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CISG CASE PRESENTATION

China 18 July 2002 CIETAC Arbitration proceeding (Textile manufacturing equipment case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/020718c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20020718 (18 July 2002)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2002/20

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Hong Kong (respondent)

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

GOODS INVOLVED: Textile equipment


Classification of issues present

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: Articles 8 ; 35

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: Intent ; Conformity of goods

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Editorial remarks

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Citations to case abstracts, texts, and commentaries

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

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Case text (English translation)

Joint translation project:
New York University School of Law
and Pace University School of Law

China International Economic & Trade Arbitration Commission CIETAC (PRC)

Textile manufacturing equipment case [18 July 2002]

Translation [*] Cheng Shu [**]

Edited by Jing Li [***]

-  Particulars of the proceeding
-  Facts and position of the parties
-  The opinion of the Arbitral Tribunal
-  The Arbitration Award

PARTICULARS OF THE PROCEEDING

The China International Economic and Trade Arbitration Commission (formerly known as "China Foreign Economic and Trade Arbitration Commission, hereafter, the ["Arbitration Commission"]) accepted this case (Arbitration Case No. M____) on the basis of:

   -    The Claimant [Buyer]'s written Request 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 Request 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 Request of Arbitration and attachments on 18 September 2001 and delivered its Answer to the Request of Arbitration 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.

The [Buyer] appointed Chen ___ as arbitrator, and the [Seller] appointed Wang ___ as arbitrator. According to the Article 24 of the Arbitration Rules of the Arbitration Commission, 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 the 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 an arbitral hearing in Beijing on 16 January 2002 as scheduled. 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 dispute was finalized, and the Arbitral Tribunal 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 majority opinion of the Tribunal 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 Anti-pilling 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:

   -    Clause 1 [Total contract price]: FOB Italy Main Ports US $274,400.00;
 
   -    Clause 7 [Packaging]: The seller is liable for the damages to products due to inadequate packaging or inappropriate or inadequate protection measures taken by the seller;
 
   -    Clause 14 [Quality guarantee]: The seller should guarantee to use top technology manufacturing with best 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.
 
   -    Clause 15(3) [Inspection]: If the quality and description 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.
 
   -    Clause 16 [Claiming damages]: The methods of settlement of claims include "restitution" and "price reduction", as well as substituting non-conforming parts with new ones according to the description, quality and function stipulated by the contract on the cost of the seller, and the coverage of buyer's direct loss.
 
   -    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 boarding machine for heavy chemical fabrics. The formed fabric should reach the standard that the width shall be stable, the touching shall be smooth, and the fabric shall be without male and female face.

Moreover, this running speed of the machine was guaranteed by the [Seller] in writing during the process of communication of technology and the process of tender requiring and arguing on 17 December 1999 and 26 January 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.

- Upon installation on 28 May 2000, in the report of examination and receipt signed by Huaibei ___ Knitting Company and the [Seller], Huaibei ___ Knitting Company listed details of several matters concerning packaging, functioning of the machine, and the supply of spare and accessory parts etc., and notified the [Seller] that " existing problems shall be fixed".

This strongly shows that the machine was not in accordance with 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 examination on the functioning of the machine. They concluded that the running speed did not conform to the contract and therefore issued a memorandum. Afterwards, the [Seller] sent its staff in the hope of conforming the machine. However, not only were the existing problems not solved, but also new problems came up. After inspecting and testing several times, the machine still could not reach the standard of the contract.

In late 2000, the [Seller] unreasonably proposed the use of non-anti-pilling 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 has never been paid.

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 loading by the third party;
 
   (2)   After the testing and examination of the actual functioning of the machine within the period of quality guarantee, the results show that the machine does not conform to the the hand-written supplementary clause of the appendix of Article 9 in Contract "2000FSBXA-40AB20102HK" which stipulates that the running speed of the machine should not be lower than 28 meters per minute for every 350 grams boarding the machine for heavy chemical fabrics.

Upon this issuing of the result of testing and examination, the [Buyer] claimed recovery of damages against the [Seller] again on 23 May 2001. Since the [Seller] was unwilling to cover the enormous damages, the [Buyer] brought the dispute to the Arbitration Tribunal.

In summary, the [Buyer] requested the Institute to find:

1. The running speed of the tentering and preshrink machine is inconsistent with the contract (the running speed can only reach approximately one-third of the stipulated speed of contract). This machine is a key system, which coordinates with other machines in the polar fleece production line. If this machine cannot reach the criteria, it would result in the waste of the whole production line in which Huaibei ___ Knitting Company has invested renminbi [RMB] 26 million and would cause the unfulfillment of the purpose of contract.

   -    Because the [Buyer] bears huge economic loss 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 (12/28 meters per minute = 43%), 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 production line of anti-pilling 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 production 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] requests the Tribunal to find:

   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], equal to 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 [...] component;
 
   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 sales contract signed by the [Seller] and the [Buyer] on 27 January 2000 is not a separate contract, but a modified version of a sales 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, and visited the latter for technology exchange. Meanwhile, 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 heating machine: 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 has not signed the contract. On 6 January 2000, Huaibei ___ Knitting Company paid the deposit for the performance of the contract to the [Seller].

Afterwards, the [Seller], Huaibei ___ Knitting Company and the [Buyer] conducted further negotiations and made some modifications to the articles stipulating the price of the subject of the contract and the date of shipment. Based on these negotiations and modifications, on 27 January 2000, a new contract, No. 2000FSBXA-40AB20102HK (hereafter "the second contract"), was formed. But in the second contract, the significant articles concerning the name of the subject of contract and specifications are identical 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 the present case, nowhere is it expressed that the equipment is specific for anti-pilling polar fleece. It has not been established that, as the [Buyer] claimed, the [Seller] breached the contract by providing equipment that was not able to meet the needs of producing anti-pilling polar fleece and the output accordingly.

The [Seller] notes that even with the Anhui Bidding Center for Machinery and Electronic Products' arrangement for bidding for "anti-pilling polar fleece" equipment in the first and second contracts executed by the three concerning parties in this case and in the description of the subject matter of the contract, there is no expression of intent that the equipment specifically provide for producing "anti-pilling polar fleece". This means that the expression of intent of the invitation to bidding for "anti-pilling 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 subject matter 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 chemical heavy fabrics stipulated in the contract. In terms of the facts, the claim of [Buyer] is unfounded.

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 the sales agent, contacted Italy ___ Company and repeatedly asked Huaibei ___ Knitting Company to arrange machine tests on 3 and 29 November and on 7, 8 and 9 December 2000, respectively. There was a dispute between the parties on the cloth for testing: Italy ___ Company wanted to have the machine tested with 350G chemical heavy fabrics (non "anti-pilling polar fleece" cloth), but Huaibei ___ Knitting Company insisted on using "anti-pilling polar fleece" cloth to test the equipment. Thus, the test could not be carried out.

The [Seller] claims 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 anti-pilling polar fleece products to test the equipment. The [Seller] does not accept anything requested beyond the contract.

3. "Anti-pilling polar fleece", as a chemical fabric, holds a big distinction from chemical heavy fabric in terms of knitting process and features of knitted fabric. Therefore, the [Seller] argues that the polar fleece is not the same product as the chemical heavy fabric stipulated in the contract.

For anti-pilling polar fleece (also named " double-sided looped pile fabric"), its knitting process is: knitting - dyeing - pilling - lower side fleecing - upper side fleecing - upper side combing - cutting - spraying and drying - shaping - dressmaking and sorting - examining and packaging. However, the knitting process of chemical heavy fabric is largely different.

   (1)   In the process of pilling, it is "one-sided" for ordinary chemical heavy fabrics, instead of double-sided.
 
   (2)   Especially after the anti-pilling polar fleece is fleeced double-sided, it still needs to be sprayed and dried, the process of which is not used to for ordinary chemical heavy fabrics. This process makes the cyanosed fabric slubbed after rolling and antipilling. These are the specific feature of anti-pilling polar fleece, [...]. Thus, its speed is substantially lower than that of ordinary heavy fabrics (28 meters per minute).
 
   (3)   The [Seller] visited several domestic anti-pilling polar fleece manufacturers to look for the solution for such problems. For efficient productivity, these manufacturers adopt the heated-air method. The machines adopting the heated-air method could finalize the shape of anti-pilling polar fleece at the temperature of 150 and keep the speed of 25 to 30 meters per minute.

The above facts show that if the buyer and the final user wish for a speed of shaping anti-pilling polar fleece not lower than 28 meters per minute, they should have chosen a machine with the heated-air method. Unfortunatly, they chose a wrong model of machine which is not fit for their initial purpose.

4. The reason why the final user, Huaibei ___ Knitting Company, is unable to achieve the goal of output is not because of the act of the seller but the act of the purchaser, because the latter failed to choose a suitable model of machine.

Prior to the conclusion of 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 sales agent for the manufacturer, Italian ___ Company, the [Seller] has no authority to modify this 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 negligent judgment, they should not shift the responsibility to the [Seller] by any excuses.

In fact, upon the delivery of the machine, when the final user found such negligence, the [Seller] cooperated with a positive attitude in finding the solution. However, the purchaser and the final user always sought to shift the blame to the [Seller] by different kinds of excuses. The [Seller] finds that unacceptable.

From what has been stated above, the [Seller] performed all of the obligations 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. The loss should be borne 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 find that:

   1.   The [Buyer] should make the payment of arrearages, US $27,028.40 and the respective 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 respective interest.
 
   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 of 30 December 1999 and the modified version of the contract of 27 January 2000. The [Seller] further signed and accepted the inspection report (in Chinese and English) in accordance with the contract on 28 May 2000. According to Article 10 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 this contractual obligation upon the realization of the respective conditions. 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 obligations. Therefore, the [Seller] requests that the Arbitration Tribunal find that the [Buyer] should make the payment of the arrearages of the contract, equal to US $27,028.40 and the respective interest.

2. On 25 June 2000, the [Seller] received oral notice and fax 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 compensate 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 the respective interest.

3. Because the breach of contract by the [Buyer] caused the arbitration expense and attorneys' fees, the [Seller] requests the Arbitration Tribunal to find that the [Buyer] shall bear all expenses incurred by the [Seller] for the arbitration and hiring lawyers.

[Buyer]'s response

The attorneys representing the [Buyer] emphasize in their memorandum 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 equipment's problem per se. From the literal meaning of clauses in the contract, 350 grams chemical heavy fabric definitely includes anti-pilling polar fleece, because anti-pilling polar fleece is made of pure chemical fiber, and anti-pilling polar fleece 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 production line of anti-pilling polar fleece. The reason why it is stipulated in the contract that the modeling speed is not 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 anti-pilling polar fleece. In the Memorandum for Respondent, the [Seller] also agrees that 350 grams chemical heavy fabric includes anti-pilling polar fleece. Moreover, Huaibei Institute of Fiber Inspection and Bangbu Entry-Exit Inspection and Quarantine also categorize anti-pilling polar fleece as a type of 350 gram chemical heavy fabric.

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 production line of anti-pilling polar fleece which is invested at the same time. So [...] is specified for the anti-pilling polar fleece. There is no doubt that the stipulation of the standard of technology both in the contract and appendix is specifically for anti-pilling polar fleece. Moreover, this contract was formed through the bidding held by Anhui Bidding Center for Machinery and Electronic Products. The title for the bidding was "Production Line of Anti-Pilling Polar Fleece" and the model was 280-550 grams anti-pilling 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 only on the basis of producing anti-pilling polar fleece.

In the hearing of the Arbitration Tribunal on 16 January 2002, the contract agent and arbitration representative of [Seller] stated that "when signing the contract, I noticed that the 'anti-pilling polar fleece production line' is stipulated in the tender and the opposite party explained that the anti-pilling polar fleece is thick chemical fabric." Therefore, the [Seller] was aware that the [...] is specifically for producing anti-pilling polar fleece.

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 anti-pilling polar fleece several times. The [Buyer] had never disagreed with that. After the equipment was delivered to the user's plant, 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 that the machine is not suitable for anti-pilling polar fleece. Half a year later, only because they were facing pressure from the [Buyer] requesting the recovery of damages, the [Seller] said that the problem was caused by using unsuitable cloth for testing (before this, in the report from the [Seller] dated 18 October 2000, they did not mention the alleged cloth problem 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] would like to note that, according to Article 16 of the contract, when the goods delivered by the [Seller] are not consistent with the contract, the [Buyer] has the right to reduce the price of goods and request the coverage of the [Buyer]'s actual loss. Hence, the four claims raised above by the [Buyer] have factual and legal basis.

According to Article 10 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 the seller and the buyer. However, because there is a serious quality problem, the machine has not been checked and accepted. Therefore, it was reasonable for the buyer to reject the payment.

In addition, according to Article 10 of the contract and the letter delivered from the [Seller] to the Bidding Center and Huaibei ___ Knitting Company on 26 January 2000, they clarified that the nature of the 10% arrearage was quality warranty. Because of the quality problem of the machine delivered, the [Buyer] was authorized to reject payment of the arrearages.

The [Buyer] claims in another statement on the relevant technology in the present case that when purchasing the shaping machine, the process should be that at first the seller confirms the technical parameters with the buyer, including the type of processed fabric, width of fabric, the temperature needed 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 (including infrared heating, gas heating or electronic heating), the buyer would merely consider in light of the cost of usage of the heating source, environmental concern and the safety of usage. Based on this, the seller should provide the information of the 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 usage. 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 problems it has, that should be solved by the seller. This case involves a dispute of a sales contract. The major obligation of the buyer is to pay the price for the goods; on the other hand, the major obligation of the seller is to deliver goods of the quality required by the contract. If the delivered goods are not of the required quality, the seller has severely breached the contract.

The reason why the [...] machine cannot reach the requirement of quality in the contract is caused by the machine itself.

Moreover, the [Buyer] also stated that shaping via infrared heating is more efficient than via heated air. To shuffle responsibility for breach of contract, the [Seller] denied knowing this industry technological common sense. The [Buyer] has a large amount of evidence to prove that shaping via infrared heating is more efficient than via heated air.

From pages 402 to 404 of the first volume of Professor Bao ___ and Professor Ma ___'s "Dyeing and Finishing Process", published by China ___ Press, it is stated that the infrared heating method, without having to heat the surrounding air around textiles, directly penetrates the textile, and therefore, the heating velocity of the infrared heating method is much faster than convection heating (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.

The theory of infrared shaping is discussed in detail at pages 11 to 14 of the treatise, "Heat Shaping of Woven Fabric Construction", by Professor Xu ___, published by ___ Industrial Press. He points out that shaping by the infrared radiation method has many advantages such as high efficiency, simple structure of equipment, easy operation 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 the shaping machines functioning with these two methods. The [Seller]'s argument that the price of equipment of warm-air heating is twice as expensive as that of infrared heating is not supported by the facts. From the quoted price from French ___, German ___ and Taiwan ___ suppliers provided by the [Buyer], the price for every single machine is between RMB 2.1 million to RMB 2.5 million, which was of little difference from the price of infrared heating shaping machine offered by the [Seller] (RMB 2.3 million), let alone the alleged difference of twice as much. The evidence provided by the [Buyer] shows that the price offered by the French ___ is RMB 2.15 million per machine, the price offered from Taiwan ___ is RMB 2.5 million. The speed of these machines processing the textile of 300-400g/ square meter is above 30 meters per minute.

Furthermore, anti-pilling polar fleece is a kind of 350 gram chemical heavy fabric. The product of anti-pilling polar fleece is made of 100% polyester short chemical fabrics or long silk, then knitted to cloth by circular knitting machine, after which the cloth would experience dyeing, raising, coming, cutting, antipilling, and finally shaping. It is not much different from the process of producing regular flannel. Since anti-pilling polar fleece has experienced the process of cutting and antipilling, it is more fluffy and even, which makes the shaping process easier. The [Seller] confirms in the technology exchange materials that the designed purpose of the shaping machine is to sort out knitted textile. It is also clearly stated in the offer that the speed for shaping the 350 gram per square meter is not 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 confirm that anti-pilling polar fleece is 100% chemical fabric. Bengbu ___ Textile Factory also verifies that anti-pilling polar fleece is chemical fabric, and it is basic knowledge that if the fabric's weight is more than 350 gram / square meter, it is considered to be heavy chemical fabric.

[Seller]'s rebuttal

In the Memorandum for Respondent, the attorney for the [Seller] stated that:

1. The issue about whether there is a promise in the contract that the machine is specifically for producing anti-pilling polar fleece

The [Seller] argues that neither in the contract nor in the course of negotiation of the contract, did the parties express any intent as to anti-pilling polar fleece, and the [Seller] did not make any promise in this regard.

The [Seller] notes that at first, the [Buyer] claimed in the request for arbitration that the [Seller] breached the contract, and later, in the course of the hearing, blamed the [Seller] for providing a defective machine based on the allegation that "the speed did not reach the standard stipulated in the contract." This leads to the key point: whether or not the two parties stipulated in the contract that the machine provided by the seller was particularly for the purpose of producing anti-pilling polar fleece.

The [Seller] requests the Arbitral Tribunal to note following facts:

      (1) In the relevant contracts, all three parties expressed their real intent on the basis of equality and autonomy of will, and there was no expression of intent about "anti-pilling polar fleece" by the parties.

      (2) The alleged bidding process was a deceptive action. There is no expression of intent about "anti-pilling 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 signed a contract with the [Seller] on 30 December 1999, clearly expressing the intent to purchase [...] machine from ___ company (MOD. 205/3). There is no expression of intent about "anti-pilling 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, the equipment to be purchased is the same model as the equipment stipulated in the contract of 30 December 1999. No expression of intent about "anti-pilling polar fleece" was expressed therein either.

The [Seller] would like to note that in Appendix 1 of the contract, the special agreement "the shaping of 350 grams chemical heavy fabric" was hand-written by the party representing "Huaibei ___ Knitting Company." If it was true, as [Buyer] said that the real purpose of the contract was to purchase a machine to produce anti-pilling polar fleece, then why it was not clearly stated in the so-called contract "as successful bidding document" that the machine is specifically for producing anti-pilling polar fleece? Instead, "chemical heavy fabric" is specially stipulated in the contract.

            c. At the hearing, the [Buyer] presented a so-called "Notification of Award" (sent out on 28 January 2000), never shown to the [Seller] before, which states "please conclude an economic contract with the buyer with this notification as soon as possible." In fact, prior to the delivery of the Notification of Award on 27 January 2000, all three parties had signed the contract. The [Seller] submits that the Notification of Award should not be effective as evidence.

            d. In the course of performance of the contract, the [Buyer] did not express any intent on the issue of "anti-pilling 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 anti-pilling polar fleece either.

In the course of performance of the contract, the [Seller] paid much attention to the inquiry from Huaibei ___ Knitting Company about technical data, deliberately forwarding the inquiries via facsimile and telephone to the manufacturers who produced the machines and sending back the correspondence from the manufacturers promptly. During that period, the [Buyer] did not mention that the equipment was specific for anti-pilling polar fleece, and did not inquire anything about anti-pilling polar fleece's technical data. They just said that the machine was used for the productions of chemical fabric, pure cotton product and mixed 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, the [Seller] would deliver the raw materials to the manufacturers for the machine test to fulfill special needs of the buyer.

Therefore, the so-called bidding was merely a formal act, which has no influence on the expression of real intent of all three parties. The execution of the contract by all three parties is completely unrelated to the process of "invitation, tender and award." From this point of view, the winning of bid is invalid.

2. Rebuttal to the [Buyer]'s statement that "there is a defect in the design"

At the hearing, the [Buyer] alleged that the equipment provided by the [Seller] has defects in its design. The [Seller] argues that this argument is groundless.

      (1) The [Buyer] did not provide any evidence to support its claim that because of a design defect, the speed of the machine for anti-pilling polar fleece production cannot reach the stipulated standard.

      (2) At the hearing, [Buyer] complained that the temperature control of the equipment was problematic, as there was a big fluctuation of temperature which negatively affects the shaping of the textile. However, the documents provided by the [Buyer] to the Tribunal show that:

      It is stated in the "Inspection and Acceptance Report" signed by the actual buyer, Huaibei ___ Knitting Company, that "there was actual instability of temperature." The Report also states that such instability was due to the fact that the equipment was not adjusted thoroughly at that time. Hence, the Report emphasizes that "it needs further adjustment and testing." After that, via the adjustment and testing by the Italian engineer, the machine operated normally and the temperature was stable. Thereafter, in the Inspection and Acceptance Report of 9 April 2001, there is no opposite conclusion about the temperature.

On the other hand, at the site appraisal, the actual buyer "Huaibei ___ Knitting Company," the [Seller], and the investigator all clearly witnessed that in the course of the operation of the machine, the temperature control worked stably, and that there was no so-called "big fluctuation of temperature."

      (3) Dozens of machines of the same type provided by [Seller] to the [Buyer] and the actual buyer "Huaibei ___ Knitting Company" have been sold in Europe, the U.S. and China before conclusion of the contract disputed. Since the machine adopts a mature technology, in the process of producing chemical fabric, pure cotton, and mixed fabric, there has been no complaint from any clients about the "defective design". Up until now, the machine of this type operates well. However, as it is known to the [Seller], none of the above manufacturers requires the same type of machine to produce anti-pilling polar fleece.

      (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-anti-pilling polar fleece. The operation is normal, as the machine reaches all the standards stipulated. However, when the actual buyer produces anti-pilling polar fleece, which was not agreed on in the contract, the speed of the equipment does not reach the stipulated standard. [Seller] argues that the problem is due to the nature of anti-pilling polar fleece per se. 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 anti-pilling polar fleece and of chemical heavy fabric

The [Seller] alleges that:

      (1) The shaping of "anti-pilling polar fleece" is not equal to the shaping of chemical heavy fabric.

Anti-pilling polar fleece is a separate series of production after a special technical process. In the technical process, anti-filling polar fleece is classified as a "product of first-class heavy and highly humid." Therefore, the shaping of anti-filling polar fleece requires the shaping machine to contain special features.

      (2) The heated-air shaping method meets the needs of the shaping of anti-pilling polar fleece.

The [Seller] would like to clarify that in the course of heat shaping, the capacity of penetration and the capacity of heat shaping are two separate concepts. As a kind of ray, infrared heat has strong capability of penetration; however, the capacity of heat shaping of infrared is not necessarily strong. Heated-air shaping is more suitable for the shaping of anti-pilling polar fleece. The reason is that in the course of heated air shaping, forced heated air is blowing, and the humid air could be diffused easily and, therefore, this method is more suitable for fabrics that are heavy and humid.

This is not to say that the machine provided by the [Seller] is not fit for shaping anti-pilling polar fleece. However, according to the feature of anti-pilling polar fleece, it is common that manufacturers in China choose to use heated-air shaping machines for producing anti-pilling polar fleece.

4. Defenses to certain issues presented in [Buyer]'s Request for Arbitration

      (1) The packaging and components

      The [Buyer] stated that it found the packaging and components were problematic after the machine arrived at Huaibei ___ Knitting Company but before it underwent the process of inspection and acceptance.

The [Buyer] argues, "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 surface of the manometer broken as well upon opening of the container."

However, the [Seller] noted that it was not responsible for this situation. It is clearly stated at page two of the "Inspection Report" that "these problems were caused by the inappropriate packaging by the third party." Also, these problems have been solved by the Italian party.

The [Buyer] also argues that the Inspection and Acceptance Report (28 May 2000) "is enough to demonstrate 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 Request for Arbitration or in the letter of 6 June 2000, respects the fundamental facts written in the Inspection and Acceptance Report of 28 May 2000. It clearly states that:

"After being tested by seller's engineers and inspected by buyer's personnel, the machine meets the stipulation of the Contract and operates well; therefore, the buyer agrees to accept the machine.However, the [Buyer], as the agent for the actual buyer, unilaterally denied in its correspondence on 26 June that the consignor, Huaibei ___ Knitting Company, and the product provider (the [Seller]) had completed the process of inspection and acceptance of the machine. According to Chinese Civil Law and Chinese Contract Law, the agent is not authorized to deny the validity of the consignor's conduct.

      (2) The inspection of the functioning of the machine

      The [Buyer] claimed that on 22 September 2000, the Inspection and Quarantine Bureau, the [Buyer], Huaibei ___ Knitting Company, and the [Seller] inspected the functioning of the machine together and confirmed that the speed of the machine was not consistent with the stipulation of the contract, and signed a memorandum.

However, the [Seller] specifically points out that as it is stated in the Request for Arbitration, the [Seller] had always been insisting on the use of chemical fabric rather than anti-pilling polar fleece prior, during, and after the function test of the machine. The reason was that, as stated above, the parties had never agreed in the contract that the machine would be used to produce anti-pilling polar fleece, nor had the parties agreed that the machine was equipment specifically for anti-pilling polar fleece production. In the course of the negotiation of the contract, the technical data mentioned by the [Buyer] and Huaibei ___ Knitting Company was only related to regular fabric, such as chemical heavy fabric, and 100% cotton textile. Moreover, the [Buyer] and Huaibei ___ Knitting Company chose this particular model on their own based on these data.

The [Buyer] argued that the result of the inspection was that the machine did not meet the requirement that "the shaping speed of 350 gram chemical heavy fabric should not be lower than 28 meters per minute."

It should be noted that the inspection was not only to test the shaping of regular chemical heavy fabric, but to test the shaping of anti-pilling polar fleece. Such shaping process requires special technology and special manufacturing. Such requirement was completely beyond the stipulation of the contract. Hence, as stated by the [Buyer], [Seller] had been insisting on the use of chemical heavy fabric for testing, and refused any unreasonable requirement that was beyond the contract. Even though the [Seller] signed the memorandum under the pressure of the Inspection and Quarantine Bureau (sitting in the scope of Huaibei ___ Knitting Company), the [Seller] merely admitted that they had used anti-pilling polar fleece to inspect and test the machine, and constantly denied such result establishing on the testing that was beyond the stipulation of the contract.

      (3) The allegation that the [Seller] was willing to pay damages

      The [Buyer] stated that "the [Seller] expressed several times that it was willing to pay damages." The [Seller] solemnly argues that it has never expressed such willingness to pay the damages of the [Buyer] and Huaibei ___ Knitting Company. In its internal report, the [Seller] reported to the inside leaders about the requirements proposed by Huaibei ___ Knitting Company, which is not equal to accepting any requirements of the [Buyer]. The [Seller] insists that the damages are due to the inappropriate choice on the type of machine model by the Huaibei ___ Knitting Company and the [Buyer].

5. Conclusion

Due to the inappropriate choice of the machine model by the purchasers, in lieu of the provider (the [Seller]), the actual user Huaibei ____ Knitting Company was not able to produce anti-pilling polar fleece with the machine.

Prior to the contract, the [Seller] informed the [Buyer] of the details of models and technical data provided by the manufacturer. As the sales 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. All parties involved in the present case expressed their real intent. As the purchaser, the [Buyer] and Huaibei ___Knitting Company should have known what products they want to produce, what features the products have, and what kind of machine they need to produce these products. If they wrongfully chose the type of machine due to their misjudgment, they should not shift the responsibility to the [Seller] with any excuses.

At the hearing, the Arbitral Tribunal asked questions on the price of machine. The fact is that since 1997, the price between the machines of heated air and those of heated radiation sold by the [Seller] has differed largely. The price of the former has been much higher than that of the latter. And only the [Buyer] knows whether it has taken into account the factor of price when deciding on the machine model to purchase.

In fact, after delivery of the machine and after the [Buyer] and the actual buyer found that they had chosen the wrong model, the [Seller] positively cooperated with them to find a solution. On the other hand, the [Buyer] and the actual buyer have been trying to shift the responsibility to the [Seller] by different kinds of excuses, and seeking to require the [Seller] to bear responsibilities that should not be borne by the [Seller]. This is unacceptable.

As stated above, there was no breach of contract by the [Seller], as the [Seller] fulfilled its obligation in accordance with the contract. The damages arising from inappropriate choice of model of machine is due to Huaibei ___ Knitting Company (the actual buyer)'s and the [Buyer]'s own mistakes, and they should bear the relevant loss. Therefore, the [Seller] refuses to accept the claim for the recovery of damages by the [Buyer].

Precisely, in response to the [Buyer]'s request, the [Seller] submits:

1. The claim for the recovery of loss of profits of the [Buyer]. This claim is baseless, because the alleged "evidence" of "loss of profits" claimed by the [Buyer] is in actuality the lost of profits of Huaibei ___ Knitting Company, which is not a party to the present dispute. Since such "loss of profits" is not in any way concerned with the [Buyer], it should not be claimed as "loss of profits of the [Buyer]." Moreover, there is no effective evidence demonstrating the existence of such loss of profits.

2. The claim that the [Seller] should bear the fees of [Buyer]'s attorneys, and the 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, the [Seller] denies such requests because there was no breach of contract by the [Seller].

3. The issue about replacement of the bearing. Since there was a problem of abrasion of bearing, the machine was undergoing maintenance. According to the contract, the [Seller] shall replace the components if abrasion occurs in the course of operation. However, the [Seller] would like to note that the responsibility of delaying such replacement should not be borne by the [Seller] in the present case.

The [Seller]'s counterclaim

In its counterclaim, the [Seller] requests the Arbitration Tribunal to order payment of the arrearage by the [Buyer]. In this regard, a key question is whether Huaibei ___ Knitting Company's signature on the "Inspection Report" is equivalent to the signature of the [Buyer].

Before the Chinese Contract Law came into effect, according to the usage of foreign trade agency remaining from the period of planned economy, the buyer in an import and export contract, as an import and export company, plays the role as an agent for those enterprises that are not authorized to import and export goods. However, in the present case, the [Buyer] is in actuality a nominal buyer, whereas the ultimate user is the actual buyer. As for the signature of the Inspection Report, such usage, to some extent, is a trap that infringes the buyer's interests. In other words, the party signing the Inspection Report is usually the actual buyer, while the agent purposely refuses or delays signing the Inspection report. Once the agent encounters any situations that go against its benefits, it would claim that the actual buyer is the ultimate user, instead of the "buyer" that appeared from the contract, so that it can refuse to fulfill its contractual obligations. This case has a similar situation. In the Inspection Report, although the actual buyer as the consigner has signed the Report, the import and export company as the agent can easily excuse that "the buyer that appeared from the contract is the import and export company," so that the signature by the consignor is totally denied.

However, the [Buyer] forgets one point that this contract was concluded after the Chinese Contract Law came into effect. Accordingly, the contract in this case violates the principle of equality, the principle of good faith, and the rules of agency.

In accordance with Article 402 of Chinese Contract Law, if within the scope of the power delegated by the principal, the agent, in his or her own name, concludes a contract with a third party, and the third party knows the proxy relationship between the agent and principal at the time of concluding the contract, the contract shall directly bind the principal and the third party, unless there is conclusive evidence to prove that the said contract only binds the agent and the third party. In the present case, even though the name Huaibei ___ Knitting Company appears in the contract as the ultimate user, Huaibei ___ Knitting Company clearly expressed in the contract that it is merely a nominal buyer, which further demonstrates its intent to act as the consignor of Anhui ___ Import and Export Ltd. Therefore, the obligations of the contract on the buyer, shall be equally effective on Huaibei ___ Knitting Company, the consignor.

Article 403(3) of the Chinese Contract Law provides that "where the principal exercises the agent's rights against the third party, the third party may claim its demur in respect of the agent against the principal" and that "where the third party chooses the principal as its counterpart, the principal may claim its demur in respect to the party against the third party." It shows that the consignor can directly perform the conduct that shall be performed by its agent. This is in accord with the basic principles on commission in the General Rules of Civil Law. On the other hand, an agent cannot deny the validity of conduct directly executed by the consignor, because even if the agent is commissioned, the consignor does not lose the right to perform the same conduct, such as to sign. Hence, the nominal buyer in this case has no authority to deny the right of the consignor -- the actual 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 actual buyer and the nominal buyer (consignor, "Huaibei ___ Knitting Company) on 28 May 2000. According to Article 5 of the contract, the [Buyer] should pay 10% of the gross payment of the contract within 120 days after the [Buyer] has inspected and accepted as well as received sales receipt and the confirmation of inspection and acceptance. However, once the situations stipulated in the contract were met, the [Buyer] did not fulfill its obligations accordingly. The [Seller] sent the [Buyer] notices for payment constantly, asking the [Buyer] to perform the obligation of payment. Until today, the [Buyer] still has not satisfied this obligation. Therefore, the [Seller] requests the Arbitral Tribunal to find that the [Buyer] should pay the arrearage, US $27,028.40, and the interest thereon.

The [Seller] also asks the [Buyer] to reimburse the cost of replacing the motor by the [Seller], US $3,160, and the interest thereon. According to the verification on site by the technicians 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 find that the [Buyer] should bear the [Seller]'s cost of arbitration and attorneys' fees.

Thereafter, the attorney of the [Seller] further stated its position in the Supplementary Statement:

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 claim 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 operating normally in producing 100% cotton product and polyester cotton products. When producing anti-pilling polar fleece products, the machine is operating well at speed of 12 meters per minute. However, a higher speed will make the width of product unstable. This situation shows that the machine itself does not have defects. The problem is due to the fact that the model of heated shaping machine does not match with the manufactured products.

      (3) In terms of textile products, every type of product has its own characteristic. The speed of a shaping machine shall be determined by the textile's characteristics. Where the equipment is chosen, every specific type of textile has its own speed. This is the conclusion drawn by experts. The parties did not have any specific agreement on the issue of "anti-pilling polar fleece" when signing the contract. However, the [Buyer] claimed for damages thereon. The [Seller] submits that it is unacceptable, because it is beyond the contract.

2. The issue on the price of the heated air shaping machine

As for the price of the heated air shaping machine, the [Seller] did not sell this kind of machine in 2000. Therefore, the [Seller] can only provide the price of the machine produced by Italian ___ in 1997 and 1998, MOD.310/3, which was US $665,521. The [Buyer] provided a price of a French machine; however, this machine was not originally produced in France but was produced by a China-France joint venture in China, therefore, there is a big gap between these two prices. This cannot prove the difference between the prices of an infrared heating machine and that of a hot-air heating machine. The reason why Huaibei ___ Knitting Company chose the machine (MOD.205/3) made by Italian ___ Company was that this type of machine cannot only shape textiles but also has the function of preshrink.

3. The evidence provided by the parties demonstrates that the [Buyer] has never described the features of anti-pilling polar fleece in the revision of the contract. Moreover, the parties have never made any specific agreement about anti-pilling polar fleece either.

When recommending products, the [Seller], as the sales agent for Italian ___ Company, strictly complied with the usage of importing machines, i.e., technology communication, on-site investigation, negotiation, and contract conclusion. Model selection was completed prior to the commercial negotiation. The choice of model is based on the requirements of the features of the machine and the needs of manufacturing.This is as if when we go to a shopping mall and decide whether to buy a business suit or casual clothes. The decision is determined by the needs of the consumers. The vendor 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 "anti-pilling polar fleece." The Invitation to Tender, sent out on 5 January 2000, did not indicate that the machine was to be used to produce "anti-pilling polar fleece." Even in the text of the executed contract, it still does not indicate anything about anti-pilling polar fleece; instead, it indicates that it is for producing chemical heavy fabric.

The [Seller] cares much about its reputation and cooperates with and helps its clients to solve problems all the time. When the machine was delivered to the user's plant, the user sought to use the machine for shaping anti-pilling polar fleece and the maintenance team from the [Seller] and Italian engineers from the manufacturer went to [Buyer]'s plant to adjust and test the machine. After inspecting and testing all the technical standards of this machine, they confirmed that the machine did not have any quality defects. Because of the difference of fundamental features between anti-pilling polar fleece and common chemical heavy fabric, 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 the [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 from the payment of damages, the [Seller] raised the issue of testing cloth in order to shift the responsibility to the [Buyer].

The hearing indicates that in the course of the performance of the contract, both parties never expressed clear intent on the issue of anti-pilling polar fleece. It is not supported by the evidence that 350 grams per square meter chemical heavy fabric is similar to anti-pilling polar fleece as claimed by the [Buyer]. To sum up, 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 anti-pilling 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 borne by [Buyer] itself. The [Seller] denies the damages claimed by the [Buyer].

THE OPINION OF THE ARBITRAL TRIBUNAL

1. Applicable law

The contract in this case is a contract for sale of goods. For such a contract, the most influential rule worldwide is that the applicable law should be the law of the place of business of the seller at the conclusion of the contract. Article 8(1) of the Convention on the Law Applicable to Contracts for the International Sales of Goods issued by the 1985 Hague Conference on Private International Law stipulates that "the contract is governed by the law of the State where the seller has his place of business at the time of conclusion of the contract." Applying this rule, the applicable law in this case would be the law of Hong Kong -- British law. However, the parties did not request the application of Hong Kong -- British law. They did not give proof on the applicable law of the present case, either. In this situation, the Arbitral Tribunal does not have knowledge of Hong Kong -- British law. Moreover, since the place of arbitration is China, the location of the place of business of the [Buyer] is in China, and the machine was tested and adjusted in China, the Arbitral Tribunal finds that the applicable law is Chinese law. Meanwhile, the Arbitral Tribunal will refer to the relevant international law to make the award.

2. Whether the [Seller] is obligated to make the speed of shaping anti-pilling polar fleece reach 28 meters per minute

      (1) The dispute

      The purpose of this contract is to purchase and sell a machine used to shape chemical heavy fabric. The [Buyer]'s major claim is to require the [Seller] to reduce the price of the machine, and to pay its loss of profits. The [Buyer] alleges 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 issued by the China Bangpu Entry-Exit Inspection and Quarantine Bureau. This certificate indicates 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 certificate of inspection also clearly shows that they used anti-pilling polar fleece to test the machine. Furthermore, the facsimiles between the two parties from November to December 2000 show that the [Seller] requested the use of non-anti-pilling 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 anti-pilling polar fleece products.

            (b) The two parties did not use non-anti-pilling polar fleece products to test the machine; moreover, the [Buyer] cannot prove that when being tested on non-anti-pilling 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 provide machines for shaping anti-pilling polar fleece products at the speed of not less than 28 meters per minute.

      (2) Basic obligations of the [Seller]

      Article 8 of Appendix 1, "major technical index", provides that "the speed of shaping 350 grams chemical heavy fabric should not be lower than 28 meters per minute." The [Buyer] claims that this article covers anti-pilling polar fleece. Therefore, 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 anti-pilling polar fleece reach that speed.

To prove that anti-pilling polar fleece is a kind of 350 grams chemical heavy fabric, the [Buyer] states that because anti-pilling polar fleece is made of pure chemical fabric, it falls into the category of 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 polyester knitted anti-pilling polar fleece is polyester.

To the above claims of [Buyer], the [Seller] provided to the Arbitral Tribunal the testimony of three experts including Mr. Hou ___, who is a senior engineer in the China Textile Academy. The expert opinion points out that:

"The machine in this case is an infrared radiation heating and shaping machine. From the perspective of the principle of heating, the energy efficiency is the highest in the course of its transferring. However, in the course of textile shaping, because there is no strong heat blast, the moist heated air flows slowly and it is not easy to volatilize. Due to the blowing of the heated air strong flow, the humid heated air of the heated air equipments is easy to spread. However, for products heavy and humid like anti-pilling polar fleece, the heated-air method is more appropriate."

The above testimony shows that anti-pilling polar fleece is not regular 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 anti-pilling polar fleece, is the obligation of the [Seller] merely to make the shaping speed of 350 grams chemical heavy fabric reach 28 meters per minute?

- Or to make all kinds of 350 grams chemical heavy fabric reach the speed as aforementioned, including anti-pilling polar fleece that is produced better when using the heated air shaping method?

The above concern is a legal issue. We should look to the relative provisions in Chinese law. Article 62(1) of the Chinese Contract Law (which has been effective since 1 October 1999) provides, that if quality requirements are unclear, and there are no State standards or trade standards, "generally held standards or specific standards in conformity with the purpose of the contract shall be applied." To further define "generally held standards", we should look to the relevant provisions in the United Nations Convention on Contracts for the International Sale of Goods (1980) [hereinafter "CISG"].

Regarding the quality of goods, Article 35(2)(a) of the CISG provides that, except where the parties have agreed otherwise, the goods shall "be fit for the purposes for which goods of the same description would ordinarily be used." Apparently, Article 62(1) of Chinese Contract Law is consistent with the CISG, which is that, when there is no specific stipulation, the goods delivered by the seller should be fit for the purposes for which goods of the same description would ordinarily be used.

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 regular non-anti-pilling 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 regular 350 grams chemical heavy fabric.

            (b) As the machine in this case is an infrared radiation heating machine, in the expert opinion, a heated-air shaping machine is more appropriate for anti-pilling polar fleece. Therefore, the shaping of anti-pilling polar fleece does not fall into the scope of the ordinary purpose of the machine in the present case. On the basis of these facts, the Arbitral Tribunal finds that the machine in this case fits for the purpose for which a machine of the same type would ordinarily be used, and the complaints of the [Buyer] that the [Seller] breached the contract as the machine cannot reach the stipulated speed shall not be supported.

The [Buyer] further alleged that to interpret the contract, we should not only consider the text, but also the purpose and background of the contract. The [Buyer] argues that the purpose of the contract is that the [Buyer] wanted to purchase equipment for a production line of anti-pilling polar fleece. The contract was concluded through tender, and the title of which is "Production Line for Anti-Pilling Polar Fleece." The [Buyer] claims that the [Seller] completely knew about this purpose of the contract. Hence, the 350 grams chemical heavy fabric should include anti-pilling polar fleece under the contract.

However, it is necessary for the Arbitral Tribunal to further analyze this issue.

      If the [Buyer] had informed the [Seller] of the particular purpose that it wanted to buy machines for shaping anti-pilling polar fleece or if, before selling the machine, the [Seller] had already known the [Buyer]'s purpose, it would raise the question whether the [Seller] has the obligation to make the machine in this case meet that "particular purpose".

      To answer this question, as stated above, Article 62(1) of the Chinese Contract Law provides that the goods sold by the seller should not only be fit for the "generally held standard", but also be fit for the "specific standards in conformity with the purpose of the contract." This provision is consistent with Article 35(2)(b) of CISG, i.e., the goods shall 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 judgement."

The Arbitral Tribunal finds that according to the Chinese Contract Law and the CISG, the [Seller] did not have any obligation to provide equipment fit for the "particular purpose" stated above. The reasons are as follows:

      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], several dozen of this model of machines have been sold in Europe, America and China prior to the conclusion of the contract. In this situation, the actual buyer "Huaibei ___ Knitting Company", commissioned by the [Buyer], as an expert manufacturer of this specific product, had the complete capability of knowing the special features and the technical parameters of this machine at the conclusion of the contract. Therefore, when the actual buyer, "Huaibei ___ Knitting Company" decided on this specific model of machine, it relied on its own skill or judgment.

      Second, the evidence provided by both parties and the situations of the present case clearly indicate that the machine involved does not have quality defects, and can be used for shaping anti-pilling polar fleece, but the speed of the machine during this shaping operation cannot reach 28 meters per minute; a machine with heated-air shaping method is more suitable for shaping anti-pilling polar fleece. In other words, it is not realistic to make the machine in dispute reach 28 meters per minute for the purpose of shaping anti-pilling polar fleece. Therefore, the decision to choose this model of machine was not appropriate. However, Huaibei ___ Knitting Company is an expert manufacturer with its own technology force, and is capable of hiring its own experts. Moreover, the technology of this type of machine is sophisticated, the technology documents for reference are accessible, and the machine already has a market history in China. Therefore, the actual user / manufacturer had complete capability to make the right judgment on the function and features of the machine before the conclusion of the contract. Under this condition, even if Huaibei ___ Knitting Company actually relied on the [Seller]'s skills and judgment when deciding on the purchase of this machine, such reliance is unreasonable.

      To sum up, the [Seller] has the basic obligation which is merely to make the machine reach the speed of 28 meters per minute when shaping regular "350 grams chemical heavy fabric." The [Seller] does not have the obligation to make the machine reach that speed when shaping anti-pilling polar fleece.

3. The [Buyer]'s requests

      (1) Reduction of price of the machine

      The [Buyer]'s first modified claim is to request the Arbitral Tribunal "to reduce the price of the '[...] machine', and to have the [Seller] return the excessive payment made by the [Buyer], $128,969." This amount is equal to the difference between the payment already made by the [Buyer] and the actual value claimed by the [Buyer], i.e., the "excessive payment" of the contract price.

As stated above, the Tribunal does not support the [Buyer]'s claim to reduce the price of the machine for the reason that its speed does not reach the standard stipulated in the contract.

      (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. Since the [Buyer]'s claim that the [Seller] has breached the contract is not founded, the Tribunal does not support this claim.

      (3) Replacement of the left bearing

      As for this request by the [Buyer], the [Seller]'s response is: the contract provides that if the machine is undergoing a period of technical maintenance, and abrasion of components arises, the [Seller] shall replace such components. In the present case, the [Seller] has performed accordingly. Therefore, the Arbitral Tribunal agrees with such request.

      (4) Payment of the cost of inspection and testing, and the fees of hiring attorneys, traveling and arbitration

      As the [Buyer]'s claim for breach of contract is not founded, the Arbitral Tribunal does not support this claim.

4. The [Seller]'s counterclaim

      (1) Payment of the arrearage

      The [Seller] claims that the [Buyer] did not pay the arrearage after it received the machine, i.e., $27,028.40. The [Buyer] affirms this complaint but argues that since there is a serious quality defect, the [Buyer] is authorized to refuse to make this payment.

Since the [Buyer]'s claim regarding the quality defects is not established, the Arbitral Tribunal supports this counterclaim.

      (2) Payment of the expense of the replacement of the governor

      In the counterclaim, the [Seller] requests the [Buyer] to pay the expense for the replacement of motor governor, i.e., $3,160. The reason is that the breakdown of the original governor is due to the user's inappropriate operation. As the [Buyer] did not respond to this counterclaim, the Arbitral Tribunal supports this counterclaim.

      (3) Payment of interest on the amount of the above two claims

      The [Seller] requests the [Buyer] to pay interest on the arrearage stated above and the replacement fees. However, the [Seller] did not provide the relevant interest rates or the starting date and the ending date for the calculation. Therefore, the Arbitral Tribunal does not support this counterclaim.

      (4) Payment of the [Seller]'s attorneys' fee and arbitration fee

      For the attorneys' fee, the [Seller] provided the Arbitral Tribunal with a receipt for the amount of RMB 164,000. Considering the award made by the Arbitral Tribunal, the Tribunal finds that it is reasonable to order the [Buyer] to bear the [Seller]'s attorney' fee in the amount of RMB 100,000.

As for the arbitration fee, considering the award of this case, the Arbitral Tribunal finds that the [Buyer] should bear this fee.

THE ARBITRATION AWARD

Based on the opinions on the factual and legal issues stated above, the majority of the members of the Arbitral Tribunal find the following:

   1.   The [Seller] should replace the left bearing of the machine free of charge.
 
   2.   Rejects the [Buyer]'s other claims.
 
   3.   The [Buyer] should pay the arrearages of the contract price, i.e., US $27,028.40.
 
   4.   The [Buyer] should pay the expense of the replacement of the motor governor, i.e., US $3,160.
 
   5.   The [Buyer] should pay the [Seller]'s attorneys' fee in the amount of RMB 100,000.
 
   6.   The arbitration fees for this case, RMB 75,012, should be borne by the [Buyer]. This payment offsets the payment made in advance to the Arbitration Institute as arbitration fees, which is equal to RMB 75,012. The arbitration fee for the counterclaim is US $1,205 which should be paid by the [Buyer]. After offset with the money paid in advance (US $1,205) by the [Seller], the [Buyer] shall pay the [Seller] US $1,205 to cover the arbitration fee paid by the [Seller].
 
   7.   Rejects all other counterclaims by the [Seller].

The above award should be implemented within 45 days after the effective date of this arbitration award.

This is the final award. It 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.

*** Jing Li, LL.M., University of Texas at Austin, School of Law; Master of Law, Sun Yat-Sen University School of Law, China; LL.B., Sun Yat-Sen University School of Law, China.

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Pace Law School Institute of International Commercial Law - Last updated July 15, 2008
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