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Chapter Nine

Chapter Nine. Inspection, Claims, Force Majeure and Arbitration.  the inspection practice in international trade the three ways of stipulating the place and time of inspection  disputes, claims and the settlement of disputes  the ways of stipulating the claim clause in the contract

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Chapter Nine

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  1. Chapter Nine Inspection, Claims, Force Majeure and Arbitration •  the inspection practice in international trade • the three ways of stipulating the place and time of inspection  disputes, claims and the settlement of disputes •  the ways of stipulating the claim clause in the contract •  the consequences of force majeure •  the concept of arbitration At the end of this chapter, you should be able to understand: Learning Objectives

  2. Contents 9.1 Commodity Inspection 9.2 Claims 9.3 Force Majeure 9.4 Arbitration

  3. Overview With the development of international trade, commodity inspection has become an indispensable link in the chain of smooth handling of international trade transactions and how to stipulate the place and time of inspection and to exercise the right of inspection is the core of concluding the inspection clause of the contract. In case of a claim, the party involved should try to settle it on the basis of integrity. The settlement of disputes through friendly negotiation is the best way for settling international trade disputes. In case no settlement can be reached, the parties to the disputes can choose arbitration, which is another widely used alternative to settling disputes. In case of a force majeure event after the conclusion of the contract, the party who suffers the event is allowed to relieve liabilities of the non-performance or terminate the contract.

  4. 9.1 Commodity Inspection Why do goods need to be inspected in international trade? An importer wants to make certain the goods delivered to him are exactly the goods described by the contract he has signed with the exporter. An exporter also wants to inspect the goods mainly for two reasons. First, he wants to control the quality of the goods so that his image will not be damaged and the market will be developed. Second, he wants to prove with an inspection document the the goods delivered have met the relevant contract terms so that he will not be responsible for any problems in the goods after delivery.

  5. 9.1.1 Place and Time of Inspection • Shipping quality and weight • (2) Landed quality and weight • (3) Inspection at the port of shipment and re- • inspection at the port of destination Three ways to stipulate the place and time of inspection. Students’Task: If the inspection clause in the sales contract reads “The certificates of quality and weight or quantity issued by the China Commodity Inspection Bureau at the port of shipment shall be part of the documents to be presented for negotiation under the relevant letter of credit. Any claim by the buyer regarding the goods shipped shall be filled within xxx days after the arrival of the goods at the port of destination, and shall be supported by a survey report issued by a survey or approved by the seller”, then what is the way of inspection here?

  6. Article 38 of United Nations Convention on Contract for the International Sale of Goods stipulates: (1) The buyer must examine the goods, or cause them to be examined, within as short a period as is practicable in the circumstances. (2) If the contract involves carriage of the goods, examination may be deferred until after the goods have arrived at their destination. (3) If the goods are redirected in transit or redispatched by the buyer without a reasonable opportunity for examination by him and at the time of the conclusion of the contract the seller knew or ought to have known of the possibility of such redirection or redispatch, examination may be deferred until after the goods have arrived at the new destination.

  7. Chinese version: 《公约》第38条： （1）买方必须在按情况实际可行的最短时间内检验货物或有他人检验货物； （2）如果合同涉及到货物的运输，检验可以推迟到货物到达目的地后进行。 （3）如果货物在运输途中改运或买方再发运货物，没有合理机会加以检验，而卖方在订立合同时已知道或理应知道这种可能性，检验可推迟到货物到达新的目的地后进行。

  8. 9.1.2 Inspection Body An inspection institution is the third party that takes a neutral position in the inspection of goods. Two types of inspection body: governmental and non-governmental. The governmental inspection bodies such as FDA in the USA. The international inspection of commodity is mainly undertaken by non-governmental bodies such as Societe General De Surveillance S. A. (SGS) in Geneva, Swiss, Underwriters Laboratory (UL) in the USA, Lloyd Surveyor, B.V. in Britain and Japan Marine Surveyor & Sworn Measurer’s Association (NKKK). In China, the State Administration for Commodity Inspection is in charge of the inspection of import and export commodities throughout the country. In the light of the needs in the development of foreign trade, it makes, adjusts and publishes a List of Import and Export Commodities Subject to Inspection by the Commodity Inspection Authorities. The commodity inspection authorities and other inspection organizations designated by the State Administration for Commodity Inspection perform the inspection of import and export commodities in accordance with the law.

  9. The inspection institutions in China undertake the following tasks: • Legal inspection • Supervision • Superintending and Surveying Services

  10. 9.1.3 Inspection Certificate The inspection certificates issued by Chinese Inspection and Quarantine Organizations are mainly as follows:  Inspection Certificate of Quality  Inspection Certificate of Quantity  Inspection Certificate of Packing  Inspection Certificate of Disinfection  Veterinary Inspection Certificate  Sanitary Inspection Certificate  Inspection Certificate on Damaged Cargo  Inspection Certificate on Tank/Hold

  11. 9.1.4 The Inspection Clause in the Contract  Inspection Certificate on Cargo Weight The inspection clause in international trade contracts usually contains stipulations on the inspection right, the time and place of inspection or re-inspection, the inspection organization, the inspection items and the inspection certificate. Example: It is mutually agreed that the Certificate of Quality and Weight (Quantity) issued by the China Exit and Entry Inspection and Quarantine Bureau at the port/place of shipment shall be part of the documents to be presented for negotiation under the relevant L/C. The buyers shall have the right to re-inspect the quality and weight (quantity) of the cargo. The re-inspection fee shall be borne by the buyers. Should the quality and or weight (quantity) be found not in conformity with that of the contract, the buyers are entitled to lodge with the sellers a claim which should be supported by survey reports issued by a recognized surveyor approved by the sellers. The claim, if any, shall be lodged within…days after arrival of the cargo at the port/place of destination.

  12. 9.2 Claims Claim When one party to a contract fails to fulfill his obligations and causes the other party financial losses, the latter would demand the former to compensate him for the losses. 1. Breach of Contract Two ways to determine the nature of breach: on the basis of terms and conditions of the contract on the basis of consequence of breach of the contract

  13. 2. Tips for Handing Claims Points for consideration:  whether the claim is justified by the contract; whether the claim is made in time;  whether the claim is well supported by good documentation. A claim can be settled in one of the following ways:  making refund with compensation for other direct losses and expenses such as banking charges, storage and inspection charges, etc;  devaluating the goods according to the degree of inferiority, extent of damage and amount of losses;  replacing the defective goods with new ones that conform to the specifications, quality and performance as stipulated in the contract.

  14. 3 Claim Clause in the Contract Two forms of claim clause: • Discrepancy and claim clause • Penalty clause. Example of discrepancy and claim clause Any claim by the buyer regarding the goods shipped shall be filed within 30 days after arrival of the goods at the port of destination specified in the relative B/L and supported by a survey report issued by a surveyor approved by the seller. Claims in respect of matter within responsibility of the insurance company, shipping company/other transportation organization will not be considered or entertained by the seller.

  15. Example of penalty clause Should the buyers for their own sake fail to open the letter of credit on time stipulated in the contract, the buyers shall pay a penalty to the sellers. The penalty shall be charged at the rate of 0.5% of the amount of the L/C for every ten days of delay in opening the L/C, however, the penalty shall not exceed 5% of the total valued of the L/C which the buyers should have opened. Any fractional days less than ten days shall be deemed to be ten days for the calculation of penalty. The penalty shall be the sole compensation for the damage caused by such delay.

  16. 9.3 Force Majeure 1. What is force majeure An event or effect that cannot be reasonably anticipated or controlled. Certain natural disasters and social disturbances are considered force majeure. A force majeure event should have the following features:  it happens after the contract is signed;  it is not due to the negligence of the buyer or the seller;  neither the buyer nor the seller can control the situation.

  17. 2. Consequences of Force Majeure Two consequences of force majeure: (1) Termination of contract In cases of natural disasters or other events that have made it impossible to fulfill the contract, the contract can be terminated. (2) Postponement of contract In cases of events (such as transportation stoppage caused by an earthquake) that will only delay the fulfillment of a contract, the contract can be postponed but not terminated since it is still possible for the seller to carry out his contract obligations.

  18. 3 Force Majeure Clause A force majeure clause is mainly a protection for the seller to enable him to avoid his contractual obligations without paying a compensation or penalty, although it protects the buyers as well. • The Scope of Force Majeure Clause Three ways to set the scope: 1) The General Type If the shipment of the contracted goods is prevented or delayed in whole or in part due to Force Majeure, the seller shall not be liable for non-shipment or late shipment of the goods of this contract. However, the seller shall notify the buyer by cable or telex and furnish the latter within…days by registered airmail with a certificate issued by the China Council for the Promotion of International Trade attesting such event or events.

  19. 2) The Listing Type If the shipment of the contracted goods is prevented or delayed in whole or in part by reason of war, earthquake, flood, fire, storm, heavy snow, the seller shall not be liable for non-shipment or late shipment of the goods of this contract. However, the seller shall notify the buyer by cable or telex and furnish the latter within…days by registered airmail with a certificate issued by the China Council for the Promotion of International Trade attesting such event or events.

  20. 3) The Comprehensive Type If the shipment of the contracted goods is prevented or delayed in whole or in partby reason of war, earthquake, flood, fire, storm, heavy snow or other causes of Force Majeure, the seller shall not be liable for non-shipment or late shipment of the goods of this contract. However, the seller shall notify the buyer by cable or telex and furnish the latter within…days by registered airmail with a certificate issued by the China Council for the Promotion of International Trade attesting such event or events.

  21. (2) Time Limit of Notifying the Other Party In case of a force majeure event, the party seeking to use the clause of force majeure has a duty to promptly notify the other party of “the impediment and its effect on his ability of perform.” (3) The Issuer of the Certificate A force majeure event should be verified by a certificate that attests such an event. The issuer of the certificate should be mentioned in the clause.

  22. 9.4 Arbitration Four ways to resolve a dispute between the exporter and the importer in international trade:  friendly(amicable)negotiation(consultation)友好协商  conciliation 第三者调解,  arbitration 仲裁 litigation 司法诉讼. 1. What is arbitration A method of resolving disputes arising from the two parties who voluntarily render their disputes to a third party agreed by themselves to deal with in accordance with certain arbitration rules and make a final decision binding each of the parties based on the arbitration clause concluded previously by them or based on the arbitration agreement the parties have reached after the disputes arose.

  23. Arbitration has the following advantages: • An arbitrator who is familiar with the technical or social setting of the dispute may be chosen. • Arbitration can better protect business secrets. • Procedures are simpler, and costs are lower. • It is time saving. • The arbitration aware is final and binding on both parties. • Friendship and goodwill may be better maintained.

  24. 2. Arbitration Procedures The general arbitration procedures : • Application for arbitration. • Composition of arbitration tribunal • Hearing • Award

  25. 3 Arbitration Clause An eligible, effective, complete and accurate arbitration clause or arbitration agreement should have the following elements.  The Intention of Requesting for Arbitration Arbitration Bodies  Arbitration Place Rules of Arbitration Procedures Effect of Arbitral Award Arbitration Fee

  26. Three common forms of arbitration clause in the contract in foreign trade in China: 1) Stipulate the place of arbitration in China. Any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination of invalidity thereof, shall be settled amicably through negotiation. In case no settlement can be reached through negotiation, the case shall then be submitted to the China International Economic and Trade Arbitration Commission of the China Council for the Promotion of International Trade, Beijing for arbitration in accordance with its Rules of Arbitration. The arbitral award is final and binding upon both parties. The arbitration fees shall be borne by the losing party.

  27. 2) Stipulate the place of arbitration in the country of the defendant. Any dispute arising out of the performance of or relating to this contract shall be settled amicably through negotiation. In case no settlement can be reached through negotiation, the case shall then be submitted for negotiation.The location of the arbitration shall be in the country of the defendant. If in China, the arbitration shall be conducted by the the China International Economic and Trade Arbitration Commission, Beijing, China, in accordance with its arbitration rules of procedure. The arbitral award is final and binding upon both parties.

  28. 3) Stipulate the place of arbitration in a third country. Any dispute arising out of the performance of or relating to this contract shall be settled amicably through negotiation. In case no settlement can be reached through negotiation, the case shall then be submitted to … for negotiation in accordance with its arbitration rules of procedure. The arbitral award is final and binding upon both parties.

  29. Follow-up Practice 1 Review and Discussion Questions 1) Why must there be the inspection clause in international trade contracts? What does the inspection clause generally include? 2) Please explain the three major ways of stipulating the place and time of inspection. 3) How disputes are settled in international trade？ 4) What are some of the major characteristics of a force majeure event? 5) Please give examples of three ways to set the scope of force majeure. 6) Why is arbitration a commonly used settlement of disputes in international trade?

  30. 2 Decide whether the following statements are true or false. 1) Should cargo be damaged or lost during transit, the carrier bears no responsibility whether or not the damage or loss is due to the carrier’s negligence. ( ) 2) For one contract, only one method and one standard should be used to ensure consistency in inspection. ( ) 3) In international trade, the party that has failed to implement the contract may choose not to carry out his contract obligations if he has paid the required penalty. ( ) 4) Arbitration can be used to settle criminal cases as well as civil cases. ( ) 5) Usually an arbitration tribunal can consist of one, two or three arbitrators. ( ) 6) An arbitration award must be in written form with or without explanations or reasons. ( ) 7) When the departure term (EXW) is used, the commodity should be inspected at the factory or warehouse where the delivery is made. ( ) 8) If shipping quality is used in inspection, the inspection must be conducted at the seller’s factory only. ( ) 9) The party who suffers a force majeure event can decide to terminate the contract without notice to the other party. ( ) 10) All inspection bodies are governmental. ( )

  31. 3.Choose the right answer from each of the following. 1 1. The necessary precondition of settling disputes by arbitration is that_______. A. there must be a sales contract between the disputing parties B. there must be an arbitration agreement between the disputing parties C. there must be mediation taking place first D. there must be litigation taking place first 2. ) To make inspection after shipment, if a quality problem was found when goods were inspected at the port of destination, ______should be responsible for the loss? A. the seller B. the buyer C. the carrier D. the insurer 3) Which of the following statements isnot true about a force majeure event? A. A force majeure event may occur before the conclusion of the contract B. A force majeure event may lead to cancellation of the contract or delayed performance of the contract C. A force majeure event can be caused by natural forces D. A force majeure event can be caused by social forces 4) The most widely used way of stipulating the place and time of inspection in the contract is _______. A. shipping quality and weight B. landed quality and weight C. inspection at the port of shipment and re-inspection at the port of destination D. gross weight 5) The award of arbitration is usually ______. A. final B. not binding on all parties C. amendable D. rejective

  32. 6) Which of the following events is usually stipulated in the contract as force majeure? A. war B. rise of price C. manufacturer’s refusal to supply to the seller D. late delivery 7) Generally, there is/are _____ way(s) to stipulate “force majeure” clauses. A. 1 B. 2 C. 3 D. 4 8) Which of the following is governmental inspection body? _______ A. Underwriters Laboratory B. Lloyd Surveyor C. Food and Drugs Administration D. Societe General De Surveillance 9) Which of the following is not true about the features of arbitration? _____ A. The litigants should submit themselves voluntarily to an arbitrator. B. An arbitration agreement in written form between the parties concerned is prerequisite for arbitration. C. The aware is final and binding on both parties. D.Once the arbitration body is chosen, there is no need to stipulate the rule of arbitration procedure in the arbitration agreement because the rule of the arbitration body is applicable. 10) Normally, there are ____ ways to determine the nature of breach. A. 1 B. 2 C. 3 D. 4

  33. Case Study1 Company A in the U.S.A and Company B in Britain signed a contract in 2006, in which Company A sold 100M/T of wheat at the price of ￡400 M/T CFR London to Company B. The total contract value was ￡40 000 and the delivery time was from May to September in 2006. After the conclusion of the contract, there was a flood in the place where Company A had planned to buy the wheat, so Company A asked to be exempted from the goods delivery obligation because of force majeure. But Company B denied Company A’s demand. Do you think Company A can be exempted from delivery obligation and cancel the contract because of force majeure? Provide your reasons.

  34. Case Study2 A Chinese company (Company X) signed a contract with a Japanese company (Company Y) in 2004. Company Y exported a second-hand cigarette production line to Company X. As the production line was second-hand, it was stipulated in the contract that the production line should operate normally before disassembly; otherwise, it should be replaced or refunded. And claims should be made by the buyer within 14 days after the discharge of the goods at the port of destination. When it arrived, Company X found out that the production line could not be put into operation. Furthermore, they discovered that the production line had not been normally used before disassembly. Therefore, Company X lodged a claim against Company Y 20 days after the arrival of the production line. However, Company Y refused to compensate Company X because the claim was made beyond the agreed effective period. Is Company Y’s refusal reasonable? Why?

  35. Web Links http://www 1. http://www.ulonline.com.cn/ 中国UL在线信息网 2. http://www.ul.com/保险商试验所 3http://www.ahtvu.ah.cn/jxc/39zcfx/index.html仲裁法学网上教学系统 4. http://met.fzu.edu.cn/tradepractices/index.asp国际贸易实务网 5. http://www.aqsiq.gov.cn/国家质量监督检验检疫总局 6.http://www.customs.gov.cn中国海关网

  36. THE END Thank You !

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