CAVEAT EMPTOR: ARE DECISIONS MORE FAVOURABLE TO THE SELLER ON MATTERS RELATING TO LETTERS OF CREDIT?

Abstract

The People’s Republic of China (PRC) has long been a source of much speculation for economists and trade pundits; with its staggering population of 1,296,500,0002 it has become a force to be reckoned with. It is with China’s accession to the World Trade Organization (WTO) on December 11, 2001 that one can assess the impact and volume of trade that has taken place over the past 5 years. To put this in perspective, worldwide China is ranked third overall in merchandise import and exports in 2004.3 Also, in 2004 in the area of merchandise trade4 which consists of Agricultural products, Fuels and Mining products, and Manufactured products, China commanded a 6.46% share in the world’s total exports and 5.88% share in the world’s total imports.5 With these figures in mind, we now turn to the legal implications of this trade. It is evident to any lawyer that with such vast amounts of transactions being conducted everyday, legal disputes are almost certain to follow. The United Nations Convention on Contracts for the International Sale of Goods 1980, (hereinafter referred to as ‘CISG’ or ‘Convention’), has been in effect in China since January 1, 1988, and governs all international sale of goods transactions between contracting Member States.6 This is important given that China’s largest trading partners are: the United States, the European Union,7and the Republic of Korea. The United States, Korea, and most of the European Union Member States are contracting States under the CISG. While most scholarly material written on the CISG focuses on the decision making of national courts, this article will instead examine a decision made by the Chinese International Economic and Trade Arbitration Commission (CIETAC).8 CIETAC is one of the largest and most important arbitration institutions in China, with over 200 disputes reported involving the application of the CISG. Many contracting parties choose arbitration as their preferred method of dispute resolution because of its advantages: efficiency of speed, low costs, and internationally binding decisions under the 1958 New York Convention.9 This article examines what is considered one of the most important issues under the CISG, that of fundamental breach. In order for a buyer or seller to avoid the contract, they must prove that the breach in question is fundamental in order to justify abandoning their contractual obligations. Although there are many reasons why an innocent party might try to avoid the contract, this writer will focus on CIETAC decision of 4 June 1999 (Industrial Raw Materials case), which dealt with inter alia documentary letters of credit. We will look at the rules regarding documentary credits as established by the Uniform Customs Practice for Documentary Credits of the ICC (UCP 500), and the need for strict compliance. Following this, we will briefly examine the criteria needed to establish fundamental breach under Article 25 CISG. This article will then present an analysis of CIETAC decision of 4 June 1999 (Industrial Raw Materials case), to determine if the Arbitration Tribunal arrived at a decision that is conducive to uniform interpretation of the CISG. In this case, the reader will have to bear in mind the seriousness of the breach and whether it justifies avoidance of the contract. Was the decision more favourable to the seller? How would a reasonable person in the trade involved regard this situation? In addition, should the buyer have been entitled to some form of remedy for the seller’s breach of his contractual obligations? Finally, this article will present what could be an alternative approach for buyers and sellers when faced with a dispute in their contractual arrangements.