The parties entered into an agreement whereby Claimant, a Chinese company, was to provide and organize after-sales services for vehicles delivered by Respondent, an East European car manufacturer. The agreement laid down certain criteria which had to be met by the provider of the after-sales service. For its part, Respondent was to make periodical payments of assistance and to provide spare parts at the most competitive prices for the Chinese market. Three such payments were made. During the second year of the agreement, Respondent was informed that the agreement had been transferred from Claimant to a company registered in another Chinese city. This led Respondent to announce its intention to cancel the agreement. After unsuccessful negotiations, Respondent requested Claimant to cease its activities under the agreement and declared the agreement terminated due to breach of contract by Claimant. Claimant initiated arbitration proceedings in which it alleged various breaches of the agreement between the parties, such as failure to supply spare parts at the lowest ex-works prices, failure to abide by the exclusivity undertakings and failure to pay assistance fees. It claimed outstanding payments, compensation for harm suffered as a result of Respondent's breaches, and punitive damages. Respondent dismissed these claims, alleging in its turn that Claimant had no capacity to perform the agreement, that the agreement had been transferred without its consent and that Claimant had failed to meet several of the criteria laid down in the after-sales service agreement. It considered itself entitled not only to withhold and then cease payment of the assistance fees but also to request repayment of those fees already paid. In addition it claimed for loss of profit due to reduced sales, loss of goodwill and various costs and unpaid invoices. Following the parties' wishes, the Arbitral Tribunal decided that, in addition to Chinese law, the <b>Unidroit Principles</b> would be applicable, as a reflection of international practices. It subsequently referred to international trade principles when ruling on punitive damages, although without explicitly naming the Unidroit Principles.

Applicable law

The parties' positions

'Claimant holds Chinese law applicable as substantive law governing the contractual relations of the Parties, but is of the opinion that "international practices" have to be applied extensively. Claimant refers specifically to the Unidroit Principles of 1994. Claimant is of the opinion that the Convention on the International Sale of Goods ("CISG") is only applicable as to the contractual obligations referring to the sale of goods.'

'Respondent holds Chinese substantive law as applicable to the extent CISG, Unidroit or general principles of international trade law do not prevail over or complete the Chinese law.'

The Arbitral Tribunal's decision

'The Agreement No. 245 does not contain a choice-of-law clause. But both Parties presume that Chinese law is applicable. This joint presumption has to be regarded as an agreement on the application of Chinese law as governing the merits of the dispute. This choice of law - even if only made during the arbitration (see Redfern/Hunter, Law and Practice of International Commercial Arbitration, 3rd ed., 1999, 2-26) - is valid according to article 17(1) ICC Rules.

CISG is a part of Chinese law. This convention is therefore applicable as part of Chinese law in a dispute between a Chinese entity and one from another country that, like China, has acceded to the CISG. However, the Arbitral Tribunal need not go further into this issue as the claims raised by the Parties do not concern issues that fall within the scope of CISG, as CISG regulates only claims resulting from non-performance, late performance or bad performance of a sales contract and none of these claims have been raised.

The Parties are jointly of the opinion that international practices, especially the Unidroit Principles, shall also apply. The Unidroit Principles (see Blessing, Regulation in Arbitration Rules on Choice of Law, 1996, p. 391; Derains/Schwartz, A Guide to the New ICC Rules of Arbitration, 1998, p. 218 ss.) are rules of law in the sense of article 17(1) ICC Rules.

The Arbitral Tribunal therefore decides, that the Chinese law and international practices including Unidroit Principles are applicable to the merits of the dispute.'

With respect to punitive damages, requested by Claimant.

'The concept of punitive damages is not known in Chinese contract law. Chinese law knows only specific performance, liquidated damages and compensatory damages as remedies for breach of contract, see Zhao, in: Wang/Mo, Chinese Law, 1999, p. 244 ss.

The FECL [1985 Chinese law on foreign economic contracts] defines compensatory damages as the actual loss resulting from the breach, which may include the expectation interests from the performance of the contract. However, such damages must not exceed the loss that was foreseeable by the breaching party at the time the contract was made.

Claimant has not given any proof that Chinese law grants damages that go beyond compensatory damages. The Arbitral Tribunal has not found any international trade principle authorizing the award of punitive damages. Punitive damages are in some jurisdictions even regarded as contrary to public policy, i.e. in German law (see Federal Supreme Court, Judgment of June 4, 1992, BGHZ 118, p. 312 ss.) and Switzerland (see Dörig, Anerkennung und Vollstreckung US-amerikanischer Entscheidungen in der Schweiz, 1998, p. 356 ss.).

In a situation where some of the important trading nations regard punitive damages as contrary to public policy, it is obvious that there is no international trade practice favouring punitive damages.

The Arbitral Tribunal therefore dismisses the claim for punitive damages.'