Chemical Supply Dispute with China: How CISG Handles Non-Conforming Goods and Damages

Tribunal	CIETAC (China International Economic and Trade Arbitration Commission)
Date of Award	2006-04-00
Docket No.	CISG/2006/21
Parties	Chinese Buyer (Claimant) v. Republic of Korea ( Seller (Respondent)
Goods/Sector	Mono ethylene glycol
Key Issues	Fundamental breach; Avoidance; Nachfrist; Damages; Foreseeability of damages; Cover transactions; Substitute goods
CISG Articles	Art. 25, 26, 49, 63, 64, 74, 75

Facts

On 16 May 2005, the [Buyer] and Zhangjiagang Bonded Zone AAA International Chemical Trading Co., Ltd (hereinafter the "Zhangjiagang AAA") signed an "Importing Agency Agreement", in which the [Buyer] agreed to act as a foreign trading agent of Zhangjiagang AAA and be responsible to import 2,000 tons of mono ethylene glycol from the [Seller] on behalf of Zhangjiagang AAA. On 16 May 2005, the [Buyer] and the [Seller] signed three Sales Contracts (hereinafter the "Contracts") for the purchase of ...

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.

• Was the injured party entitled to avoid the contract? Under CISG Art. 49/64, avoidance requires both a fundamental breach and proper notice under Art. 26. The tribunal examined whether these preconditions were met.

• 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.

• Was a Nachfrist notice properly issued? The CISG allows the buyer to fix an additional period of time for the seller to perform. The tribunal examined whether this procedure was correctly followed.

Practical Takeaways for International Businesses

1. Define breach thresholds in your contract. CIETAC applies the Art. 25 "fundamental breach" test strictly. Explicit remedies and termination triggers reduce ambiguity and protect both parties.

2. Avoidance requires proper notice. Under CISG Art. 26, a declaration of avoidance must be communicated to the other party. Failing to give timely notice can forfeit your right to terminate, even if the breach is fundamental.