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CISG CASE PRESENTATION

China 19 January 2000 CIETAC Arbitration proceeding (Steel cylinders case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/000119c1.html]

Primary source(s) of information for case presentation: Case text

Case Table of Contents


Case identification

DATE OF DECISION: 20000119 (19 January 2000)

JURISDICTION: Arbitration ; China

TRIBUNAL: China International Economic & Trade Arbitration Commission [CIETAC] (PRC)

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2000/08

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: New Zealand (respondent)

BUYER'S COUNTRY: People's Republic of China (claimant)

GOODS INVOLVED: High-pressure compressed natural gas delivery steel cylinders


Case abstract

PRC: Award of China International Economic & Trade Arbitration Commission [CIETAC] 19 January 2000 (Steel cylinders case)

Case law on UNCITRAL texts (CLOUT) abstract no. 804

Reproduced with permission of UNCITRAL

Abstract prepared by Indira Satarkulova

A Chinese company and a firm from New Zealand entered into a contract for the purchase and sale of high-pressure compressed natural gas delivery steel cylinders. When the shipment arrived at the port of destination, the buyer requested an inspection which concluded that there was no conformity with the goods mentioned in the contract. The buyer contacted the seller several times to declare contract avoidance, and requested return of the goods and refund of the purchase price by the seller. After several unsuccessful attempts, the buyer applied for arbitration.

The contract did not contain any applicable law clause, but the arbitration clause stated that arbitration was to be held in China. Thus Chinese law would apply. Furthermore, since both parties had their place of business in contracting states of the CISG, the Convention would also apply. The Arbitral Tribunal ruled that the delivery of non-conforming goods by the seller amounted to a breach of contract. According to the inspection report produced by the buyer, the documents provided by the seller were not related to the goods. The Arbitral Tribunal accepted this conclusion. Moreover, it ruled that the buyer's payment under the letter of credit ("L/C") did not mean the seller had fully performed all the obligations under the contract. When the beneficiary, i.e. the seller, provides the issuing bank the documents required in the L/C, even though the seller has not performed its contractual obligations, the bank cannot refuse the payment. Thus, the Tribunal concluded that the seller had fundamentally breached the contract and, according to Article 49 (1) (a) CISG, the buyer was entitled to declare the contract avoided. The Tribunal stated that the buyer could return the goods and the seller should collect them from the buyer and bear the cost. The seller should also refund the buyer the price of the goods with interest.

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Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 8 ; 35 ; 49(1)(a) ; 84

Classification of issues using UNCITRAL classification code numbers:

8C [Intent: interpretation in light of surrounding circumstances];

35A [Conformity of goods to contract: quality, quantity and description required by contract];

49A1 [Buyer's right to avoid contract (grounds for avoidance): fundamental breach of contract];

84A [Seller bound to refund price must pay interest]

Descriptors: Intent ; Conformity of goods ; Fundmental breach ; Avoidance ; Interest

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Editorial remarks

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Zhong Guo Guo Ji Jing Mao Yi Zhong Cai Wei Yuan Hui Cai Jue Shu Hui Bian [Compilation of CIETAC Arbitration Awards] (May 2004) 2000 vol., pp. 1222-1231

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at nn.90, 158, Nordic Journal of Commercial Law (2/2005)

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Case text (English translation)

Queen Mary Case Translation Programme

China International Economic & Trade Arbitration Commission
CIETAC (PRC) Arbitration Award

Steel cylinders case (19 January 2000)

Translation [*] by Alison Ng, Hoi-Yan [**]

Edited by Howard Yinghao Yang [***]

1. FACTS OF THE CASE

On 8 March 1997, the Claimant [Buyer] and the Respondent [Seller] drafted Contract no. xxxxx. [Buyer] and [Seller] signed the contract on 18 March and 27 March 1997, respectively. The Contract provides for the purchase of high-pressure compressed natural gas delivery steel cylinders for US $242,640. The product was to be manufactured in New Zealand.

  -   GUARANTEE. The [Seller] guaranteed that its supply of goods would be of the best material, with high quality workmanship, brand new and unused product, as well as complying with the Contract's terms on quality and specifications.
 
  -   DISPUTE RESOLUTION SET IN THE CONTRACT. Ninety days after the goods arrive at the port of destination, if the buyer discovers anything in the quality, specifications or quantity of goods that does not conform with the Contract, the buyer should request replacement of the goods or claim damages from the seller based upon the certificate of inspection issued by the National Commodity Inspection Bureau, and the seller shall be liable for all related expenses.
 
  -   TECHNICAL SPECIFICATIONS. Company A is the user of the cylinders. The appendix to the Contract states that "the technical requirements of Company A's compressed natural gas steel cylinders import contract" sets forth detailed terms on technical specifications, which require the seller to provide: (1) products' structure drawing to indicate cylinders' diameter, length, wall thickness and material; (2) strength calculation chart to indicate the various measures of the cylinders' volume, wall thickness, etc at certain temperature; (3) the standards for product design and manufacture and their abstracts; (4) product quality warranty; (5) the certificate of inspection the seller obtained in 1997 from the National Ministry of Labour; and (6) product manual."
 
  -   EQUIPMENT AND CERTIFICATION REQUIREMENT. The "technical requirements" also state that all equipment provided must be newly manufactured within a two-year period before delivery of the goods, must be recently certified by the inspection of the Ministry of Labour, and that there shall not be any refurbished equipment.

On 8 April 1997, the Bank of China (Shandong branch), upon the application from the [Buyer], issued a letter of credit, naming [Seller] as the beneficiary, by means of teledrawing.

On 16 June 1997, the [Seller] loaded the goods to the ship and the carrier signed and issued the bill of lading on the same date.

On 14 July 1997, the goods arrived at the port of destination. The [Buyer] requested an inspection by the Shandong Commodity Inspection Bureau. On 21 August 1997, the Shandong Commodity Inspection Bureau released an "Inspection Certificate" which described the package, documents and outlook for each containers and issued its opinions as follows:

  1. The aforesaid steel cylinders are not brand new steel cylinders;
  2. Some steel cylinders were not manufactured in New Zealand;
  3. Relevant identification documents for all the steel cylinders are missing.

The "Inspection Certificate" concluded that the above does not conform to the terms of the Contract and its appendix.

The [Buyer] and the [Seller] had a discussion in regard to the above issues at XX Petroleum Management Department from 4 to 7 September 1997. The [Buyer] wished to revoke the Contract, to return the goods and to have the [Seller] refund the purchase price. The [Seller] did not agree.

After that, the [Buyer] contacted the [Seller] several times via telephone and facsimile in attempt to request revocation of the Contract, return of the goods and refund. There was no response from the [Seller].

[Buyer]'s claim

The [Buyer] then applied to CIETAC for arbitration, with claims as follows:

  1. The [Buyer] shall have the right to avoid the Contract and to return the goods;
  2. The [Seller] shall refund the price of the goods amounting to US $230,508;
  3. The [Seller] shall pay interest on that US $230,508, interest to be calculated from the day when the letter of credit was issued (i.e., 8 April 1997) to the day when the arbitration decision is executed, and to be computed at the annual rate of 8%.
  4. The [Seller] shall bear the attorneys' fees of renminbi [RMB] 80,000 paid by the [Buyer] for the case; and
  5. The [Seller] shall bear the arbitration fees for the case.

The reasons for these claims that were advanced by [Buyer] are:

      1. The Contract requires brand new steel cylinders, while the [Seller] in fact provided old and used steel cylinders which were produced years ago.

The Contract and its inseparable appendix on technical requirements clearly mandate that all the steel cylinders the [Seller] provides must be brand new, not refurbished second-hand steel cylinders. The [Seller] used a quotation document dated 25 May 1996 -- the time which was before the first contact of the parties, and a document which [Buyer] had never seen -- to argue that since its price was higher than the Contract, the Contract price could not be for brand new products. In any event, before a contract is officially signed, quotations of prices are means of negotiation for information exchange purposes, and unless they become part of the contract, they are not binding on the parties. When the price of the goods and the term for brand new products are clearly set forth in the Contract, the obligations of the [Seller] are defined by the Contract within its four corners. Furthermore, although the Contract price of the new steel cylinders is relatively lower than the market price, a low sales price cannot be a ground to avoid the term to deliver new products. The [Seller] also argued that the term to deliver brand new products was not stated on the letter of credit and therefore attempted to avoid that obligation. However, a letter of credit is independent from the underlying transaction. It reflects only the major terms of the Contract such as amounts to pay and conditions for payment, but not every single condition stated in the Contract. Moreover, according to the reasonable interpretation, whenever a contract or letter of credit has stated the product name, but without the note that they are "used", "second-handed" or "as it is", such products shall be deemed to be brand new.

Nonetheless, the steel cylinders delivered were used ones which had been inspected several times. According to the Inspection Certificate issued by the Shandong Commodity Inspection Bureau on 21 August 1997, the steel cylinders the [Seller] actually delivered contain "various extent of scars and damages on the external surface" and several inspection date marks. For instance, there were twenty sets of small delivery steel cylinders (20 cylinders per set) for CNG that contained date marks of 81.1 at the bottom of the cylinders. This indicated that these cylinder sets were manufactured on January 1981 or earlier and had been inspected in January 1981 for the first time. Hence, the steel cylinders that the [Seller] delivered were in breach of the Contract term.

      2. The Contract stated that goods should be manufactured in New Zealand, while some cylinders the [Seller] delivered were from the United States or England.

Article 3 of the Contract provides "all goods under this Contract should be manufactured in New Zealand." Nevertheless, the inspection certificate indicated that there were five large steel cylinders stamped with "US STEEL" on their surfaces, which revealed those steel cylinders were manufactured in the United States. Furthermore, there were four small steel cylinders stamped with "made in England" at the bottom of the cylinders. Therefore, the Inspection Certificate was of the opinion that "some of the steel cylinders were not manufactured in New Zealand." This suggested that the origin of the delivered goods (by the [Seller]) was inconsistent with the Contract terms.

      3. The Contract required the [Seller] to provide six different types of technical documents. However, there were five types of technical documents missing from those the [Seller] provided. The [Seller] later presented a collection of technical documents in court, but they were irrelevant to the steel cylinders, the Contract, or the National Standard. The absence of the documentation means there lacks the yardstick to measure the quality of cylinders.

Article 3 of the Appendix -- "Technical Requirements for Import Contract" -- clearly requested the [Seller] to provide six different types of technical documents. Nevertheless, as indicated on the inspection certificate of the Shandong Commodity Inspection Bureau, the [Seller] only provided the Inspection Certificate released by the Ministry of Labour of New Zealand, while five other significant types of technical documents were missing. According to the "Import-Export Management Rules for Boilers and Pressure Vessels" (tentative) (hereafter, Management Rules), by the Ministry of Labour of the People's Republic of China and the National Commodity Inspection Bureau, the goods of this case must be inspected by relevant Government departments before they are put into use. The technical documents required by the "Technical Requirements for Import Contract" were consistent with that requirement. The [Seller] was obligated to follow the "Technical Requirements for Import Contract" to provide relevant technical information. Furthermore, the legal requirement for technical information was mandatory which was essential both for the purpose of inspection and safe usage. Therefore, the technical documentation must be provided together with the goods on the ship and shall not be provided after.

The [Seller] mentioned that his engineer, Mr. C gave the other five types of technical documents as required by the Contract to Manager T of XX oil field during an evening event held at XX oil field, and that Mr. T would pass the documents to the actual user. However, the [Buyer] did not receive the above-mentioned documents. The [Seller] also mentioned that payment in this case is by means of letter of credit, in which the issuing bank will not pay the [Seller] if he did not provide the other five different types of technical documents. Nevertheless, the letter of credit employed in this case only required the fifth item of the six different types of technical documents, that is "the Inspection Certificate, which was released by the Ministry of Labour of New Zealand, obtained by the [Seller] in 1997" and that was the only technical document the [Seller] provided to the [Buyer]. Hence, the [Seller] cannot use the rationale that "the letter of credit has been paid, therefore those five different types of technical document must have been provided."

In April 1999, after receiving the technical document together with the "AS2337.1-1989 AUSTRALIAN STANDARD" provided by the [Seller], passed by the Secretary of the Arbitration Commission, the [Buyer] requested the Shandong Ministry of Labour for inspection of the goods. The Department replied stating that the inspection studies on the safe hazards of imported boilers and pressure containers are the responsibility of the human resources section of the National Ministry of Labour. However, before inspection, relevant affixed documents should be examined by the National Commodity Inspection Bureau. In short, for the goods to be inspected, it is compulsory to pass the examinations to indicate that the documents provided comply with the National Standard. After that, the [Buyer] handed over to the Shandong Commodity Inspection Bureau for inspection purposes the documents which were provided by the [Seller] during the dispute. On 12 July 1999, the Shandong Commodity Inspection Bureau released an "Examination Certificate" stating that:

"... the above drawing information shows many discrepancies with the actual products, and is not consistent with the terms as stated in the xxxxx Contract and the appendix on technical requirements. Furthermore, these discrepancies do not comply with the documented quality requirements for steel containers set by both the People's Republic of China and the National Standard on GB150- 89 for 'Steel Pressure Container' and GB509- 94 for 'Non-sealed Steel Gas Container'."

Hence, the [Buyer] alleged that the technical documents provided by the [Seller] are neither original nor real, but passed off, made up or forged for the purposes of misleading the Arbitration Tribunal, and that primarily led to the steel cylinders of the case being unable to pass further inspection.

The [Seller]'s response

      1. During the negotiation, after the [Seller] mentioned to Mr. L, who is the general manager of Company A (the user), that it was not easy to get brand new steel cylinders. L instructed the [Seller] to purchase non-brand new steel cylinders. The [Seller] informed Company A, clearly from the beginning that there are material and price differences between brand new and non-brand new steel cylinders. In addition, the price of the Contract is lower than the quotation for brand new steel cylinders. The [Seller] later requested to amend the clause in the appendix of the Contract which says "the steel cylinders provided must be newly manufactured within a two-year period before delivery of goods." However, Mr. L stated that the appendix is just a document for formality purpose and the [Seller] need not worry about it. Furthermore, the price as shown on the letter of credit is not for brand new steel cylinders, and does not mention any requirement for "two year old new steel cylinders", and that matches the description of Mr. L. The [Seller] thus understood that the [Buyer] was purchasing non-brand new steel cylinders.

      2. As to the issue whether the steel cylinders were manufactured in New Zealand, there are only three countries, i.e., the United States, England and Italy, that produce naked high pressure steel cylinders. The naked high pressure steel cylinders shall, thereafter, be equipped with all kinds of meters according to the requested design, be classified according to the weight holding capacity of the truck and be delivered for inspection. This work was done in New Zealand and was of higher value than the naked steel cylinders, so the steel cylinders should be deemed to be manufactured in New Zealand.

      3. As to the issue of missing technical documents, the [Seller] had already given the documents to Manager T of the [Buyer]'s side on 20 July 1997. It was more than twenty days between the time of loading of the goods and the date of payment of the letter of credit. If the [Buyer] had not received all the documents as required by the Contract, it could have raised the request and suspended the payment. Therefore, the [Buyer]'s claim that the [Seller] had not provided the other five different types of documents is totally groundless.

      4. As to the issue on the "Examination Certificate" by the Shandong Commodity Inspection Bureau about the five different types of documents, the [Seller] rebutted every point stated by the "Examination Certificate", which are "product drawing paper of the drawing paper information", "strength calculating chart of the drawing paper", "quality identification documents", "standards for product design and manufacture criteria" and "seals on the steel cylinders", stating that the conclusion of the Commodity Inspection Bureau is anything but true. Additionally, the [Seller] stated that the relationship between the [Buyer] and the Shandong Commodity Inspection Bureau is unusual.

According to the Arbitration Tribunal's decision in Order No. xxxx (99), the [Buyer] had a further contact with the Labour Division of Shandong Province, arranged the inspection of the goods and submitted to the Arbitration Panel the "Imported Compressed Natural Gas Steel Cylinders Inspection Report" (hereafter "Inspection Report"), No. xxxxx, issued by the Shandong Province Boiler Pressure Vessel Inspection Center on 8 October 1999, together with the executed signature page of the Inspection Report and the "Claimant's third Supplementary Statement."

The "Inspection Report"

According to the "Inspection Report", the inspection was focused on the documents on the cylinders to determining whether these documents can be used as yardstick to measure the qualities of steel cylinders.

The details of the "Inspection Report" are as follows:

"1. Overall Drawings and Major Pressured Element Drawings: There were three drawings of Steel Cylinders, provided by the [Seller], of which one was for large cylinders, one for small and the third for vehicle-use steel cylinders.

  1. Large steel cylinder. The drawing provided by the [Seller] was US STEEL Company's drawing and was drafted on 27 September 1981. It was stated on the steel cylinders grouping chart that each set contains three steel cylinders. However, there were three sets of actual products, of which two sets only contain two steel cylinders and one set contains only one steel cylinder. This showed an inconsistency between the actual products and the drawings. Also, all the five steel cylinders were manufactured by US STEEL in January 1982.

  2. Small steel cylinders. The drawing provided by the [Seller] was TI CHESTERFIELD Company's drawing and was drafted on 24 January 1985. On-site inspection revealed the embossments of either "DUAL FUEL SYSTEMS INC" or "MADE IN UK DUAL FUEL SYSTEMS INC" were found on the bottlenecks or on the shoulders of the cylinders in nine sets of the steel cylinders. The embossments were made during the production process, not added afterwards. These nine sets of steel cylinders were manufactured by DUAL FUEL SYSTEMS INC, while another three sets of steel cylinders were found with "MESCO GAS" stamp on the shoulders of the steel cylinders. These steel cylinders are all marked with manufacturing dates on their surface and are: March 1981 for DUAL FUEL SYSTEMS INC and May 1981 for MESCO GAS, both dates are before the design date (24 January 1985) as stated on the drawing paper of TI CHESTERFIELD. Therefore, the drawings provided by the [Seller] are not the drawings the manufacturer actually used to produce these steel cylinders.

  3. Vehicle-use steel cylinders: The SIMMEL Company's drawing, which was provided by the [Seller], described the structural features of the steel cylinders: bottom is to be sealed as flat surface and head is to be sealed as semi-sphere. However, it was found during the on-site inspection that bottoms of steel cylinders were sealed as curved surface and only five steel cylinders' heads were sealed as semi-sphere, while another five heads were sealed in plate shape. Therefore, the actual products do not conform to the Overall Drawings and Major Pressured Element Drawings. Ten steel cylinders were manufactured by FABER, dated in 1985.

"2. Steel Cylinder Strength Calculation Chart. The steel cylinder strength calculation chart provided by the [Seller] was merely a formula for calculation of strength, and it did not show the actual computation process and outcomes. Therefore, the Steel Cylinder Strength Calculation Chart does not comply with the requirements.

"3. Product Quality Proof Documents. According to the standard requirements for non-sealed steel cylinders, product quality proof documents should at least include product certificate, proof for major pressured element materials and pressure capacity and gas density test reports. After an inspection of the certificate provided by the [Seller], the certificate was found to be a quality inspection certificate signed on 9 July 1997 by SULZER Company instead of a certificate issued by original manufacturer. Moreover, a certificate of major pressured materials and a test report for pressure capacity and gas density were not provided."

The "Inspection Report" reached the following conclusions:

"1. The documents provided by the [Seller] relate to neither the actual products nor the actual inspection records. Hence, those documents cannot be used as a yardstick to measure the quality of the steel cylinders.

"2. None of the steel cylinders complies with the agreed terms of the Contract." On 18 October 1999, the Shandong Province Ministry of Labour Division for Boilers signed the "Approval for the Inspection Conclusion" based on the aforesaid."

Based on the above, the [Buyer] suggested that the "Inspection Report" was consistent with the "Inspection Certificate" released by the Shandong Import-Export Commercial Goods Department and thus completely disproves every argument made by the [Seller]. According to the inspection conclusion, the "relevant affixed documents" provide by the [Seller] cannot be used to measure the quality of the goods. According to China's relevant rules and regulations, absence of supporting technical documentation means the goods cannot go through Chinese inspection and consequently cannot be used in China.

The [Seller]'s response to the "Inspection Report"

      1. Overall Drawings and Major Pressured Element Drawings

(1) Large steel cylinders for public transportation vehicle. According to the original design, a set of three steel cylinders will have a total net weight of 15,777 lbs (about 7.2 tons). In addition to the delivery truck and supporting cart's weight and including the weight of full compressed natural gas, total weight will exceed 10 tons. According to many village roads and weight capacity of most bridges in China, some regions' maximum capacity is below 10 tons. Furthermore, when three steel cylinders line up together, the width of the set exceeds 2.2 meters and may not fit some narrow roads or small bridges in China. Considering the above special situation, the [Seller] changed to a set of two steel cylinders (totally two sets), while the other one was set as individual. If conditions allowed, the user may rearrange to have three steel cylinders in a set through simple adjustment.

(2) Small steel cylinders for public transportation vehicle. This small steel cylinders were TI CHESTERFIELD's products. There are no such companies called DUAL FUEL SYSTEMS INC or MESCO GAS.

(3) Vehicle-use steel cylinders. All of the ten vehicle-use steel cylinders were manufactured by FABER Company. The [Seller] had already provided the overall Drawing and Structure Measures of the FABER steel cylinders. SIMMEL design drawing was provided solely for the purpose of illustrating the material used, pressure capacity and expanding strength of the steel cylinders.

      2. Steel cylinders strength calculation chart. The purpose of the steel cylinders strength calculation chart is to obtain the value of the "pressure strength of the steel cylinders." Wall thickness, pressure, outer and inner diameters of the steel cylinders influence the pressure strength of the steel cylinders. Therefore, one single formula is needed as the principle to compute the pressure strength of the steel cylinders. If the [Buyer] wished to investigate the procedures of the steel cylinders strength calculation chart, the [Buyer] should have informed the [Seller] before purchase.

      3. Product quality proof documents. SUIZER Company is assigned by the New Zealand Ministry of Labour as the steel cylinders inspection center. According to the New Zealand Government's regulations on high pressure natural gas steel cylinders, all the steel cylinders must be inspected by the center assigned by the Ministry of Labour and must pass the inspection before usage, regardless of their place of production. There were detailed conditions about the above point stated in both the contract and the letter of credit signed by the [Buyer] and the [Seller] and the [Seller] had fulfilled this obligation.

The inspection certificate already indicated the pressure capacity and internal area of the steel cylinders, including whether there are any rusting, corruption, arc-fault damage, any damages from acetylene gas, etc. Moreover, every design drawing of the steel cylinders contains clear information on what materials were used.

As to the product certificate, since the factory only checks on a random basis instead of one-by-one, it is impossible for any nation to accept the product certificate signed by the manufacturing factory as the final approval of product quality. Therefore, it is common practice to request products be inspected by an inspection center, whose certificate must be obtained before usage.

In conclusion, the [Seller]'s arguments are:

  1. The "Inspection Report", which was based on the inspection outcomes released by the Shandong Province Boiler Pressure Vessel Inspection Center, is groundless.

  2. The goods of this sale and purchase contract are "compressed natural gas transport set equipment", instead of solely "steel cylinders." "Steel cylinders" are only part of the "compressed natural gas transport set equipment." If there are any unusual requirement about cylinders by the Shandong Province Ministry of Labour, the [Buyer] should have mentioned this in the sale and purchase contract.

On 24 November 1999, the Arbitration Tribunal sent a letter to the Shandong Province Ministry of Labour and Social Security requesting a clear response to "whether the steel cylinders of the case could be inspected to determine whether or not they can be used in China." On 28 December 1999, the Shandong Province Ministry of Labour and Social Security responded as follows:

"The conclusion of the "Imported Compressed Natural Gas Steel Cylinders Inspection Report" (number JK99-09-01), released by this center on 9 October 1999, is our final decision of that batch of steel cylinders. Since the affixed documents provided by the [Seller] do not correspond to the actual manufacturing quality of that batch of steel cylinders, it is impossible for us to conduct any further inspection based on those affixed documents. We are therefore unable to conclude whether or not the cylinders can be used."

2. OPINION OF THE ARBITRATION TRIBUNAL

      (1) Applicable law

The Contract did not contain any applicable law clause, but since the arbitration clause states that the arbitration is to be held in China, Chinese law should apply. Furthermore, since both China and New Zealand are Contracting States of the "United Nations Convention on Contracts for the International Sales of Goods" (hereafter, CISG), relevant articles of the Convention should be applicable.

      (2) Should the [Seller] have delivered brand new steel cylinders?

It was agreed in the Contract that the [Seller] would deliver brand new steel cylinders, while the actual goods delivered are old / used steel cylinders. The [Seller] claimed that both parties had understood that the contracted goods were not to be brand new steel cylinders. The [Seller] also argued that the contracted price is below the quoted price for brand new steel cylinders. However, since the [Seller] did not present sufficient evidence to prove both parties agreed on the sale of used cylinder, the [Seller]'s act shall be deemed to have violated the terms of the contract . Furthermore, the price of goods cannot indicate whether parties intended sell brand new goods or not. Thus, the Arbitration Tribunal concluded that the [Seller] was obligated to deliver brand new steel cylinders, and that the fact that the [Seller] delivered non-conforming goods was a breach of contract.

      (3) Was the [Seller] obligated to provide all the documents on steel cylinders quality information?

According to the "People's Republic of China's Import-Export Management Rules for Boilers Pressure Vessel" (tentative), all import / export pressure vessels must be inspected by the Chinese Commercial Goods Inspection Organization and Province Level Boiler Surveillance Department. Any imported pressure vessels that have not passed that inspection cannot be used in the country. In order to determine whether the steel cylinders can be inspected so that it can be used in China, the [Buyer], in response to the Arbitration Tribunal's request, went to the relevant departments to apply for such inspection. According to the conclusion of the JK99-09-01 Inspection Report, released on 8 October 1999, by the Shandong Province Boiler Pressure Vessel Inspection Center and the Center's response made to the Arbitration Tribunal on 28 December 1999, the "affixed documents provided by the [Seller] are neither related to the actual products nor the actual inspection records, therefore cannot be used as basis to measure quality for that batch of steel cylinders"; and it is thus "impossible to use these affixed documents as basis to perform any further inspection on that batch of steel cylinders."

      (4) Should the [Seller] have provided brand new steel cylinders and the six different types of technical documents as agreed on the Contract?

The Arbitration Tribunal also noted that the [Seller] claimed that the letter of credit issued by the [Buyer] did not mention that the steel cylinders had to be brand new. The [Seller] further suggested that as there were more than twenty days between the Bank of China receiving the documents (as required by the letter of credit) by the [Seller] and obtaining the approval for payment from the [Buyer], the [Buyer] could have complained and suspended the payment, if all the required documents (including the ones required by the letter of credit as well as those six different types of technical documents) were not received. Based on this, the [Seller] deduced that the allegation of [Seller]'s failure to provide the other five technical documents is groundless.

The above argument of the [Seller] mixes up the underlying sale and purchase transaction with that of the letter of credit. The letter of credit is not required to list all the terms stated in the contract. The responsibilities under the contract are not be waived because such obligations are not repeated on the letter of credit. When the beneficiary (the [Seller]) provided the issuing bank the required documentation for the letter of credit, even though [Seller] had not performed the contract's obligations, the bank cannot refuse the payment. Therefore, payment under letter of credit does not mean the [Seller] had fully performed all the obligations under the Contract.

      (5) The [Seller]'s duties under the Contract

The Contract is for sale of compressed natural gas steel cylinders. It was agreed by both parties that the [Seller] would guarantee to supply goods made of the best material, with high quality workmanship, and a brand new and unused product. As requested under the technical requirements appendix of this Contract, all cylinders provided must be newly manufactured and have been recently certified by the Ministry of Labour. The goods must not be refurbished equipment. The Inspection Report of the Safety Control Authority showed that the steel cylinders provided by the [Seller] were either old or used. The report also said that the technical documents provided did not relate to the manufacturing quality and inspection records of that batch of steel cylinders and therefore could not be used as basis for further inspection. Thus, the Arbitration Tribunal concluded that the [Seller] has fundamentally breached the contract. According to Article 49(1)(a) of CISG, the [Buyer] may avoid the contract.

      (6) About the [Seller]'s arbitration claims

            1. As mentioned above, the Arbitration Tribunal agrees with the [Buyer]'s arbitration claims, which includes avoidance of the contract and the return of the goods. The [Seller] should collect the returned goods from the [Buyer] and bear the cost therefor.

            2. The [Seller] should refund to the [Buyer] the price of the goods, amounting to US $230,508.

            3. For interest, since the [Buyer] did not apply for the Inspection from the Safety Control Authority on a timely basis, the interest accruing period shall be shortened accordingly. The [Seller] should pay interest from 19 September 1997 (three months after issuing the letter of credit on 19 June 1997) to the date when the Arbitration Tribunal rendered its award on 19 January 2000, at the annual rate of 7%. Thus the interest should be: US $230,508 x 28 months x 7% / 12 = US $37,649.

            4. For the claim made by the [Buyer] that the [Seller] should bear the attorneys' fees of RMB 80,000, the Arbitration Tribunal, based on the Article 59 of CIETAC Arbitration Rules, decides that it would be more appropriate for the [Seller] to pay part of the [Buyer]'s attorneys' fee, in the amount of 50,000 RMB.

            5. The [Seller] should bear the arbitration cost for the case.

THE DECISION

The Arbitration Tribunal's award is:

  1. The [Buyer] has the right to avoid the Contract (no. xxxxx) signed by the [Seller] and the [Buyer]. The [Seller] should collect the goods from the [Buyer] within 45 days from the date of this award and bear the cost therefor.
  2. The [Seller] should refund to the [Buyer] the price of the goods amounting to US $230,508.
  3. The [Seller] should pay the [Buyer] interest, amounting to US $37,649, calculated from 19 September 1997 to 19 January 2000, the date of this decision.
  4. The [Seller] should bear part of the attorneys' fee of the [Buyer], amounting to 50,000 RMB.
  5. The [Seller] should bear the arbitration cost for the case.

The [Seller] should pay for the aforesaid damages within 45 days starting from the date of this decision.

This award is final.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of the People's Republic of China is referred to as [Buyer]; Respondent of New Zealand is referred to as [Seller]. Amounts in U.S. currency (dollars) are indicated as [US $]; amounts in the currency of the People's Republic of China (renminbi) are indicated as [RMB].

** Alison Hoi-Yan, Ng. Research Student of the University of New South Wales (Australia, Sydney), Chief Editor and Researcher on legal texts -- Principles of Business Law (General Press Pty Limited t/a Law Press Asia) and Tourism Law (CCH Australia Ltd).

*** Howard Yinghao Yang, Associate with Debevoise & Plimpton LLP, New York office.

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Pace Law School Institute of International Commercial Law - Last updated October 27, 2008
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