Data

Date:: 02-09-2005
Country:: Arbitral Award
Number:
Court:: China International Economic and Trade Arbitration Commission (CIETAC)
Parties:: Unknown

Keywords

SALES CONTRACT - BETWEEN FRENCH SELLER AND CHINESE BUYER – CISG APPLICABLE ACCORDING TO ARTICLE 1(1)(A) CISG

INTEREST ON DELAYED OR FAILED PAYMENT OF PRICE – ARTICLE 78 CISG SILENT AS TO APPLICABLE RATE – SELLER’S CLAIM TO APPLY RATE ACCORDING TO ARTICLE 7.4.9 UNIDROIT PRINCIPLES “SINCE BOTH CHINA AND FRANCE ARE MEMBER STATES OF THE UNIDROIT PRINCIPLES” – ARGUMENT REJECTED BY ARBITRAL TRIBUNAL BECAUSE “THE PRINCIPLES ARE NEITHER AN INTERNATIONAL CONVENTION NOR DID THE PARTIES STIPULATE THE PRINCIPLES IN THE CONTRACT” – ARBITRAL TRIBUNAL NEVERTHELESS FREE “TO REFER TO THE PRINCIPLES” – INTEREST AWARDED ACCORDING TO SELLER’S ALLEGATION

Abstract

A French Seller and a Chinese Buyer entered into a contract for the sale of freezing facilities. During the performance of the contract a dispute regarding payment of the contract price arose. After negotiations the parties failed to reach an agreement prompting Seller to commence arbitration proceedings in accordance with the arbitration clause in the contract.

The contract was silent as to the applicable law, but in view of the fact that both China and France are Contracting States of the CISG, the Arbitral Tribunal decided that the contract was governed by the CISG in accordance with Art. 1 (1)(a) CISG.

As to the merits the Arbitral Tribunal decided in favour of Seller. It found that, while Seller had fulfilled its obligations to deliver the goods, Buyer had either paid with delay or had not paid the price for goods delivered at all, notwithstanding the fact that it had taken them over without raising any objection. As to Seller’s claim for interest on the delayed and failed payments according to Art. 78 CISG, the Arbitral Tribunal rejected Seller’ argument that the applicable rate should be determined according to Art. 7.4.9 UNIDROIT Principles “since both China and France are Member States of the UNIDROIT Principles […]”. The Arbitral Tribunal held that since “the Principles are neither an international convention nor did the parties stipulate the Principles in the Contract […] it lacked either legal or contractual grounds for the Arbitral Tribunal to rule according to the Principles.” At the same time however the Arbitral Tribunal pointed out that “[it] could refer to the Principles […]” and indeed in the case at hand “[b]ecause the parties did not stipulate the method to calculate interest on delayed payment or non-payment, [it] sustained the [Seller’s] allegation on the annual interest rate and the period accrued […]”.

Fulltext

China International Economic & Trade Arbitration Commission
CIETAC (PRC) Arbitration Award

Freezing facilities case [2 September 2005]

Translation [*] by Zheng Xie [**]

The China International Economic and Trade Arbitration Commission (hereafter, the "Arbitration Commission") accepted the case (Case number: M___) according to:

- The arbitration clause in Contract No. SJ2001-1-6129 (revised as No. J2002-I-6025 (hereafter, the “Contract”) signed by Claimant [Seller], ___ [of France], and Respondent [Buyer], ___ Auto Group [of the People’s Republic of China], on 18 September 2001; and

- The written arbitration application submitted by the [Seller] on 26 November 2004.

The Arbitration Rules of the Arbitration Commission [hereafter, the “Arbitration Rules”], which took effect on 1 October 2000, apply to this case.

[...]

FACTS

On 18 September 2001, the [Seller] and the [Buyer] signed a Contract for sales of four sets of LF____ freezing facilities and one set of LF___ freezing facility (totaling five freezing facilities). The Contract No. was SJ2001-I-6129. On 21 September, the [Seller] signed a service contract (the “Service Contract”) with ___Technology Ltd. (the “End-User”), related to the facilities under the Contract, and the Service Contract, which was numbered SJTY2001-I-6129B. The total value of the two contracts was US $608,926.00 (i.e., US $379,200.00 + US $229,726.00).
Thereafter, the parties changed the delivery term from FOB to EXW.
Article 9 of the Contract stipulated:
“The [Buyer] shall issue an irrevocable Letter of Credit (L/C) for 100% of the contract price with the [Seller] as the beneficiary. The [Seller] shall issue a Bill of Exchange for 100% of the value of the commercial invoice with the issuing bank as the Payer and for payment within 60 days after presentation, and shall provide the shipping documents stipulated in Article 10 for negotiation of the L/C.”
On 20 February 2002, the [Buyer] issued irrevocable L/C No. 002L___ for US $379,200 with the [Seller] as the beneficiary. After the parties’ agreement, the L/C was revised twice:
First, on 20 March 2002, Article 46A Clause 2 of the L/C was revised to provide for “freight collected on arrival”;
Second, on 23 May 2002, it was revised so that the total value (US $608,926.00) of the Contract and the Service Contract shall be paid under one L/C, and the expiration date of L/C and the latest date of loading were revised to 15 July 2002 and 30 June 2002, respectively.
On 4 June 2002, the [Seller] notified the [Buyer] that one of the freezing facilities was damaged, caused by an accident, and therefore, the facilities under the Contract could not be loaded before the deadline stipulated in the Contract. On 11 June 2002, with the End-User’s approval, the [Buyer] expressly agreed that the facilities could be shipped in two installments.
During the performance of the Contract, a dispute regarding payment of the contract price arose. After negotiation, the parties failed to reach an agreement; thereafter, the [Seller] filed the arbitration application.

THE [SELLER]’S POSITION

1. The first delivery of the four sets of facilities
On 29 May 2002, the [Seller] issued the first invoice in the amount of US $485,988 for the four freezing facilities. This amount was the total value of the Contract and the Service Contract, agyrt deducting the price of one freezing facility. The price for each facility includes the relevant service fee.
The four freezing facilities were loaded on board on 22 June 2002, and were delivered on 30 September 2002. Because the parties agreed on the deliveries by installments, on 8 July 2002, the [Seller] presented the first document to the designated bank, ___ Credit Bank. On 9 September 2002, the issuing bank (China ___ Bank) accepted the document, and the expiration date of Letter of Exchange was 9 December 2002. However, although the facilities had been delivered, and the document had been accepted by the issuing bank, the [Buyer] still refused to pay the price of the invoice before the expiration date of the Letter of Exchange, and held up the payment until 9 April 2003.
2. The second payment for the remaining one set of facility
On 12 September 2002, the [Seller] informed the [Buyer] that the remaining one set of facility was ready to load. On 18 September 2002, the [Buyer] accepted the condition that the payment should be made within 90 days of the acceptance of the documents. On 27 September 2002, the [Seller] issued the second invoice in the amount of US $122,938. On 3 October 2002, this facility was loaded on board, and was delivered on 19 November 2002.
On 7 November 2002, the [Seller] presented the second document under the same L/C No. 002LC___ to the designated bank. On 20 November 2002, regarding the payment of US $129,938 for the second installment, the issuing bank via SWIFT notified the designated bank that “the aforementioned document has been accepted, and the payment will be made on time. The expiration date is 13 February 2003.”
However, the [Buyer] neither made the payment on or before the expiration date nor paid thereafter. Both the [Seller] and the designated bank made numerous demands that the [Buyer] should pay the remaining price, but the [Buyer] did not respond.
On 12 March 2004, the [Seller]’s attorney send a demand letter to the [Buyer] requesting it to pay US $122,938; and alleged that if the [Buyer] failed to make the payment, the [Seller] would take any necessary measures to protect its interests.
On 22 March 2004, the [Buyer] responded by alleging:
“With respect to the payments mentioned in your certified letter, please allow us to take a few days to confirm this amount and to discuss with our bank in detailed. Our bank (China ___ Bank) and our accounting department are trying to resolve the aforementioned matter, and would make a decision on this payment probably at the end of this month.”
However, the [Buyer] did not make the payment.
3. The [Seller] made the following claims:
(1) The [Buyer] should pay US $122,938 for the freezing facility of LF ___;
(2) The [Buyer] should pay interest on the delayed payment. The interest on the first delayed payment of US $485,988 is US $6,587; the interest on the second delayed payment of US $122,938 should be calculated to the date when the second delayed payment is actually made.
(3) The [Buyer] should pay the [Seller] for the expenses and the attorneys’ fees incurred for this arbitration;
(4) The [Buyer] should pay the arbitration fee of this case.
4. Legal Grounds
(1) Jurisdiction
The [Seller] filed this arbitration based on Contract No. SJ2002-I-6025. According to the Arbitration Clause in the Contract, any dispute that arises out of the Contract shall be submitted to the Arbitration Commission for arbitration.
(2) Applicable law
Because both China and France are Contracting States of the United Nations Convention on Contracts for International Sales of Goods (CISG), CISG shall automatically apply to the Contract that is the subject of this arbitration.
(3) Claim for the contract price of one facility in the amount of US $122,938
According to Articles 53 and 59 of CISG, the [Buyer] shall pay the contract price. Article 53 of CISG provides, “The buyer must pay the price for the goods and take delivery of them as required by the contract and this Convention.” Article 59 provides, “T he buyer must pay the price on the date fixed by or determinable from the contract and this Convention without the need for any request or compliance with any formality on the part of the seller.” The fifth set of facility was loaded on 3 October 2002, and the [Buyer] and the issuing bank had already confirmed the contract price of this set of facility. Regarding this set of facility, the [Buyer] did not raise any objection. Therefore, the [Buyer] should pay the contact price for this set of facility.
(4) Claim for interest on the two delayed payments

Article 78 of CISG provide, “If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it, without prejudice to any claim for damages recoverable under article 74.” Therefore, the [Seller] requests the [Buyer] to pay interest on the delayed payments. Since both China and France are Member States of the UNIDROIT Principles of International Commercial Contracts (the “Principles”), the interest rate should be determined according to Article 7.4.9 of the Principles:

“The rate of interest shall be the average bank short-term lending rate to prime borrowers prevailing for the currency of payment at the place for payment, or where no such rate exists at that place, then the same rate in the State of the currency of payment. In the absence of such a rate at either place the rate of interest shall be the appropriate rate fixed by the law of the State of the currency of payment.”

Because the payment should be made in US dollars, the interest rate should be prevailing interest rate of the United States, i.e., the annual interest rate of 4.67% in 2002, the annual interest rate of 4.12% in 2003 and the annual interest rate of 4% in 2004.
Therefore, the [Buyer] should pay the [Seller] the following interest:
The first installment of four sets of facilities:
2002: (485,988 ÷ 365) × 23 days × 4.67%=US $1,430
2003: (485,988 ÷ 365) × 94 days × 4.12%=US $5,157
Total:US $6,587

The second installment of one set of facility:
2003: (122,938 ÷ 365) × 306 days × 4.12%=US $4,246
2004: the [Buyer] shall pay interest up to the date when the payment is actually made.
In the Agent’s Opinion submitted on the same day, the [Seller] alleged as follows:
1. The facts in this case are obvious, and the evidence is sufficient
The sales contractual relationship between the [Seller] and the [Buyer] can be proved by the Evidence 1 of the Contract and the Evidence 21 of the [Buyer]’s Responding Letter.
After signing the Contract, the [Seller] delivered the goods to the [Buyer] in two installments. The Evidence 5 proves that the [Buyer] agreed on the deliveries by installments; the Evidence 8 proves that the goods had been delivered; the Evidence 13 and 14 proves that the second installment was delivered; the Evidence 21 of the [Buyer]’s responding letter also proves the deliveries of the goods.
2. The [Seller]’s claims are based on the relevant laws
According to the relevant provisions of CISG, after accepting the goods under the Contract, the [Buyer] should have paid the contract price; if the payment was delayed, the [Buyer] should pay interest accrued due to the delay of payment. Therefore, the [Seller]’s claim should be sustained based on the relevant law.
1. Since the [Buyer] had no intent to pay the contract price, the [Seller] had to resort to legal remedy to resolve this matter; therefore, the [Seller] incurred attorneys’ fees of US $12,000. The [Seller] requests the Arbitration Tribunal to rule that the [Buyer] should bear the [Seller]’s attorneys’ fees.
After the court session, the [Seller] submitted the English Translation of the Arbitration Application in the [Seller]’s Supplementary Statements Regarding Some Relevant Issues Raised in the Court Session and provided supplementary statements on some evidence and also submitted six new pieces of evidence. In addition, the [Seller] also submitted the supplementary explanation on the parties’ modification of payment terms and the contract number. The modification of the contract number is referred to in the first part of this award, so it is not re-stated here. As to the modification of the payment term, the [Seller] explained as follows:
As stated above, on 4 June 2002, the [Seller] informed the [Buyer] that because one set of facility was damaged due to an accident, it could not be loaded on board according to the Contract; on 11 June 2002, after obtaining the End-User’s approval, the [Buyer] expressly agreed on the deliveries in two installments. Because the deliveries in two installments might cause some damages to the [Buyer], in order to avoid damages, as per the [Buyer]’s request, the [Seller] accepted the payment term of the payment by presentation of documents within 60 days. Thereafter, on 29 August 2002, the [Buyer] hoped that the [Seller] could accept the payment term of payment within 90 days of delivery of documents instead of payment within 60 days of delivery of documents as formerly accepted. Considering that the term of payment within 90 days of delivery of documents could provide convenience to the [Buyer] to pay the contract price after selling the goods to a third party and receiving the payment, the [Seller] accepted the payment term of payment within 90 days of delivery of documents as proposed by the [Buyer].

THE ARBITRATION TRIBUNAL’S OPINION

[...]

3. Applicable law

The parties did not stipulate either applicable substantive law or procedural law. According to the general principles of international private law and international trade custom, the procedural law of the arbitration place shall apply; as to the substantive law, since France and China where the [Seller]’s and the [Buyer]’s respective places of business were are Contracting States of the CISG, the Arbitration Tribunal determined that the provisions of CISG governing the rights and obligations of buyer and seller shall apply.
Whether the UNIDROIT Principles of International Commercial Rules shall apply to this case? The Arbitration Tribunal noted that the [Seller] cited the relevant articles of the Principles when calculating interest on the delayed payments. The Arbitration Tribunal held that the Principles are neither an international convention, nor did the parties stipulate the Principles in the Contract, and therefore, it lacked either legal or contractual grounds for the Arbitration Tribunal to rule according to the Principles; however, the Arbitration Tribunal could refer to the Principles.

4. The performance of the Contract

According to the [Seller]’s statements and the twenty-eight (28) pieces of evidence, the Arbitration Tribunal verified the following facts regarding the performance of the Contract:
(1) The parties did not object to the deliveries in two installments. The relevant evidence proved that the parties agreed that the payment term of payment of 100% of the value of the commercial invoice within 60 days of presentation of the letter of exchange,” was changed to payment of 100% of the value of the commercial invoice within 90 days of acceptance.”
(2) During the performance of the Contract, although the unit price was not changed, the price of one set or four sets of facilities recorded in the L/C and other documents/evidence included the corresponding price of the Service Contract.
(3) The evidence demonstrated that the first installment of four sets of facilities was loaded on board on 22 June 2002, and the issuing bank accepted the documents on September 9, and the expiration date of the letter of exchange should be 9 December as calculated based on 90 days. On 22 February 2003, the [Buyer] sent a fax to the [Seller] confirming the contract price of US $485,988 and promising to make the payment before the end of February of 2003. In fact, the [Seller]’s evidence proved that this payment was not made until 9 April 2003.
(4) The evidence showed that as to the second installment of one set of facility, the [Seller] issued an invoice in the amount of US $122,938; the goods were loaded on board on October 3 and delivered on 19 November 2002; on 7 November 2002, the [Seller] provided several documents to the designated bank showing that the goods were one set of LF___ freezing facility for the price of US $122,938. On 20 November 2002, the issuing bank notified the designated bank that the documents had been accepted, and that the payment deadline was 13 February 2003.
(5) On 12 March 2004, the [Seller]’s attorney sent a demand letter to the [Buyer] requiring that the [Buyer] pay US $122,938 for the one set of facility; on 22 March 2004, the [Buyer] responded to the demand letter confirming the transaction of the five sets of facilities, and requesting the [Seller] to allow more time to verify the contract price, and promising to respond at the end of March.
(6) No evidence or defense showed that the [Buyer] made further confirmation of the contract price or paid US $122,938 for the second installment.

5. The [Buyer]’s liability for breach

The Arbitration Tribunal held that the Contract was voluntarily established by the parties’ true intent, and was binding on both parties; therefore, the parties should perform the Contract in good faith.
In this case, the [Seller] performed its duties including delivery of the goods and the documents according to the Contract. The [Buyer] did not raise any objection as to the [Seller]’s performance including the quantity, quality, time of delivery, etc. However, the [Buyer] delayed the payment for the first installment of the goods, and did not pay for the second installment at all. The Arbitration Tribunal held that the [Buyer] was obligated to take the delivery of the goods and pay the contract price; otherwise, it violated Articles 53 and 59 of CISG. The [Buyer]’s aforementioned conduct constituted a breach of the Contract; therefore, the [Buyer] should bear the relevant liability according to the CISG.

6. The [Seller]’s claims

(1) The [Seller] requests the [Buyer] to pay the contract price of US $122,938 for the one set of LF___ freezing facility. As stated above, the [Buyer]’s non-payment of US $122,938 for the second installment constituted a breach of the Contract. The Arbitration Tribunal held that according to Article 62 of CISG: “The seller may require the buyer to pay the price, take delivery or perform his other obligations, unless the seller has resorted to a remedy which is inconsistent with this requirement.” Therefore, the [Seller] was entitled to request the [Buyer] to pay the contract price. The Arbitration Tribunal sustained this claim.
(2) The [Seller] requests the [Buyer] to pay interest on the delayed payments. According to Article 78 of CISG, “If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it, without prejudice to any claim for damages recoverable under article 74.” The Arbitration Tribunal held that the [Buyer] should pay the [Seller] interest on the delayed payment for the first installment and on the unpaid contract price of the second installment.
Because the parties did not stipulate the method to calculate interest on delayed payment or non-payment, based on the relevant background and facts of this case, the Arbitration Tribunal sustained the [Seller]’s allegation on the annual interest rate and the period accrued as follows:
The first installment of four sets of Facilities:
2002: (485,988 ÷ 365) × 23 days × 4.67%=US $1,430
2003: (485,988 ÷ 365) × 94 days × 4.12%=US $5,157
Total:US $6,587

The second installment of one set of Facility:

2003: (122,938 ÷ 365) × 306 days × 4.12%=US $4,246

2004: 122,938 × 4%=US $4,917.52

2005: The [Seller] did not allege the interest rate; according to the most preferential interest rate in 2005 (e.g., 6.5% on August 22), the Arbitration Tribunal decided that the [Buyer] should pay the [Seller] interest on US $122,938 at the annual rate of 5% from 1 January 2005 to the date when the payment is actually made.
(3) The [Seller] requests the [Buyer] to pay its attorneys’ fees and other expenses incurred due to this arbitration. In the Agent’s Opinion submitted by the [Seller], the [Seller] specified that the attorneys’ fees were US $12,000, and other expenses specified in the evidence were US $1,254.66. According to Article 59 of the Arbitration Rules and the facts of this case, the Arbitration Tribunal held that the [Buyer] should compensate the [Seller] for the attorneys’ fees and other expenses, totaling US $13,000.
(4) The [Seller] requests the [Buyer] to pay the arbitration fee. The Arbitration Tribunal held that since the dispute that is the subject of this case arose due to the [Buyer]’s breach, and most of the [Seller]’s claims were sustained, according to the Article 58 of the Arbitration Rules, the Arbitration Tribunal decided that the [Buyer] should bear the entire arbitration fee.

AWARD

In view of the above, the Arbitration Tribunal handed down the following award:
1. The [Buyer] shall pay the [Seller] US $122,938 for the contract price of the second installment of one set of LF____ freezing facility;
2. The [Buyer] shall pay the [Seller] interest in the amount of US $6,587 on the delayed payment for the four sets of facilities, and interest on the unpaid contract price of US $122,938 of the second installment of one set of facility, including US $9,163.52 from 14 February 2003 to 31 December 2004, and interest at the annual rate of 5% from 1 January 2005 to the date when the payment is actually made.
3. The [Buyer] shall compensate the [Seller] for its attorneys’ fees and other expenses incurred for this case, totaling US $13,000.
4. The [Buyer] shall pay the arbitration fee of US $6,236. The [Seller] had already pre-paid the arbitration fee of US $6,236 which was offset by the arbitration fee. Therefore, the [Buyer] should compensate the [Seller] for US $6,236.
The [Buyer] shall pay the [Seller] the above awarded amount within 30 days of this award; otherwise, interest at the annual rate of 6% should be added.
This is the final award. It takes effect when handed down.
______________________________________________________________________________________________________
FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of France is referred to as [Seller]; Respondent of the People’s Republic of China is referred to as [Buyer]. Amounts in the currency of the United States (dollars) are indicated as [US $]; amounts in the currency of the People’s Republic of China (renminbi) are indicated as [RMB].

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

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