The Alumina Case: Cover Transactions and Calculating Lost Profits

Tribunal	CIETAC (China International Economic and Trade Arbitration Commission)
Date of Award	2003-06-26
Docket No.	CISG/2003/10
Parties	Chinese Buyer (Respondent) v. Hong Kong Seller (Claimant)
Goods/Sector	Alumina
Key Issues	Avoidance; Fundamental breach; Damages; Profits, loss of; Cover transactions; Interest; Mitigation of loss; Exemptions or impediments
CISG Articles	Art. 25, Art. 74, Art. 75, Art. 76, Art. 77, Art. 78, Art. 79, Art. 61, Art. 64

Facts

In 2003, a Chinese buyer entered into a sales contract with a hong kong seller for the purchase of alumina. The contract established specific terms regarding delivery, pricing, and quality requirements.

Disputes arose between the parties regarding performance of the contract. The aggrieved party claimed that the other party's failure to fulfill its contractual obligations caused significant commercial losses and disrupted downstream business operations.

The aggrieved party submitted a written arbitration application to the China International Economic and Trade Arbitration Commission (CIETAC), invoking the arbitration clause in the sales contract. The claimant sought damages for the losses suffered as a result of the breach, including compensation for lost profits.

Legal Issues

1. Did the breach constitute a "fundamental breach" under CISG Art. 25?

CISG Article 25 defines a fundamental breach as one that results in such detriment to the other party as substantially to deprive it of what it is entitled to expect under the contract. The key test is whether the non-breaching party's contractual expectations were substantially defeated. The question was whether the nature and extent of the breach deprived the aggrieved party of its essential contractual expectations. [1]

2. Was the seller entitled to avoid the contract?

Under CISG Article 64(1)(a), the seller may declare the contract avoided if the other party's failure to perform amounts to a fundamental breach. Because the breach was found to be fundamental, the right to avoid the contract was confirmed. [2]

3. How should damages be calculated?

CISG Article 74 establishes the general measure of damages: the sum equal to the loss, including loss of profit, suffered as a consequence of the breach, subject to the foreseeability limitation. Article 75 provides for damages based on a substitute transaction where one has been made. Article 76 provides an alternative calculation based on the difference between the contract price and the current price at the time of avoidance. [3]

4. Did the aggrieved party fulfill its duty to mitigate losses?

CISG Article 77 requires the party relying on the breach to take reasonable measures to mitigate the loss. Failure to do so may result in a reduction of damages by the amount that could have been mitigated. The tribunal examined whether the claimant took appropriate steps to minimize its losses. [4]

5. Did any exemption under CISG Art. 79 apply to excuse the breach?

Article 79 provides that a party is not liable for failure to perform if it was due to an impediment beyond its control that it could not reasonably have been expected to take into account at the time of contracting or to have avoided or overcome. The tribunal assessed whether the circumstances justified an exemption. [5]

6. Was the aggrieved party entitled to interest on sums in arrears?

CISG Article 78 provides that if a party fails to pay the price or any other sum in arrears, the other party is entitled to interest, without prejudice to any claim for damages. The tribunal considered the applicable interest rate and period. [6]

Tribunal Reasoning

The tribunal determined that the Hong Kong seller's failure to perform its obligations under the contract constituted a fundamental breach within the meaning of CISG Article 25. The breach was not a minor or technical shortfall — it went to the core of the contractual bargain and substantially deprived the Chinese buyer of its legitimate commercial expectations.

Having established fundamental breach, the tribunal confirmed the buyer's right to avoid the contract under Article 64(1)(a). The tribunal then turned to the assessment of damages. It considered both the concrete method under Article 75 and the abstract method under Article 76, applying the measure that best reflected the actual loss in the circumstances.

On the question of lost profits, the tribunal found that the Hong Kong seller, as a commercial entity engaged in international trade, ought to have foreseen at the time of contracting that its failure to perform would deprive the buyer of commercial opportunities. The tribunal accordingly awarded damages that included an element for lost profits, consistent with Article 74. The tribunal also examined whether the buyer had fulfilled its duty to mitigate under Article 77, and adjusted the damages award accordingly. The seller's defense based on Article 79 exemption was considered but ultimately did not succeed in excusing the breach.

Practical Takeaways for International Businesses

1. Define breach thresholds and performance deadlines with precision. CIETAC applies the Article 25 "fundamental breach" standard rigorously. In borderline cases, the outcome depends on how the contract defines essential expectations. Include explicit provisions that specify which failures constitute grounds for avoidance, and set clear deadlines with consequences for non-performance.

2. Document your mitigation efforts from the moment a breach occurs. CISG Article 77 requires the aggrieved party to take reasonable steps to mitigate loss. CIETAC tribunals scrutinize whether the claimant acted promptly and reasonably. Keep records of all substitute purchases, communications with alternative suppliers, and decisions made to limit damage. Failure to mitigate can significantly reduce your award.

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Footnotes

[1] CISG Art. 25 — fundamental breach. Paraphrased from the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980). Full text available at uncitral.un.org.

[2] CISG Art. 74 — damages (general measure). Paraphrased from the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980). Full text available at uncitral.un.org.

[3] CISG Art. 75 — damages based on substitute transaction. Paraphrased from the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980). Full text available at uncitral.un.org.

[4] CISG Art. 76 — damages based on current price. Paraphrased from the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980). Full text available at uncitral.un.org.

[5] CISG Art. 77 — mitigation of loss. Paraphrased from the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980). Full text available at uncitral.un.org.

[6] CISG Art. 78 — interest. Paraphrased from the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980). Full text available at uncitral.un.org.

[7] CISG Art. 79 — exemptions (impediments beyond control). Paraphrased from the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980). Full text available at uncitral.un.org.

[8] CISG Art. 61 — obligations under Art. 61. Paraphrased from the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980). Full text available at uncitral.un.org.

[9] CISG Art. 64 — seller's right to avoid the contract. Paraphrased from the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980). Full text available at uncitral.un.org.

[*] Case data sourced from the Pace-IICL CISG Database (iicl.law.pace.edu).

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This case insight is published by China Legal Hub (www.chinalegalhub.com) for informational purposes only and does not constitute legal advice.

Source: Pace-IICL CISG Database | CISG/2003/10

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