China 18 July 2002 CIETAC Arbitration proceeding (Textile manufacturing equipment case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/020718c1.html]
DATE OF DECISION:
JURISDICTION:
TRIBUNAL:
JUDGE(S):
DATABASE ASSIGNED DOCKET NUMBER: CISG/2002/20
CASE NAME:
CASE HISTORY: Unavailable
SELLER'S COUNTRY: Hong Kong (respondent)
BUYER'S COUNTRY: People's Republic of China (claimant)
GOODS INVOLVED: Textile equipment
APPLICATION OF CISG: The tribunal drew upon Article 35 CISG to help interpret Article 62 of the 1999 Contract Law of China.
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
8C [Interpretation of party's statements or other conduct: interpretation in light of surrounding circumstances]; 35B [Conformity of goods to contract (requirements implied by law): fitness for purposes for goods of same description, fitness for particular purpose made known to seller, reliance on seller's skill and judgment]
Descriptors:
CITATIONS TO ABSTRACTS OF DECISION
(a) UNCITRAL abstract: Unavailable
(b) Other abstracts
Unavailable
CITATIONS TO TEXT OF DECISION
Original language (Chinese): Unavailable
Translation (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
Unavailable
Go to Case Table of ContentsCase text (English translation) [second draft]
Joint translation project:
New York University School of Law
and Pace University School of Law
Textile manufacturing equipment case (18 July 2002)
The China International Economic and Trade Arbitration Commission (formerly known as "China International Trade and Economic Arbitration Commission, hereafter, the "Arbitration Commission") accepted this case (Arbitration Case No. M...) on the basis of:
| - | The Claimant [Buyer]'s written application for arbitration submitted to the Arbitration Commission on 16 July 2001; and |
| - | The arbitration clause in Purchase Contract (No. 2000FSBXA-40AB20102HK) signed by [Buyer], Anhui Import and Export Co. Ltd., and Respondent [Seller], ___ Group International Limited, on 27 January 2000. |
On 14 September 2001, the Secretariat of the Arbitration Commission sent the Notice of Arbitration to both parties and sent the [Seller] a copy of [Buyer]'s application for arbitration with the attachments. [Seller] received the notice of arbitration and [Buyer]'s application of arbitration and attachments on 18 September 2001 and delivered its statement of defense with its attachments to the Arbitration Commission on 1 November 2001. On 14 November, [Seller] faxed a counterclaim to the Arbitration Commission, and thereafter sent the original copy with the original attachments.
According to the Article 24 of the Arbitration Rules of the Arbitration Commission, the [Buyer] appointed Chen ___ as arbitrator, and the [Seller] appointed Wang ___ as arbitrator. As the two parties failed to appoint or to jointly entrusted the Chairman of the Arbitration Commission to appoint a presiding arbitrator within the specific period, the Chairman of the Arbitration Commission appointed Chen ___ as the presiding arbitrator; On 2 November 2002 the Arbitration Tribunal was established for this case with these three as arbitrators.
The Secretariat of the Arbitration Commission set the hearing of case for 20 December 2001. On 15 November 2001, as the [Seller] still needed time to collect critical evidence, it sent a notice to the Arbitration Commission, according to Article 41 of Arbitration Law of the People's Republic of China, requesting a postponement of the hearing. The Secretariat of the Arbitration Commission postponed the hearing to 16 January 2002 to give the [Seller] needed time to collect evidence. Moreover, as the [Seller] filed a counterclaim, it was also appropriate to give the [Buyer] a reasonable time to submit a response.
The Arbitration Tribunal held a court session in Beijing on 16 January 2002. Both parties' representatives and arbitration agents participated in the hearing, presented oral statements and discussed the issues and answered questions posed by the Arbitral Tribunal. In the course of the hearing, both parties agreed on the conciliation of the Arbitral Tribunal but did not reach a mediation agreement. After the hearing, both parties submitted supplemental materials to the Tribunal.
The Arbitral Tribunal handed down its final decision and issued this award on the basis of the opinion of the majority of the arbitrators within the prescribed period. The following are the facts, the Arbitration Tribunal's opinion and the award.
FACTS AND POSITION OF THE PARTIES
[Buyer]'s position
The [Buyer] alleged:
On 26 January 2000, Anhui Bidding Center for Machinery and Electronic Products arranged a bidding for the Polar Fleece Product Line, the Technical Reconstruction Project of Huaibei ___ Knitting Company. [Seller], ___ Group International Limited, won the bid. On 27 January, the [Buyer] as import agent and Huaibei ___ Knitting Company as user signed a contract with the [Seller] to purchase a Monti's MOD.205/3 SUPREMA tentering and preshrink machine with its attachments. The number of the purchase contract is 2000FSBXA-40AB20102HK. The major provisions of the contract are:
| - | Article 1 [Total contract price]: FOB Italy Main Ports US $274,400.00; |
| - | Article 7 [Packing]: The seller is liable for the damages to products due to
inadequate packing or inappropriate or inadequate protection measures taken
by the seller; |
| - | Article 14 [Quality guarantee]: The seller should guarantee to use top
technology manufacturing with brand new material which should be fully
consistent with the stipulation of contract. The expiration date of the quality
guarantee is 12 months since the day seller and buyer signed the certification
of quality in the user's manufactory. Within the period of quality guarantee,
under normal operational condition, provided that buyer uses the machine in
accordance with the guidelines of the manual, the seller shall be liable for damages due to defect of manufacturing or design. |
| - | Article 15(3) [Inspection]: If the quality and specifications of the goods are inconsistent with the stipulations of the contract, or within the specific period
of quality guarantee stipulated in Article 14 it can be proven that the goods
have defects resulting from inherent vice or inappropriate material selected,
the buyer should deliver the goods to the Bureau of Inspection and Quarantine
and will have the right to claim for the recovery of damages on the basis of the
inspection report. |
| - | Article 16 [Claiming damages]: The methods of settlement of claims include
"returns" and "depreciation". The buyer should replace the components by
new ones in accordance with the stipulated standards of specifications, quality
and function in the contract and bear the cost for the replacement and the
direct damages of buyer. |
| - | Appendix 1 [The speed of the machine]: The running speed of the machine should not be lower than 28 meters per minute for every 350 grams [...]. The [...] fabric should reach the standard that [...]. Moreover, this running speed of machine was guaranteed by the [Seller] in writing during process of communication of technology and process of tender requiring and arguing on 17 December of 1999 and 26 January of 2000. |
The machine arrived at Huaibei ___ Knitting Company on 3 May 2000. After opening the container, it was found that the bracket of the heating tube in the No. 6 container was broken and was deformed; moreover, the surface of the [...] manometer was also broken. After installation on 28 May 2000, in the report of inspection and acceptance signed by Huaibei ___ Knitting Company and the [Seller], Huaibei ___ Knitting Company listed details of several matters having to do with packing, function of the machine and parts and asked the [Seller] to "fix the existing problems". This strongly shows that the machine was not in accordance with the standard stipulated in the contract. On 26 June 2000, the [Buyer] sent a formal notice to the [Seller], requesting [Seller] to solve the problems as soon as possible and explicitly told the [Seller] that the goods were unacceptable. On 22 September 2000, the Bureau of Inspection and Quarantine, the [Seller], Huaibei ___ Knitting Company and the [Buyer] conducted an inspection and examination of the function of the machine. They concluded that the running speed was not consistent with the standard of the contract and they signed the memorandum. Afterwards, the [Seller] sent its staff to inspect the machine. Not only were the existing problems not solved, but also new problems came out. After inspection and testing several times, the machine still cannot reach the standard of the contract. In late 2000, the [Seller] unreasonably proposed the use of non-polar fleece cloth to test the machine. This was rejected by Huaibei ___ Knitting Company. Huaibei ___ Knitting Company and the [Buyer] claimed damages from the [Seller] several times and the [Seller] agreed to cover the damages. However, the recovery was always delayed.
On 9 April 2001, the machine was inspected by the Bengbu Bureau of Inspection and Quarantine. The results were:
| (1) | The damage to the goods was due to improper packing by the foreign party; |
| (2) | After the test and examination of the actual function of the machine within the period of quality guarantee, the results of the test and examination shows that the machine is not consistent with the standard stipulated in the contract (under the supplemental clause written in under Article 9 of Contract 2000FSBXA-40AB20102HK which stipulates that the running speed of machine should not be lower than 28 meters per minute for every 350 grams [...]. |
After the examination results came out, the [Buyer] claimed recovery of damages against the [Seller] again on 23 May 2001. Since the [Seller] was unwilling to cover the damages, the [Buyer] brings the dispute to the Arbitration Tribunal.
The [Buyer] presented the following arbitration claims:
1. The running speed of the tentering and preshrink machine is inconsistent with the standard of the contract (the running speed can only reach one-third of the stipulated speed of contract). This machine is a key part combined with other components in the production line. If this machine cannot reach the standard of the contract, this would result in the waste of the whole product line in which Huaibei ___ Knitting Company has invested renminbi [RMB] 26 million and would make the purpose of contract unfulfilled.
| - | Because the [Buyer] bears huge economic damages due to the breach of contract by the [Seller], it is appropriate to depreciate the value of the equipment and reduce the price. |
| - | Because the efficiency of the machine provided by the [Seller] is only 43% of the stipulated efficiency in the contract (12m per minute ÷ 28m per minute), it is reasonable to depreciate the contract price by 43%, thus the [Seller] should return US $156,682.40. |
2. As the running speed of the equipment cannot reach the standard stipulated in the contract due to [Seller]'s breach of contract, it is impossible for the Huaibei ___ Knitting Company to lay up the product line of polar fleece, of which the amount of investment is up to RMB 26 million. To avoid further loss, the only choice for Huaibei ___ Knitting Company is to keep running the equipment under the condition of high cost but low efficiency which causes the total output in each single unit time to dramatically shrink. The loss is equal to RMB 0.5 million (from 28 May 2000 to 28 May 2001). The [Seller] should cover this loss. And, if the [Seller] cannot provide compensation sufficient to enable the [Buyer] to purchase substitute equipment to keep the product line working, then the [Seller] should bear the further loss of profits of Huaibei ___ Knitting Company.
3. According to Article 16 of the contract signed by both parties, the [Seller] should bear the loss of expense of inspection, traveling expense, attorneys' fees and arbitration fees resulting from [Seller]'s breach of contract.
The [Buyer] filed its application of arbitration asking Arbitration Tribunal rule that:
| 1. | The [Seller] should return the payment for the equipment made by the [Buyer], equal to US $156,682.40; |
| 2. | The [Seller] should compensate for the loss of profits of the [Buyer], RMB 0.5 million; |
| 3. | The [Seller] should replace the [...] component; |
| 4. | The [Seller] should bear the expense of inspection and traveling, attorneys' fees and arbitration fees due to its breach of contract; |
On 14 January 2002, the [Buyer] advised that it wished to revise its four claims as follows. But the object of the arbitration does not change.
| 1. | The [Buyer] requests the depreciation of the value of the tentering and
preshrink machine, and asks the [Seller] to return the payment for the
equipment made by the [Buyer], US $128,969 (274,400 * 90% - 274,400 *
43% = US $128,968). |
| 2. | The [Buyer] asks the [Seller] to compensate for damages of RMB 0.73
million. |
| 3. | The [Seller] should replace the [...]; |
| 4. | The [Seller] should bear the expense of inspection, traveling, attorneys' fees and arbitration fees due to its breach of contract. The first three of these claims amount to RMB 33,739.00, the arbitration fee should be calculated on the basis of actual cost. |
The [Seller]'s response
Responding to the [Buyer]'s arbitration application, the [Seller] argued as follows:
1. The Purchase Contract signed by the [Seller] and the [Buyer] on 27 January 2000 is not a separate contract, but a modified edition of a Purchase Contract signed by the [Seller] and Huaibei ___ Knitting Company (Anhui province) on 30 December 1999.
The [Seller] is a commission agent of textile machinery industry for Italy ___ Company. Since early May of 1999, the [Seller] has started communication with Huaibei ___ Knitting Company about technology. During that period, the [Seller] sent the equipment manual made by Italy ___ Company to the [Buyer] in which it described that there are two methods of heating for the [...]: infrared radiation and heated air. The manual also introduced the technology function of several different kinds of equipment.
Upon the manufacturer's request, in November of 1999, the [Seller] sent its personnel to the purchasers of a [...] made by Italy ____ Company in Ma Anshan and Ning Bo.
Huaibei ___ Knitting Company chose to buy the [...] (MOD.205/3) from Italy ___ Company on the basis of its needs of production and the technical data provided by Italy ___ Company. On 30 December 1999, both parties signed Contract No. WW19991230AW (hereafter, "the first contract"). The contract shows that the [Buyer] is a party to that contract, even though it did not sign that contract. On 6 January 2000, Huaibei ___ Knitting Company asked the [Seller] to pay the deposit for the performance of the contract.
Afterwards, the [Seller], Huaibei ___ Knitting Company and the [Buyer] conducted further negotiations and made some modifications to the contract articles on price and date of shipment. Based on these negotiations and modifications, on 27 January 2000, they entered into Contract No. 2000FSBXA-40AB20102HK (hereafter "the second contract"). But in the second contract, the articles having to do with the name of object of contract and specifications are the same as stipulated in the first contract.
Thus, the contract of 27 January 2000 is a modified expression of intent based on the contract formed on 30 December 1999.
2. Within the expressions of intent of the two contracts in this case, nowhere is it expressed that the equipment is specific for polar fleece. It is not acceptable for the [Buyer] to claim that the [Seller] breached the contract because the equipment sold by the [Seller] could not meet the needs of producing polar fleece and its output.
The [Seller] notes that even with the Anhui Bidding Center for Machinery and Electronic Products' arrangement for bidding for "polar fleece" equipment, in the first and second contracts executed by the three concerning parties in this case and in the description of the object of the contract, there is no expression of intent that the equipment specifically provide for producing "polar fleece". This means that the expression of intent of the invitation to bidding for "polar fleece" equipment arranged by the Anhui Bidding Center for Machinery and Electronic Products in January of 2000 does not negatively affect the expression of intent regarding the object of the contract entered into by the parties in the first and second contracts.
In fact, the performance of the [Seller] is completely in accordance with the contract. This equipment could produce many kinds of [...] stipulated in the contract. In terms of the facts, the claim of [Buyer] is baseless.
As to the inspection report, the fact is that after Huaibei ___ Knitting Company claimed that the running speed of the [...] (MOD.205/3) produced by Italy ___ Company did not reach the standard stipulated in the contract, the [Seller], as agent, contracted Italy ___ Company and asked Huaibei ___ Knitting Company to arrange machine tests on 3 and 29 November and on 7, 8 and 9 December 2000. There was a dispute between the parties: Italy ___ Company wanted to have the machine tested with 35G [...] (non "polar fleece" cloth) but Huaibei ___ Knitting Company insisted on using "polar fleece" cloth to test the equipment. Thus the test was not carried out.
The [Seller] stated that to test whether the quality of Italian ___ MOD.205/3 [...] reaches the standard stipulated in the contract, they must test the equipment according to the stipulation of the contract. The [Seller] does not accept the [Buyer]'s conclusion that the quality of the equipment does not meet the standard of contract because the [Buyer] only used product of polar fleece to test the equipment. The [Seller] will not accept anything outside the contract.
3. "Polar fleece", as a fabric, has a big difference from chemical heavy fabric in terms of knitting process and features of knitted fabric. Therefore, the Polar Fleece is not the same product as the chemical heavy fabric stipulated in the contract.
For polar fleece (also named "[...]"), its knitting process is: knitting-dyeing- pilling-[...]-shape-clothing-inspect and packing. There is a big difference of knitting process between polar fleece and chemical heavy fabric.
| (1) | In the process of ([...]), [...]. |
| (2) | When the polar fleece is [...], it still needs to be [...], the process of which is not used to knit [...]. This process [...], [...]. Which is the specific feature of polar fleece, [...]. |
| (3) | The [Seller] visited several domestic polar fleece manufacturers to look for the solution for the problem. For efficient productivity, these manufacturers adopt the heated-air method. The [...] for the heated-air method could finalize the shape of polar fleece at the temperature of 150 degrees and the speed of 25 to 30 meters per minute. |
The above facts show that if the buyer and the final user want the speed of shaping polar fleece not lower than 28 meters per minute, they should choose a [...] of the heated-air method. However, they regretted that they chose a wrong model of machine which does not fit their initial purpose.
4. The reason why it is difficult for the final user Huaibei ___ Knitting Company to achieve the goal of output is not because of the act of the seller but the act of the purchaser, the purchaser failed to choose a suitable model of machine.
Prior to the contract, the [Seller] informed the purchaser of the details of the model of the machine and technical data, which were provided by the manufacturer. As a commission agent for the manufacturer, Italian ___ Company, the [Seller] has no authority to modify these technical data. Moreover, there was no illegal act of the [Seller] that forced the purchaser to purchase this machine. The expressions of intent of both parties are genuine. As the purchaser and the final user of the machine, they should have known which kind of machine they wanted. Since they made a wrong choice based on their judgment, they should not shift the responsibility to the [Seller] by any excuses.
In fact, after the machine was delivered to the final user, when the user found this mistake, the [Seller] showed a positive attitude to cooperate with the user to find out the solution. However, the purchaser and the final user always sought to shift the blame to the [Seller] by different kinds of excuses which are not accepted by the [Seller].
From what has been stated above, the [Seller] performed the entire obligation stipulated in the contract without breach of contract. The losses of the purchaser and the final user are from their unreasonable selection of the model of machine. They should bear the loss by themselves. Therefore, the [Seller] refuses to accept the request of damages from the [Buyer].
The [Seller] submits its counterclaim in the Counterclaim Application dated 13 November 2001 and requests the Arbitration Tribunal to rule that:
| 1. | The [Buyer] should make the payment of arrearages, US $27,028.40 and
interest for the [...] (MOD.205/3). |
| 2. | The [Buyer] should make the payment for the expense of US $3,160 incurred
for replacing the engine governor of the [...] (MOD.205/3) and the interest on
this sum. |
| 3. | The [Buyer] should bear the arbitration fee and attorneys' fee. |
The [Seller] submits its counterclaim on the basis of following facts and reasons:
1. The [Seller] delivered the machine in accordance with the Purchase Contract (30 December 1999) and the modification of Contract (27 January 2000) and signed and accepted the inspection report (in Chinese and English) in accordance with the Contract (28 May 2000). According to the 10th clause of the Contract, the [Buyer] should make the payment of arrearages equal to 10% of the total price of the Contract after 120 days since the [Buyer] completed the process of inspection and acceptance and received the invoice and certification of inspection and acceptance. However, the [Buyer] did not perform its contractual obligation. The [Seller] sent notices to the [Buyer] many times requesting the [Buyer] to perform its contract obligations. Up till now, the [Buyer] still has not performed its obligation. Therefore, the [Seller] requests that the Arbitration Tribunal rule that the [Buyer] should make the payment of the arrearages of Contract, equal to US $27,028.40 and interest on this amount.
2. On 25 June 2000, the [Seller] received oral notice and facsimile from the [Buyer] and Huaibei ___ Knitting Company, stating that the governor motor of the [...] (MOD.205/3) is broken. Via the on-site-inspect by the technician of Italian ___ Company and the verification of Italian ___ Company, the broken governor motor was due to an error in operation by the user. The [Seller] cooperated with the manufacturer and the final user to solve the problem. The [Seller] also paid for the cost of replacing the engine and informed the [Buyer] of this situation, requesting the [Buyer] to make the payment for the cost of replacing the motor paid by the [Seller]. The [Buyer] verified the expense of the cost for the replacement. However, up till now, the [Buyer] has not made the payment. Thus, the [Seller] requests the [Buyer] to make the payment for the cost of replacing the governor motor, equal to US $3,160 and interest on this amount.
3. Because the breach of contract by the [Buyer] caused the arbitration expense and attorneys' fees, the [Seller] requests the Arbitration Tribunal to rule that the [Buyer] shall bear all expense incurred by the [Seller] for the arbitration and hiring lawyers.
[Buyer]'s response
The [Buyer] emphasizes in its statement of 5 February 2002 that the equipment provided by the [Seller] is not consistent with the contract and the speed of [...] cannot reach 28 meters per minute. There are three reasons for this:
| (1) | After several tests of the equipment, it still could not meet the standard. The equipment has not been officially checked and accepted by the [Buyer]. |
| (2) | The mandatory inspection certificate by law (which is also required in the contract) verifies that the equipment is not consistent with the requirements of the contract; |
| (3) | Moreover, the [Seller] has also affirmed that the equipment does not meet the standard. |
As can be seen in the literal meaning, the purpose of the contract, the background and the performance of the contract, the stipulation of the contract is clear and the reason why the equipment could not meet the standard is the problem per se. From the literal meaning of clauses in the contract. 350 grams chemical heavy fabric definitely includes polar fleece. Because polar fleece is made of chemical fiber, 350 grams chemical heavy fabric definitely includes polar fleece which is one kind of chemical heavy fabric. It is clear for both [Buyer] and the [Seller] that the purpose of purchasing the equipment by [Buyer] is for the product line of polar fleece. The reason why it is stipulated in the contract that the modeling speed is no less than 28 meters per minute for 350 grams chemical heavy fabric is for a broader application of the machine. It is doubtless that the scale of application includes polar fleece. In the pleadings, the [Seller] also agrees that 350 grams chemical heavy fabric includes polar fleece.
In addition, from the perspective of the purpose and background of the contract, the purpose of the [Buyer]'s purchase of the [...] from the [Seller] is to match with the product line of polar fleece which is invested at the same time. So [...] is specified for the polar fleece. There is no doubt that the stipulation of the standard of technology both in the contract and appendix is specifically for polar fleece. Moreover, this contract is formed through the bidding held by Anhui Bidding Center for Machinery and Electronic Products. The title for the bidding is "Product Line of Polar Fleece." The model is 280-550 grams polar fleece. Therefore, the [Seller] should have known the [Buyer]'s purpose in purchasing the [...] and the scale of application of the machine. And then the speed stipulated in the appendix of the contract for the [...] is calculated on the basis of producing polar fleece.
In the hearing of the Arbitration Tribunal on 16 January 2002, the contract agent and arbitration agent of [Seller] stated that "when signing the contract, I noticed that the 'polar fleece product line' is stipulated in the contract and the opposite party explained that the polar fleece is thick [...]." Therefore, the [Seller] was aware that the [...] is specifically for producing [...].
From the perspective of performance of the contract, the understanding of this matter stated above and the expression of intent of the [Seller] is consistent with the [Buyer]'s. Thus, after the equipment was delivered to the user, both parties, user and the Administration of Quality Supervision, Inspection & Quarantine tested the machine by [...] several times. The [Buyer] did not disagree with that. After the equipment was delivered to the user's manufactory, as there was a problem with the speed not being consistent with the standard of the contract, the [Seller] and the Italian manufacturer of the equipment went to repair and test the equipment on the spot and tried to find the cause of the problem. During the course of of repairing and testing, they did not say that the problem was because the machine is not suitable for [...]. Half a year later, facing pressure from the [Buyer] requesting the recovery of damages, they said that the problem was caused by using unsuitable cloth to test the machine (before this, in the report from the [Seller] dated 18 October 2000, they did not mention the cloth for the machine testing and they expressed their willingness to pay the damages). This is to shuffle the responsibility and avoid the legal responsibility when they are in a situation in which the machine still could not reach the standard and solve the problems after several tests and inspections.
The [Buyer] stated that, according to the 16th clause of the contract, when the goods delivered by the [Seller] are not consistent with the contract, the [Buyer] has the right to depreciate the value of goods and request the [Seller] to pay the value difference caused by depreciation. The four counts of the [Buyer]'s Complaint have factual and legal basis.
According to the 10th clause of the contract, the [Buyer] only needs to pay the arrearages, equal to 10% of the contract price, after the [Buyer] receives the verification of checking and acceptance signed by both seller and buyer. However, because there is a serious quality problem, the machine has not been checked and accepted. Therefore, the buyer has reason to reject the payment.
In addition, according to the 10th clause of the contract and the letter delivered from the [Seller] to the Bidding Center and Huaibei ___ Knitting Company on 26 January 2000, they clarify that the 10% arrearage is in accordance with the quality warranty. Because of the quality problem, the [Buyer] has the right to reject payment of the arrearages.
The [Buyer] claims in another statement for the matter of relevant technology in this case that when purchasing the shaping machine, the process should be that at first the seller should confirm the technical parameters with the buyer, including the type of processed fabric, width of fabric, the temperature for processing, the weight of processed product in every square meter and the speed of processing for one gram per square meter. To decide which methods will be adopted (infrared heating, gas heating and electronic heating), the buyer will consider in light of the cost of usage, environmental concern and the safety of usage. Furthermore, the seller should provide the information of specification of entire set of equipment and the scale of mode of the machine which should meet the standard of buyer's technical parameters. This process is an industrial custom. Where the equipment provided by the seller is not consistent with the requirements of the contract, it could be deemed that the equipment has a quality problem.
As to which quality problem it has, that should be solved by the seller. This case involves a contract dispute. The major obligation of the buyer is to pay for the goods; the major obligation of the seller is to deliver qualified goods. If the delivered goods are not qualified, the seller has breached the contract.
The reason why the [...] cannot reach the requirement of quality in the contract is a self-problem with the machine.
Moreover, the [Buyer] also stated that modeling via infrared heating is more efficient than via heated air. To shuffle responsibility for breach of contract, the [Seller] denied knowing this common industry technological knowledge. The [Buyer] has a large amount of evidence to prove that modeling via infrared heating is more efficient than via heated air.
At pages 402 to 404 of the first volume of the book "[...]", published by China ___ Press, Professor Bao ___ and Professor Ma ___ state that the infrared heating method, which needs to heat the surrounding air around textiles, directly penetrates the textile, therefore, the velocity of the infrared heating method is much faster than convection (warm-air heating), and the exhaust heat loss is less than convection heating; moreover, as the penetration ability of infrared radiation is stronger, the heat is distributed inside the textile more evenly than convection heating.
Modeling by infrared radiation theory is interpreted in detail at pages 11 to 14 of the book, "[...]", by Professor Xu, published by ___ Industrial Press. He points out in this book that modeling by the infrared radiation method has many advantages such as high efficiency, simple structure of equipment, easy to operate and broad range of application.
As stated above, the method of infrared heating is more advanced because it has higher efficiency than the warm-air heating method in the shaping of textiles. Moreover, there is no big difference of price between [...] of the infrared heating method and [...] of the warm-air heating method. The [Seller]'s argument that the price of equipment of warm-air heating is one time greater than for equipment of infrared heating is not supported by the facts. The [Buyer] provided evidence that the average price for every single machine offered from French ___, German ___ and Taiwan ___ is between RMB 2.1 million to RMB 2.5 million, basically which is very close to the price of infrared heating [...] offered by the [Seller] (RMB 2.3 million). The evidence provided by the [Buyer] shows that the price offered by the French ___ is RMB 2.15 million, the price offered by Taiwan ___ is RMB 2.5 million. The average speed when the machine process the textile of 300-400g/ square meter is above 30 meters per minute.
Furthermore, polar fleece is one kind of 350 gram chemical heavy fabric. The product of polar fleece is made of [...], [...], [...], [...], [...], [...], [...]. It is not much different from the process of producing regular [...]. After [...] [...], it is more easy for modeling as the polar fleece become more [...] [...]. The [Seller] stipulates in the technical material that the shaping machine is for the purpose of [...] textile. It is also clearly said in the offer that the speed for shaping the 350 gram per square meter can be no less than 28 meters per minute.
The Inspection and Test Report issued by Huaibei Fabric Testing Institution and the Quality Supervisions and Inspection Report issued by the Anhui Center of Quality Supervision and Inspection on Textile Products shows that polar fleece is 100% fabric. Bengbu ___ Textile Factory also verifies that polar fleece is fabric and it is common knowledge that if the polar fleece's weight is more than 350 gram / square meter, then it is [...].
[Seller]'s rebuttal
The agent for the [Seller] stated that:
1. The issue about whether there is a promise in the contract that the machine is specifically for polar fleece
The [Seller] alleges that neither in the contract nor in the course of execution of the contract, did the parities express any intent as to whether the machine was specific for polar fleece, and the [Seller] did not make any promise in this regard.
The [Seller] notes that at first, the [Buyer] claimed in the arbitration application that the [Seller] breached the contract, and then, in the course of the hearing, blamed the [Seller] for providing a machine that had defects so that "the speed did not reach the standard stipulated in the contract." This leads to the key point: whether or not in the contract the two parties stipulated that the machine provided by the seller is specific for the producing of polar fleece.
The [Seller] requests the Arbitral Tribunal to note following facts:
(1) All three parties expressed their real intent on the basis of equality and autonomy of will, and there was no intent expression of intent about "polar fleece" by the parties.
(2) The entire bidding process is just eyewash. There is no expression of intent about "polar fleece" in the contract. The facts are:
a. The information about the "bidding invitation" mentioned by the [Buyer] was released on 5 January 2000. However, the real buyer, Huaibei ___ Knitting Company (Anhui Province) had already had signed a contract with the [Seller] on 30 December 1999, clearly expressing the intent to purchase [...] from ___ company. There is no expression of intent about "polar fleece" in the contract. To get the equipment as soon as possible, "Huaibei ___ Knitting Company paid the deposit to the [Seller] on 6 January 2000.
b. In the contract signed by the three parties on 27 January 2000, it shows that the equipment to be purchased is the same model as the equipment stipulated in the contract on 30 December 1999. There is no expression of intent about "polar fleece" there either.
The [Seller] requests the Arbitral Tribunal to note that in Appendix 1 of the contract, the context specially stated in the contract about "350 grams chemical heavy fabric" was written by the party signing for "Huaibei ___ Knitting Company." If it is true as [Buyer] said that the real purpose of the contract is to purchase a machine to produce polar fleece, then why it is not clearly stated in the so-called bid document of the winner that the machine is specifically for producing polar fleece? Instead, "[...]" is specially stipulated in the contract.
c. At the hearing, the [Buyer] showed so-called a "Notification to Bid Winner" (sent out on 28 January 2000), never shown before, which states "please reach the buyer with this notification and sign the contract as soon as possible." In fact, prior to the delivery of the Notification for Bid Winner, on 27 January 2000, all three parties had signed the contract. The [Seller] does not agree that the Notification to Bid Winner can be treated as evidence.
d. In the entire process of execution of the contract, the [Buyer] did not express any intent on the issue of "polar fleece." When the [Seller] visited the relevant manufacturers at the request of Huaibei ___ Knitting Company, the Huaibei ___ Knitting Company never requested inspection on the production of polar fleece.
In the process of execution of the contract, the [Seller] paid much attention to the inquiry from Huaibei ___ Knitting Company about technical data, forwarding the inquiries, via facsimile or telephone to the manufacturers who produced the machines and sending back the reply from the manufacturers. During that period, the [Buyer] did not mention that the equipment was specific to polar fleece and did not inquire anying about polar fleece's technical data. They just said that the machine is used for the productions of chemical fiber, pure cotton product and blended fabric. According to the [Seller]'s custom, if a buyer stated that the purchased machine is used for new products (special textiles), at the request of the buyer, to fulfill special needs of the buyer, the [Seller] would deliver the textile raw materials to the manufacturers for the machine test.
Therefore, the so-called bidding is eyewash, which has no influence on the expression of intent of all three parties. The execution of the contract by all three parties is not related to the process of "bid invitation, tender and winning a bid." From this point of view, the winning of bid is invalid.
2. The argument by the [Seller] in opposition to the [Buyer]'s statement that there is a defect in the design
At the hearing, the [Buyer] complained that the equipment provided by the [Seller] has defects in its design. The [Seller] defended that it this argument is groundless. The [Seller] alleged that:
(1) The [Buyer] did not provide any evidence to support its claim that because of a design defect, the speed of machine for polar fleece production cannot reach the stipulated standard.
(2) At the hearing, [Buyer] complained that the temperature control of the equipment did not work well as there was a big fluctuation of temperature which negatively effects the shaping of the textile. However, the documents provided by the [Buyer] to the tribunal show that:
It is demonstrated in the "Inspection and Acceptance Report" signed by the [Buyer] and Huaibei ___ Knitting Company that there actually exists instability of temperature. However, the reason for the instability is that at that time, the equipment was not adjusted to fit the work. Hence, in the "Inspection and Acceptance Report" it emphasizes that it needs further adjustment and testing.
After that, via the adjustment and test by the Italian engineer, the machine worked well and the temperate was stable. Thereafter, in the Inspection and Acceptance Report of 9 April 2001, there is no opposite conclusion.
Moreover, on the site appraisal, the real buyer "Huaibei ___ Knitting Company," the [Seller], and the investigator all clearly noted that the temperature control worked stably in the running of the machine and that there was no so-called "big fluctuation of temperature."
(3) Dozens of machines of the type provided by [Seller] to the [Buyer] and its real buyer Huaibei ___ Knitting Company have been sold in Europe, America and China before execution of this contract. As it adopts a mature technology, in the process of producing [...]. [...] and [...], there have been no complaint from clients that there is a design deficiency. Up till now, the machine works well. However, as the [Seller] knows, none of the above manufacturers produces polar fleece by that type of machine.
(4) According to the Inspection and Acceptance Report provided by the [Buyer] to the Arbitral Tribunal, and the statement by the [Buyer] at the hearing, the equipment provided by the [Seller] works well for producing non-polar-fleece textiles as it reaches all the standards stipulated in the contract. However, when the real buyer produces polar fleece textile, which is not stipulated in the contract, the speed of the equipment does not reach the stipulated standard. In [Seller]'s opinion, the problem is due to the feature of polar fleece. Thus, the [Buyer] cannot properly draw the conclusion that the equipment provided by the [Seller] does not fit the standard in the contract.
3. The matters of shaping of polar fleece and chemical heavy fabric
The [Seller] alleges that:
(1) The shaping of "polar fleece" is not equal to the shaping of chemical heavy fabric. Polar fleece calls for a separate series of production after special process. For the process of polar fleece, because it is a kind of production that is heavy and has high humidity, the shaping of polar fleece requires a special shaping machine.
(2) The heated-air shaping method meets the needs of polar fleece shaping. The [Seller] wants to clarify the point that the processing of [...], [...] and [...] are totally different concepts. As one kind of ray, infrared radiation has strong capability of penetration, however, this is not to say that its capability of heat shaping is strong as well. Heated-air shaping is more fitting for textiles of [...], and is also good for the shaping of polar fleece as it has strong warm air and [...].
It is not to say that the machine provided by the [Seller] does not fit shaping of polar fleece but it is to say that, according to the feature of polar fleece, presently, it is common that manufacturers in China choose to use heated-air shaping machines for this.
4. The defenses to the issues presented in [Buyer]'s Application for Arbitration
(1) The packing and components
The [Buyer] stated that it found the packing and components were not consistent with the standards of the contract after the machine arrived at Huaibei ___ Knitting Company but before it underwent the process of inspection and acceptance.
The [Buyer] complained that after the machine had been delivered to Huaibei ___ Knitting Company on 3 May 2000, they found it distorted with the heating tube broken and the manometer also broken.
However, the [Seller] argues that it was not responsible for this situation. It is clearly stipulated at page two of the "Inspection Report" that these "problems were caused by the inappropriate packing by the foreign seller." So they should be repaired by the Italian party.
The [Buyer] stated that the Inspection and Acceptance Report (28 May 2000) is enough to show that the machine is inconsistent with the stipulations of the contract. Afterwards, the [Buyer] sent a formal letter on 26 June ... clearly stating that it is impossible to inspect and accept the machine.
Obviously, neither the statement by the [Buyer] in the Application for Arbitration or in the letter of 6 June 2000, respects the fundamental facts written in the Inspection and Acceptance Report on 28 May 2000. It clearly states that:
"After tested by seller's engineers and inspected by buyer, the machine meets the stipulation of the contract and works well; therefore, the buyer agrees to accept the machine."
However, the agent for the [Buyer] unilaterally denied in his correspondence on 26 June that the consigner Huaibei ___ Knitting Company and the provider of the machine (the [Seller]) completed the process of inspection and acceptance of the machine. According to China's Civil Law and Contract Law, the agent does not have authority to deny the validity of the consigner's conduct.
(2) The inspection of the function of the machine
The [Buyer] alleged that on 22 September 2000, the Inspection and Quarantine Bureau, the [Buyer], Huaibei ___ Knitting Company and the [Seller] inspected the function of the machine all together, verified that the speed of the machine was not consistent with the stipulation of the contract and signed the memoranda.
However, the [Seller] specifically points out that as it is stated in the Application for Arbitration, before, during and after the process inspection by the [Seller], the [Seller] always insisted to use chemical fiber rather than polar fleece because, as stated above, the parties do not agree that the machine is to be used for polar fleece according to the contract and only for producing polar fleece. In the negotiation of the contract, the technical data mentioned by the [Buyer] and Huaibei ___ Knitting Company was only related to [...] and 100% cotton textile. Moreover, the [Buyer] and Huaibei ___ Knitting Company chose the model on the basis of these data.
The [Buyer] stated that the result of inspection is that the machine does not meet the standard that the shaping speed of 350 chemical heavy fabric should not be less than 25 meters per minute.
We should be aware that the inspection is not only to test the shaping of regular chemical heavy fabric, but to test the shaping of polar fleece, for which the producing process needs a special technology requirement that exceeds the contract. Hence, as stated by the [Buyer], [Seller] always required the use of chemical heavy fabric to test the machine and refused to do anything else which exceeds the range of the contract. Even though the [Seller] signed the memoranda under the pressure of the Inspection and Quarantine Bureau, it merely demonstrates that they used polar fleece to inspect and test the machine. However, the [Seller] refuses to accept all the results based on that inspection which exceeds the stipulation of the contract.
(3) The allegation that the [Seller] was willing to pay the damages recovery
The [Buyer] stated that the [Seller] several times expressed its willingness to pay damages. The [Seller] solemnly states that it never expressed the willingness to pay the damages of the [Buyer] and Huaibei ___ Knitting Company. In its internal reporting, the [Seller], only reported to the internal management the requirement proposed by Huaibei ___ Knitting Company, which is not equal to accepting any requirements of the [Buyer]. The [Seller] defends that the damages are due to the inappropriate choice on the type of machine by the Huaibei ___ Knitting Company and [Buyer].
5. Conclusion
Due to the inappropriate choice of the model of machine by the purchaser, not the provider (the [Seller]), the final user, Huaibei ___ Knitting Company has the difficulties in producing polar fleece.
Prior to the contract, the [Seller] informed the [Buyer] of the details of models and technical data provided by the manufacturer. As an agent for the producer, Italian ___ Company, [Seller] has no authority to modify these data. Moreover, the [Seller] did not use any illegal ways to induce the purchaser to buy the machine such as deceit or threat. Both truthfully expressed their intention. As purchaser, [Buyer] and Huaibei ___Knitting Company should know what product they want to produce, what features the products have and what kind of machine they need to use. Once they wrongfully chose the machine due to their misjudgment, they should not shift the responsibility to the [Seller] by any excuses.
At the hearing, the Arbitral Tribunal asked questions on the price of machine. The fact is that since 1997, there is a big price gap between the two types of machines, heated-air and heat radiation, which are all sold by the [Seller]. The heated-air machine is much more expensive than the heat radiation machine. As to why the [Buyer] chose to buy the expensive one, whether the [Buyer] considered the price gap, only the [Buyer] himself knows the reason.
The fact is that after delivery of the machine and after the [Buyer] and the real buyer found that they had chosen the wrong model, the [Seller] positively cooperated with them to find a solution. However, in fact, the [Buyer] and the real buyer always tried to shift the responsibility to the [Seller] by different kinds of excuses. This is unacceptable.
As stated above, there was no breach of contract by the [Seller] as the [Seller] conducted its obligation in accordance with the contract. The damages arising from inappropriate choice of model of machine is due to Huaibei ___ Knitting Company's and [Buyer]'s own mistakes and they should bear the loss of damages. Therefore, the [Seller] refuses to accept the claim for the recovery of damages from the [Buyer].
In further response, to the [Buyer]'s complaints, the [Seller] states:
1. The claim for the recovery of loss of profits of the [Buyer]. This claim is baseless, because the evidence of loss of profits provided by the [Buyer] is in relation to Huaibei ___ Knitting Company whose profits are not [Buyer]'s profits and Huaibei ___ Knitting Company is not the party in this case. It is groundless to complain that it caused profit loss of [Buyer]. Moreover, there is no evidence to show that loss of profits really happened.
2. The claim that the [Seller] should bear the fees of [Buyer]'s lawyers, traveling, arbitration and inspection expense as they resulted from the breach of contract by the [Seller]. In terms of the facts and analysis of the case, because there was no breach of contract by the [Seller], the [Seller] denies [Buyer]'s requests.
3. The issue about switching the bearing. When there was a problem of abrasion of bearing, the machine was undergoing maintenance. By the contract, where [Seller] is responsible, the [Seller] will replace abrased components. However, the [Seller] stated that responsibility of delaying changing of components is not due to the [Seller].
The [Seller]'s counterclaim
In its counterclaim, the [Seller] requests the Arbitration Tribunal to order the [Buyer] pay the arrearage of the payment under the contract. In this regard, a key question is whether the signature of Huaibei ___ Knitting Company Knitting Company on the "Inspection Report" is equivalent to the Report being signed by the [Buyer].
Before China's Contract Law (hereafter "Contract Law") became effective, according to the custom for foreign trade by agency, the buyer in an import and export contract is deemed an agent as an import and export company but without authority for the import and export of the goods. However, in this case, the buyer, in fact, is a nominal buyer, the final user is the real buyer. To the signature of Inspect Report, this custom, to some extent, is a trap. On the other hand, the party always signing the Inspect Report is the real buyer, while the agent does not always sign or delays signing the inspect report which gives an illusion that the buyer signs the contract or makes it possible that once finding the situation is good for them, they refuse to perform the contract by the excuse that the real buyer is only the final user not the party in the contract. This case has a similar situation. In the Inspection Report, even as the real buyer signed the contract, the import and export company can deny validity of the consignor's signature in the contract for the reason that in terms of the contract, the [Buyer] is the import and export company.
However, the [Buyer] forgets one point that this contract was executed after China's Contract Law became effective. According to China's Contract Law, the contract in this case is opposite to the principles of equality, good faith and the rule of agency which are stipulated in China's Contract Law.
In clause 402 of China's Contract Law, where the consigner within its authority signs a contract, if the third party knows the relationship between consigner and assignee, the contract directly binds the assigner and the third party unless there is apparent evidence to show that the contract only binds the assignee and the third parties. In this case, even though the name Huaibei ___ Knitting Company is shown directly in the contract as a final user of machine, it is clearly expressed that Huaibei ___ Knitting Company is a nominal buyer and as an assigner of [Buyer]. Therefore, the contract is binding on Huaibei ___ Knitting Company which is assigner as well.
The third clause of Article 403 in China's Contract Law regulates that when the consigner can execute assignee's right to third parties, the third party can execute the right of defense to the assignee. If the third party deems the consigner as the counter party, then the consignor can make a claim against the third party by its defense to the assignee or by assignee's defense to the third party. It displays that the consigner can directly execute the right which belongs to the agent that fits the core principle of agency stipulated in China's Civil Law. Contrarily, an agent cannot deny the validity of conduct directly executed by the consignor. Because the conduct of agent executed by the consignor does not deprive the capability of the consignor to execute conduct such as signature. Hence, the nominal buyer in this case has no authority to deny the right of the consignor - the real buyer - Huaibei ___ Knitting Company to sign the Inspection Report. In this case, the [Seller] delivered the machine on time and signed the Inspection and Acceptance Report with the real buyer and nominal buyer (consignor, "Huaibei ___ Knitting Company) on 28 May 2000. According to clause 5 of the contract, after within 120 days, since the [Buyer] inspected and accepted the machine and received the receipt and the Certificate of Inspection and Acceptance, the [Buyer] should pay the 10% of the arrearage. However, when the requirement stipulated in the contract was fulfilled, the [Buyer] did not perform its obligation under the contract. The [Seller] sent the [Buyer] notice for payment, asking [Buyer] to execute the obligation of payment. The [Buyer] has not satisfied this obligation. Therefore, the [Seller] requests the Arbitral Tribunal to rule that the [Buyer] should pay the arrearage, US $27,028.40, and the interest on this amount.
The [Seller] asks the [Buyer] to reimburse the cost of replacing the motor by the [Seller], US $3,160 and the interest on this amount. According to the verification by the technician from Italian ___ Company and the investigation by the Arbitral Tribunal, the break-down of the motor was due to the user's inappropriate use.
Because of the breach of contract by the [Buyer], the [Seller] paid attorneys' fees and arbitration fees for claiming its rights (the receipt provided by the [Buyer] shows that the amount is equal to RMB 164,000 - added by the Tribunal). The [Seller] requests the Arbitral Tribunal to rule that the [Buyer] should bear the [Seller]'s cost of arbitration and hiring lawyers.
Thereafter, the agent of [Seller] further stated its position in Supplemental Representation:
1. The dispute between the [Buyer] and the [Seller] primarily focuses on the speed of the heat shaping machine. It is baseless for the [Buyer] to assert that the machine has defects of quality because the speed of the machine cannot fulfill the needs of production.
(1) The [Buyer] did not provide any evidence to prove that the machine has defects (evidence to prove that the machine cannot reach all the technical functions described in the usage manual).
(2) During the hearing on 16 January 2002, Li, the manager of Huaibei ___ Knitting Company , clearly stated that this machine is good at producing 100% cotton product and polyester products. When producing polar fleece products, the machine is running well at speed of 12 meters per minute, however, a higher speed will make the width of product unstable. The situations stated above appropriately show that the machine itself does not have defects, however, the problem is due to the fact that the model of machine does not match with the products.
(3) In terms of textile products, every type of textile has its own characteristic. The speed of a shaping machine depends on each textile's characteristics. The expertise in this field is that the speed to produce each kind of textile is different. The parties did not make any decisions on the issue of "polar fleece" when signing the contract. The [Buyer]'s claim for the recovery of damages is unacceptable because it is beyond the contract.
2. The matter about the price of a heated air shaping machine. As the [Seller] did not sell this kind of machine in 2000, the [Seller] can only provide the price of the machine produced by Italian ___, MOD.310/3 which was US $665,521 in 1997 and 1998. The [Buyer] provided a price for a French machine; however, this machine was not originally produced in France but was produced by a China-France joint venture in China so there is a big gap between the two prices. This cannot prove that there is a difference between the prices of an infrared heating machine and a hot-air heating machine. The reason why Huaibei ___ Knitting Company chose the machine (MOD.205/3) made by Italian ___ Company is that this type of machine cannot only shape textiles but also has the function of preshrink.
3. The evidence provided by the parties shows that the [Buyer] did not mention the features of polar fleece in the executing of the contract. Moreover, the parties never made any specific agreement about polar fleece.
When the [Seller] as the agent for Italian ___ Company introduced machines to the client, the [Seller] strictly complied with the custom of importing machines which is an entire process of technology communication, on-site investigation, negotiation and signing contract. Model selection was completed prior to the negotiation. The choice of model is based on the characteristic of the machine and the needs of manufacturing. It is the same as when we go to a shopping mall and decide whether to buy a business suit or casual clothes which depends on our personal preference. As a vendor, the [Seller] only can tell the truth about the product and make recommendation rather than make choices for the client.
The evidence provided by both parties shows that in the contracts signed on 30 December 1999 and 27 January 2000, there is no intent expressed regarding "polar fleece." The Invitation to Bid, sent out on 5 January 2000, did not indicate that the machine was to be used to produce "polar fleece." Even in the text of the executed contract, it still does not indicate anything about polar fleece; instead, it indicates that it is for producing chemical fiber textiles.
The [Seller] cares much about its reputation and cooperates with and help its clients to solve problems all the time. When the machine was delivered to the manufacturer and the user sought to use the machine for shaping polar fleece, the maintenance team from the [Seller] and Italian engineers from the manufacturer went to [Buyer]'s manufacturer to adjust and test the machine. After inspecting and testing all the technical standards of this machine, they verified that the machine did not have any quality defects. Because of the difference of fundamental characteristics between polar fleece and common chemical fibre textiles, the machine cannot meet the needs of speed. However, with a positive attitude to cooperate with the user, even though the order exceeds the range of responsibility of [Seller], the [Seller] tried its best to help to solve the problem. There is no evidence to support the [Buyer]'s allegation that because of the pressure arising from the claim for the recovery of damages, the [Seller] used cloth to test the machine to shift the responsibility.
The hearing shows that in the process of executing the contract, both parties never expressed clear intent on the issue of polar fleece. It is not well supported by the evidence that 350 grams per square meter is similar to polar fleece. As stated above, the [Seller] thoroughly complied with the contract to provide a machine which has no quality defects. The problem that the machine cannot meet the needs of shaping polar fleece which is 28 meters per minute is due to [Buyer]'s own mistake in choosing the wrong model of machine. Thus, the damages resulting from the [Buyer]'s own mistake should be assumed by itself. The [Seller] refuses accept the request for the recovery of damages by the [Buyer].
THE OPINION OF THE ARBITRAL TRIBUNAL
1. Application of law
The contract in this case is a contract for sale of goods. For such a contract, the general principle is that the applicable law should be the law of the country in which the seller's business is located. The first clause of Article 8 of the Convention on the Law Applicable to Contracts for the International Sales of Goods, which became effective pursuant to the 1985 Hague Conference on Private International Law, stipulates that the law applicable to the contract should be the law of seller's place of business when signing the contract. Under this provision, the applicable law in this case would be the law of Hong Kong --- British law. However, the parties did not request the evidence for Hong Kong --- British law. In this situation, the Arbitral Tribunal does not have knowledge of Hong Kong --- British law. In addition to this situation which is related to the dispute in this case, because the place of hearing of this case is China, the location of buyer's business is in China and the machine was tested and adjusted in China as well, the Arbitral Tribunal holds that the applicable law is Chinese law, meanwhile, the Arbitral Tribunal will refer to the relevant international law to make its decision.
2. Whether the [Seller] was obligated to make the speed of shaping polar fleece reach 28 meters per minute
(1) The dispute
The objective of this contract is to purchase and sell the machine which is to shape [...]. The [Buyer]'s claim is to require the [Seller] to pay a damage recovery at a discounted price. [Buyer]'s reason is that the efficiency of the shaping speed of the machine provided by the [Seller] is only 43% of that required by the contract. To prove this point, the [Buyer] provided a certificate of inspection and quarantine issued by the China Bang Pu Entry-Exit Inspection and Quarantine Bureau and concluded that the machine in this case cannot meet the standard stipulated in the contract that the speed should be not less than 28 meters per minute. However, the "Inspection certificate" clearly shows that they used polar fleece to test the machine. Furthermore, the facsimiles between two parties from November to December 2000 shows that the [Seller] requested the use of non-polar fleece to test the machine, but the [Buyer] rejected the [Seller]'s request.
According to the above situation, the Arbitral Tribunal concludes that:
(a) The machine in this case cannot reach the speed stipulated in the contract when being tested on polar fleece products.
(b) The two parties did not use non-polar fleece products to test the machine; moreover, the [Buyer] cannot prove that when being tested on polar fleece products, the machine still cannot reach the speed stipulated in the contract.
(c) The major dispute between the two parties is whether the [Seller] has the obligation to make the machine to shape the polar fleece products at the speed not less than 28 meters per minute.
(2) Basic obligation of [Seller]
The eighth clause of Appendix 1, "major technical index", regulates that the speed of shaping "350 grams chemical heavy fabric" should not be lower than 28 meters per minute. The [Buyer] alleges that this clause covers polar fleece and that the [Seller] not only has obligation to make the speed of shaping of 350 grams chemical heavy fabric reach 28 meters per minute but also has the obligation to make the shaping of polar fleece reach that speed.
To prove that polar fleece is one kind of 350 grams chemical heavy fabric, the [Buyer] states that because polar fleece is made of pure chemical fiber, it belongs to 350 grams chemical heavy fabric. Moreover, the [Buyer] provided relevant evidence, for example, an inspection report issued by the Anhui Center of Quality Supervision and Inspection which proves that 100% of [...] is polyester.
To the above allegation of [Buyer], the [Seller] provided the Arbitral Tribunal an expert testimony issued by Mr. Hou ___ who is a senior engineer in the China Textile Academy. The expert points out that "the machine in this case is an infrared radiation heating and shaping machine. From the perspective of the principle of heating, because it has high efficiency of transferring of energy, there is no strong heat blast, the moist air flows slowly and it is not easy to volatilize; this method is advanced. However, for products like polar fleece which is heavy and has high humidity, the heated-air method is more appropriate."
The above testimony shows that polar fleece is not normal chemical heavy fabric, but belongs to a type of product which is heavy and has high humidity that matches with the heated-air shaping method. The question here is: when there is lacking a stipulation in the contract that 350 grams chemical heavy fabric includes polar fleece, what is the obligation of the [Seller]? Only to make the shaping speed reach 350 grams chemical heavy fabric reach 28 meters per minute? Or to make all kinds of 350 grams chemical heavy fabric reach the speed st forth in the contract, including polar fleece?
The above concern is a legal issue. We should look to Chinese law. In China's Contract Law (which is effective since 1 October 1999), the first clause of Article 62 states that if the contract does not clearly stipulate the quality of goods, when there is no national standard or trade standard, the performance of the contract should be consistent with the specific standard which fits the purpose of contract or general standard. To further define "general standard," we should look to the relevant regulation in the CISG.
Regarding the quality of goods, Article 35(2)(a) of the CISG states that in the situation in which there is no specific stipulation in the contract, the goods should comply with the purpose for ordinary use of goods of similar quality. Apparently, the first clause of article 62 of China's Contract Law is consistent with the CISG, which is that, when there is no specific stipulation, the goods delivered by seller should comply with the purpose for ordinary use of goods of similar quality.
In this case, the clarified facts are:
(a) The [Buyer] did not prove that the machine in this case cannot reach the stipulated speed when it is used to shape polar fleece products. Therefore, the Arbitral Tribunal concludes that the machine in this case can reach the stipulated speed when it is used to shape 350 grams chemical heavy fabric.
(b) As the machine in this case is an infrared heating machine, in the expert's opinion, a heated-air shaping machine is more appropriate for polar fleece. According to the expert's opinion, we conclude that polar fleece shaping does not fit into the range of "ordinary purpose of use." On the basis of these facts, the Arbitral Tribunal holds that the machine in this case meets the requirements of ordinary use of similar machines, and the complaints of the [Buyer] that the [Seller] breached the contract as the machine cannot reach the stipulated speed is not supported by the Arbitral Tribunal.
The [Buyer] further alleges that the interpretation of the contract in this case not only should be from the perspective of the context of contract but also needs to be on the basis of the purpose and background of the contract. In this case, [Buyer] alleges that the purpose for the contract is that the [Buyer] wanted to produce a product line of polar fleece and needed related machines. The contract was executed after an Invitation to Bid, of which the title is "Product Line for Polar Fleece." The [Buyer] alleges that the [Seller] completely knew about this purpose of the contract. Hence, the 350 [...] should include polar fleece.
However, it is necessary for the Arbitral Tribunal to further analyze this issue:
If the [Buyer] had informed the [Seller] of the specific purpose that it wanted to buy machines for producing polar fleece or if, before selling the machine, the [Seller] had already known the [Buyer]'s purpose, that would raise the question whether the [Seller] has the obligation to make the machine in this case meet that "specific purpose".
As stated above, in China's Contract Law, the first clause of Article 62 states that the goods sold by seller should not only meet "general standard" but needs to meet "the standard for specific contract purpose." This clause is in accordance with Article 35(2)(b) CISG which is the goods should be "fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract, except where the circumstances show that the buyer did not rely, or that it was unreasonable for him to rely, on the seller's skill and judgment."
The Arbitral Tribunal holds that according to China's Contract Law and the CISG, in this case, the [Seller] did not have an obligation to comply with a "specific purpose of the contract." The following are the reasons:
First, the machine, [...] (MOD.205/3) in this case is produced by Italian ___ Company. It is a specific model. According to the statement and evidence provided by the [Buyer], prior to this contract, more than ten sets of this model of machines have been sold in Europe, America and China. In this situation, the real buyer, "Huaibei ___ Knitting Company" as a manufacturer of this specific product, and which was represented by the [Buyer], prior to the contract, had the capability of knowing the special functions and features of this machine and its technical parameters. This manufacturer made its choice on the basis of its own judgment and knowledge of technology.
Second, the evidence provided by the two parties and the situation shown to the Arbitral Tribunal clearly indicates that the machine does not have quality defects and can be used for shaping polar fleece, but for this purpose, the speed of the machine cannot reach 28 meters per minute; a machine that uses the heated-air method is a better fit for polar fleece. In other words, it is not realistic to make the machine in this case reach 28 meters per minute for the purpose of shaping polar fleece. Therefore, the decision to choose this model of machine was not appropriate. However, Huaibei ___ Knitting Company is a specific manufacturer with its own technical team and can get opinions from experts. Moreover, in this case, the technology of this type of machine is mature. There are technical references available. And the machine has already been sold in China. The manufacturer-user has the complete capability to make the right judgment on the function and features of machine. Under this condition, if it is said that Huaibei ___ Knitting Company relied on the [Seller]'s knowledge of technology and judgment, this reliance is unreasonable.
To sum up, the [Seller] has the basic obligation only for the machine being used to produce ordinary 350 [...] at a speed of 28 meters per minute. The [Seller] does not have the obligation to make the machine reach that speed for producing polar fleece.
3. The [Buyer]'s arbitration claims
(1) Depreciation of value of machine
The [Buyer]'s first modified claim is to "request the Arbitral Tribunal to depreciate the value of '[...]' and to ask the [Seller] to return the excessive part of payment made by the [Buyer], equal to US $128,969." This amount is equal to the difference between the payment already made by the [Buyer] and the alleged depreciated value of the machine.
As stated above, the claim to depreciate the value of machine for the reason that its speed does not reach the standard stipulated in the contract is not supported by the Arbitral Tribunal.
(2) Recovery of damages, RMB 730, 000
The prerequisite to grant recovery of damages by the Arbitral Tribunal is that the loss is due to the [Seller]'s breach of contract. Because the [Buyer]'s claim that the [Seller] breached the contract is not supported by the Arbitral Tribunal, the Tribunal does not support this claim.
(3) Replace the left bearing
Notwithstanding the [Seller]'s argument that when the abrasion problem arose, the machine was undergoing technical maintenance, the Arbitral Tribunal holds that the [Seller] has the obligation to replace the component. The Tribunal supports this claim of the [Buyer].
(4) [Buyer]'s request that the [Seller] assume the cost of inspection and testing, hiring lawyers, traveling and arbitration
As the [Buyer]'s claim for breach of contract is not accepted, the Arbitral Tribunal does not support this claim.
4. The [Seller]'s counterclaim
(1) The claim that [Buyer] pay the arrearage
The [Seller] alleges that the [Buyer] did not pay the arrearage after it received the machine. The [Buyer] affirms this complaint but argues that since there is a serious quality defect, the [Buyer] alleges that it has the right to refuse to make payment.
Since the [Buyer]'s claim regarding the quality defects is not acceptable, the Arbitral Tribunal supports this counterclaim.
(2) Pay the expense for the replacement of the [...]
In the counterclaim, the [Seller] requests the [Buyer] pay the expense for the change of motor which is equal to US $3,160. The reason is that the break-up of governor ([...]) is due to user's inappropriate operation. As the [Buyer] did not respond to this counterclaim, the Arbitral Tribunal supports this counterclaim.
(3) Request that the [Buyer] pay interest on the money in the above two claims
The [Seller] asks the [Buyer] to pay the interest on the arrearage and the exchange fees. However, the [Seller] did not provide the relevant interest rates and the starting date and the ending date for the calculation. Therefore, the Arbitral Tribunal does not support this counterclaim.
(4) Have the [Buyer] pay the [Seller]'s attorneys' fees and arbitration fees
For the attorneys' fees, the [Seller] provided the Arbitral Tribunal a receipt in the amount of RMB 164,000. Considering the decision made by the Arbitral Tribunal in this case, the Arbitral Tribunal holds that it is reasonable to order the [Buyer] to bear the [Seller]'s attorneys' fees, equal to RMB 100,000.
To the arbitration fees, considering the decision in this case, the Arbitral Tribunal holds that the [Buyer] should bear them.
On the basis of the above, the majority of the members of the Arbitral Tribunal hands down following decision:
| 1. | The [Seller] should change the [...] for free. |
| 2. | Rejects [Buyer]'s other claims. |
| 3. | The [Buyer] should make a payment for the arrearages of price of the machine which is equal to US $27,028.40. |
| 4. | The [Buyer] should pay the expense for the change of motor governor, equal to US $3,160. |
| 5. | The [Buyer] should pay the [Seller]'s attorneys' fees in the amount of RMB 100,000. |
| 6. | The arbitration fees for this case, RMB 75,012, should be paid by the [Buyer]. This part of money offsets the payment made in advance for the arbitration fees which is equal to RMB 75,012. The arbitration fees for the counterclaim are US $1,205 which should be paid by the [Buyer]. After offset with the money paid in advance (US $1,205), the [Buyer] needs to pay the [Seller] US $1,205 to cover the arbitration fees paid by the [Seller]. |
| 7. | Rejects other counterclaims by the [Seller]. |
The above award should be implemented within 45 days after the arbitration award becomes effective.
This is the final award, which shall be effective as of the day of this award.
FOOTNOTES
* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of Mainland China is referred to as [Buyer] and Respondent of Hong Kong 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].
** Cheng Shu, LL.M., Dean's Graduate Scholar at NYU School of Law; LL.B. from Shanghai University School of Law, China.
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Pace Law School Institute of International Commercial Law - Last updated April 7, 2008