Since January 2026, China International Economic and Trade Arbitration Commission (“CIETAC”) officially launched a regular publication of selected cases. Through its official website and WeChat official account, CIETAC will periodically and continuously publish representative arbitration cases, presenting arbitration “in action” with broad coverage and in-depth content, helping enterprises enhance risk prevention capabilities, promoting exchanges between China and the world in arbitration culture, and leading to an overall improvement in the credibility of arbitration. CIETAC will, through institutional innovation, unleash the energy of seventy years of arbitral practice and provide reliable solutions for global commercial dispute resolution with “China’s arbitration wisdom”.

In January 2011, German Company A (the “Claimant”), as buyer, and Chinese Company B (the “Respondent”), as seller, entered into two contracts for the sale of rebar. The contracts provided that the price term was FOB; the Claimant was required to open an irrevocable letter of credit  no later than 11 January 2011 (Germany time); the Respondent was required to ship the goods to Vancouver, Canada no later than 28 February 2011; and the goods were required to comply with the CSA-M09 standard of the Canadian Standards Association. After the goods arrived at the port of destination, in May 2011 the Claimant raised quality issues with the Respondent, and the parties engaged in multiple rounds of communications. During that period, the Claimant’s downstream buyer, Canadian Company C, commissioned Inspection Agency D to test the quality of the goods. The inspection confirmed that the goods did not comply with the CSA-M92 standard. The parties also communicated by email and in person regarding the return of the goods but failed to reach an agreement. Subsequently, Canadian Company C disposed of the goods at a discount.

The Claimant alleged that the Respondent had delivered non-conforming goods, constituting a breach of contract, and requested an award ordering the Respondent to compensate losses and corresponding interest, including: the Claimant’s loss of expected profits; Canadian Company C’s claims against the Claimant for loss of profits due to inability to resell the non-conforming goods and losses incurred by discounted disposal of the goods; foreign exchange losses; and losses of inspection, loading/unloading, transportation and warehousing costs.

1. Can the parties’ agreement on the applicable law of the contract exclude the application of the CISG

2. Can a unilateral inspection serve as the basis for determining a quality dispute?

3. How should one assess: (i) whether the breaching party was given a reasonable opportunity to cure; (ii) whether the non-breaching party fulfilled its duty to mitigate; and (iii) the standard for determining foreseeability of loss?

I. Application of the CISG

The Claimant argued that, as both Germany and China are Contracting States to the CISG, the Convention should govern the dispute, and it advanced its claims on the basis of relevant CISG provisions. The Respondent argued that the contracts expressly stipulated that Chinese law applied and that the CISG did not apply.

The TTribunal held that, following China’s approval of the CISG, the CISG forms part of Chinese law; except for matters as to which China has made reservations, China has an obligation to perform the CISG. The CISG is binding on contracts between a Chinese company and a company having its place of business in another CISG Contracting State (such as the German company in this case). In addition, pursuant to Article 142 of the General Principles of the Civil Law of the People’s Republic of China,  the CISG prevails over domestic Chinese laws and regulations. Where the parties have not expressly excluded the CISG, a contractual stipulation that Chinese law applies cannot exclude the CISG’s application to the dispute.

II. Admissibility and Probative Value of the Unilateral Inspection Report

The Respondent argued that the Claimant’s unilateral inspection report should not be relied upon for the determination of quality, primarily for the following reasons: 1. The inspection report was commissioned by a non-party affiliate of the Claimant suggesting possible collusion and fraud; 2. The Respondent did not participate in the selection of the inspection institution or the inspection process, and there was no evidence that the samples tested were the goods delivered by the Respondent; 3. The standard applied in the inspection report did not match the standard stipulated in the contracts; 4. The Claimant had inspected the goods prior to shipment and did not raise any objection to the factory report at that time.

The Tribunal noted that the contracts provided that, after receipt of the goods, the Claimant and its buyer would inspect the quantity and quality of the goods in accordance with the CSA-M09 standard. Therefore, Canadian Company C, as the Claimant’s buyer, had a contractual basis to commission a professional inspection company to inspect the goods at issue. Where the Claimant and its buyer were entitled to organise an inspection unilaterally, the Respondent’s participation in the inspection did not constitute an obligation of the Claimant or its buyer; as long as the Claimant and its buyer made reasonable efforts to enable the Respondent to participate, the inspection and its results should be recognised.

The evidence submitted by the Claimant showed that, after raising quality issues, the Claimant proposed by email that the parties jointly select a quality inspection institution, suggested three candidate inspection institutions, explained the urgency of commencing the inspection promptly, and requested the Respondent’s confirmation as soon as possible, but the Respondent did not respond. After the draft inspection report was produced, the Claimant promptly sent it to the Respondent by email and again urged the Respondent to send personnel to Canada to participate in the inspection.

Although the Respondent denied the above emails, the Tribunal found them credible as they recorded exchanges between the parties, including specific dates, subjects, participants and communication content; absent contrary evidence from the Respondent. The Respondent’s accusation that the Claimant colluded with Canadian Company C to commit fraud lacked evidence and was mere speculation. In international commercial activities, transactions among affiliated companies are normal and common, and affiliated transactions conducted on a fair and independent basis are widely accepted. The Tribunal did not accept the Respondent’s collusion allegation, and the Claimant’s evidence proved that it had made reasonable efforts to enable the Respondent to participate in the inspection.

As to the Respondent’s sampling objections, the Tribunal held that the vessel stated in the inspection report as the sampling vessel was consistent with the vessel name stated in the bill of lading, which proved that the samples tested were the goods under the contracts. As to the Respondent’s objection regarding the applicable standard, the Tribunal compared the specific wording of the two standards and found that their requirements were substantively consistent; the inspection report would not yield different results merely due to a different standard code. As to the Claimant’s pre-shipment inspection, the Tribunal held that it was only a preliminary visual inspection, and the Claimant’s acceptance of the factory report did not waive the Claimant’s right to conduct technical testing after arrival to verify conformity with the contractual requirements.

In summary, the Tribunal accepted the inspection report submitted by the Claimant and found that the Respondent had delivered a non-conforming goods, constituting a breach of contract.

III. Scope of Damages

The Respondent argued that it was not given an opportunity to cure the breach, that returning the goods would have resulted in lesser loss, that the Claimant failed to mitigate its loss, and that the third-party claims asserted by the Claimant exceeded what was foreseeable to the Respondent.

1. Seller’s right to cure

The Tribunal noted that Article 48 of the CISG grants the seller the right to cure after dispatch of the goods, provided that cure does not cause unreasonable delay, does not cause the buyer unreasonable inconvenience, and does not create uncertainty as to whether the seller will reimburse the buyer for expenses advanced. In addition, the seller must indicate its intention to cure, and the buyer is entitled  to decide whether to accept the cure.

After confirming the quality issues, the parties communicated by email and in person regarding the return of the goods but failed to agree on the return price. In October 2011, the Claimant’s legal department sent a letter to the Respondent requiring the Respondent either to accept the Claimant’s repurchase terms or to face legal proceedings. In the absence of any response from the Respondent, Canadian Company C disposed of the goods at a discount.

The Tribunal held that the Claimant had provided a reasonable opportunity for the Respondent to cure. The Respondent’s proposed cure did not specify a concrete timeframe for implementation, and the return price was uncertain. For the Claimant, this created unreasonable inconvenience and uncertainty regarding the reimbursement of expenses.

2. Buyer’s duty to mitigate (injured party’s duty)

The Tribunal noted that Article 77 of the CISG requires the party who relies on a breach of contract  to take reasonable measures to mitigate the loss; otherwise, the party in breach may claim a reduction in the damages claimed by the injured party.

The Tribunal held that the above provision does not require the injured party to choose the course of action that minimises the breaching party’s loss; it only requires the injured party to mitigate loss by reasonable means. After the parties failed to reach agreement on returning the goods, the Claimant decided to dispose them at a discount. The Tribunal only needed to determine whether that disposal method was reasonable, rather than whether it was the method resulting in the least loss. Considering the mounting port storage costs resulting from the prolonged negotiations, the failure to agree on a return, and Canadian Company C’s pressure to perform its contract with the ultimate buyer, the Tribunal held that the Claimant’s discounted disposal was reasonable and that the Claimant had fulfilled its duty to mitigate under Article 77 of the CISG.

3. Scope of recoverable loss

The Tribunal held that, pursuant to Articles 50, 74 and 78 of the CISG, the Claimant was entitled to claim: loss of value of the goods caused by the breach; foreseeable losses caused by the breach, including loss of profit, reasonable additional expenses, and third-party claims; and interest.

As to the Respondent’s argument that third-party claims were unforeseeable, the Tribunal held that, once commoditised goods are sold, the seller should foresee that non-conforming quality may cause the buyer to incur liability to its downstream purchaser. The contract terms and letter of credit indicated that the Claimant would resell the goods in Canada. Canadian Company C’s claims against the Claimant arising from the quality issue did not exceed what was foreseeable to the Respondent.

The Tribunal accepted the Claimant’s claims for its own loss of profit, the price-difference loss arising from Canadian Company C’s discounted disposal, and the inspection costs, legal costs and warehousing costs incurred due to the quality issue. However, as to Canadian Company C’s loss of profit, the Tribunal held that it was already covered by the price-difference loss and allowing both would constitute double recovery. As to the cargo insurance loss and foreign exchange rate loss, the Tribunal held that these were normal expenditures or commercial risks in goods trade and should not be borne by the Respondent.

As to interest, the Tribunal held that, pursuant to Article 78 of the CISG, the Claimant was entitled to claim interest from the time the loss occurred. However, considering that the parties had engaged in extensive communications regarding the quality issue and the Respondent’s potential cure, it was unreasonable for the Claimant to calculate interest from the time it raised the quality issue (i.e., the time it sent the quality-issue email). The initiation of arbitration marked the end of amicable negotiations between the parties; therefore, the Tribunal determined that interest should accrue from the time the Claimant commenced arbitration.