Data

Date:: 10-06-2002
Country:: Arbitral Award
Number:: - -
Court:: CIETAC China International Economic and Trade Arbitration Commission
Parties:: Unknown

Keywords

MODIFIED ACCEPTANCE - NEW TERMS REGARDING AGE OF VESSEL AND PAYMENT OF FREIGHT - NOT AMOUNTING TO MATERIAL MODIFICATIONS IN A FOB SALE (ART. 19 CISG)

OFFEROR'S OBJECTIONS NOT MADE WITHOUT UNDUE DELAY - DO NOT AMOUNT TO REJECTION (ART. 19(2) CISG)

DAMAGES - INJURED PARTY'S RIGHT TO MAKE A SUBSTITUTE TRANSACTION AND TO RECOVER DIFFERENCE BETWEEN CONTRACT PRICE AND PRICE OF SUBSTITUTE SALE (ART. 75 CISG)

RIGHT TO INTEREST (ART. 78 CISG)

Abstract

A Swedish buyer and a Chinese seller entered into negotiations for the sale of 10,000 metric tons of rapeseed dregs FOB China. When the seller faxed the contract and the letter of credit terms to the buyer for signing, the buyer changed two of the contract provisions. First, it removed a clause requiring the shipping vessel to be no older than twenty years; secondly, it replaced the words "carriage paid" with "carriage shall be paid according to the charter-party." Some days after the buyer had returned the signed contract to the seller, the latter notified the buyer that it did not consider the contract neither concluded nor valid because the buyer had unilaterally made changes to it; as a result, it would not perform its obligations under the contract. Then, in order to fulfill its obligation towards a third party to whom part of the goods were to be resold, the buyer entered into a cover sale at a price higher than that provided for in the original contract. Any attempt to solve the dispute through conciliation failed and the buyer commenced arbitral proceedings.

The Arbitral Tribunal held that the CISG was applicable because both parties were situated in Contracting States (Art. 1(1)(a) CISG).

As to the merits, the Tribunal found that the contract had been validly concluded, since the modifications made by the buyer did not materially alter the terms of the contract under Art. 19 CISG. In fact, since in accordance with INCOTERMS 2000 a FOB sale requires the buyer to pay for shipment at its own expenses, the new terms regarding the age of the vessel and the payment of freight did not affect the seller's obligations under the contract. Moreover, the seller's objection to the modifications were not made promptly as required by Art. 19(2) CISG and, thus, it had not prevented the contract to come into existence.

Furthermore, the Arbitral Tribunal found the buyer entitled to recover the difference between the price agreed in the contract and the price paid for the goods in replacement (Art. 75 CISG).

Finally, the Tribunal held the buyer entitled to interest (3%) under Art. 78 CISG.

Fulltext

China International Economic & Trade Arbitration Commission
Rapeseeds dregs case (10 June 2002)

Translation [*] by Zheng Xie [**]

Edited by JIANG Chi [***]

[...]

INTRODUCTION

China International Economic and Trade Arbitration Commission (CIETAC) [hereafter, "the Arbitration Commission"] accepted the present case according to the arbitration clause in Contract No. SF0610 between the Claimant [Buyer], XX Company, Sweden, and the Respondent [Seller], XX Company, Hunan, China, and the Buyer's written application for arbitration submitted on 23 July 2001.

The Buyer appointed Arbitrator XXX. The Chairman of the Arbitration Commission appointed Arbitrator XX for the Seller according to Article 26 of the Arbitration Rules,[1] because the Seller neither appointed the arbitrator nor authorized the Chairman of the Arbitration Commission to appoint the arbitrator within the specified time under the Arbitration Rule. The Parties neither appointed the third arbitrator jointly nor authorized the Chairman of the Arbitration Commission to appoint the third arbitrator. Therefore, according to Article 24 of Arbitration Rules,[2] the Chairman appointed XX as the Presiding Arbitrator in this arbitration, and the three arbitrators formed the Arbitration Tribunal on 10 January 2001, and heard the present case.

The Arbitration Tribunal examined the written materials submitted by the Buyer and the Seller, and held an oral hearing session on 26 March 2002. The Buyer's agent made an oral argument during the session and answered the Arbitration Tribunal's questions. The Seller did not send anyone to appear in the session. The Buyer submitted supplementary materials after the session. The Arbitration Tribunal, through the Secretariat of the Arbitration Commission, forwarded the supplementary materials to the Seller on 12 April, and required the Seller to submit any comments and/or objections before 9 May 2002. It also notified the Seller that if the Seller failed to do so within the time period, the Arbitration Tribunal would decide the case according to the written materials available to it and the information from the oral hearing session. The Seller did not submit any supplementary materials in the specified time.

The Arbitration Tribunal has concluded the present case, and made the award by consent. The following are the facts, the Arbitration Tribunal's opinion and the award.

1. THE FACTS

On 5 June 2000, the Seller offered the Buyer 10,000 metric tons rapeseeds dregs, for which the standard of quality was set at above 38% of oil protein, and below 12.5% of moisture content. The price term was US $78 per ton, FOB, Zhang Jia Gang, China.

On 7 June, the Buyer accepted the Seller's offer, and required the Seller to fax the contract and the terms of the Letter of Credit [L/C] to him. On 9 June, the Seller faxed Sales Contract No. SF0610 with seal.

The Buyer deleted the language that "A ship with the age of above twenty years is not accepted" in the original contract, and modified " Carriage paid" to "Carriage shall be paid according to the charter-party" and authorized Milan Company, Italy to sign and seal the contract, and to fax it to the Seller.

Disputes then arose between the parties concerning the validity and performance of the contract. They failed to resolve the disputes through conciliation. On 23 July 2001, the Buyer submitted application for arbitration to the Arbitration Commission.

2. ARGUMENTS OF THE PARTIES

The Buyer alleged that:

On 14 June, the Seller faxed to the Hong Kong representative office of the Buyer, stating that because the Buyer modified the contract unilaterally, the Seller could not confirm the contract, and would suspend the performance of the contract, and required the Buyer to suspend issuance of the L/C.

On 22 June, the Seller sent the Buyer a letter, stating that the contract was void, and the L/C issued by the Buyer had to be invalidated.

At the same day, the Buyer replied to the Seller in a letter, explaining that because the price term in the contract was FOB, the modification of the age of the ship and the payment of freight would not affect the Seller's performance of the contract. The Buyer told the Seller that it had agreed to sell the goods under the contract to an Italian customer. The Buyer also reminded the Seller that if the Seller failed to perform its obligation of delivering the goods, it would breach the contract, and also that the Buyer would have to purchase substitute goods to fulfill its obligation to its Italian customer. In this letter, the Buyer required the Seller to confirm that it would perform its obligation under the contract.

On 23 June, the Seller insisted, in its reply letter to the Buyer, that the contract was void, and that the clauses on the age of the ship and carriage paid affected the Seller's loading. The Seller also stated that because the contract did not come into effect, obligations and liabilities under the contract should be regarded as void.

The Buyer had reached an agreement with its Italian customer to sell 7,000 tons goods, the goods Buyer was expecting to receive from the Seller under its contract with the Seller. Because the Seller refused to perform its obligation, the Buyer would have to breach its agreement with its Italian customer, unless the Buyer made a cover purchase.

In order to perform its obligation under the contract with the Italian customer, The Buyer had to buy substitute goods at a higher price of US $98.50 per ton from XX Company, Singapore. Because of its purchase of the substitute goods, the Buyer paid US $150,675.00 more than it would otherwise have had to pay had the Seller performed the contract.

It is the Buyer's position that the Buyer and the Seller had concluded an agreement through offer and acceptance. The Buyer had been contacting the Seller about the validity and performance of the contract, as well as remedies Buyer was planning to resort to. Furthermore, the contract in the present case clearly specified that XX Company, Sweden (the Buyer) was the purchaser of the goods. Because the Buyer intended to resell the goods under the contract to an Italian customer, the destination port was MONEFALCONE/VENICE port, Italy, and the Buyer authorized XX Company, Italy, to deal with certain part of the contract. This was the reason why the contract in the present case was signed and sealed by an Italian Company. That being said, the Italian Company was merely acting on behalf of the Buyer in its capacity as an agent for the Buyer, authorized by the Buyer to sign and seal the contract. Therefore, the consequences of the contract should be assumed by the Buyer. Although the Buyer modified the contract signed by the parties, the modification did not affect any of the Seller's interests. Nor did the modification constitute a material modification of the offer as defined in Article 19 of CISG. Moreover, the Seller, as the offeror, failed to object to the modification promptly. The Seller did not express objection to the Buyer's modification until 14 June 2000, when the Buyer had issued the L/C, the beneficiary of which was the Seller. Thus, according to CISG, the Seller's objection was delayed, the Seller was bound by the Buyer's modification, and the contract was established. The Seller unreasonably refused to perform its obligation under the contract; the Buyer therefore had to buy substitute goods at a higher price. The Seller had breached the contract and should bear all consequences and liabilities.

The Buyer had the right to take reasonable measures for mitigation. The quality of the substitute goods the Buyer bought was in conformity with the goods under the contract, and the price was lower than that of similar product in the international market; the measure the Buyer took was therefore reasonable.

For the above reasons, the Buyer petitioned the Arbitration Tribunal to grant the following awards:

Seller shall pay to the Buyer US $150,675.00, the amount of damages Buyer incurred as a result of having to purchase the substitute goods;

Seller shall pay the loss of interest in the amount of US $10,547.25 (at the annual interest rate of 7%, and with the interest accruing period ending on 9 June 2001); and

Seller shall pay the arbitration fee and attorneys' fee incurred by the Buyer for the present case.

The Seller defended that:

In June 2000, the Seller and Yueyang XX Company agreed through negotiation that the Seller would act as an agent for Yueyang XX Company to export 10,000 tons rapeseeds dregs. Yueyang XX Company authorized the Seller to sign the contract with the Buyer, and the Seller was responsible for the arrangement of the goods and the shipment. When the disputes arose, the Seller did not know the details. Now the Buyer has applied for arbitration. However, since the Seller was in deficit for more than RMB 10 million and was on the edge of bankruptcy, the Seller was unable to resolve the disputes. In addition, the Seller was only an agent, and had no relationship with the Buyer. The Buyer should contact Yueyang XX Company to resolve the dispute.

3. REASONING OF THE TRIBUNAL

(1) The applicable law

CISG applies to the present case because the States where the parties have their places of business are Contracting States.

(2) Whether a contract was concluded

The Arbitration Tribunal finds that on 9 June 2000, the Buyer received the Seller's fax of Contract No. SF0610 with the seal of the Seller. The Buyer deleted the clause providing that "a ship with the age of above twenty years is not accepted", and modified the language "carriage paid" to "carriage is paid according to charter-party." The Buyer authorized XX Company, Italy to sign and seal the contract, and to fax it to the Seller on 9 June 2000. The Seller later advised the Buyer that it would not confirm the contract because it was unilaterally modified by the Buyer, and that the Seller would suspend the performance of the contract.

Article 19 of CISG provides that:

"(1) A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer.

"(2) However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect. If it does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance.

"(3) Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party's liability to the other or the settlement of disputes are considered to alter the terms of the offer materially."

The Arbitration Tribunal finds that when accepting the offer, the Buyer made notes on the contract. However, the Arbitration Tribunal also notes the price term in the contract was FOB. According to Incoterms 2000, under FOB, the Buyer is responsible for shipment at its own expenses, and thus as far as the Seller is concerned, the age of the ship and the payment of the freight were irrelevant issues. The Buyer's modifications of the clauses regarding the age of the ship and payment of the freight did not "materially modify the offer". Moreover, the Seller failed to object to this modification within a timely manner. It was not until 14 June 2000 that the Seller indicated that it would not confirm the contract. Based on the above facts and in accordance with the relevant law, the Arbitration Tribunal holds that Contract No. SF0610 was validly concluded between the Buyer and the Seller, and that the parties are obligated to perform according to the contract.

(3) The agency defense of the Seller

The Seller claimed it was only an agent, and had no relationship with the Buyer, and therefore that the Buyer should contact Yueyang XX Company directly to solve the dispute. The Arbitration Tribunal holds that the parties to Contract No. SF0610 were the Buyer and the Seller, and not Yueyang XX Company. In addition, the Seller did not submit any evidence to prove that it had ever disclosed Yueyang XX Company to the Buyer. Thus, the Arbitration Tribunal holds that Seller, who signed Contract No. SF0610 under its own name, was a party to the contract and of the present case, and shall be bound by the contract. The legal relationship between the Seller and Yueyang XX Company was a different one, which does not fall within the scope of this hearing; the Arbitration Tribunal will not rule on this issue.

(4) Damages incurred in connection with the purchase of substitute goods

Article 75 of CISG provides that:

"If 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 the evidence provided by the Buyer, the Arbitration Tribunal found the Buyer had bought 7,350 tons substitute goods. Thus, the Arbitration Tribunal supported the Buyer's claim that the Seller shall pay for the damages the Buyer incurred by purchasing substitute goods; and the calculation formula shall be (US $98.50/ton - US $78.00/ton) * 7,350 metric tons = US $150,675.00.

(5) Interest

Article 78 of CISG provides that:

"If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it, without prejudice to any claim for damages recoverable under article 74."

The Buyer is entitled to loss of interest from the Seller. However, the Arbitration Tribunal finds the annual interest rate claimed by the Buyer was too high, and the interest period was too long, while the evidence does not support all of the Buyer's claims for the amount of interest. The Arbitration Tribunal holds that it is reasonable for the Seller to pay the interest at the annual rate of 3%, for the period starting from June 2000 and ending on the date this Arbitration Tribunal grants its award.

(6) Attorneys' fee

The Arbitration Tribunal does not support Buyer's claim for the attorneys' fee, because the Buyer did not submit relevant evidence to support this claim.

(7) The arbitration fee

The Arbitration Tribunal holds that the Seller shall pay 90% of the arbitration fee, and the Buyer shall pay the remaining10%.

4. AWARD

The Seller shall pay the Buyer $150,675.00, the amount of the damages Buyer incurred as a result of purchasing substitute goods;
The Seller shall pay the Buyer $9,040.50, the amount of loss of interest;
The Buyer's other claims are dismissed; and
The arbitration fee is $XX. The Seller shall pay 90% of the arbitration fee, and the Buyer shall pay the remaining10%. The Buyer has paid to the Arbitration Tribunal the above mentioned arbitration fee, so the Seller shall pay the Buyer the amount which the Buyer has advanced for the Seller.

For amount due under paragraphs 1, 2, and 4 above, the Seller shall make full payment within forty-five days of the effective date of this Arbitration award. Otherwise, the Seller will be responsible for paying interest for any overdue amount at the annual interest rate of 5%.

This is the final award.

--------------------------------------------------------------------------------

FOOTNOTES

* For purposes of this translation, the Claimant of Sweden is referred to as Buyer and the Respondent of China is referred to as Seller.

** Zheng Xie, LL.M., Washington University in St. Louis, LL.M., BA in Economics, University of International Business and Economics, Beijing.

*** JIANG Chi is an Associate with the New York office of Debevoise & Plimpton LLP.

1. Article 26 If the Claimant or the Respondent fails to appoint or authorize the Chairman of the Arbitration Commission to appoint an arbitrator according to Article 16 of these Rules, the Chairman of the Arbitration Commission will appoint an arbitrator for the Claimant or the Respondent. China International Economic and Trade Arbitration Commission (CIETAC) Arbitration Rules

2. Article 24 Each of the parties shall appoint one arbitrator from among the Panel of Arbitrators of the Arbitration Commission or entrust the Chairman of the Arbitration Commission to make such appointment. A third arbitrator shall be jointly appointed by the parties or appointed by the Chairman of the Arbitration Commission upon the parties' joint authorization.

In case the two parties fail to jointly appoint a third arbitrator or fail to jointly entrust the Chairman of the Arbitration Commission to appoint a third arbitrator within 20 days from the date on which the Respondent receives the Notice of Arbitration, the third arbitrator will be appointed by the Chairman of the Arbitration Commission. The third arbitrator will act as the presiding arbitrator.

The presiding arbitrator and the two appointed arbitrators will jointly form an Arbitration Tribunal to jointly hear the case.}}

Source

Published in Chinese:
- Zhongguo Guoji Jingji Maoyi Zhongcai Caijueshu Caijueshu Xuanbian [Selected Compilation of Awards of CIETAC]: 1995-2002, Law Press, pp. 585-592.

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