China: The First Victory for PRC Fertilizer Enterprises in Offshore Arbitration

Last Updated: 10 April 2012
Article by He Wei

I. Introduction

Although Chinese enterprises are often engaged in disputes arising out of international fertilizer transactions, generally a large number of these enterprises are struggling, since they are unacquainted with international dispute resolution mechanisms, and the numerous highly technical issues that are involved in relevant international sale contracts. However, in January 2009, a Chinese fertilizer company obtained the first ever victory in offshore arbitration, in which expert witnesses played an important role.

II. Case history

On 22 November 2004, a Chinese fertilizer import & export company entered into a contract to purchase 22,000 MT of bulk fertilizer from a Singapore-based company for a price of US$4,400,000. On 14 December 2004, the goods arrived in Shanghai and was subsequently inspected by the Shanghai Entry-Exit Inspection and Quarantine Bureau (the "Shanghai CIQ") upon which several quality indices were indicated to be outside the specifications contained in the contract. A notice of the initial inspection result was sent to the Singaporean company immediately. On 12 January 2005, the Chinese company lodged a claim for damages in accordance with the report issued by Industrial Products and Raw Materials Inspection Technical Centre of Shanghai. After obtaining two samples of the goods drawn by Shanghai CIQ, the Singaporean company appointed a private laboratory in Malaysia for inspection, and then refused to admit responsibility for the low quality of the goods, on the grounds that the analysis results confirmed the samples conformed with the quality specifications set out in the contract. In March 2005, the Chinese company filed a further claim and attempted to communicate with the vendors, continuing to receive no positive responses.

Owing to the failure to raise a claim against the other party, the Chinese company applied for arbitration in Hong Kong on 22 May 2006. The dispute resolution clause of the contract provided as follows: "Any dispute or discrepancy which may arise out of the present contract or in connection therewith are to be referred to arbitration in Hong Kong in accordance with the rules of International Chamber of Commerce (ICC), and the Arbitration award shall be final and binding both parties. All the fees and expenses shall be bear by losing party." The claimant sought to recover its overall losses, including losses in relation to its obligations under the sale contract with the third party, with the allegation that the defective goods supplied by the respondent constituted a breach of the contract and Articles 8, 25, 35, 74 and 77 of the 1980 United Nations Convention on Contracts for the International Sale of Contracts ("CISG"). The respondent asserted that the loadport certificates were final and binding on the parties, furthermore, after arrival at Shanghai the goods ought to be tested through an independent inspection. As a matter of this, the respondent challenged the independence and impartiality of the certificates issued by the Shanghai CIQ, a Chinese governmental agency. Meanwhile, the report from the laboratory in Malaysia was submitted to prove the quality of goods was consistent with the contract.

During the hearings in November 2007 and January 2008, the correlative technical personnel of the Inspection Center of the Shanghai CIQ appointed on behalf of the claimant gave oral evidence, with abundant proof, he demonstrated the whole process of inspection conducted by the Shanghai CIQ was in accordance with PRC Laws and applicable national standards for inspections and quarantine, moreover, the test method adopted was reasonable to draw accurate results. In view of the evidence and facts, the International court of Arbitration in International Chamber of Commerce (ICC) rendered an award with regard to the disputes between both parties, in which the respondent was found to have breached the contract by failing to provide goods in compliance with specifications of quality within the contract, and ruled to compensate the claimant the overall losses, as well as interest, reasonable expenses for this arbitration, including fees for this arbitration, attorneys, travel expenses and so on.

III. Key Issues in Dispute

The main issues between the contractual parties lie in the recognition of the results applied by the Shanghai CIQ's inspection methods, being the inspection authority at the destination port. Whether such an inspection could be taken as the final basis for assessing the claim and be accepted by both parties was an issue in the dispute. Several aspects should be discussed as follows:

A. Notwithstanding the fact that Clause 7(1) of the contract stated that the loadport certificates were final and binding on the parties, meanwhile, Clause 7(2) provided that the claimant was entitled to have the goods inspected by an independent inspection at its expense at the destination port, and raise a claim within 30 days from the date that the discharging is completed. Therefore, the loadport certificates were final and enforceable only if the claimant chose not to demur as to the quality of the goods, whereas, in circumstances where the claimant invokes its right to claim a discrepancy under Clause 7(2), the destination certificates took precedence over the loadport certificates within the contract.

B. Regardless of the claimant's right to claim, the Shanghai CIQ was obliged to inspect the goods pursuant to the laws of the People's Republic of China.1 On the one hand, two sets of reports issued by the Shanghai CIQ confirmed the goods were off-inspection. On the other hand, there were no further restrictions for independent inspection, which should be conducted by a member of the International Federation of Inspection Agencies (IFIA), nor any requirements precluding the governmental agency in any country of the contractual parties. More to the point, there was no indication that the Chinese company was in a position to intervene, influence, control or in any way affect the results of the tests conducted by the Shanghai CIQ, as a non-profit inspection authority. For the reasons set out above, the arbitrator considered the result to be impartial, dependent, and adoptable.

C. Expecting to obtain quality indices in accordance with the contract, the Malaysian laboratory's report submitted by the respondent was conducted on a dry basis; furthermore, different tests adopted AOAC methods and the Malaysian Standard respectively. By contrast, the inspection by the Shanghai CIQ was proved to be authorized under Chinese laws and regulations, as well as the national standards for inspection and quarantine, with respect to the basis of inspection, sampling procedures, and testing methods. Since the contract was silent as to the law to be applied, the methods of the Shanghai CIQ was regarded to be appropriate.

IV. Significance and Practical Value of the Case

Due to its special status as a Chinese government agency, as well as an irreplaceable witness, the Shanghai CIQ was a significant factor in the final outcome. In this regard, the burden of proof on the claimant became quite difficult. To emphasize the professional and impartial characteristics, attorneys for the claimant endeavored to gain an opportunity to communicate with the author of the Chinese national standards for inspection and quarantine, and achieved the interpretation of national standards for inspection and quarantine referred to this case, after twists and turns, the technical personnel of the Inspector center of the Shanghai ICQ was finalized as the most appropriate expert witness. By virtue of the attorneys' legal basis, tactical arbitration skills, and persistent efforts, they obtained the first triumph in offshore arbitrations eventually; this landmark case will boost the confidence of Chinese fertilizer enterprises to a great deal when facing trade disputes overseas in the future.

In practice, it is rare for contractual parties to agree on the specific rules of evidence. In addition, participants in the arbitration generally come from different regions or legal systems. As for Chinese enterprises, it is a prevailing phenomenon that they are accustomed to relying on written evidence, and normally expert witnesses are reluctant to testimony in tribunal. However, depending on rules of evidence among offshore arbitrations, evidence preparation is bound to mainly consist of the testimony of witnesses and supplemented with written evidence; these complement each other. Throughout the whole process, expert witnesses are of the highest importance among the most vital cross-examinations. In the case discussed above, the arbitrator was satisfied with the outstanding performance of the expert witness for the claimant and mentioned this several times in the award; the expert was considered to be not only straightforward but also reliable. Moreover, in light of his relevant experience and requisite expertise, the expert witness illustrated technical disciplines penetratingly. As a result of this, the arbitrator accepted overall evidence provided by the claimant and fully supported its request. This case may serve as a good reference for Chinese enterprises in offshore arbitrations, demonstrating that is well worth paying great attention to the process of evidence preparation.

Along with the development of the global economy, technical issues involved in transnational trade are becoming more and more professional. According to Black's Law Dictionary, an expert witness is qualified by knowledge, experience, trainings or skills to provide a scientific, technical, or other specialized opinion about evidence or a fact issue.2 When resolving international trade disputes through offshore arbitration, Chinese enterprises along with the arbitration tribunal inevitably have to source expertise. During the complex process of choosing the expert witness, Chinese enterprises should attach importance to the eligibility, admissibility and independence of expert witnesses in different cases and take advantage of them in professional fields, so as to protect legal rights and interests.

In this case, the arrangement of dispute resolution was relatively unique: contractual parties agreed that the place of dispute resolution would be outside the mainland and chose the rules of ICC as the procedure rules. As the non-fault party, undoubtedly, the Chinese company would be required to master relevant rules, cope with costly expenses and time-consuming procedures. Consulting with lawyers and experts at the contract drafting stage might be a better choice to avoid the occurrence of these disputes or discrepancies.

Footnotes

1 Law of the People's Republic of China on Import and Export Commodity Inspection, Frontier Health and Quarantine Law of the People's Republic of China, catalogues of Import and Export Commodity Inspection and Quarantine, and so on.
2 Black's Law Dictionary.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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