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CISG CASE PRESENTATION

China 23 December 2002 CIETAC Arbitration proceeding (Hydraulic press case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/021223c1.html]

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

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Case identification

DATE OF DECISION: 20021223 (23 December 2002)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2002/28

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Italy (respondent)

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

GOODS INVOLVED: Hydraulic punching machine


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 35 ; 36 ; 74 ; 77 [Also cited: Article 39 ]

Classification of issues using UNCITRAL classification code numbers:

35A [Conformity of goods to contract: quality, quantity and description required by contract];

36B2 [Lack of conformity occurring after passage or risk: guarantees of continuing conformity];

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

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

Descriptors: Conformity of goods ; Guarantees ; Damages ; Mitigation of loss

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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

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Case text (English translation)

Queen Mary Case Translation Programme

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

Hydraulic press case (23 December 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 PROCEEDING

The China International Economic and Trade Arbitration Commission (hereafter, the "Arbitration Commission") accepted the case (Case number: M_____) on 27 April 2002 according to:

   -    The arbitration clause in the sales contract (the Contract) signed by Claimant [Buyer], Ningbo __ Electronic Ltd., and the first Respondent [Seller], __ and the second Respondent Shanghai __ Machine Tool Ltd. as the first Respondent's representative, in February 2001; and
 
   -    The written arbitration application submitted by the [Buyer] on 18 April 2002.

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

The [Buyer] appointed Wei __ as its arbitrator. The two Respondents appointed Lu __ as their arbitrator. Because the parties neither jointly agreed nor authorized the Chairman of the Arbitration Commission to appoint a presiding arbitrator within the stipulated period, the Chairman appointed Gao __ as the presiding arbitrator according the Arbitration Rules. The above three arbitrators formed the Arbitrators Tribunal on 21 June 2002 to hear this case.

On 31 July 2002, the court session was held in Beijing. All three parties sent their arbitration agents to attend the court session. They made statements and arguments about the factual and legal issues, and answered the Arbitration Tribunal's questions. The tribunal cross-examined the relevant evidence. After the court session, the parties submitted supplementary material.

After the court session, the [Buyer] request the Arbitration Tribunal in writing to inspect the goods under the Contract in this case; the two Respondents did not agree, and the [Buyer] did not request inspection any more.

This case is completed. The Arbitration Tribunal handed down the award by consent according to the written material submitted by the parties and the court session.

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

I. FACTS

In February 2001, the [Buyer] signed the Contract with the first Respondent (the second Respondent affixed its company seal on the Contract as the first Respondent's representative). The Contract stipulates that the [Buyer] purchases from the first Respondent a ZX1250/30-2000 CNC hydraulic press for the contract price of US $86,000; the payment term is:

      1. Within two days after signing the Contract, the [Buyer] shall issue a 90 day irrevocable L/C with the first Respondent as the beneficiary for 50% of the contract price, i.e., US $ 43,000.

      2. Within three months' normal operating after the machine arrives at the factory, the [Buyer] shall pay 40% of the contract price, i.e., US $34,400 by T/T.

      3. The parties shall sign the acceptance certificate on site of the adjustment testing. Within one year when the bank has received the acceptance certificate, and when the machine works normally, the [Buyer] shall pay the remaining 10% of the contract price, i.e., US $8,600 by T/T.

Article 13, Article 14, Article 15 and Article 17 of the Contract stipulate quality, inspection, damages, and maintenance and liquidated damages.

After signing the Contract, the [Buyer] paid 50% of the contract price, i.e., US $43,000. The machine arrived in Ningbo on 18 April 2001, and was installed and adjusted by the second Respondent.

POSITION OF THE PARTIES

[Buyer]'s allegations

The [Buyer] alleged that after the adjustment testing, many problems with the machine occurred on 14 May 2001. Although the parties tried for a long time, the problems were not resolved. On 18 July 2001, the Ningbo Entry-Exit Inspection and Quarantine Bureau issued Inspection Certificate No. S380000101006278, which states that the machine has the following defects:

   (1)    The perfection is far from complying with the requirement in the Contract;
   (2)    The tightening part was not set in accordance with the procedure, and randomly entered the safety area, so that it caused the machine to stop;
   (3)    The computer procedure is out of order;
   (4)    Extra holes were made because the machine worked out of order.

The inspection certificate expresses the opinion that the quality problems were caused by the defects when the machine was manufactured.

At the end of August 2001, the [Buyer] authorized its attorney to request the two Respondents for return of the goods as well as for compensation for damages.

On 24 December 2001, the second Respondent faxed to the [Buyer] an "Agreement on Return of the Machine" and officially agreed to the return of the machine and to compensate the [Buyer] for the loss of US $8,000, but did not honor this promise.

Accordingly, the [Buyer] filed the following claims:

   (1)    The first Respondent [Seller] should arrange for the return of the machine at its own expense, and refund to the [Buyer] US $43,000;
   (2)    The first Respondent [Seller] and the second Respondent should compensate the [Buyer] for RMB 300,000.

Response by the first Respondent [Seller] and the second Respondent

As to the [Buyer]'s claims and factual and legal basis, the Respondents made the following response:

1. The [Buyer]'s allegation, "after the adjustment testing, many problems with the machine occurred on 14 May 2001. Although the parties tried for a long time, the problems were not resolved", does not accord with the facts.

The facts are that on 18 April 2001, the machine was shipped to Ningbo port, and the import procedure was completed. On 23 April, the second Respondent sent a technician to test the machine at the [Buyer]'s place and trained the [Buyer]'s employees for eight days. On 30 April when the training was completed, the parties jointly signed a memorandum acknowledging that the second Respondent had sent the technician to test the machine and operate according to the client's design, and meanwhile trained the [Buyer]'s operating workers. The second Respondent's conduct complied with the requirements. In the section, "Problems needed to be solved", it was noted that "The operators cannot independently complete the task of writing programs, and need further training." It was obvious that the operators of the [Buyer] were unable to independently operate the machine after the second Respondent's technician had provided eight days' training. However, according to the second Respondent's after sales service experience, and the after sales services records for other clients, the personnel of other clients could independently operate the machines within two to six days generally.

On 4 June 2001, the [Buyer] faxed a memorandum stating that on 3 June the machine suddenly crashed and the right tightening tool was broken. On 8 June, the [Buyer] request the return and adjustment of the machine.

On 18 July 2001, the [Buyer] applied to the People's Republic of China Ningbo Entry-Exit Inspection and Quarantine Bureau to inspect the machine. It is obvious that the [Buyer] applied for inspection after the machines crashed. The CNC press is a kind of precision instrument, and any outside force can affect the machine's normal operation, not to mention a severe crash. The two Respondents alleged that the relevance of an inspection certificate issued by the bureau after the machine crashed was questionable.

The two Respondents allege that it was the crash on 3 June which caused the machine to not work normally. The crash was directly related to the fact that the [Buyer]'s employees could not operate the machine after their training. In addition, the [Buyer] did not follow the Respondents' instruction to install a voltage stabilizer for the machine until 6 June after the crash. Instability of voltage can cause the machine to crash.

2. The [Buyer]'s allegation, "On 24 December 2001, the second Respondent faxed to the [Buyer] an "Agreement on Return of the Machine" and officially agreed to the return the machine and to compensate the [Buyer] for the loss of US $8,000, but did not honor this promise", is not in compliance with the facts.

After the above problems occurred, employees of first Respondent [Seller] and the second Respondent went to the [Buyer]'s place many times to provide service. However, the [Buyer] insisted on returning the machine and claiming liquidated damages. The Respondents suggested helping to revise the program or fix the machine, but the [Buyer] refused. Finally, in order to maintain the reputation of the company and to provide the clients good service, not excluding the fact that it may be the [Buyer]'s reason which caused the machine not to work normally, the second Respondent, after discussing with the first Respondent, agreed on the [Buyer]'s request to the return of the machine.

After many negotiations, on 24 December 2001, the [Buyer] eventually agreed on the "Agreement on the Return of the Machine" prepared by the Respondents, and informed the second Respondent to send a technician to inspect the machine after 1 January according to this agreement. When the second Respondent sent its technician to the [Buyer]'s place, the [Buyer] asked to revise the agreement made on 24 December, and also prepared a "Memorandum of the Return of the Machine". This memorandum had many discrepancies with the agreement made on 24 December; the memorandum sought to have the second Respondent make the payment before inspecting the machine. At that time, the [Buyer]'s obvious intent was that it would freely use the machine and meanwhile make profit from that use. During this period, the technician of the second Respondent preliminarily inspected the machine and found that the machine was severely damaged.

After returning to Shanghai, the second Respondent sent faxes on 7 January and 1 February. Meanwhile, the two Respondents' legal counsel sent many letters to the [Buyer] on 18 January, 4 and 19 February and 5 April, respectively, and repeated that the second Respondent would like to actively resolve the problems, and repeatedly requested the [Buyer] to identify the date when the second Respondent could send the technician to inspect the machine according to the "Agreement on the Return of the Machine" made on 24 December so that it could proceed with the return as soon as possible.

Although the [Buyer] agreed to the "Agreement on the Return of the Machine" made on 24 December, it did not confirm the date for the Respondent to inspect the machine. So it was not the second Respondent who did not perform as promised. The liability for not returning the machine should not be completely borne by the second Respondent.

3. After receiving the machine, the [Buyer] did not apply for a commodity inspection, so that the machine could be regarded as complying with the Contract.

Article 14 of the Contract stipulates, "The [Buyer] shall apply to the Commodity Inspection Bureau to inspect the quality, specification, quantity, etc. of the goods after the goods arrive at the destination port," but the [Buyer] did not apply for inspection. Article 158 of the Contract Law of the People's Republic of China states:

"Where an inspection period was prescribed, the buyer shall notify the seller of any non-compliance in quantity or quality of the subject matter within such inspection period. Where the buyer delayed in notifying the seller, the quantity or quality of the subject matter is deemed to comply with the contract."

The [Buyer] did not apply for inspection and gave up its right stipulated in the Contract. According to the Contract Law of the PRC, because the [Buyer] delayed in notifying the Seller, the machine should be deemed to comply with the Contract.

4. The [Buyer]'s inspection certificate had severe defects. The Respondents did not receive the inspection certificate issued by the Ningbo Entry-Exit Inspection and Quarantine Bureau. According to the relevant commodity inspection rules of the PRC, if any of the disputing parties objects to the inspection certificate, it shall raise the objection within 15 days after receiving the inspection certificate. In this case, the [Buyer] deprived the two Respondents of their right to raise objection, so the inspection certificate submitted by the [Buyer] has no legal effect on the Respondents.

5. The key to resolve the disputes in this case is the two agreements on the return of the machine.

After the machine crashed and the [Buyer] asked to return the machine; the two Respondents agreed, so it is meaningless to dispute on the quality of the machine. The key is to proceed with the return according to the two agreements on the return of the machine.

According to the agreement made on 24 December, if there is no artificial damage, the two Respondents should refund US $43,000 after inspecting the machine; and after receiving the refund, the [Buyer] should complete the customs declaration procedure for the return of the machine and inform the two Respondents to arrange for the return of the machine. After inspecting the machine, the two Respondents should compensate the [Buyer] for US $8,000.

The [Buyer] had confirmed the above agreement, but on 5 January 2002, it prepared the other "Memorandum on the Return of the Machine"; the [Buyer] did not mention a word of this in the arbitration application.

In fact, the discrepancy of the two agreements is only about the procedure for the return of the machine.

The two Respondents repeated that they agreed on return of the machine according to the agreement, and the refund should be submitted to the Arbitration Commission for deposit; when the inspection showed that there was no artificial damage, and when the [Buyer] completed the customs declaration procedure for return of the machine, the US $8,000 should be paid to the [Buyer]; if, however, the inspection shows that some artificial damage existed, the [Buyer] should make the corresponding compensation.

6. It was unreasonable for the [Buyer] to claim for a compensation of RMB 300,000.

After the machine could not work normally, the second Respondent sent its technician to the [Buyer]'s place to provide service many times. After reaching the agreement on the return of the machine, the second Respondent sent many letters to the [Buyer] in order to resolve the problem as soon as possible. During the entire process, the second Respondent tried its best to perform its duty and cooperate actively. How could the second Respondent be regarded as having breached the Contract?

Article 113 of the Contract Law of the PRC states:

"Where a party failed to perform or rendered non-conforming performance, thereby causing loss to the other party, the amount of damages payable shall be equivalent to the other party's loss resulting from the breach, including any benefit that may be accrued from performance of the contract, provided that the amount shall not exceed the likely loss resulting from the breach which was foreseen or should have been foreseen by the breaching party at the time of conclusion of the contract."

Accordingly, the amount which the [Buyer] claimed obviously exceeded its actual loss; in addition, the [Buyer] randomly calculated the loss, so the two Respondents could not agree with the [Buyer]'s claim.

[Buyer]'s response

As to the two Respondents' opinion, the [Buyer] alleged:

1. The United Nations Convention on Contracts for International Sales of Goods (1980) (CISG) applies to this case.

The [Buyer]'s and the first Respondent [Seller]'s places of business are in China and Italy, respectively. These two countries are Contracting States of the CISG, so the CISG applies to this case. It is therefore improper for the Respondents' attorneys to cite the Contract Law of the PRC.

2. The Agreement on the Return of the Machine did not take effect.

      (1) China made a reservation on contracts formation when adopting the CISG, so the CISG does not apply to the formation and validity of contracts, and the Law of the PRC should apply.

      (2) Article 32 of the Contract Law of the PRC stipulates, "Where the parties enter into a contract by a memorandum of contract, the contract is formed when it is signed or sealed by the parties." Since the Agreement on the Return of the Machine was entered into by memorandum and the [Buyer] did not sign or seal it, it did not take effect.

      (3) This Agreement also stipulates that signing or sealing it is a precondition for the Agreement to take effect.

      (4) Neither of the Respondents refunded the contract price, nor did the [Buyer] return the machine to the Respondents. So the Agreement did not take effect by the parties' actual performance as stipulated in Article 36 and Article 37 of the Contract Law of the PRC.

3. The Memorandum of the Return of the Machine prepared by the [Buyer] did not take effect.

The two Respondents did not agree on the payment methods stipulated in this memorandum. In the court session, the two Respondents stated this opinion. The payment method is one of the substantive provisions of the offer, so the Respondents' objection to the payment methods was the rejection of the Memorandum. The rejected offer could not be accepted anymore.

4. The machine had severe defects which were caused by its design and manufacture, and had nothing to do with the operation or the installation of the voltage stabilizer. This could be sufficiently proved by the six repair memoranda, one repair record, one negotiation record, etc. It is unnecessary to repeat.

5. Non-inspection of the machine could not relieve the Respondents' liability for the quality defects within the warranty period.

      (1) The Contract stipulates two inspections: one is the inspection when the goods arrive, and the other is the inspection before filing claims when the quality problems occur within the warranty period. These two inspections have no causal relationship.

      (2) According to the CISG, if the goods were not inspected upon arrival, the [Buyer] only lost the right to reject the goods and to request reduction of the price.

      (3) Article 36 of the CISG states:

"(1) The seller is liable in accordance with the contract and this Convention for any lack of conformity which exists at the time when the risk passes to the buyer, even though the lack of conformity becomes apparent only after that time.

"(2) The seller is also liable for any lack of conformity which occurs after the time indicated in the preceding paragraph and which is due to a breach of any of his obligations, including a breach of any guarantee that for a period of time the goods will remain fit for their ordinary purpose or for some particular purpose or will retain specified qualities or characteristics."

Article 39(2) CISG states:

"In any event, the buyer loses the right to rely on a lack of conformity of the goods if he does not give the seller notice thereof at the latest within a period of two years from the date on which the goods were actually handed over to the buyer, unless this time-limit is inconsistent with a contractual period of guarantee."

Accordingly, the Respondents should be liable for the non-conformity of the machine within the warranty period stipulated in the Contract.

Thus, although the [Buyer] did not apply for the first inspection, the goods should not be deemed as conforming. According to the Contract and the CISG, the Respondents should be liable for the quality problems of the machine within the warranty period, and the [Buyer] had the right to claim for damages due to the quality defects of the machine.

6. The [Buyer] took timely remedial measures to avoid enlarging the loss. On 16 July 2001, when the Respondents expressly stated (see the sixth repair memorandum, "it is necessary to update the software and replace the machine or computer to resolve the problem") that it was impossible to fix the machine, the [Buyer] immediately applied to inspect the machine. When the inspection certificate issued on 18 July showed that the machine could not work normally due to defects, the [Buyer] immediately did investigation and selection, and on 21 July signed a contract to order another machine, which arrived on 20 September; the adjustment testing was completed on 10 October. The above facts showed that the [Buyer] took timely and reasonably remedial measures.

The following two points should be explained:

      (1) The CNC machine is a type of expensive precision equipment and is used only to produce precision products, so few enterprises in or around Ningbo employ such equipment. Although some enterprises have such equipment, it are only for their own use. Therefore, when the machine cannot be used, it is unrealistic to outsource the production to other enterprises.

      (2) As mentioned above, the CNC machine is a type of expensive precision equipment and not a common machine, so the [Buyer] needed to investigate, select, order and adjust the machine. It took only about two months for the [Buyer] to complete the entire process: the inspection certificate was issued on 8 July 2001; the [Buyer] signed the contract on 21 July; the machine arrived on 20 September; and the adjustment testing was completed on 10 October. The [Buyer]'s conduct was timely and reasonable during the process. However, it took four or five months for the Respondents to do their investigation and adjustment testing, and they still alleged that the time was not sufficient.

7. According to the Contract, the liquidated damage, i.e., RMB 2,000 per day, which the Respondents should pay, should be calculated for 122 days.

On 8 June 2001, the Respondents sent their technicians to repair the machine, but failed. So the liquidated damage should be calculated from 10 June 2001; the ending day should be the day (see Item 6) when the adjustment testing of the other machine which the [Buyer] purchased, was completed, i.e., 10 October 2001. So the total number of days for liquidated damage are 122 days, and the liquidated damage is RMB 244,000.

8. The Respondents alleged that the Contract in this case was not reasonable. It is the [Buyer]'s position that the Respondents had full civil capacity and it was the Respondents' true intent to sign the Contract. When signing the Contract, the [Buyer] did not commit fraud or duress, and the terms of the Contract were fair. The Contract had no legal defects. The reasonableness of the Contract is not a legal issue.

9. The Respondents alleged that others could operate the machine after six days' training, but the [Buyer] could not, even after eight days' training. The [Buyer] does not agree with this allegation.

      (1) The Respondents' two technicians were not familiar with the machine, which could be proved by the fact that the second Respondent's technicians could not find where the quality problem was after one month' repairing until the first Respondent sent its technician, and then they found that the problem was the incompatibility of the machine and the computer.

      (2) If the Respondent itself was not familiar with the machine, how could it train others? How could the machine work normally if defects existed?

      (3) Although the Respondents alleged that others could operate the machine after two to six days' training, they did not provide any evidence to prove that during the same period others could normally operate the same model machine after being trained by the same persons.

10. The inspection certificate. According to the contract, the period for claiming for damages did not expire. The [Buyer] has applied for another inspection.

11. The amount which the Respondents should compensate for:

The liquidated damage calculated in Item 7 of the [Buyer]'s representation opinion is RMB 244,000; the [Buyer]'s loss of profits and other loss are RMB 550,000. So the two Respondents should pay the liquidated damage of RMB 244,000. Because the [Buyer]'s loss is more than the liquidated damage, the Respondents should compensate the [Buyer] for the exceeding amount. Considering the second Respondent's financial capacity (it alleged that it would pay the damages), the [Buyer] only request the two Respondents to pay RMB 300,000, which includes the liquidated damages of RMB 244,000, and part of the loss, and the arbitration fee of RMB 32,992; accordingly, the two Respondents should pay the [Buyer] in total RMB 332,992.

The [Buyer] made the following evidence of expected profits.

   (1)    The calculation of expected profits was shown in Clause 2 Item 2 of the Audit Report (Wei Yuan Audit (2002) No. 332), "The calculation of three pro forma invoices ...";
 
   (2)    The pro forma invoices include the name of the goods, specification, quantity, price, delivery term, time, etc. which are the essential factors of the sales contract; the parties signed the pro forma invoice, which can prove the contractual relationship. The pro forma invoice is the confirmation of the sales contract.
 
   (3)    The contract price described in these three pro forma invoices was not paid to the [Buyer]. Because the machine could not be used, the goods could not be delivered. Under such circumstances, the [Buyer] did not and could not receive the contract price.

12. The validity of the inspection certificate

      (1) The Respondents raised the objection to the validity of the inspection certificate, alleging that the [Buyer] did not provide the inspection certificate to the Respondents in a timely manner, and deprived the Respondents' right for re-inspection, so the certificate was invalid to the Respondent. Thus, because the warranty period did not expire, the [Buyer] applied with and authorized the Arbitration Commission to do an inspection.

      (2) The purpose of the inspection is to determine whether the machine could work normally. The evidence submitted could sufficiently prove that the machine had some defects, so the Respondents should be liable according to the CISG and the Contract Law of the PRC.

      (3) Even if the defects of the machine were not too severe to cause the machine to not work properly, the Respondents should pay the [Buyer] the liquidated damage of RMB 244,000 due to the delayed repair for 122 days at RMB 2,000 per day.

      (4) If the Respondents agree, the [Buyer] would like to perform the agreement which it prepared.

Further response by the first Respondent [Seller] and the second Respondent

In this case, after the court session the [Buyer] applied to and authorized the Arbitration Commission to inspect the goods, and the Respondents submitted the following opinion on the [Buyer]'s request.

1. The [Buyer] mistakenly cited and understood the laws.

In its "Application to the Arbitration Commission for Inspection", the [Buyer] cited Article 3 and Article 32 of Regulations for the Implementation of the Law of the People's Republic of China on Import and Export Commodity Inspection (hereafter, the Regulations), and alleged that the according to the Regulations, the inspection should be conducted by the local commodity inspection bureau where the port is. As to this allegation, the Respondents mistakenly cited and understood the law, and intentionally and partially interpreted the Regulations for its own purpose.

Article 14 of the Regulations states:

"If the foreign trade contract stipulates the place to inspect the imported commodities, the inspection shall be conducted at the stipulated place; if the contract has no provision on this regard, the inspection can be conducted at the unloading port, the destination or the place stipulated by the commodity inspection agency."

In the Contract in this case, the parties definitely stipulated that after the goods were shipped to the destination port, the [Buyer] should apply to the China Entry-Exit Inspection and Quarantine Bureau to inspect the specification, quality/quantity of the goods. Accordingly, the parties definitely stipulated the commodity inspection agency. According to the Regulations, if the parties stipulated the place for the inspection, the inspection should be conducted at the stipulated place; it was not necessarily conducted by the inspection agency where the port was.

2. The machine under this Contract crashed on 3 June 2001 (the parties admitted). The Respondents alleged that the machine was a type of precision equipment and that, after it crashed, the internal structure of the machine must have changed compared with the former structure. If the inspection was conducted then, because of the change of the structure, the inspection result would not be fair. The inspection was meaningless. The Respondents did not agree to inspect the machine after it crashed.

II. OPINION OF THE ARBITRATION TRIBUNAL

1. Applicable law

The Contract did not stipulate the applicable law. The [Buyer] alleged that the CISG should apply to this case; as to the formation and validity of the Contract, the Contract Law of the PRC should apply; the two Respondents did not submit any definite opinion on the applicable law, but in the response submitted, they cited the Contract Law of the PRC. Accordingly, the Arbitration Tribunal holds that since both the [Buyer] and the second Respondent are Chinese companies, their business places are in China, the place of performing this Contract is in China and the inspection place is in China, the law of the PRC shall apply first. Meanwhile, the Arbitration Tribunal considers that the first Respondent is in Italy, and both China and Italy are Contracting States of the CISG, so when the law of the PRC has no stipulation or no definite stipulation, the CISG shall apply.

2. The inspection and the validity of the inspection

Clause 2 Article 14 of the Contract stipulates that after the goods arrived at the destination port, the [Buyer] should apply to the China Entry-Exit Inspection and Quarantine Bureau to initially inspect the quality, specification, quantity/weight of the goods; if the quality, specification or quantity/weight are not in compliance with the Contract ... the [Buyer] has the right to reject the goods or claim damages within 120 days after the goods arrive at the port.

Clause 3 stipulates that, within the warranty period stipulated in Article 13, if it finds the quality and/or specification are not in compliance with the Contract, or there are defects caused by any reason or materials, the [Buyer] shall apply to the commodity inspection bureau, and has the right to claim for damages with the inspection certificate."

According to the investigation in the court session, the facts in this case are that after the goods arrived at the destination port on 18 April 2001, the [Buyer] did not apply for initial inspection, but started the testing operation after the Respondents conducted the adjustment testing; on 3 June 2001, during the testing operation, the machine crashed, and the parties disputed on the reasons which caused the crash; then the Respondents sent technicians to repair the machine, but failed; the [Buyer] applied for inspection on 18 July 2001.

As to the above facts, the parties have no dispute, so the Arbitration Tribunal confirms them.

As to the [Buyer]'s application to the Arbitration Commission on goods inspection, the Arbitration Tribunal holds that the machine under this contract is not an item of common merchandise which can be inspected without adjustment testing, but goods of which the inspection must be conducted with adjustment testing; if the adjustment testing is completed, and the machine works normally, it complies with the quality requirements; otherwise, the machine in fact is not complying. According to this Contract, the inspection certificate is a form condition required for the [Buyer] to claim for damages.

The Arbitration Tribunal holds that the application with the Arbitration Commission submitted by the [Buyer] on 18 July 2001 was filed within the 120 days stipulated in the Contract, and was in compliance with the Contract. The [Buyer] did not give up the right stipulated in the Contract as the Respondents alleged, because the Contract did not stipulate within how many days after the goods arrived at the destination port the inspection should be conducted, but only stipulated that the [Buyer] should inspect the goods and file claims for damages within 120 days after the goods arrived at the destination port. Accordingly, the Arbitration Tribunal holds that the [Buyer]'s application on 18 July 2001 was still an initial inspection, i.e., the first inspection, and the Arbitration Tribunal does not sustain the Respondents' allegation that the [Buyer] gave up its right, because it did not timely inform of the inspection result to the Respondents, and the goods should therefore be deemed in compliance with the Contract.

The Arbitration Tribunal does not sustain the [Buyer]'s opinion that it did not apply for the first inspection. However, the Arbitration Tribunal sustains the [Buyer]'s allegation that even if it did not apply for the initial inspection, within the warranty period, the [Buyer] still has the right to apply for inspection and claim for damages with the inspection certificate. The facts of this case are that because the parties did not sign the acceptance certificate, and the machine had been adjusted, the warranty period of the machine under this Contract has not yet started. The inspection is the initial inspection unless the first inspection was not conducted within 120 days.

As to the validity of the inspection certificate, the two Respondents alleged that the commodity inspection bureau did not inform them of the inspection result, so the [Buyer] deprived the Respondents of their right of objection, and the inspection certificate has no legal effect on the Respondents. As to this allegation, the Arbitration Tribunal holds that according to the Regulations, it is the commodity inspection bureau's responsibility to inform of the inspection result; it is unreasonable to blame the [Buyer] for the commodity inspection bureau's failure to inform the Respondents of the inspection results which caused them to lose the chance of objection. It is more important that no evidence proves that the inspection certificate includes any mistake; the Respondents' allegation that the inspection certificate has no legal effect lacks any legal or factual basis. Thus, the Arbitration Tribunal does not sustain the two Respondents' above allegation.

3. The quality problems with the goods

According to the following facts, the Arbitration Tribunal holds that the goods under this Contract have quality defects.

      (1) The parties did not sign the acceptance certificate in accordance with Clause 4 , Article 10 of the Contract;

      (2) The memorandum signed by the parties on 30 April, 2001 described that there were seven problems needed to be solved, which include "the production procedure is sometimes out of order";

      (3) The description of the adjustment testing and failure were in the memorandum of 16 June, 2001, the memorandum of 22 June 2001, the meeting minutes of 4 July 2001. In the memorandum of 16 July 2001, the parties confirmed that the machine had the following problems:

            (1)   the CNC presses ... not complying;
            (2)   extra holds existed;
            (3)   the program was lost when revised, and a good solution was not found;
            (4)   the computer was sometimes broken;
            (5)   all problems have not been resolved.

      (4) In the memorandum of 16 July 2001, it was described that according to the above proof, the crash was not caused by the program, but by defect of the computer and the machine...which was the incompatibility of the computer and the machine; the machine did not follow the instructions, so the crash occurred; the version should be updated, so that the problem may be resolved.

      (5) The inspection certificate described that the perfection was not complying; the tightening tool randomly entered in the safety zone, and it caused the machine to stop; the program was out of order; extra holes were created. The above description was almost same with the memorandum signed by the parties.

Accordingly, the Arbitration Tribunal holds that the machine had defects.

4. The agreement on the return of the machine

Because the three parties did not sign the Agreement on the Return of the Machine and the Memorandum of the Return of the Machine, the Arbitration Tribunal does not consider this agreement and the memorandum.

5. The [Buyer]'s arbitration claims

      (1) The first Respondent [Seller] should arrange for the return of the machine at its own expense and refund US $43,000 to the [Buyer].

The Arbitration Tribunal holds that Article 15 of the Contract specifies claims for damages, so it should determine the [Buyer]'s claims according to the Contract.

According to Article 15 and Article 15(a), the [Buyer] should file claims within the stipulated period, and after agreed by the [Buyer], the two Respondents should compensate the [Buyer] by the following method: agree to the return of the goods, refund the contract price to the [Buyer], and bear all direct loss and expenses incurred due to the return, including interest, bank charges, transportation fee, insurance premium, inspection fee, storage charge, loading and unloading fee, storage fee, and other necessary expenses.

In this case, the [Buyer] requested return of the goods, and the two Respondents agreed; all three parties admitted this fact, so the Arbitration Tribunal confirmed. Since the three parties agree on the return of the goods, the goods should be returned according to the Contract; the two Respondents should refund to the [Buyer] the contract price of US $43,000 and bear the expenses incurred; and the [Buyer] should return the goods to the Respondents.

In this case, the [Buyer]'s expenses incurred due to importing the goods should be calculated according to the audit report issued by the Ningbo Wei Yuan Accounting Firm, including issuance fee, inspection fee, transportation fee, interest of loan, totaling RMB 18,592.56.

The two Respondents shall bear the expenses incurred due to the return of the goods.

The [Buyer] shall cooperate with the two Respondents to return the goods. If the machine was damaged due to the [Buyer]'s improper storage, it shall be determined in another case.

      (2) The [Buyer]'s claim that the two Respondents should compensate for RMB 300,000. The [Buyer]'s basis for this claim is:

            (1) Article 5 of Appendix VI of the Contract signed by the three parties stipulates that within the two years' warranty period, when the Respondents' technician ... repairs ... from the fourth day... shall pay the standard penalty of RMB 2,000 per day. However, the Arbitration Tribunal holds that the warranty period did not start, and the basic condition for the penalty of RMB 2,000 per day was not satisfied so the Arbitration Tribunal does not sustain the [Buyer]'s claim based on this Article.

            (2) The [Buyer] submitted three pro forma invoices to prove that it signed the contracts with a third party, and also based on these three invoices, requested the Respondents to compensate for part of the loss of expected profits and other loss because the defects of the machine under this Contract caused the [Buyer] to be unable to perform the three contracts. As to this claim, the Arbitration Tribunal holds that the pro forma invoices cannot be used as evidence to prove the conclusion of the contracts, and not to mention to prove that the non-performance of the three contracts was caused by the defects of the machine under this Contract. Thus, the Arbitration Tribunal does not sustain this claim of the [Buyer].

However, the Arbitration Tribunal notes that Clause 3 of Article 15 of the Contract stipulates that if the [Seller] did not reply within one month after receiving the notice of claiming for damages, it shall be deemed that the [Seller] has accepted the [Buyer]'s claim. In this case, on 24 August 2001 the [Buyer] sent the attorneys' letters to the two Respondents requesting the Respondents to refund the contract price and compensate for RMB 100,000 as liquidated damages and economic loss, and the two Respondents did not reply within one month. Accordingly, the Arbitration Tribunal holds that according to Clause 3 of Article 15, the two Respondents accepted the [Buyer]'s claim for RMB 100,000.

In conclusion, as to the [Buyer]'s second claim, the Arbitration Tribunal holds that the two Respondents should compensate the [Buyer] for RMB 100,000. However, it must be pointed out that the [Buyer]'s claim for RMB 100,000 shall include the expenses, i.e., RMB 18,592.56 mentioned above, which the [Buyer] incurred for importing the goods.

6. The arbitration fee

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

III. AWARD

Based on the above, the Arbitration Tribunal rules that:

   (1)    The two Respondents shall refund to the [Buyer] the contract price of US $43,000;
 
   (2)    The [Buyer] shall return the machine under this Contract to the two Respondents, and cooperate with the two Respondents to complete the necessary procedure. The two Respondents shall bear the expenses duly incurred.
 
   (3)    The two Respondents shall compensate the [Buyer] for RMB 100,000.
 
   (4)    The arbitration fee is RMB 32,992, of which the [Buyer] shall bear 20%, i.e., RMB 6,598.40, and the two Respondents shall bear 80%, i.e., RMB 26,393.60. The [Buyer] has prepaid the entire arbitration fee, so the two Respondents shall pay the [Buyer] RMB 26,393.60.
 
   (5)    The [Buyer]'s other claims are dismissed.
 
   (6)    The two Respondents shall pay the above amount, totaling RMB 26,393.60, within 30 days after the awards are made.

This award shall take effect from the date it rendered.

This 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]; first Respondent of Italy is referred to as [Seller]; and second Respondent of the People's Republic of China is simply referred to as second Respondent. 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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