Fabric Import Dispute with China: Non-Conforming Goods and Price Reduction Under CISG

Tribunal	CIETAC (China International Economic and Trade Arbitration Commission)
Date of Award	1997-07-21
Docket No.	CISG/1997/22
Parties	Chinese Seller (Respondent) v. United States ( Buyer (Claimant)
Goods/Sector	Yam-dyed fabric
Key Issues	Fundamental breach; Avoidance; Damages; Cover transactions; Interest
CISG Articles	Art. 25, 64(1), 74, 75, 78

Facts

China's International Trade and Economic Arbitration Commission Shanghai Commission [hereafter, Shanghai Commission] accepted the present case on 21 November 1994 according to: - The arbitration clause in Contract No. 95 CZM71001 signed by Claimant [Seller], China ___ Import and Export Company, and Respondent [Buyer], US ___ Company, and - The written arbitration application submitted by [Seller] to the Shanghai Commission.

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.

• 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. 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.