Applying trade usage to resolve diamond deal disputes

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Applying trade usage to resolve diamond deal disputes, 交易习惯在钻石买卖纠纷审裁中的实践运用

The claimant, company A, is a foreign-invested company registered in China, engaging in transactions of diamonds on the Shanghai Diamond Exchange (SDE). The respondent, company B, is a Chinese company that trades in jewellery, diamonds and accessories. Between June 2013 and July 2013, company A and company B entered into five contracts for the transaction of diamonds, under which company A was the seller and company B was the buyer. During the performance of the contracts, disputes arise over the payment obligation. As the seller, company A submitted its request for arbitration to the Shanghai International Arbitration Centre (SHIAC), the venue agreed in the contracts.

In its request for arbitration, the claimant contends that after the contracts were concluded, it delivered the agreed diamonds worth a total amount of RMB953,674.97 (US$147,450) to the respondent, who then only partially paid to the claimant an amount of RMB200,000 for the diamonds. The amount of RMB753,674.97 remains outstanding and should be duly paid by the respondent.

The respondent, on the other hand, objects that the receipt for the diamonds submitted by the claimant did not bear the company stamp of the respondent, and, for the lack of sufficient evidence, the claimant had failed to prove the agreed diamonds had all been delivered to the respondent. As such, the respondent refused to pay the requested amount.

Analysis of arbitral tribunal

The arbitral tribunal hears the submissions of both parties, and finds that the issue of this case is whether or not the claimant has delivered the diamonds of the contractual quantity and value to the respondent. However, neither of the parties has presented sufficient evidence to convince the arbitral tribunal that the diamonds were delivered, or were not. Without a straightforward answer to this issue, the arbitral tribunal decides that the relevant trade usage for diamond transactions may assist the task of fact-finding.

The arbitral tribunal starts with the general business practice that, in a standard transaction for diamonds, involves the steps of:

(1) the inspection of goods;

(2) tendering;

(3) securing the deal by handshake;

(4) buyer taking possession of the goods; and

(5) buyer making the payment in agreed time. A written contract is not required in a standard transaction for diamonds.

However, due to the fact that the diamonds traded in mainland China are imported, the government has promulgated targeted policies for taxation on the transaction of diamonds. Therefore, in the view of governmental compliance, while the use of handshake in a standard transaction for diamonds is continued, a written contract is still required for the sole purpose of deducting the value-added tax.

Diamonds imported into China are placed in the custody of the SDE, after customs clearance. When a trader on the SDE intends to exhibit for sale the bonded diamonds, the trader should make a deposit at the customs agency of the SDE before taking the diamonds. Apart from the deposit, the documents containing the information of the trader, the date of exit, the quantity, the unit price and the total amount, are all required to be filed with the customs as well.

When the exhibition is completed, and the diamonds are ready to return to the SDE, the exchange should examine the information of the trader, the estimated time of arriving for the returning diamonds, and the quantity and price of the diamonds, both before and after the return.

After that, the SDE should issue the documents approving the return, and deduct the payable taxes from the deposit the trader has made. The rule with exhibition and trading at the auspices of the SDE is that the quantity of the diamonds returning to the SDE should not exceed the quantity exiting the SDE, otherwise customs may impose penalties.

Based on this analysis, the arbitral tribunal finds that since both parties are experienced traders of diamonds, they should be aware of the trade usage in their particular industry. Under the above-mentioned usage of securing the deal by handshake, the arbitral tribunal ascertains that the delivery of the diamonds was completed before the making of partial payment from the buyer, or else the deal would not have been secured, nor would the buyer make any payment.

In addition, the diamonds traded in this case are bonded and have been approved to exit the SDE. Therefore, when the seller managed to perform the contract, it would have to go through the steps introduced in the above-mentioned analysis. The arbitral tribunal goes on to conclude that the sequences of trading the diamonds between the claimant and the respondent include:

(1) the respondent selects the diamonds to purchase;

(2) the claimant and respondent enter into the contracts with the details of the diamonds selected;

(3) the claimant and respondent sign the contracts, and, on the same day, the respondent takes the selected diamonds; and

(4) the respondent makes the payment after taking the diamonds.

The arbitral tribunal then examines the customs documents submitted by the claimant and finds that the recorded data of the diamonds are compatible with those contained in the contracts. Relying on the trade usage for diamond transactions, and the fact of compatibility of the data across the documents, the arbitral tribunal determines that the claimant has delivered the diamonds of the contractual quantity and value to the respondent, who should have made the payments to the claimant, pursuant to the contracts. The respondent did not provide any evidence to show that the obligation to pay had been discharged, and as a result, the arbitral tribunal supports the claims for overdue payments and the accrued interest.

The take-away

Trade usage is an important form of modern lex mercatoria (Law Merchant), the unwritten law for business parties. The proper functioning of trade usage may lower trading costs, especially in international transactions.

Due to its unwritten form, a trade usage features great flexibility in commercial arbitration, where the parties’ freedom to contract is given respect to the largest extent. If a trade usage is included in a fundamental contract, the arbitral tribunal may rely on it to allocate the rights and obligations of the parties. In other cases that deem fit, the arbitral tribunal may discretionally rely on the trade usage to assist with its fact-finding tasks.

In the above-mentioned case, there is no document signed by the respondent that clearly records the delivery and possession of the sold diamonds, which would be commonly seen in the performance of other types of sales contracts. The arbitral tribunal deploys its expertise in the particular industry, and discretionally relies on the trade usage.

By ascertaining that the parties have secured their deal by handshake, as the usage turns out to be, the arbitral tribunal finds that the claimant has performed its contractual obligation to deliver the diamonds to the respondent. Without sufficient counter-evidence, the arbitral tribunal finds that the respondent has breached the contract by delaying payment.

The case also demonstrates the advantages of the arbitration mechanism, where the disputants may expect the industrial expertise from the arbitrators, who can make the final awards in line with the practices of parties and the industry.

Xu Zhihe is the deputy head of the Department of Research and Information, and Li Tingwei is a senior case manager at Shanghai International Arbitration Centre (SHIAC)