The claimant in this case is a Chinese company making beverages and related food products in the field of biotechnology, while the respondent is a Vietnamese company that produces and sells food raw materials. In May 2018, the claimant entered into a sales contract with the respondent, which agreed to supply honey aloe vera fruit capsules in accordance with the sample standards confirmed in writing by both parties.

The parties had clearly agreed on the subject matter, price, quality, performance period, packaging and acceptance standards of the goods in the contract and its annexes, with a clause providing that all disputes arising from or connected to the contract be referred to the Shanghai International Arbitration Centre (SHIAC).It is worth noting that article 11 of the contract provides that if the seller does not reply within 15 days of the buyer’s objection on quality, it is deemed to have accepted all of the buyer’s complaints and requests for remedy.

After the contract was concluded, the claimant fulfilled its duty to pay for all the goods agreed on in two instalments. However, the fruit capsules did not meet the standards agreed on in the contract and the packaging was rusty. The claimant then sent a “receipt report” and an “inspection report” on the goods to the respondent via e-mail, in September 2018. The receipt report records details made on-site such as the quantity and packaging of the received goods.

During the on-site inspection, the claimant found the outer packaging and spray code of the goods supplied by the respondent did not meet the agreed standards of the contract. In addition, after the examination of goods, the inspection report recorded that the soluble solids, PH value, total acid and pulp content of the goods did not meet the agreed standards of the contract.

Since the respondent did not reply to the reports sent, the claimant followed up with a lawyer’s letter to the respondent in October 2018, explaining that the packaging and quality of the goods failed to conform with the contract, and making claims for compensation. Although the delivery record showed that the respondent had signed for the lawyer’s letter, the claimant did not receive any response. In view of this, the claimant filed an application for arbitration to the SHIAC, demanding the respondent refund the purchase price and compensate for the loss.

The tribunal’s view

The arbitral tribunal concluded the issues of the case as follows: Whether the goods delivered by the respondent were not of the quality required by the contract; whether the claimant’s quality objection and claims had legal and contractual basis; and how the claimant’s loss should be identified.

The tribunal first clarified the applicable law. Since both China and Vietnam have ratified the 1980 UN Convention on Contracts for the International Sale of Goods (CISG), the tribunal decided to apply it as the governing law of the case in accordance with the provisions of article 1 of the accord.

Considering that the goods were delivered to China and the claimant’s place of business was also in China, the arbitral tribunal determined that Chinese law, as the most closely connected law with the contract, should apply to matters that were out of the scope of the convention.

On this basis, the tribunal made the following analysis of the issues. First, according to the receipt and inspection reports submitted by the claimant, the arbitral tribunal found that the goods delivered by the respondent did not meet the quality standards and packaging standards required by the contract.

Second, although the convention provides for the buyer’s remedies in the event of a breach of the seller’s obligations, article 6 also provides that the parties may, subject to some conditions, exclude the application of the convention. Therefore, article 11 of the contract shall be regarded as a particular agreement between the parties on the remedy claims arising from the quality of the goods, and such an agreement does not violate the application of article 6 of the convention.

To this end, the arbitral tribunal was persuaded by the claimant’s point of view that the respondent’s failure to make any response to the claimant’s claims was deemed to be its acceptance of all the claimant’s requests for remedy, including but not limited to refunding the purchase price. The claimant’s requests accordingly had legal and contractual bases.

Third, according to articles 45.1 and 74 of the convention, if the seller fails to perform its contractual obligations, the buyer may claim for compensation from the seller for damages, including lost profits suffered as a result of its breach of contract.

After analysing the evidence provided by the claimant and its reasonableness, the tribunal held that in addition to the full amount of the goods, the insurance fee, shipping fee, tax fee and freight forwarding fee paid by the claimant were all reasonable losses of the claimant due to the respondent’s breach of the contract. At the same time, according to the applicable arbitration rules of the SHIAC in this case, the respondent should bear all the arbitration fees deposited by the claimant.

Comments

This is a typical Belt and Road Initiative (BRI) dispute in terms of international trade in goods where the arbitral tribunal accurately applied the convention. In this case, the tribunal is first required to examine the provisions of article 1 of the convention to determine whether it should be applied from the perspective of the contracting parties, and then to determine whether the goods bought and sold, as well as the manner of sale and purchase, were within the scope of the convention according to the nature of the transaction.

On the premise of the conclusion that the convention shall apply to the underlying contract, the arbitral tribunal is entitled to determine whether the parties have effectively deviated from the application of the convention according to article 6.

As far as the interpretation of article 6, which allows the parties to deviate from some of the provisions of the convention, the tribunal in this case made an accurate analysis of this article. That is, when the contractual provisions applicable to a particular matter are in conflict with the relevant provisions of the convention, it is presumed that the parties’ intention is to deviate from the provisions of the accord in respect of the particular issue, without affecting the application of convention in other regards.

This construction accurately reflects the legislative intent of the convention that the rules of international sales contracts derive primarily from party autonomy, fully respecting the centrality of party autonomy in international business activities, especially in international trade.

Within the context of the BRI, economic, trade and investment transactions between countries are frequent, and the importance of dispute resolution as well as co-ordination to avoid conflict of laws is particularly prominent. The types of transactions involved in BRI projects are growing in both variety and complexity, which will result in more frequent application of international treaties and other multilateral agreements to resolve disputes.

Chinese companies engaged in economic, trade and investment transactions are advised to further strengthen their familiarity with and understanding of international conventions, treaties and commercial transaction rules. This will help them formulate favourable provisions when drawing up contracts with business partners to protect their legal rights.

It is equally important for institutions and experts providing legal services to further strengthen their knowledge of international conventions, treaties and commercial transaction rules so as to correctly and appropriately apply the laws and provide proper resolution of transnational trade and investment disputes.

Xu Zhihe is the deputy head of the Department of Research and Information, and Li Tingwei is a senior case manager at SHIAC