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CISG CASE PRESENTATION

China 17 December 2002 CIETAC Arbitration proceeding (Production line case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/021217c1.html]

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Case identification

DATE OF DECISION: 20021217 (17 December 2002)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2002/27

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Italy (respondent)

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

GOODS INVOLVED: Filling and sealing production line


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 46 ; 74

Classification of issues using UNCITRAL classification code numbers:

46A [Buyer's right to require performance];

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

Descriptors: Specific performance ; Damages


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

Production line case (17 December 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 number: M __) according to:

   -    The arbitration clauses in Contract No. 980122 signed by Claimant [Buyer], China Haikou __ Bio-Products Ltd., and Respondent [Seller], Italy __ Corp., on 22 January 1998; and
 
   -    The written arbitration application submitted by the [Buyer] on 21 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 Secretariat of the Arbitration Commission sent the arbitration notice to the parties by express mail on 7 March 2002, and also sent the [Buyer]'s arbitration application, the Arbitration Rules, and the Arbitrators List to the [Seller].

According to Article 24 of the Arbitration Rules, the [Buyer] appointed Mr. Yao __ as arbitrator. Because the [Seller] neither appointed nor authorized the Chairman of the Arbitration Commission to appoint its arbitrator within the stipulated period, the Chairman appointed Mr. Wang __ as arbitrator according to Article 26 of the Arbitration Rules. Because the parties neither jointly appointed nor authorized the Chairman to appoint a Presiding Arbitrator within the stipulated period, the Chairman appointed Mr. Chen __ as the Presiding Arbitrator according to Article 24 of the Arbitration Rules. The above three arbitrators formed the Arbitration Tribunal on 17 April 2002 to hear this case.

On 18 April 2002, the [Seller] submitted its response and evidentiary material. On 1 July 2002, the [Buyer] submitted its response to the [Seller]'s written material and the relevant evidence.

On 20 August 2002, the Arbitration Tribunal opened the court session in Beijing. The [Buyer] sent its representative and agent to attend the court session. The [Seller] did not send any representative or agent to attend. According to Article 42 of the Arbitration Rules, the Arbitration Tribunal heard this case by default. The [Buyer] made oral statements about the issues of this case, cross-examined the evidence submitted by the [Seller], and answered the Arbitration Tribunal's questions. After the court session, on 22 August 2002, the Arbitration Tribunal through the Secretariat sent a letter to the [Seller] informing it of the situation in the court session held on 20 August 2002, and notifying [Seller] that it should submit a written application with the Arbitration Commission before 30 September 2002, if the [Seller] would like to have the Arbitration Tribunal open another court session.

After the court session of 22 August 2002, both parties submitted written opinions. The [Seller] did not submit a request for another court session within the stipulated period.

The case is completed. The Arbitration Tribunal has handed down its award by consent. The following are the facts, the Arbitration Tribunal's opinions and the award.

FACTS

On 22 January 1998, the [Buyer] and the [Seller] signed Contract No. 980122 (hereafter, the Contract), which stipulates that the [Buyer] purchases a production line for filling and sealing bottles for the price of US $150,000. The Contract states that "the Contract price shall be paid by a 100% irrevocable L/C" and "the [Buyer] shall issue the L/C two months before the production line is shipped." In addition, the Contract also stipulates, "The [Seller] guarantees that under the condition that the production line is properly installed, used and maintained, the production line will work in good condition for twelve months after the installment and adjustment testing is completed."

POSITION OF THE PARTIES

[Buyer]'s position

In the arbitration application, the [Buyer] alleged that after signing the Contract, the [Buyer] paid to the [Seller] US $135,000, 90% of the contract price in June 1998, and the [Seller] shipped the goods to Haikou, China. In 1999, the [Buyer] sent many letters to the [Seller] requesting it to send technicians to install and test the production line. Meanwhile, at the [Seller]'s request, the [Buyer] paid the remaining 10% of the contract price by T/T to the [Seller]'s office in Wenzhou, China. The [Buyer] fully performed its duty under the Contract.

In January 2000, the [Seller] sent its technicians to install and test the production line. However, because parts of the production line had quality defects, which was confirmed by the [Seller]'s technicians, the production line did not pass the test. On 17 January 2000, the parties signed a supplementary agreement which stipulates that the [Seller]'s technicians should bring the parts with defects, and the [Seller] should replace them with conforming parts and send its technicians to conduct another adjustment test. However, in February 2000, the [Seller] sent parts, the quality and quantity of which did not comply with the stipulation in the supplementary agreement reached on 17 January 2000. The [Buyer] refused to accept the parts, which were brought back by the employer of Hainan Foreign Transportation Company. Then, the [Buyer] by phone urged the [Seller] to replace the parts, but the [Seller] neither did so, nor sent its technicians to test the production line. The result was that the production line could not be operated and the [Buyer] suffered severe economic damages.

On 27 September 2001, the [Buyer] sent another letter to the [Seller] requesting it to negotiate with the [Buyer] to resolve the problem. On 22 October 2001, the [Seller] responded to the [Buyer] stating that it had only received 90% of the contract price, and had not received the remaining 10%. On 26 October 2001, the [Buyer] faxed the payment certificate to the [Seller] and, on 22 November 2001, the [Seller] responded to the [Buyer] expressing that it believed the [Buyer] had paid the remaining part of the contract price. However, the [Seller] did not perform its contractual duty.

The [Buyer] alleged that the goods delivered by the [Seller] were not in compliance with the Contract, therefore, the [Seller] breached the Contract. The [Seller] has the duty to continue the performance of the contract and to make the production line comply with the Contract after adjustment testing. Because the production line has not been used for production, after paying the contract price, the [Buyer] incurred the loss of interest, i.e., RMB 250,710.60 and other economic loss, such as the loss of workers' salary, the expenses incurred to take remedial measures by the [Buyer], the loss of interest because of other equipment not in use, etc. Thus, the [Buyer] filed claims requesting the [Seller] to:

1. Perform its contractual duty and adjust the production line to comply with the Contract;

2. Compensate the [Buyer] for the economic loss of RMB 1,500,000; and

3. Bear the entire arbitration fee.

[Seller]'s response

In its response, the [Seller] stated:

1. The Contract stipulated that "the contract price shall be paid by an irrevocable L/C," but the [Buyer] had never issued the L/C with the [Seller] as beneficiary. So it was the [Buyer] who breached the Contract.

2. The Contract also stipulated that "in order to manufacture and test the production line, the [Buyer] shall mail samples to the [Seller]'s factory" and that "the materials for testing shall arrive at the [Seller]'s factory at least 60 days before the goods are shipped." Because the anticipated shipping time was April 1998, the materials for testing should have arrived at the [Seller]'s factory before 30 April 1998. However, the [Buyer] breached the Contract again, and the [Seller] had to purchase the materials for testing from Italy in order to deliver the goods on time.

3. On 14 July 1998, the [Seller] delivered the production line to the [Buyer]. On 23 July 1998, the [Buyer] paid US $135,000, 90% of the contract price not by L/C, but by check; the total contract price was US $150,000. The [Seller] did not receive the remaining 10%.

4. Although the [Seller] did not receive the remaining part of the contract price, when receiving the [Buyer]'s request, the [Seller] still sent the technicians to install and test the production line in the [Buyer]'s factory. During the adjustment testing, the production line worked normally. However, because some parts had been stored for a long time (this situation was caused by the [Buyer]), they were broken. In order to maintain a good cooperative relationship, the [Seller] agreed to provide replacement parts when it received the remainder of the contract price. On 11 and 25 February 2000, the [Seller] sent the parts by express mail to the [Buyer], although it had not received the remaining part of the contract price. On 29 September 2001, the [Seller] received a letter from the [Buyer] stating that the [Buyer] rejected the parts. The [Buyer] did not provide any reasons in the letter, and the [Seller] did not receive any returned parts.

5. On 22 October and 22 November 2001, the [Seller] informed the [Buyer] by fax of the fact that it had not received the remaining 10% of the contract price, and the [Seller] lost contact with its Wenzhou office, but the [Seller] would adjust and test the production line for the [Buyer] when serving its other clients in China. On 18 March 2002, the [Seller] sent another letter to the [Buyer] informing that it would provide some parts to the [Buyer] again without any charge.

[Buyer]'s response

As to the [Seller]'s allegations, the [Buyer] stated:

1. During the performance of the Contract, the [Buyer] negotiated with the [Seller] that the [Seller] was responsible to ship the goods to Haikou, and that the [Buyer] would pay the 90% contract price by cash; after the goods arrived in Haikou, the [Buyer] would pay the remaining 10% of the contract price when the [Seller]'s technicians completed the adjustment testing; the [Seller] agreed. On 30 June 1998, the [Buyer] paid through a bank to the [Seller] US $135,000, and faxed the payment certificate to the [Seller]. The [Seller] shipped the goods under the Contract to the [Buyer] in July 1998. The above facts show that the parties actually agreed to change the method of performance while performing the Contract.

2. According to the supplementary agreement reached on 17 January 2000, the [Seller] was to send its technicians to adjust and test the production line in the [Buyer]'s factory within 10 days after receiving the remaining amount of the contract price, but the [Seller] breached again.

3. As to the materials for testing, the [Buyer] alleged that the production line under this Contract was general equipment, and the materials used for testing were Italian products, on which the parties orally agreed. In addition, the parties had never had any disagreement on the materials for testing in this case.

Thus, the [Seller]'s allegation that the [Buyer] breached the Contract is not established. It is the [Seller] who breached the Contract and caused the [Buyer] to suffer severe economic loss.

OPINION OF THE ARBITRATION TRIBUNAL

1. Applicable law

The Arbitration Tribunal notes that the parties did not stipulate the applicable law in their Contract. Because the [Buyer]'s place of business is in Haikou, China, and the [Seller]'s place of business is in Florence, Italy, and both China and Italy are Contracting States of the United Nations Convention on Contracts for the International Sales of Goods (1980) (CISG), the Arbitration Tribunal holds that the CISG applies to this case.

2. Performance of the Contract

On 22 January 1998, the [Buyer] and the [Seller] signed a Contract for the sale of a production line for filling and sealing bottles. The total contract price was US $150,000. On 29 June 1998, the [Buyer] paid the [Seller] US $135,000, i.e., 90% of the contract price, and in July 1998, the [Seller] delivered the production line to the [Buyer]. Then, the [Buyer] alleged that it sent many letters to the [Seller] requesting the adjustment and testing of the production line. In its response, the [Seller] alleged that it did not receive the [Buyer]'s payment of US $135,000 (not the total contract price of US $150,000) until 23 July 1998, and did not receive the remaining part at all.

As to the [Seller]'s request that the [Buyer] pay the remaining US $15,000, the Arbitration Tribunal reviewed the evidence submitted by the parties. Both parties' evidence includes the letters sent by the [Seller] on 17 June, 9 and 22 July, and 2 September urging the [Buyer] to make the payment. The [Seller] in its reply letter of 2 September, 1999 agreed to have the [Buyer] pay the remaining part of the contract price to the [Seller] in renminbi (RMB). The amount was RMB 132,750. Also in this letter, the [Seller] asked the [Buyer] to make this payment to Italy __ Company Wenzhou branch (the Bank is China Industrial and Commercial Bank Wenzhou Branch; the Account No. is 20202450248917), and alleged that when the [Buyer] made this payment, the [Seller] would continue to perform the Contract.

According to the evidence submitted by the [Buyer], the Arbitration Tribunal finds that the [Buyer] deposited RMB 124,200 to the [Seller]'s Wenzhou Branch's account in China Industrial and Commercial Bank Wenzhou Branch by T/T on 22 September 1999, and deposited RMB 8,250 on 17 January 2000.

The Arbitration Tribunal finds that during the performance of the Contract, the parties admitted and accepted the following changes:

      (1) The stipulation that the payment shall be made by a 100% irrevocable L/C (i.e., Article 10, the "Payment" clause of the Contract) was changed to that the [Buyer] paid US $135,000, i.e., 90% of the contract price on 29 June, 1998, and paid RMB 132,750, i.e., 10% of the contract price.

      (2) The stipulation in Article 10 that "the [Buyer] shall issue the L/C two months before the goods are shipped" was changed to the fact that the [Buyer] paid the entire contract price to the [Seller] on 17 January, 2000.

The Arbitration Tribunal notes that in the letter sent to the [Buyer] on 22 October 2001, the [Seller] alleged that it had sent many faxes to the [Buyer] stating that the [Seller] had not received the 10% of the contract price. As to this allegation, the [Buyer] sent a fax to the [Seller] on 26 October 2001 stating, "On 2 September 1999, you informed us to pay the remaining 10% of the contract price directly to your Wenzhou Branch (the fax attached), and on 22 September 1999, we paid RMB 124,200 to your Wenzhou Branch, and on 17 January 2000, we paid RMB 8,250 by T/T to your Wenzhou Branch (the fax attached); so we paid off the entire contract price."

After reviewing the evidence, the Arbitration Tribunal finds that the [Buyer] actually paid the [Seller]'s Wenzhou Branch RMB 124,200 and RMB 8,250 on 22 September 1999 and 17 January 2000, respectively, totaling RMB 132,450 (which is RMB 300 less than RMB 132,750 required by the [Seller]). So the Arbitration Tribunal holds that the [Buyer] has already paid the [Seller] the contract price till 17 January 2000 (the remaining part is RMB 300).

3. The installment and adjustment testing of the production line under the Contract

      (1) The beginning of the installment and adjustment testing

      In the material submitted by the [Buyer] and the [Seller], the [Buyer] alleged, " After we paid the remaining part of the contract price the [Seller] did not send a technician to Haikou until January 2000"; the [Seller] alleged, "although we had not received the remainder of the contract price, in order to maintain a good relationship, on 16 and 17 January 2000, we sent the technician to conduct the adjustment testing as the [Buyer] requested." According to the parties' statements, the Arbitration Tribunal determines that the adjustment testing started on 16 January 2000.

      (2) The situation regarding further adjustment testing

      In the arbitration application, the [Buyer] alleged, "In January 2000, the [Seller] sent its technician to our factory to conduct adjustment testing, but because some parts of the production line have quality defects, which was confirmed by the [Seller]'s technician, the production line did not pass the adjustment testing. On 17 January 2000, the parties signed an agreement stipulating that the [Seller]'s technician should bring back the parts with defects, and the [Seller] should replace the parts and send the technician again to conduct adjustment testing. However, in February 2000, neither the quantity nor the quality of the replaced parts complied with the agreement reached by the parties on 17 January 2000, so the [Buyer] refused the parts, and the parts were brought back by Zhang, Xingfa, the employee of Hainai __ Company. Although the [Buyer] urged the [Seller] many times, the [Seller] neither sent the conforming parts nor sent the technician to conduct adjustment testing. As a result the production line could not be used and the [Buyer] suffered severe economic loss." The [Buyer] also alleged, "On 27 September 2001, the [Buyer] sent another letter to the [Seller] requesting the resolution of the problems by negotiation. The [Seller] replied on 22 October 2001 alleging that it had only received 90% of the contract price, and had not received the remaining 10%. On 21 October 2001, the [Buyer] faxed the relevant payment certificate to the [Seller], and the [Seller] replied on 22 November stating that it believed that the [Buyer] had paid the remaining amount. However, the [Seller] did not perform its duty under the Contract."

In its response, the [Seller] alleged, "During the testing the machines worked very well. Some parts were damaged due to the long time that passed between the purchasing contract (and so the manufacturing of the machines) and the request of start-up (due to the [Buyer]'s problem), and we, to have a good relationship, promised to supply the spare parts (items 1-11 of the agreement dated 17 January 2000) but only "after receiving the payment of the balance from Haikou __ Bio-Product Co. Ltd" as stated in the agreement signed by the [Buyer]." The [Seller] also alleged, "We sent them the spare pants in two shipments (on 11 February 2000, by and on 25 February 2000, by ) without receiving the payment of the balance written in the agreements," and

"On 29 September 2001, the [Buyer] sent us a letter informing that they rejected the parts we sent them. They did not inform us why and we never received the rejected parts back!!! From February 2000 until October 2001 (approximately two years!!!) we have not received any information from the [Buyer] and now, the [Buyer] asks for a trip of our technician free of charge). In the response, the [Seller] also alleged, "On 18 March 2002, we sent to the [Buyer] another fax confirming that we have never received back the rejected parts and informing of our availability to send them the spare parts again free of charge, just to make the [Buyer] satisfied; (and) on 12 March 2002 we received the Arbitration Letter."

The Arbitration Tribunal notes both parties' statements on the adjustment testing, their different description on the replacement of parts, and the different opinions on the liabilities. After carefully reviewing the material submitted by the parties, the Arbitration Tribunal holds:

      (i) During the period of adjustment testing, on the same day when the parties signed the agreement, i.e., 17 January 2000, the [Buyer] paid the [Seller] the remaining amount, i.e., RMB 8,250, so the [Buyer] paid off the total contract price on 17 January 2000 and completed its duty to make payment.

      (ii) The agreement reached by the parties on 17 January 2000 shows that on 17 January 2000, the adjustment testing failed due to the problems with four pumps and valves, etc., and [Seller] promised to replace the parts and send the technician again to conduct adjustment testing.

      (iii) As to the process of replacement and liabilities, the Arbitration Tribunal reviewed the parities' correspondence after 17 January 2000 when the adjustment testing failed, and the evidentiary material, and determines that on 11 and 25 February 2000, the [Seller] actually sent the parts to the [Buyer], but the [Buyer] only submitted its letter dated 18 February 2000 and sent to Hainan Foreign Transportation Company, which stated, "receiving __, made in Italy, which you delivered to us. After the box was opened, we found that the package lacked protective material, and the parts were piled out of order, and the following parts are missing because the quantity is not conforming, the consignee did not accept the delivery, and the package was brought back by Zhang, Xingfa, the employee of Hainan Foreign Transportation Company, which is responsible for further investigation." The Arbitration Tribunal holds that the letter which the [Buyer] submitted was sent to Hainan __ Company and shows the relationship with the carrier, but it cannot prove the defects of quantity and quality of the goods which the [Seller] delivered. The [Buyer] alleged that it urged the [Seller] by phone many times, but the [Seller] neither replaced the non-conforming parts nor sent the technician to conduct adjustment testing, which caused the [Buyer] to suffer severe economic loss. However, the [Seller] alleged that it did not know the [Buyer] refused the parts until receiving the letter from the [Buyer] on 29 September 2001. The [Seller] also alleged that it neither knew the reason why the [Buyer] rejected the parts nor received the returned parts. Accordingly, the Arbitration Tribunal holds that the [Seller] shall not be held liable for the negligence and delay during the replacement

4. The [Buyer]'s arbitration claims

      (1) According to the performance of the Contract and the cooperative relationship between the parties, the [Seller] expressed that it would continue to perform the Contract (On 18 March 2002, the [Seller] made the following statement to the [Buyer], "Anyway, to show you again our availability to help you, we can send to you free of change the four pistons again but wish you to confirm that this solution is acceptable for you and will solve all your problems with us." The Arbitration Tribunal sustains the [Buyer]'s request that the [Seller] continue to perform the Contract and complete the adjustment testing, and make the production line complying with the Contract.

      (2) The [Buyer]'s claim for the loss of RMB 1,500,000 is dismissed.

      (3) Because the production line did not pass the adjustment testing, the [Seller] should be liable for the quality problems of the production line and the [Buyer] shall be liable for the delay of the replacement. The Arbitration Tribunal holds that the [Buyer] should bear 50% of the arbitration fee, and the [Seller] should bear 50%.

AWARD

The Arbitration Tribunal made the following award:

1. The [Seller] shall continue to perform the Contract until the production line passes the adjustment test and complies with the Contract;

2. The [Buyer]'s other claims are dismissed;

3. The arbitration fee is RMB 67,500, of which the [Buyer] should bear 50%, i.e., RMB 33,750, and the [Seller] should bear 50%, i.e., RMB 33,750. The arbitration fee has been prepaid by the [Buyer], so the [Seller] should pay the [Buyer] RMB 33,750.

The award is final.


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 Italy 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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