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CISG CASE PRESENTATION

China 6 November 2002 CIETAC Arbitration proceeding (Pipe extrusion case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/021106c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20021106 (6 November 2002)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2002/25

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Australia (respondent)

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

GOODS INVOLVED: PVC pipe extrusion equipment


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 25 ; 49 ; 74 ; 78

Classification of issues using UNCITRAL classification code numbers:

25B [Definition of fundamental breach];

49B2 [Buyer's right to avoid contract (grounds for avoidance: fundamental breach of contract];

74A ; 74B [General rules for measuring damages: loss suffered in consequence of breach; Outer limits of damages: foreseeability of loss];

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

Descriptors: Fundamental breach ; Avoidance ; Damages ; Foreseeability of damages ; Interest

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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)

Queen Mary Case Translation Programme

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

Pipe extrusion case (6 November 2002)

Translation [*] by Zheng Xie [**]

Edited by John W. Zhu [***]

-   Particulars of the proceeding
-   Facts
-   Position of the parties
-   Opinion of the Arbitration Tribunal
-   Award

PARTICULARS OF THE CASE

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

   -    The arbitration clause in Contract 98JKK-006 (hereafter, the "Contract") signed by Claimant [Buyer], Shanxi Provincial __ & __ Imp. & Exp. Corp., and Respondent [Seller], __ Industries Pty. Ltd., on 29 May 1998; and
 
   -    The written arbitration application submitted by [Buyer] on 12 November 2001.

The Arbitration Rules of the Arbitration Commission that took effect on 1 October 2000 (hereafter, the Arbitration Rules) shall apply to this case.

On 27 December 2001, the Secretariat of the Arbitration Commission by express mail sent the arbitration notice, the Arbitration Rules and the arbitrators list to both parties, and meanwhile sent the [Buyer]'s application material to the [Seller] and requested the [Seller] to appoint its arbitrator within the stipulated period and submit its response.

The receipt provided by the express company shows that the address of the [Seller] provided by the [Buyer] has changed and the mail has been left at that address on 11 January 2002 based on the sender's request. In accordance with Article 87 of the Arbitration Rules, this notice should be deemed to have been delivered.

On 4 January 2002, the [Seller] sent a fax to the Arbitration Commission requesting it to send the arbitration notice to the address of its representative office in China. On 10 January 2002, Zhao Fan of the [Seller] received the arbitration notice and documents attached thereto.

Then, the Arbitration Commission sent the notice of arbitration procedure and the arbitration material to both the address of the [Seller]'s corporation and that of its representative office in China.

The [Seller] neither appointed an arbitrator nor submitted any written response within the period stipulated in the Arbitration Rules.

On 8 February 2002, the Chairman of the Arbitration Commission appointed Wang __ as the presiding arbitrator according to Article 24 of the Arbitration Rules; the [Buyer] appointed Du __ as its arbitrator; the Chairman appointed Wei __ as the arbitrator for the [Seller] according to Article 26 of the Arbitration Rules. The above three arbitrators formed the Arbitration Tribunal to hear this case.

The Arbitration Tribunal carefully reviewed the arbitration material submitted by the [Buyer], and after discussing with the Secretariat, decided to hold a court session in Beijing on 18 April 2002. On 5 March 2002, the Secretariat sent the notice of the court session to both parties.

On 18 April 2002, the Arbitration Tribunal held the court session in Beijing as scheduled. The [Buyer] sent its arbitration agent to attend the court session; the [Seller] neither attended the court session nor gave any reason. According to Article 42 of the Arbitration Rules, the Arbitration Tribunal heard this case by default. The [Buyer]'s arbitration agent made an oral statement about the facts and legal opinion of this case, answered the Arbitration Tribunal's questions, and after the court session, submitted an "Application for Requesting to Revise the Arbitration Claims and the Supplementary Opinion" and relevant evidentiary material on 20 May, 2002.

On 22 May 2002, the Arbitration Tribunal through the Secretariat informed the [Seller] of the court session by letter, and sent the supplementary material submitted by the [Buyer], and meanwhile notified the [Seller] that it should submit any opinion or request to hold another court session if desired within 15 days after receiving this letter; however, within the above period, the [Seller] neither replied in writing nor submitted any response.

On 19 October 2002, the [Buyer] submitted further supplementary materials and evidence, and the Secretariat sent these documents to the [Seller]; the [Seller] did not raise any objection, response or request to hold another court session.

This case has been completed. Based on the written material and the information confirmed in the court session, the Arbitration Tribunal made the final award by consent within the period stipulated in the Arbitration Rules.

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

I. FACTS

On 29 May 1998, the [Buyer] and the [Seller] signed a contract under which the [Buyer] will purchase a production line for PVC extrusion pipes manufactured by German __ Company. According to the arbitration clause in the contract, the [Buyer] filed this arbitration application because the equipment delivered by the [Seller] has severe defects and cannot be used for production, and the [Buyer] has incurred the severe economic damages.

POSITION OF THE PARTIES

[Buyer]'s claims

The [Buyer] filed the following claims in its arbitration application:

1. Because of the [Seller]'s late delivery, according to Article 16 of the Contract, the [Seller] shall pay the [Buyer] for a penalty of Deutsche Mark 190,628.80 (the formula: 3,812,576.00 X 5%)

2. Because the production line did not operate well even after three adjustment tests, the [Buyer] incurred additional expenses, i.e. renminbi [RMB] 220,529.36, for which the [Seller] should compensate. These additional expenses include the workers' salary, i.e., RMB 73,660.33, utilities of water and electricity, i.e., RMB 42,776.49, and the cost of raw materials used to test the equipment, i.e., RMB 104,092.54.

All of the above expenses were incurred during the second and third testing adjustments.

3. The [Seller] shall compensate the [Buyer] for the cost of raw materials used when the [Buyer] sent the equipment overseas for acceptance testing, i.e., RMB 110,011.88.

4. Because the equipment cannot be used for production, the [Buyer]'s client cannot pay off the loan for purchasing the equipment; the interest of the loan is RMB 2,671,650.80, for which the [Seller] should compensate.

5. Because the equipment cannot be used for production, the [Buyer]'s client incurred an economic damage of RMB 17,449.300, for which the [Seller] shall compensate.

The above damages consist of the following items:

The annual production: 4,500 tons;
The annual sales income: RMB 65,250,000;
The annual cost: RMB 48,469,000;
The annual tax and additional charges: RMB 3,694,000;
The net annual profit: RMB 65,250,000 - RMB 48,469,000 - RMB 3,694,000 = RMB 13,087,000.

The [Buyer] requests the [Buyer] to compensate for the 16 months' economic loss, i.e., RMB 13,087,000 / 12 X16 = RMB 17,449,300.

6. Because the [Seller] did not deliver the unloading platform with the value of Deutsche Mark 10,000 to the [Buyer] according to Section 6 of Appendix II of the Contract, but delivered a frozen water trough of which the value is far less than Deutsche Mark 10,000. Thus, the [Seller] should refund the extra payment to the [Buyer] based on the value of the goods actually delivered.

7. If the [Seller] agrees to satisfy the [Buyer]'s above arbitration claims, the [Buyer] conditionally agrees to have the [Seller] continue and complete the adjustment testing within the arbitration period until the equipment can be used to produce the products conforming to the contract. However, the [Seller] should bear all expenses incurred during this adjustment testing.

8. The [Seller] should bear the arbitration fee and the [Buyer]'s actual expenses (including the attorneys' fee) incurred for this case.

In the supplementary material submitted after the court session, the [Buyer] revised its arbitration claims as follows:

1. Because of the [Seller]'s late delivery, according to Article 16 of the Contract, the [Seller] shall pay the [Buyer] for a penalty of Deutsche Mark 190,628.80, equal to US $86,257.37 (according to the foreign exchange rate of US $1 = Deutsche Mark 2.21 released by Bank of China on 31 December 2001.)

2. The equipment has severe defects. Although the [Seller] sent technicians to conduct adjustment testing three times, the equipment cannot be used for production. So the [Seller] fundamentally breached the Contract. Accordingly, the [Buyer] requests to return the equipment, and that the [Seller] should refund to the [Buyer] the contract price of Deutsche Mark 3,431,318.00, equal to US $1,552,632.58, and interest at the annual interest rate of 6.93%, calculated from 1 January 1999 to the date when the [Seller] actually refunds the money. The [Seller] should bear any expenses incurred due to the return of the equipment.

3. Because of the return of equipment, the [Seller] should bear the actual expenses, i.e., RMB 211,662.23, which have been incurred for commodities inspection, transportation insurance and customs declaration, etc.

4. Because the equipment delivered by the [Seller] cannot be used for production, the [Seller] fundamentally breached the contract. Thus, the [Seller] should bear the actual expenses, i.e., RMB 639,983.82, incurred during the two acceptance tests and three adjustment tests. The above expenses include:

      (1) The expenses, i.e., RMB 72,515, incurred during the first acceptance test, including transportation fee, i.e., RMB 25,180, and the payment for materials, i.e., RMB 47,335. According to its business registration, Shanxi Provincial Aluminum Products Factory was previously known as the Shanxi Provincial __ Plastics Products Factory, so some expenses were paid in the name of Shanxi Provincial __ Plastics Products Factory;

      (2) The expenses, i.e., RMB 110,011.88, incurred during the second acceptance testing, including the domestic transportation fee, i.e., RMB 4,100, and overseas transportation fee, i.e., RMB 24,935, and payment for materials, i.e., RMB 80,976.88;

      (3) The payment for raw materials used in the first adjustment test, i.e., RMB 216,943.47, the payments for raw materials used in the second and third adjustment test, i.e., RMB 104,092.14, respectively;

      (4) The salary paid to 17 workers from May to December 2000 during the three adjustment tests, i.e., RMB 78,605.23;

      (5) The utilities fees for water and electricity incurred from May to December during the three adjustments tests, i.e., RMB 57,816.10.

5. Because it fundamentally breached the contract, the [Seller] should compensate the [Buyer] against the expenses incurred for the project appraisal, project initial review, design, feasibility study, project investigation, environmental protection, service, etc., totaling RMB 403,970. The above expenses include the project appraisal fee of RMB 30,000, the project review fee of RMB 48,370, the project environmental protection fee of RMB 12,000, the project service fee of RMB 3,600, and the project design fee of RMB 310, 000.

6. Because this is large-scale equipment, the [Buyer] had to renovate its workshops to accommodate it and the construction expenses total RMB 1,143,809.83, which include:

      (1) The construction fee for truck scale building is RMB 31,037.32. This building is for setting up the truck scale in the PVC project, and its value for other use is limited, so it has to be abandoned. Thus, the [Seller] should compensate for the entire fee.

      (2) The construction fee for extrusion processing building is RMB 125,883.94. This is for foreign manufactured extrusion processing equipment, so it has some value for future use. Accordingly, the [Seller] should compensate for 50% of this construction fee, i.e., RMB 62,941.97.

      (3) The construction fee for the mobile air compressor building is RMB 99,489.30. This building is for setting up the mobile air compressor, cold water equipment, frozen water trough, etc.; when the equipment is disassembled, this building's value is limited. Accordingly, the [Seller] should compensate for 60% of the construction fee, i.e., RMB 59,693.58.

      (4) The construction fee for the warehouse is RMB 68,530.61. This warehouse is for storing materials and molds, so it has value for future use. Accordingly, the [Seller] should compensate for 40% of the construction fee, i.e., 27,412.20.

      (5) The construction fee of RMB 818,868.66 for the combination building. This building is for setting up the combination equipment, and is larger than an ordinary building; this four stories building is more than 23 meters high. Its value for future use is limited, so the [Seller] should compensate for 80% of the construction fee, i.e., RMB 655,094.92.

The total amount of above construction fees is RMB 1,143,809.83; after deducted reasonable items, the remaining amount is RMB 836,179.99, for which the [Seller] should compensate.

7. In order to support the operation of this equipment, according to the manufacturer's requirement, the [Buyer] and its client purchased a number of accessory equipments. Because the equipment under this contract cannot be used at all, the accessory equipments have no other use. The expenses for the accessory equipments are RMB 3,216,497.43. These expenses include:

      (1) The construction fee for the water cooling tower is RMB 33,880. This equipment is a single processing system, and has some value for future use, so the [Buyer] requests the [Seller] compensate for 50% of the construction fee, i.e., RMB 16,940;

      (2) The expenses for setting up cable are RMB 435,342.40. This equipment is primarily used for lighting and buried cable, so it has to be disposed as trash. Accordingly, the [Buyer] requests the [Seller] to compensate for 85% of the expenses, i.e., RMB 370,041.04;

      (3) The expenses for changing the electricity lines are RMB 112,322.84;

      (4) The expenses for purchasing the adjustment testing equipment are RMB 44,900. This equipment can be used only for the testing of PVC pipe extrusion, and its value for future use is limited, so the [Buyer] requests the [Seller] to compensate for 80% of the expenses, i.e., RMB 35,920;

      (5) The expenses of purchasing the mobile air compressor, i.e., RMB 131,000. This equipment is primarily used to provide air for the pipe extrusion, and it has some value for future use. Thus, the [Seller] should compensate for 50% of the expenses, i.e., RMB 65,500;

      (6) The expenses of purchasing the cable bridge frame are RMB 126,032.15. This equipment is primarily used for supporting and controlling the power line from low-voltage electricity cabinet to each set of equipment. When this equipment is disassembled, the value for future use is limited, so the [Seller] should compensate for 85% of the expenses, i.e., RMB 107,127.32;

      (7) The expenses of purchasing the submersible motor pump, i.e., RMB 56,200. This equipment is used for cooling and freezing recycled water, and has some value for future use. So the [Seller] should compensate for 50% of the expenses, i.e., RMB 28,100;

      (8) The expenses of purchasing the low-voltage cabinet are RMB 259,819. This equipment is used for distributing electricity to each set of equipment, and has limited value for future use. Accordingly, the [Buyer] requests the [Seller] to compensate for 80% of the expenses, i.e., RMB 207,855.20;

      (9) The expenses for purchasing the electric hoist, i.e., RMB 28,120. This was customized equipment, and has limited value for future use. Thus, the [Buyer] requests the [Seller] to compensate for 85% of the expenses, i.e., RMB 23,902;

      (10) The expenses for purchasing the cold water freezing trough are RMB 6,800. This equipment is used for recycling the cold freezing water, and has no value for future use. Accordingly, the [Seller] should compensate for 90% of the expenses, i.e., RMB 6,120;

      (11) The expenses for purchasing the cold water machine are RMB 327,400. This equipment has some value for future use, so the [Buyer] requests the [Seller] to compensate for 50% of the expenses, i.e., RMB 163,700;

      (12) The expenses for purchasing the combination production line are RMB 1,398,000. This equipment is used for combining PVC materials, and has limited value for future use. So the [Seller] should compensate for 85% of the expenses, i.e., RMB 1,188,300;

      (13) The expenses for purchasing the cooling system are RMB 119,000. This equipment is used to process cooling and separating for compressed air without oil, water or dirt, and has some value for future use. So the [Seller] should compensate for 60% of the expenses, i.e., RMB 71,400.

      (14) The expenses for purchasing steel pipes and valves are RMB 44,741.04;

      (15) The expenses for purchasing the weighbridge are RMB 48,000. This equipment was specially purchased for the PVC project, and the value for future use is limited. Thus, the [Seller] should compensate for 80% of the expenses, i.e., RMB 38,400;

      (16) The expenses for purchasing the boiler, i.e., RMB 44,940. This equipment is used for warming the factory building of PVC project, and has limited value for future use. So the [Buyer] requests the [Seller] to compensate for 80% of the expenses, i.e., RMB 35,952.

After deducted reasonable items, the remaining amount of the above expenses for the accessory equipments is RMB 2,516,321.44, for which the [Seller] should compensate.

8. Because the equipment delivered by the [Seller] cannot be used for production at all, the [Buyer] and its client did not receive any return on the large amount of investment in terms of capital and human resources; the [Buyer]'s and its client's expected profits cannot be achieved; in addition, they suffered severe economic loss. Accordingly, the [Seller] should be liable. According to the initial project plan drafted by the [Buyer] for its client, the annual output of the equipment should be 4,500 tons, and the annual sales income should be RMB 65,250,000, among which the total cost is RMB 48,469,000; after the tax and the additional fee are deducted, i.e., RMB 3,694,000, the annual net profit is RMB 13,087,000. Furthermore, according to the [Buyer] and its client's investigation of other domestic factories which are using the same equipment, it shows that the equipment can bring a large amount of profits. For example, Wu Lu Mu Qi __ Plastic Pipe Ltd manufactured 1,200 tons of products in 2001 and sold 750 tons, and the sales income was RMB 9,000,000; the net profit is RMB 1,800,000.

In sum, because the equipment delivered by the [Seller] cannot be used for production, the [Buyer] and its client suffered severe loss. Considering the [Seller]'s financial capacity, the [Buyer] and its client request the [Seller] to compensate RMB 6,000,000.

The total economic loss suffered by the [Buyer] and its client from item 3 to item 8 above is RMB 10,608,117.48, for which the [Seller] should compensate.

9. The [Seller] should bear the arbitration fee and the [Buyer]'s expenses including the attorneys' fee incurred due to this case, totaling RMB 200,000.

[Buyer]'s allegations

As to the facts and causes of this case, the [Buyer] alleged that

1. According to the Contract, the [Seller] sold to the [Buyer] a PVC pipe extrusion production line manufactured in Germany for the price of Deutsche Mark 3,812,576 CIF Xingang, China; the delivery period was within seven months after receiving the deposit (including the time for pre-arrangement). The contract also specifies the payment terms, inspection and claim for compensation, late delivery and penalty, and the acceptance standard. Appendix VIII of the contract, "Assembling, Testing and Acceptance", specifically stipulates: "The materials used for testing and acceptance tests shall come from China and satisfy related requirements", and "The assembling, testing and acceptance test should be completed within three weeks. If the assembling, testing and acceptance cannot be completed within the above period because of the [Seller], when both parties agree, the period can be extended for one more week; however, if the acceptance testing cannot be completed within this additional week because of the [Seller], the [Buyer] has the right to claim for damages according to the Contract, and the [Seller] should bear any expenses duly incurred."

The facts related to the [Seller]'s breach of the Contract are described as follows:

      (1) The [Seller] failed to provide the relevant equipment technical documents on time, and caused the [Buyer]'s client to be unable to timely complete the construction and to suffer economic loss.

According to Appendix V of the Contract (Technical Documents), when the Contract took effect, the [Seller] was to provide technical documents to the [Buyer] without any charge so that the [Buyer]'s client could complete the construction and other matters, such as water, electricity, air, etc. However, the [Seller] did not complete such tasks on time, so the [Buyer]'s client could not complete the construction of the factory building and the accessory facility, and suffered economic loss.

      (2) The [Seller]'s late delivery caused severe economic loss to the [Buyer] and its client.

After the Contract was concluded, the [Buyer] paid the deposit to the [Seller] in June 1998 according to the Contract, and issued the L/C on 31 December 1998. According to the L/C, the latest shipping date is 30 January 1999. However, the [Seller] could not deliver the goods on time, and request the [Buyer] to revise the L/C and extend the shipping period. The [Buyer] had to revise the L/C many times, and extend the shipping period to 30 November 1999. Although the [Buyer] had to revise the L/C and extend the shipping period, the [Seller] should be held liable, because the [Seller] could not deliver the goods on time, and the [Buyer] suffered severe economic loss.

      (3) After many adjustment tests, the equipment delivered by the [Seller] still failed to conform to the Contract, and cannot be used for production, which caused severe economic loss to the [Buyer] and its client. The equipment delivered by the [Seller] arrived at Xingang Port, Tianjin on 20 December 1999, and arrived at the factory of the [Buyer]'s client on 31 December 1999. On 3 May 2000, the [Seller] sent its technicians to the factory; they assembled and adjusted the equipment. Because the equipment delivered by the [Seller] has many defects, the first adjustment testing failed. Accordingly, Shanxi Import and Export Commodities Inspection Bureau issued an inspection certificate on 6 July 2000. According to this certificate, the equipment delivered by the [Seller] not only has the severe defect of missing some parts, but also has severe quality defects.

In any event, the [Buyer] still agreed that the [Seller] could conduct the second adjustment test. From 3 August 2000 to 5 September 2000, the [Seller]'s technicians conducted the second adjustment test. Because the mold part has severe defects, this second adjustment test failed. Then, on 27 October 2000, the [Buyer] and the [Seller] signed an "Agreement on Repairing the PVC Pipe Extrusion Production Line", which stipulates that the [Seller] is responsible to repair nine mold parts, and the [Seller] promised to complete the adjustment testing before 30 November 2000. After the [Seller] changed the above nine mold parts, on 15 December 2000 the [Seller] sent its technician for the third adjustment test, which had been conducted for only three days. Because the output of the materials was uneven, the third adjustment test failed.

Thus, although three adjustment tests were conducted, the equipment delivered by the [Seller] cannot be used for production, and the [Buyer] suffered severe economic loss. Thus, the [Buyer] filed the claims to the [Seller] for compensation on 20 December, 2000.

2. Because China implements a statutory foreign trade agency system and the [Seller] obviously knew the agency relationship between the [Buyer] and its client before signing the contract, the [Seller] should be liable for the economic loss suffered by the [Buyer] and its client due to the [Seller]'s fundamental breach.

The Contract in this case was a foreign trade contract signed by the [Buyer] as the agent of Shanxi Provincial Aluminum Products Factory which has no power of foreign trade. The contract was concluded through publicly soliciting bids and bidding. The [Seller] is the winner of the bidding, and the notice of winning the bid shows that the end user of the equipment is Shanxi Provincial Aluminum Products Factory. In addition, although the legal representative of Shanxi Aluminum Products Factory did not sign the contract, it signed all of the Appendixes of the contract, which proves that the end user confirmed the Contract. Thus, the [Seller] knew that if it breached the contract, it would cause the [Buyer]'s client to incur economic loss, so the [Seller] should be liable for the loss. In fact, when the adjustment tests failed, the [Seller] negotiated with the [Buyer]'s client many times about the compensation.

3. The [Seller] fundamentally breached the Contract; therefore, it is legally and factually reasonable for the [Buyer] to request the return of the goods.

After three adjustment tests, the following defects were found: (1) the materials were burned; (2) the automatic control system could not be connected; (3) the connection port could not work properly. Although the [Buyer] gave the [Seller] sufficient time and opportunities including changing molds, etc., the equipment still failed to be usable for production. The inspection certificate issued by the Chinese commodity inspection bureau proves that the equipment has severe defects, and cannot manufacture any product. The equipment is still in the [Buyer]'s client's factory without any use, like useless iron. The [Buyer] and its client suffered severe economic loss. According to Article 111 and Article 115 of the Contract Law of the People's Republic of China, the [Buyer] request to return the equipment to the [Seller], and the [Seller] to refund the contract price and the interest to the [Buyer].

As to the [Buyer]'s above statements and arbitration claims, the [Seller] did not submit any response.

II. OPINION OF THE ARBITRATION TRIBUNAL

After hearing this case, the Arbitration Tribunal handed down the following opinions:

The applicable law

The parties did not stipulate the applicable law in the Contract. However, both China and Australia in which the parties' places of business are situated are Contracting States of the United Nations Convention on Contracts for International Sales of Goods (1980) (CISG). The Arbitration Tribunal holds that the CISG shall apply to this case. When CISG has no relevant stipulation, according to the principle of proximate connection, because both the place where the equipment was assembled and used and the place of arbitration are in China, the Chinese laws shall apply.

The validity of the contract

The Contract was signed by both parties and legally valid. The parties should perform their duties according to the Contract.

The facts of the [Seller]'s breach

1. The fax of 21 September 1998 submitted by the [Buyer] proves that after the Contract was signed on 29 May 1998, the [Seller] failed to provide the technical documents within one month as stipulated in the contract; the [Buyer] had raised objection, and requested the [Seller] to compensate for damages. The [Seller] did not raise any objection or provide contrary evidence. Thus, the Arbitration Tribunal confirmed that the [Seller] breached the contract in term of the duty to provide the technical documents.

2. The [Buyer] submitted the L/C, the revised L/C and the "Agreement of Revising the L/C" with the [Seller]'s seal and signature to prove that the [Seller] failed to deliver the goods within the period stipulated in the Contract, and requested to revise the shipping period in the L/C many times; the [Buyer] had requested the [Seller] to pay the penalty due to the [Seller]'s breach according to Article 16 of the Contract, "Late Delivery and Penalty", and the [Seller] did not agree; the [Buyer] accepted the [Seller]'s request to revise the L/C and reserved the right to claim for penalty and compensation.

As to the above facts, the [Seller] did not submit any objection or provide any evidence to the contrary. The Arbitration Tribunal determines that the [Seller] did not deliver the goods within the time period stipulated in the Contract.

3. The [Buyer] submitted the "Quantity and Quality Inspection Certificate" (No. 140000100000217) issued by the Shanxi Import and Export Commodity Inspection Bureau on 6 July 2000, to prove that the goods delivered by the [Seller] had severe defects of missing some parts. On 18 October 2000, this bureau also issued a Quality Inspection Certificate (No. 140000100000217-1) to prove that the equipment has quality defects; the certificate stated: "The adjustment testing period stipulated in the Contract is four weeks. Because the equipment has severe quality defects, two adjustment tests have been conducted for nine weeks, i.e., from 3 May to 6 June 2000, and from 3 August to 5 September 2000, and the adjustment tests have not been completed yet", and the conclusion in the certificate is, "Because the package is in good condition, the [Seller] shall be liable for the defects of the equipment." The [Seller] did not raise any objection. The Arbitration Tribunal determines that the equipment delivered by the [Seller] has quality defects.

4. The [Buyer] submitted the "Agreement of Repairing the PVC Pipe Extrusion Production Line" signed by the parties on 27 October 2000 which includes the following main contents: after the production line arrived at the [Buyer]'s place on 20 December 1999, the [Seller] assembled, adjusted and tested the equipment according to the Contract many times, but failed; the [Seller] thought that it was caused by the fact that the mold of the production line did not fit the Chinese materials; after negotiation, the parties reached the agreement on repairing the nine mold parts; in addition, the [Seller] agreed that the period for the [Buyer] to claim for damages was extended to 28 February 2001, and also promised to successfully complete the adjustment test before 30 November 2000. The [Buyer] alleged that the [Seller] sent its technicians to conduct the third adjustment test on 15 December 2000, but failed. The equipment is still in the client's factory without any use. As to the above facts, the [Seller] did not submit any objection or evidence to the contrary. The Arbitration Tribunal determines that the equipment cannot be normally used for production after the three adjustment tests.

Based on the above, the Arbitration Tribunal determines that the [Buyer]'s allegations about the [Seller]'s late delivery, the severe quality defects of the equipment, the failure of the three adjustment tests, etc. are true. Because the [Seller] failed to deliver the goods according to the Contract, and the production line lacks some parts, has severe quality defects, and did not pass the adjustment tests, and could not be used for normal production, the [Seller] fundamentally breached the Contract and should be liable for the breach.

The [Buyer]'s arbitration claims

1. Because of the [Seller]'s late delivery, according to Article 16 of the Contract, "If the [Seller] fails to deliver the goods on time, the [Buyer] may agree on late delivery on the condition that the [Seller] agrees that the paying bank deducts the penalty from the contract price. However, the penalty due to late delivery cannot exceed 5% of the contract price for the part which is delivered late", the Arbitration Tribunal sustains the [Buyer]'s request that the [Seller] pay the [Buyer] for the penalty (3,812,576 5% = Deutsche Mark 190,628.80 (equal to US $86,257.37 based on the foreign exchange rate of US $1 : Deutsche Mark 2.21 published by Bank of China on 31 December 2001).

2. Because the equipment delivered by the [Seller] cannot be used for production after three adjustment tests, according to Article 25 of CISG, "A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract", the Arbitration Tribunal holds that the equipment delivered by the [Seller] cannot be used for production, so the [Seller] fundamentally breached the contract, and the [Buyer] has the right to avoid the Contract. On 30 June, 1998, the [Buyer] by T/T paid the [Seller] 10% of the contract price as deposit, i.e., Deutsche Mark 381,257, and on 24 December 1999, the [Buyer] paid the [Seller] for the contract price of Deutsche Mark 3,050,010.80. Accordingly, the Arbitration Tribunal sustains the [Buyer]'s request to return the equipment, and the [Seller] should refund to the [Buyer] the contract price paid, i.e., Deutsche Mark 3,431,267.80 (equal to US $1,552,609.86).

Based on the relevant evidence, the Arbitration Tribunal sustains the [Buyer]'s claim that the [Seller] should pay interest on the deposit of Deutsche Mark 381,257, calculated from 30 June, and interest on the contract price of Deutsche Mark 3,050,010.80, calculated from 24 December 1999, to the date when the [Seller] actually makes the refund, at the annual interest rate of 6.93%.

3. According to Article 74 of CISG, "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," the Arbitration Tribunal holds that the expenses which the [Buyer] incurred for commodity inspection, transportation insurance, customs declaration, etc., constitute actual loss for which the [Seller] should compensate. Accordingly, the Arbitration Tribunal sustains the [Buyer]'s claim that the [Seller] should compensate for the actual expenses incurred for commodity inspection, transportation insurance, customs declaration, etc., totaling RMB 211,662.23.

4. Based on the same reason as above, the Arbitration Tribunal sustains the [Buyer]'s claim that the [Seller] should compensate for the actual expenses incurred for the two acceptance tests and the three adjustment tests, totaling RMB 639, 983.82, and also the [Buyer] and its client's actual expenses incurred for the project appraisal, preliminary project review, design, feasibility study, the investigation, environmental protection, service, etc., totaling RMB 403,970.

5. Article 74 of CISG provides, "Damages for breach of contract by one party 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." The Arbitration Tribunal holds that the [Buyer] did not prove that the construction fees related to the renovation of the factory building, etc., are the loss which the [Seller] foresaw or ought to have foreseen at the time of the conclusion of the contract, so it does not sustain the [Buyer] and its client's claim for the construction fees related to the renovation of the factory building, totaling RMB 836,179.99.

6. The [Buyer] alleges that in order to successfully use this equipment for production, according to the manufacturer's requirement, the [Buyer] and its client purchased a number of items of accessory equipment. Because the equipment under the Contract cannot be used at all, the accessory equipment has no other use. The expenses of the accessory equipment are RMB 3,216,497.43. These expenses are described as follows:

      (1) The construction fee for water cooling tower is RMB 33,880. This equipment is a single processing system, and has some value for future use, so the [Buyer] requests the [Seller] compensate for 50% of the construction fee, i.e., RMB 16,940;

      (2) The expenses for setting up cable are RMB 435,342.40. This equipment is primarily used for lighting, and buried cable, so it has to be disposed as trash. Accordingly the [Buyer] requests the [Seller] to compensate for 85% of the expenses, i.e., RMB 370,041.04;

      (3) The expenses for changing electricity line are RMB 112,322.84;

      (4) The expenses for purchasing the adjustment testing equipment are RMB 44,900. This equipment can be used only for the testing of PVC pipe extrusion, and its value for future use is limited, so the [Buyer] requests the [Seller] to compensate for 80% of the expenses, i.e., RMB 35,920;

      (5) The expenses of purchasing the mobile air compressor, i.e., RMB 131,000. This equipment is primarily used to provide air for the pipe extrusion, and it has some value for future use. Thus, the [Seller] should compensate for 50% of the expenses, i.e., RMB 65,500;

      (6) The expenses of purchasing cable bridge frame are RMB 126,032.15. This equipment is primarily used for supporting and controlling the power line from low-voltage electricity cabinet to each set of equipment. When this equipment is disassembled, the value for future use is limited, so the [Seller] should compensate for 85% of the expenses, i.e., 107,127.32;

      (7) The expenses of purchasing the submersible motor pump, i.e., RMB 56,200. This equipment is used for cooling and freezing recycled water, and has some value for future use. So the [Seller] should compensate for 50% of the expenses, i.e., RMB 28,100;

      (8) The expenses of purchasing the low-voltage cabinet are RMB 259,819. This equipment is used for distributing electricity to each set of equipment, and has limited value for future use. Accordingly, the [Buyer] requests the [Seller] to compensate for 80% of the expenses, i.e., RMB 207,855.20;

      (9) The expenses for purchasing the electric hoist, i.e., RMB 28,120. This equipment was customized equipment, and has limited value for future use. Thus, the [Buyer] requests the [Seller] to compensate for 85% of the expenses, i.e., RMB 23,902;

      (10) The expenses for purchasing the cold water freezing trough are RMB 6,800. This equipment is used for recycling the cold freezing water, and has no value for future use. Accordingly, the [Seller] should compensate for 90% of the expenses, i.e., RMB 6,120;

      (11) The expenses for purchasing the cold water machine are RMB 327,400. This equipment has some value for future use, so the [Buyer] requests the [Seller] to compensate for 50% of the expenses, i.e., RMB 163,700;

      (12) The expenses for purchasing the combination production line are RMB 1,398,000. This equipment is used for combining PVC materials, and has limited value for future use. So the [Seller] should compensate for 85% of the expenses, i.e., RMB 1,188,300;

      (13) The expenses for purchasing the cooling system are RMB 119,000. This equipment is used to process cooling and separating for compressed air without oil, water or dirt, and has some value for future use. So the [Seller] should compensate for 60% of the expenses, i.e., RMB 71,400.

      (14) The expenses for purchasing the steel pipes and valves are RMB 44,741.04;

      (15) The expenses for purchasing the weighbridge are RMB 48,000. This equipment was specially purchased for the PVC project, and the value for future use is limited. Thus, the [Seller] should compensate for 80% of the expenses, i.e., RMB 38,400;

      (16) The expenses for purchasing the boiler, i.e., RMB 44,940. This equipment is used for warming the factory building of PVC project, and has limited value for future use. So the [Buyer] requests the [Seller] to compensate for 80% of the expenses, i.e., RMB 35,952.

In sum, the [Buyer] alleges that the remaining amount of the above expenses for the accessory equipments after reasonable deductions is RMB 2,516,321.44, for which the [Seller] should compensate.

As to the [Buyer]'s above arbitration claim, the Arbitration Tribunal holds that although the above accessory equipments were purchased for the equipment in this case, they do not totally lose their use value, and not the entire amount after deduction is the [Buyer]'s actual loss. Accordingly, the Arbitration Tribunal rules that the [Seller] should compensate the [Buyer] for RMB 1,300,000.

7. According to the initial project design drafted by the [Buyer] and its client, the [Buyer] alleges that the annual output of the equipment under the Contract is 4,500 tons, the annual sales income is RMB 65,350,000, among which the total cost is RMB 48,469,000, and after deduction of the sales tax and the additional fee, i.e., RMB 3,694,000, the annual net profit is RMB 13,087,000. Considering the [Seller]'s financial capacity, the [Buyer] requests the [Seller] to compensate for the economic loss of only RMB 6,000,000. The Arbitration Tribunal holds that the project design drafted by the [Buyer] cannot prove that the expected output and profits can be achieved; in addition, the [Buyer] has already requested to return the goods, so it is unreasonable to request the [Seller] to compensate for the loss of expected profits. Thus, the Arbitration Tribunal does not sustain this claim of the [Buyer].

8. The [Buyer] requests the [Seller] to compensate it for the attorneys' fee of RMB 200,000 according to Article 58 of the Arbitration Rules, and also provided the relevant invoice, so the Arbitration Tribunal sustains this claim.

9. The [Buyer] shall bear 20% of the arbitration fee, and the [Seller] shall bear 80%.

III. THE AWARD

According to the above opinion, the Arbitration Tribunal rules that:

   1.     The [Seller] shall pay the [Buyer] the penalty of Deutsche Mark 190,628.80 (equal to US $86,257.37) due to late delivery.
 
   2.     The [Seller] shall bear the expenses to return the equipment, and refund to the [Buyer] the contract price of Deutsche Mark 3,431,267.80 (equal to US $1,552,609.86).

The [Seller] shall pay the [Buyer] interest on the deposit of Deutsche Mark 381,257, calculated from 30 June 1998, and interest on the contract price of Deutsche Mark 3,050,010.80, calculated from 24 December 1999 to the date when the [Seller] actually makes the refund; the annual interest rate is 6.93%.
 

   3.     The [Seller] shall compensate the [Buyer] for the actual expenses incurred for commodity inspection, transportation insurance, customs declaration, etc., totaling RMB 211,662.23.
 
   4.     The [Seller] shall compensate the [Buyer] for the actual expenses incurred for the two acceptance tests and the three adjustment tests, totaling RMB 639, 983.82, and also the [Buyer] and its client's actual expenses incurred for the project appraisal, preliminary project review, design, feasibility study, the investigation, environmental protection service, etc., totaling RMB 403,970.
 
   5.     The [Seller] shall compensate the [Buyer] for the expenses of purchasing the accessory equipments, totaling RMB 1,300,000.
 
   6.     The [Seller] shall compensate the [Buyer] for the attorneys' fee of RMB 200,000.
 
   7.     The [Buyer]'s other arbitration claims are dismissed.
 
    8.     The arbitration fee of this case is RMB 331,759, of which the [Buyer] shall pay 20%, i.e., RMB 66,351.80, and the [Seller] shall pay 80%, i.e., RMB 265,407.20. The [Buyer] has paid the entire arbitration fee of RMB 331,759 in advance to the Arbitration Commission, so the [Seller] shall compensate the [Buyer] for RMB 265,407.20.

The [Seller] shall pay the above amount to the [Buyer] within 45 days after this award is made; otherwise, interest will be added at the annual interest rate of 5%.

This is the final award.


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]; Respondent of Australia 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].

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

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

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Pace Law School Institute of International Commercial Law - Last updated February 27, 2008
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