Data

Date:: 17-12-1999
Country:: China
Number:: Ri Jingchuzi No.29 (1997)
Court:: Rizhao Intermediate People's Court, Shandong Province
Parties:: --

Keywords

DAMAGES (ART. 74 CISG) - DELIVERY OF NON-CONFORMING GOODS - LOSS OF PROFITS - RECOVERABLE

MITIGATION OF LOSSES (ART. 77 CISG)

SELLER'S DUTY TO REFUND THE PRICE AND PAY INTEREST (ART. 84(1) CISG)

REJECTION OF GOODS BY BUYER - AFTER TAKING DELIVERY – BUYER BOUND TO TAKE REASONABLE STEPS TO PRESERVE GOODS (ART. 86(1) CISG)

Abstract

An American buyer (Plaintiff) and a Chinese seller (Defendant) entered into a contract for the sale of frozen shrimps. The agreement expressly provided that if the goods were denied entry through customs by the U.S. Food and Drug Administration (FDA), the seller would have to return the price and bear the costs for shipping the goods back to the seller.

Upon arrival at the port of Long Beach, the goods were seized by the U.S. authorities and, after an inspection by a non-official professional laboratory, they were found to be decayed, and thus, illegal. The buyer then faxed the seller that the FDA had denied entry and ordered the goods to be shipped back to China. After extensive negotiations between the parties, the goods were loaded and sealed under the supervision of U.S. custom's officials. However, upon arrival in China a new dispute arose, as the seller affirmed not to be provided with the original set of bill of ladings, by which it would be possible to collect the goods. When, one month later, the buyer notified the seller to have obtained the necessary documents, the latter refused to pay for them. The buyer then brought an action against the seller. Meanwhile, as the containers' fee were exceeded and left unpaid, the Chinese authorities ordered the goods to be resold.

The Court based its decision on the Law of the People's Republic of China on Economic Contracts Involving Foreign Interests and CISG. In applying CISG, the Court held the buyer entitled to return the goods and recover the price paid, plus interest, and foreseeable profits (CISG Arts. 84(1) and 74). While the seller had reason to request the original documents providing for inspection and denial of entry into the United States, nonetheless it had to be considered liable since it did not pay for the documents and did not take appropriate steps to avoid losses to the goods (CISG Art. 77). However, the buyer, though entitled to retain the goods, had at the same time the obligation to preserve them (CISG Arts. 86(1) and 88). Since no reasonable measures were adopted to this effect and the goods were held so long that their value was nearly extinguished, the Court found the buyer responsible for the loss incurred after the return of the goods to China.

Fulltext

[English translation provided by Pace University, to be found at
http://www.cisg.law.pace.edu]

POSITION OF THE PARTIES

[Buyer]'s position. On June 30 1995, [Buyer] and [Sellers] concluded letter agreement PTO-9502. In the letter agreement, [Seller] A is referred to as the seller, the object was frozen PTO shrimp, 203 boxes of Spec. 71/79 at the price of US $2.95/pound, 580 boxes of Spec. 91/110 at the price of US $2.75/box, and 717 boxes of Spec. 111/130 at the price of US $2.40/box. The total amount was 1,500 boxes of shrimp; the total price was US $103,562.86. The package standard was 6X2Kg per box; the internal and external packages were to meet the foreign trade standard. The time for lading was 15 July 1995; the lading place was China and the destination was Florida, U.S.A. A letter of credit [L/C] was to be used to pay the price. It was especially provided in the letter agreement that the quality of goods should meet U.S. sanitation and health standards, the color should be natural, the number of the intermediate granule should be correct, no extreme small specification, no chemical, and non short of weight. If the goods were refused admission to the United States by the US Food and Drug Administration [FDA], seller shall be obliged to return the price paid and compensate the cost of freight to ship the goods back and other relevant costs. During the performance, the parties made an additional agreement on the quantities and unit prices of some of the goods with the total amount unchanged but the price changing to US $106,328.51. [Buyer] set a L/C under the number of BNINYG-100/83/95 and paid all the money. But, [Sellers] were in breach because the goods were denied by the FDA. [Buyer] applied for an FDA re-inspection; the result was the same. [Buyer] thus planned to return the goods to Qingdao according to the letter agreement. But the negotiation on the return of goods did not reach any solutions, and [Buyer] thus suffered a gross loss. [Buyer] asserted that the letter agreement is legal and valid, so it should be protected by law. [Buyer] claimed 1) the return of the money paid, which was US $103,562.86; 2) US $19,624.94 in damages (including foreseeable profits); 3) interest from 20 December 1995 (at the lending rate); 4) [Sellers] should bear the costs of suit; and 5) [Seller] B should be jointly and severally liable.

[Seller]'s position. In response, the two sellers argued that: 1) [Buyer] did not provide valid evidence to prove that the FDA had denied the entry of goods. Firstly, [Buyer] did not provide the original text of the denying documents of the FDA. The notarized documents provided by [Buyer] could not prove the facts of the said original inspection report kept by Li Dehai, nor could [Buyer] prove that the report that was notarized was a true photocopy of the original text. Secondly, the documents provided by [Buyer] were not complete in form: no seals on the margins of the key documents, errors in language, contents, time and scope, so these documents were forged. 2) [Sellers] never delayed in negotiation with [Buyer] on the return of the goods. It was completely due to [Buyer] acts that severely broke the normal rules. All of the costs and liabilities arising from the return to Qingdao should therefore be borne by [Buyer]. Based on the aforesaid, [Sellers] thus requested the court to dismiss [Buyer] claims.

OPINION OF THE COURT

After trial, the court found that in June 1995, [Buyer] entered into negotiation for the purchase of frozen PTO shrimp from [Seller] B and Rizhao Shijiu No.2 Aquatic Products Refrigeration Factory, an independent legal entity owned by [Seller] A and the Chinese shareholder of [Seller] B. On 30 June, [Buyer] and [Seller] A concluded letter agreement PTO-9502 for frozen PTO shrimp as follows:

- 203 boxes of Spec. 71/79 at the price of US $2.95/pound, 580 boxes of Spec. 91/110 at the price of US $ 2.75/box, 717 boxes of Spec. 111/130 at the price of US $2.40/box. The total quantity was 1,500 boxes; the total price, US $103,562.86. The delivery term was C&F Tampa, Florida, U.S.A. The package standard was 6X2Kg per box. A letter of credit [L/C] was to be used to pay the price.
- It was expressly provided in the letter agreement that: he seller warrants that the quality of goods shall meet US sanitation and health standards, the color shall be natural, the number of the intermediate granules shall be correct, and there shall be no extreme small specifications, no chemicals, and no short of weight. If the goods are denied entry into the United States by the US Food and Drug Administration [FDA], seller shall be obliged to return the price paid (C&F) and compensate the cost of freight to ship the goods back and other relevant costs.

During performance, the parties made an additional agreement on the quantities and unit prices of some of the goods with the total amount unchanged and price still under the original letter of credit. [Seller] B delivered the goods in the name of [Seller] A after inspection by the Chinese Commodities Inspection Administration. [Seller] A issued the packing list and invoice to [Buyer] on 1 August 1995. [Buyer] paid the DDC cost (US $1,052) and the price (US $103,562.86).

On 23 August 1995, the frozen PTO shrimp reached the port of Long Beach in L.A., U.S.A. The Importer who applied to customs was Great Five Oceans Inc., the entity to whom [Buyer] sold the goods. On the same day, the FDA, Department of Health and Human Services Food and Drug ADM, seized the goods and issued a notification of seizing and hearing. The notification stated: n accordance with 801 act (A)(3), the goods are denied entry to customs. If you desire to provide a report from a non-official professional laboratory as proof of demur, you must submit it to FDA directly by the lab within 10 days of the seizing. On the second day, FDA notified regarding the taking of a sample. On 5 September, Great Five Oceans Inc. gave the frozen PTO shrimp to Los Angles Cold Storage Company to store them. The storage company stored the PTO shrimp according to their specifications: Spec. 71/90 into No.81216 stack, Spec. 91/110 into No.81217 stack, Spec. 111/130 into No.81218 stack. On 6 September, Great Five Oceans Inc. entrusted Michelson Laboratories Inc. to analyze the PTO shrimp. The lab took three boxes from Spec. 111/130 as samples and completed the analysis on 20 September. On 12 October 1995, the FDA sent its notification which stated: he lab found the goods under Spec. 111/130 had decayed; the goods are illegal, so how to deal with them? On 16 October, [Buyer] notified [Seller] B that FDA found the goods had decayed and had to be shut out and requested repayment of the price. On 19 October, [Seller] B asked [Buyer] to find a way to avoid shut out of the shrimp. On 12 October, [Buyer] sent a fax to [Seller] B that Spec. 111/130 PTO shrimp were far under the customs standard so that FDA decided to either shut them out or destroy them. The other two specifications were arranged for re-inspection. On the second day, [Seller] B refaxed that it did not want them shut out or destroyed and requested [Buyer] to handle it. On 27 October 1995, Great Five Oceans Inc. entrusted Michelson Laboratories Inc. to again analyze the other two specifications of PTO shrimp. Based on the report of 7 November, the FDA sent a notification again on 15 November that the PTO shrimp had decayed and inquired how to deal with them. In this notification, the FDA wrote the Spec. 91/110 into 111/130 in mistake and it sent a written notice to correct it. On 16 November, [Buyer] faxed [Seller] B that the FDA ordered the PTO shrimp to be shut out and returned to China and asked for the detailed address, name and the means of repayment. On November 20, [Seller] B refaxed that: If the case was true, it agreed to return the goods to Rizhao Aquatic Products Group with the address of eaport Road, the City of Rizhao, Shandong Province, China if it affirmed the goods returned were those delivered on 5 August and with the same quaintly and quantity, [Seller] B would repay by Telegraphic Transfer [T/T].

On 27 November 1995, the U.S Treasury Department and Customs Service issued a notice of denial of entry which stated that the frozen PTO shrimp entering on 23 August 1995 and originating from P.R. China, the importer of which was Great Five Oceans Inc. and the producer of which was Rizhao Rirong Aquatic Products Ltd. Co., the quantity was 1,500 boxes; that they did not conform to relevant laws so as to be denied entry and ordered them returned. On 29 November, [Buyer] notified [Seller] B of the contents of the official notice and requested it to repay by Sight L/C. On 11 December 1995, the Great Five Oceans Inc. issued invoices and packing list with the consignee to be Rizhao Aquatic Products Group. On 14 December 1995, under the supervision of officials of U.S. customs, the 1,491 boxes of frozen PTO shrimp (9 boxes excluded as samples) were loaded into frozen container and sealed by the officials of U.S. customs. North American Branch of China National Import & Export Commodities Inspection Corporation was also applied by [Buyer] to supervise the loading and issued a report which stated that the returning frozen PTO shrimp were originally provided by Rizhao Rirong Aquatic Products Ltd. Co. On 20 December 1995, Cosco Group received the container and issued a straight Bill of Lading [B/L], on which the consigner was the Great Five Oceans Inc. and consignee Rizhao Aquatic Products Group; and specially noted that the goods were returned to China directly under the permission of U.S. government to avoid any prohibiting provisions in U.S. laws.

On 4 January 1996, the frozen PTO shrimp arrived at Qingdao Harbor. China Qingdao Ocean Shipping Agency then notified the two sellers and the Qingdao office of [Buyer] many times. On 18 January, [Seller] B faxed [Buyer] that it received the notice of the transporter, but without the original set of Bills of Lading it could not pick up the goods. [Buyer], however, requested [Seller] B to repay the Great Five Oceans Inc. to retire the documents. Thereafter, the two parties negotiated by fax several times and vis- vis in Qingdao on 27 January 1996, but no solution was reached. On 28 February, [Buyer] notified [Seller] B that the original set of B/L was obtained from the Great Five Oceans Inc. upon the surety provided by [Buyer] and requested [Seller] B to retire them. But [Seller] B insisted that [Buyer] should notarize the documents. On 25 April 1996, [Buyer] notified [Seller] B that the notarization and certification of all the documents dealing with the shut out was completed and requested it to negotiate with [Buyer] in seven days; otherwise [Buyer] would exercise its right to sue. In early May 1996, [Buyer] brought a suit before Qingdao North District People Court and later withdrew that suit. On 19 September, [Buyer] brought a lawsuit again before Qingdao Intermediate People Court. Upon the ruling of the Shandong High People Court on 20 January 1997, the case was in the jurisdiction of this court.

On 14 October 1996, China Qingdao Ocean Shipping Agency faxed [Seller] A that it had been a long time since the arrival of the goods, that the container fee had exceeded 300,000 Renminbi [RMB]. It requested [Seller] A to pick up the goods and pay the container fee; otherwise it would submit the goods to the Qingdao Customs.

On 22 January 1997, Qingdao Custom Inspection Center seized the frozen PTO shrimp for the reason of time-exceeding non-application and handed them over to the Qingdao Customs Investigation Bureau to dispose of them. The latter on 15 April 1997 had them sold and obtained 143,500 RMB, which was turned over to the Treasury because no one claimed its ownership for more than one year since the shrimp were sold.

In addition, the court found that the freight cost for returning the frozen PTO shrimp was US $5,752, [Buyer] foreseeable profit on this transaction was US $3,425.38, the supervision fee on loading was US $300; and the cost of consular certification was US $35.

Meanwhile, the frozen PTO shrimp returned consisted of 1,491 boxes at the cost price of US $81,344.58.

The evidences to the aforesaid finding are: the affirmative letter of agreement, the discharging bill of exporting goods, documents of commodities inspection, invoices, packing lists, faxes, automatic seizing notification, sampling notification, storage bill, report of sampling and test, notice, answering letter of the cold storage warehouse, explanation of the lab, explanation of the FDA, notification of shut out, report of supervision on the loading, B/L, manifest, certificate of Qingdao Customs, receipt of payment of fees, certification report on price, notes of investigation and the statements of the parties.

During the trial, Qingdao Intermediate People Court on 18 October 1996 sealed up a 4,000 tons cold storage workshop of [Seller] B.

The court holds that the affirmative letter agreement between [Buyer] and [Seller] A and the partial modification on it by [Seller] B were legal and valid. Upon the denial of entry by the FDA after inspecting the goods, [Buyer] was entitled to return the PTO shrimp and obtain the money paid and other relevant costs, foreseeable profits and interest included. When the frozen PTO shrimp arrived at Qingdao, the two sellers were obliged to receive them. Though the sellers had reasons to request the original documents of inspection and shut out, the sellers shall bear certain liability because they did not repay to retire the documents with suspicion on the documents and did not take other positive measures to avoid the losses to the PTO shrimp value. [Buyer], in accordance with the CISG, was entitled to keep the goods, but at the same time it also had the obligation to preserve them. [Buyer] was neither the consignee nor the consigner on the B/L, but it held them for a long time. In the situation in which it could not get repaid in this way and had brought a suit, [Buyer] did not take reasonable measures and just let the losses grow until the value of the PTO shrimp was nearly extinguished. [Buyer] shall therefore bear the main responsibility for this. The two sellers shall, jointly and separately, bear the returning costs and damages of [Buyer]. The claim of [Buyer] for compensation of price and damages is supported by the court, but interest shall be not calculated since 20 December 1995, but since seven days after 25 April 1996, i.e., 3 May 1996. The response of Sellers that [Buyer] should bear the responsibility of the losses after the return of the PTO shrimp is also adopted by the court.

HOLDING OF THE COURT

Pursuant to articles 18, 19, 22, 23 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interests, article 6 paragraph 1 of the Supreme Court Answer on Some Problems of Application of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interests, and article 86(1) and article 88 of the CISG, the court hereby decides:

In ten days as of the effective date of this judgment, the two sellers shall repay [Buyer] US $110,701.86 (US $103,562.86 price, US $1,052 DDC fee, US $5,752 freight, US $300 supervision of loading, US $35 certification fee) and interest since 3 May 1996 until the actual repayment day at the rate of the contemporary US dollar lending rate provided by the China People Bank.

In ten days as of the effective date of this judgment, the two sellers shall compensate [Buyer] US $3,425.80 for loss of foreseeable profit.

[Buyer] shall bear 70% of the losses of the value of the returned PTO shrimp, i.e., US $56,941.21, which shall be paid to the two sellers in ten days as of the effective date of this judgment.
After set-off of the aforesaid items 1 and 2, 3, the two sellers shall pay [Buyer] US $57,186.45 and interest based on the principal of US $110,701.86 since 3 May 1996 until the actual repayment day at the rate of the contemporary US dollar lending rate provided by the China People Bank in ten days as of the effective date of this judgment.

Suit acceptance fee 15,510 RMB, preservation fee 6,030 RMB, consulting fee of certification on price 2,800 RMB, other lawsuit fee 1,200 RMB. These fees summed up amount to 25,540 RMB. [Buyer] shall bear 12,770 RMB and the two sellers shall bear 12,770 RMB.

If any of the parties is not convinced in this judgment, [Buyer] may within 30 days after the arrival of the judgment and sellers may within 15 days after the arrival of the judgment, submit a petition for appeal and copies corresponding to the number of the other party to the court and appeal before the Shandong High People Court.}}

Source

Original in Chinese:
- available at http://www.ccmt.org.cn/ss/writ/

English translation:
- available at the University of Pace website, http://www.cisg.law.pace.edu/}}