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CISG CASE PRESENTATION

China 11 November 2002 CIETAC Arbitration proceeding (Platform case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/021111c1.html]

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

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Case identification

DATE OF DECISION: 20021111 (11 November 2002)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2002/26

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Singapore (respondent)

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

GOODS INVOLVED: Platforms for an air purifying facility


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 25 ; 29 ; 46 ; 49 ; 50 ; 82

Classification of issues using UNCITRAL classification code numbers:

25B [Definition of fundamental breach: substantial deprivation of expectation, etc.];

29A [Parties by agreement may modify or terminate the contract];

46B [Buyer's right to compel performance: requiring delivery of substitute goods];

49A1 [Buyer's right to avoid contract (grounds for avoidance): fundamental breach of contract];

50A [Buyer's right to reduce price for non-conforming goods];

82A1 [Buyer's inability to return goods in same condition: buyer would have right to avoid contract except inability to return goods in same condition]

Descriptors: Fundamental breach ; Avoidance ; Modification of contract ; Waiver ; Substitute goods ; Reduction of price, remedy of

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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

Platform case (11 November 2002)

Translation [*] by Zheng Xie [**]

Translation edited by Meihua Xu [***]

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

PARTICULARS OF THE PROCEEDING

The China International Economic and Trade Arbitration Commission (hereafter, the "Arbitration Commission") accepted the case (Case no. M__) on 21 February 2001 according to:

   -    The arbitration clause in Contract No. 01SGBJ/E023D021 for the sale of platforms (hereafter, the "Contract") signed by Claimant [Buyer], China __ Import and Export Company, and Respondent [Seller], __ Micro PTE Ltd January 2001; and
 
   -    The written arbitration application submitted by the [Buyer] on 21 January 2002.

On 21 February 2002, the Secretariat of the Arbitration Commission sent the arbitration notice to the parties and requested them to follow the Arbitration Rules.

The [Buyer] appointed Mr. Chi __ as an arbitrator. Because the [Seller] did not appoint or authorize the Chairman of the Arbitration Commission to appoint an arbitrator within the stipulated period, the Chairman appointed Ms. Wang __ as arbitrator according to Article 26 of the Arbitration Rules. Because the parties did not jointly appoint or authorize the Chairman to appoint a Presiding Arbitrator, the Chairman appointed Wei __ as the Presiding Arbitrator in accordance with Article 24 of the Arbitration Rules. On 2 April 2002, the above three arbitrators formed the Arbitration Tribunal to hear this case. The Secretariat sent the notice of the formation of the Arbitration Tribunal to the parties.

On 24 April 2002, the Secretariat sent the notice of the court session to the parties.

On 31 May 2002, the Arbitration Tribunal opened the court session. Both parties sent their representatives. The parties made statements and arguments, expressed their opinions, and answered the Arbitration Tribunal's questions.

After the court session, the parties submitted supplementary material and the [Buyer] modified its arbitration claims. The Secretariat exchanged the material between the parties in order to solicit the other party's opinion.

This case is completed. According to the written material and the information identified at the court session, the Arbitration Tribunal made its award by consent. The following are the facts, the Arbitration Tribunal's opinion and the award.

FACTS

In January 2001, the [Buyer], China ___Import and Export Company, as the import agent of __ Ltd., signed Sales Contract No. 01SGBJ/E023D021 (hereafter, the "Contract") with the [Seller], __ Micro PTE Ltd. The Contract stipulates that the [Buyer], as the agent of __ Ltd., purchases double operating platforms from __Micro PTE Ltd; the unit price is US $2,460 CIF Tianjin; the quantity is 50; the total price is US $123,000; the Contract stipulates the quality warranty and the procedure to follow to claim for damages.

The [Seller] delivered the goods and the [Buyer] paid the contract price. However, the [Buyer] raised objection to the quality of the goods, and disputes arose between the parties. The parties did not reach any agreement after negotiation; therefore, the [Buyer] filed the arbitration application with the Arbitration Commission.

POSITION OF THE PARTIES

[Buyer]'s position

The [Buyer] alleged that after the goods were delivered to __ Ltd, the [Seller] sent its technician to do adjustment testing and found the severe quality defects. The [Buyer] then contacted the [Seller] hoping to resolve the problem properly. However, after some discussion, the [Seller] did not provide any substantive plan to resolve the problem. In accordance with Article 14 of the Contract, on 1 November 2001, the [Buyer] applied to the People's Republic of China Entry-Exit Inspection and Quarantine Bureau for a commodity inspection. The bureau found that the 50 platforms had the following quality defects:

      (1) The height of the booth does not comply with the contract;
      (2) The height of the plate does not comply with the contract;
      (3) The size of the plate and the high effective filter do not comply with the contract;
      (4) The length of the plate does not comply with the contract;
      (5) Some paint is off the plate.

The [Buyer] alleged that it was the [Seller]'s fundamental duty to deliver complying goods, but the goods delivered by the [Seller] did not comply with the contract and had severe quality defects, which adversely affected the [Buyer]'s normal production. According to Article 13 and Article 14 of the Contract, the [Seller] should exchange all of the goods and bear the expenses duly incurred. The [Buyer]'s initial claims were as follows:

1. The [Seller] should exchange the 50 platforms;

2. The [Seller] should bear all expenses incurred for returning the original 50 platforms, including inspection fee, disassembling fee, installation fee, transportation charges, insurance premium, customs declaration charges, etc.

3. The [Seller] should pay the import duty and value added tax imposed for the 50 platforms;

4. The [Seller] should pay the entire arbitration fee;

5. The [Seller] should pay the [Buyer]'s attorneys' fee, i.e., RMB 25,000.

[Seller]'s response

The [Seller] submitted its response to these claims on the day of the court session before the court session started.

The [Seller] first stated its opinion on the applicable law. The [Seller] alleged that the disputes between the parties arose from a contract for the international sales of goods; that the parties did not stipulate the applicable law in their Contract, and that the parties' respective places of business and registration are in China and Singapore. These countries are Contracting States of the United Nations Convention on Contracts for International Sales of Goods (1980) (CISG). Accordingly, the CISG should apply to this case. In addition, the place of signing and performing the Contract was in China. Therefore, according to the most proximate connection principle, the Contract Law of the People's Republic of China (hereafter, the "Contract Law") can also be used as a reference.

The [Seller] alleged that according to Article 25 of CISG and Article 148 of the Contract Law, the [Seller] would have fundamentally breached the contract only if the goods delivered had defects that were so severe that the result was a detriment to the [Buyer] that substantially deprived the [Buyer] of what the [Buyer] was entitled to expect under the contract, and the [Seller] foresaw or a reasonable person of the same kind in the same circumstances would have foreseen such a result when signing the Contract.

And Article 46(2) CISG states:

"If the goods do not conform with the contract, the buyer may require delivery of substitute goods only if the lack of conformity constitutes a fundamental breach of contract and a request for substitute goods is made either in conjunction with notice given under article 39 or within a reasonable time thereafter."

The [Seller] did not fundamentally breach this Contract.

The [Seller] alleged that the subject of this Contract was equipment for an air purifying facility. The function of this facility is to create a dirt free working environment by filtering air in a circle or one-way filtering system.

The air purifying and circle filtering facility consists of a pre-filter, high effective filter, fans, pressure gauge, operating platform, etc. The fundamental part of the facility is the filter system. The purifying capacity and the quality (the standard factors include speed, volume, effectiveness, noise, unit, etc.) of filter, fans, etc. of the platforms delivered by the [Seller] comply with international general standards and the standards stipulated in the Contract. The [Seller] denied that the goods delivered had severe quality defects.

The [Seller] did, however, acknowledge that the height of the frame of the operating platform and the size of the plate are 10 cm shorter than the specification described in the Contract. The [Seller] alleged that the paint off problem may be caused by transportation or design, however, the discrepancy in the height of frame and the size of the plate, and the paint off problem are not essential quality problems for the entire purifying facility. Although the discrepancy of size may bring some inconvenience to workers to operate, it does not affect the function and efficiency of the entire purifying facility, which is not severe enough to have substantially deprived the [Buyer] of what the [Buyer] was entitled to expect under the contract.

The [Seller] alleged that since accepting the goods in April 2001, the [Buyer] has been using the platforms, which shows that it is impossible that the goods have severe defects. In addition the [Buyer] cannot meet the requirements for requesting substitute goods stipulated in the CISG, because the goods are not in their original condition.

For the above reasons, the [Seller] alleged that the [Buyer] had no right to require the [Seller] to exchange the goods and bear the expense. However, the [Seller] expressed that it would actively cooperate with the [Buyer] to resolve the disputes.

The parties' statements and opinion raised in the court session are almost the same with the above position described in the application and response. The [Seller] stated that it would compensate the [Buyer] for some defects of performance.

[Buyer]'s modification of its claims and [Buyer]'s supplementary statementa

After the court session, the [Buyer] changed some of its claims. The original first claim, "the [Seller] should exchange the 50 platforms", the original second claim, "The [Seller] should bear all expenses incurred for returning the original 50 platforms, including inspection fee, disassembling fee, installation fee, transportation charges, insurance premium, customs declaration charges, etc.", and the original third claim, "The [Seller] should pay the import duty and value added tax imposed for the 50 platforms", were changed to that the [Seller] should either satisfy the above three requests or reduce the contract price by 50%. The claims for the attorneys' fee and the arbitration fee are unchanged.

In the supplementary material submitted by the parties after the court session, they made further statement about their former opinions and also raised some new issues.

As to the applicable law, the [Buyer] expressly stated that CISG and the law of the PRC should apply to this case.

The [Buyer] made further specific statements about the effects of the defects on the use value. The [Buyer] alleged that, according to the technical agreement in the Contract, the double operating working platform as the subject matter of this Contract should have two fundamental functions: providing the platform for production equipment and purifying the working environment; either can be missing. The purpose for which the [Buyer] purchased the platforms from the [Seller] was to install the platforms in the purified production building in which there are high quality and specification facilities, light line, lighting facility, operating system, production cable, etc.

   -    The height of the filtering system of the platform is 105 mm shorter than the specification stipulated in the Contract, and the distance between the plate of the platform and the high efficient filter is 15 mm shorter, which causes the workers to often hit their heads when changing the working platforms;
 
   -    The plate of the platform is 18mm shorter, which causes the workers to be uncomfortable when working on the platforms and makes them tired;
 
   -    The length of the plate of the platform is 100 mm shorter, which causes a discrepancy between the platform and the framework and the high specification facility cannot be balanced, and the supporting part of the high specification facility is slipping in the discrepancy, which caused the facility to break;
 
   -    These defects cause the platforms to shake, and the light line has to be adjusted repeatedly, which adversely affects the efficiency of the production.
 
   -    In addition, the [Buyer] set up the cable and the facility in the platform, and these facilities have strict requirements about the space and environment. Because of the defects of the platforms, the facility could not be safely installed on the platform, and the production was adversely affected.
 
   -    Finally, the platform has the severe paint off problems, with dust particles, which affected the cleanliness of the [Buyer]'s purified working environment.

In sum, the [Buyer] alleged that the primary function of the goods delivered by the [Seller] was adversely affected. The [Buyer] did not agree with the [Seller]'s allegation that the defects were not important.

[Seller]'s response

The [Seller], in turn, stated that the evidence submitted by the [Buyer] could not prove the focus of the disputes in this case, i.e., that the platforms have severe defects, and that the [Seller] fundamentally breached the Contract.

The issue of the timeliness of [Buyer]'s claims

The parties also expressed different opinions on whether the [Buyer] filed its claims after the stipulated period for claims had expired.

The [Seller] alleges that the [Buyer] filed the claims after the 90 days period for claims expired. The [Seller] alleged that the parties stipulated two different periods for claims, i.e., 90 days and 12 months, in Article 14 of the Contract the 90 days period applies to claims alleging external defects, such as lack of conformity of quantity and specification, etc. with the Contract; the 12 months period applies to hidden defects, which cannot be found unless the goods are used, such as the low quality of the design or materials, etc. According to the inspection certificate submitted by the [Buyer] and the corresponding faxes between the parties, the [Buyer] alleged that the goods delivered by the [Seller] had two main defects: one is lack of conformity of the size of the platform to the Contract, and the other is the paint off the platform. As to the air purifying facility with the primary function of purifying air, these two defects are external defects which the [Buyer] could have found without necessarily using the platforms. Because the defects alleged by the [Buyer] are external defects, the period for filing claims should be the 90 days stipulated in the Contract.

The [Seller] also alleged that the parties definitely stipulated in Article 14 of the Contract that the [Buyer] should file claims for damages with the inspection certificate issued by China Entry- Exit Inspection and Quarantine Bureau within 90 days after the goods arrived, so it is a necessary condition for the [Buyer] to file claims for damages within 90 days with the inspection certificate. The [Buyer] did not satisfy this condition.

[Buyer]'s response

The [Buyer] alleges that 90 days period for claims does not apply to this case. The [Buyer] explained that the Contract included the following three stipulations on the defects of the goods:

      First, Article 13 of the Contract stipulates that the [Seller] guarantees that the quantity, quality, specification and package of the goods are in compliance with the Contract. The warranty period is 18 months after the goods are inspected and accepted;

      Second, Article 14 provides two stipulations: if the quality, specification or quantity of the goods does not conform to the Contract, the [Buyer] can file claims for damages with the [Seller] within 90 days after the goods arrive at the destination port with the inspection certificate issued by China Entry-Exit Inspection and Quarantine Bureau;

      Third, if any damages were incurred and caused by the poor quality, design or materials of the goods, the [Buyer] should immediately notify the [Seller] and could file claims for damages with the [Seller] within 12 months after the goods arrive at the destination port with the inspection certificate issued by China Entry-Exit Inspection and Quarantine Bureau. The [Seller] should immediately eliminate defects, exchange all or part of the goods, or reduce the price according to the condition of the defects.

The [Buyer] alleged that after the goods arrived at San Yi Company on 13 April 2001, San Yi Company found the goods had many defects at the beginning, and informed the [Seller] about the above defects by fax on 16 April 2001. The [Seller] admitted the defects of the goods which it delivered, in the faxes sent on April 17, 23, 24, June 1, 6, etc. Accordingly, at the beginning the [Seller] admitted the five problems listed in the inspection certificate, and the parties had no disputes on the fact that the goods had defects. The [Buyer] also alleged that, when using the goods, it gradually found the damages caused by the defects of the goods, for example, the height of the filtering system of the platform was 105 mm shorter than the specification stipulated in the Contract, the distance between the plate of the platform and the high efficient filter was 15 mm shorter, which often caused the workers to hit their heads when changing the working platforms; the plate of the platform was 18mm shorter, which caused the workers to be uncomfortable when working on the platforms and makes them tired; the length of the plate of the platform was 100 mm shorter, which caused the discrepancy between the platform and the framework and the high specification facility could not be balanced, and the supporting part of the high specification facility was slipping in the discrepancy, which caused the facility to break; meanwhile these defects caused the platforms to shake, and the light line had to be adjusted repeatedly, which adversely affected the efficiency of the production; the paint kept falling off. Thus, the [Buyer] alleged that the alleged defects and damages could not be found within three months after the goods arrived at the destination port. In addition, the [Seller] had never raised any objection to the [Buyer] about the period for claims. Accordingly, the period for claims stipulated in Article 14 of the Contract should apply to this case. The [Buyer] alleged that since the [Buyer] informed the [Seller] of the lack of conformity of the goods within the stipulated period, and the [Seller] admitted the lack of conformity by its conduct, the [Buyer]'s claims are established.

OPINION OF THE ARBITRATION TRIBUNAL

Applicable law

The Arbitration Tribunal noted that the parties did not stipulate the applicable law in the Contract, but reached agreement during the process of this case that CISG should apply to this case, and that the Contract Law of the PRC can be used as a reference.

The period for filing claims

The Arbitration Tribunal notes that the Contract includes two stipulations on the warranty of the goods delivered by the [Seller]. Article 13 "GUARANTEE OF QUALITY" stipulates:

"The seller guarantees that the goods delivered are in conformity with the quantity, quality and specifications as provided in the Contract and are packed in the manner required by the Contract. The guarantee period shall be 18 months counting from the date on which the goods have been inspected and accepted. The guarantee period expires whichever the termination date is due."

Article 14 "CLAIMS" stipulates:

"Within 90 days after the arrival of the goods at destination, in case the quality, specification or quantity is found not in conformity with the stipulation of the Contract except those claims for which the insurance company or the carrier are liable, the buyer, on the strength of the Inspection Certificate issued by the China Commodity Inspection Bureau, may require the seller to remedy the lack of conformity by repairing, replacement or compensation, and all the expenses shall be borne by the seller. As regards quality, the seller guarantees if, within 12 months from the date of the arrival of the goods at destination, damages occur in the course of operation by reason of inferior quality, poor workmanship or the use of inferior materials, the buyer shall immediately notify the seller in writing and put forward a claim supported by an Inspection Certificate issued by the China Commodity Inspection Bureau. The Certificate so issued shall be accepted as the basis of the claim. The seller, in accordance with the buyer's claim shall be responsible for the immediate elimination of the defects, complete or partial replacement of the goods or shall devaluate the goods according to the state of the defects ..."

The Arbitration Tribunal notes that Article 12 stipulates an 18 month warranty period, and Article 14 stipulates a three month and 12 month period for claiming for damages according to the nature of defects. The parties disputed on the nature of the defects and the period for filing claims. The [Seller] alleged that, according to the nature of the defects, the three month period should apply, and the [Buyer] should also provide the inspection certificate, but the [Buyer] provided the inspection certificate much later than the three month period. However, the [Buyer] alleged that the 12 month period should apply, and that it provided the inspection certificate within this period.

The Arbitration Tribunal also notes that the end-user of the goods in this Contract, __ Ltd., which was represented by the [Buyer], informed the [Seller] by fax about the lack ofconformity of the size and the paint off problem, etc. on 16 April 2001 when the platforms were installed. Then, the parties negotiated through faxes. The [Seller] did not refuse the [Buyer]'s claims by alleging that either the [Buyer] or the end-user did not provide the inspection certificate within the period stipulated in the Contract. On the contrary, the [Seller] admitted the defects of the goods which it delivered and promised to take some remedial measure. However, no actual remedial measures have been taken due to the two parties' disagreement on remedial measures. Accordingly, the Arbitration Tribunal holds that the parties have revised the provision of claims in the Contract by their conduct, i.e., the [Seller] did not request the [Buyer] provide the inspection certificate when claiming for damages.

In addition, when this arbitration application was filed, in the response and the court session, the [Seller] did not raise the defense that the [Buyer] filed the claims out of the time period for claims. The parties' disputes focused on the issue whether the defects were substantial and the different remedial measures. The [Seller] first raised the defense of period for claims in its supplementary material submitted after the court session. The Arbitration Tribunal holds it cannot accept this defense.

In conclusion, the Arbitration Tribunal holds that the [Buyer] is entitled to compensation based on its actual damages.

The [Buyer]'s arbitration claims

The [Buyer]'s final claims are that the [Seller] should either replace the 50 platforms and bear the relative expenses, or reduce the price by 50%, and that the [Seller] bear the arbitration fee and the [Buyer]'s attorneys' fee.

After reviewing all evidence provided by the [Buyer], the Arbitration Tribunal finds that the main defects of the goods delivered by the [Seller] are that the size does not comply with the Contract, which caused the inconvenience for the workers in operation, and the defects were admitted by the [Seller]. Moreover, the paint off the platforms adversely affected the cleanness of the working environment. However, the Arbitration Tribunal is not convinced by the evidence submitted by the [Buyer] to prove that the necessary or more reasonable remedy for the above defects is to replace all of the goods, because the replacement means that all of the goods have to be exported, and the substitute goods have to be imported. Such replacement would incur a large amount of import and export duty and transportation expenses. According to the nature of the defects, the Arbitration Tribunal holds that these defects could be fixed by the [Buyer]. The [Seller] should compensate the [Buyer] by reducing the contract price, because it did not deliver the conforming goods according to the Contract. Based on the facts of this case, the Arbitration Tribunal determines that it is reasonable to reduce the contract price by 20%.

The Arbitration Tribunal holds that the [Buyer] should bear 30% of the arbitration fee, i.e., RMB 13,500, and the [Seller] should bear 70%, i.e., RMB 31,500. In addition, the [Seller] should compensate the [Buyer] for its attorneys' fee, i.e., RMB 12,500.

AWARD

The Arbitration Tribunal made the following award:

1. The [Seller] should reduce the contract price by 20%, i.e., US $ 24,600, which the [Seller] should refund to the [Buyer].

2. The arbitration fee is RMB 45,000, of which the [Buyer] should bear 30%, i.e., RMB 13,500, and the [Seller] should bear 70%, i.e., RMB 31,500. The arbitration fee has been paid by the [Buyer] in advance, so the [Seller] should pay the [Buyer] RMB 31,500.

3. The [Seller] should compensate the [Buyer] for its attorneys' fee, i.e., RMB 12,500.

The [Seller] should pay the [Buyer] the above amount, i.e., US $24,600 and RMB 44,000. The [Seller] should pay the above amount within 45 days of the date of this award, otherwise, interest should be added at the annual rate of 5%.

The award is final.

Presiding Arbitrator: _____; Arbitrator: _____: Arbitrator: _____

11 November 2002 in Beijing.


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 Singapore 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.

*** Meihua Xu, LL.M. University of Pittsburgh School of Law on an Alcoa Scholarship. She received her Bachelor of Law degree, with the receipt of Scholarship granted by the Ministry of Education, Japan, from Waseda University, Tokyo, Japan. Her focus is on International Business Law and International Business related case study.

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