(2014) Zhe Shang Wai Zhong Zi No. 48
High People’s Court of Zhejiang Province




[CLOUT Case no. 1741]

In early 2008, a Chinese seller and a Korean buyer entered into a contract for the sale and purchase of steel plates intended for ship-building. Both parties agreed that the destination port would be in India, that any disputes would be settled by an arbitral tribunal seated in Hong Kong, and that the tribunal’s decision would be binding. Subsequently, the Korean company entered into a separate contract to supply the Chinese steel plates to an Indian company. The Chinese company was aware of the latter contract. In October 2008, the Chinese seller delivered the steel plates to the Indian port. Based on a test report, the Indian company found that the steel plates were defective. In May 2009, the Korean buyer refused to accept delivery of all goods and commenced arbitration against the Chinese seller in Hong Kong. Meanwhile, arbitration took place between the Korean buyer and the Indian company in Singapore, where the arbitral tribunal found that the Korean company was obliged to pay damages to the Indian company arising from the defective steel plates. In addition, the arbitral tribunal held that the Indian company was required to store the steel plates properly and to return them to the Korean company upon settlement of the dispute between the Chinese and Korean companies. Following the Singapore tribunal’s decision, the Hong Kong tribunal held that the Chinese seller had committed a deliberate breach of contract, and as a result, the Korean buyer was under no obligation to mitigate its damages. Accordingly, the Korean buyer was entitled to compensation from the Chinese seller. However, the tribunal considered that it did not have jurisdiction to
rule on the Chinese seller’s application for the goods to be returned. In 2011, the Korean buyer applied to the first instance court in China to enforce the Singapore tribunal’s decision. The Chinese seller also sued the Korean buyer in the same court for the return of the goods. Although there was no dispute about the jurisdiction of the court over the Chinese seller’s claim, the issue arose as to whether the CISG was applicable to the case.

The court held that the CISG was indeed applicable, since China and Korea were both Contracting States to the Convention, and the application of the CISG was not excluded by the contract between the Chinese and Korean parties. The court further observed that the Hong Kong tribunal had cited the Convention in its decision, thus confirming that the CISG was applicable to this case.

Applying Articles 86 and 87 CISG, the court noted that the Korean buyer should first pay the Indian company for warehouse expenses incurred for storage of the steel plates in India, before it was entitled to compensation from the Chinese seller. As to the Chinese seller’s claim, the court reasoned that, under Chinese law, only the Korean buyer was entitled to demand the return of the goods from the Indian company, and therefore it had no jurisdiction over the claim.
Both parties appealed against the first instance decision. The issues on appeal included: whether the CISG was applicable to this case; whether the Korean buyer was obliged to return the defective steel plates to the Chinese seller; and whether the Chinese seller had to first pay the Korean buyer the warehouse expenses for storage of the steel plates in India. The appeal court held that, according to Article 81 CISG, the Chinese seller was entitled to require the Korean buyer to return the steel plates after paying for the warehouse expenses. As both parties had agreed on CFR (Cost and Freight) shipping terms, the Korean buyer was obliged to assist the Chinese seller in transferring the steel plates back to China, but the costs resulting from the transfer were to be borne by the Chinese seller. Further, according to Article 86 CISG, the
Korean company was entitled to be compensated by the Chinese seller for reasonable
expenses incurred in storing the goods in the warehouse, before assisting with the return of the goods to the Chinese seller. On appeal, the Chinese seller also claimed that the Korean buyer was obliged to pay the full contractual price of the goods, since the steel plates were damaged during their storage in the warehouse in India. The Korean buyer refused to make any payment since it considered that the steel plates delivered by the Chinese seller were defective. In this regard, the appeal court observed that any issue of reduction in compensation would involve a third party, namely, the Indian company, and was therefore an issue beyond its jurisdiction. As a
result, the first instance decision was upheld.




Case Law on Uncitral Texts (CLOUT), A/CN.9/SER.C/ABSTRACTS/189}}