The Art Paper Case: Letters of Credit, Force Majeure, and Risk of Loss

Tribunal	CIETAC (China International Economic and Trade Arbitration Commission)
Date of Award	1997-06-25
Docket No.	CISG/1997/16
Parties	Chinese Buyer (Respondent) v. Korean Seller (Claimant)
Goods/Sector	Art paper
Key Issues	Usages and practices; Fundamental breach; Avoidance; Delivery; Price; Letters of credit; Passage of risk; Damages; Interest; Exemptions or impediments
CISG Articles	Art. 9, Art. 25, Art. 30, Art. 49(1), Art. 53, Art. 60, Art. 67, Art. 74, Art. 78, Art. 79

Facts

In 1997, a Chinese buyer entered into a sales contract with a korean seller for the purchase of art paper. The contract established specific terms regarding delivery, pricing, and quality requirements.

Disputes arose between the parties regarding performance under the contract. Issues related to the letter of credit, delivery obligations, and contract terms led to a breakdown in the commercial relationship, resulting in significant losses.

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 the commercial losses incurred. The respondent also filed counterclaims, which the tribunal agreed to hear together with the main claims.

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 buyer entitled to avoid the contract?

Under CISG Article 49(1)(a), the buyer 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 suffered as a consequence of the breach, subject to the foreseeability limitation. [3]

4. 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. [4]

5. When did the risk of loss pass from seller to buyer?

Under CISG Articles 66-67, the risk of loss or damage to the goods passes to the buyer at the time specified in the contract or, absent such provision, when the goods are handed over to the first carrier. The timing of risk transfer was relevant to determining liability for any loss or damage. [5]

6. Did the letter of credit issues affect the parties' obligations?

The contract required payment by letter of credit. Disputes regarding the opening, terms, or compliance of the letter of credit raised questions about whether either party's failure to meet L/C requirements constituted a breach of their contractual obligations. [6]

7. 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. [7]

Tribunal Reasoning

The tribunal determined that the Korean 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 49(1)(a). The tribunal then turned to the assessment of damages.

The tribunal assessed the damages suffered by the buyer and awarded compensation consistent with Article 74, taking into account the foreseeability limitation and the evidence presented regarding the actual losses incurred. 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. Include detailed force majeure and exemption clauses. CISG Article 79 sets a high bar for exemption from liability. If your industry is susceptible to supply disruptions, regulatory changes, or other impediments, negotiate specific force majeure provisions that go beyond the CISG default. Define what constitutes an impediment, the notice requirements, and the consequences for the contract.

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Footnotes

[1] CISG Art. 9 — usages and practices. 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. 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.

[3] CISG Art. 30 — seller's obligations. 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. 49 — buyer'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.

[5] CISG Art. 53 — buyer's obligation to pay the price. 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. 60 — buyer's obligation to take delivery. 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. 67 — passage of risk. 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. 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.

[9] 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.

[10] 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.

[*] 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/1997/16

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