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CISG CASE PRESENTATION

China 25 December 2001 CIETAC Arbitration proceeding (DVD HiFi case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/011225c1.html]

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

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Case identification

DATE OF DECISION: 20011225 (25 December 2001)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2001/04

CASE NAME: Unavailable

CASE HISTORY: For related proceeding, see DVD HiFi case of 23 July 2002

SELLER'S COUNTRY: People's Republic of China (respondent)

BUYER'S COUNTRY: Australia (claimant)

GOODS INVOLVED: DVD players and HiFi systems


UNCITRAL case abstract

PEOPLE'S REPUBLIC OF CHINA: China International Economic & Trade Arbitration
Commission (CIETAC) (now South China Branch) 25 December 2001 (DVD HiFi case)

Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/112],
CLOUT abstract no. 1102

Reproduced with permission of UNCITRAL

Abstract prepared by Ting Zhou

A Chinese seller and an Australian buyer entered into a contract of sales of DVD players. Upon the arrival of the goods, the buyer inspected them and found that they did not comply with the provisions of the contract in terms of either quantity or quality. In view of these problems, the two parties reached an agreement to reduce the price, and agreed that the seller would make appropriate deductions when negotiating the payment. However, the seller did not implement the agreement for price reduction and continued to negotiate the full amount for all the goods according to the original price. In addition, the two parties failed to reach any result about returns and compensation. The buyer applied for arbitration, and requested the Arbitration Tribunal to rule that: (1) the seller should refund the overpayment for the goods; and (2) the goods should be returned and the seller should refund the rest of the money for the goods and make compensation for the damages.

The two parties had not chosen a law to govern disputes over the contract. The Tribunal held that, since the places of business of the two parties were in States Parties to CISG, the Convention should be applied.

The Tribunal determined that the problems discovered by the buyer after inspecting the goods were real and granted recognition to the agreement between the parties for price reduction. The Tribunal ruled that the seller ought to refund to the buyer the sum of money overpaid for the goods, and to pay interest on that money (Article 78 CISG).

Concerning the issue of returning the goods, the Tribunal held that the buyer had examined the goods immediately after they had arrived in Australia, and had given notice of issues with the quality and quantity (Article 38 CISG). The buyer hence had the right to claim compensation from the seller according to Article 36 (2) and Article 39 of the Convention. The Tribunal finally ruled that the seller ought to refund the buyer for the over payment of the goods and the relevant damages, as well as pay interests.

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Classification of issues present

APPLICATION OF CISG: Yes [Article 1(1)(a)]

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 36(2) ; 38 ; 39 ; 74 ; 78 ; 79(2)

Classification of issues using UNCITRAL classification code numbers:

36B2 [Time for assessing conformity of goods: guarantee of conformity];

38A [Buyer's obligation to examine goods: time for examining goods];

39A [Requirement to notify seller of lack of conformity: buyer must notify seller within reasonable time];

74A [General rules for measuring damages: loss suffered as consequence of breach];

78A [Interest on receiving price or any other sum in arrears];

79C [Impediment excusing party from damages: non-performance attributable to third-party contractor]

Descriptors: Conformity of goods ; Guarantees ; Examination of goods ; Lack of conformity notice, timeliness ; Damages ; Interest ; Exemptions or impediments

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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): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

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

DVD Hi-Fi case (25 December 2001)

Translation [*] by Meihua Xu [**]

Edited by John Zhu [***]

The China International Economic and Trade Arbitration Commission Shenzhen Sub-Commission (hereafter, the "Shenzhen Sub-Commission") accepted the case on 11 September 2001 according to:

   -    The arbitration clause in Sales Contract No. S - D001 signed by Claimant [Buyer], Australia __ Company, and Respondent [Seller], China __ Company; and
 
   -    The written arbitration application submitted by [Buyer].

This case is qualified to use the Arbitration Rules of the Arbitration Commission (hereafter, the "Arbitration Rules"), which became effective on 1 October 2000, are applicable to this case.

Based on Article 64 of the Arbitration Rules, the amount in dispute in this case is less than renminbi [RMB] 500,000, therefore, summary procedure should be applied.

On 11 September 2001, the Secretariat of the Shenzhen Sub-Commission sent to the [Seller] the arbitration notice, the [Buyer]'s Arbitration application and attachments thereto, the Arbitration Rules, arbitrators list, and the list of arbitration fees to the registered address provided by the [Buyer] by express mail, and sent the arbitration notice to the [Buyer] on the same day.

In accordance with the Arbitration Rules, since the two parties failed to jointly appoint the sole arbitrator within the stipulated time, the Chairman of the Arbitration Commission appointed Ms. Wang as the sole arbitrator to form the Arbitration Tribunal to hear this case on 11 October 2001.

On 15 October 2001, the [Seller] submitted a written defense to the Secretariat of the Shenzhen Sub-Commission.

The Secretariat of the Shenzhen Sub-Commission scheduled a court session in Shenzhen on 30 October 2001, and a second court session was held on 26 November 2001. The agents of the two parties attended the two court sessions. The Arbitration Tribunal heard the parties' statements and arguments and investigated related facts. After the court session, the two parties submitted supplementary documents.

This case has been concluded, and the Arbitration Tribunal handed down this award. The following are the facts, the Tribunal's opinion and award.

I. FACTS

On 20 March 2001, the [Buyer] and the [Seller] executed Contract No. S -D001 (hereafter, the "Contract") under CFR terms. The Contract had both Chinese and English versions. The following are the terms in the Contract related to the dispute in this case.

(1) The goods

-    The [Buyer] was to purchase DH-1111 DVD players (hereafter, "DVD players") and DH-518 Hi-Fi systems from the [Seller];
 
-    The quantity of the DVD players was 600 at a unit price of US $99, totaling US $59,400;
 
-    The quality and quantity of the goods should be based on the quality, quantity, and country of origin labels and quantity certificate provided by the manufacturer (articles 1, 2, 3, and 4 of the Contract);

(2) Inspection

-    The [Buyer] shall inspect the goods within 45 days after the goods arrive at the destination port, and raise any quality objections within 15 days after the inspection period expires;
 
-    The quality of the goods shall conform to the Import and Export Industry Standard;
 
-    The quality index in the Contract attachment shall be the inspection standard (article 13 of the Contract);

(3) Quality guarantee

-    The [Seller] guarantees that the quality of the material and specifications of the goods conform to the final samples and the requirements stipulated in the product instructions.
 
-    The [Seller] guarantees that the quality of the goods satisfies the product quality requirements set forth in Chinese law (article 14 of the Contract).

(4) Non-conformity on quality/quantity and compensation claims

-    After the goods arrive at the destination port, if there is any technical problem or any lack of conformity on quantity or quality of the goods, the two parties shall settle the problem by negotiation or the [Buyer] may claim damages from the [Seller] by providing the inspection certificate issued by an inspection agency agreed to by both parties, however, those damages for which the insurance company or the carrier shall be liable shall be excluded;
 
-    The [Buyer] shall claim damages on quality defect within 60 days after the goods arrive at the destination port and within 45 days for non-conformity on quantity or weight of the goods;
 
-    The [Seller] shall make response to the [Buyer] within 30 days after receiving a compensation claim.

Within the quality guarantee period (there is no stipulation on the quality guarantee period in the Chinese version of the Contract; it was indicated as one year in the English version), the [Seller] shall repair the entire defective goods and guarantee a 100% exchange if the defective goods are more than 0.5% and less than 5% of the entire goods; however, if the goods with technical (it was indicated as technical performance) defects exceed 5% of the entire goods, the [Buyer] is entitled to return the goods and claim compensation for damages incurred thereof (article 17 of the Contract).

It was stipulated in the Contract attachment (Export Product Technical Confirmation), that the DVD players shall have a YUV output function.

During the performance of the Contract, the two parties had a dispute, and the [Buyer] filed the arbitration application, asking the Arbitration Tribunal to rule that:

      1. [Seller] shall refund the extra US $9,672 paid for DVD players and the interest on it to the [Buyer], and bear US $1,583 which has been incurred by the [Buyer] due to the [Seller]'s failure to comply with the price reduction agreement;

      2. [Seller] shall refund the price for the defective goods based on the actual quantity, and bear the entire costs incurred for returning the goods (which is US $21,469 if temporarily calculated to the day of the arbitration application);

      3. [Seller] shall bear the arbitration fee.

At and after the court session, the [Buyer] modified the first claim to:

      (1)   Price reduction and the price for undelivered 8 DVD players for a total of US $9,672, plus interest on it of US $187;
 
      (2)   Customs tax and bank procedure fee for L/C issuance of US $1,302.

And modified the second claim to: losses caused by the return of defective goods;

      (1)   165 items of defective goods (US $84/DVD player) worth US $13,860 plus bank loan interest of US $269 and expectation profit of US $12,045;
 
      (2)   Loading and unloading fee and certification fee of US $596.

And added to the third claim to provide that the [Seller] shall pay the [Buyer]'s attorneys' fee of RMB 20,000.

POSITION OF THE PARTIES

[Buyer]'s position

The [Buyer] alleges that:

On 20 March 2001, the [Buyer] and the [Seller] signed the Contract with the following terms:

   -    Goods: 600 DVD players with YUV output function;
   -    Price: The unit price was US $99/DVD player, totaling US $59,400;
   -    Quality: The quality and specifications of the goods shall be based on the samples and product instructions;
   -    Spare goods: The [Seller] shall provide 1% of the quantity of the goods as spare goods;
   -    Payment terms: The [Buyer] shall issue an irrevocable L/C prior to the loading of the goods;
   -    Return policy: If defective goods exceed 5% of the entire goods, the [Buyer] is entitled to return the goods;
   -    Dispute resolution: Any dispute arising from the performance of the Contract which is unable to be settled through negotiation shall be submitted to the Shenzhen Sub-Commission.

After the conclusion of the Contract, the [Buyer] issued the L/C as stipulated in the Contract, and the [Seller] sent the sample goods to the [Buyer]. Upon inspection, it was found that functions of the sample goods conformed to the stipulations in the Contract. However, after the goods arrived at Sydney, Australia, the following defects were discovered:

      (1)   Only 592 DVD players were delivered, which was eight less than the 600 required by the Contract;
 
      (2)   The [Seller] failed to provide six spare DVD players based on 1% of the entire goods as stipulated in the Contract;
 
      (3)   All of the DVD players lack the YUV function;
 
      (4)   The goods were of poor quality, and four DVD players broke down during inspection.

The [Buyer] informed the [Seller] of the aforesaid problems immediately, asking for resolution. After repeated negotiations, the [Seller] replied that it could provide six spare goods and eight DVD players, however, the YUV function problem could not be solved because the DVD player would be unable to read CDs if the YUV function was restored.

In order to mitigate the loss and settle the dispute as soon as possible, the [Buyer] made a major compromise, agreeing not to have the problems on YUV output and Karaoke technical functions fixed upon the condition that the amount of US $15 per DVD player would be reduced from the original price and that the price for the missing eight DVD players would be deducted when negotiating the payment.

[Buyer] thereupon commenced to resell the DVD players. After DVD players were resold for only one month, 132 DVD players were returned due to quality defects. At the time of the court session, this had increased to 165 DVD players, which caused severe damage to the [Buyer]'s business reputation.

After an inspection conducted by SGS Australia Pty Ltd (hereafter, "SGS"), the sample goods performed normally, however, 25% ~ 100% of the DVD players which were spot checked could not pass the function test and were not in conformity with the product instructions. The [Buyer] tried to negotiate with the [Seller], however, the [Seller] made no response and even refused to perform the price reduction agreement, and negotiated payment for the entire goods without providing the spare goods.

The [Buyer] alleges that it is the [Seller]'s obligation to deliver the entire goods conforming to the sample goods and product instructions, however, the goods delivered by the [Seller] not only had no YUV function but were not merchantable. The severe defects on Karaoke function, picture transmission, and screen display caused continuous return of the goods. The proportion of goods that are defective has reached 22% of the entire goods, and the [Seller]'s severe contract violation has caused damages to the [Buyer]'s finances and business reputation. After failure to negotiate with the [Seller], the [Buyer] filed the arbitration application based on related stipulations in the CISG.

The [Seller] submitted a defense to the [Buyer]'s arbitration claims, and the agent of the [Seller] filed representation statements twice. The following are the parties' main disputes and the basis for the positions taken:

(1) The 60 days quality objection period and the one-year quality guarantee period

[Seller]'s position

Pursuant to the evidence submitted by the [Buyer] to the Arbitration Tribunal, the DVD players delivered by the [Seller] in the second delivery arrived at the destination port on 4 May 2001. Based on the aforesaid time, the [Buyer] should have raised compensation claim at latest on 4 July. In addition, as stipulated in the Contract, the [Buyer] should provide an inspection certificate issued by an inspection agency agreed to by both parties. However, without the [Seller]'s agreement, the [Buyer] had the goods inspected by the SGS, which was a contract violation; and the inspection report was issued on 1 August 2001, which was beyond the 60 days limitation stipulated in the Contract.

As to the quality problem mentioned in the fax sent by the [Buyer], the [Seller] alleges that without a third party's impartial inspection, it reserves the right whether or not to accept its reliability.

It is the [Seller]'s position that the 60 days is a reasonable time as stipulated in the CISG. The [Buyer]'s failure to inspect the goods and claim compensation was actually a delay in exercising its rights. Therefore, the [Seller] alleges that it should not bear the damages or losses occurred thereof due to the aforesaid reasons.

The two parties have reached an agreement on a compensation of US $9,672, which the [Seller] will pay. However, the [Seller] does not accept [Buyer]'s claims on related damages or other claims.

[Buyer]'s position

The [Buyer] counter argues that:

The quality guarantee is both a contractual obligation and a statutory obligation, which the [Seller] should perform strictly and bear responsibility.

      1. Article 15(2) of the Contract stipulates that the quality guarantee period for DVD players was one year, that if the defective goods are more than 0.5% and less than 5% of the entire goods, the [Seller] shall be responsible for repair, and that if the defective goods are more than 5%, then the [Buyer] is entitled to return the goods. 165 DVD players had been returned due to quality problems within several months after delivery, which was as high as 25% of the entire goods. Therefore, the [Buyer] has the right to return the goods;

      2. Article 14(2) of the Contract stipulates that the quality of the DVD players shall conform to the quality requirements stipulated in Chinese law. Based on related provisions in the Measures on the Administration of Household Appliances Commodities Management Services, there is a "Three Guaranties" policy, in other words, even though there is no stipulation on quality guarantee in the Contract, the [Seller] still has the obligation to guarantee the quality of the goods. Therefore, as long as the DVD players have problems during the quality guarantee period, the [Seller] is obligated to take the responsibility;

      3. The [Buyer]'s compensation claim period shall be filed within the quality guarantee period, not just within sixty days after the goods arrive at the destination port for the following reasons:

            (1) According to Article 39 of the CISG, the [Buyer] shall inform the [Seller] of any lack of conformity within a reasonable time. The reasonable time shall not exceed a period of two years from the date on which the goods were actually handed over to the [Buyer]. However, a quality guarantee period shall be applied if there is one. In the instant case, it was stipulated in the Contract that the quality guarantee period was one year, and it has been only several months since the goods were delivered. Therefore, the goods under the Contract are still within the quality guarantee period, and the [Buyer] has not lost the right to claim damages.

            (2) The [Seller]'s allegation that the [Buyer] has lost the right for compensation is because the [Seller] improperly confuses the concepts of "quality objection period" and "quality guarantee period." The quality objection period applies to quality defects which exist at the time of delivery, and the quality guarantee period applies to potential defects or defects in the goods which become apparent after being used. The sixty days period in the Contract was for quality objections; it does not apply to the quality guarantee period. Therefore, for quality problems which occurred during the quality guarantee period, the [Buyer] may claim damages within one year, i.e., the quality guarantee period.

[Seller]'s counter argument

The [Seller] counter argues:

First, as to the allegation that the quality guarantee period is different from the repair guarantee period.

      1. Article 15 of the Contract has two meanings; section 1 stipulates the period for raising compensation claim on quality defects and the procedure, and section 2 stipulates the period and methods for making repair; it is not a "quality guarantee period" as stated by [Buyer]'s attorney. [Buyer]'s attorney mistakenly mixes the quality guarantee period with the repair guarantee period, without accepting the effectiveness of the compensation claim period set forth in article 15(1) of the Contract. The "entire losses" mentioned in section 2 could only be described as "the entire losses caused by repair (such as the transportation fee for returning the goods)."

      2. As to article 15(2) of the Contract, the [Seller] has two opinions:

      -   One is that the English version of the Contract is inconsistent with the Chinese version. And, based on the proximate connection principle set forth in international private law, the Chinese version shall prevail.
 
      -   The other is that even if this section is regarded as effective and the repair guarantee is not regarded as equal to the quality guarantee, it should be understood as meaning that the [Seller] shall make repair or accept the return of the goods based on this article and bear the entire losses incurred by performing this obligation.

Second, Article 14(2) of the Contract stipulates that the quality of the DVD players shall satisfy the requirement in Chinese law. "Chinese law" refers to basic laws made by the People's Congress, but not the Measures on the Administration of Household Appliances Commodities Management Services, which is an administrative regulation made by the Ministry of Commerce. In addition, based on principles of international law, provisions of a treaty can override the domestic law. Article 39 of the CISG stipulates the related time limit. However, the agent of the [Seller] misunderstands the reasonable time as two years. The two-year limitation mentioned in the CISG is the latest time for raising quality objection under the condition that the two parties failed to stipulate a reasonable time [mentioned in section (1)] within which to raise compensation claim on quality defects.

Article 38 of the CISG states that

"The buyer must examine the goods, or cause them to be examined, within as short a period as is practical in the circumstances."

Based on this article, as an international trade usage, in order to limit the defects on the goods to protect the parties' interests, the contract parties shall determine a quality objection period, which is the sixty days period in this case. The [Buyer] discovered the defects on the goods soon after they arrived at the destination port. Therefore, the two parties signed the price reduction agreement on 22 May. The [Buyer] failed to perform pursuant to the stipulation on the period for raising quality objections, and did not apply for inspection with the SGS until 1 August, which was obviously a violation.

(2) Force majeure

[Seller]'s position

The [Seller] alleges that:

According to Article 79 of Section IV, Exemption, Chapter V of the CISG [Provisions common to the obligations of the seller and of the buyer]:

"A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences."

During the performance of the Contract, the [Seller] entrusted H Company to manufacture the goods. However, on 24 May 2001, G City Public Security Bureau H Branch filed a proceeding against H Company for suspicion of evading taxes, and H Company's business was sealed up by the People's Court of H District. Under this circumstance, the [Seller] still agreed to compensate US $9,672 to the [Buyer] on 21 May, notwithstanding that the seller was also a victim in this case.

According to the provisions of the CISG above, except for US $9,672, the [Seller] should be exempted from bearing the [Buyer]'s other related economic losses. The legal representative of H Company has been detained by G City H District Procuratorate, which the Arbitration Tribunal can confirm. After the legal representative of H Company was detained, the [Seller] took back the DVD players which had been stored at H Company (which were returned by foreign companies) through civil litigation, which indicated that the [Seller] was very conscientious in dealing with foreign companies.

[Buyer]'s position

The [Buyer] counter argues that:

That H Company's business has been sealed up is not a force majeure event, and the [Seller] has no right to apply article 79 of the CISG to be exempted from bearing liability. H Company's situation has nothing to do with the [Buyer]. The [Buyer] charges the [Seller] with contract violation liability based on the Contract; since H Company is not a party to the Contract, it is not bound by the Contract. Therefore, the [Buyer] has no right to claim against H Company and H Company has no obligation to compensate the [Buyer]. In addition, the [Seller]'s liability cannot be exempted even though H Company's seal is present on the price reduction agreement. The [Buyer] only reached its price reduction agreement with the [Seller].

As to what kind of agreement has been reached between the [Seller] and H Company or whether H Company shall take the responsibility, they are separate legal relationships, about which the [Buyer] did not know and which has nothing to do with this case. Therefore, the [Seller] cannot be exempted from liability by this.

[Seller]'s counter argument

The [Seller] then defended that:

The [Seller] did not say clearly that the H Company situation was a force majeure event. It is the [Seller]'s position that there are two different contractual relationships between the [Seller] and H Company and between the [Seller] and the [Buyer]. The [Seller]'s agreement on paying US $9,672 was a performance of the Contract.

(3) Whether the [Buyer] had inspected the goods prior to loading

[Buyer]'s position

The [Buyer] alleges that:

The inspection certificate provided by the [Seller] indicated that the DVD players had been inspected by the [Buyer], attesting that they conformed to the Contract. The [Buyer] alleges that this evidence cannot prove that the [Seller] delivered conforming goods.

      a. The inspector was not the [Buyer]'s employee, and the [Buyer] did not authorize this person to inspect the goods; therefore, this person's inspection cannot represent the [Buyer];

      b. The evidence failed to prove that the goods inspected were the goods under the Contract;

      c. It was stipulated in the Contract that the goods shall be inspected at the time when the goods arrive at the destination port. The goods arrived at Sydney, Australia, on 4 May 2001; however, the inspection date indicated in the evidence was on 22 April 2001, which obviously did not conform to the stipulation in the Contract;

      d. Eight DVD Players were missing during the inspection conducted at the destination port, and none of the DVD players had the YUV function. Because of the aforesaid problems, the two parties had reached a price reduction agreement. However, this inspection certificate indicated that the entire goods conformed to the Contract, which contradicted the facts and should not be used as evidence in this case.

[Seller]'s position

The [Seller] counter argues that:

      1. Based on international trade usages, L/C trade is documentary trade, which means that the payment made by the bank is independent of the transaction with the goods. The bank can make payment to the [Seller] only when the documents conform to the L/C. Based on the translation in page 2, it is stipulated in the L/C that "the [Buyer] shall provide an inspection report to prove that the goods conform to the Contract". If the signature of the inspector entrusted by the [Buyer] was invalid, the [Seller] would have been unable to negotiate payment from the bank;

      2. The documents regarding inspection can prove that the goods inspected were the goods under the Contract because the DVD players that were inspected were 700, which was the same number as that in the Contract;

      3. As to the inspection time, it is a rule and an actual procedure for international business that an inspection shall be conducted based on the L/C, based on which the [Seller] shall deliver the goods to the foreign company and negotiate payment, therefore, the [Buyer]'s attorney's speculation was erroneous.

(4) The SGS inspection

[Seller]'s position

The [Seller] alleges that:

The SGS inspection certificate and the authentication issued by the Embassy provided by the [Buyer] as evidence need to be confirmed. Based on stipulations on service and effectiveness of evidence involving foreign interest in the Civil Procedure Law of the PRC, the documents for compensation claim provided by the [Buyer] will be effective as evidence only after being authenticated by the Chinese Embassy in Australia. Therefore, the SGS inspection material submitted by the [Buyer] for the second time to the Arbitration Tribunal cannot be used as evidence.

As to the authentication issued by the Chinese Embassy in Australia provided by the [Buyer], the [Seller] makes the following statement:

      1. The Chinese Embassy only authenticated the authenticities of the Ministry of Foreign Affairs in New South Wales, Australia, and the signature of its officer, __ Oshana, without authenticating the compensation issue itself. In addition, it only authenticates whether the documents provided by the [Buyer] are consistent with the original documents without authenticating the compensation amount in detail, or the defects on the goods on the merits;

      2. The following problems were found on the attachment documents provided by the [Buyer] to the Embassy:

            (1) Part of the documents were issued by the [Buyer]. For example, page 35 of the attachment to the certification was issued on the [Buyer]'s stationery, and the person who issued page 36 is unknown;

            (2) The goods inspected by the [Buyer] should be those which were resold after the two parties reached the price reduction agreement on 22 May. Based on this, part of the goods listed in the return list submitted by the [Buyer] to the Embassy was beyond the aforesaid period of time. For example, page 15, 17, 19, 21, and 22 of the return list indicated that the time for return was as early as in March. In addition, the returning time in page 29, 30 and 31 of the return list was unclear, and the [Seller] has doubts about it.

[Buyer]'s position

The [Buyer] counter argues that:

First, the SGS inspection certificate can prove that the DVD players inspected were of the model DH-1111, which had different DVD player codes without duplication. Based on the inspection result, 165 DVD players had quality defects and could not perform normally;

Second, after verification conducted at two court sessions, the [Seller] had no objection to the fact that DVD players in DH-1111 model were provided by the [Seller]. The [Seller] was the sole supplier for DH-1111 model DVD players in Australia. Therefore, no matter whether the DVD players have been resold or not, as long as the model was DH-1111, it was delivered by the [Seller];

Third, the [Seller] is obligated to guarantee the quality of the goods as required by the Contract.

      1. Since the DVD players in model DH-1111 were all sold by the [Seller], and it has been confirmed that those DVD players had quality defects, in accordance with article 15(2) of the Contract, the [Seller] should perform the obligation to repair the defective goods. The ratio of defective goods has reached 27% (165/600 = 27%), therefore, the [Buyer]'s request to return the goods has legal basis, which should be supported;

      2. The [Seller] suspects that not the entire 165 DVD players were returned from consumers; however, the [Buyer] alleges that this suspicion cannot be established for the following reasons:

            (1) 165 DVD players were all returned from consumers, which is evidenced by return invoices;

            (2) No matter whether the DVD players inspected were returned goods or are still kept by the [Buyer] as the end user, this does not affect the [Buyer]'s right to return the goods. The [Buyer] is not executing its right as a consumer, but executing its right to return the goods based on the quality guarantee clause stipulated in the Contract, i.e., for quality defect occurred within the one-year guarantee period, the [Seller] is obligated to accept the return of the goods or make compensation on the defective goods no matter whether the goods have been resold or not. Moreover, there is no stipulation in the Contract that the [Seller] shall only accept goods that have been returned by consumers. The [Seller] is obligated to perform its obligations in accordance with the Contract.

II. OPINION OF THE ARBITRATION TRIBUNAL

Based on the evidence provided by the two parties and the investigations made by the Arbitration Tribunal, the Tribunal ascertains the following facts and makes the following analysis.

(1) Applicable law

The parties failed to stipulate the applicable law in the Contract. The Arbitration Tribunal notes that the places of business of the [Buyer] and the [Seller] are in Guangzhou, China and Australia, respectively, and that both China and Australia are Contracting States of the CISG. Therefore, the CISG shall be applied to the dispute in this case.

(2) The effectiveness of the Contract

The Contract in this case was signed by the two parties voluntarily. It is valid and has binding effect on the parties.

(3) Contract performance and inspection

      1. The delivery of the goods

      On 20 March 2001, the [Buyer] and the [Seller] signed the Contract, by which the [Seller] was to sell DVD players, among which, 600 DH-1111 DVD players at a unit price of US $99/DVD player, totaling US $59,400, are involved in the dispute in this case.

An Export Product Technical Confirmation was attached to the Contract, stipulating that the DVD players should have YUV output function. The [Buyer] issued its L/C pursuant to the Contract, and the [Seller] delivered the goods on time. These goods arrived in Australia on 4 May 2001. Evidence shows that the [Buyer] inspected the DVD players in a timely manner and raised quality and quantity objections immediately. The [Buyer] discovered the following defects in the goods:

            a. Eight DVD players were missing from a quantity of 600 as stipulated in the Contract;
            b. The [Seller] failed to provide six spare goods based on 1% of the entire goods;
            c. The entire shipment of DVD players lacked the YUV output function.

      2. The price reduction agreement and the performance of that agreement

      Regarding the aforesaid defects on the goods, the two parties negotiated by letters and reached an agreement on 22 May 2001 by which the [Seller] accepted the following conditions for making compensation:

            a. The [Seller] agreed to reduce US $15 per DVD player without repairing the technical problems having to do with YUV and Karaoke; and US $9,000 would be deducted directly when negotiating payment;

            b. The L/C would be extended for thirty days from the original date;

            c. Except for the problems on YUV and Karaoke, the [Seller] shall be responsible to fix other problems with the goods;

            d. The price for eight missing DVD players, i.e., US $672, would be deducted when negotiating payment.

            A total of US $9,672 would be deducted from the L/C.

After an investigation performed at the court session, it was discovered that the [Seller] had accepted this agreement, but failed to perform, with the result that the [Seller] still owns US $9,672 to the [Buyer]. The [Seller] is liable for this and should compensate the aforesaid amount and the entire losses incurred thereof.

      3. The inspection conducted by SGS

      After the parties reached their price reduction agreement, the buyer resold the goods, however, part of the goods was returned by customers due to quality defects. The Arbitration Tribunal notes that the [Buyer] provided a certification issued by the Chinese Embassy in Australia to prove the return of the goods. This certification confirmed the authenticities of the seal of Ministry of Foreign Affairs in New South Wales, Australia, and the signature of its officer, __ Oshana. Some receipts were attached to this certification, which evidenced the return of the goods after resale.

Under this circumstance, on 24 July 2001 and 1 November 2001, respectively, the [Buyer] entrusted SGS to inspect the goods unilaterally. 65 DVD players were inspected at the first time and 100 were inspected at the second time. On 1 August 2001 and 2 November, respectively, SGS issued two inspection certificates for inspections conducted on pictures and DVD performance in terms of four functions of the DVD players, indicating that:

   -    The goods were chosen based on 105E military standard;
   -    The 165 DVD players were all brand new without any damages or defects on the surface;
   -    The DVD players inspected did not conform to the specifications with percentages of 25% ~ 100% and 20% ~ 100%, respectively, which failed to pass the function test; therefore, these goods are not acceptable.

The [Seller] argues that the SGS was entrusted by the [Buyer] unilaterally, and that, based on the Contract, the goods should be inspected by an inspection agency agreed to by both parties.

The Arbitration Tribunal notes that even though the SGS was not agreed to by both parties, considering the SGS's reputation and authority, its inspection result could be the basis for the Arbitration Tribunal to make its decision. In addition, the [Buyer] had the goods inspected by the SGS within the one-year quality guarantee period. An inspection agency agreed to by both parties, which was stipulated in article 15(1) of the Contract, was for the 60 days quality objection period. Therefore, the [Seller]'s refusal to accept the SGS's inspection certificate, raising that it was not the agency agreed to by both parties cannot be established.

The SGS inspection report indicates that the DVD players were all brand new. The Arbitration Tribunal deems that "brand new" means that the packages of the DVD players were undamaged and that the quality of the goods was in the same condition as that prior to delivery without any damages or defects on the surfaces.

      4. Article 15 of the Contract and whether the [Buyer] delayed in returning the goods

      The Arbitration Tribunal notes that article 15(1) of the Contract stipulates that there are two methods to choose after discovering technical problems or non-conformities in the quantity or quality of the goods after they arrive at the destination port:

   -    The two parties may settle the problems by negotiation; or
   -    The [Buyer] may claim damages by providing an inspection certificate issued by the inspection agency agreed to by both parties.

This article also includes a 60-day quality objection period and a 45-day quantity and weight objection period. Section (2) of this article has stipulations on the compensation standard and method within the one-year guarantee period, i.e., if the goods with technical defects are less than 5% of the entire goods, the [Seller] shall provide comprehensive repair service and if the goods with technical defects exceed 5% of the entire goods, [Buyer] is entitled to return the goods and claim compensation. The two sections of this article have different meanings, which means the two parties may still enforce the right stipulated in section (2) after performing a Section (1) compensation claim after inspection.

It was ascertained at the court session that the [Buyer] inspected the goods after they arrived at the destination port, Sydney, Australia, on 4 May 2001. Based on trade usages, the [Buyer] is entitled to inspect the goods after receiving them, otherwise, it should not be deemed that the [Buyer] has accepted the goods.

After discovering the defects on quality and quantity of the goods, the [Buyer] chose to settle the problem through negotiation as stipulated in section (1), and reached a price reduction agreement with the [Seller] on 22 May. Therefore, the [Buyer] has enforced its right to inspect the goods in time. After the problem occurred, the [Buyer] chose to settle the problem by negotiation as stipulated in section (1), not by having the goods inspected by an inspection agency agreed to by both parties. Based on the two parties' agreement, either method could be chosen to settle the problem.

Article 36(2) of the CISG stipulates that:

"The [Seller] is also liable for any lack of conformity which occurs after the time indicated in the preceding paragraph and which is due to a breach of any of his obligations, including a breach of any guarantee that for a period of time the goods will remain fit for their ordinary purpose or for some particular purpose or will retain specified qualities or characteristics."

The parties in this case agreed that the [Buyer] is entitled to ask repair or return of the goods if any quality problem occurs within the one-year guarantee period. Thus, the [Seller] should not be exempted from accepting the return of the goods or making repair on the goods just because the [Buyer] failed to claim damages within 60 days (it was indicated as 90 days in the original text - note by the translator) based on the inspection conducted by the inspection agency agreed by both parties.

The Arbitration Tribunal deems that based on article 15(2) of the Contract, within the one-year guarantee period, the [Buyer] is entitled to return the goods and claim damages if the goods with technical defects exceed 5%. The [Buyer] received the goods on 4 May 2001, and claimed compensation on the day of arbitration application, i.e., 28 August 2001, which was within the one-year guarantee period. Even though the one-year guarantee period was only mentioned in English version of the Contract, it is still one part of the Contract. In addition, there is no stipulation on a guarantee period in the Chinese version of the Contract, which is not in conflict with the one-year period mentioned in English version.

      5. Quality of the DVD players delivered by the [Seller]

      The Arbitration Tribunal notes that the two parties confirmed at the court session that the requirements for return and compensation stated in article 15(2) of the Contract, i.e., goods with technical defects exceed 5%, did not refer to one DVD player, but that if the goods with technical damages exceed 5% of the entire goods, the [Buyer] is entitled to return the goods. As to whether the goods with technical defects have exceeded 5% of the entire goods shall be decided based on SGS's inspection certificate:

   -    Pursuant to two inspection results, after a test conducted on four functions of the goods, 25% ~ 100% and 20% ~ 100% of the goods did not conform to the Contract, which means the non-conforming goods in terms of technical performance were far beyond 5%.
 
   -    Even though the first two functions were discussed in the price reduction agreement reached by the two parties, the non-conforming goods in terms of the other two functions have already exceeded 5%.

Based on the aforesaid facts, the Arbitration Tribunal concludes that the 165 DVD players inspected by SGS have satisfied the requirement for the return of the goods for the following reasons:

            (1) According to SGS's inspection, 165 DVD players had defects, which indicated that non-conforming goods exceeded 5% of the entire goods as stipulated in the Contract;

            (2) The [Buyer] claims its discovery of the aforesaid defects within the one-year guarantee period;

            (3) Based on SGS's inspection result, no damages or defects had been found on the surfaces of the goods; therefore, the [Buyer] is able to return the goods in the original condition.

Based on the aforesaid facts and reasons, as a supplier of the goods, the [Seller] shall be liable for the quality problems on the goods and shall make compensation for the damages incurred by the [Buyer].

(4) [Buyer]'s arbitration claims

      1. The [Buyer]'s first claim

      The evidence and the court session prove that the two parties have no dispute on the price reduction agreement reached on 22 May 2001. However, the [Seller] failed to perform it.

The Arbitration Tribunal holds that the [Seller] shall immediately pay to the [Buyer] US $9,672 and the interest on it of US $187 (from the day that the [Seller] received payment to 27 October 2001, totaling 90 days) as stipulated in the agreement.

Part of the [Buyer]'s first claim is thus established, and the Arbitration Tribunal accepts this claim.

As to whether Australian dollars [AUD] 2,183 for customs tax and bank L/C issuance fee incurred for the aforesaid sum should be compensated by the [Seller], since there was no agreement between the two parties and the [Buyer] has claimed expectation profit in its second claim, therefore, the Arbitration Tribunal does not accept this part of the [Buyer]'s claim.

      2. [Buyer]'s second claim

      The [Buyer]'s second claim involves the focus of the primary dispute between the two parties. This dispute occurred due to the presence of quality defects during the performance of the Contract. A focus of the dispute is how best to understand the relationship between the quality objection period and the quality guarantee period and whether the [Buyer] has lost the right to raise quality objections or ask for the return of the goods.

Based on the aforesaid analysis, the Arbitration Tribunal concludes that, based on article 15 of the Contract, after the goods arrive at the destination port and within the one-year guarantee period, the [Buyer] may claim damages for non-conformities on quality and quantity of the goods and ask for repair or return of the goods, respectively. Article 39 of the CISG stipulates that:

"The [Buyer] loses the right to rely on a lack of conformity of the goods if he does not give notice to the [Seller] specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it."

In other words, the [Buyer] shall inform the [Seller] of any lack of conformity and the decision to reject the goods within a reasonable time after he has discovered it or ought to have discovered it. The [Buyer] in this case has inspected the goods within a reasonable time and has claimed compensation. After SGS's inspection, technical performance of 165 of the DVD players delivered by the [Seller] did not conform to the Contract, which was beyond the 5% ratio stipulated in the Contract. Therefore, pursuant to article 15(2) of the Contract, the [Seller] shall accept the return of the goods and make compensation for the damages caused to the [Buyer].

As to the amount of compensation, the [Buyer]'s calculation is on a wrong basis. It should be calculated based on the average resale price of US $157/DVD player, and the cost for one DVD player should be US $99, not US $84. Therefore, the expectation profit should be: (157 - 99) 165 = US $9,570.

Also, the loading and unloading fee and certification fee have been calculated into the expectation profit as cost; therefore, they should not be calculated as losses. Accordingly, the Arbitration Tribunal does not support this claim of the [Buyer]. The Arbitration Tribunal does not accept the [Seller]'s defenses that the [Buyer] failed to claim compensation for quality defects pursuant to the provisions of the contract, that there was fraud in the certification, and that the claim documents need further confirmation because of lack of evidence substantiation.

Based on the above and pursuant to article 15(2) of the Contract, the [Buyer] shall return 165 DH-1111 DVD players to the [Seller] and the [Seller] shall compensate the following damages of the [Buyer]:

a.   Price for the goods: US $84/DVD player 165 = US $13,860;
b. Interest on the price for the goods (calculated to 27 October 2001, totaling 90 days): US $13,860 7.75% 90/360 = US $269;
c. Expectation profit: US $9,570.
 
The above totals US $23,699.

      3. Based on the aforesaid analysis, the defects on the goods delivered by the [Seller] caused the dispute in this case. Based on related stipulations in the Arbitration Rules, the Arbitration Tribunal accepts the [Buyer]'s claim for attorneys' fee of renminbi [RMB] 20,000.

And the [Seller] shall bear the arbitration fee.

III. THE AWARD

The Arbitration Tribunal rules that:

      (1) [Seller] shall refund the extra price for the goods paid by the [Buyer] and losses incurred by the [Buyer], totaling US $9,859, within 30 days of this award;

      (2) [Seller] shall return the price for the goods and compensate the damages incurred by the [Buyer], i.e., US $23,699, within 30 days of this award; meanwhile, the [Buyer] shall return 165 DVD players to the [Seller];

      (3) [Seller] shall pay the [Buyer]'s attorneys' fee of RMB 20,000 within 30 days of this award;

      (4) [Seller] shall bear the entire arbitration fee.

This is the final award.

Sole Arbitrator:

25 December 2001 in Shenzhen


FOOTNOTES

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

** Meihua Xu, LL.M. University of Pittsburgh School of Law on an Alcoa Scholarship. She received her Bachelor of Law degree, with the receipt of a Scholarship granted by the Ministry of Education, Japan, from Waseda University, Tokyo, Japan. Her focus is on International Business Law and International Business related case study.

*** John W. Zhu, LL.M. China University of Political Science and Law (National Graduate Scholarship); Bachelor of Law, Southwest University of Political Science and Law; Double Degree, English Literature, Sichuan International Studies University, Chongqing, China. Focus: International Economic Law.

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Pace Law School Institute of International Commercial Law - Last updated January 20, 2012
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