Data

Date:: 00-09-2004
Country:: Arbitral Award
Number:: 0291-1
Court:: China International Economic and Trade Arbitration Commission (CIETAC)
Parties:: Unknown

Keywords

SALES CONTRACT - BETWEEN A SWISS SELLER AND A CHINESE BUYER – SILENT AS TO APPLICABLE LAW – CISG APPLICABLE AS PARTIES SITUATED IN TWO DIFFERENT CONTRACTING STATES – CISG NOT A “COMPLETE CODE” - TO BE APPLIED IN CONJUNCTION WITH OTHERWISE APPLICABLE DOMESTIC LAW (IN THE CASE AT HAND CHINESE LAW AS CHINA BEING THE PLACE OF ARBITRATION)

LIQUIDATED DAMAGES CLAUSES AND PENALTY CLAUSES NOT DEALT WITH BY CISG – GAP CANNOT BE FILLED BY REFERENCE TO ARTICLE 7.4.13 OF THE UNIDROIT PRINCIPLES – RECOURSE TO APPLICABLE DOMESTIC LAW (ARTICLE 114 OF THE CHINESE CONTRACT LAW)

DETERMINATION OF AMOUNT OF DAMAGES PAYABLE BY PARTY IN BREACH – REFERENCE TO ARTICLES 74 AND 76 CISG AND TO ARTICLE 7.4.6 OF THE UNIDROIT PRINCIPLES

Abstract

Defendant, a Swiss trading company, entered into a contract with Claimant, a Chinese steel importer, for the supply of rolled steel sheets (“the Contract”). Shortly before the agreed time of delivery Defendant informed Claimant that it would not be in a position to fulfil its contractual obligations since it had to deliver the goods to another customer in the Middle East under a contract it had previously concluded with the latter.

When Claimant commenced an arbitral proceeding requesting compensation for the losses suffered as a result of Defendant’s failure to perform, Defendant invoked a clause contained in the Contract (“the Clause”) stating that “[i]f […] the Seller cancels the present contract or fails to deliver the Goods for reasons other than Force Majeure, the Seller shall pay a penalty of 2 USD/MT to the Buyer. The Seller will pay no further claims on this account." According to Defendant the clause in question was a liquidated damages clause fixing the amount of damages that can be recovered for breach of contract, with the consequence that Claimant was not entitled to any further damages.

The Contract was silent as to the applicable law. According to the Arbitral Tribunal the Contract was governed by the CISG since the parties were situated in two different Contracting States. However, since the CISG does not constitute “a complete code”, it had to be applied in conjunction with the otherwise applicable domestic law, i.e. the law of the People’s Republic of China as the law implicitly chosen by the parties as the proper law of the Contract by agreeing that the place of arbitration was in China.

As to the merits of the case, the Arbitral Tribunal rejected Defendant’s argument according to which, although according to Article 74 CISG the party in breach was liable to pay damages covering all losses suffered by the other party as a consequence of the breach, by virtue of the Clause the parties had stipulated in advance the damages Defendant had to pay in case of breach thereby entitling Claimant to recover only that amount irrespective of whether or not it covered all the losses actually suffered by Claimant. In so doing, the Arbitral tribunal, after quoting an opinion by Professor Sieg Eiselen pointing out that the CISG deliberately does not deal with liquidated damages clauses and with penalty clauses and that, in view of the considerable differences among domestic laws in this field, the gap could not be filled by virtue of Article 7.4.13 of the UNIDROIT Principles but only by recourse to the otherwise applicable domestic law, invoked Article 114 (2) of the Chinese Contract Law according to which “[i]f the agreed breach of contract damages are lower than the losses caused, any party may request the People's Court or an Arbitral Institution to increase them […]” and concluded that in the case at hand the losses suffered by Claimant were considerably higher than the amount stipulated in the Clause. As to the exact amount of the damages to which Claimant was entitled the Arbitral Tribunal, recalling that according to Article 76 (1) CISG " [i]f the contract is avoided and there is a current price for the goods, the party claiming damages may […] recover the difference between the price fixed by the contract and the current price at the time of avoidance as well as any further damages recoverable under Article 74 […]” and that according to Article 76 (2) CISG “[f]or the purposes of the preceding paragraph, the current price is the price prevailing at the place where delivery of the goods should have been made or, if there is no current price at that place, the price at such other place as serves as a reasonable substitute, making due allowance for differences in the cost of transporting the goods", found that the Convention was unclear as to the time at which damages are to be calculated. In support of this view it quoted again an opinion by Professor Sieg Eiselen (“Neither article 74 CISG nor the UNIDROIT Principles contain an express provision about the time at which damages are to be calculated […]. However, the underlying principle is suggested by the provisions in Article 76 CISG and Article 7.4.6 of the UNIDROIT Principles dealing with the current price of goods as presumptive measure of the calculation of damages. This would suggest that damages are to be calculated at the time the action is lodged and not at the time of the breach") as well as an opinion by Professor Bruno Zeller (“In general, UNIDROIT Article 7.4.6 uses simpler language […] it would [therefore] be advantageous if the Principle were read before the counterpart provision of the CISG is applied […] CISG Article 76 and UNIDROIT Article 7.4.6 attempt to give solutions to two problems, namely, the determining of the date when the contract has been declared avoided and, secondly, the place where the current price has to be determined […]") and concluded that the relevant time for calculating the damages, i.e. the time of avoidance of the contract, had to be understood as referring to the time “when the repudiation of it by one of the parties is accepted by the other party”.

Fulltext

China International Economic and Trade
Arbitration Commission
Beijing, September 2004

Claimant AAA Steel Co Ltd of aaa, PRC
v.
Respondent BBB AG of bbb, Switzerland

PARTIAL AWARD AND REASONS THEREFOR MADE
PURSUANT TO ARTICLE 57 OF THE CIETAC RULES
(2004) CIETAC AWARD NO. 0291-1

[…]

For the sake of ease of reference and brevity, the following abbreviations are used below:
(a) China International Economic and Trade Arbitration Commission is referred to as the Arbitration Commssion;
(b) Claimant, AAA Steel Co Limited is referred to as [Buyer];
(c) Respondent, BBB AG, is referred to as [Seller];
(d) Shanghai CCC Steeling Material Co Ltd is referred to as CCC;
(e) DDD Tradings SA Brazil Nanjing Office is referred to as DDD; and
(f) The United Nations Convention on Contracts for the International Sale of Goods (Vienna Sales Convention) is referred to as CISG.

SUMMARY OF PROCEDURE

The China International Economic and Trade Arbitration Commission (hereinafter referred to as "the Arbitration Commission") accepted a dispute arising under the contract marked "CONTRACT No. 77-639 (with the Buyer's Reference No. :02HKWTJ7208069T039 and hereinafter called "the Contract") signed by and between the AAA Steel CO., Ltd. of aaa, P.R.C. (hereinafter called "the Claimant" or "[Buyer]") of the one part and BBB AG of Fischergasse 1 CH-6362 Standard, Switzerland (hereinafter called "the Respondent" or "[Seller]") of the other part. The Arbitration Commission took cognizance of the dispute based on the arbitration clause incorporated in the Contract, and the written arbitration application filed by the Claimant on December 16th, 2003. The CIETAC number of the case is R2003XXXX.
The dispute was referred to the Arbitration Commission pursuant to Clause 6 of the Contract. It states as follows:
"(1) All disputes arising out of or in connection with the present Contract including disputes on its conclusion, binding effect, amendment and termination shall be resolved by China International Economic and Trade Arbitration Commission in Beijing in accordance with its rules of arbitration.
(2) The decision shall be final and binding for both parties.
(3) Arbitration shall be held in English Language.
(4) The arbitration fees shall be born by the loosing party unless otherwise awarded by the commission."
A Notice of Arbitration was sent to the Claimant [Buyer] and the Respondent [Seller] respectively on December 30th, 2003 by the Secretariat of the Arbitration Commission. Attached to the Notice of Arbitration to the [Buyer] were the Panel of Arbitrators and CIETAC Arbitration Rules, and to the [Seller] were the Application for Arbitration submitted by the Claimant, the Panel of Arbitrators and the CIETAC Arbitration Rules.
[…]

1. [Buyer]'s Claim
[Buyer] of aaa, P.R. China, represented in this Arbitration by EEE Law Firm, claims damages from [Seller] of bbb, Switzerland, represented by FFF Lawyers, in the following amounts:
(a) Reimbursement of anticipated profit:
Average Market price (Evidence VII: Market prices on
December 13 and 23, 2002) - less contractual price and
port charge (Evidence VIII: calculation sheet) RMB 5,353,660
(b) Reimbursement of the banking service charge: RMB 19,340
(c) Reimbursement of the retaining expense: RMB 400,000
(d) Reimbursement of traveling and other cost:
(e) Reimbursement of interest up to payment of claim:
(f) Reimbursement of arbitration fee:
(g) Total: RMB 5,773,000
2. The grounds for and the basis of [Buyer]'s claim
2.1 [Buyer] claims that it and [Seller], through their respective agents, CCC and DDD, negotiated a contract for the supply of certain steel products by [Seller] to [Buyer].
2.2 A contract no. 77-639 with [Buyer] reference no. 02HKWTJ7208069T039 was concluded by an exchange of faxes on 10 and 11 September 2002. The Contract shows that its date of execution was 5 September 2002.
2.3.1 Pursuant to the Contract referred to above, [Seller] sold 5,560 MT of new produced hot rolled steel sheets in coils to [Buyer] for a total consideration of US$1,559,000.00.
2.3.2 Under the heading SPECIFICATION and the sub-heading Shipment, it is provided that shipment would be "By October 10, 2002 ex any Azov Sea and/or Black Sea Port by bulk shipment".
2.4 [Buyer], pursuant to the terms of the Contract, had a Letter of Credit no. 002LC0200895 issued in favour of [Seller] on 19 September 2002 for the purchase consideration.
2.5.1 On 22 September 2002, DDD, on behalf of [Seller], notified CCC, on behalf of [Buyer], that it would not fulfil its contractual obligations.
2.5.2 According to [Buyer], the information given to by DDD was to the following effect:
"1. [Seller] first sold the contractual cargo to the Middle East market before. Then it sold to your company in Chinese market in secret at the increased price by USD 18 per MT. But now Hong Kong GGG (producer) and client in Middle East knew its intention now, informed the Head Office of GGG, and prepared for arbitration. It can not but sold to the client in Middle East again and say sorry to you.
2. [Seller] informed our company that it would like to compensate USD 2 per MT as the opening fee occurred by your company and hope you can understand its plight situation. It will guarantee to give you preferential treatment concerning the products produced by GGG in the future.
3. We are still trying our best but maybe with little hope for it will be very difficult for [Seller] to buy the product from GGG if it had sold to you this time. It is still unreasonable to try to keep this transaction by increasing the price again.
4. One company is only the agent but not [Seller] itself. So we will try our best to cooperate with you to solve the problem ...."
[…]
2.6 On 9 October 2002, DDD informed CCC by fax that [Seller] intended returning the above letter of credit, which it ultimately did.
2.7 [Buyer], relying on the United Nations CISG as read with Chinese Contract Law, seeks an award in its favour for damages as set out in paragraph 1 above.
3. [Seller]'s defence
3.1 In paragraph 1 of [Seller]'s Statement of Facts, the Contract is admitted. [Seller] however states in paragraph 2 that [Buyer] purchased the goods for CCC. The latter company did not have an import licence, but [Buyer] did, and because of that position CCC arranged for the importation of the steel through [Buyer].
[…]
3.3 [Seller] admits that it failed to fulfil the Contract, see paragraphs 4 and 6 of its Points of Defence. [Seller] says it informed CCC, through DDD, that there was no vessel available for the shipment of goods in time to Taicang, the destination port, and that the only available vessel would have delivered the goods later than the date set in the agreement for delivery and "at a much higher freight rate than normal". [Seller] goes on to say in paragraph 4 that it offered CCC three options:
"A. To ship the goods to South China (Huangpu port);
B. To change the delivery terms to FOB and then customer could arrange for shipment by himself.
C. To cancel the Contract, return the L/C to the applicant (i.e. the Claimant) and to pay liquidated damages in accordance with Clause 7.2 of the Contract."
3.4 At a later point in time, [Seller] was informed through DDD that CCC had agreed to cancel the Contract and requested the return of the Letter of Credit which [Seller] had received.
3.5 On 9 October 2002, DDD informed CCC as to the procedure to return the Letter of Credit, after which [Seller] returned the Letter of Credit.
3.6 In paragraph 7, [Seller] says that as it did not hear further about the matter, it had no reason to believe that the Contract was not validly cancelled, and then went on to sell the goods to another buyer.
3.7 Under the heading Legal Argument:
(a) [Seller] does not accept [Buyer]'s submission that the proper law is CISG and Chinese Contract Law. [Seller] maintains that the proper law of the Contract is CISG only.

(b) [Seller] states that both it and [Buyer] are from countries which are signatories to CISG. It adds that even if both parties were not in countries that are signatories to CISG, international practice dictates that the law of Switzerland, ie the law where [Seller] carries on business, should be applied, and

(c) [Seller] points to Article 2.6.1 of the Judicial Interpretation of the PRC Foreign Related Economic Contract Law [Fa(Jing)fa(1987)No.27], in support of further argument that where the parties do not choose the laws applicable to an international purchase contract of goods, the laws of the country of where the seller has its address, at the time of the conclusion of the contract, shall be applied.
3.8 In paragraph II. The [Buyer]'s Claim for Damages Should be Set Aside, [Seller] alleges that having regard to the facts above, the Contract was cancelled by consent.
3.9.1 In paragraph III. The [Seller] Should at the Most be Liable to Pay For the Amount of Liquidated Damages as Specified in the Contract if the Tribunal Deemed the Contract had Not Been Discharged, [Seller] refers to Clause 7.2 of the Contract. This clause provides for payment of penalty and reads as follows:
"If Buyer opens an acceptable Letter of Credit as per the Contract and thereafter the Seller cancels the present contract or fails to deliver the Goods for reasons other than Force Majeure, the Seller shall pay a penalty of USD/MT 2 to the Buyer. The Seller will pay no further claims on this account."
3.9.2 [Seller] maintains that this clause is not a penalty clause but in fact a liquidated damages clause. [Seller] says that the liquidated damages (penalty) is the amount which under Article 74 limits the amount of damages that can be recovered for breach of contract. The clause relevantly says:
"Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract."
3.10 [Seller] has in any event denied each and every subheading of damages claimed by [Buyer].
4. [Seller]'s Supplementary Points of Defence
In [Seller]'s Supplementary Points of Defence, [Seller]:
[…]

(d) says in paragraph 4 that the amounts claimed by [Buyer] exceed the foreseeable loss at the time of the execution of the Contract, in the light of the fact that both parties decided that US$2.00 per MT was the most appropriate figure reflected in the Contract as damages that [Buyer] would suffer in the event of a breach of Contract.
5. [Buyer]'s Points of Reply
5.1 In [Buyer]'s Points of Reply, [Buyer] advances the following relevant contentions under the heading Statements of Facts:
[…]
(b) [Buyer] denies that it agreed to cancel the Contract.
5.2 Under the heading Legal Argument, [Buyer] advances the following contentions:
[…]
(b) It maintains that Chinese Contract Law is the proper law of the Contract, to be read with "CISG". In sub-paragraphs 1-5, [Buyer] advances its reasons for this contention, viz:
"1. The terms and conditions of this contract were negotiated, concluded, and signed through the faxes and emails of the [Buyer] and the agent of the [Seller] which is located in China even the [Seller] is not. The agent is familiar with the Chinese transaction practice and laws. The place of conclusion of this contract was actually in China.

2. The shipment port is Azov Sea and / or Black Sea port which is not in the country of the [Seller] but the destination port and final use of the contractual cargo is in China.

3. The [Seller[ is only trading company not real shipper. This can be found from the clue in the article 3.2.1 of contract mentioning that "Third party documents except for invoice and B/L's acceptable" and from faxes which said the [Seller[ bought from GGG and resold to the [Buyer].

4. The Buyer is located in China.

5. The Place of arbitration is in China."
5.3 In paragraph III. The [Seller should be responsible for all the damages other than the penalty as specified in the contract, [Buyer] says:
"There is Paragraph one of Article 114 in the Chinese Contract Law, which stipulates that 'The parties to a contract may agree that one party shall, when violating the contract, pay breach of contract damages of a certain amount in light of the breach, or may agree upon the calculating method of compensation for losses resulting from the breach of contract.'
This is the so-called liquidated damages clause in the [Seller]'s Defense.
The paragraph two of this same Article continues stipulating that: 'If the agreed breach of contract damages are lower than the losses caused, any party may request the People's Court or an Arbitral Institution to increase it; If it is excessively higher than the losses caused, any party may request the People's Court or an Arbitral Institution to make an appropriate reduction.'
So this paragraph means that any clause in the contract which contains any forms of breach of contract damages can be negotiated between both the parties to the contract. But the breach of contract damages must be fair and on the basic estimate of the actual damage, otherwise, the damage which is too lower can be increased by the Arbitral Tribunal once upon the Buyer] requests so.
So even there is liquidated damages clause in the contract just as what the [Seller] says, the Law stipulates that this amount can be increased other than what the [Seller] says that 'The [Seller] should at the Most liable for the amount of liquidated damages as specified in the contract...' for the US $11,120 is too lower and unreasonable for the following reasons:
1. It is extremely low for it even can not cover the cost of the import agent service as the [Seller] already knew that fact during conclusion of the contract not saying that there are also other fees such as bank expense for opening, the interest of deposit put in bank for opening of L/C, possible amendment fee, telephone, and potential profit earned by the [Buyer].
2. It is not reasonable and unfair as the price of almost all kinds of the steel products in Chinese market was going up then. […]
So the [Seller] should be responsible for the actual damages even there is the sentence in the contract saying that "the Seller will pay no further claims on this account."
[…]
9. Agreed list of issues
9.1 In order to further facilitate the smooth hearing of this arbitration, the Tribunal extracted the following List of Issues:
(a) […]

(b) Whether the proper law of the Contract was CISG or CISG as read with Chinese Contract Law, the relevant law of the People's Republic of China.

(c) Whether or not [Buyer] impliedly agreed to cancel the Contract when it accepted the return by [Seller] of the Letter of Credit, without protest.
[…]
(e) Whether or not clause 7.2 of the Contract is a penalty clause and, if so, whether it is void or whether that clause is in fact an agreed liquidated damages clause.

(f) Whether in either event, ie that the clause is a penalty clause or a liquidated damages clause, the damages claimed by [Buyer] falls within Article 74 of CISG.

(g) Whether or not the Arbitral Tribunal has the power to increase and/or reduce any amount of liquidated damages pursuant to Article 114 of the Chinese Contract Law.

(h) The quantum of damages [Buyer] may have suffered.

(i) Questions of interest.

(j) Costs.
[…]
11. Whether or not clause 7.2 of the Contract is a penalty clause and, if so, whether it is void or whether that clause is in fact an agreed liquidated damages clause
11.1 This is an unusual case in that ordinarily the party attacking the validity of the penalty clause is the party against whom the clause is directed. In this case, that party, ie [Seller], argues in support of clause 7.2 and [Buyer], the party who would normally seek to invoke a penalty clause, argues against it.
11.2 Article 6 of CISG says:
"The parties may exclude the application of this Convention or, subject to Article 12, derogate from or vary the effect of any of its provisions."
11.3 As held in the ICC Arbitration Award of March 1999 (Case No 9978), the validity of a penalty clause falls to be determined in accordance with the proper law of the contract which, in that case, was German law.
11.4 Sieg Eiselen, in his October 2002 article "Remarks on the Manner in which the UNIDROIT Principles of International Commercial Contracts May be Used to Interpret or Supplement Article 74 of the CISG", says in sub-paragraph n, page 5 of 21, Unidroit 74 Database Directory, in "GUIDE TO ARTICLE 74" "Use of UNIDROIT Principles to help interpret CISG Article 74", the following:
"The CISG consciously does not deal with so-called liquidated damages and penalty clauses. The framers of the Convention agreed that the validity and application of such clauses were to be dealt with in terms of the applicable legal system due to widely divergent approaches in the different legal systems, Staudinger/Magnus, Art 74, Rn 59 & 60; Honsell/Schönle Art 74, Rn 32; Witz/Salger/Lorenz, Art 74, Rn 42. Article 7.4.13 of the UNIDROIT Principles, however, is based on the validity of such clauses subject to a judicial discretion to reduce the amount where it is grossly excessive. The vagaries of private international law will therefore decide this issue and the UNIDROIT Principles cannot provide any interpretative assistance to the CISG, Russia 23 November 1994 Arbitration proceeding 251/1993, restricting the damages to the extent of the penalty clause."
11.5 In the Tribunal's view, the validity of clause 7.2 of the Contract, and the effect of that clause on the quantum of damages, is to be determined in accordance with Chinese law, which as is held elsewhere in this Partial Award, is the proper law of the Contract.
11.6 Neither of the parties' lawyers could draw the Tribunal's attention to any of the provisions in Chinese law to the effect that a penalty clause is invalid.
11.7 Mr Guiguo Wang, in his article The New Contract Law of China (2000) 15 JCL 242 at p 10, has written as follows:
"The Law permits the parties to agree liquidated damages for breach of contract. For instance, parties may fix an amount as penalty for breach of contract (Article 114 of the Contract Law. The parties concerned may also agree on a formula for calculating the amount). The liquidated damages clause becomes operational once a party expresses by words or acts not to perform the contract regardless of whether the period for performance has expired (The Contract Law, Article 108). If the penalty amount is less than the loss suffered including economic loss that is foreseeable at the conclusion of the contract, the party concerned may request the court or arbitration tribunal to raise the amount so that all losses can be covered (The Contract Law, Articles 113 and 114. The Law also provides that where the penalty amount is higher than the losses suffered, the defaulting party may request the court or arbitration tribunal to make appropriate reductions. The word appropriate clearly indicates the Law's preference for enforcing penalty clauses. Other laws may also apply in cases of breach of contract. In such cases if the other laws offer higher penalties, the party concerned may choose other laws. The Law on Consumer Protection is one such law). Penalties may also be agreed upon for delay of performance. This is new in Chinese contract practice. Under such circumstance, if any party fails to perform the contract in time, he must pay the penalty to the other party."
11.8 It is interesting to note that Mr Guiguo Wang, in his article above, seems to elide the concepts of liquidated damages on the one hand and penalties on the other. He does not distinguish between the two concepts, which are clearly distinguishable in common law systems.
11.9 A liquidated damages amount is an amount representing a genuine pre-estimate of the damages that a party to a contract will suffer in the event of a particular breach, whereas a penalty sum is not determined as any such genuine pre-estimate.
11.10.1 The Tribunal notes that the right of the parties to stipulate a penalty in a contract for its breach seems to be predicated upon "... the seriousness of the breach". This qualification seems to suggest that, under Chinese Contract Law, a penalty is only valid if it is akin to the concept of "liquidated damages" as contain in the common law systems.
11.10.2 Upon a careful reading of Article 114, it would appear as if a penalty to be valid, it must be determined "according to the seriousness of the breach."
11.11 Neither of the parties has addressed the Arbitral Tribunal on this aspect.
11.12.1 Neither party has lead any evidence on the issue as to whether or not the penalty was agreed to by the parties in accordance with the seriousness of the breach.
11.12.2 No evidence was led by either party as to the basis of how the USD/MT 2 referred to in clause 7.2 was fixed.
11.12.3 In the absence of any such evidence, the Tribunal is unable to conclude that this amount represented a genuine pre-estimate of the damages [Buyer] would suffer in the event of the non delivery of the steel. Accordingly, the Tribunal cannot come to the conclusion that clause 7.2 provided for liquidated damages. Having regard to the fact that there was no evidence as to how the amount was fixed, the Tribunal is driven to the conclusion that this amount was nothing more than a penalty.
11.12.4 But as pointed out above, there does not appear to be any clear statement in Chinese Contract Law as to whether or not a mere penalty is invalid.
11.13 In the premises, [Buyer]'s submission that clause 7.2 is invalid, as it constitutes an invalid penalty, presents certain difficulties.
11.14 Fortunately, it is not necessary for the Tribunal, in the light of the other conclusions to which the Tribunal has arrived, to make any final decision on whether clause 7.2 is invalid. For the purpose of this Partial Award and in [Seller]'s favour, the Tribunal will assume that the "penalty" provision in clause 7.2 is valid. In the premises, it is not necessary to address the detailed submissions which [Seller] has made in support of the validity of the penalty provision of clause 7.2.
[…]
13. Whether the proper law of the Contract was CISG or CISG as read with Chinese Contract Law, the relevant law of the People's Republic of China or whether or not the law of Switzerland, being the place of the address of [Seller] at the time of the execution of the Contract, together with CISG, constitutes the proper law of the Contract
13.1.1 There was a considerable debate between the parties in the documents which they submitted prior to the commencement of the hearing in regard to whether or not CISG constitutes a complete code, or whether or not CISG, together with Chinese Contract Law and/or the law of Switzerland, being the place where [Seller] had its address at the time of the conclusion of the Contract, constitutes the proper law of the Contract.
[…]
13.2.2 There is no express choice of law in the Contract, the subject matter of this dispute.
13.2.3 Both the People's Republic of China and Switzerland are signatories to CISG.
13.2.4 CISG, therefore, as part of Chinese Law becomes part of the proper law or the substantive law of the Contract.
13.3 The focus of the debate during the oral hearing was whether CISG constituted a complete code or whether or not regard had to be had thereto in conjunction with either the law of the People's Republic of China, and/or Switzerland. These matters will be dealt with in separate paragraphs below.
14. Whether or not CISG constitutes a complete code
14.1 Mr Du argues that one can only have regard to CISG and no other aspect of Chinese Law.
14.2 In the alternative, Mr Du submitted that there was a "hierarchy", ie:
(a) First, CISG;

(b) the Contract; and

(c) the law of contract of the Seller, ie Swiss law.
14.3 When pressed the point as to whether or not this was an admission that the Tribunal could have regard to some body of law other than that set out in CISG, Mr Du said that his submission above was only in the alternative, and that his principal submission was that CISG was a complete Code.
14.4 Mr Du's contention cannot possibly be correct. One has to have regard to a body of law to assist in the construction of the contractual terms where CISG is silent. Some examples of this are:
(a) Clause 2.7 refers to the passing of the risk in the goods. What is meant by the words "passing of the risk" will not be found in the Convention but by reference to some legal system, either that of the People's Republic of China or Switzerland.

(b) Clause 4.4 refers to claims being made within a number of calendar days from the date of discharge. What constitutes a calendar day has to be determined in accordance with some legal system. There is no definition of "calendar days" in CISG.

(c) Clause 7.2 refers to an acceptable letter of credit. Whether or not the Letter of Credit established by [Buyer] was acceptable is a matter of law which has to be determined in accordance with some legal systems, either Swiss or Chinese.

(d) Clause 7.4 refers to an anti dumping investigation. Again, the meaning to be ascribed to that phrase must be determined by reference to some system of law that would, in this case, either be Chinese or Swiss.
14.5 The Tribunal remains, for the reasons set out above, unpersuaded that one is bound by the four corners of the Convention, and that this Tribunal cannot refer to the Convention with the proper law of some recognized legal system.
15. Article 114 of the Chinese Contract Law
15.1 [Buyer] has drawn attention to Article 114 of the Chinese Contract Law, the relevant paragraph reads as follows:
"The parties may stipulate that in case of a breach of contract by either party a certain amount of penalty shall be paid to the other party according to the seriousness of the breach, and may also stipulate the method for calculating the sum of compensation for losses caused by the breach of contract.
If the stipulated penalty for breach of contract is lower than the loss caused by the breach, the party concerned may apply to a people's court or an arbitration institution for an increase. If the stipulated penalty for breach of contract is excessively higher than the loss caused by the breach, the party concerned may apply to a people's court or an arbitration institution for an appropriate reduction.
If the parties agree upon a penalty for the breach of contract by a delayed fulfillment, the breaching party shall, after paying the penalty for breach of contract, discharge the debts notwithstanding."
15.2 Mr Du properly admitted that Article 114 could, in the appropriate circumstances, apply to an international commercial arbitration. He however stated that it did not apply in this case, as the proper law of the arbitration clause was not Chinese law.
Mr Du very properly conceded in his written submissions of 29 July 2004 that "It is a significant and fundamental issue whether or not Article 114 of Chinese Contract Law applies to the case."
15.3 The impact of Article 114 will be dealt with more fully below.
16. Choice of the Proper Law/Substantive Law of the Contract
16.1 Under Article 126 of the Contract Law, where the contract "... is silent with respect to the applicable substantive law, the contract will be governed in accordance with the law of the country having the closest connection to the contract, i.e., the law of the country most closely associated or connected with the performance of the contract.", see Professor Jingzhou Tao, "Arbitration Law and Practice in China" paragraph 244, page 84, Kluwer Law International, The Hague.
16.2 This principle is consistent with well established authority, viz:
(a) The rule stated in Dicey and Morris, The Conflict of Laws (10th ed), is in the following terms:
Rule 145 - The term "proper law of a contract" means the system of law by which the parties intended the contract to be governed, or, where their intention is neither expressed nor to be inferred from the circumstances, the system of law with which the transaction has its closest and most real connection.
Sub-rule 1 When the intention of the parties to a contract, as to the law governing the contract, is expressed in words, this expressed intention, in general, determines the proper law of the contract.

Sub-rule 2 When the intention of the parties to a contract with regard to the law governing the contract is not expressed in words, their intention is to be inferred from the terms and nature of the contract, and from the general circumstances of the case, and such inferred intention determines the proper law of the contract.

Sub-rule 3 When the intention of the parties to a contract with regard to the law governing it is not expressed and cannot be inferred from the circumstances, the contract is governed by the system of law with which the transaction has its closest and most real connection.
(b) Sykes and Pryles, Australian Private International Law, p 547, point out that a two tier approach based on the first, with the second and third sub-rules combined, has generally been adopted by the English courts.

(c) Australian case law, see John Kaldor Fabricmaker Pty Ltd v Mitchell Cotts Freight (Aust) Pty Ltd (1990) 6 ANZ Insurance Cases 60-960 at 76,350-76,357 where the issue pertinently arose as to whether the second sub-rule exists. Brownie J, after an exhaustive analysis of the authorities held that the better view was that it did and that "the correct view is that the proper law of the contract is determined by the subjective view, or the inferred actual intention of the parties, where that inference can be drawn. Where that inference cannot be drawn, then and only then should the court go on to impute an intention to the parties, by reference to the system of law having the closest and most real connection with the transaction."

(d) Furness Withy (Aust) Pty Ltd v Metal Distributors (UK) Ltd, The Amazonia [1990] 1 Lloyds Rep 236, where the English Court of Appeal held that although the parties intended that English law should be the proper law of the charter, incorporation by reference of the Australian Sea-Carriage of Goods Act 1924 (Cth) nullified that intention and made the law of South Australia, including the aforesaid Act, the proper law of the charter containing the arbitration clause. See also Ocean Steamship Co Ltd v Queensland State Wheat Board [1941] 1 KP 402.
16.3 The arbitration clause giving rise to an implication
Under English and Australian Law, one of the most probable grounds for implying an agreement as to the substantive law applicable to the merits, is the existence of an agreement that any dispute shall be submitted to arbitration in a particular place, ie country, state or territory. In the Kaldor case the arbitration clause provided for an arbitration in London, subject to English law. Such a choice contains an implication that the law of that place should be applied as the substantive law relating to the merits of the dispute: Hamlyn & Co v Talisker Distillery [1894] AC 202 at 212-213; Kwik Hoo Tong Handel Maatschappij NV v James Finlay & Co [1927] AC 604 at 608; Mackender v Feldia AG [1967] 2 QB 590; D Rhidian Thomas, "Arbitration Agreements as Signpost of the Proper Law" [1984] Lloyd's Maritime and Commercial Law Quarterly 141; D Rhidian Thomas, Proper Law of Arbitration Agreements" [1984] Lloyd's Maritime and Commercial Law Quarterly 304.
In Compagnie d'Armememt Maritime SA v Compagnie Tunisienne de Navigation SA [1971] AC 572 it was held that this test was too high. In Tzortzis v Monark Line A/B [1968] 1 WLR 406, it was held that by choosing London as the place of the arbitration the parties impliedly selected English law as the proper law of the contract. See also Norske Atlas Insurance Co Ltd v London General Insurance Co Ltd (1927) 43 TLR 541; Naamlooze Vennootschap Handels-en-Transport Maatschappij Vulcaan v A/S J Ludwig Mowinckels Rederi [1938] 2 All ER 152 at 156; Maritime Insurance Co Ltd v Assecuranz-Union Von 1865 (1935) 52 L1 L Rep 16 at 19-20; NV Kwik Hoo Tong Handel Maatschappij v James Finlay & Co Ltd [1927] AC 604; Hellenic Steel Co v Svolamar Shipping Co Ltd; The Komninos S [1991] 1 Lloyd's Rep 370 at 376.
Although not at all conclusive, where there is an arbitration clause frequently used in a particular country, substantial weight must be accorded to that fact: Compagnie d'Armememt at 600, where Wilberforce LJ held:
An arbitration clause must be treated as an indication, to be considered together with the rest of the contract and relevant surrounding facts. Always it will be a strong indication; often, especially where there are parties of different nationality or a variety of transactions which may arise under the contract, it will be the only clear indication. But in some cases it must give way where other indications are clear.
See further Egon Oldendorff v Libera Corporation [1996] 1 Lloyd's Rep 380.
16.4 As pointed out by Fouchard Gallard Goldman On International Commercial Arbitration, Kluwer, The Hague 1999 in paragraph 1428 at p 788:
"It is important to note that, in the continental legal tradition, the choice of a place of arbitration cannot, in itself, be considered a choice of applicable law."
At p 789, the learned authors point out that:
"Contemporary international arbitration practice tends to give less importance to the choice of the seal of arbitration. In an award made in Paris in 1976 in ICC Case No. 2735, it was considered that the choice of applicable law could be inferred from the determination of the seat of the arbitration: ICC Award No. 2735 (1976), Yugloslavian seller v U.S. purchaser, 104 D.I. 947 (1977), and observations by Y. Derains. By contrast, a 1988 award made in London in ICC Case No. 5717 rightly stated, with regard to the law applicable to the merits of the case and despite an awkward reference to the "agreement to arbitrate," that:
"[t]he choice of London as the place of arbitration and English as the language of the contract does not, in itself, indicate an intention of the parties that English law should govern the validity of the agreement to arbitrate: ICC BULLETIN Vol 1, No. 2 at 22 (1990).""
[…]
16.13 In the Tribunal's opinion, there has been an implied choice by the parties of Chinese Law as the proper law of the Contract. […]
16.16.2 For the reasons set out in this paragraph, the Tribunal is of the opinion that the proper law of the Contract is the Law of the People's Republic of China.
16.16.3 And therefore, this Tribunal in determining the rights and obligations of the parties, is entitled to have regard to CISG as read with the Law of the People's Republic of China including Article 114.
[…]
23. Article 76 of CISG
23.1 The following issue is critical in regard to the finalization of this Partial Award:
What the "Current Price" of the subject goods was at the relevant port of delivery, or if there was no current price at that place, the price at such other place as serves as a reasonable substitute, making due allowance for differences in the cost of transporting the goods (Article 76(2)), at the date of the avoidance of the Contract?
23.2 Mr Tony Zhang (Zhang Zhen-an) said during the course of the oral hearing during July 2004, that his client's case for damages was under Article 76 of CISG. It is not without significance, that this was the first intimation from the legal representatives of [Buyer] of that fact, and as pointed out above, this was not the case which [Buyer] sought to make in its Application for Arbitration in which it sought damages for loss of profits.
No prior notification of the fact that [Buyer] was bringing its claim under Article had previously been made.
23.3 Article 76 reads as follows:
"(1) If the contract is avoided and there is a current price for the goods, the party claiming damages may, if he has not made a purchase or resale under article 75, recover the difference between the price fixed by the contract and the current price at the time of avoidance as well as any further damages recoverable under article 74. If, however, the party claiming damages has avoided the contract after taking over the goods, the current price at the time of such taking over shall be applied instead of the current price at the time of avoidance.

(2) For the purposes of the preceding paragraph, the current price is the price prevailing at the place where delivery of the goods should have been made or, if there is no current price at that place, the price at such other place as serves as a reasonable substitute, making due allowance for differences in the cost of transporting the goods."
23.4 In the UNIDROIT Guide to Article 76, under the heading "Use of the UNIDTROIT Principles to help interpret CISG Article 76" and the subparagraph to that article "Remarks on the manner in which the UNIDROIT Principles may be used to interpret or supplement Article 76 of the CISG" by Bruno Zeller, the first paragraph of paragraph 3 reads as follows:
"3. Calculation of Damages
CISG Article 76 and the counterpart UNITROIT Principle in essence establish a formula whereby the injured party can calculate damages where the contract has been avoided and no substitute transaction has been entered into (the Secretarial Commentary is the closest counterpart to an Official Commentary on the CISG; see ). It is established that CISG article 76 and hence UNIDROIT article 7.4.6 are only to be used if a concrete calculation of damages pursuant to CISG article 75 is not possible (Germany, Oberlandesgericht [Appellate Court] Hamm, 19. Zivilsenat, 22 September 1992, 19 U 97/91, )."
23.5 Under Article 76, the Arbitral Tribunal has to determine the current price of the goods the subject matter of the Contract "at the time of avoidance."
23.6 The phrase "at the time of avoidance" is not defined in CISG and may possibly refer to:
(a) the date when delivery of the goods should have been made and the failure to deliver took place, viz 10 October 2002;

(b) the date on which DDD informed CCC that the goods would not be delivered and DDD gave CCC the three options (whenever that date was). The date has not been proved with any degree of certainty;

(c) the date on which [Buyer] allegedly agreed to cancel the Contract. Again paragraph 5 of Mr Kenny Chen's Affidavit is referred to. What needs re-emphasizing is that [Seller] denies that Mr Chen acted as its agent and hence [Seller] may have considerable difficulty in advancing an argument that the date of the alleged agreement to cancel the Contract, as referred to in paragraph 5 of Mr Kenny Chen's Affidavit, is the relevant date.
Furthermore, [Seller] would have to prove that CCC had authority to act for [Buyer] in making any such alleged agreement.

(d) the date on which CCC and/or [Buyer] agreed to accept the return of the Letter of Credit. The Tribunal points out here that there is no acceptable evidence before the Tribunal from either Mr Chen, on behalf of DDD, and/or anyone at CCC and/or [Buyer] as to actually what happened. Was there any such agreement? What was said by whom to whom?

(e) the date of the institution of these Arbitration Proceedings, ie the date on which the application by [Buyer] for this Arbitration was made to CIETAC.
23.7 In the article by Sieg Eiselen "Remarks on the Manner in which the UNIDROIT Principles of International Commercial Contracts May Be Used to Interpret or Supplement Article 74 of the CISG" (October 2002) UNIDROIT 74, the following is stated in paragraph i.:
"Neither article 74 CISG nor the UNIDROIT Principles contain an express provision about the time at which damages are to be calculated (Staudinger/Magnus, Article 74, Rn 55; Schlechtriem/Stoll 33). However, the underlying principle is suggested by the provisions in article 76 CISG and article 7.4.6 of the UNIDROIT Principles dealing with the current price of goods as presumptive measure of the calculation of damages. This would suggest that damages are to be calculated at the time the action is lodged and not at the time of the breach."
23.8 In the same UNIDROIT article by Bruno Zeller, paragraph 4, under the heading "Current Price", reads as follows:
"4. Current Price
CISG Article 76(2) and UNIDROIT Principle 7.4.6(2) attempt to clarify the current price by tying it to the prevailing place where delivery of the goods should have been made. In general, UNIDROIT article 7.4.6 uses simpler language and condenses parts of CISG article 76 into a more readable form. It can be argued therefore that it would be advantageous if the Principle were read before the counterpart provision of the CISG is applied. It would allow the court or arbitral tribunal to get a "feeling" of what the CISG attempts to achieve.
CISG article 76 and UNIDROIT article 7.4.6 attempt to give solutions to two problems, namely, the determining of the date when the contract has been declared avoided and, secondly, the place where the current price has to be determined.
The problem of timing has been addressed and clarified at the 10th plenary meeting of the Diplomatic Conference at which the CISG was promulgated (Legislative History, 1980 Vienna Diplomatic Conference, Summary Records of Meetings of the Plenary Meetings, para. 38 et seq. (A/CONF.97/C.L.245)). The meeting minutes clearly state that the time is not the time when the party who "declared the contract avoided had for the first time the right to do so". Instead the crucial time is the "time of avoidance". This phrase was taken over by the CISG as well as the UNIDROIT Principlies. Both instruments use the same phraseology and therefore the clarification has been provided and the time is definitely not when a "Nachfrist" was granted pursuant to CISG articles 49 to 64."
23.9.1 Although not determinative of the question, the word "Avoid" is stated in the Shorter Oxford English Dictionary to include the meanings "to get rid of, put an end to".
23.9.2 Prima facie, the Tribunal has difficulty in holding that the time of avoidance is the date when the goods should have been delivered but were not delivered.
There is a clear distinction in law between the date of an act of repudiation by one party to a contract and the date of the acceptance of that repudiatory act by the other.
An act of repudiation does not bring a contract to an end unless the act of repudiation is accepted by the other party. The non delivery of the goods may be an act of repudiation (but not necessarily so - this would depend on all the circumstances), but that does not bring the contract to and end.
If the date of repudiation was intended by the framers of the Convention to be the date of avoidance, that could have been said in very simple language.
The Tribunal notices that Article 75 reads "if the contract is avoided ...". The Tribunal draws some comfort from those words in Article 75 to come to the prima facie conclusion that the word "avoidance" in Article 76 refers to the avoidance of the contract and not merely the failure to supply. There might well be an argument in favour of the proposition that the contract is only avoided when the repudiation of it by one of the parties is accepted by the other party. Until such time, the contract remains on foot and might well not be avoided.
Even where there is a repudiatory act by one party to a contract, there may be a change of mind and the contract might be fulfilled.
[…]
26. Questions of interest
26.1 Whether or not [Buyer] is entitled to claim interest on damages, if it is successful in this Arbitration, is within the discretion of the Tribunal.
26.2 The Tribunal would have been considerably more sympathetic to a claim for interest, if [Buyer] had determined for itself the proper date on which its damages were required to be assessed, and had presented its case on that basis.
26.3 However, it cannot be said that [Seller]'s actions are without fault. [Seller] has been found to be in fundamental breach of the Contract. It appears as if in order to save shipping costs and to obtain a higher price for the subject goods, it was prepared to disregard the standard of good faith that contracting parties are entitled to expect from each other.
26.4 If this Tribunal comes to the conclusion that Article 114 is to be invoked, any award from damages should carry interest at the official Chinese Bank Rate. The Tribunal would invite submissions from the parties as to that rate. The Tribunal would also award interest on the Award at the same rate.
[…]
28. Conclusions thus far
For the reasons and upon the ground set out above, the Tribunal comes to the following conclusions:
(a) There has been a fundamental breach of contract by [Seller]. The defences to [Buyer]'s claims are to be rejected except for the issue of the quantum of damages.

(b) Clause 7.2 has not been proved to be invalid.

(c) The last sentence of clause 7.2 of the Contract does not preclude the application of Article 114.

(d) [Buyer] has not waived and/or abandoned its right to claim damages.

(e) Whether or not this Tribunal will exercise its discretion under Article 114 will depend upon the current price of the goods at the time of the avoidance of the Contract by [Seller] of the Contract.

(f) The current price at the relevant date still remain open questions, and in regard to which the Tribunal will seek further evidence and/or submissions from the parties (see the further directions below).

(g) The question whether the Arbitral Tribunal will apply Article 114 will obviously depend upon the current price of the goods at the relevant date and with delivery at the relevant port or if there was no such price, then the price determined under Article 76(1).

(h) Interest on damages, if any, and costs will be determined in the final award when the Tribunal determines the remaining Article 76 questions above.

(i) Further evidence and submissions in regard to costs will be required.
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