Issues in arbitration on international sale of goods contracts

arbitration issues on international sale
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In January and April of 2013, Chinese company A issued two purchase orders to US company B. The two parties then concluded contract No. 1 and contract No. 2 based on the two purchase orders in April.

Under contract No. 1, company B was going to sell two pieces of equipment C and one piece of equipment D to company A. Under contract No. 2, company B was going to sell one piece of equipment C and two pieces of equipment D to company A. It was all agreed in the two contracts that any related dispute shall be submitted to the Shanghai International Arbitration Centre (SHIAC) for arbitration.

There were agreements on the time of delivery, terms of payment, contract language, etc., in the two contracts. Article 13 of the two contracts stipulated that: “In the case of delay delivery over 50 days, the buyer has the right to dissolve this contract. The seller shall refund all downpayments and pay additional damage that amounts to 20% of the total price.”

During the performance of contract No. 1, company B delivered the three pieces of equipment three times, separately. After company A received the equipment, it started to consult with company B about quality problems, technical standards and lack of spare parts for the equipment.

Although company B had resent the spare parts and dispatched engineers to company A, the three pieces of equipment still could not be entered into service successfully. Under contract No. 2, company B did not deliver any piece of equipment after company A paid the downpayment.

Due to the unsuccessful acceptance of equipment under contract No. 1 and the non-delivery in contract No. 2, company A sent a notice of termination to company B on 16 September 2013, returning the equipment and claiming a refund of the downpayment, damages for delayed performance under contract No. 1, and damages under contract No. 2.

With no response from company B, company A’s lawyer sent a letter to company B, repeating the above-mentioned claims, but this was rejected by company B.

Under the circumstance that the two parties could not reach an agreement, company A submitted an application for arbitration at the SHIAC, claiming a refund of downpayments and payment of damages from company B.


During the first hearing, the respondent argued that: (1) the laws of California State shall be applied in the arbitration case; (2) the respondent shall not bear the responsibility of breaching contract No. 1 because the three pieces of equipment had been delivered in time with no quality problem; and (3) the claimant has no right to claim the refund of the downpayment under contract No. 2.

After the second hearing, the respondent submitted a new written opinion in which it agreed to apply PRC law in the case.


Application of the law. The tribunal noticed that in this case, the claimant was a company registered in the PRC, and the respondent was a registered company in California state, in the US. Therefore, the case belonged to the category of a foreign-related case under the Law of the People’s Republic of China on Choice of Law for Foreign-related Civil Relationships.

At the beginning of the arbitration proceeding, since the two contracts contained no article about the application of the law, the claimant argued that PRC law should be applied because of the most significant relationship doctrine, while the respondent argued that the laws of California should be applied because the two parties had so agreed in the technical appendix of the two contracts.

After the second hearing, the two parties reached an agreement that PRC law should be applied. The tribunal confirmed the application of the law based on the parties’ agreement.

At the same time, considering that the two parties of the contracts came from China and the US, two contracting states of the UN Convention on Contracts for the International Sale of Goods (1980) (CISG), without any explicit exclusion of the convention, the rribunal deemed that CISG shall be applied in this case preferentially.

Quality of equipment. The two contracts included specific technical standards for the quality of the equipment. According to the records in the emails and minutes of meetings between the two parties, the tribunal held that the equipment delivered by the respondent did not meet the technical standards specified in the contracts, and this constituted a fundamental breach of contract. The claimant had the right to claim the return of equipment and the refund of the downpayment.

Delayed performance. In this case, the main conflict between the two parties on the issue of delayed performance was whether partial performance had been allowed. The tribunal found that it was agreed in the contracts that partial delivery was not allowed. In this regard, the tribunal supported the claimant’s request for damages for delayed performance.

In the final award, the tribunal supported all the claimant’s claims under contract No. 1 but rejected its claims for refund of the downpayment under contract No. 2, because the claimant had requested so before the latest performance date stipulated in contract No. 2.


The question of the application of the law is frequently seen in international sale of goods contract disputes. As one of the international conventions concluded by China, CISG has been applied by China’s judiciary in three ways: direct application, indirect application, and application based on agreements.

When two parties from different contracting states of CISG reach no agreement on the application of the law, whether CISG should be applied with preference has often been discussed. Article 142, paragraph 2 of the former General Principles of the Civil Law used to be the direct legal basis for Chinese courts to apply international conventions and common practice. However, the newly enacted Civil Code has not kept that article.

Lacking a law for applying international conventions, the Supreme People’s Court has released relevant normative documents and guiding cases, which include: the Circular of the Supreme People’s Court on Transmitting Certain Issues of the MOFTEC in Connection with the Implementation of United Nations Convention on Contracts for the International Sale of Goods; the Summary of the Consultive Forum on Judicial Work of Foreign-related Economy and Economy Affairs related to Hong Kong and Macau in the Coastal Regions (released in 1989); and the No.107 Supreme People Court’s Guiding Case.

The points of judgement in the No. 107 guiding case state that where parties of an international sale of goods contract come from different contracting countries of CISG, CISG shall preferentially apply to the contract. For contents that are not stipulated in CISG, the laws agreed upon by the parties shall then apply. Whenever the parties explicitly exclude the application of CISG in the contract, CISG shall not be applied.

The above-mentioned opinion has provided the legal basis for Chinese courts and arbitration institutions to deal with the application of conventions and has manifested the positive attitude of judges and arbitrators to applying CISG.

Other common issues in sale of goods contract disputes include the quality of the goods, especially when assessing such goods requires professional knowledge and high technical standards. The judges and arbitrators may decide to conduct quality appraisal in order to come to a final decision, which probably costs much money and time.

In this case, none of the parties applied for quality appraisal. The tribunal confirmed the quality problem with the equipment solely based on the contents of the emails and minutes of meetings between the two parties. Thus, it can be seen that parties should fully and carefully express their opinions during the transaction process, in order to prevent any equitable estoppel in the future.

Fan Jiayu is deputy director at the research department of the Shanghai International Arbitration Centre

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