Chemical Import Dispute with China: Buyer Rights When Goods Do Not Conform to Contract

Tribunal	CIETAC (China International Economic and Trade Arbitration Commission)
Date of Award	1996-08-16
Docket No.	CISG/1996/39
Parties	Chinese Seller (Respondent) v. Republic of Korea ( Buyer (Claimant)
Goods/Sector	Dioctyl phthalate
Key Issues	Fundamental breach; Damages; Profits, loss of; Foreseeability of damages; Cover transactions; Mitigation of loss; Interest
CISG Articles	Art. 25, 74, 75, 77, 78, 18, 35, 80

Facts

On 17 April 1995, [Seller] and [Buyer] signed the Contract, which stipulates that: - [Buyer] purchases 768 tons DOP (dioctyl phthalate) at the price of FOB Qingdao [People's Republic of China] US $2,020 per ton. - The first half of the goods (384 tons) shall be delivered in early May 1995 and the second half shall be delivered in late May 1995. - [Buyer] shall make payment by documentary letter of credit [hereinafter: L/C].

Legal Issues

This case raised the following questions under the CISG:

• Did the breach constitute a "fundamental breach" under CISG Art. 25? The tribunal assessed whether the non-performance substantially deprived the injured party of its contractual expectations — the threshold for invoking avoidance remedies.

• How should damages be calculated? The tribunal considered the concrete method (Art. 75, based on cover transactions) and the abstract method (Art. 76, based on current market price) to determine the appropriate measure of compensation.

• Were the claimed losses foreseeable at the time of contracting? Under CISG Art. 74, damages are limited to losses that the breaching party foresaw or ought to have foreseen as a possible consequence of the breach.

• Can the injured party recover lost profits? CISG Art. 74 expressly includes loss of profit in recoverable damages, subject to the foreseeability limitation.

• Did the injured party fulfill its duty to mitigate? Under CISG Art. 77, the injured party must take reasonable measures to reduce its losses. Failure to mitigate can reduce the damage award.

• Is the injured party entitled to interest on sums in arrears? Under CISG Art. 78, a party who fails to pay the price or any other sum in arrears is liable for interest, without prejudice to any claim for damages.

Practical Takeaways for International Businesses

1. Document your losses from day one. CIETAC's ability to award appropriate damages depends on the quality of evidence. Maintain contemporaneous records of all communications, market prices, and cover transactions.

2. Foreseeability limits your recovery. Under CISG Art. 74, you can only recover losses that were foreseeable at the time of contracting. Make sure your contract clearly allocates risk for consequential damages.