China 23 July 2002 CIETAC Arbitration proceeding (DVD HiFi case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/020723c1.html]
DATE OF DECISION:
DATABASE ASSIGNED DOCKET NUMBER: CISG/2002/04
CASE HISTORY: For related proceeding, see DVD HiFi case of 25 December 2001
SELLER'S COUNTRY: People's Republic of China (respondent)
BUYER'S COUNTRY: Australia (claimant)
GOODS INVOLVED: DVD players and HiFi systems
PEOPLE'S REPUBLIC OF CHINA: China International Economic & Trade Arbitration
Commission (CIETAC) (now South China Branch) 23 July 2002 (DVD HiFi case)
Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/112],
CLOUT abstract no. 1100
Reproduced with permission of UNCITRAL
An Australian buyer and a Chinese seller signed a contract for the sale of DVD players. Afterwards, the buyer applied for a letter of credit according to the contract, and the seller sent samples by post to the buyer. Upon examination, the functioning of the sample players was found to comply with the contract provisions. After the goods reached the destination port, the buyer, however, discovered through examination that not all the DVD players had YUV output. Furthermore, the DVD players were poor in quality, and four of them broke down during the testing. After repeated discussions, the parties reached an agreement to reduce the price because of the issue of YUV output. However, 165 defective DVD players were returned several months after the DVD players went on sale, although the dispute had already been settled through an earlier arbitration. Later, the buyer's customers returned another 69 defective machines. The quality problems occurred within the one-year warranty period, and the rate of breakdown was 39 per cent. The buyer initiated another arbitration proceeding, and requested that the seller be ordered to refund the money for the defective machines with interest, and to pay for all the damages caused by the return of the machines and other costs.
The contract did not include any clause on the choice of law. Since the place of business of both parties was in States Parties to the CISG, the Arbitration Tribunal found that the dispute was to be governed by the Convention.
Regarding the request of the buyer to return the goods, the Tribunal held that there was no limit on the number of times the goods could be returned as long as the buyer exercised its right to return them within the warranty period. The Tribunal found that the buyer had examined the goods immediately after they had reached the destination port, and had disputed the quantity and quality at the time (Articles 38 and 39 CISG). In addition, the seller had not disputed the demand of the buyer to return the goods. The Tribunal upheld the request to return the goods and further ruled that the costs for returning should be covered by the seller. The Tribunal also ruled that the seller must refund the money for the 69 defective DVD players, with interest. The Tribunal finally held, under Article 74 of the Convention, that the seller should compensate the buyer for all the damages including the costs for testing the defective machines and the anticipated profits.Go to Case Table of Contents
APPLICATION OF CISG: Yes [Article 1(1)(a)]
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
38A [Buyer's obligation to examine goods: time for examining goods]; 39A [Requirement to notify seller of lack of conformity: buyer must notify seller within reasonable time]; 74A [General rules for measuring damages: loss suffered as consequence of breach]
38A [Buyer's obligation to examine goods: time for examining goods];
39A [Requirement to notify seller of lack of conformity: buyer must notify seller within reasonable time];
74A [General rules for measuring damages: loss suffered as consequence of breach]
CITATIONS TO OTHER ABSTRACTS OF DECISION
CITATIONS TO TEXT OF DECISION
Original language (Chinese): Unavailable
Translation (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
UnavailableGo to Case Table of Contents
|Case text (English translation)|
DVD Hi-Fi case (23 July 2002)
Translation [*] by Meihua Xu [**]
Edited by John Zhu [***]
The China International Economic and Trade Arbitration Commission Shenzhen Sub-Commission (hereafter, the "Shenzhen Sub-Commission") accepted the case (case number: SHEN M2002035) on 11 September 2001 according to:
|-||The arbitration clause in Sales Contract No. S - D001 signed by Claimant [Buyer], Australia __ Company, and Respondent [Seller], China __ Company; and
|-||The written arbitration application submitted by [Buyer].|
The Arbitration Rules of the Arbitration Commission (hereafter, the "Arbitration Rules"), which became effective on 1 October 2000, are applicable to this case.
In accordance with Article 64 of the Arbitration Rules, since the amount in dispute in this case is less than renminbi [RMB] 500,000. Therefore, this case is qualified to use summary procedure.
On 22 May 2002, the Secretariat of the Shenzhen Sub-Commission sent to the [Seller] the arbitration notice, [Buyer]'s arbitration application and attachment, the Arbitration Rules, arbitrators' list, and the schedule of arbitration fees to the address provided by the [Buyer], and sent the arbitration notice and corresponding documents to the [Buyer] on the same day.
According to the Arbitration Rules, since the two parties failed to jointly appoint the sole arbitrator within the stipulated time, the Chairman of the Arbitration Commission appointed Mr. Huang as the sole arbitrator to form the Arbitration Tribunal to hear this case on 18 June 2002.
The Secretariat of the Shenzhen Sub-Commission scheduled a court session on 9 July 2002, and the Arbitration Tribunal formation notice and court session notice were sent to the parties.
The [Buyer]'s attorney (agent) attended the court session. The [Seller] did not submit any defense nor attend the court session.
The Arbitration Tribunal heard the [Buyer]'s attorney's statement and made investigations on related facts. After the court session, the agent of the [Buyer] submitted a further statement.
This case has been concluded and the Arbitration Tribunal has handed down this award by default.
The following are the facts, the Tribunal's opinion and award.
On 20 March 2001, the [Buyer] and the [Seller] signed Sales Contract No. S -D001 (hereafter, the "Contract") under CFR terms. The Contract had both Chinese and English versions in the forms provided by the [Seller]. The following are the terms in the Contract related to the dispute in this case.
(1) The goods
|-||The [Buyer] was to purchase DH-1111 DVD players (hereafter, "DVD players") and DH-518 Hi-Fi systems from the [Seller];
|-||The quantity of the DVD players was 600 at a unit price of US $99, CFR Sydney, totaling US $59,400;
|-||The quality and quantity of the goods delivered should be evidenced by the quality, quantity, and origin labels and quantity certificate provided by the manufacturer (articles 1, 2, 3, and 4 of the Contract);|
|-||The [Buyer] shall inspect the goods within 45 days after the goods arrive at the destination port, and raise any quality objections within 15 days after the inspection period expires;
|-||The quality of the goods shall conform to the Export Industry Standard;
|-||The quality index in the Contract attachment shall be the inspection standard (article 13 of the Contract);|
(3) Quality guarantee
|-||The [Seller] guarantees that the quality of the material and specifications of the goods conform to the final samples and the requirements stipulated in the product instructions;
|-||The [Seller] guarantees that the quality of the goods satisfies the product quality requirements set forth in Chinese law (article 14 of the Contract).|
(4) Non-conformity on quality/quantity and compensation claims
|-||After the goods arrive at the destination port, if there is any technical problem or any lack of conformity on quantity or quality of the goods, the two parties shall settle the problem by negotiation or the [Buyer] may claim damages from the [Seller] by providing the inspection certificate issued by an inspection agency agreed to by both parties, however, those damages for which the insurance company or the carrier shall be liable shall be excluded;
|-||For non-conformity on quality defects, [Buyer] shall claim damages within 60 days after the goods arrive at the destination port and within 45 days for non-conformity on quantity or weight of the goods;
|-||The [Seller] shall make response to the [Buyer] within 30 days after receiving a compensation claim.|
Within the repair guarantee (also called quality guarantee) period (there is no stipulation on the quality guarantee period in the Chinese version of the Contract; it was indicated as one year in the English version), the [Seller] shall repair the entire defective goods and guarantee a 100% exchange if the defective goods are more than 0.5% and less than 5% of the entire goods; however, if the goods with technical (it was indicated as technical performance in the English version of the Contract) defects exceed 5% of the entire goods, the [Buyer] is entitled to return the goods and claim compensation for damages incurred thereof (article 17 of the Contract).
It was stipulated in the Contract attachment (Export Product Technical Confirmation), that the DVD players shall have a YUV output function.
During the performance of the Contract, the two parties had a dispute, and the [Buyer] filed the first arbitration application on 15 October 2001 based on the arbitration clause in the Contract, claiming damages caused by 165 items of defective goods which had been returned by the customers. The [Buyer]'s claims were basically supported in [DVD HiFi case dated 25 December 2001].
The [Buyer] alleges that after that award, an additional 69 items of defective goods have been returned from the [Buyer]'s consumers due to the poor quality of the DVD players. After an inspection conducted by SGS Australia Pty Ltd (hereafter, the "SGS"), it was confirmed that these goods could not perform normally due to the defects in Karaoke function, picture transmission, and screen display, similar to those discovered on the DVD Players which had been returned last time. Based on the arbitration clause in the Contract, the [Buyer] filed a further arbitration application, asking the Arbitration Tribunal to rule that:
1. [Seller] shall refund US $5,796.00 for the price of the goods and bear the entire damages and expenses caused by the return of the goods; the [Seller] shall also pay the interest on the price for the goods of US $338.00, expectation profit of US $2,898.00, defective goods inspection fee of US $224.00, and cost for the return of the goods of US $200.00;
2. [Seller] shall bear the [Buyer]'s attorneys' fee incurred for this case of renminbi[RMB]10,000.00; and
3. [Seller] shall bear the arbitration fee.
The following are the facts and reasons stated by the [Buyer]:
After the conclusion of the Contract, the [Buyer] issued the L/C as stipulated in the Contract, and the [Seller] sent the sample goods to the [Buyer]. Upon inspection, it was found that functions of the sample goods conformed to the stipulations in the Contract. On 4 May 2001, the goods arrived at Sydney, Australia. The [Buyer] inspected the goods and discovered that the entire shipment of DVD Players lacked the YUV function and that the goods were of poor quality, and that four DVD players broke down during inspection.
After several negotiations, the two parties reached an agreement to reduce the price by US $15.00/DVD Player to settle the YUV function problem. However, after the DVD players had been resold by the [Buyer] for only a few months, 165 DVD players were returned due to quality defects (the dispute regarding the 165 items of defective goods has been settled in the [DVD HiFi case of December 25, 2001].
After settling the dispute regarding those defective goods, an additional 69 items of defective goods were returned by the [Buyer]'s customers. The defects on these goods were also within the one-year guarantee period, and the ratio of defective goods has reached to 39% of the entire goods on a cumulative basis (204/600 = 39%). Therefore, the [Buyer] is entitled to exercise its right to return the goods again, and to ask the [Seller] to bear the entire economic losses caused by the return of the goods.
After failing to settle the problem with the [Seller] through negotiation, the [Buyer] filed the arbitration application again based on the relevant stipulations in the United Nations Convention on Contracts for the International Sales of Goods (hereafter, the "CISG").
The [Seller] failed to submit a defense or present at the court session.
II. OPINION OF THE ARBITRATION TRIBUNAL
Based on the evidence provided by the [Buyer] and the investigations made by the Arbitration Tribunal at the court session, the Tribunal ascertains the following facts and makes the following rulings.
(1) Applicable law
The parties failed to stipulate the applicable law in the Contract. However, the places of business of the [Buyer] and the [Seller] are in Guangzhou, China and Australia, respectively, and both China and Australia are Contracting States of the CISG. Therefore, the CISG shall be applied to the dispute in this case.
(2) The effectiveness of the Contract
The Contract in this case was signed by the two parties voluntarily without any obviously unfair terms. Therefore, it is valid and has binding effect on the parties.
(3) The delivery of the goods and inspection
On 20 March 2001, the [Buyer] and the [Seller] signed the Contract, by which the [Seller] was to sell 600 DVD players at a unit price of US $99/DVD player, totaling US $59,400.
An Export Product Technical Confirmation was attached to the Contract, stipulating that the DVD players should have YUV output function. The [Buyer] issued its L/C based on the Contract, and the [Seller] delivered the goods on time. They arrived in Australia on 4 May 2001. Evidence shows that in accordance with Article 38 of the CISG, the [Buyer] inspected the DVD players in a timely manner and raised quality and quantity objections immediately. The [Buyer] discovered the following defects in the goods:
a. Eight DVD players were missing from a quantity of 600 as stipulated in the Contract;
b. The [Seller] failed to provide six spare goods based on 1% of the entire goods;
c. The entire shipment of DVD players lacked the YUV output function, etc.,
The aforesaid defects have been confirmed by the award in the [DVD HiFi case of 25 December 2001].
(4) The price reduction agreement and the performance of that agreement
Regarding the aforesaid defects, it has been confirmed in the above award that the two parties have reached an agreement on the lack of YUV function on the DVD Players by reducing the price by US $15.00/DVD Player.
(5) The [Buyer]'s first arbitration claim for 165 items of defective goods
[Buyer]'s claims were basically supported by the above award. The [Buyer] alleges that it has returned the goods to the [Seller] pursuant to that award and asked execution with G Province G City Intermediate People's Court, and that the [Seller] has basically performed in accordance with the award.
6. [Buyer]'s claim to return the goods again
The Contract in this case involves only one transaction and the contract goods have been delivered in one delivery. There was no stipulation in the Contract on the number of returns which the [Buyer] may make within the quality guarantee period. On 16 April 2002, the SGS inspected 69 items DVD Players and issued Inspection Report No. 21441909/2, confirming that the 69 DVD Player were the goods under the Contract and concluding that "[W]e cannot accept the consignment within reasonable acceptable quality levels."
Based on article 15 of the Contract, if goods with technical defects exceed 5% of the entire goods, the [Buyer] is entitled to return the goods.
|-||69 items of defective goods have reached 11.5% of the entire goods, plus 165 items of
defective goods which have been returned to the [Seller], the ratio of defective goods
has reached to as high as 39%.
|-||In addition, the [Seller] raised no objection to the [Buyer]'s claim to return the goods.|
Therefore, the Arbitration Tribunal supports this claim of the [Buyer], and the [Seller] shall be liable for the damaged related to the 69 items of defective goods.
7. [Buyer]'s other claims
The [Buyer] asks the [Seller] to pay its attorneys' fee for this case of RMB 10,000.00. Based on article 59 of the Arbitration Rules, the [Buyer] is entitled to have the [Seller] compensate the attorneys' fee it incurred for processing this case. However, the amount shall not exceed 10% of the amount of the award. Based on that article, the Arbitration Tribunal holds that the [Seller] shall pay the [Buyer]'s attorneys' fee of RMB 7,780.00.
8. [Buyer]'s loss of price and damages in detail
A. Price for the defective goods which shall be refunded by the [Seller]
US $84.00/DVD Player × 69 items = US $5,796.00;
B. Interest on the price for the goods
US $338.00 (from 27 July 2001, the day of the [Seller]'s receipt of payment to 28 April 2002, totaling 272 days): US $5,796.00 × 7.75% × 271/360 = US $338.00;
C. Expectation profit: US $2,898.00
Cost of DVD Player: US $99.00, Price for resale: Australia dollars [AUD]264 (i.e., US $141.00): (US $141.00 - US $99.00) × 69 = US $2,898.00;
D. Defective goods inspection fee
AUD 420.00 (i.e. US $224.00);
E. Transportation fee for the return of the goods
Article 74 of the CISG states that:
"Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract."
In accordance with this provision, the Arbitration Tribunal rules that the aforesaid damages are supported. Even though the transportation fee for the return of the goods has not been incurred, it has to be incurred, and it is calculated based on the cost for the return of the goods last time. Therefore, it should be deemed reasonable. Thus, the [Seller] shall pay the aforesaid sum to the [Buyer].
9. Arbitration fee
Since the damages were caused by the [Seller]'s contract violation, the Arbitration Tribunal holds that the [Seller] shall bear the arbitration fee.
III. THE AWARD
The Arbitration Tribunal rules that:
(1) [Seller] shall refund the price for the goods and pay to the [Buyer] the damages and expenses incurred by the [Buyer], totaling US $9,456.00 within 30 days of this award;
(2) [Buyer] shall return 69 items of DVD Players to the [Seller] within 30 days of this award;
(3) [Seller] shall pay the [Buyer]'s attorneys' fee of RMB 7,780.00 within 30 days of
(4) [Seller] shall bear the entire arbitration fee.
This is the final award.
23 July 2002 in Shenzhen
* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of Australia is referred to as [Buyer] and Respondent of the People's Republic of China is referred to as [Seller]. Amounts in the currency of the United States (dollars) are indicated as [US $]; amounts in the currency of the People's Republic of China (renminbi) are indicated as [RMB]; amounts in the currency of Australia (dollars) are indicated as [AUD].
** Meihua Xu, LL.M. University of Pittsburgh School of Law on an Alcoa Scholarship. She received her Bachelor of Law degree, with the receipt of a Scholarship granted by the Ministry of Education, Japan, from Waseda University, Tokyo, Japan. Her focus is on International Business Law and International Business related case study.
*** John W. Zhu, LL.M. China University of Political Science and Law (National Graduate Scholarship); Bachelor of Law, Southwest University of Political Science and Law; Double Degree, English Literature, Sichuan International Studies University, Chongqing, China. Focus: International Economic Law.Go to Case Table of Contents