to be delivered within five (5) weeks after [seller] received [notice that] the letter of credit [had been] opened by [buyer]. The letter of credit was opened on August 16, 1990 and [seller] shipped the goods on September 14, 1990. The goods arrived in Dalian on November 8, 1990 and were sent on to [buyer's] end user's factory at Mu Danjiang where they arrived on November 21, 1990. After examination, the goods were found to be 0.0118 inches thick in violation of the specifications in the contract. Thereafter, the [buyer] requested that [seller] take back the goods.
2. Contract No. 069 was for the purchase of 115 tons of aluminum parts -- the tops and pull-tabs for the manufacture of aluminum cans -- for a total price of $426,895.00. The parts were to be produced in the United States. The parts were to be shipped from an American port. The port of destination was Dalian, PRC. The parts were to be delivered within seven (7) weeks after [seller] received [notice that] the letter of credit, [had been] opened by [buyer]. [Buyer] opened the letter of credit on October 22, 1990. [Seller] failed to deliver the goods on time and requested that the [buyer] extend the time for delivery and extend the valid term of the letter of credit. [Buyer] rejected both requests. [page 285]
Argument
1. Contract No. 072
[Buyer] alleged that before the contract was concluded, [buyer] had told [seller] twice, on July 10 and 16, 1990, that the quality of the roll aluminum and its thickness were very important to [buyer] because if the roll aluminum did not meet the specifications, [buyer's] end user could not use it in its factory. [Buyer] further alleged that [seller] had provided untruthful receipts and thereby defrauded the bank by opening the letter of credit of the purchase price. [Buyer] alleged that because the goods did not comply with the contract specifications, the goods were not produced in the place called for in the contract, which resulted in [buyer's] end user -- the Mu Danjiang Material Beverage Can Factory -- being unable to use the goods. This in turn resulted in [buyer's] end user's inability to test and accept a whole set of imported machines, inability to execute a machinery import contract, inability to pay loan interest and principle on schedule, being forced to stop its factory from working, and being required to pay the penalty for breach of the machinery import contract and the interest and penalty charged by [buyer's] end user's bank.
[Buyer] pointed out that, after finding that the goods did not comply with the contract specifications, [buyer] immediately remitted the Commercial Examination Agency Report to [seller] and requested damages. In [buyer's] formal claim letter dated December 13, [1990], [Buyer] requested that in order to avoid further damages, [seller] should ship qualified goods to [buyer's] end user before February 20, 1991, and first transport 10 (ten) tons by air in order to reduce losses. [Seller] replied by fax that it was negotiating with a supply merchant, […] Corp., and would take no other action to reduce losses. Following this exchange, both parties communicated several more times in an attempt to negotiate a settlement but without results. On February 8, 1991, [seller] sent a letter to [buyer] refusing all claims.
In its defense, [seller] argued that it ordered 120 tons of roll aluminum from […] Corp. in accordance with the specifications of contract No. 072, and that on September 7, 1990, […] Corp. provided [seller] a certification that the roll aluminum had been produced in the United States. [Seller] stated that on September 14, 1990, it provided [buyer] the certification. [Seller] shipped the goods, through […] Corp., on the same day. Therefore, [seller] argued, it had never seen the goods, and the [page 286] fact that the goods did not comply with the contract and that the certification of the place of production was false were the result of fraud on the part of […] Corp.
[Seller] further argued that in order to help [buyer] and its end user to reduce losses, [seller] had communicated with [buyer] through meetings, telephone conversations, and fax transmissions and offered the following proposals to settle the matter:
1) Assign experts to [buyer's] end user's factory to help them adjust their machinery, including an offer to contact Italian personnel to help them adjust their machinery;
2) Offer to return payment for the goods and have [buyer] return the roll aluminum;
3) Have [buyer] sell the roll aluminum as soon as possible; and
4) Allow […] Corp. to re-ship about 150 tons of roll aluminum conforming to the contract specifications, a proposal to which [buyer] did not respond.
[Seller] alleges that [buyer] ignored all of their proposals for settlement, and, thus, if [buyer] suffered any losses it was due to [buyer's] failure to take positive actions to reduce its losses.
2. Contract No. 069
[Buyer] alleged that after contract No. 069 was concluded, the representative of [seller], Mr. […], informed [buyer] on October 15, 1990, that the date of delivery would be December 8, 1990, and therefore, [buyer] must open the letter of credit as soon as possible. [Buyer] alleges that it opened the letter of credit through the Heilongjiang Branch of the Agriculture Bank on October 22,1990, and immediately faxed a copy of the letter of credit to [seller]. [Buyer] states that [seller] did not ship the goods within seven (7) weeks after [seller] had received [notice of the opening of] the letter of credit and therefore failed to perform its obligations under the contract. Subsequently, [seller] requested that the time for delivery be postponed and the valid term of the letter of credit be extended. [Buyer] stated that it felt that [seller] should ship the goods within the valid term of the letter of credit and, according to Article 16 of the contract, agreed to extend the time for delivery subject to the following conditions:
a) [Seller] agrees to pay the penalty [that would be incurred because of the late arrival of the goods]; and
b) [Seller] agrees that the penalty would be deducted from the payment for the goods when the documents required for payment were delivered. [page 287]
[Buyer] argues that because [seller] refused to pay the penalty for late delivery of the goods and because [seller] did not specify a definite date for delivery of the goods, [buyer] refused to extend the time for delivery. [Buyer] further argued that [seller] did not satisfy [buyer's] requirement that [seller] provide an examination report from the S.G.S. for the goods under contract No. 069. [Buyer] alleges that [seller] did not attempt to remedy its failure within the valid period of the letter of credit, but rather canceled the order and declared the contract avoided ten (10) days before the letter of credit expired. [Buyer] argues that though it did not agree to the cancellation of the contract and demanded that the goods be shipped on schedule, [seller] formally informed [buyer] on February 12, 1991 that the contract was canceled.
[Seller] argued that contract No. 069 was concluded after December 3, 1990 because on September 30, 1990, [buyer] had only prepared a draft version of the contract. [Seller] argued, therefore, that because the contract was concluded after December 3, 1990 and because there was no specific date for delivery specified in the contract (only that the goods would be shipped within seven (7) weeks after the letter of credit had been opened), [seller] had the right to require that [buyer] open a new letter of credit or extend the valid period of the original letter of credit until December 31, 1990 or later. [Seller] argues that its demand that [buyer] extend the valid period of the letter of credit was absolutely within its rights under the contract, and that [buyer's] refusal to do so was a refusal to pay for the goods and constituted a material breach of the contract.
[Seller] stated that [buyer] never stated as a condition for extending the time for delivery that [seller] pay any penalty, but rather conditioned the extension on [seller] agreeing to pay [buyer's] damages under contract No. 072. [Seller] claims that [buyer's] refusal to extend the letter of credit deprived [seller] of the right to deliver the goods and was an obvious material breach of the contract.
[Seller] further argues that it never avoided the contract, but that [buyer's] refusal to extend the letter of credit forced [seller] to cancel its order from the aluminum parts manufacturer, and that the cancellation of the order is not the same as the cancellation of contract No. 069. [Seller] denied that Ms. […]'s fax of January 24, 1991 made any statement that can be construed as canceling the contract. [page 288]
Claim
Concerning the disputes arising out of the two contracts, [buyer] raised the following claims:
1) Terminate contract No. 072 and return the goods; [seller] shall return the payment for the goods in the amount of $313,800;
2) [Seller] shall compensate [buyer] for economic losses of $248,613.90 consisting of:
a) Loan interest of $37,097.44;
b) Handling fees for the letter of credit and electronic fax fees of $1.067.84;
c) Mitigation expenses of $75.617.50;
d) Marine transport, insurance, domestic transport, and commercial examination fees of $6,927.17;
e) Work stoppage losses of $26,917.61;
f) Rent of the lease of machinery and late payment penalty of $67,516.80;
g) Contract No. 069 breach fee of $21,344.75;
h) Business travel expenses and fax fees of $2.881.21;
i) Arbitration fees of $8.300.19; and
j) Lawyer's fees of $943.39.
Answer and counterclaim
In answer to these claims, [seller] argued that it did not know, and could not foresee, that the aluminum materials would be used by [buyer's] end user on a machine that it had recently imported from abroad. Further, [seller] argued that it did not know that the machinery had been imported with the help of a loan from a bank. Therefore, [seller] insisted that [buyer's] claims for damages suffered pursuant to these arrangements should be denied. In addition, [seller] counterclaimed for damages from [buyer's] breach of contract No. 069 in the amount of $280,333; said amount consisting of [seller's] lost profits in the amount of $25,874, damages [seller] owed to its supply merchant […] Corp. in the amount of $248,695, and counterclaim arbitration fees of $5,764.
Opinion of the Arbitral Tribunal
I. Choice of Law
Whereas the two contracts in dispute were signed in Beijing, PRC, and the issues in dispute relate mainly to China, Chinese law shall be applied to this case. [page 289]
According to Article 6 of the Foreign Economic Contract Law of the People's Republic of China, the CISG [United Nations Convention on Contracts for the International Sale of Goods] shall also be applied.
II. Concerning Contract No. 072
The Tribunal finds that the thickness of the roll aluminum delivered by [seller] was 0.0118 inches and did not comply with the specifications in the contract that called for 0.0125 inches. The roll aluminum was certified as such in the Examination Report issued by Heilongjiang Import and Export Goods Examination Bureau on November 29, 1990, and neither party disputes the report. At the time [seller] signed the contract, [seller] knew that if the goods did not comply with the specifications in the contract, [buyer's] end user's factory would not be able to use it. Thus, according to CISG Article 25, the Tribunal concludes that [seller] materially breached the contract.
III. Concerning Contract No. 069
The Tribunal finds that contract No. 069 was forwarded by [seller] to [buyer] after [seller] had signed it on December 3, 1990. Thus, according to Article 7 of the Foreign Economic Contract Law of the People's Republic of China, the Tribunal concludes that the contract was concluded after December 3, 1990, but the Tribunal also takes notice of the following facts:
1. [Buyer] opened a letter of credit, No. […], through Heilongjiang Agriculture Bank on October 22, 1990 according to the provisions of, and naming. contract No. 069; and
2. [Seller] had already ordered the goods specified in, and naming, contract No. 069 from its supplier on October 26. 1990.
These facts lead the Tribunal to conclude that both parties had started performing the contract before the procedure of signing the contract was completed.
[Seller] failed to establish that the contract required that the letter of credit be opened only after the buyer received notice that the seller would deliver the goods. [Seller's] argument on this issue rests on Article 11(1) of the contract, which governs delivery on FOB terms. However, the delivery in this case was to be on C & F terms, and therefore was governed by article 11(2) of the contract. As Article 11(1) was obviously [page 290] crossed out [(canceled)], [buyer's] opening of the letter of credit on October 22, 1990 complied with the contract.
The Tribunal finds that after [seller] ordered the goods from its supplier […] Corp., the purchase order returned to [seller] from its supplier clearly states that the delivery date was assumed to be December 8, 1990. Thereafter, [seller] failed to deliver the goods, and requested an extension of the time for delivery and an extension of the valid term of the letter of credit, because, according to its own fax to [buyer], [seller] was in the process of changing its internal personnel.
Notwithstanding the above, however, the Tribunal also finds that, in accordance with CISG Article 47 and Article 29, Section 2 of the Foreign Economic Contract Law of China, [buyer] was required to give [seller] a reasonable amount of additional time to perform its obligations under the contract. [Buyer] agreed to an extension in its fax of December 16, 1990, but also at that time requested that [seller] state a specific date until which the letter of credit should be extended. [Seller] instead replied on December 19, 1990 that unless the letter of credit was extended immediately, it would consider the contract automatically canceled and it would return the goods to its supplier. On December 20, 1990, [buyer] responded that their end user would not agree to an extension of the letter of credit unless [seller] arranged for shipment of 120 tons of conforming roll aluminum as soon as possible.
The Arbitration Tribunal finds that the object of contract No. 072 was roll aluminum for the manufacture of can bodies and that the object of contract No. 069 was for covers and pull-tabs. Although the two contracts are connected, from the point of view of the law, they are independent contracts. There are no provisions in either contract to suggest that one exists on the condition of the other. Although [buyer] argued that the materials to be delivered under the two contracts were necessary for factory production, and therefore that it should have been allowed to treat the settlement of the dispute over contract No. 072 as a condition for extending the valid term of the letter of credit under contract No. 069, there is no authority under the law to treat them as conditional.
Between January and February 1991, [buyer] and [seller] negotiated several times by letter and fax concerning how to perform contract No. 069, but no agreement was concluded. [Seller] sent a fax to [buyer] on February 12, 1991, which stated that [seller] was formally canceling contract No. 069, was in the process of returning the goods to its supplier, and that [buyer] would have to assume all expenses for returning the goods already delivered. [Buyer] responded by fax on February 19, 1991 that it had [page 291] submitted the disputes concerning both contracts to arbitration. The Tribunal concludes that, according to CISG Article 64, because [buyer] consistently requested that [seller] deliver the goods, [seller] had no right to cancel the contract [No. 069] and, thus, the contract must be performed.
IV. In accordance with the above facts and reasoning, the Arbitration Tribunal concludes that:
1. Contract No. 072 shall be terminated. The goods delivered by [seller] did not comply with the specifications called for in the contract and shall be returned to [seller]. [Seller] shall return the payment made, with interest, and compensate [buyer] for the expenses incurred in its performance of the contract, including fees for the opening of the letter of credit, marine transport and insurance fees, and domestic transport fees, etc.
The Arbitration Tribunal orders:
[Seller] shall return the payment of $313,800.00 to [buyer] and, in addition, shall pay annual interest of 8% from the date when payment for the goods was made, October 10, 1990, to the date when the goods are returned, which shall be the date of this award. [Seller] shall compensate [buyer] for the following expenses: (1) Handling fees for the opening of the letter of credit, electronic fax fees of RMB 2,428.25, which is equal to $513.37 according to the exchange rate at that time; (2) Marine transport and insurance fees, domestic transport fees, and commercial examination fees equaling $6,927.17.
2. [Buyer] has the right to obtain substitute goods from other sources in lieu of the goods under contract No. 072. [Seller] shall compensate [buyer] for the difference between the price of the substitute goods and the contract price. Although [buyer] purchased 44 tons of substitute roll aluminum, it will not be deprived of the right to purchase the remaining 76 tons of substitute goods. Thus, the difference in price will be calculated on 120 tons. According to data provided by [buyer], and considering reasonable additional processing fees, transport fees, and losses incurred in obtaining the substitute goods, the Tribunal finds that the price of the substitute goods is $2,800.00 per ton. The difference from the contract price is thus $185.00 per ton. [Seller] shall compensate [buyer] the difference in price of $22,200.00.
3. [Buyer's] request for loan interest, expenses incurred in preventing losses from increasing, and losses incurred due to work stoppage while waiting for materials shall not be considered.
4. Contract No. 069 shall continue to be performed. In order to perform contract No. 069, [buyer] shall open a letter of credit in accordance with the stipulations of contract No. 069 within a reasonable time after this award. [Seller] shall deliver the goods under the contract within seven (7) weeks after receiving [notice that] the letter of credit [has been opened]. If [buyer] fails to open the letter of credit, [buyer] shall pay compensation to [seller] in the amount of $40,000.00. If, however, [seller] fails to deliver the goods to [buyer] after receiving [notice that] the letter of credit [is opened], [seller] shall compensate [buyer] in the amount of $40,000.00. If, in the process of performing the contract, another dispute should arise, other than the above stated settlement for failure to open the letter of credit or deliver the goods, either party may apply to the Arbitration Committee for arbitration. [page 292]
5. The rental of machinery by [buyer's] end user is beyond the reasonably foreseeable scope of the parties' agreement. Therefore, in accordance with Article 19 of the Foreign Economic Contract Law of China. [Buyer's] request to recover the rent of the machinery and penalties for late payment of the rent shall not be taken into account.
6. Concerning the counterclaim of [seller]: because contract No. 069 shall continue to be performed. [Seller's] counterclaim will not be considered.
7. [Buyer] and [seller] shall each assume respectively its own lawyer's fees incurred in this case.
8. 30% of the arbitration fees incurred in this case shall be assumed by [buyer] and 70% shall be assumed by [seller].
Award
The Arbitration Tribunal decides as follows:
1. The 120 tons of roll aluminum for the manufacture of aluminum cans delivered by [seller] under contract No. 072, signed between [buyer] and [seller], shall be returned. [Seller] shall return the payment for the goods to [buyer] in the amount of $313,800.00 and interest of $25,104.00. The roll aluminum now in [buyer's] possession shall be returned within 90 days of this award and [buyer] shall provide assistance to make the return convenient.
2. [Seller] shall compensate [buyer] for the handling fees in the opening of the letter of credit, electronic fax fees of $513.37, and marine transport and insurance fees, domestic transport fees and commercial examination fees of $6, 927.17.
3. [Seller] shall compensate [buyer] for losses resulting from the difference in price for substitute roll aluminum for the manufacture of aluminum cans in the amount of $22,200.00.
Regarding the above four items, the total amount of compensation that [seller] shall pay to [buyer] shall be $368,544.54.
4. Contract No. 069 between [buyer] and [seller] shall continue to be performed, and shall be performed according to the second paragraph of Article 4, Section 4 of the opinion of the Arbitration Tribunal, and according to the stipulations of contract No. 069, [buyer] shall not open the letter of credit later than 45 days after the date of this award.
5. All other claims raised by [buyer] and [seller] are denied.
6. The arbitration fees shall be assumed 30% by [buyer] and 70% by [seller].
This award is final. [page 293]
FOOTNOTES
* All translations should be verified by cross-checking against the original text. Originally published in Mandarin Chinese in Compilation of Selected Awards of the China International Economic and Trade Arbitration
Commission, 1989-1995, at 429 (1997), by China Foreign Economic and Trade Publisher, Beijing, P.R.C.
** B.S. 1990, LL.B. 1992, People's University of China; LL.M. 1999, University of Pittsburgh School of Law.
*** B.A. 1995, Louisiana State University, J.D. 1999, University of Pittsburgh School of Law.
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