Data

Date:: 28-09-2007
Country:: USA
Number:: 03-4165-JAR
Court:: U.S. District Court, District of Kansas
Parties:: Guang Dong Light Headgear Factory Co., Ltd., v. ACI International, Inc.

Keywords

INTERPRETATION OF STATEMENTS AND CONDUCT - ACCORDING TO PARTY'S OWN INTENT WHERE OTHER PARTY KNEW OF SUCH INTENT (ART. 8(1) CISG)

INTERPRETATION OF STATEMENTS AND CONDUCT - ACCORDING TO UNDERSTANDING OF REASONABLE PERSON OF THE SAME KIND AS OTHER PARTY IN SAME CIRCUMSTANCES (ART. 8(2) CISG)

Abstract

A Chinese state owned factory (seller) and a US corporation (buyer) concluded a series of contracts for the sale of headwear through a Chinese intermediary. From the end of 1998, the parties started contracting directly with one another by using a contract form that contained a ninety-day credit limit and an arbitration clause. Since the buyer failed to pay the amounts due under the sale contracts, the seller filed an application for arbitration with the China International Economic and Trade Arbitration Commission (CIETAC).

By applying Arts. 25 and 53 CISG, the Arbitral Tribunal found the buyer liable for breach of contract. Then the seller filed an action before the Kansas District Court in order to obtain recognition and enforcement of the award pursuant to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The buyer counterclaimed that it had no direct contractual relationship with the seller.

After finding that the parties did not contest the application of CISG, the Court rejected the buyer’s argument, based on Art. 8(1) CISG, that it intended to treat the contract forms between itself and the seller as mere confirmations of orders between itself and the intermediary and that such an intention was known to the seller. In fact, the buyer did not provide any evidence thereof. Nor could a reasonable person in the same circumstances of the seller have interpreted the contract forms as mere confirmation of orders (Art. 8(2) CISG), since the forms exchanged between the parties from the end of 1998 onwards did not mention the intermediary and referred to the parties, respectively, as buyer and seller. Furthermore, the statements and conduct of the buyer clearly indicated its intent to be bound by the contracts with the seller.

Therefore, the Court granted recognition of the arbitral award.

Fulltext

MEMORANDUM AND ORDER

The Court now considers plaintiff Guang Dong Light Headgear Factory Co., Ltd.'s ("Guang Dong") Motion for Partial Summary Judgment (Doc. 126) and Motion for Partial Summary Judgment on ACI's Counterclaim Counts XI, XII, and XIII (Doc. 170). These motions are now fully briefed and the Court is prepared to rule. As described more fully below, the Court grants Guang Dong's motion on its claim to confirm the foreign arbitral award and denies summary judgment on all of ACI's counterclaims against Guang Dong.

I. Uncontroverted Facts

The following facts are either uncontroverted, stipulated to, or viewed in the light most favorable to ACI The Court only recites facts material to the arguments made by the parties in these summary judgment briefs. Guang Dong is a state owned factory located in the People's Republic of China that produces headwear. Defendant ACI International, Inc. ("ACI") is a Kansas corporation that identifies companies in the United States that are looking for headwear production and provides that production by using factories in Asia. Prior to 1999, ACI routinely contracted with China Pearl International ("China Pearl"), who would then contract directly with Guang Dong for headwear production. These contracts provided for thirty-day credit terms. ACI would make commission payments to China Pearl for the headwear orders.

Sales Contracts

In December 1998, a document entitled "Sales Contract" was forwarded by ACI to Guang Dong. This document lists Guang Dong as the seller and ACI as the Buyer. It states: "This Sales Contract is made by and between the Seller's [sic] and the Buyers whereby the seller agree [sic] to sell and the Buyers agree to buy the under-mentioned goods according to the terms and conditions specified below." This contract for headwear contained a thirty-day credit term and an arbitration clause. At the top was a handwritten note: "Please confirm, sign and stamp then fax back."

In approximately the beginning of 1999, ACI requested an increase in its credit terms to ninety days. ACFs credit terms were extended in 1999 and it continued to receive invoices from China Pearl for products manufactured by Guang Dong and continued making payment directly to China Pearl for headwear covered by those purchase orders. After ACI's credit terms were extended, ACI continued to receive invoices from China Pearl for products manufactured by Guang Dong.

Starting in 1999, a number of documents entitled "Sales Contracts" were exchanged between Guang Dong and ACI. These documents appear to be identical form contracts, that list ACI as the buyer and Guang Dong as the seller. They are substantially similar in language and form to the December 1998 sales contract, except that they each provide for a ninety-day credit limit. Each sales contract includes an arbitration clause that states:

All disputes arising from the execution of, or in connection with this contract shall be settled amicably through friendly negotiation. In case no settlement can be reached through negotiation, the case shall then be submitted to the Foreign Economic and Trade Arbitration Commission of the China Council for the Promotion of International Trade, Beijing FN2 for arbitration in accordance with its provisional rules of procedure. The arbitral award is final and binding upon both parties.

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From July 26, 2000 to January 9, 2001, fourteen of these sales contracts were exchanged between Guang Dong and ACI and they are the subject of the arbitration confirmation proceeding before the Court. ACI President Chris Davis and a representative from Guang Dong signed all but three of the sales contracts, two of which were signed by Linda Schroeder, ACI's comptroller. FN4 The signatures on behalf of ACI were all next to the line labeled "Buyer" and the stamps and signatures on behalf of Guang Dong are all next to the line labeled "Seller." Each of these fourteen documents contained an incorrect price term, however, because they included the commission due to China Pearl. The headwear produced under the fourteen sales contracts was shipped to ACI's customers.

Delays in Payment

In May or June 2000, ACI began having cash flow problems that continued through 2001. According to Schroeder, ACI was unable to stay current with all of its vendors and it was slow in making payments to China Pearl. ACI became late in its payments to either China Pearl or Guang Dong, generally making payments over six months after a product had been shipped. Beginning in 2000, due to the delays in payment, Guang Dong often notified ACI that it would withhold shipment if at least partial payments were not made. In a September 20, 2000 facsimile to Mr. Hua, the general manager at Guang Dong during the period of time ACI conducted business with the company, Davis stated that he understood "no payment, no shipment." He stated further that he would "guarantee that ACI will do it's best to effect payment" on two different "CPI invoice[s]."

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On December 4, 2001, Guang Dong filed an application for arbitration with CIETAC, claiming that ACI had failed to pay under the fourteen sales contracts.

On December 7, 2001, CIETAC sent to ACI: (1) a Notice of Arbitration requesting ACI to select arbitrators and submit its statement of defense in time, (2) the Application for Arbitration and accompanying annexes that had been filed by Guang Dong, (3) the Arbitration Rules of the Arbitration Commission, and (4) a list of arbitrators. By fax dated December 20, 2001, Guang Dong notified ACI of its selection of an arbitrator. ACI never responded to Guang Dong's fax. Furthermore, ACI never made any election as to an arbitrator. Subsequently, CIETAC received a signed return receipt indicating that the documents had been received by ACI on December 17, 2001. During discovery, ACI produced a copy of the Notice of Arbitration with a handwritten notation that it was received on December 17, 2001.

On January 15, 2002, a Notice on the Formation of Arbitration Tribunal Hearing for Arbitration Case and Notice of the Hearing for Arbitration Case were mailed to ACI. These documents were received by ACI on January 21, 2002. An attorney-in-fact was appointed to represent ACI, and an arbitration panel heard the case by default. ACI did not provide any statement to the arbitration panel during or after the hearing. Guang Dong requested an award of $205,280.77 under the fourteen sales contracts for payments in arrears plus $12,109.73 in interest on that amount. This request subsumed a previous ACI payment of $9,900 and a customs clearance fee of $29,700, which Guang Dong previously owed to ACI.

The arbitration panel's May 28, 2002 award found that Guang Dong satisfied its obligation for delivery of goods under the fourteen sales contracts. It also determined that ACI violated articles 25 and 53 of the United Nations Convention on Contracts for the International Sales of Goods and would bear the liabilities for breach of contract. The panel's decision awarded Guang Dong $205,280.77 in addition to $12,109.73 in interest. The decision also ordered ACI to pay an arbitration fee of RMB 73,973.00.

II. Procedural History

Guang Dong filed this action on August 2, 2003 to confirm the foreign arbitral award pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("New York Convention") and 9 U.S.C. s 207. ACI initially filed three counterclaims with its Answer-breach of contract, breach of the covenant of good faith and fair dealing, and equitable set-off-all dealing with the Joint Venture Agreement.

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III. Summary Judgment Standard

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IV. Discussion

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A. Confirmation of the Arbitration Award

Guang Dong first asks the Court to grant summary judgment in its favor by confirming the CIETAC award. In its May 10 Memorandum and Order Denying Plaintiffs Motion for Summary Judgment ("2005 Order"), the Court concluded that it had jurisdiction to consider this confirmation action under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("New York Convention") and 9 U.S.C. s 207. FN41 However, the Court found a genuine issue of material fact existed regarding whether the parties had a meeting of the minds sufficient to form a contract when each of the sales contracts were signed, and whether ACI was given appropriate notice of the arbitration action.

Under the New York Convention, the Court may refuse to enforce an arbitral award only under the specific grounds set forth in article V. FN42 Article V provides the following five grounds of refusal to recognize and enforce an arbitral award: (1) the parties to the agreement were under some incapacity or the agreement is not valid under the laws the parties have subjected it to; (2) the party against whom the award was invoked did not receive proper notice; (3) the award contains decisions on matters outside the scope of the arbitration agreement; (4) the composition of the arbitral authority was not in line with the agreement of the parties or was not in line with the law under which the award was made; and (5) the award is not binding on the parties, or it has been set aside by a competent authority in the country where the award was made. FN43

In addition, refusal may be appropriate if the authority in the country where confirmation is sought finds that: (1) the subject matter of the difference is not capable of settlement by arbitration under the law of that country; or (2) confirming the award would be contrary to the public policy of that country. FN44 ACI bears the burden of proving that the Court should refuse to enforce the award under one of these grounds. FN45

The burden is a heavy one, as 'the showing required to avoid summary confirmance is high.'...Given the strong public policy in favor of international arbitration, review of arbitral awards under the New York Convention "is very limited in order to avoid undermining the twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation." FN46

The Court previously decided that it must make an independent determination of the sales contracts' validity and thus, the arbitrability of the dispute. At the time of the 2005 Order, the Court found there was a genuine issue of material fact on that question. Now that extensive discovery has been conducted by the parties, ACI argues that there still exists a genuine issue of material fact about whether the parties had a direct contractual relationship that rendered the sales contracts enforceable, and thus, arbitrable. FN47

The parties appear to agree that the United Nations Convention on Contracts for the International Sale of Goods ("CISG") governs this matter. FN48 The CISG only deals with the formation of the contract for sale and with the rights and obligations of the buyer and seller. FN49 The CISG does not concern itself with the validity of the contract or any of its provisions. FN50 ACI argues that no contract was formed between itself and Guang Dong when it signed the sales contracts at issue. Article 8 of the CISG provides:

(1) For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was.

(2) If the preceding paragraph is not applicable, statements made by and conduct of a party are to be interpreted according to the understanding a reasonable person of the same kind as the other party would have had in the same circumstances.

(3) In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties. FN51

The plain language of the CISG requires the Court to evaluate a party's subjective intent, so long as the other party was aware of that intent. Otherwise, paragraph two of article 8 applies. FN52 ACI argues that despite the plain language of the sales contracts, the subjective intent of the parties was to treat these forms as mere confirmations of orders between ACI and China Pearl.

ACI argues that its subjective intent was to treat the sales contracts as confirmations and that it only intended to contract directly with China Pearl. But ACI comes forward with no evidence that Guang Dong knew of its subjective intent The evidence cited by both parties on this issue is the deposition testimony of Guang Dong's corporate representative, where he was asked if he ever told ACI that Guang Dong was going to require it to contract directly with it in 1999.

A. Somebody has, you know, talked to ACI and, otherwise, they wouldn't sign the sales contract back to us.

Q. Well, had you ever heard that ACI signed the sales contract to verify quantities of product?

A. That's not our knowledge, what we think is, this is a sales contract, it's-it's a contract, not just a verification.

Q. Okay. So who, at Guang Dong, communicated to ACI that they were going to have to start signing sales contracts in 1999 and that the whole relationship was going to be changed from where it had been for the previous seven. years?

A. That, I don't know.

Q. Okay. But it wasn't you?

A. It wasn't me.

While this testimony may be evidence that ACI was never informed directly about the change in procedure in 1999, it provides no evidence that Guang Dong was aware of this fact, or that it was aware that ACI was treating the sales contracts as verifications. To the contrary, this evidence shows a lack of knowledge on the part of Guang Dong of ACI's subjective intent. Further, ACI comes forward with no other evidence that Guang Dong agreed or acknowledged that these forms were mere confirmations of orders. Because there is no other evidence that Guang Dong was aware that ACI was treating these forms as verifications, article 8(1) is not applicable.

Because the Court is confined to Article 8(2) of the CSIG, it is to look at the objective evidence of the parties' intent. In other words, the Court must consider whether ACI's actions made its subjective intent to treat the sales contracts as mere verifications known to the understanding of a reasonable person of the same kind as the other party (i.e., Guang Dong) in the same circumstances.

First, ACI argues that although its credit terms were extended to ninety days in 1999, the substance of the relationship between ACI and Guang Dong did not change. ACI insists that it continued to contract with China Pearl and not Guang Dong for the sale of headwear, even after the credit terms were extended. In support of this contention, ACI points to the fact that it continued to send purchase orders directly to China Pearl after January 1999 and that it received an invoice from China Pearl after an order was completed by Guang Dong. ACI also points the Court to a December 1998 sales contract that is substantially similar to those involved in the arbitration and lists Guang Dong as the seller and ACI as the buyer, where Guang Dong asks ACI to confirm, sign, and fax back an order, and includes a credit term of thirty days. Guang Dong contends that the December 1998 sales contract was formed at the beginning of the period when ACI and Guang Dong began contracting directly with one another, and is not evidence that these sales contracts were historically and routinely passed between the parties as mere confirmations.

According to Guang Dong, a direct contractual relationship between itself and ACI was necessary in order to accommodate the increase in credit terms and China Pearl was simply an intermediary between the parties. Guang Dong concedes that both before and after the credit terms changed, China Pearl provided services such as receiving purchase orders, inspecting product, and handling shipping and invoicing. Guang Dong contends that before the end of 1998, Guang Dong's sales contracts were addressed to China Pearl, whereas after the end of 1998 or the beginning of 1999. Guang Dong began contracting directly with ACI.

An example of an old sales contract between ACI and China Pearl substantiates both parties' contention that, at one time, the two companies contracted directly for the sale of headwear. But ACI points this Court to no other evidence of past sales contracts between itself and China Pearl. What does exist in the record are many sales contracts between Guang Dong and ACI beginning in December 1998 that are identical in form to the fourteen sales contracts at issue in the arbitration. These contracts list Guang Dong as the seller and ACI as the buyer, contain price terms and quantities, credit terms, and arbitration clause, and the signatures of both parties.

Viewed in the light most favorable to ACI, the evidence in the record shows that it was misled by Guang Dong because although the sales contracts stated that they were between ACI and Guang Dong, they were forwarded by China Pearl, as they had been prior to the change in credit terms. Therefore, ACI believed it was contracting with China Pearl. The Court does not find this contention sufficient to create a genuine issue of material fact about whether the parties formed a contract. Such a contention requires this Court to assume that the ACI representatives did not read the sales contracts before signing them. For if they had read the contracts, it would be obvious to them that they constituted direct contracts between themselves and Guang Dong, and that they did not mention China Pearl. It is an elemental principle of contract law that "parties who sign contracts will be bound by them regardless of whether they have read them or understood them." FN55 "We live in a global economy and contracts between parties of different nationalities, and speaking different languages, are commonplace. But a party who agrees to terms in writing without understanding or investigating those terms does so at his own peril." FN56

Moreover, the weight of evidence about the parties' conduct shows that they were in a direct contractual relationship. Importantly, there are numerous communications between representatives of ACI and Guang Dong regarding money owed by ACI to Guang Dong on these contracts. In all of the communications between Davis and Mr. Hua, Davis explicitly acknowledged that ACI owed Guang Dong payment for headwear orders that Guang Dong had produced and shipped pursuant to sales contracts. Despite ACI's current position that it was not contracting with Guang Dong at the time, Davis made no reference in the emails to the fact that he believed he owed China Pearl, and not Guang Dong payment.

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The Court finds that the objective evidence of ACI's intent-the statements and conduct of ACI-could not be interpreted by a reasonable person in Guang Dong's position to be that the sales contracts constituted mere verifications of orders. The statements and conduct of ACI overwhelmingly indicate an intent to be bound by those contracts; an understanding that ACI owed Guang Dong payment for headwear orders that it produced for ACI's customers. While there is certainly evidence of a past contractual relationship between ACI and China Pearl, who would then contract with Guang Dong, there is no such evidence of this relationship extending past late 1998 aside from Davis' assertions. Instead, the evidence-the contracts themselves and the objective evidence of the parties' intent-shows a contractual relationship between ACI and Guang Dong, which included an agreement to arbitrate. Accordingly, the Court finds that ACI is unable to come forward with evidence to show that there was no meeting of the minds when the parties signed the fourteen sales contracts that were the subject of the CIETAC arbitration. Because this is the only ground upon which ACI challenges the confirmation of this award, the Court grants Guang Dong's motion for summary judgment and confirms the arbitral award by CIETAC.

B. ACI's Counterclaims

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IT IS THEREFORE ORDERED BY THE COURT that Guang Dong's Motion for Partial Summary Judgment (Doc. 126) is granted in part and denied in part. The motion is granted on Guang Dong's motion to confirm the foreign arbitral award and is denied on ACI's counterclaims. Guang Dong's Motion for Partial Summary Judgment on ACI's Counterclaim Counts XI, XII, and XIII (Doc. 170) is denied.

IT IS SO ORDERED.

FN41. The Court's holding was specific to confirmation of the award with respect to the fourteen sales contracts between the parties. The Court was clear that, to the extent Guang Dong sought to adjudicate the rights and obligations of the parties under any joint venture agreement that may have existed, the arbitration award did not apply. (Doc. 32 at 10.)

FN42.9 U.S.C. s 207; New York Convention, art. V; see, e.g., Encyclopaedia Universalis S.A. v. Encyclopaedia Britannica, Inc., 403 F.3d 85, 90 (2d Cir.2005).

FN43. New York Convention, art. V.

FN44 .Id.

FN45. Encyclopaedia Britannica, 403 F.3d at 90;Karaha Bodas Co. v. Perusahaan Pertambangan Minyak, 364 F.3d 274, 288 (5th Cir.2004); Czarina ex rel. Halvanon Ins. v. W.F. Poe Syndicate, 358 F.3d 1286, 1292-93 n. 3 (11th Cir.2004). Because Guang Dong, as the movant, does not bear the burden of proof, it will be sufficient for Guang Dong to show a lack of evidence in support of ACI's contention that summary confirmance is not appropriate.

FN46. Encyclopaedia Britannica, 403 F.3d at 90 (citations omitted) (quoting Yusuf Ahmed Alghanim & Sons v. Toys "R" Us, Inc., 126 F.3d 15, 23 (2d Cir.1997), cert. denied,522 U.S. 1111, 118 S.Ct. 1042, 140 L.Ed.2d 107 (1998)).

FN47. ACI does not pursue its prior argument that notice was insufficient under the New York Convention in its response memorandum (Doc. 133).

FN48. 15 U.S.C. app. [hereinafter "CISG"]. The CISG applies to contracts for the sale of goods when the parties' places of business are in different States and the States are contracting States. CISG art. 1(1)(a). Both China and the United States are parties to the Convention.

FN49. Id. art. 4.

FN50. Id.

FN51. Id. art. 8.

FN52. MCC-Marble Ceramic Ctr., Inc. v. Ceramica Nuova d'Agostino, S.p.A., 144 F.3d 1384, 1388 n. 11 (11th Cir.1998), cert. denied,526 U.S. 1087, 119 S.Ct. 1496, 143 L.Ed.2d 650 (1999) (explaining that only evidence of the other party's knowledge of subjective intent allows a case to fall within article 8(1) instead of 8(2)).

FN55.MCC-Marble Ceramic Ctr., Inc. v. Ceramica Nuova d'Agostino, S.p.A. 144 F.3d 1384, 1387 n. 9 (11th Cir.1998), cert. denied,526 U.S. 1087, 119 S.Ct. 1496, 143 L.Ed.2d 650 (1999).

FN56.Paper Express, Ltd. v. Pfankuch Maschinen GmbH, 972 F.2d 753, 757 (7th Cir.1992); see also Am. Heritage Life Ins. Co. v. Lang, 321 F.3d 533, 538 (5th Cir.2003); Proin S.A. v. LaSalle Bank, N.A., 223 F.Supp.2d 960, 964-65 (N.D.Ill.2002).}}

Source

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