Larry_A_DiMatteo_-_International_Sales_Law_A_Global_Challenge-Cambridge_University_Press_2014

of the arbitration clause an issue of validity, which is outside the scope of the CISG pursuant to CISG Article 4.18 Therefore, Article 36 of the CCL would be the applicable law, which would recognize the buyer’s arbitration provision as binding the seller.19 In essence, Chinese law adopts the “first-shot” rule in “battle of the forms” scenario. However, if the seller had called the buyer’s attention to its arbitration provision, or the arbitration provision was handwritten and the buyer failed to object, then the seller’s arbitration clause would have been incorporated into the contract under the CISG and the CCL.

IV. Applying the CISG in China

The major objective of the CISG is to promote uniformity in international sales law. Uniform law is a unique state of legal order for addressing international business disputes. It begins with the adoption of a uniform text and hopefully is fulfilled by a relative uniformity of application. The CISG’s uniformity of text is somewhat compromised because it has been issued in six equally authentic languages. The original Chinese version is consistent with its English counterpart.20 However, some inconsistencies do exist due to the inherent problems of translation. For example, the word “substantially” is found in CISG Articles 25 and 82(1).21 “Substantially” was translated in Chinese as “ ,” which means “actually” in English. “Actually” is far from the correct meaning of the expression “substantially.” Regarding Article 25’s definition or criteria for determining fundamental breach, to deprive something substantially means to do it to a great extent, not to do it actually. For example, if the seller delivers 950 units of a product, but the contract was for the delivery of 1,000 units, then it can be said that the seller had not “actually” performed on the contract. However, the seller’s delivery of 950 units would not be considered a fundamental breach of contract because the missing fifty units do not “substantially” deprive the buyer of “what he is entitled to expect under the contract.” Under Article 82(1), if the seller commits a fundamental breach the buyer has the right to avoid the contract if the buyer can “make restitution of the goods substantially in the condition in which he received them.” An “insubstantial” deterioration in the condition of goods does not prevent the buyer from exercising its right to avoid the contract. Furthermore, Article 51(2) states that: “the buyer may declare the contract avoided in its entirety only if the failure to make delivery completely or in

18Not all arbitration clauses in standard contract are invalid. According to CCL Articles 39 and 41, if the party that provided the standard term brings it to the attention of the other party in a reasonable manner or the arbitration clause is not a “standard term,” then the term is enforceable.

19CCL Article 36 states: “Where the parties fail to make a contract in written form as provided for by laws or administrative regulations or as agreed by the parties, but a party has already performed the major obligations and the other party has accepted the performance, the contract shall be considered as formed.”

20In case of discrepancies between the various language versions of the text, the English version is generally preferred because English was the language used by the drafting committee. See Rolf Herber in Peter Schlechtriem, Commentary on the UN Convention on the International Sale of Goods (Oxford: Clarendon Press, 1998), 64.

21CISG Article 25 states that “a breach of contract committed by one party is fundamental if it esults in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract.” CISG Article 82(1) provides that “the buyer loses the right to declare the contract avoided or to require the seller to deliver substitute goods if it is impossible for him to make restitution of the goods substantially in the condition in which he received them.”

conformity with the contract amounts to a fundamental breach.” In the Chinese version “only if failure to make delivery completely” was interpreted as “ ( )

.” The Chinese expression’s English meaning is the buyer can avoid a contract “only if seller makes no delivery completely,” which is an obvious error in translation.22

These imprecise translations have not led to as many difficulties as one would expect. English and Chinese commentaries and scholarly articles are available to Chinese lawyers, judges, and arbitrators to enable them to better understand the meaning of CISG provisions, even those provisions that have not been well translated. Also, most college-educated Chinese lawyers know English and can refer to the deep English law literature on the CISG. Generally, Chinese, legal practitioners accept reasonable interpretations of the CISG, especially those interpretations put forward by UNCITRAL and well-known CISG experts. No specifically or uniquely “Chinese” approach to interpreting the CISG has been developed. This is encouraging for purposes of the uniform application of the CISG.

For this purpose, law practitioners should apply the CISG based on a review of CISG jurisprudence and related international private law rules. A review of the arbitral decisions of CIETAC is one way of assessing the state of the CISG in China. Most contractual disputes over international sale of goods involving Chinese parties are settled through arbitration. CIETAC has published four volumes23 of compilations of arbitral awards. The four books collected include 419 arbitral awards in the period from 1960 to 2006. Among them, 201 were cases relating to the international sales of goods made after 1988, or after the CISG had entered into force in China.

A survey of these 201 arbitral awards, 103 of them contained no formal opinion on the application of law. Of the 128 arbitral awards made before 1993, only twelve awards included discussion of the application of law. This illustrates the informal, chaotic nature of the arbitral awards during this earlier time period. The tribunals did not focus on applying the formal rules of law, but, instead, focused on arbitrarily determining a compromise award of the parties’ claims. Since the primary target was to reach a compromise, the formal rules of law were viewed as a hindrance to that objective and were mostly ignored.

The content of a Chinese arbitral award consists of three parts: finding of facts, the opinion, and the decision. As noted above, most opinions contain inadequate juridical analysis and reasoning. The tribunal simply determines whether a party had performed its obligations; whether there was a lack of conformity, and the appropriateness of the claims.

22Other obvious translation errors are found in Article 25, the Chinese words “ ” should be changed to “ ”; Article 3(1), “ ” should be changed to “

”; Article 1(2), “ ” should be substituted for “ ”; Article 81(2), “ ” should be substituted for “ ”.

23CIETAC, 1963–88, Compilation of Arbitral Awards on China International Economy and Trade, 1963– 1988 (Chinese People’s University Press, 1993); CIETAC, Compilation of Arbitral Awards on China International Economy and Trade, 1989–1995 (China Foreign Economy and Trade Press, 1997); CIETAC,

Compilation of Arbitral Awards on China International Economy and Trade, 1995–2002 (Law Press, 2002); CIETAC, Compilation of Arbitral Awards on China International Economy and Trade, 2002–2006 (Law Press, 2009).

In the 142 arbitral awards made after 1990, at least in 6 the tribunals wrongly decided the issue of the applicability of the CISG. The 6 cases were Shanghai Company v. U.S. Company24 (TV set case);25 U.S. Ltd. v. China Shanxi Import & Export Company (Carborundum case);26 Chinese-Foreign Joint Venture Electronic Ltd. v. U.S. Technology & Industry Company (Plated circuit equipment case);27 U.S. Company v. China Medical Company (Chondroitin sulfate case);28 China Company v. German Company (Vitamin C case);29 and China Breeding Stock Company v. U.S. Company (Imported breeding cows case).30 All the parties in these international sale cases had their places of business in CISG contracting states, and none of the contracts contained a choice of law clause excluding the application of the CISG. The CISG by virtue of its Article 1(1) was the applicable law in these cases. Some of the tribunals did not recognize its applicability, and in some cases the tribunals ignored the application of any law. However, in the Vitamin C case, the tribunal applied domestic Chinese law under the principle of it having the closest connection to the case and to the forum tribunal.

However, in China Ltd. v. Hong Kong Company (Raincoat case),31 the parties agreed that the CISG governed their contract. Hong Kong is not a contracting party of CISG and yet, the tribunal held that the parties’ choice of the CISG was a manifestation of the principle of party autonomy, and did not violate Chinese law.

Arbitral awards improved in quality and law application during the period from 2002 to 2006. Only five awards out of forty-one selected failed to reference law in their decisions. The selected arbitral decisions indicate a trend in which tribunals have recognized the CISG as governing law, as well as an increase in well-reasoned awards. There were fourteen cases or 34 percent in which the tribunal applied the CISG. Whereas the number of cases that applied the CISG from 1995 to 2002 numbered fifteen cases out of sixty-four cases or 23 percent. CIETAC’s neutrality is supported by the fact that of the cases reviewed twenty-four favored the foreign parties, and only four favored the Chinese parties.

The CIETAC tribunals have correctly applied the CISG under its Article 1(1)(a) jurisdiction. In the U.S. cotton case,32 a U.S. seller of cotton argued that the Rules of the Liverpool Cotton Exchange, rather than the CISG, was applicable law. The tribunal found no explicit agreement to apply the Liverpool Rules and, therefore, the parties had not opted out of the CISG. So the CISG governs the contract by virtue of Article 1(a). The tribunal affirmed buyer’s claim for damages as a result of seller’s delivery of defective cotton. The damages covered labor expenses for picking the defective goods, loss of import tariff paid for the portion of cotton not delivered, and the difference between the value of conforming and defective goods. But the tribunal denied the applicant’s claim

24In Chinese arbitral awards, the published cases do not disclose the real names of the parties.

25CIETAC, Compilation of Arbitral Awards on China International Economy and Trade, 1989–1995, 492–6.

26CIETAC, Compilation of Arbitral Awards on China International Economy and Trade, 1995–2002 (Law Press, 2002), 20–4.

27Id., 148–60.

28Id., 181–90.

29Id., 192–5.

30CIETAC, Compilation of Arbitral Awards on China International Economy and Trade, 2003–2006, 382–96.

31CIETAC, Compilation of Arbitral Awards on China International Economy and Trade, 1995–2002, 136–48.

32CIETAC, Compilation of Arbitral Awards on China International Economy and Trade, 2003–2006, 286–7.

for damages based on loss arising out of purchasing replacement goods. The tribunal held that the buyer’s acceptance of the defected goods and claim for a price reduction (based upon the differential in value between conforming-defective goods) precluded it from also recovering on the loss attributed to the substitute transaction.

In the Wool case,33 the tribunal confirmed that the buyer of wool, Chinese H Company, authorized a Hong Kong agent to sign three order confirmations sent by Australian DAP Company. The special clauses in the confirmations stated that all other terms and conditions are as per Chinatex’s General Terms and Conditions Governing Purchase of Wool”. Because the contracts contained no provisions about governing law, the CISG was the governing law. The tribunal denied the buyer’s excuse for not opening a letter of credit and failing to obtain an import license. It held in favor of the seller’s claim for damages based on the difference between the contract price and the market price pursuant to CISG Article 76. But the tribunal denied the applicant’s claim for interest damages.

Twenty-two of the forty-one (54 percent) CIETAC cases from 2002 to 2006 applied the CCL as applicable law. This large percentage of cases reflects the fact that many of the contesting parties had places of business in noncontracting states (or areas), such as Hong Kong,34 Taiwan, and Japan. Because China filed a reservation opting out of CISG Article 1(1)(b), the tribunal was prevented from using international private law rules in order to apply the CISG.

The modest number of CISG cases relative to the total number of international sales law cases heard in China is due to a lack of knowledge and a misunderstanding of CISG and its applicability as uniform law. The best way to ensure the use of the CISG as applicable law, especially in cases where one of the parties is from a noncontracting state, is through an express choice of law. Even an agreement to use the CISG (where one of the parties is from a noncontracting state) has been challenged by Chinese law practitioners as a validity issue to be determined under domestic law. The majority view is that such a choice of law is invalid because it violates China’s reservation relating to Article 1(1)(b). In addition, the CISG does not apply, under Article 1(1)(b), when one of the parties is from an area of a contracting state that itself is not considered as a party to the CISG. In the case of China, Hong Kong, Macau, and Taiwan would be excluded under the Article (1)(b) reservation.

Article 1(1)(b) does not always prevent the application of the CISG if one or two parties to a contract are from noncontracting states. The rules of private international law generally apply the law of the country with the closest and most real connection to the contract or transaction. This may result in the application of the national law of a contracting state consisting of domestic law or the CISG, or both. For example, parties to a contract from Brazil (noncontracting state) and Germany have agreed that German law is to apply to their contract. Under Article 1(1)(b), the CISG and German domestic law are together applicable. If Germany had made a reservation opting out of Article 1(1)(b),

33Id., 313–22.

34Ulrich G. Schroeter has argued that Hong Kong became a contracting state of the CISG upon its transfer from British to Chinese control. See Ulrich G. Schroeter, “The Status of Hong Kong and Macao under the United Nations Convention on Contracts for the International Sale of Goods,” 16 Pace Int’l L. Rev. 13 (2004). Chinese scholars regard Hong Kong as a noncontracting party to the CISG. This opinion is also supported by a French Supreme Court decision of April 2, 2008, available at http://cisgw3.law.pace.edu/ cases/080402f1.html (“CISG is not applicable to the special administrative region of Hong Kong”).

then German domestic law (BGB) would have been applicable. However, Article 1(1)(b) does not control, despite the views of some Chinese scholars, if the Brazilian and German parties expressly chose the CISG as applicable law. The principle of private autonomy underlying the CISG preempts the application of the Article 1(1)(b) reservation in such cases.

V. Case Study: Indian Iron Sand Case

The buyer, a Chinese company, agreed to purchase Indian iron sand from a Hong Kong company.35 The contract provided that the seller was to deliver twenty thousand tons of sand containing a minimum iron content of 63.5%. The sand was to be delivered in July 2005 at the price of 58.40 USD per ton CFR Shandong Rizhao port. On July 15, 2005, the date specified in the contract, the buyer opened a letter of credit in favor of seller. The letter of credit set the deadline for the shipment of the goods as August 5, 2005. In the meantime, the market price of the sand increased to 65.60 USD per ton. The seller did not ship the goods by the stated deadline. The buyer gave a notice to the seller requesting a clarification by August 31 of the seller’s intent to perform on the contract. The seller replied that the sand had been delivered to an Indian port, but was delayed because of extraordinary port congestion. The buyer informed the seller of avoidance of the contract on September 12. On that date, the price of Indian iron sand had risen to 72 USD per ton. In December 2005, the buyer submitted a written request for CIETAC arbitration. The buyer, referencing CISG Article 76 and Article 7.4.6 of the UNIDROIT Principles, made a claim of 322,000 USD as damages. This sum included lost profit based on the differential between the contract price (58.40 USD per ton) and the market price (72 USD) at the time of the contract avoidance. It also requested damages related to the costs of obtaining the letter of credit.

A. Application of Law

The tribunal recognized Hong Kong as the seller’s place of business, making it an “international” transaction. The contract did not contain a choice of law clause. According to CCL Article 126, the state law most closely connected with the contract is the applicable law. Because China is the state having the closest connection with the contract (place of settlement of the dispute and buyer’s place of business), Chinese law was recognized as the applicable law.36 The tribunal denied the buyer’s request to apply the CISG and

35CIETAC, The Compilation of Arbitral Awards on China International Economy and Trade, 2003–2006, 555–68.

36Chinese scholar Guo Wen-li examined 757 judicial decisions of the Chinese Intermediate People’s Courts involving foreign-related disputes, published through September 10, 2009. He concluded that Chinese courts have the propensity to apply the law of the place of the court in settling foreign-related disputes. Cases in which the courts applied domestic Chinese law totaled 689 out of the 757 judicial decisions. There were only eight cases in which the courts applied foreign law and that included cases applying Hong Kong or Macau law. The CISG was applied in only five cases. In one case, heard by Shan Dong Higher People’s Court in 2002, the parties were from China and France respectively. The place of performance (handing over the goods) was in Russia. The Court simply ignored the CISG and applied Chinese domestic contract law. The propensity to apply the law of the forum is also seen in CIETAC arbitrations. See Guo Wen-li, “Empirical Analysis on the Problems in the Foreign-involved Civil and Commercial Trial in China: According to 757 Judgments,” 5 Present Day Law Science 17 (2010).

UNIDROIT Principles to the case. Chinese domestic law applied because Hong Kong was a noncontracting state of the CISG and China had opted out of Article 1(1)(b) jurisdiction. However, as argued by the buyer, the CCL contains no provisions comparable to CISG Article 76 and Article 7.4.6 of the UNIDROIT Principles. Therefore, the tribunal was free to use these more particularized rules for calculating damage, as they did not conflict with the general provisions of the CCL. The buyer argued that the two articles could be recognized as international business usage or as a supplementary source for interpreting the CCL. The tribunal did not agree. It reasoned that Article 142 of China’s Principles of Civil Law allows the application of international usages in the absence of express provisions of Chinese law, but that Article 113 CCL (the equivalent to CISG Article 74) was sufficient for determining the damages owed.

B. Damages

The tribunal found the seller was in breach of the contract. It noted the buyer’s request for belated delivery on two occasions and its attempt to arrange carriage of the goods despite the contract containing a CFR term. Further, the seller failed to reply to buyer’s notice of avoidance, nor did it successfully negotiate a settlement of the dispute. The tribunal held that the contract was successfully avoided on September 12, 2005, pursuant to CCL Article 96.37 However, the tribunal denied the buyer’s claim to recover the difference between the contract price and the market price at the time of avoidance (13.60 USD per ton). Instead, it granted damages based on the difference between the contract price and the resale price of the goods to a domestic buyer or 2.50 USD per ton. The tribunal reasoned that:

[Buyer’s] requirement for recovering the [difference] between contract price and the current price is based on a wrong application of law. Parties to the contract did not foresee, and had no reason to foresee when the contract was formed that the price of Indian iron sand would sharply increase to 72 USD/ton within one or two months. They would have not concluded the contract if they had foreseen such an increase in price. [Buyer] has no ground for recovering the differential price as damages because of the unforeseeable [nature of the price increase], and such damage is unfair to [the breaching] party.

Thus, the tribunal did not expressly rule out the use of the contract price versus market price (at avoidance) means of determining damages, but it held that in this particular case that calculation would have amounted to damages not foreseeable at the time of contracting.

C. Discussion

CCL Article 113, like CISG Article 74, recognizes that damage recovery is restricted by the principle of foreseeability: The amount of damages the injured party is entitled to “shall not exceed the loss caused by breach of contract, and that the [breaching] party

37CCL Article 96 requires the avoiding party to notify the other party of its dissolution of the contract due to breach. The contract is dissolved when the notice reaches the other party. The other party may object to the dissolution by applying for relief from a court or arbitral institution within three months of receiving the notice of dissolution.

foresaw or ought to have foreseen at the time of conclusion of the contract.” However, the tribunal’s application of the foreseeability principle in the Indian Iron Sands case was misplaced. It failed to discuss what distinguished a foreseeable from an unforeseeable increase in the market price. It simply stated that the “parties would have not concluded the contract if they had foreseen such [an] increase in price.” In fact, market prices for such commodities are characterized by a high degree of volatility. The tribunal placed the risk of such increases on the nonbreaching party. Given the facts of this case, the decision undermines the principle of good faith. The facts show that the seller acted in bad faith in failing to respond to the buyer in a timely manner and indicating that the goods would be forthcoming, but were delayed at the port. During this period the market price continued to increase. The seller should have been held liable for the price differential for the price increase under the principle of good faith. The seller should not have received the benefit of a lack of foreseeability when its subsequent bad faith conduct caused injury to the buyer.

The majority of scholarly commentary on the foreseeability requirement “define” it as that which may reasonably be supposed to have been in the contemplation of the breaching party at the time of making the contract that the damages being claimed would have been the probable result of the breach of contract.38 According to this approach, damages caused by a fluctuation in the market price of a good or a component part is almost always a foreseeable occurrence. Thus, the differential price formulas found in CISG Articles 75 and 76 are appropriate means of determining foreseeable damages. The impact of market fluctuations in relation to the contract price provides a useful surrogate in determining the damages suffered by the nonbreaching party. Foreseeability relates to the nature or type of loss but not the amount of the loss,39 which is best measured using the differential price formulas. The exception would be when a party claims a hardship due to a fluctuating market that fundamentally alters the equilibrium of the contract.40 Calculating damages based on contract price–market price or contract price–substituted price differentials capture reasonable and foreseeable damages as mandated by the general principle of full compensation.

Some practitioners argue that loss calculated by using price differentials is best described as “expected” damages, not actual damages. For this reason, Chinese courts often do not endorse the methods of damage calculation provided in CISG Articles 75 and 76.41 As a result, the Chinese contract damages system sets a high threshold for the burden of proving damages, making the recovery of lost profits problematic, which is contrary to the general principle of full compensation found in CISG Article 74. The Chinese view of recoverable damages provides greater incentive for parties to breach their contracts.

38Hadley v. Baxendale (1854) 9 Ex. 341.

39See, UNIDROIT Principles (2010), Article 7.4.4, official comment.

40The China Contract Law contains no provision relating to hardship, but Articles 117 and 118 deal with the issue of force majeure.

41Wan Exiang, the Vice President of the China Supreme Court, pointed out the difference between CCL Article 113 and CISG Article 74. He stated at an academic salon held by the International Law Faculty, China University of Political Science and Law (December 4, 2010), that “not full loss of profit[s] can be recovered. Chinese judicial institutions are apt to take the probable business risks into account when they calculate expected loss of profit[s]. The injured party is entitled to damages for breach of contract equal to the reasonable loss, not the full loss.” See http://www.cuplfil.com/jiangzuo detail.aspinfoid=89.

Under the principle of full compensation, the aggrieved party to provide proof of loss of profits with reasonable certainty. Reasonable proof is established on the probabilities of occurrence. Reasonable proof is construed as the claimant proving by a preponderance of the evidence (more than a fifty percent probability of loss profits) that it had incurred the given loss. Alternatively stated, a degree of uncertainty as to the correctness of the amount of the damages claimed is acceptable. The breaching party should not escape liability if the claimant is unable to prove damages with absolute certainty (because the breaching party’s wrongful act is partially the cause of the difficulty of proof problem). The CISG Advisory Council’s opinion on the “Calculation of Damages” states that: “Courts impose the risk of uncertainty on the breaking party whose breach gave rise to the uncertainty.”42 As long as the damages being claimed are not purely speculative, then the benefit of the doubt should favor the nonbreaching party.

VI. Conclusion

China’s adoption of the CISG reflected its need to create a Western-style business law as it transitioned from a planned economic regime to a socialist market economy. The importance of adopting the CISG is symbolic, and symptomatic, of China’s rise as an import–export power. The early adoption of the CISG and consolidation of Chinese contract law in the CCL (China Contract Law) was due to China’s decision to open its country to the existing world trade regime. In sum, it needed a national business law that would be suitable for international transactions. The twenty-three year existence of the CISG in China has had a dramatic affect on Chinese legal practice. Today, it has become a familiar legal instrument for Chinese lawyers. The CISG has also substantially influenced Chinese domestic legislation. A total of forty-seven CISG Articles were incorporated into the CCL. It has been interesting to witness the blending of a Western-style law into a socialist legal system.

However, the absence of provisions in the CCL on the recovery of damages based on differential pricing (contract–market; contract–substituted goods) reveals a severe defect in the CCL’s remedy scheme.43 The CCL should be changed or interpreted to embrace the CISG’s principle of full compensation. This failure to provide full compensatory damages in Chinese national contract law is likely the reason for the high rate of breach in Chinese contracting practice. Because the breaching party is not made to pay full compensatory damages, it incentivizes breach when there is even a modest change in market prices. The problem is exacerbated by the courts’ deficiency in applying the good faith duty in business transactions.44 For the purpose of recovering full damages, applying the CISG is more beneficial to the aggrieved party than the CCL. Damages aside, the CISG and the CCL are creating uniform results in China.

42CISG-AC Opinion 6, “Calculation of Damages under CISG Article 74,” comment, para. 2.4.

43Recovery of damages based on price differentials is recognized in the CISG (Articles 75 and 76); “Principle of European Contract Law” (Articles 9-506 and 9-507); and by the UNIDROIT Principles of International Commercial Contracts (Articles 7.4.5 and 7.4.6).

44For statistics on the value the contracts in dispute and performance rates, see China Administrative Bureau for Industry and Commerce at http://www.caijing.com.cn/2008–03–10/100051613.html. (“Withholding payment is a frequent tactic used in China to force price negotiations. A contract is not an unchangeable bible for Chinese companies. Contracts are not viewed in China with the same sort of legal sanctity that they receive in most developed countries.”). See Andrew Galbraith and Jason Dean, “In China, Some Firms Defy Business Norms,” Wall Street Journal (September 6, 2011).