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CISG CASE PRESENTATION

China 4 November 2002 CIETAC Arbitration proceeding (Beech log case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/021104c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20021104 (4 November 2002)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2002/08

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Germany (respondent)

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

GOODS INVOLVED: Beech logs


UNCITRAL case abstract

PEOPLE'S REPUBLIC OF CHINA: China International Economic & Trade
Arbitration Commission (CIETAC) 4 November 2002 (Beech log case)

Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/99],
CLOUT abstract no. 984

Reproduced with permission of UNCITRAL

Abstract prepared by Georges Sawadogo

This case deals primarily with conformity of the goods, intent of the parties, trade practices and calculation of damages.

The parties entered into a contract for the sale of "A-quality" beech logs, without any flaws in quality.

When the first [installment] was delivered to the buyer in Shanghai, the local inspection bureau issued a certificate that it did not find any defects in the goods. Yet, a second inspection certificate from the final destination contained that part of the goods had serious defects. The buyer immediately informed the seller of the defects. Most of the goods did not conform to the contract in the second [installment] either. At that time, the market price of the goods dropped dramatically forcing the buyer to sell the goods at a reduced price in order to reduce its losses. When the negotiations between the parties broke down, the buyer commenced arbitration arguing non-conformity of the goods which the seller denied.

The arbitral tribunal applied the CISG under article 1(1)(a) CISG.

The tribunal first interpreted the contractual terms defining quality of the goods. The tribunal held that the term describing quality requirements in the contract is equivalent in meaning to the term used in the timber industry, therefore, the parties had implicitly made applicable to their contract that industrial term under article 9(2) CISG.

Regarding the interpretation of other contractual terms concerning quality, the tribunal interpreted the respective terms according to their general meaning, and compared them to the specific quality requirements under the contract. The tribunal ultimately held that goods with "scars", "gaps" or "holes" do not conform to the contractual requirement to deliver "A-quality" goods. The arbitral tribunal allowed the buyer to use the second inspection certificate as a basis for its damages claim. The tribunal ruled that the buyer was only the importer and not the end-user of the goods and that Shanghai was only the connecting port of the goods, not their final destination. For these reasons, under article 38(2) CISG, requiring the buyer to have the goods examined in the port of Shanghai would have been impracticable, and a waste of time and money. Therefore, the second certificate of inspection was valid and the buyer was entitled to rely on it.

The tribunal ruled that, in the absence of any relevant contractual provisions and certificates, the buyer could not include in the calculation of the damages the market situation at the time of the inspection. In calculating the damages under article 74 CISG, the tribunal considered the price of conforming beech logs recorded by the Shanghai customs authorities while doing customs clearance. The tribunal allowed the buyer to recover only the price of those goods which had many kinds of quality defects and had to be sold at a reduced price. The tribunal held that the losses resulting from the market price drop cannot be enforced as damages under article 74 CISG because the price drop was not foreseeable by the seller.

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Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 9 ; 25 ; 35 ; 38 ; 74 ; 77 ; 88

Classification of issues using UNCITRAL classification code numbers:

9B [Implied agreement on international usages; standards];

25B [Definition of fundamental breach];

35A ; 35B [Conformity of goods: quality, quantity and description required by contract; Requirements implied by law];

38A ; 38C [Buyer's obligation to examine goods: time for examining goods; Deferral of examination in case of redirection or dispatch]

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

77A [Obligation to take reasonable measures to mitigate damages];

88A2 [Resale of goods: appropriateness of method of sale]

Descriptors: Usages and practices ; Fundamental breach ; Conformity of goods ; Examination of goods ; Damages ; Mitigation of loss ; Resale of goods

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Editorial remarks

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

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

Beech log case (4 November 2002)

Translation [*] by Zheng Xie [**]

Translation edited by William Zheng [***]

The China International Economic and Trade Arbitration Commission (hereafter, the "Arbitration Commission") accepted this case (Case Number: G_____) according to:

   -    The arbitration clause in Contract 20FSBXA-BF15621DM (hereafter, the "Contract") signed by Claimant [Buyer], Shanghai __Technology Import and Export Company, and Respondent [Seller], __& Co. KG of Germany, on 8 November 2000; and
 
   -    The written arbitration application submitted by [Buyer] on 24 January 2002.

The Arbitration Rules of China's International Economic and Trade Arbitration Commission [hereafter, the "Arbitration Rules"], which took effect on 1 October 2000, apply to this case.

The [Buyer] appointed Ms. __ as its arbitrator; the [Seller] appointed Mr. __ as its arbitrator; and the Chairman of the Arbitration Commission appointed Mr.__ as the presiding arbitrator. On 22 May 2002, these three arbitrators formed the Arbitration Tribunal to hear this case.

The Arbitration Tribunal reviewed the [Buyer]'s arbitration application and evidentiary materials and the [Seller]'s response and evidentiary materials, and held a court session in Beijing on 29 July 2002. The representatives of the parties attended. The parties made oral statements and arguments about the other party's allegation, legal basis and contractual basis, and cross-examined the evidence. After the court session, the parties submitted supplementary documents to the Arbitration Tribunal.

This case is completed. Based on the court session and the written documents submitted by the parties, the Arbitration Tribunal handed down the arbitration award by consent.

The following are the facts, the Arbitration Tribunal's opinion and the award.

FACTS

The [Buyer] and the [Seller] signed Contract No. 20FSBXA-BF15621DM (hereafter, the "Contract") on 8 November 2000 by fax. The [Buyer] purchased beech logs from the [Seller] on the following terms:

   -    Quantity: 800 m3 (i.e., forty containers of 40 inches);
   -    Quality: A quality logs, straight grown, no scars, no gaps, no knots, and no twists, as specified in Articles 1, 13 and 17 of the Contract;
   -    Unit price: US $540/ m3 C&F Shanghai;
   -    Total price: US $432,000;
   -    Shipping period: Ten containers shall be delivered on or before 20 November 2000; fifteen containers shall be delivered on or before 5 December 2000; and fifteen containers shall be delivered on or before 5 January 2001.

The Contract also contains related stipulations on inspection, damages, force majeure and arbitration, etc.

POSITION OF THE PARTIES

The [Buyer]'s position

In the arbitration application and the statements made in the court session, the [Buyer] alleged:

After signing the Contract, on 15 November 2000 the [Buyer] through its bank issued an L/C with the [Seller] as the beneficiary on 15 November 2000. On 6 December 2000, the [Buyer] sent the [Seller] a fax emphasizing the quality standard to which the goods must adhere. However:

   -    Following receipt of the first installment of the goods, the [Buyer] found that part of the goods had serious defects including twists and knots, etc. The [Buyer] immediately sent a fax to inform the [Seller] of the defects. The [Seller] replied on 13 and 19 December 2000 acknowledging that it was liable for the defects, and promised to go to China to deal with this issue personally.
 
   -    While the [Buyer] was trying its best to solve the problems with the first installment, the second installment of the goods arrived. The [Buyer] was surprised to find that most of the second installment did not conform to the Contract, and that there were a great number of twists, knots and gaps, etc.
 
   -    On 8 January 2001, the [Buyer] applied to the China Huzhou Import and Export Commodities Inspection Bureau to inspect the two installments of goods. The China Huzhou Import and Export Commodities Inspection Bureau issued inspection certificate No. 330800101000014 on 17 January 2001. The inspection certificate shows that 82 pieces of beech (totaling 157.445 m3) in the 25 containers of the first and second installments had quality defects and did not conform to the Contract.
 
   -    After the inspection certificate was issued, the [Buyer] immediately sent an official letter requesting return of the goods, but the [Seller] did not reply. Because of the physical nature of beech, the goods could not be piled for a long time. In the situation when the [Seller] failed to provide any response after receiving [Buyer]'s letter, in order to avoid enlarging the loss, the [Buyer] had to dispose of the non-conforming 82 pieces of beech. Because of the defects of the goods, although the [Buyer] tried its best to sell them for a higher price, the goods were sold at only RMB 2,000/ m3. Compared with the market price of the qualified logs at that time, the loss of each m3 was RMB 4,000.

The [Buyer] alleged that:

   -    The [Seller] should have delivered conforming goods in accordance with the Contract;
 
   -    The [Seller]'s conduct was a violation of international trade rules, and constituted a fundamental breach of contract; and
 
   -    As a party performs its obligations according to the Contract, the [Buyer] has the right to claim damages.

The [Buyer]'s claims

The [Buyer] filed the following claims.

   (1)   The[Seller] shall compensate the [Buyer] for the loss of contract price, i.e., RMB 629,780;
   (2)   The [Seller] shall pay for the inspection fee, i.e., RMB 2,163;
   (3)   The [Seller] shall pay for the [Buyer]'s attorneys' fee, i.e., RMB 10,000, and the entire arbitration fee.

The [Seller]'s response

In the response and the statement made in the court session, the [Seller] alleged:

The [Buyer] and the [Seller] have had a long established relationship in the supply of logs. After signing the Contract in this case in November 2000, the [Seller] shipped 10, 15 and 15 containers of beech of grade and quality that conformed to the Contract on 19 November, 2 December 2000, and 5 January 2001, respectively. The goods were shipped to Shanghai in accordance with the Contract.

Soon after the goods arrived in Shanghai, the market price dropped dramatically because of the influence of the "French Storm". The [Buyer] contacted the [Seller]'s Shanghai Representative Office and claimed damages. However, because the [Seller] considered that it had no duty to bear the [Buyer]'s market risk, it did not accept the [Buyer]'s claim. The [Buyer] then began to criticize the quality of the goods. The [Seller] had delivered to the [Buyer] high quality goods that conformed to the Contract. Therefore, it could not accept the [Buyer]'s unreasonable requests. The [Seller] alleged that it had fully performed its duties under the Contract, and that the [Buyer] sold the goods at a reduced price due to the market risk but not because of the quality of the goods. Therefore, the [Seller] should not be liable for the loss. The [Seller] requests the Arbitration Tribunal to dismiss the [Buyer]'s arbitration claims.

After the court session, the [Seller] submitted supplementary materials to the Arbitration Tribunal and further stated that the goods delivered had no quality defects. In addition, the [Seller] alleged that many statements made in the [Buyer]'s arbitration application did not conform to the facts for the following reasons:

(1) As to the stipulation on the quality of the goods in the Contract, the [Seller] alleged that according to Article 1 and Article 17.2 of the Contract, the beech under the Contract should be A quality, fresh cut, clean outside, straight grown, no inner bark, no minerals, no knots and no twists, and there was no reference to "no scars and no gaps" in the Contract as the [Buyer] alleged in its arbitration application. On 6 December 2000, the [Buyer] sent a fax to the [Seller] unilaterally requesting that the quality standard be raised, but the [Seller] never recognized or agreed with it. Thus, the [Buyer]'s request was not legally valid, and the quality standard of the goods should conform to the Contract.

(2) As to the legal validity of the basis for the claims, the [Seller] alleged that the inspection certificate which was attached to the arbitration application and was issued by the PRC Huzhou Import and Export Commodities Inspection Bureau, was not the initial inspection report stipulated in the Contract and could not be the basis for the claims. In addition, the inspection certificate had nothing to do with the goods under this Contract and could not be used as evidence in this case.

The [Seller] alleged that according to Article 14 (B) of the Contract, when the goods arrived in Shanghai, the [Buyer] should immediately do the initial inspection on the quality, dimension and quantity/weight of the goods. If the initial inspection showed any defects, the [Buyer] had the right to claim damages based on the initial inspection report.

      -  In fact, when the first installment of the goods arrived at the Shanghai port, Shanghai Pujiang Import and Export Commodities Inspection Bureau conducted the initial inspection of the goods, and issued Imported Goods Customs Formalities Certificate on 18 December 2000. This certificate did not show any quality defects of the goods.

      -  The inspection certificate submitted by the [Buyer] in the arbitration application was issued by Huazhou Import and Export Commodities Inspection Bureau, and the inspection place was the __ Timber Market in Nanxun, Huzhou, Zhejiang, but not the Shanghai port. Thus, the inspection certificate provided by the [Buyer] was not the initial inspection report stipulated in the Contract, and could not be the legal basis for the [Buyer] to claim for damages.

      -  In addition, this inspection certificate shows that the unloading date was 2 January 2001, but the inspection date was 8 January 2001. This fact shows that the commodities inspection bureau did not open the containers and inspect the goods once the goods arrived at the place which the [Buyer] specified, but did so six days later. Therefore, on what basis did the commodities inspection bureau conclude that the goods inspected were those under the Contract in this case? Since the [Buyer] and the [Seller] had a long established supply relationship, and the [Buyer] had just filed a claim for damages on a quality problem according to a former sales contract (i.e., Contract No. 19DM for 30 containers of goods). If the inspection bureau made the above judgment based only on the [Buyer]'s unilateral statement, did not the inspection certificate lose the evidentiary credibility?

      -  Moreover, every log delivered by the [Seller] had an individual number. If the inspection bureau inspected the goods according to the packing list and the B/L, why not list the numbers of the logs with defects in the inspection certificate? Furthermore, although the B/L number of the first installment and the invoice number of the second installment were recorded in this inspection certificate, the goods inspected were those which were delivered on 30 December 2000 and packed in 20 containers of 40 inches each. However, the goods disputed in this case were packed in 25 containers of 40 inches each. The goods inspected had nothing to do with those disputed in this case. Therefore, this inspection certificate could not be a basis for claims in this case.

(3) The inspection certificate could not prove that the quality defects of the log existed. The [Seller] alleges that the Contract stipulates that the beech should be A quality, fresh cut, clean outside, straight grown, no inner bark, no minerals, no knots and no twists, so the quality problems of the 82 pieces of log, which included four pieces with gaps, twelve pieces with scars and three pieces with holes, described in the inspection certificate, could not prove that the goods did not conform to the Contract. Moreover, according to Article 1 of the Contract, the dimension of the goods under the Contract should be 2.7-3.0m (20 cm added to each end) or times of such length, so the goods should be inspected by each dimension, i.e., 2.7-3.0m.

      -  The packing lists show that among the two installments of the goods delivered by the [Seller], the longest log was 11.4m, the shortest one was 2.7m, and 20cm was added to each end. However, the result of the inspection did not specify where the quality problem occurred in the logs. For example, when a 11.4m log which seems bent is cut to four pieces of 2.7m each, each piece may not reach the twist standard, or if the scar or twist is not more than 40cm, and the position where the scar or twist exits does not affect the [Buyer]'s use of 2.7-3.0m piece cut, so it should not be deemed as a breach of the Contract. Thus, the inspection certificate issued by the commodities inspection bureau cannot prove that the goods did not conform to the Contract.

      -  In addition, according to the [Seller]'s original record, when delivering the goods, the [Seller] actually delivered more than the quantity stipulated in the Contract, but did not ask for any additional payment, such as in the first installment, six pieces of log were 20-60cm longer each, eleven pieces were 1-2.5m longer each, and three pieces were deducted from the volume with the diameter of 20-70cm each; in the second installment, five pieces of log were 1-2 m longer, seven pieces were 5-15 m longer and six pieces of log were deducted from the volume with the diameter of 5-10cm. Accordingly, even if the above logs had some so-called defects which affected the dimension needed by the [Buyer], the [Seller] did not breach the Contract if the free quantity delivered to the [Buyer] could offset the alleged defects.

Based on the above, the [Seller] alleged that the inspection certificated issued by the commodities inspection bureau could not prove that the quality defects of the goods existed.

(4) The [Buyer]'s claim for damages has no legal validity. The [Buyer] alleged: according to the Contract, when finding the quality of the goods was not conforming to the Contract, the [Buyer] should have applied to the commodities inspection bureau to conduct the inspection, and it had the right to claim damages with the inspection certificate, so the precondition for the [Buyer] to claim damages was to provide a valid inspection certificate which can prove the goods are not conforming to the stipulation of the Contract.

In the arbitration application, the [Buyer] states, "Once the inspection certificate was issued, the [Buyer] sent the [Seller] an official letter claiming damages (Appendix VII)". In fact, the issue date of the inspection certificate was 17 January 2001, and the letter claiming damages (Appendix VII) was dated 15 January 2001. Because it is impossible that the letter claiming damages was sent before the inspection certificate was issued, the letter in Appendix VII had no legal validity. In addition, after finding the serious defects of twists and knots existed in part of the first installment in December 2000, the [Buyer] did not mention the quality problems of the goods in the two correspondences between the parties, The Appendix VII was the first time the [Buyer] raised objection to the quality of the goods to the [Seller], which happened after the following three events:

      First, upon finding out that the [Seller] had sold goods to Zhejiang __ Import and Export Company at the same price, the [Buyer] requested [Seller] to reduce its contract price for that reason;

      Second, the [Buyer] asked the [Seller] to delay shipping the third installment of the goods, but the [Seller] insisted on performing according to the Contract;

      Third, the [Seller] had promised to negotiate the above request to reduce the contract price in China, but the parties did not reach any agreement by the negotiation.

Thus, the [Seller] alleges that the [Buyer] claims for damages not because of the quality problems of the goods, but for economic compensation and is using the quality issue as an excuse. In addition, when on 20 February 2001, the [Buyer] informed the [Seller] by fax that it would sell the goods at US $200/ m3, the [Seller] authorized its attorneys, __ and __ of Shanghai __ Law Firm to reply to the [Buyer] on 22 February, 2001 and inform it that the market price for the goods of same kind was US $650/ m3, and if the [Buyer] unreasonably insisted on selling the goods at US $200/ m3, it should bear all consequences incurred. Because the [Seller] replied to deny the [Buyer]'s sales price in time, the [Buyer]'s fax had no legal validity to implement.

Furthermore, the [Buyer]'s request that the [Seller] reply within 48 hours did not comply with the stipulation, i.e., 30 days response period, in Article 14 (D) of the Contract, so the letter had no legal validity.

(5) The [Buyer] did not prove that the sales of the goods at the price of US $200/ m3 really occurred. The [Seller] alleged that:

      First, Zhenjiang __ Construction Market Timber Transaction Sub-market was not the party with whom the [Buyer] conducted the transaction. The certificate issued by this sub-market on 14 March 2001 was circumstantial evidence. In addition, this sub-market was an interested party with the [Buyer], because the [Buyer] had a stall in this sub-market to do timber business, and they were business partners. Accordingly, this certificate should not be admitted as evidence.

      Second, on 28 May 2002, Huzhou Nanxun___Timber Industry Company issued a certificate stating it purchased 400 m3logs from the [Buyer] at RMB 4,100/ m3, and that the transaction was completed, but it did not provide any invoice or any bank's payment voucher, which was related to this alleged transaction.

   -    According to the Measures of the People's Republic of China for the Control of Invoices, the party that receives a payment shall issue an invoice to the party who made the payment. According to the Temporary Rules for the Control of Cash, if the contract price transferred between the entities exceeds RMB 1,000, the payment shall be made through the deposit bank.
 
   -    The contract price of the transaction described in this certificate was RMB 1,640,000, but the [Buyer] did not submit any legally valid certificate including invoice and transfer certificate issued by the bank to prove that the transaction really occurred.

Based on the above, the [Seller] alleges that in the arbitration application, the [Buyer] made false statements which do not conform to the facts. Accordingly, the [Seller] requests the Arbitration Tribunal to dismiss the [Buyer]'s unreasonable claims.

The [Buyer]'s position

At and after the court session, the [Buyer] submitted supplementary documents, which include the following statements in terms of facts and reasons on the issues in this case.

(1) As to the quality standard stipulated in the Contract, the [Buyer] alleges that both the [Buyer] and the [Seller] admit the description of "no twists, no bent, no knots" stipulated in the quality clause of the Contract. The dispute is about the issue of "no scars". The inspection certificate shows that there were twelve pieces of log with scars among the non-conforming logs, so the issue whether the Contract stipulates "no scars" is essential to this case.

The [Buyer] alleges that the Contract has the definite description, which is "no inner bark" as set forth in Article 17(2). Here, "inner bark" is a log terminology, and can be directly translated as "inside bark or sunk bark," and figuratively describes the character of scar, which is the calix formed during the growth of the trees. Used as a terminology, it can be explained as "a scar"

Meanwhile, "clean outside", i.e., "four sides clean" described in Article 1 "The Name and Dimension of the Goods" of the Contract includes the restriction of scars. The [Seller] unreasonably continues emphasizing the quality clause in the Contract, because it lacks knowledge of beech and processing beech. Beech logs are mainly used in China to make beech plate which is used for home fitment and furniture, and it is mainly used for home fitment currently. Because of the limited supply and high price of beech in the world, in China the beech plate is not wholly made from beech, but from plywood impregnated with beech flake. In other words, imported beech logs are cut to flakes as thin as paper in factories; one piece of conforming beech log can be cut to many pieces of flakes which can be made into many beech plates. Plywood is a product with specific dimensions: the standardized length is 2.44m. Therefore, the length of beech flake should be standardized and more than the length of plywood. The standardized length of beech flake is 2.7m. For that reason, the length of beech log should be more than 2.7m. The general requirement is 2.7-3m, and some length may be added to each end. With the above knowledge, it is easy to resolve the following two questions:

      First, as to the issue of "gaps", if the log has gaps, the flake cut from the log will also have gaps. If the log is used to make the surface or legs of a table, the effect caused by the gap may not be essential, but it is essential if the log is cut into flakes. Needless to say, "gaps" are not clearly restricted in the Contract, but it is not in conformity with the general standard for beech log and the purpose of the Contract. Thus, "No gaps" should be regarded as an implied warranty of the [Seller].

      Second, as to the issue of "holes", for the same reasons stated above, a hole will cause the flakes cut from the log to also have a hole, and at least cause the production of flakes to be reduced. "No holes" should also be regarded as the [Seller]'s implied warranty.

Accordingly, breech with gaps and/or holes does not comply with the Contract.

(2) As to the issue of initial inspection: for the following reasons, the [Seller] alleged that the inspection certificate provided by the [Buyer] is not legally valid unless it was issued by a Shanghai commodities inspection agency when the goods arrived at Shanghai port:

      First, Article 14(2) of the Contract states that when the goods arrive at the destination port, the [Buyer] should apply to a commodities inspection agency for initial inspection;

      Second, according to the Law of the People's Republic of China on Inspection of Import and Export Commodities, the inspection shall be conducted "immediately".

The [Buyer] alleges that this defense of the [Seller] is unsound for the following reasons:

      1. Although the Contract stipulates that the initial inspection shall be conducted after the goods arrive at the destination, it does not specify the inspection place and agency. "When the goods arrive at the destination port" is a description of time, but not place. The words used in Article 14(2) of the Contract do not support the conclusion that the inspection should be conducted by the commodities inspection agency at the destination port.

      2. Neither the Law of the People's Republic of China on Inspection of Import and Export Commodities nor the Detailed Rules stipulates that the inspection shall be conducted "immediately." The law only stipulates that the inspection shall be conducted within the stipulated period, so any inspection conducted within the stipulated period is reasonable and timely. Although Article 38 of United Nations Convention on Contracts for the International Sale of Goods uses the words "within as short a period", it also uses the words "as is practicable in the circumstances." In addition, this Article also describes some circumstances under which the goods can be examined at the destination port. Thus, the [Seller] cannot infer that the stipulated inspection place should be Shanghai based only on the word "immediately."

      3. Both Article 14 of the Detailed Rules of the Law of the PRC on Inspection of Import and Export Commodities and Article 18 of Regulations of the PRC on Application for Inspection of Import and Export Commodities specify that the inspection place can be either the port where the goods are unloaded or the final destination, and any relevant commodities inspection agency can inspect the goods. Thus, the inspection conducted in this case conforms to the law and regulations.

      4. The logs under the Contract in this case fall within the category of bulk goods transported in containers. When the goods arrived at the Shanghai port, the containers were still needed to transport the goods to the final destination. Thus, it was impossible and unreasonable to open the containers for inspection at the Shanghai port. Furthermore, even if the [Buyer] should have applied to the Shanghai commodities inspection agency to do the initial inspection of the goods, it did not affect the validity of the inspection certificate used to claim for damages, because Article 14(C) specifies the validity of re-inspection. It states that if, within 90 days, the [Buyer] finds the goods do not conform to the Contract, it can apply for inspection, and also claim for damages with the inspection certificate. Based on an outcome of an initial inspection, whether the goods are conforming or not is not a precondition to a claim for damages. It is a worldwide usage. Thus, the [Buyer]'s application with Huzhou Commodities Inspection Bureau for the inspection was reasonable and legal.

(3) As to the issue whether the goods described in the inspection certificate were those delivered by the [Seller] under the Contract, the original inspection certificate, pictures and inspection record, etc. issued by Huzhou Commodities Bureau and submitted by the [Buyer] fully show that the inspected goods' invoice number, packing list, and individual log numbers match those listed under the Contract. On 1 August 2002, Huzhou Import and Export Commodities Inspection Bureau issued a certificate documenting that:

      First, the goods inspected piece-by-piece matched the description in the packing list;

      Second, an invoice number and a B/L number listed in the inspection certificate are missing: the missing numbers are the Invoice No. 000050, and the B/L No. LTNV894001007903.

This certificate proves that the beech logs inspected under the inspection certificate were those delivered by the [Seller]. Although this certificate has some defects, its validity is not affected. There are twenty-five containers under the first and second installments of the Contract, but only twenty containers of 40 inches each of goods were inspected and recorded in the inspection certificate. In fact, on 15 January 2001 the [Buyer] sent a fax to the [Seller] to explain this situation, which is that the [Buyer] sold five containers of 40 inches each of goods before the inspection. Thus, the five containers of goods sold are not within the scope of the disputes in this case. The "unloading date" described in the inspection certificate refers to the date when the containers were unloaded from the ship, and not the date when the goods were taken out of the containers and put into storage. Furthermore, even if there were six days between the day when the inspection was conducted and the date when the goods were put into storage, the conformity of all bills, documents and numbers can prove that the goods were those under the Contract. How could the [Seller] presume that the goods inspected were not those under the Contract only by a few days' gap?

(4) As to the [Seller]'s allegation that the free additional volume of the log provided could enable the [Buyer] to receive qualified timber, the [Buyer] holds that the inspection method used by the inspection bureau excludes the possibility the [Seller] alleged, because the inspector examines whether any twist, knot, etc., exists in the 2.7m length part or times 2.7m length part of the beech, and the remaining part is not within the scope of the inspection. According to this inspection method, if the free additional volume provided by the [Seller] results in the 2.7m length part or the times 2.7m part having no twist or knot, etc. , the goods are conforming; otherwise, they do not conform. There is no middle ground.

(5) As to the fax claiming damages, although the fax claiming damages (i.e., Appendix VII of the arbitration application) was sent by the [Buyer] to the [Seller] on 15 January 2001 and before the inspection certificate was issued, the [Buyer] alleges that it also provided the inspection certificate to the [Seller] after the official inspection certificate was issued on 17 January 2001. Thus, the combination of the fax and the inspection certificate constitutes the complete and valid claim for damages. The fax sent by the [Buyer] to the [Seller] on 19 December 2000 (after the first installment arrived) did not specify the quality problems because when the containers were opened, only the logs piled on the top could be seen, and about 90% of the logs could not be seen. It would have been nonsense to discuss the quality problems at that time as the [Seller]'s attorney presumed. In fact, since 19 December 2000, the [Buyer] has been keeping phone contact with the [Seller]'s Shanghai Representative Office, and informing [Seller] of the problems found in time. Mr. __ of the [Seller]'s Shanghai Representative Office has been informing the [Seller] of the problems reported by the [Buyer] until Mr. __, the [Seller]'s supervisor, promised to go to Shanghai to solve the problems. The fax sent in 3 January 2001 did not mention the quality problems of the second installment for the following reasons:

      First, the [Seller] promised to come to China and negotiate in person;

      Second, the [Seller] did not see the second installment at that time; "unloaded" means the goods were unloaded from the ship. The goods were unloaded on 2 January; the customs clearance was conducted on 3 January; the duty was paid on 4 January; the port zone transportation plan was filed on 5 January; the goods were delivered to Dongqian Timber Market on 6 and 7 January. It is nonsense that the quality problems of the goods under the Contract could be clearly described on 3 January. The [Seller] lacks credit and honesty to arbitrarily presume that the [Buyer] premeditated its claim for damages.

      In fact, the good faith is reflected by the factual conduct finally.

(6) As to the reason for disposing part of the non-conforming logs and the method used to calculate damages, the [Buyer] alleges that the anti-causticity ability of beech log is weak; lack of insulation, rain or wild corrosion may cause a beech log to become molded and rotted, and to reduce or even to lose its use value. In China timber is piled outdoors.

Due to the physical character of beech logs, the [Buyer] had to dispose of the logs in time in order to avoid enlarging the loss. On 20 February 2001, the [Buyer] sent its telegram to the [Seller] and requested return of the goods, advising that, otherwise, it would sell the goods in order to avoid enlarging the loss. After informing the [Seller], the [Buyer] disposed of the goods. As to the issue of the market price of beech logs at that time, the [Buyer] alleges that the reasonable domestic market price of conforming beech log at that time was about RMB 6,000, which can be proved by the following evidence:

      First, the [Buyer] imported the goods under the Contract from the [Seller] at the price of US $540/ m3 and the [Buyer] resold the goods in the domestic market at RMB 5,800/ m3; the unit price of the domestic sales contract was RMB 5,800/ m3, which was recorded in the [buyer]'s domestic sales contract of the customs clearance documents which the [Seller] found when doing its investigation in Shanghai Customs.

      Second, the Evidence V-1 provided by the [Seller] shows that in February 2001, the imported price of conforming beech logs--"clean outside" with the same dimension was US $560 /m3, and that, in March 2001, the imported price of "clean outside" with the same dimensions was US $525 /m3; so the price for domestic sales must be around RMB 6,000 /m3.

   -    However, the price at which the [Buyer] sold the remainder of the two installments, i.e., 384,489m3, was reasonable, because non-conforming goods constituted more than 40% of the total; the [Buyer] sold the goods at the uniform price of RMB 4,100/ m3, which was 30% less, as a reasonable method to urgently dispose of the non-conforming goods. It was reasonable to reduce the price by 30%. If all of the 384,489 m3 of logs had conformed to the Contract, the [Buyer] would have been able to sell the goods at RMB 5,800/ m3.
 
   -    The actual sales price of the non-conforming goods was RMB 4,100/ m3. Thus, the loss of per m3was RMB 1,700, and the total loss the [Buyer] suffered was more than RMB 650,000 (384,489×1,700).

The amount which the [Buyer] claims is less than the above amount, so the [Buyer]'s claim was proper.

      Third, only considering the actual price of the 82 pieces of non-conforming logs (157,445 m3) at that time, the [Buyer]'s disposal of the goods was reasonable under the circumstances. The [Buyer]'s evidence provided by Zhejiang ___ Construction Materials ___ Timber Transaction Sub-Market shows that the price for the beech logs with twist, bent and knot, etc. was RMB 2,000-2,300/ m3. This proof was provided by the local market organization but not by some buyer or seller, so it shows the market condition and can be used as the basis. In the telegram sent by the [Buyer] to the [Seller] on 20 February 2002, the [Buyer] clearly informed of the sales price, i.e., US $200/m3.

   -    During the disposal, the unit price for the non-conforming logs was: (the total price of the disposal (384,489 × RMB 4,100/ m3) - the value of the conforming part (227.044 × RMB 5,800/ m3) / the volume of the non-conforming part (157.445 m3), which was consistent with the price mentioned above and RMB 4,200 less than the unit price for conforming goods.
 
   -    It is reasonable for the [Buyer] to calculate the loss per m3 for the non-conforming goods as RMB 4,000 (i.e., 6,000- 4,000.)
 
   -    These facts can be proved by Evidence VI. The loss of price, i.e., RMB 629,780, claimed in the [Buyer]'s arbitration application is calculated as the volume of the non-conforming logs (157.445 m3) times the price loss per m3 of non-conforming logs (RMB 4,000). The calculation is reasonable as thus explained.

In sum, the [Buyer] holds that there are sufficient reasons and evidence to support its claims, and requests the Arbitration Tribunal to sustain these claims.

THE ARBITRATION TRIBUNAL'S OPINION

The applicable law

The parties did not stipulate the applicable law in the Contract. However, they directly cited the stipulations of United Nations Convention on Contracts for the International Sale of Goods (1980) (CISG) in their arbitration application or response, and in their statements in the court session and supplementary materials. In addition, the [Buyer] is a legal entity in China; the [Seller] is a legal entity in Germany. Both China and Germany are Contracting States of the CISG. Thus, the CISG applies to this case. In addition, the Contract in this case cites the trade term of C&F, and the Contract was signed by both parties, so Incoterms 2000 also applies to this case.

The quality standard of the goods under the Contract

The parties focus on two issues: how to translate the term "inner bark" described in Article 17(2) of the Contract, and whether a beech log with "gaps" and "holes" conforms to the Contract.

   -    The [Buyer] alleges that "inner bark" should be translated as "scar", and according to Article 17 of the Contract, beech logs with scars do not conform to the Contract; and that, although the Contract did not include any specific stipulation about "gaps" and "holes", it is hard to make beech logs with gaps and holes into certain products. Thus beech logs with gaps and holes, like logs with scars, do not conform to the Contract.
 
   -    On the other hand, the [Seller] holds that "inner bark" should be translated as "speckle," and that "scar", "gap" and "hole" are not described in the Contract. Therefore, [Seller] alleges that a log with scars, gaps or holes is not non-conforming to the Contract.

After hearing the parties' arguments and carefully reviewing the relevant documents submitted by them, the Arbitration Tribunal holds that "inner bark" basically refers to "inside bark" or "sunk bark," which is the calix formed during the growth of the trees, and the terminology in the timber industry is "scar." The [Buyer]'s translation is correct, so the Arbitration Tribunal sustains its translation.

As to the issue of "gaps" and "holes": the Arbitration Tribunal finds that although the Contract has no definite stipulation on these terms, Article 1 of the Contract specifies that the goods shall be "A quality" and "clean outside," and Article 17 specifies that logs with twist, bent or knot, etc., do not conform to the Contract. Compared with twist, bent and knot, gaps and holes are more severe defects, so a log with gaps and holes is neither "A quality" nor "clean outside." Accordingly, after comprehensively reviewing the stipulations in the Contract, the Arbitration Tribunal rules that any log with bent, twist, knot, scar, gap or hole does not conform to the Contract.

The legality of the inspection certificate

The [Buyer] alleges that inspection certificate No. 3308001000014 issued by China Huzhou Import and Export Commodities Inspection Bureau on 17 January 2001 complies with the stipulation in the Contract, and that it is a legal and valid basis for the [Buyer]'s claims.

The [Seller] alleges that the inspection certificate is not the initial inspection report issued by a Shanghai commodities inspection agency, and is not related to the goods under the Contract, and cannot prove that the logs delivered by the [Seller] do not conform to the Contract, so it cannot be used as a legal and valid basis for the [Buyer]'s claims.

The Arbitration Tribunal finds that the end-user of the goods under the Contract was not the [Buyer]; the [Buyer] was only the importer. The end-user of the goods was in Huzhou, Zhejiang. The Shanghai port was only the connecting port for the goods under the Contract; the destination was Huzhou, Zhejiang. For the goods to have been examined in the Shanghai port, they would have had to have been moved out of the containers and inspected piece-by-piece and, after the inspection, the logs would have had to have been re-packed in the containers and transported to Huzhou. This would have wasted time and money, and was impracticable. In fact, the [Buyer] transported the goods to the destination, Huzhou, Zhejiang, and then applied to Huzhou Import and Export Commodities Inspection Bureau to inspect the goods, and the inspection was conducted within the period stipulated in the Contract. The inspection certificate was issued on 17 January 2001. The inspection certificate described the Contract No., the B/L number of the first installment, the invoice number of the second installment and the defects of the 82 pieces of beech logs, which are described as:

"39 pieces of beech log (76.034 m3) are bent, 4 pieces (6.859 m3) have gaps, 12 pieces (27.502 m3) have scars, 12 pieces (18.695 m3) have knots, 12 pieces (22.11 m3) have twists, and 3 pieces (6.245 m3) have holes."

In addition, the inspection certificate includes five pictures, which recorded the logs with defects at the time of inspection. After the court session, the [Buyer] submitted the proof issued by Huzhou Import and Export Commodities Inspection Bureau on 1 August 2002.

This proof stated:

"On 8 January 2001, we accepted the inspection application filed by Shanghai __ Technology Import and Export Company to inspect the beech logs imported from Germany __ Company. The Contract number is 20FSBXA-BF15621DM, the B/L numbers are LTNV894001007903 and EISU560000072350, and the invoice numbers are 000050 and 000074. On 9 January 2001, we sent employees to inspect the logs which were piled in the Huzhou Nanshun __Timber Market. There were 233 pieces of beech logs on spot. After the piece-by-piece inspection was conducted, it was found that the log numbers matched the packing list, and 82 pieces of logs, i.e., 157.445 m3 had more or less defects. Accordingly, on 17 January 2001, we issued Inspection Certificate No. 330800101000014. Due to our negligence, the invoice number 000050 was missing: the invoice numbers should be 000050 and 000074; and the B/L number LTNV894001007903 was missing: the B/L numbers should be LTNV894001007903 and EISU560000072350. We will avoid such mistakes in the future. We apologize for any inconvenience suffered by the parties. In testimony whereof."

In addition, the [Buyer] submitted to the Arbitration Tribunal the Containers Inspection Record by the commodities inspection bureau at the time of inspection. This record described in detail the container number, the log number, the length and diameter, the volume and the specific quality defects of the 82 pieces of beech logs. The [Seller] did not provide any contrary evidence to prove that above evidence was false or not conforming to the facts, so the Arbitration Tribunal admitted this evidence. In sum, the Arbitration Tribunal holds that:

   -    The inspection conducted by Huzhou Import and Export Commodities Inspection Bureau conforms to the stipulation in the Contract;
 
   -    The goods inspected were those delivered by the [Seller]; and
 
   -    The quality defects were definitely and clearly described.

Thus, the Arbitration Tribunal rules that the inspection certificate can be used as a valid basis for the [Buyer] to claim damages.

The amount of damages awarded to the [Buyer]

The Arbitration Tribunal finds that in the arbitration application, the [Buyer] claimed damages of RMB 629,780, but did not provide any relevant contract and certificates. This amount was calculated by the [Buyer] according to the market situation at that time, which cannot be used as the basis for the claims. Thus, the Arbitration Tribunal does not sustain the [Buyer]'s claim for compensation of loss of price, i.e., 629,780.

After the court session, the [Buyer] submitted supplementary materials in which the [Buyer] alleged that in March 2001, the 82 pieces of beech logs with quality defects and the remaining part of the first and second installments were sold to Huzhou Nanxun __ Timber Industry Company at the reduced price of RMB 4,100/ m3.

   -    The [Buyer] recorded this domestic sales contract with the Shanghai Customs while doing customs clearance. This domestic sales contract shows that conforming beech logs were priced at RMB 5,800/ m3 at that time. Based on this price, the [Buyer] deducted the reduced price (i.e., RMB 5,800-4,100 = 1,700), and then got the loss of price, i.e., RMB 1,700/ m3.
 
   -    After reviewing the domestic sales contract recorded with Shanghai Customs and the proof provided by Huzhou Nanxun __ Timber Industry Company and other relevant documents, and considering that the 82 pieces of beech log really had many kinds of quality defects and only had to be sold at a reduced price, the Arbitration Tribunal holds that the loss of price of RMB 1,700/ m3 is reasonable under the circumstances at that time.

However, only 82 pieces (157.445 m3) among the goods disposed had quality defects, so the Arbitration Tribunal can only sustain the amount claimed for the 82 pieces of logs, i.e., 157.445 m3×RMB 1,700/ m3 = RMB 267,657, and the claims for other beech logs are not sustained.

The inspection fee

In the arbitration application, the [Buyer] request the [Seller] to pay for the inspection fee of RMB 2,163, and provided the receipt issued by the Huzhou Import and Export Commodities Inspection Bureau. The Arbitration Tribunal holds that this claim is reasonable and sustains it.

The attorneys' fee

At the court session, the [Buyer] requested the [Seller] pay for the [Buyer]'s attorneys' fee, i.e., RMB 10,000. After the court session, the [Buyer] submitted the "Shanghai Attorney Service Uniform Invoice" issued by Shanghai __ Law Firm. After reviewing this fee, the Arbitration Tribunal holds it is reasonable and sustains it.

The arbitration fee

The [Seller] shall pay for the entire arbitration fee.

AWARD

The Arbitration Tribunal hands down the following award by consensus.

   (1)   The [Seller] shall compensate the [Buyer] for the loss of price, i.e., RMB 267,657.
 
   (2)   The [Seller] shall compensate the [Buyer] for the inspection fee of RMB 2,163.
 
   (3)   The [Seller] shall compensate the [Buyer] for the attorneys' fee for this case, i.e., RMB 10,000.
 
   (4)   The arbitration fee is RMB 32,118, which the [Seller] shall pay. The arbitration fee has been prepaid by the [Buyer] when filing the arbitration application, so the [Seller] shall pay the [Buyer] RMB 32,118.

The [Seller] shall pay the [Buyer] the amounts listed (1) - (4) within 45 days after this award is handed down; otherwise, interest shall be added at an annual rate of 6%.

This is the final award.

THE PRESIDING ARBITRATOR
THE ARBITRATOR
THE ARBITRATOR

4 November 2002


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of the People's Republic of China is referred to as [Buyer] and Respondent of Germany 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 (renmimbi) are referred to as [RMB].

** Zheng Xie, LL.M. Washington University in St. Louis, LL.M., BA in Economics, University of International Business and Economics, Beijing.

*** William Zheng is a graduate of the Pace University School of Law. He is Special Counsel with the Shanghai office of Sheppard Mullin Richter & Hampton, LLP.

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