- Arbitral Award
- CIETAC China International Economic and Trade Arbitration Commission
TERMINATION AGREEMENT FORMATION - SELLER'S MODIFIED ACCEPTANCE (REQUEST TO DRAFT TERMINATION AGREEMENT) - DOES NOT AMOUNT TO COUNTER-OFFER (ART. 19(1)(2) CISG)
A Chinese seller and an US buyer concluded a contract for the sale of steel products. In view of the seller's impossibility to deliver a substantial part of the goods, both parties agreed to enter into further negotiations in order to terminate the contract and amicably settle their dispute. The seller took the initiative and declared itself willing to pay the penalty provided for in the contract for late delivery on the condition that the buyer would discharge it from any further contractual obligation; the buyer replied it would accept this proposal provided that the seller would also bear the insurance expenses. The seller then sent a fax to the buyer whereby it (1) expressly accepted the buyer's offer and (2) asked the latter to draft a formal termination agreement. After the seller paid its penalty, however, the buyer filed an arbitration suit claiming its entitlement to the full compensation of the harm sustained (invoking Art. 19 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interests together with Art. 74 CISG): it argued that the afore-mentioned fax sent by the seller, amounted to a counter-offer which it had never accepted.
With respect to the law governing the contract, the Arbitral Tribunal stated that it would apply both the Law of the People's Republic of China on Economic Contracts Involving Foreign Interests (by virtue of the principle of closest relation with the contractual performance) and CISG (because China and the United States were both contracting countries).
The Arbitral Tribunal rejected the buyer's claim. In its view, the fax sent by the seller amounted to an acceptance of the offer made by the buyer (Art. 19 (2) CISG) rather than, as pleaded by the latter, to a counter-offer. The Arbitral Tribunal therefore concluded that the parties had reached a final agreement on the termination of the contract, whereby they had completely settled their dispute, and held that the buyer was not entitled to any compensation in addition to the contractual penalty.
On January 28, 1988. by means of international invitation to tender, the claimant entered into a sale and purchase contract no. F8870406 for steel products (the contract) with the respondent for the construction of a hydro-electricity power station. The contract stipulated that the respondent had to supply 4,860 tons of L-shaped iron bar, wire material and other steel products to the claimant for a total of US$ 1‚365,260. The price clause was CIF Mawei, and the transaction should take place before the second half of 1988.
In November 1988, the respondent delivered 718.012 tons of L-shape iron bar and the claimant paid US$205,351.43. Due to supply problems, the respondent could not deliver the remaining 4,141,988 tons of steel products and both parties agreed to terminate the contract. The claimant bought part of the steel products which the respondent failed to deliver on the market. Since the respondent failed to fulfil the contract, it paid a penalty of US$57,995.43 to the claimant.
After the termination of the contract, both parties disputed whether the respondent had resolved all the relations of rights and obligations in the contract by paying the penalty and whether the respondent still had to compensate the claimant for the loss arising from the termination of the contract. On July II, l99l, the claimant made an arbitration application alleging that:
1. In accordance with the contract, the respondent should have delivered the products before the second half of 1988. During the period of contract execution, the respondent failed to deliver all the goods within the time limit stipulated in the contract, which had constituted a breach of contract.
2. As a result of the respondent's breach of the contract the contract could not be completed and it had to be terminated. In order not to affect the construction of the hydro-electricity power station, the claimant had to buy steel products, which should have been supplied by the respondent, on the market at a price higher than the contract price. The claimant suffered from the price difference.
3. By virtue of Article 18 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interests, if the respondent breaches a contract, the claimant has a right to demand compensation from the respondent for the loss so incurred.
4. As to the amount of compensation, Article 19 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interests and Article 74 of the United Nations Convention on Contracts for the International Sale of Goods (the Convention) provided the compensation which the respondent is liable to pay for a breach of contract to compensate the claimant's loss resulting from such a breach, including the loss of profit. Furthermore, by virtue of Articles 75 and 76 of the Convention, the claimant was entitled to the difference between the contract price and the purchase price to buy substitute steel products or the difference between the contract price and the current price of the steel products which had not yet been purchased at the time the contract was terminated or a certain period thereafter.
5. Article 19 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interests and Article 74 of the United Nations Convention on Contracts for the International Sale of Goods provide that one party's obligation to compensate the loss suffered due to its breach of contract is not to exceed the loss it could possibly foresee if there was a breach, at the time the contract was made. The claimant entered into the contract with the respondent by means of international invitation to tender. The respondent went through the whole process of invitation to tender, held by the claimant, and there was no reason for the respondent not to understand the contract and that the steel products stipulated in the tender were to be used for the construction of the hydro-electricity power station in Shaxikou. Therefore. the respondent could clearly foresee that its breach would make it necessary for the claimant to purchase substitute steel products for completion of construction. Moreover, the respondent is a businessman dealing in steel products with experience and knowledge of the international and domestic market of steel products. The respondent should reasonably realise that the price for this kind of transaction is usually above the contract price. That means that the loss to the claimant from the difference between the contract price and the purchase price to buy substitute steel products, or the difference between the contract price and the current price of the steel products which had not yet been purchased, would be clear. Therefore, requesting the respondent to compensate the price difference did not exceed the possibly foreseeable loss for the breach of contract at the time the contract was made.
The claimant claimed in its arbitration application that:
1. The respondent should compensate the claimant for the price difference of the steel and wire products in the sum of Rmbl,196,907.72 as well as that of other parts of steel products in the amount of US$367,987.17.
2. The arbitration fee of this case should borne by the respondent.
The respondent argued that:
The disputes mentioned in the claimant's arbitration application have been settled. The claimant should have no right to arbitrate again. After the respondent failed to proceed with its obligation to deliver. and according to both parties' negotiation, discussion and agreement, on November 30, 1989, the respondent compensated the claimant in the total amount of US$60,142.26. Upon the claimant's receipt of this amount, the relations of rights and obligations of both parties under the contract ended. When this means of resolution was accomplished, it became legally effective. The claimant shall have no right to demand additional compensation for the same dispute.
The claimant and the respondent submitted their correspondence on the dispute.
On December 6, l988, the claimant telephoned the respondent and alleged that:
You had received the fax on November 23. Since you are not certain of your own capability to deliver, in accordance with clause 14, we have decided to terminate the contract. ... As aforementioned, you cannot fulfil the contract, we have a right in accordance with the contract to forfeit your contract performance guarantee money. Since you have not delivered the letter of guarantee, we request you to pay 10 per cent of the total amount of the undelivered goods as stipulated in the contract, which is the contract performance guarantee money, before December 3), 1988. This is to compensate our loss incurred in managing the goods mentioned in the contract. For sake of your reputation, we hope you resolve the problem as soon as possible.
On December 9, 1988, the respondent replied, which is different from claimant's case in the fax of December 6. The respondent alleged that on March 8, 1988 it had issued a letter of guarantee for contract performance through the People's Bank of China in Beijing, but as there was a mistake in the contract which the beneficiary did not affirm, the People's Bank of China cancelled the letter of guarantee on July 1‚ 1988. It also asserted that the respondent was still willing to fulfil the contract and stated that the question of penalty for breach of contract did not arise at the moment.
On December 31‚ 1988, the claimant telephoned the respondent and stated that in order to ensure the progress of the project to be on schedule, and after our careful consideration, we find that before continuing the contract, it is necessary to clarify the following points: (1) In accordance with the contract stipulations, you shall issue contract performance guarantee through the Fujian branch of the People's Bank of China. In case you cannot fulfil the contract, the guarantee money will compensate our loss. (2) As to the contract terms, except for the date of delivery that is postponed to March 3l, l989, other terms like technical requirements, quantities, quality specifications and port of destination remain unchanged and shall not be modified afterwards. As to the part undelivered (except for the 720 tons of L-shape iron-bar, in accordance with clause 11‚ you shall pay a five per cent penalty. If you can affirm these two points before January 6, 1989, it would enable us to decide whether to continue with the contract(...)
On January 4, 1989, the respondent telephoned the claimant: Despite all their efforts, it would be difficult for them to deliver the goods to Mamei Harbour within the time limit set by the claimant. In order to avoid delaying the project, it was suggested to the claimant that it exercise the right in clause 12 to rescind the contract. The respondent would immediately compensate five per cent of the undelivered goods as a penalty to terminate the rights and obligations of both parties in the contract.
In the middle of February 1989, the claimant demanded the respondent pay US$1l4.990.86 into the claimant's account on or before March 20 so as to compensate its loss. As no transfer was made by the respondent. the claimant further demanded the transfer which should be made before April 20. I 989.
On April 11, 1989, the respondent expressed its regret for the situation and its willingness to negotiate. The respondent hoped the claimant realised the shortage of steel products in the international market and that the producing countries did not fulfil the agreement to deliver. The respondent had also suffered great loss and requested the claimant to fix the penalty at five per cent in order to enable a friendly termination of the contract. At the same time, the respondent mentioned that it had several contracts with the China Technology Import and Export Company which were rescinded at live per cent of the unit price.
On April 26, 1989, the claimant replied that, (...) the contract is a legal document, which both parties had to perform strictly. In case the contract cannot be fulfilled, the contract is the basis for resolution. The means of resolution between you and the China Technology Import and Export Company can only be used as a reference.
The next day, the respondent pointed out that in accordance with clause I2 of the contract, in case the seller was late in delivery and with the buyer's consent not to deliver, the maximum compensation was five per cent.
On July 8, 1989, the claimant further demanded the respondent to pay 10 percent of the price of the undelivered goods, i.e. US$115,990.86, into the claimant's account before July 31.
On July 19, l989, the respondent restated its willingness to resolve the dispute amicably and requested the claimant to accept the five per cent suggestion. If the claimant agreed, the respondent would pay at once.
On September 23, I 989, the claimant telephoned the respondent and replied that: After due consideration, we agree to accept the five per cent penalty of the undelivered goods in a total of US$57,995.43 for your breach and failure to fulfil the contract, on the condition that you also pay for 6.824 tons of short supply in the L-shape iron-bar which you had delivered, i.e. an amount of US$2,146.83 as the insurance compensation. Or else we will follow the 10 per cent penalty as stipulated in the contract. You shall make the payment of the live per cent penalty and the more than US$2.000 of insurance compensation (i.e. a total of US$60,142.26) to the beneficiary's account in the People's Bank of China.
On September 29. 1989, the respondent agreed to the claimant's suggestion and, from then onwards, the claimant released the respondent from the past, present and future request of compensation of any nature. In the fax, the respondent proposed to the claimant to draft a formal agreement and fax it to the respondent for signature; or the claimant could sign at the space at the end of the fax and return it to the respondent to confirm. The respondent also requested the claimant to provide the English name of the recipient and would immediately transfer the amount when the claimant confirmed.
The claimant did not reply to the fax. The respondent had called the claimant and asked for a reply on November 22 and November 30. Despite the respondent's willingness and capability to accept the suggestion made by the claimant, the claimant did not give any specific instructions on payment. As the respondent approached the end of the financial year, the amount of pending compensation had to be paid. On November 30, the respondent transferred US$60, 142.26 to the claimant. The respondent cautioned the claimant to avoid any problem on receipt of the before-mentioned amount owing to invalid English name of the end recipient. Upon the claimant's receipt of this amount, the claimant and/or its user would end all its request for compensation under the contract.
On March 7, 1990, the claimant affirmed the receipt of the fax and money transferred on December 30, 1989 by the respondent. As to whether the dispute between the two parties had been resolved, the claimant is of the opinion that:
on September 29, 1989, the respondent sent a fax alleging that after the compensation, the disputes between both parties had been wholly resolved and it requested the claimant to sign to confirm. This amounted to a new offer. Since the claimant did not sign the formal resolution agreement, the two parties did not reach an agreement for resolution. The five per cent damages for breach of contract was only the penalty for late delivery. Concerning the contract rescission without delivery of goods, the respondent should further compensate the claimant's loss. The claimant demanded further compensation of five per cent as damages for breach of contract; the respondent denied such demand. Until june 1991, both parties did not reach an agreement. Thus on July 1, 1991, the claimant applied to the Arbitration Commission for arbitration.
Opinion of the Arbitration Tribunal
The claimant (buyer) issued an invitation to tender for contract no. FB870406 for a contract of sale and purchase of steel products. The goods were used for the construction of a project located at the claimant's site. In accordance with the principle of closest relation, the Law of the People's Republic of China on Economic Contracts Involving Foreign Interests shall be applicable. Furthermore, as both China and the United States are member nations of the United Nations Convention on Contracts for the International Sale of Goods. (the Convention) the stipulations of the Convention shall also be applicable.
By means of hearing this case, the arbitration tribunal is of the opinion that by paying the compensation of US$60,142.26 to the claimant the respondent had resolved the dispute over contract no. FB870406. The reasons are as follows:
1. The respondent faxed the claimant and agreed to compensate five per cent of the undelivered part of goods as penalty, i.e. US$57,995.43. and insurance compensation of US$2,146.83. On September 29, 1989, the two parties reached an agreement. That fax was a resolution suggested in response to the claimant's fax on September 29. 1989 which was an acceptance of the claimant's offer instead of a counter offer. By virtue of Article l9 of the United Nations Convention on Contracts for the International Sale of Goods ( I ) If one accepts the price of the offer or but with additions, limitations or other modifications, it is a denial to the price. It constitutes a counter offer of price. (2) However if one accepts the price with additions or reply on different conditions, and these additions or reply on different conditions do not amount to conditions which modify the price in substance, it constitutes an acceptance, as long as the offeror of the price does not object to the difference within a certain period, either orally or in writing. In case the offeror of the price does not make such objection, the terms of the contract will be based upon the terms of the offer and modifications in the notice of acceptance. The fax on September 29 which requested the claimant to confirm by signing it clearly indicated the dispute had ended as there was no real modification of the claimant's term in the fax on September 23. In addition, on the receipt of the fax, the claimant had no indication to object within a reasonable time. Therefore, the fax on September 29 did not constitute a new offer and both parties had reached an agreement on their disputes.
2. That resolution of the contract is final. There was no misunderstanding between the parties. As the claimant described in the telex on July 8, 1989, as to the rate of compensation, we, both parties, had negotiated for more than six months. Within this period, the claimant insisted on a rate of 10 per cent compensation, i.e. US$ ll5,990.86. This amount is equal to all the claims demanded by the claimant which the claimant considered to be the reasonable compensation it was entitled to. The correspondence of both parties reflected that during the course of negotiation, the claimant clearly knew that both parties were discussing the whole amount of compensation. Finally, after examination, it was agreed that, the rate of compensation was reduced to five per cent, but at the same time, the respondent had to pay US$2,146.83 as insurance compensation. It indicated that the concession given is final. It is unreasonable for the claimant to consider that such concession was the resolution for part of the disputes only.
3. Upon receipt of the fax and the compensation amount of US$ 60,142.26 transferred by the respondent on November 30, 1989, the claimant made no objection within a reasonable time. Nor did the claimant return the amount to the respondent h was only after three months, on March 7, 1990, that the claimant telephoned the respondent and raised its disputes. This period is far beyond the reasonable time in international trade practice. The claimant's act is. in effect, a retraction of the resolution on September 23, 1989.
4. The claimant demanded the claimant compensate for the price difference arising out of the purchase of substitute steel products. However, the claimant did not provide sufficient evidence to prove the existence of the loss. Besides, according to the above, the respondent had resolved the problem of non-delivery by paying compensation of US$ 60,142.26. The claimant had no right to claim the price difference.
From the above, the arbitration tribunal does not uphold the claimant's arbitration application.
The arbitration tribunal makes an award as follows:
1. The claimant's arbitration application is dismissed;
2. The arbitration fee is to borne by the claimant.
Published in English:
- M. WILL, CISG and China, Theory and Practice, Cahiers des étudiants allemandes en droit à Genève, 1999, 24.}}