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CISG CASE PRESENTATION

China 27 December 2002 CIETAC Arbitration proceeding (Medicine manufacturing equipment case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/021227c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20021227 (27 December 2002)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2002/29

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Sweden (respondent)

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

GOODS INVOLVED: Medicine manufacturing equipment


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 7(2) ; 8(3) ; 25 ; 29(1) ; 49 ; 71 ; 72 ; 80 [Also cited: Articles 46(1) ; 48(2) ; 60 ; 62 ]

Classification of issues using UNCITRAL classification code numbers:

7C23 [Gap-filling by domestic law: resort to domestic law to determine rules applicable to return of deposit];

8C [Interpretation of party's statement or other conduct: interpretation in light of surrounding circumstances];

25A [Effect of a fundamental breach];

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

49A [Buyer's right to avoid contract: grounds for avoidance];

71A1 [Suspension of performance: grounds for suspension by other party];

72A [Avoidance prior to date for performance: when clear that party will commit fundamental breach];

80A [Failure of performance caused by other party (party causing non-performance): loss of rights]

Descriptors: Gap-filling ; Intent ; Fundamental breach ; Avoidance ; Suspension of performance ; Failure of performance, other party

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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): Translated text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Joint translation project:
New York University School of Law
and Pace University School of Law


 

China International Economic and Trade Arbitration Commission (CIETAC) PRC

Medical manufacturing equipment case (27 December 2002)

Translation [*] by Xiao Ling [**]

Edited by William Zheng and Julie Yu [***]

[PARTICULARS OF THE PROCEEDING]

The China International Economic and Trade Arbitration Commission (originally named the Foreign Trade Arbitration Commission of the China Council for the Promotion of International Trade, hereinafter referred to as the Arbitration Commission) accepted this case [Case no. M...] involving disputes arising from the sale of medical manufacturing equipment, according to:

   -    The arbitration clause in Contract No. 97TTNOR01 signed by the Claimant [Buyer], Shenzhen ... Pharmaceutical Co. (originally named as Shenzhen ... Pharmaceutical Co., Ltd) of the People's Republic of China, and the Respondent [Seller], N... Package Machinery AB of Sweden, on 15 September 1997; and
 
   -    The written arbitration request submitted by the [Buyer] on 22 October 2001.

The Arbitration Rules of the Arbitration Commission (hereinafter referred to as the "Arbitration Rules") effective 1 October 2000, apply to this case.

On 25 December 2001, the Arbitration Commission received mail from the [Seller] appointing Mr. U... F... as its arbitrator. On 24 January 2002, the Secretariat of the Arbitration Commission sent written notice to the [Seller] requiring the prepayment of the actual expenses (US $10,000) incurred by the aforesaid arbitrator's business trip to Beijing according to the Arbitration Rules. On 8 February 2002, the [Seller] sent a letter to the Arbitration Commission requesting the replacement of the formerly appointed arbitrator by Mr. ... Tao. On 28 February 2002, the Secretariat of the Arbitration Commission wrote to the [Seller] requiring the prepayment of the actual expenses incurred by Mr. ... Tao's handling of this case according to the Arbitration Rules. The Arbitration Commission received this prepayment from the [Seller] on 13 March 2002.

The [Buyer] appointed ... Cui as its arbitrator and the [Seller] appointed Mr. ... Tao as its arbitrator. Since the parties neither jointly appointed nor entrusted the Chairman of the Arbitration Commission to appoint the presiding arbitrator, the Chairman of the Arbitration Commission appointed Mr. ... Chen as the presiding arbitrator according to Article 24 of the Arbitration Rules. On 29 March 2002, the above three arbitrators formed the Arbitration Tribunal to hear this case.

On 5 June, the Secretariat of the Arbitration Commission held a court session in Beijing. The [Buyer] and the [Seller] sent representatives to attend. At the court session, both parties made oral statements, and answered the inquiries of the Arbitration Tribunal. After the court session, both parties submitted further complementary materials.

This case has been concluded. Since the Arbitration Tribunal cannot reach consensus after deliberation, according to Article 54 of the Arbitration Rules, this award is rendered in accordance with the opinion of the majority of the arbitrators.

The facts, the majority opinion of the Arbitration Tribunal and the arbitral award are as follows:

A. FACTS

On 15 September 1997, the [Buyer] and the [Seller] signed Contract No. 97TTNOR01, stipulating that the [Buyer] was to purchase from the [Seller] one BF700 item of Equipment for the Filling and Sealing of Oral Solutions for the total price of US $400,000 with a contract deposit in the amount of US $120,000. It was stipulated in the Contract that the main unit of the equipment was to be shipped no later than the end of October 1997, the widgets were allowed to be delivered to Hong Kong no later than the end of November 1997 and the installation and commissioning of the equipment were to be completed no later than Christmas of 1997.

Disputes arose during the performance of the Contract and the equipment was not delivered as scheduled.

The [Buyer] alleged that after the signing of the Contract, the [Seller] failed to deliver the goods as scheduled and that the package of the equipment was defective. The parties failed to reach agreement on the cooperation afterwards. On 27 May 1998, the [Seller] sent a facsimile to the [Buyer], informing that "We are not going to deliver the first NBF700 Equipment this August as per the previous plan due to the concern that the expertise of our company for this type of equipment will be disclosed to another manufacturer."

In light of the above, on 20 July 1998, the [Buyer] formally notified the [Seller] requesting the delivery of the equipment on time in August 1998. The [Buyer] also stated that if the [Seller] failed to deliver the goods as scheduled for any reason, the [Buyer] would disclaim their agreement and shall retain the right to request the refund of the deposit under the Contract amounting to US $120,000 and the overdue fine by the [Seller].

The [Buyer] finally terminated [avoided] the contract because the [Seller] failed to deliver the equipment on time. The two parties negotiated over refund of the deposit and the return of moulds by the [Seller], but failed to reach an agreement.

The [Buyer] alleged that:

   -    The Contract and agreement reached between the two parties are legal and valid and binding upon both parties.
 
   -    Therefore, the [Seller] should perform the contract in conformity with the scheduled time and the requisite quality.
 
   -    However, the [Seller] delayed the time of performance several times and made unreasonable requirements repeatedly.
 
   -    Finally, the [Seller] failed to deliver the goods and the [Buyer] suffered considerable loss from the conduct of the [Seller].

Therefore, the [Buyer] submitted this case for arbitration to the Foreign Trade Arbitration Commission of the China Council for the Promotion of International Trade (now named as the China International Economic and Trade Arbitration Commission) in accordance with the arbitration clause recited in Article 18 of the Contract and requested protection of the lawful rights and interests of the [Buyer].

The claims of the [Buyer] were:

   1.   [Seller] should refund the deposit of the contract amounting to US $120,000;
 
   2.   The [Seller] should pay the interest;
 
   3.   The [Seller] should return the testing mould or refund an amount of money equivalent to the value of the testing mould;
 
   4.   The [Seller] should pay the arbitration fee.

The [Seller] defended as follows:

      1. As to the claims of the [Buyer]:

   -    The [Seller] challenged the claim of [Buyer] concerning the payment of US $120,000 plus interest.
 
   -    The [Seller] did not deny the fact that the [Buyer] purchased one testing mould from the [Seller]. However, the [Seller] alleged that, because the [Buyer] had not paid the price of the testing mould, the [Seller] was entitled to a lien on the property before the [Buyer] paid the whole amount of the price of the testing mould.
 
   -    The [Seller] requested the Arbitration Tribunal to order the [Buyer] to:

(1) Indemnify the [Seller] for all the costs relating to this case;

(2) Bear the entire arbitration fee and other costs which the two parties are required to pay to the Arbitration Commission.

      2. The [Seller] stated that the facts are as follows:

      The [Seller] confirmed that it signed the aforementioned Contract with the [Buyer] on 15 September 1997. The two parties kept frequent mutual contact since 1996 before signing this Contract.

Since the [Buyer] hoped to fill in its medication packages at the rate of seventy packages per hour, the [Buyer] wished to purchase a series of twelve items of filling equipment. The [Buyer] selected the Standardized Single-filling Machine of the [Seller].

The equipment mentioned in the Contract was the first of the twelve items of equipment. The two parties did not reach an agreement on the price of the remaining eleven items of equipment, but they were very close to an agreement during the negotiation. When the two parties signed this Contract, the [Seller] reasonably anticipated that the [Seller] would be asked to provide the [Buyer] with all twelve items of equipment.

The [Buyer] aimed for the innovation of a unique package difficult to imitate. Therefore, the [Seller] was asked to assist the [Buyer] with the accomplishment of the project plan, which included the development and design of the package. During the process of the project, a considerable number of alterations would have to be made even after the final determination of the selected package. The [Seller] had been taking charge of the research and development.

The [Seller] explained to the [Buyer] that a type of mould with high accuracy was requisite for pliability of the package. Therefore, the [Seller] urged the [Buyer] to use the moulds produced either by E... Co. in Austria or by a Japanese manufacturer. However, the [Buyer] selected the moulds from a Taiwanese manufacturer regardless of the [Seller]'s advice.

The testing of the package was conducted in Sweden by the [Seller]. The experiment of disinfection was conducted by an independent third party, G... The [Seller] advised the [Buyer] to adopt the disinfecting equipment provided by G... The [Seller] reported the testing result to the [Buyer]. According to the agreement between the [Seller] and the [Buyer], the product of the [Buyer], after the filling, was to undergo a high-temperature disinfecting process with the temperature exceeding 138ºC. This was a strict requirement for the expertise of the package. G... and the [Seller] both mastered the necessary related expertise. Meanwhile, such expertise was provided to the [Buyer] as part of the agreement. Special experiments were conducted in the laboratory of G... to enable the [Buyer] to master the expertise of G....

The [Seller] and the [Buyer] were linked by Eastern Asia (Hong Kong) Co. (hereinafter referred to as Eastern Asia Co.). On 25 May 1998, Mr. B... F... of Eastern Asia Co. notified the [Seller] that the [Buyer] had purchased two filling machines from J... K... & Co. GmbH (hereinafter referred to as K...), a German corporation. In other words, the [Buyer] chose to purchase the product from the [Seller]'s competitor after two years' preparation by the [Seller] including research of the expertise, the comprehensive testing and the transfer of the expertise from the [Seller] to the [Buyer]. It was conspicuously intended by the [Buyer] to apply the package developed by the [Seller] to the filling machines provided by K..., so the [Seller] was concerned that K... and the [Buyer] would infringe upon the patent rights of the [Seller]. J... H... of the [Seller] expressed the concern in a facsimile sent to the [Buyer] on 28 May 1998 and J... H... wrote to the [Buyer] again on 4 June 1998.

The two parties held a meeting in Shenzhen on 11 June 1998. Mr. J... H... retained the minutes of the meeting. It can be indicated from the e-mail sent by J... H... on 19 June 1998 that the two parties held further negotiations after the meeting, via Mr. B... F.... The exchange of three facsimiles between the two parties on 29 June 1998 indicated that the negotiation eventually came to the "white-hot" stage.

The two parties held a meeting in Shenzhen again on 8 July 1998 to settle the disagreement. This meeting resulted in the facsimile from Mr. J... H... on July 10, 1998. The [Buyer] confirmed in the facsimile on 20 July 1998 that it was to purchase only one item of equipment from the [Seller].

As of early September 1998, the [Seller] had not yet received the ten thousand package samples for the pre-delivery commissioning which were to be provided by the [Buyer]. According to the Contract, the filling equipment should have been delivered by then. Therefore, J... H... telephoned C... J... of the [Buyer] on 9 September 1998. According to Item 6 of the telephone record of Mr. H..., the two parties began to discuss the probable termination of delivering the first item of equipment then. Mr. H... received the facsimile from Cui Jiu Jin later that day.

The [Seller] confirmed in the facsimile of 10 September 1998 that it was prepared to reach an agreement with the [Buyer] on the termination of delivering the first item of equipment. The [Buyer] replied on 16 September 1998.

Finally, on 2 November 1998, the [Seller] received the package samples for the commissioning of the equipment at the [Seller]'s place of business.

As mentioned in the mail from H... S... of the [Seller] to B... F... on 9 January 1998, the package samples were defective before then. After the receiving and initial inspection of the ten thousand package samples, J... H... had to point out a variety of defects in the package samples on 19 November 1998. The [Seller] informed the [Buyer] of the defects in the package samples on 27 November 1998. J... H... restated the concern of the [Seller] on 15 December 1998.

J... H... informed B... F... of the situation in the facsimile of 16 December 1998. The [Buyer] did not realize the severity of the defects in the package samples and insisted on requiring the delivery of the goods. J... H... complained of the attitude of the [Buyer] in the respective facsimiles of 7 January 1999 and 17 February 1999.

The [Buyer] avoided the contract on 19 May 1999 and requested the refund of US $70,000, which triggered a further exchange of mail between the two parties.

Eastern Asia Co. informed the [Seller] on 9 July 1999 that the [Buyer] had started to use the equipment of K...

The expertise of the [Seller] was unique for the following reasons:

   (1)   The pliability of the upper part of the package;
 
   (2)   The expertise of material coil permitting the welding of the bottom of the package after filling, which required package of optimal quality and moulds with high accuracy. It was the reason why the [Seller] was concerned with the package samples provided by the [Buyer].
 
   (3)   The heating by hot air for the use of welding.

The design patent of the [Seller] would expire at the end of 1998, therefore the [Buyer] and K... could imitate the welding expertise as described in the aforesaid Item ii. Meanwhile, K... could obtain the patented heating expertise in a sophisticated manner as described in the aforesaid Item iii.

The [Buyer] obviously took cognizance of the complaint of the [Seller] as to the package samples, which was indicated by the [Buyer]'s purchase of the moulding equipment and moulds from E..., the supplier recommended by the [Seller].

The two parties had no contact during the previous two years until the [Seller] received the arbitration request submitted by the [Buyer].

      3. Positions

The [Seller] alleged that:

   -    The [Buyer] refused to take the delivery of the equipment as stipulated by the Contract and ordered similar equipment from another supplier.
 
   -    The [Buyer] failed to deliver the package samples qualified for the equipment commissioning.
 
   -    The [Seller] was entitled to the indemnification for the cost from the [Buyer] because of the termination of the Contract by the [Buyer], which exceeded US $120,000.

The representative of the [Buyer] claimed as follows at the court session:

      The [Buyer] and the [Seller] signed a contract for the sale of goods, the subject matter of which was "BF700 Equipment for the Filling and Sealing of Oral Solutions." The [Buyer] performed the obligation to prepay the deposit in accordance with the Contract. However, the [Seller] refused to deliver the goods offering a variety of unreasonable excuses although repeatedly urged by the [Buyer]. The [Buyer] alleged that the [Seller] fundamentally breached the contract for the following reasons:

1. The fact that the [Buyer] paid US $120,000 was incontrovertible, but the [Seller] did not deliver the subject matter of the Contract to the [Buyer]. According to Article 25 of the United Nations Convention on Contracts for the International Sale of Goods (hereinafter referred to as the CISG): "A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result."

The [Seller] breached the Contract fundamentally, and therefore the [Buyer] failed to realize the purpose of the Contract and suffered a huge amount of marketing loss.

In response to this, the [Seller] alleged:

      (1) "The normal operation of the machine for the filling and sealing under this contract is closely associated with the quality of the filling containers matching with the machine, but the containers for the commissioning provided by the [Buyer] did not meet the quality criterion, which would negatively affect the normal operation of the equipment under this contract." In light of the concern of the [Seller], the [Buyer] requested the manufacturer of the filling containers to produce according to the stipulated quality criterion several times in order to satisfy the requirement of the [Seller]. However, the replies from the [Seller] were always "disqualified" every time after the delivery of the testing bottles to the [Seller]. Thus, the [Buyer] required the [Seller] to provide convincing inspection reports to prove the positions of the [Seller].

In fact, as indicated in the exchange of facsimiles, the immediate reaction of the [Seller] after hearing the news that the [Buyer] purchased two machines for the filling and sealing from another supplier was "the concern that the expertise of our company for this type of equipment will be disclosed to another manufacturer," therefore "we are not going to deliver the first NBF700 Equipment this August as per the previous plan." The [Buyer] signed the contract on 15 September 1997, but did not receive the equipment until May of 1998. The reason why the [Buyer] purchased the equipment under the Contract was to distinguish the package of the oral solution from other domestic manufacturers and to prevent the imitation of the [Buyer]'s products (the [Buyer]'s products were imitated on a large scale then. After the adoption of new equipment for the filling and sealing, the [Buyer] managed to grasp the business opportunity because none of the other domestic manufacturers owned this kind of equipment).

      The [Buyer] alleged that it had to purchase the equipment from another supplier as a remedial measure because of the failure to get satisfactory result after waiting for a long period of eight months. Furthermore, the [Buyer] did not exclude the first contract with the [Seller] when negotiating the purchase of equipment from other suppliers.

The [Seller]'s concern that "our expertise would be disclosed to another manufacturer of this kind of equipment" was worth further consideration. The [Buyer] was in dire need of the new equipment for filling, but as a bona fide and faithful enterprise, the [Buyer] would never infringe on the patent right of others in violation of the law. The [Buyer] paid special attention to the patent issue when negotiating with other suppliers for the purchase of equipment. The [Buyer] entrusted a detached patent office to research the patented expertise with the "alleged disclosing" of which the [Seller] was concerned and to screen out prudently, and was replied that the patent of the [Seller] was not infringed upon. Meanwhile, the [Buyer] decided to purchase the equipment from another supplier after the solemn promise not to infringe upon the patent of any third party. Furthermore, the [Seller] did not take any further legal action perceived by the [Buyer] to protect the patented expertise. This was indeed susceptible. Why was the [Seller] so indifferent after the "patented expertise" was infringed upon?

It can be concluded that it was reasonable and prudent for the [Buyer] to select another supplier, and the [Buyer] did not cease to request the delivery of the goods by the [Seller] according to the Contract when negotiating with other suppliers for the prospect of purchasing equipment. Therefore, if the [Seller] failed to submit convincing inspection reports on the testing bottles, the [Buyer] could reasonably infer that the actual reason for the non-delivery of the goods by the [Seller] was not for the quality of the testing bottles, and the "infringing upon the patent" was merely a pretext. The actual reason was that, if the [Buyer] purchased equipment from other suppliers, the marketing scheme of the [Seller] afterwards to sell equipment to the [Buyer] would be futile or substantially affected. It can be logically concluded that the original supplier would be given priority for further purchases if the original supplier cooperated well and the equipment supplied was of decent quality. However, since the cooperation on the first equipment went so unfavorably, how shall the [Buyer] trust the [Seller]'s contractual capacity?

2. In the later stage during the performance of the contract, the two parties already started to conduct tentative negotiation for the termination of the contract. The claim of the [Seller] "to retain US $90,000 of the prepaid US $120,000" was unacceptable to the [Buyer]. Because the [Buyer] also made considerable efforts during the negotiation for the Contract, the claim of the [Seller] was obviously unacceptable. On the basis of fairness, the [Seller] still shall not be entitled to insist on "the retaining of US $90,000" even when valid evidence could be provided by the [Seller] to prove the efforts equaling the aforesaid amount for the performance of the contract. The [Buyer] took it seriously when signing the contract. The [Buyer] paid a deposit in the amount of US $120,000 even when no equipment was received, which led to endless efforts for the refund of the money belonging to the [Buyer] when the purpose of the contract became futile.

The [Seller] submitted the following materials as a supplement to its statement of defense at the court session held by the Arbitration Tribunal in Beijing on 5 June 2002.

1. The context

Basic context of the contract and negotiation for the contract:

J... H... of the [Seller] and six managers of the [Buyer], including the President, met in September 1996, which was the first meeting of the representatives of the [Seller] and the [Buyer]. The [Buyer] alleged that they were selling a Chinese herbal medication with market popularity. The two parties started to discuss issues relating to the purchase of a number of so-called "Standardized Single" filling machines by the [Buyer].

During the process for the project, Mr. J... H..., a project manager of the [Seller] visited the [Buyer] in China five or six times. Mr. H... L... of the [Seller] paid similar visits twice, and Mr. Jarl Uggla and Mr. H... S... (spelled differently from the aforementioned H... S..., as the original text-note by the Arbitration Tribunal) visited once each, respectively. Two delegations of the [Buyer] visited the factory of the [Seller] in Sweden, the first visit in May 1997 (before the signing of the Contract), and the second one in January 1998 (after the signing of the Contract). During the second visit in Sweden, the [Buyer] requested substantial alteration on the "model bottle" agreed previously. The [Buyer] made several new requests concerning many other issues: the filling machine should be equipped with widgets made of stainless steel (allegedly) in conformity with the mandate of the medication manufacturing. This caused the further delay of the project and the increase of the cost for the [Seller] in the development of the product.

Before the signing of the contract by the two parties in September 1997, the [Seller] had been in negotiation with the [Buyer] for about one year. During the negotiation, the [Buyer] kept changing the requirements for the operation of the filling machine and the quantity of the machines the [Buyer] intended to purchase.

2. The Contract

The elements of the Contract

The following elements of the Contract are especially relevant to the dispute between the two parties.

      (1) The purpose of the contract
      (2) The alteration of the contract
      (3) The clauses of the contract
            (a) the abstract
            (b) the model bottle
      (4) The delivery
            (a) the schedule of the delivery
            (b) the delivery date
            (c) the sample
            (d) the model bottle, a prerequisite for the obligation of delivery by the [Seller]
      (5) The termination of the contract by the [Buyer]
      (6) The reasons why the [Buyer] is not entitled to the refund of the entire prepayment

(A) The purpose of the contract

The expertise of the [Seller]

Facts

It was obviously indicated during the first meeting in September 1996 that the [Buyer] was not satisfied with the package made of glass which was copied successfully by imitators who were marketing their own products in the name of the [Buyer]. Therefore, the [Buyer] took particular interest in the product of the [Seller], since it can provide a unique way to weld the reagent bottle and the pipette together. The [Seller] could assist the [Buyer] in the developing of a special product adopting the expertise called "disjunction" when filling in the package. The [Seller] held patents on this expertise and design in China.

Initially, the [Buyer] was totally ignorant on the expertise and technology adopted by the [Seller] in the package method. The [Seller] manufactured brand new equipment for the [Buyer] in order to dispel any doubt.

The expertise and technology were transferred to the [Buyer] by the [Seller] effectively before the signing of the contract and during the contract period: "... has accepted the higher price for the first item of equipment because of the inclusion of the transfer of expertise and the right to use our patented package in the higher price."

However, the result of the transfer of expertise from the [Seller] to the [Buyer] was that the [Buyer] could use the other patents held by the [Seller] in a sophisticated manner through [Buyer]'s cooperation with [Seller]'s competitor, K...

The [Seller] once sent a letter to the [Buyer] with the following statement: "We have to inform you that we adopted the patent held by ... in the package designed and developed for ... If you intend to conclude an agreement from any other supplier, we will not allow you to use this package."

Because of the incorporation of the [Seller]'s unique expertise in the equipment, the [Seller] was concerned with the imitation of the equipment and the reverse engineering of the equipment just as [Buyer] was concerned with the imitation of its own product by others. The [Seller] was very concerned with the imitation and reverse engineering of its product. Therefore, after hearing that the [Buyer] purchased two machines for filling and sealing from K..., the [Seller] immediately wrote to inform the [Buyer] of the decision to refuse to deliver the equipment for risk of expertise disclosing, unless the [Buyer] reconsidered its cooperation with K...

The [Buyer] did not take any measure in response to the aforesaid mail except to invite the [Seller] to a meeting on 11 June 1998.

Conclusion

The relation between the [Buyer] and the [Seller] involved an important part, the transfer of expertise. Though not stated explicitly in the Contract, it was the privity between the two parties that the [Buyer] would, by the purchase of the equipment, indirectly obtain the advanced expertise and technology on which the [Seller] spent several years and considerable cost. As a matter of fact, the filling machine was customized by the [Seller] according to the quality requirement of the [Buyer] (including the requirement that the packages manufactured were to be difficult to imitate). The [Seller] had to raise certain requirements, including the requirement that the moulds shall conform to the model bottle as agreed by both parties for the purpose of the effective combination of the expertise and technology of the [Seller] in the filling machine.

Although the equipment was based on the current equipment provided by the [Seller], it, to a large extent, was customized in accordance with the special requirements and technical index raised by the [Buyer] and the technical index agreed upon jointly by the [Seller] and the [Buyer] on the basis of the requirements of the [Seller].

(B) The alterations to the Contract

Facts

The Contract was signed by the two parties on 15 September 1997. However, the Contract merely reflected the positions of the two parties on certain issues concerned during the discussion on the signing day. Afterwards, the two parties agreed to make alterations to a considerable number of the clauses of the Contract by exchange of mail, minutes of meeting and other documents reflecting the intention of both parties.

The two parties held broad discussions in response to the new technical index required by the [Buyer], which was beyond the technical index previously stipulated by the Contract.

It can be proved in the following documents cited by the [Buyer] that the Contract was still under discussion for long time after it was signed. Thus, the contract merely reflected the agreement and intention of both parties on the signing day, excluding the agreement and intention afterward. The documents are:

   1.   minutes of the meeting in Shenzhen on 11 June 1998;
 
   2.   The letter of E... (... Agency) from the [Seller] to the [Buyer];
 
   3.   The facsimile requiring the new offer of the [Buyer] for the new technical index from the [Seller];
 
   4.   The facsimile from the [Seller] to the [Buyer] on 10 July 1998. The [Seller] specifically cited Paragraph 10, Page 2: "During the discussion between the two parties, the [Seller] is always willing to satisfy new requirements raised by you. We will accept the new style of the equipment, i.e., the new equipment with larger quantity of output and equipped with a fully-automatic robotic processing system able to load the bottles for the filling on the conveying pallets for the disinfecting process."
 
   5.   The facsimile from the [Seller] to the [Buyer] on 10 July 1998. The [Seller] specifically cited Paragraph 12, Page 2, "Notwithstanding, ... is still willing to discuss with ... on the basis of the general consideration and the basic agreement between the two parties."

Conclusion

After the signing of the contract on 15 September 1997, both parties agreed to make legally binding alterations on the description of the product and the delivery date. It was groundless for the [Buyer] to insist on the adherence to the schedule of delivery (i.e.; November 1997) stipulated in the contract.

Legal grounds

Article 29(1) of CISG: A contract may be modified or terminated by the mere agreement of the parties.

(C) The clauses of the Contract

(1) The abstract

Facts

Except for the commerce clause and Article 20, the other conditions and clauses of the Contract were, both in terms of content and form, standard Chinese contract clauses commonly used in the import of equipment. Article 20 of the Contract was incorporated at the request of the [Seller] as the prerequisite and condition of the guarantee of quality according to the criteria required by Article 15 of the Contract.

(2) Model bottle

Facts

Since the [Seller] agreed to warrant the quality and operation of the equipment (Article 15), the [Seller] was obliged under the Contract for the pre-delivery comprehensive inspection of the ordered products (including the quality, description and function) (Paragraph 1 of Article 16(a)), and only after the performance of the warranty by the [Seller] in adherence to the contract would the [Seller] be deemed to have performed its contractual obligation, and the [Buyer] would pay the [Seller] the last 10% of the purchase price for this, the [Seller] requested to incorporate Article 20 into the contract as the condition of the performance of the [Seller] and the warranty of the quality, which was agreed by both parties.

Article 20 states. "The manufacturer shall warrant the quality of the operation of equipment for the filling/sealing provided only when the moulds and injection molding machines are provided by the same supplier who shall take responsibility for the quality of the moulds and injection molding machines, and the aforesaid moulds and injection molding machines shall take the model bottle manufactured by the existing pre-mouldings as technical criteria,"

This was based on the following considerations of the [Seller]:

-   "The moulds and injection molding machines are provided by the same supplier."

-   Since the [Seller] shall warrant the quality of the equipment and its operation (Article 15), and the [Seller] was obliged to inspect the equipment before delivering to assure the quality and operation of the equipment according to the contract (Paragraph 1 of Article 16(a)), the [Seller] had to be assured of the prevention of the intermediary risk that the two suppliers (one for the moulds for manufacturing and the other for the injection molding machine) would blame each other for defects in the final product relating to the operation of the equipment. Accordingly, the [Seller] requested to incorporate the aforesaid prerequisite into the Contract which was agreed by both parties.

-   "Model bottle". Since the [Seller] accepted warranting the quality and operation of the equipment (Article 15), and the [Seller] was obliged under the contract for the pre-delivery inspection of the equipment to assure the quality and operation (Paragraph 1 of Article 16(a)), it was crucial for the [Seller] to perform the contractual obligations that the testing of the equipment should proceed in a way that the [Seller] could assure the acceptance of the equipment by the [Buyer]. The risk of disputes between the two parties on the quality and operation of the equipment would always arise unless the two parties consented to certain criteria to compare with. Otherwise, the [Seller] risked being blamed by the [Buyer] for performing not in accordance with the contract.

Thus, the aforesaid prerequisites were agreed to be incorporated into the contract by both parties, and both parties further agreed to draft the clause in such a manner to assure both of the aforesaid conditions as a prerequisite for the warranty and performance of the [Seller].

Article 20 of the Contract stipulated that: "The manufacturer shall warrant the quality of the operation of equipment for the filling/sealing provided only when the moulds and injection molding machines are provided by the same supplier who shall take responsibility for the quality of the moulds and injection molding machines, and the aforesaid moulds and injection molding machines shall take the model bottle manufactured by the existing pre-mouldings as technical criteria."

Article 16(a) further stipulated that: "The manufacturer shall conduct specific and comprehensive inspection in the quality, description, function and quantity/weight of the goods before delivering, and shall sign the certification stating that the goods are in conformity with the stipulation of the contract."

Therefore, the assurance of the quality and operation of the equipment was not only the general warranty of the [Seller] in Article 15 (concerning post-delivery quality and operation of the equipment), but also was incorporated specifically into the aforesaid text as the contractual obligation before the delivery of the equipment to the [Buyer] and during the final inspection and testing after the delivery and the installation of the equipment and part of the performance of the contract of the [Seller].

The index of description of the model bottle as reference object agreed by both parties was the basis of the pre-delivery testing, post-delivery inspection and testing, and the one-year warranty.

During the court session the Arbitration Tribunal held on 5 June 2002, the counsel of the [Buyer] acknowledged the linkage between the model bottle and the promise of the [Seller] for the operation of the equipment, and further acknowledged the fact that whether the samples purchased from the appointed sub-supplier in the charge of the [Buyer] conformed to the index of description of the model bottle shall only be confirmed by inspection and quality control.

The index of description of the model bottle was determined by the two parties at the meeting in K..., Sweden, from 27 May to 28 May 1997, which was before the signing of the Contract.

The [Seller] prepared the final index of description of the model bottle on 2 July 1997.

The two parties confirmed that the index of description of the model bottle was a prerequisite of the warranty for the quality and operation of the equipment by the [Seller] agreed to by both parties in different forms, as directly indicated in the following documents:

   1.   Article 20 of the contract;
 
   2.   A document signed by the representatives of the [Seller] and the [Buyer] dated 16 January 1998, especially the sentence: "The samples do not conform to the index of description of the model bottle determined by ... and ... (herewith)."

and as indirectly indicated in the following documents: (The purpose of providing the following documents by the [Seller] was to prove that the index of description of the model bottle specified part of the contractual obligations of the [Buyer], and the [Buyer] accepted such obligation which was to provide package samples in conformity with the model bottle to the [Seller] in order to assure that the [Seller] could conduct final pre-delivery testing and to assure the full payment to the [Seller] and the complete relief of the contractual obligation (except the twelve-month warranty ) if the [Seller] could pass final inspection and testing.)

   1.   Appendix D of the letter from E... Company on 15 November 1997. Please refer to "1. Sample", the content headlined by "2. Progress and Schedule", especially the blueprint, the inspection of the blueprint and the product of the mould; "4. The Coding of the Blowhole": especially the alteration of the mould rather than the alteration of the pre-moulding.
 
   2.   The facsimile from the [Seller] to E... Company on 14 November 1997: Please refer to the contents headlined by 1. Sample; 2. Progress and Schedule; 3. Blueprint. In addition, the second paragraph from the bottom on Page 2: "It is very important for us that you can explain to ... the importance to obtain correct samples from the pre-moulding."
 
   3.   The facsimile from the [Seller] on 21 November 1997, emphasizing in Paragraph 1: "The supplier of the mould made alterations on the blueprint. We feel that they do not fully understand the need and requirement of the widgets to achieve better production efficiency for the project."
 
   4.   The facsimile from the [Seller] to the [Buyer] on 19 November 1998, emphasizing in Paragraph 1: "Although the monitoring has not been completed yet, the report from Mr. S... so far is that the samples provided by you do not conform to the model bottle determined by the two parties," refer to the last paragraph at the same time. "I feel sorry for this news, but the operation of the equipment cannot meet the requirement as you expect if the packages do not meet certain quality requirements."
 
   5.   The facsimile from the [Seller] to the [Buyer] on 27 November 1998, emphasizing in Paragraph 2: "As mentioned in my facsimile (98704) on 19 November, the samples received by us do not conform to the model bottle agreed by both parties. Frankly speaking, the quality of the samples does not meet the criteria that we recommend be used in the manufacturing. If you use packages of this quality in the manufacturing, the efficiency of the equipment would be very low with a high risk of package leaking."
 
   6.   The facsimile from the [Seller] to the [Buyer] on 15 December 1998, the third paragraph from the bottom: "We hope that you can provide us with package samples in conformity with the model bottle agreed by both parties."
 
   7.   The facsimile from the [Seller] to the [Buyer] on 17 February 1999, especially Paragraph 2 and Paragraph 3:"We have explained in the previous exchange of facsimiles that the samples delivered to us do not conform to the model bottle agreed by both parties. We have suggested that you wait for the delivery of the equipment until the moment when you can produce the package samples in conformity with the model bottle which shall enable the [Seller] to assure the quality of operation of the equipment."
 
   8.   The facsimile from the [Seller] to the [Buyer] on 28 June 1999, especially Paragraph 3: '... only requires the quality of the package in conformity with the model bottle agreed by both parties. ... has stated that if ... fails to produce packages of agreed quality, we can accept your termination of the contract, but with the following conditions ..."

Conclusion

The description of the model bottle was the agreement on the index of technical description concerning the quality and operation of the equipment between the two parties.

Legal grounds

Article 60 of CISG stipulates that the buyer's obligation to take delivery includes "doing all the acts which could reasonably be expected of him in order to enable the seller to make delivery." Article 62 of CISG further stipulates that the seller, when the buyer failed to perform his obligations under Article 60 of CISG, may require the buyer to "perform his other obligations."

(D) The delivery

(1) The schedule of the delivery

Facts

The [Buyer] imposed certain requirements on the quality and operation of the equipment of the [Seller]. In order to meet the aforesaid requirements (the general warranty of the product indicated in Article 15 of the contract and the inspection and testing on the operation, which were the respective prerequisites for the [Seller] to make final delivery and receive the final payment), the [Seller] had to assure that the packages manufactured by the moulds fully conformed to the model bottle agreed by both parties. Otherwise the [Seller] would risk failing in the final inspection and testing and not being relieved of its contractual obligations.

As a prerequisite of the performance of the Contract by the [Seller], it was acknowledged by the [Buyer] that it would be of great importance for the [Seller] to test the samples provided by the [Buyer]. During the court session of the Arbitration Tribunal on 5 June 2002, the counsel of the [Buyer] acknowledged the direct linkage between the model bottle and the promise of the [Seller] on the operation of the equipment, and further acknowledged the fact that whether the samples purchased from the appointed sub-supplier in the charge of the [Buyer] conformed to the index of description of the model bottle shall only be confirmed by inspection and quality control.

Therefore, both parties agreed that the [Buyer] must assure that the manufacturer of the tool selected by the [Buyer] was able to provide the samples (which the [Buyer] was obliged to provide to the [Seller] for the test), and the samples shall conform to the model bottle. It was a condition of the schedule of delivery in the Contract that the [Buyer] could deliver the samples in conformity with the description of the model bottle on time.

However, the delivery of the samples by the [Buyer] was delayed for a long time. In fact, as acknowledged by the counsel of the [Buyer] in the court session on 5 June 2002, the [Buyer] delivered the samples to the [Seller] on 2 November 1998 at last. It was regretful that such samples were found not in conformity with the model bottle when the [Buyer] delivered the samples as the actual performance of contractual obligations. The time to deliver the equipment by the [Seller] was correspondingly delayed because the [Buyer] failed to deliver the samples as agreed by both parties and promised in the exchanges of mail by the [Buyer], which was not the fault of the [Seller].

(2) The delivery date

Facts

No finally-agreed delivery date ever existed. The delivery date was of no significance because the [Buyer], rather than the [Seller], failed to perform the contractual obligations. It was further proved below:

   1.  The two parties were still discussing the delivery date until May 1998, which was later by seven to eight months than the original delivery date stipulated in the Contract (October 1997 and November 1997), because of the alteration in the index of description of the equipment by the [Buyer].
 
   2.  Even in June 1998, the [Buyer] stated that it intended to start producing on 15 January 1999 and the [Seller] responded by stating that the [Buyer] was too optimistic. The [Seller] instead advised that (as indicated in the facsimile from the [Seller] to the [Buyer], and the minutes of the meeting in Shenzhen on 11 June 1998): "Mr. H... also estimates that it would be too optimistic to start producing on 15 January 1999. The injection molding machine may be delivered on time, but it takes about three months to conduct producing testing and inspection on the packages produced by the testing moulds, and another six months to manufacture, deliver and commission the moulds. According to Mr. H...'s opinion, it would be realistic to start producing nine to ten months later after the signing of the contract and the payment of the deposit, with all the technical problems with different suppliers being resolved."
 
   3.  Afterwards (11 June 1998), the final delivery was delayed repeatedly because the [Buyer] failed to deliver the samples to the [Seller]. The [Seller] repeatedly requested the [Buyer] to deliver the samples. As acknowledged by the [Buyer] in the court session on 5 June 2002, the [Buyer] failed to deliver the samples until early November 1998, although promising to arrange the delivery. The relevant documentary evidence concerning the samples can be further cited in the following text to prove the position of the [Seller] that no finally-agreed delivery date ever existed.
 
   4.  The [Seller] informed the [Buyer] repeatedly that the [Seller] could not make the delivery unless and until the quality of the samples provided by the [Buyer] could conform to the index of description of the model bottle. Therefore, the [Buyer] was informed indirectly that it should be held liable for the delayed delivery resulting from the failure to deliver the samples. As indicated in Item 1, Paragraph 3 of the telephone record between the [Seller] (J... H...) and the [Buyer] (C... J... Cui...) on 9 September 1998, "Mr. Cui told me that the samples were manufactured by the twelve-hole tool. He also asked me how long it would take to deliver the filling machine after we receive the samples. I told him that it depends on whether the samples received by us conform to the description of model bottle and the result of the operation test on the new samples. The correctness of the samples is of great importance, otherwise the operation of the filling machine would be jeopardized."
 
   5.  When the [Buyer] delivered to the [Seller] the samples for the final pre-delivery test on the filling machine (as acknowledged by the counsel of the [Buyer] in the court session on 5 June 2002), such samples were found not in conformity with the description of the model bottle.
 
   6.  The [Seller] confirmed the receiving of the ten thousand samples in the facsimile to the [Buyer] on 3 November 1998. The [Seller] reaffirmed that the delivery date shall be determined when the [Seller] confirmed the quality of the samples: "It would be too early to offer the testing or delivery schedule at this stage before we get the information of the quality of the samples."
 
   7.  The [Seller] reaffirmed again in the facsimile to the [Buyer] on 15 December 1998 that the delivery must be and would be made after the delivery of the samples in conformity with the model bottle. The [Seller] specially cited the third and fourth paragraph from the bottom: "Since we have not found any improvement or any intent to make improvement, we feel obliged to inform you that because of the quality of the package material, the commissioning or putting into operation of the equipment would be futile since neither you nor we would be satisfied with the operation. Your equipment has been laid aside. We need some more time after receiving acceptable samples from you and before our commissioning. We hope that you would talk with your supplier of the package, or replace your supplier, which would be better. We hope that you would deliver to us the package samples in conformity with the agreed model bottle soon."
 
   8.  The [Seller] stated in the facsimile to ... Agency (E...) on 16 December 1998 that: "As you have read, the packages are still not qualified. And we have not found any improvement either by ... or the supplier of packages. We know that it would be problematic to produce with packages of this quality. Therefore we do not think it is necessary to conduct commissioning before ... improving the quality of the packages. We have proposed our assistance in solving the problems with ... It depends on whether ... hopes to solve the problems now. In my personal opinion, the present Taiwanese supplier is not good enough. They do not follow our previous advice on how to manufacture the injection molding tool. They are trying to take a short cut and save the cost in the tools. I am looking forward to the opinions of you and ... on the solution of the problems."
 
   9.  The [Buyer] suggested in the facsimile to the [Seller] on 17 December 1998 that they demanded the immediate delivery of the equipment although they acknowledged the samples were not good enough (completely disregarding the agreed index of description of the model bottle).
 
   10.  In the facsimile from the [Seller] to ... Agency on 9 January 1999, the [Seller] informed the [Buyer] that the samples received were not in conformity with the model bottle, which was especially indicated in the third sentence of Paragraph 1: "We cannot guarantee the effect of the sealing since the samples are not in conformity with our blueprint. But we think that we can conduct disinfecting test on the samples if requested by ..." The attitude of the [Seller] was expressed in this paragraph that the uncertainty of the [Seller] with respect to the delivering date as a result of the samples' lack of conformity with the model bottle was completely in conformity with the stipulation of Article 20 and Article 16(a) of the Contract, respectively, concerning the delivery and the inspection.
 
   11.  The [Seller] stated in the facsimile to the [Buyer] on 17 February 1999 that: "We have explained in the previous exchange of facsimiles that the samples delivered to us are not in conformity with the model bottle agreed by both parties. We have suggested that you wait for the delivery of the equipment until you can produce the package samples in conformity with the model bottle which meet the criteria of the quality to enable ... to guarantee the operation of the equipment. ... of course will adhere to the requirement of ... and we are prepared to deliver the equipment. It is entirely your fault that the operation of the equipment will be completely out of the control of ... caused by the defects of the quality of the packages. I estimate that the equipment will be delivered in two months after your confirmation and issuance of the L/C according to the balance (US $280,000) between the pre-payment (US $120,000) and the purchase price (US $400,000). Under the aforesaid circumstance, the [Seller] cannot accept the payment of 10% of the purchase price after the inspection and test. We demand the aforesaid balance be paid two months before the shipment by the issuance of an irrevocable and confirmed L/C, and that the total amount be paid on seeing the shipping documents. We are looking forward to your confirmation and L/C in order for us to make the delivery."

Conclusion

The delivery was delayed indefinitely because the [Buyer] failed to deliver the samples in conformity with the description of the model bottle. The [Buyer] demanded the immediate delivery (facsimile of 17 December 1998 and of 10 February 1999, respectively). After receiving the facsimiles, the [Seller] proposed delivery with being relieved of the contractual warranty (facsimile of 17 February 1999), but the [Buyer] never agreed to that. The [Seller] did not intend to delay delivering. On the contrary, the [Seller] preferred to make the delivery as soon as possible because when the [Buyer] issued the L/C in accordance with the contract, the [Seller] would be paid the other 60% of the purchase price immediately once making the delivery.

However, the [Seller] regrettably realized that the [Seller] could not meet the requirement to conform to the model bottle unless the moulds made in Taiwan purchased by the [Buyer] could produce acceptable products. The [Seller] was required to conduct final pre-delivery test on the filling machines according to Article 16(a) of the Contract in order to perform contractual obligations. (The manufacturer shall conduct specific and comprehensive inspection in the quality, description, function and quantity/weight of the goods before delivering, and shall sign the certification stating that the goods are in conformity with the stipulation of the Contract, Article 16(a) of the Contract)

The [Buyer] claimed in the letter to the [Seller] of 17 December 1998 that the samples provided to the [Seller] by them were good enough ("I hereby reaffirm again that although the samples provided to you are not very good, they will not negatively affect the test on the operation of the filling machine." And "We are confident in the negotiation with our supplier of moulds, but it should not constitute the excuse for your refusal to deliver the filling machine.")

However, since the [Buyer] did not agree to take the delivery with relieving the [Seller] of the warranty for the quality and operation under the contract, the opinion of the [Buyer] concerning the quality of the samples would not be of significance for the performance of the [Seller].

In fact, if what was critical for the delivery was time rather than quality or conforming to the description as asserted by the [Buyer], the [Seller] proposed such solution.

Refer to the facsimile from the [Seller] to the [Buyer] on 15 December 1998: "We have explained in the previous exchange of facsimiles that the samples delivered to us are not in conformity with the model bottle agreed by both parties. We have suggested that you wait for the delivery of the equipment until you can produce the package samples in conformity with the model bottle which meet the criteria of the quality to enable ... to guarantee the operation of the equipment. ... of course will adhere to the requirement of ... and we are prepared to deliver the equipment. It is entirely your fault that the operation of the equipment will be completely out of the control of ... caused by the defects of the quality of the packages. I estimate that the equipment will be delivered in two months after your confirmation and issuance of the L/C according to the balance (US $280,000) between the pre-payment (US $120,000) and the purchase price (US $400,000). Under the aforesaid circumstance, the [Seller] cannot accept the payment of 10% of the purchase price after the inspection and test. We demand the aforesaid balance be paid two months before the shipment by the issuance of an irrevocable and confirmed L/C, and that the total amount be paid on seeing the shipping documents. We are looking forward to your confirmation and L/C in order for us to make the delivery."

Legal grounds for the conclusion

The [Seller] was entitled to invoke the defense of insecurity according to the stipulation of the law and the Contract.

-   The stipulation of the contract: See the above opinion of the [Seller].

-   The stipulation of the law

The notion of defense of insecurity was embodied and supported by the Law on Economic Contracts Involving Foreign Interest: "A party may temporarily suspend its performance of the contract if it has conclusive evidence that the other party is unable to perform the contract. However, it shall immediately inform the other party of such suspension."

The [Seller] informed the [Buyer] of the above suspension:

   -    Stating in the facsimile on 19 November 1998 that: "In this stage, I can tell you that it would be impossible to make the delivery in late November. I feel sorry for this, but the operation of the equipment cannot meet the requirement as you expect if the packages do not meet certain quality requirement."
 
   -    Stating in the facsimile on 27 November 1998 that: "Frankly speaking, the quality of the samples does not meet the criteria as we can recommend to be used in the manufacturing. If you use packages of this quality in the manufacturing, the efficiency of the equipment would be very low with a high risk of package leaking."
 
   -    Stating in the facsimile on 15 December 1998 that: "Since we have not found any improvement or any intent to make improvement, we feel obliged to inform you that because of the quality of the package material, the commissioning or putting into operation of the equipment would be futile since neither you or we would be satisfied with the operation. Your equipment has been laid aside. We need some more time after receiving acceptable samples from you and before our commissioning. We hope that you would talk with your supplier of the package, or replace your supplier, which would be better. We hope that you would deliver to us the package samples in conformity with the agreed model bottle soon."
 
   -    Stating in the facsimile on 17 February 1999 that: "We have explained in the previous exchange of facsimiles that the samples delivered to us are not in conformity with the model bottle agreed by both parties. We have suggested you wait for the delivery of the equipment until you can produce the package samples in conformity with the model bottle which meet the criteria of the quality to enable ... to guarantee the operation of the equipment."

(3) The samples

As stated above, the [Buyer] imposed certain requirements on the quality and operation of the filling machines provided by the [Seller]. In order to perform the contract pursuant to such requirements (embodied in the general warranty of the product in Article 15 of the contract and the inspection and test on the operation based on the actual performance, which were the prerequisite for the [Seller] to make final delivery and the payment of the final purchase price under the Contract), the [Seller] had to assure that the moulds were able to produce filling bottles completely in conformity with the model bottle agreed by both parties. Otherwise the [Seller] would risk failing in the final inspection and test and therefore being unable to perform its contractual obligations.

Therefore, the [Seller] required that the warranty of the quality and operation by the [Seller] was conditioned, which was in accordance with the agreement by both parties in Article 20 of the Contract: "The manufacturer shall warrant the quality of the operation of equipment for the filling/sealing provided only when the moulds and injection molding machines are provided by the same supplier who shall take responsibility for the quality of the moulds and injection molding machines, and the aforesaid moulds and injection molding machines shall take the model bottle manufactured by the existing pre-mouldings as technical criteria."

Article 16(a) further stipulated that: "The manufacturer shall conduct specific and comprehensive inspection in the quality, description, function and quantity/weight of the goods before delivering, and shall sign the certification stating that the goods are in conformity with the stipulation of the contract."

The importance for the [Seller] to test with the samples provided by the [Buyer] as the prerequisite for the performance by the [Seller] was acknowledged by the [Buyer]. During the court session of the Arbitration Tribunal on 5 June 2002, the counsel of the [Buyer] acknowledged the direct linkage between the model bottle and the promise of the [Seller] on the operation of the equipment, and further acknowledged the fact that whether the samples purchased from appointed sub-supplier in the charge of the [Buyer] conformed to the index of description of the model bottle could only be confirmed by inspection and quality control.

Therefore, both parties agreed that the [Buyer] must assure that the manufacturer of the tool unilaterally selected by the [Buyer] was able to provide the samples (the [Buyer] was obliged to provide to the [Seller] for the testing.) which shall conform to the model bottle. It was the condition of the schedule of delivery in the Contract that the [Buyer] shall deliver the samples in conformity with the description of the model bottle on time.

However, the delivery of the samples by the [Buyer] was delayed for a long time. In fact, as acknowledged by the counsel of the [Buyer] in the court session on 5 June 2002, the [Buyer] delivered the samples to the [Seller] on 2 November 1998 at last. It was regretful that the [Seller] immediately found such samples not in conformity with the description of the model bottle once the [Buyer] delivered the samples as the actual performance of contractual obligations. Thus, the delivery of the equipment by the [Seller] was delayed merely because the [Buyer] failed to deliver the samples as promised by the [Buyer] in the exchange of letters. This was not the fault of the [Seller].

Initially, the [Seller] advised the [Buyer] to purchase the tools from a credible supplier able to guarantee the delivery of tools with decent quality. However, the [Buyer] persisted in arranging the supply from a Taiwanese supplier regardless of the strong advice of the [Seller]. The persistence was the primary reason for the problem with the project.

The inferiority of the samples provided by the [Buyer] emerged as early as in November 1997. These problems were never resolved although the [Seller] reminded and tried to suggest various methods for improving for several times.

It was the contractual obligation of the [Buyer] that the samples must be in conformity with the description of the model bottle, which the [Buyer] failed to perform.

The [Seller] submitted the following evidence and pointed out that:

   1.   The facsimile on 6 November 1997, including the detailed remark on the defects of the samples provided, and advice on how to eliminate the defects. The facsimile also included the reminding of the [Seller] to the [Buyer] requiring good samples to conduct equipment commissioning: "The improvement on the widgets according to our aforesaid description must be accomplished in order for us to get the correct samples to conduct sealing test and equipment commissioning. We will refer to the samples produced by the pre-moulding when conducting filling test."
 
   2.   E... forwarded the opinion of the [Buyer] in the facsimile to the [Seller] on 13 November 1997 confirming that they understood the opinion of the [Seller] and would make some arrangement for the improvement by the supplier of the tools.
 
   3.   Item 1 of the facsimile from the [Seller] to E... on 14 November 1997 contemplated the inquiry of the [Seller] about when they could receive correct samples. The facsimile further indicated that the [Seller] kept trying to advise the improvement on the samples with defects, inferred by "the [progress of the project] and the schedule" in Paragraph 2. They emphasized the second paragraph from the bottom on Page 2: "It is very important for us that you can explain to ... the importance to obtain correct samples from the pre-moulding."
 
   4.   Further advice on how to improve and obtain the samples in conformity with the description of the model bottle was incorporated in the facsimile from the [Seller] to E... on 21 November 1997. In paragraph 1, it was explicit that the [Seller] discerned that in light of the situation afterward, the primary problem of the samples was that "the supplier of the mould made alterations on the blueprint. We feel that they do not fully understand the need and requirement of the widget to achieve better production efficiency for the project" which in fact was very likely to happen.
 
   5.   It was stated in the first two paragraphs in the document jointly-signed by the [Seller] and [Buyer] on 16 January 1998 that "With respect to the testing material, filling bottles and bottle bottom, we have received the result of inspection and testing of xxNBF600 this week. Both of us, ... and ..., confirm that it does not meet the required quality criteria: the samples are not in conformity with the description of the model bottle agreed by ... and ...."
 
   6.   The [Seller] mentioned to the [Buyer] the previous advice to improve the samples in the facsimile to the [Buyer] on 16 February 1998.
 
   7.   The [Seller] expressed in the facsimile to the [Buyer] on 2 April 1998 that the samples had been improved although further improvement was needed. But according to the opinion of the [Seller], it was qualified to complete the delivery of the first filling machine by using the samples available then.
 
   8.   The [Buyer] confirmed the existing defects in the samples in Paragraph 2 of the facsimile from E... to the [Seller] on 7 April 1998.
 
   9.   The [Seller] required the bulk of about ten thousand new samples for "the final operation and product testing (including the disinfection)" in the second paragraph from the bottom of the facsimile to E... on 23 April 1998.
 
   10.   The facsimile from the [Buyer] to the [Seller] on 20 July 1998. It was indicated in Paragraph 1, Page 2 that the [Buyer] promised to deliver the bulk of new samples in early August, "ten thousand filling bottles and their bottle caps will be delivered to you in early August as you required in order for you to deliver the equipment on time."
 
   11.   The telephone record between the [Seller] (J... H...) and the [Buyer] (Mr. ... Cui) on 9 September 1998, especially stated in Item 1 that "I told Mr. Cui that the delivery time of the filling machine was postponed, but we are still waiting for the ten thousand samples for the pre-delivery operation test. Mr. Cui told me that the Taiwanese supplier of the injection moulds delayed the delivery. The samples were expected to be delivered in early August, but the delivery has to be delayed now. The supplier told him that the preparation for the shipment of the samples would be completed on 20 September 1998 and then the samples would be sent to ...."
 
   12.   The [Buyer] confirmed that the samples would be sent out by 20 September 1998 in the facsimile to the [Seller] on 9 September 1998.
 
   13.   The [Buyer] confirmed that the samples would be sent out "next week" in the facsimile to the [Seller] on 16 September 1998.
 
   14.   The [Seller] confirmed the receiving of the ten thousand samples in the facsimile on 3 November 1998. The [Seller] stated that the [Seller] could not determine the delivery date until the [Seller] confirmed the quality of the samples: "It would be too early to offer the testing or delivery schedule in this stage before we get the information of the quality of the samples."
 
   15.   The [Seller] confirmed that the samples received on 2 November 1998 were not in conformity with the index of description of the model bottle in the facsimile from to the [Buyer] on 19 November 1998. The [Seller] further explained the reason why they failed to conform and stated as follows: "I can tell you that it will be impossible to deliver the filling machines at the end of November so far. I feel sorry for this, but the operation of the equipment cannot meet the requirement as you expect if the packages do not meet certain quality requirements."
 
   16.   The [Seller] reported the result of the quality inspection on the samples received from the [Buyer] by the [Seller] on 2 November 1998 in the facsimile to the [Buyer] on 27 November 1998, and emphasized that: "As mentioned in my facsimile (98704) on 19 November, the samples received by us do not conform to the model bottle agreed by both parties. Frankly speaking, the quality of the samples does not meet the criteria we recommend to be used in the manufacturing. If you use packages of this quality in the manufacturing, the efficiency of the equipment would be very low with a high risk of package leaking." The [Seller] even suggested the [Buyer] replace the supplier: "We have been suggesting you replace the supplier of the package for a long time, because we can infer from the samples that the tools used by the injection mould machine were not produced in a way assuring good quality."
 
   17.   The [Seller] explained in the facsimile to the [Buyer] on 15 December 1998 that it could only be indicated that the [Seller] found improvement on the samples even though the quality of the samples received in March was "relatively good", and further explained that the samples received in November were not improved "at all". "We can understand your surprise to a certain extent, because we told you that the samples received in March were acceptable. However, please be aware of the fact that we did not tell you that the quality of the samples in March was "relatively good". instead, we found some improvements by the supplier and the intention to improve the quality of injection mould machine and package of the supplier and you then. The packages we have received now do not show any improvement. In fact, we think they are worse than the ones sent out by you in March. Since we have not found any improvement or any intent to make improvement, we feel obliged to inform you that because of the quality of the package material, the commissioning or putting into operation of the equipment would be futile since neither you or we would be satisfied with the operation. Your equipment has been laid aside. We need some more time after receiving acceptable samples from you and before our commissioning. We hope that you would talk with your supplier of the package, or replace your supplier, which would be better. We hope that you would deliver to us the package samples in conformity with the agreed model bottle soon."
 
   18.   The [Seller] stated in the facsimile to ... Agency (E...) on 16 December 11998 that: "As you have read, the packages are still not qualified. And we have not found any improvement either by ... or the supplier of packages. We know that it would be problematic to produce with packages of this quality. Therefore we do not think it is necessary to conduct commissioning before ... improves the quality of the packages. We have proposed our assistance in solving the problems with ... It depends on whether ... hopes to solve the problems now. In my personal opinion, the present Taiwanese supplier is not good enough. They do not follow our previous advice on how to manufacture the injection molding tool. They are trying to take a short cut and save the cost in the tools. I am looking forward to the opinions of you and ... on the solution of the problems.
 
   19.   The [Buyer] acknowledged that "the quality of the samples is not good enough" in the facsimile to the [Seller] on 17 November 1998.
 
   20.   In the facsimile from the [Seller] to ... Agency on 9 January 1999, the [Seller] informed the [Buyer] that the samples received were not in conformity with the model bottle, which was especially indicated in the third sentence of Paragraph 1: "We cannot guarantee the effect of the sealing since the samples are not in conformity with our blueprint. But we think that we can conduct disinfecting test on the samples if requested by ...." The attitude of the [Seller] was expressed in this paragraph that the uncertainty of the [Seller] with respect to the delivery date as a result of the samples' lack of conformity with the model bottle was completely in conformity with the stipulation of Article 20 and Article 16(a) of the Contract, respectively, concerning the delivery and the inspection.
 
   21.   The [Seller] stated in the facsimile to the [Buyer] on 17 February 1999 that: "We have explained in the previous exchange of facsimiles that the samples delivered to us are not in conformity with the model bottle agreed by both parties. We have suggested you wait for the delivery of the equipment until you can produce the package samples in conformity with the model bottle which meet the criteria of the quality to enable ... to guarantee the operation of the equipment."

Conclusion

Both parties agreed on certain criteria for quality and operation of the equipment for the comparative testing with the description of the model bottle. Such criteria for quality and operation would be determined after the [Seller]'s testing on the package samples provided by the [Buyer].

The [Buyer] breached the contract because of:

Legal grounds

According to the contract (Article 15, Article 16(a) and Article 20), and in connection with the aforementioned exchange of mail, it can be proved that the [Buyer] had taken the obligation to provide the [Seller] with samples in conformity with the model bottle according to the practice of the transaction. Although the aforesaid obligation was not explicated in the contract, it was clearly indicated in the mutual letters that both parties intended to impose such obligation upon the [Buyer]. Under this circumstance, such intent, as the evidence of the understanding of both parties, should be endowed equal status as the contract (Article 8 of CISG).

Article 60 of CISG stipulates that the buyer's obligation to take delivery includes "doing all the acts which could reasonably be expected of him in order to enable the seller to make delivery." Article 62 of CISG further stipulates that the seller, when the buyer failed to perform his obligations under Article 60 of CISG, may require the buyer to "perform his other obligations."

Remarks

It was interesting that the [Buyer] never realized and accepted the repeatedly complaints of the [Seller] with respect to the inferiority of the samples. The [Buyer] still refused to acknowledge these problems in the court session on 5 June 2002, and, on the contrary, insisted on alleging the nonexistence of severe problem of the quality and alleging that the [Seller] was excessively serious and cautious and used the samples as the excuse for refusal to deliver the equipment.

However, it was conspicuous that the [Buyer] paid special attention to the inferiority of the quality of the package produced by the moulds and injection mould machine of the Taiwanese supplier raised by the [Seller]. (although the [Buyer] never acknowledged that to the [Seller] publicly, the reason of which was obvious for common sense.) It was indicated in the evidence submitted to the Arbitration Tribunal that the [Buyer] already ordered the injection mould machine from E..., the supplier originally recommended by the [Seller].

(4) The description of the model bottle: a prerequisite for the delivery of the equipment by the [Seller]

The [Seller] deemed the description of the model bottle as a prerequisite for the delivery of the filling machine by the [Seller]. This should be comprehended, rather than solitarily, in connection with the obligation of warranty of the quality and operation by the [Seller] to the [Buyer] under the Contract, especially with the obligation expressed in Article 16(a) of the Contract.

Article 20 of the Contract stipulates that: "The manufacturer shall conduct specific and comprehensive inspection in the quality, description, function and quantity/weight of the goods before delivering, and shall sign the certification stating that the goods are in conformity with the stipulation of the Contract."

Article 16(a) further stipulates that: "The manufacturer shall warrant the quality of the operation of equipment for the filling/sealing provided only when the moulds and injection molding machines are provided by the same supplier who shall take responsibility for the quality of the moulds and injection molding machines, and the aforesaid moulds and injection molding machines shall take the model bottle manufactured by the existing pre-mouldings as technical criteria."

Therefore, the assurance of the quality and operation was the contractual obligation and part of the performance of the Contract of the [Seller]. It did not merely mean the general guaranty stipulated in Article 15 (relating to the post-delivery quality and operation), but was specially stipulated in related issues before the delivery to the [Buyer].

The delivery of the equipment by the [Seller] was conditioned upon the pre-delivery inspection including testing on the operation and quality conducted by the [Seller] and then the signing of certificate stating that the goods conformed to the description of the Contract (i.e., the various descriptions incorporated in the Contract and the appendix) by the [Seller]. According to the Contract, the certificate shall "constitute an integral part to present for negotiation/collection to the paying bank, but be not deemed as the final cognizance on quality, description, function and quality/weight. The details and result of the test conducted by the manufacturer shall be recorded in the statement as the appendix of the aforesaid certificate."

In order for the [Seller] to conduct such a definite comprehensive inspection on the equipment (including the operation of the equipment), it was absolutely necessary for the [Seller] to be provided with samples for the equipment commissioning which shall conform to the requirement stipulated in Article 20 of the Contract.

The [Buyer] was informed that the [Seller] could not conduct pre-delivery test and the reason for that by the facsimile from the [Seller] on 15 December 1998. The [Seller] reaffirmed that the delivery could not be made until the [Buyer] provided samples in conformity with the description of the model bottle. The [Seller] especially mentioned in the third and fourth paragraphs from the bottom: "Since we have not found any improvement or any intent to make improvement, we feel obliged to inform you that because of the quality of the package material, the commissioning or putting into operation of the equipment would be futile since neither you or we would be satisfied with the operation. Your equipment has been laid aside. We need some more time after receiving acceptable samples from you and before our commissioning. We hope that you would talk with your supplier of the package, or replace your supplier, which would be better. We hope that you would deliver to us the package samples in conformity with the agreed model bottle soon."

The [Seller] stated in the facsimile to ... Agency (E...) on 16 December 1998 that: "As you have read, the packages are still not qualified. And we have not found any improvement either by ... or the supplier of packages. We know that it would be problematic to produce with packages of this quality. Therefore, we do not think it is necessary to conduct commissioning before ... improves the quality of the packages. We have proposed our assistance in solving the problems with .... It depends on whether ... hopes to solve the problems now. In my personal opinion, the present Taiwanese supplier is not good enough. They do not follow our previous advice on how to manufacture the injection molding tool. They are trying to take a short cut and save the cost in the tools. I am looking forward to the opinions of you and ... on the solution of the problems."

During the court session of the Arbitration Tribunal on 5 June 2002, the [Buyer] acknowledged the direct connection between the model bottle and the warranty of performance by the [Seller].

During the same court session, the [Buyer] further acknowledged that the warranty of the [Seller] for the operation of the equipment depended on moulds and moulding equipment which were produced in conformity with the quality and description of the model bottle.

The [Buyer] further acknowledged that the only method to confirm that the moulds and moulding equipment conformed to the index of description of the model bottle was through the commissioning on the actual equipment provided by the [Seller] and the inspection and quality control on the package samples produced by the moulds and moulding equipment.

Conclusion

As proved by Subtitle 3 "Samples" of Item 3 in the Statement of Defense by the [Seller], the [Seller] never received the samples required for the equipment commissioning that could confirm the completion of manufacturing the equipment and its conformity with the description stipulated by the Contract.

Therefore, the [Buyer] could not conduct the pre-delivery inspection. According to Article 16(a) of the Contract, the [Seller] could not, and was not obliged to, deliver the equipment to the [Buyer] either in accordance with the Contract or the law (CISG).

(E) The suspension of performance by the [Seller]: legal grounds:

Based on the above facts, the [Seller] was entitled to invoke the right of defense of insecurity, in which way the [Seller] already acted.

In accordance with the contract: see the Statement of Defense by the [Seller]

In accordance with the law:

The notion of defense of insecurity is embodied and supported by Article 17 of the Law on Economic Contracts Involving Foreign Interest: "A party may temporarily suspend its performance of the contract if it has conclusive evidence that the other party is unable to perform the contract. However, it shall immediately inform the other party of such suspension."

The [Seller] informed the [Buyer] of the above suspension:

-   Stating in the facsimile on 19 November 1998 that: "At this stage, I can tell you that it would be impossible to make the delivery in late November. I feel sorry for this, but the operation of the equipment cannot meet the requirement as you expect if the packages do not meet certain quality requirement."

-   Stating in the facsimile on 27 November 1998 that: "Frankly speaking, the quality of the samples did not meet the criteria as we can recommend using in the manufacturing. If you use packages of this quality in the manufacturing, the efficiency of the equipment would be very low with a high risk of package leaking."

-   Stating in the facsimile on 15 December 1998 that: "Since we have not found any improvement or any intent to make improvement, we feel obliged to inform you that because of the quality of the package material, the commissioning or putting into operation of the equipment would be futile since neither you or we would be satisfied with the operation. Your equipment has been laid aside. We need some more time after receiving acceptable samples from you and before our commissioning. We hope that you would talk with your supplier of the package, or replace your supplier, which would be better. We hope that you would deliver to us the package samples in conformity with the agreed model bottle soon."

-   Stating in the facsimile on 17 February 1999 that: "We have explained in the previous exchange of facsimiles that the samples delivered to us are not in conformity with the model bottle agreed by both parties. We have suggested you wait for the delivery of the equipment until you can produce the package samples in conformity with the model bottle which meet the criteria of the quality to enable ... to guarantee the operation of the equipment."

(F) The termination [avoidance] of the Contract by the [Buyer]

It is stipulated in Article 49 of CISG that: "(1) The buyer may declare the contract avoided: (a) if the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract; or (b) in case of non-delivery, if the seller does not deliver the goods within the additional period of time fixed by the buyer in accordance with paragraph (1) of article 47 or declares that he will not deliver within the period so fixed. ..."

Applicability

In response to the aforesaid Article 49(1)(a), the [Buyer] never asserted the existence of a fundamental breach of contract, and there was no breach of contract by the [Seller]. The delay of delivery was caused by the conduct of the [Buyer] (i.e., the [Buyer] failed to deliver qualified samples.)

If the [Buyer] had alleged (had not done in this way until now) that the [Buyer] had fixed (or at least consented) an additional period for the performance, this article might have been applied. However, in any event, the aforesaid period had been extended due to the delayed delivery of the samples and the following problem of quality (please note that the [Buyer] did not confirm the application of 72(1)(b).) Therefore, the [Buyer] lacked valid legal ground to terminate [avoid] the contract.

It is stipulated in Article 72 of CISG that: "(1) If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoided; (2) If time allows, the party intending to declare the contract avoided must give reasonable notice to the other party in order to permit him to provide adequate assurance of his performance."

Applicability

The [Seller] claimed that the termination [avoidance] of the contract by the [Buyer] on 19 May 1999 could only be defined as a termination based on anticipatory breach of contract (in contrast to the termination based on actual breach of contract). But this case did not fit into what was described in Article 72, therefore, it can be concluded that the [Buyer] was not entitled to terminate [avoid] the contract by the method adopted.

It is stipulated in Article 80 of CISG that: "A party may not rely on a failure of the other party to perform, to the extent that such failure was caused by the first party's act or omission."

Applicability

The [Seller] already proved that it was entirely because of the failure to deliver package samples in conformity with the description of the model bottle by the [Buyer] that the [Seller] could not perform the contract. The [Seller] further invoked the right of defense of insecurity under the related law and informed the [Buyer]. Therefore, the [Buyer] was not entitled to terminate [avoid] the contract according to the law.

Conclusion

The ex parte termination [avoidance] of contract by the [Buyer] was groundless both in the CISG and in the Law on Economic Contracts Involving Foreign Interest. Therefore, the ex parte termination of contract in violation of Article 80 of CISG by the [Buyer] should be deemed as a breach of contract by the [Buyer]. Accordingly, the [Buyer] should be held liable for breach of contract.

(G) The reason why the [Buyer] was not entitled to a refund of the prepayment

The [Buyer] terminated [avoided] the contract when not entitled to by the law, therefore the [Buyer] could not claim the remedy conferred by the lawful termination of contract. If the [Buyer] was entitled to terminate the contract, the [Buyer] shall request the refund of the prepayment and the damages resulting from the breach of contract by the [Seller] only under such circumstance.

The [Buyer] could not assert any claim towards the [Seller] lawfully because the termination of the contract was wrongful.

The [Seller] asserted, and was still entitled to request damages for the breach of contract by the [Buyer] (because of the wrongful termination of the [Buyer]). The loss suffered by the [Seller] grossly exceeded the amount of the purchase price paid under such circumstance.

In response to the statement of the [Buyer], the [Seller] reaffirmed the following opinions:

   1.   The [Buyer] still failed to explicate the legal ground of the claims. The facsimile from the [Buyer] on 19 May 1999 was the termination of the contract (and confirmed by the facsimiles from the [Seller] on 31 May 1999 and 28 June 1999, respectively). The fact that the [Buyer] kept no contact with the [Seller] after the summer of 1999 further proved the aforesaid fact. In fact, the silence of the [Buyer] was broken until the request for arbitration by the [Buyer] in the second half of 2001. However, the [Buyer] asserted that "... fails to deliver the equipment until now" in the statement submitted by the [Buyer]. It was indicated in the aforesaid text that the [Buyer] alleged that the contract was valid and still expected the delivery of the equipment by the [Seller] according to the contract. The [Seller] hereby required the [Buyer] to clarify whether the contract was valid (if valid, the content of the contract), or it could be determined that the contract was terminated in May 1999 (which had been the prerequisite in the arbitration proceeding until then).
 
   2.   In the statement submitted, the [Buyer] claimed that the purchase of equipment by the [Buyer] in 1998 from a competitor of the [Seller] was a "self-help" remedy of the [Buyer]. The [Buyer] never informed the [Seller] when purchasing the aforesaid equipment; therefore, the above explanation seemed mere varnish afterward. The [Seller] noted that the [Buyer] purchased a "substitute product", for which the [Buyer] could no longer require the performance. (Article 46(1) of CISG). In addition, both parties agreed to delay the delivery date, therefore the [Buyer] was not entitled to purchase a "substitute product" as the remedy, which was inconsistent with the performance by the seller. (Article 48(2) of CISG).

The [Buyer] reasserted the following additional opinion in response to the defense of the representative of the [Seller]. The [Buyer] stated that the two primary excuses of the [Seller] for refusing to deliver the goods to the [Buyer] were:

   1.   Concern of the disclosing of the [Seller]'s expertise. The [Seller] decided to refuse the delivery of the equipment immediately after hearing that the [Buyer] turned to other manufacturers for the purchase of the equipment. However, the [Buyer] could not find any text related to "expertise" and relevant stipulations concerning the so-called "expertise" of the [Seller] during the sale of the equipment between the two parties or after the performance of the Contract in the main Contract, nor could the [Buyer] construe the existence of privity between the two parties from the exchange of mails and facsimiles.
 
   2.   The quality of the "testing bottle." All of the evidence of the [Seller] on the quality of the testing bottles provided by the [Buyer] was ex parte opinions of the [Seller]. Therefore, the [Buyer] wondered about the feasibility of entrusting a third party with professional qualification to appraise the quality of the testing bottle.

B. OPINION OF THE ARBITRATION TRIBUNAL

1. Applicable law

Since the two parties to the Contract have their places of business in China and Sweden, respectively, and both States are Contracting States of the United Nations Convention on Contracts for the International Sale of Goods, the provisions of the CISG shall apply to this case. Besides, since this case involves the contract for import of equipment, the law of the place for the installation and operation of the equipment, which is the law of People's Republic of China, is applicable according to the conflict rule of the seat of arbitration, China. Therefore, the relevant law of PRC shall apply to issues not stipulated in the CISG.

2. Whether the testing bottles were qualified

It is indicated in the several exchange of mail, and especially proved by the Test Material signed by ... Cui, Representative of the [Buyer], and K..., Representative of the [Seller], on 16 January 1998 that the testing bottles provided by the [Buyer] indeed failed to meet the quality requirement for a long period of time after the delivery date stipulated by the Contract. Besides, the pictures in the [Buyer]'s publications in the theme of "New ..., Thorough Femininity" were printed with the indication of the E... equipment, which also proves the fact that since the testing bottles provided by the Taiwanese manufacturer previously selected by the [Buyer] failed to meet the quality requirement, they were replaced by the products of E... Co. recommended by the [Seller]. However, the Arbitration Tribunal notes simultaneously a letter dated 2 April 1998 from the [Seller] to B... F... among the evidence submitted by the [Seller], in which the [Seller] stated that "Those new samples look much better even if they still have a few things that can be better. N... has, however, decided that those samples are good enough for delivery of the first machine." This indicates that on 2 April 1998, the quality of the testing bottles provided by the [Buyer] had met the requirement for the [Seller] to deliver the first machine. However, during the further process for the preparation to deliver the equipment, the [Seller] found that the [Buyer] purchased relevant equipment from the [Seller]'s competitor, and the [Buyer] failed to continue cooperating with the [Seller] in the further preparation, which led to the final failure to deliver the equipment.

3. Whether meeting the criteria for the testing bottle may be taken as a prerequisite for the delivery of the equipment

The key to the matter lies in whether it may be taken as the prerequisite for the delivery of the equipment that the testing bottles shall meet certain criteria under the aforesaid analysis. The [Seller] alleged that this was a prerequisite because the disqualification of the testing bottles would cause the operation of the equipment provided by the [Seller] to fail to meet the requirement of the Contract, which would expose the [Seller] to the risk of being denied the remaining purchase price of the equipment. The [Buyer] alleged that [Seller]'s position lacked legal ground and was not supported by relevant clauses of the contract. After deliberate review, the Arbitration Tribunal finds that, taking the whole Contract and the statements of the [Buyer] and the [Seller] together, indeed no clause in the Contract stipulated that the [Seller] may take it as the prerequisite to delivery of the equipment that the testing bottles shall be in conformity with the quality requirement. However, Article 16(a) of the contract stipulated that, "Before the delivery of the goods, the manufacturer shall conduct accurate and comprehensive inspection in the quality, description, function, quantity/weight of the goods ordered, and issue certification stating that the goods are in conformity with the stipulation of the Contract. This certification is part of the documents supposed to be presented to the bank for negotiation/collection of the purchase price...." In addition, as indicated in the evidentiary material, the [Buyer] did request the [Seller] to deliver the equipment to the [Buyer] even when the testing bottles did not fully conform to the requirement. And the [Seller] replied by stating that the [Seller] would deliver the goods if the [Buyer] would confirm that the delivery may be made before the successful testing, and that the related liability shall be held by the [Buyer] and the L/C liquidating the remaining purchase price shall be issued. However, it ended up to no material effect as indicated by the relevant documents.

In light of these facts, the Arbitration Tribunal holds that the Contract was based on the mutual consent of the two parties. The [Buyer] may disclaim its own right, but the right of the [Seller] must not be threatened by the disclaiming of the [Buyer], and the [Seller] should have been granted the corresponding guarantee by the [Buyer]. Otherwise, the [Seller] was entitled to deny the request of the [Buyer]. Therefore, because of the disqualification of the testing bottles, the [Seller] shall not be held liable for the non-delivery of the goods.

4. Whether the [Seller] was entitled to refuse the delivery of equipment for fear of the disclosing of expertise

Another important reason for the failure to deliver the equipment was the possibility of disclosing expertise in addition to the aforesaid testing bottle issue. The [Seller] alleged that the [Buyer] purchased two filling machines from J... K... & GmbH Co., a competitor of the [Seller]. The [Buyer] did not deny this. [Buyer] stated that it was compelled to turn to other suppliers because of the long-term non-delivery by the [Seller]. The [Seller], however, asserted that since the [Buyer] intended to adopt the packages developed by the [Seller] to the filling machines provided by J... K... & GmbH Co., the [Seller] was concerned that they would infringe upon the patent rights of the [Seller], and expressed this concern to the [Buyer]. The Arbitration Tribunal holds that since both parties acknowledged that the purpose of purchasing the equipment by the [Buyer] was to distinguish the packages of the oral solution from the ones of the other domestic manufacturers and avoid the imitation of the products, both parties made considerable efforts for this purpose; but the adoption of the packages developed by the [Seller] in the filling machines of J... K... & GmbH Co. would expose the new expertise of the [Seller] to the attention of its competitors, which indeed posed a threat to the confidentiality of the [Seller]'s expertise. Therefore, the concern of the [Seller] was reasonable. In other words, the [Seller] was entitled to refuse the delivery of the equipment without protection of the confidentiality of its expertise.

5. The nature of the deposit and whether it should be refunded

Article 10 of the Contract signed by the parties stipulated the condition of payment as: "Thirty percent of the total amount of the contract shall be remitted via telegraph transfer by the buyer as deposit within two weeks after the signing of the contract." The Arbitration Tribunal notes that the parties adopted the word "deposit" in the Contract. However, the Contract in this case was signed on 15 September 1997. The Law on Economic Contracts Involving Foreign Interest of the People's Republic of China applicable then did not stipulate the issue on "deposit", but the Guaranty Law of the People's Republic of China entering into force then covered the issue in a relevant manner. Considering that the law of the People's Republic of China applies to this case, the word "deposit" adopted by both parties shall be deemed as the deposit under the law of the People's Republic of China. In other words, if the party paying the deposit defaults, he shall not be entitled to demand the refund of the deposit; however, if the party accepting the deposit defaults, he shall refund twice the amount of the deposit.

The amount of the deposit under this contract was US $120,000. According to the aforesaid analysis of the Arbitration Tribunal, the [Buyer] was primarily liable for the default of the Contract because of the failure to cooperate fully with the [Seller] by failing to provide testing bottles conforming to the quality requirement and purchasing the same equipment from the competitor of the [Seller] without prior informing and reassuring the [Seller]. The [Buyer] did not perform the obligations stipulated in the Contract, and therefore is not entitled to demand the refund of the deposit.

6. As to the issue of the request of a convincing inspection report to prove the disqualification of the testing bottles and the [Buyer]'s request that the Arbitration Tribunal entrust a third party with professional qualification to appraise the quality of the testing bottle, based on the analysis in the first part of the opinion and for the same reason, the Tribunal holds that it is sufficient to accept the truth of the claim of the [Seller] based on the evidence provided by the [Seller], and unnecessary to entrust a third party to appraise.

7. The arbitral claims of the [Buyer]

As to the first arbitral claim of the [Buyer], it is denied by the Arbitration Tribunal based on the aforesaid analysis.

As to the second arbitral claim of the [Buyer], i.e., the claim for interest. Since the first claim of the [Buyer] for the principal has been denied, the Arbitration Tribunal also denies the second claim of the [Buyer] for interest.

As to the third claim of the [Buyer], i.e., the claim for the return of the testing moulds or the amount of equivalent value. Since the testing moulds are the property owned by the [Buyer], and the [Buyer] failed to provide the amount of the corresponding value, the Arbitration Tribunal holds that the [Seller] shall return the testing moulds of the [Buyer].

The entire arbitration fee shall be borne by the [Buyer].

C. THE AWARD

According to the opinion of the majority of the arbitrators, the Arbitration Tribunal hereby rules as follows:

   1.   The [Seller] shall return the testing equipment of the [Buyer] to the [Buyer];
 
   2.   The other arbitral claims of the [Buyer] are denied;
 
   3.   The [Seller] shall bear the entire US $1,974 for the expense incurred by the foreign arbitrator, which shall be offset by the prepayment of the [Seller];
 
   4.   The [Buyer] shall bear the entire arbitration fee, 44,860 RMB, which shall be offset by the prepaid arbitration fee paid by the [Buyer].

This is the final award, which shall be effective as of the day of this award.


FOOTNOTES

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

** Xiao Ling LL.M. candidate in General Legal Studies, New York University School of Law; LL.B. Fudan Law School, 2007.

*** William Zheng is a graduate of the Pace University School of Law. He is Special Counsel with the Shanghai office of Sheppard Mullin Richter & Hampton, LLP. Julie Yu, China Consultant, Sheppard Mullin Richter & Hampton Shanghai office. Ms. Yu actively participates in pro bono projects, such as volunteering at the Legal Aid Centre.

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Pace Law School Institute of International Commercial Law - Last updated May 15, 2008
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