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CISG CASE PRESENTATION

China 3 June 2003 CIETAC Arbitration proceeding (Clothes case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/030603c1.html]

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

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Case identification

DATE OF DECISION: 20030603 (3 June 2003)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2003/01

CASE NAME: Unavailable

CASE HISTORY: For related proceeding, see CIETAC Arbitration proceeding of 31 December 2003 (Clothes case)

SELLER'S COUNTRY: People's Republic of China (respondent)

BUYER'S COUNTRY: Australia (claimant)

GOODS INVOLVED: Clothes


UNCITRAL case abstract

PEOPLE'S REPUBLIC OF CHINA: China International Economic & Trade Arbitration
Commission (CIETAC) (now South China Branch) 3 June 2003 (Clothes case)

Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/112],
CLOUT abstract no. 1097

Reproduced with permission of UNCITRAL

Abstract prepared by Haozhen Duan

An Australian buyer and a Chinese seller signed a contract for the purchase of garments. The buyer paid the amount due for the goods and shipping, but the seller delayed the delivery of the goods and the quality of the garments was very poor, which caused the buyer's clients to return them and refuse payment. The buyer had numerous fruitless discussions with the seller, and then initiated arbitration proceedings and asked the Arbitration Tribunal to order the seller to refund the money for the goods, shipping costs and loss of interest.

The parties had not established in the contract a law to govern it. In view of the fact that the place of business of the parties was in two States Parties to the CISG, the Tribunal ruled under Article 1 of the Convention that the dispute should be governed by the Convention.

The Tribunal held that the seller had violated the provisions of the contract, that the goods delivered had serious quality problems and that they were not fit for commercial sale (Article 35 (2) CISG), which had prevented the buyer from selling the goods to its clients. Under Article 45 CISG, the seller should assume responsibility for breach of contract. The Tribunal also noted that the buyer had informed the seller of the quality problems within a reasonable time limit, and therefore, had not lost its right to claim damages (Article 39 CISG).

The Tribunal, however, held that the amount of compensation demanded by the buyer for the loss of profit needed to be adjusted, as it was too high and violated the provisions of Article 74 of the Convention. The Tribunal ruled that the seller should refund the money for the goods and shipping costs to the buyer and compensate it for a certain loss of profit. The Tribunal finally held that the return of the goods did not have any practical significance, and if the seller requested such return it should bear the relevant costs.

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Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 8 ; 30 ; 35(2)(a) ; 39 ; 74 [Also cited: Article 45 ]

Classification of issues using UNCITRAL classification code numbers:

8A [Interpretation of party's statements or other conduct: intent of party making statement or engaging in conduct];

30A [Obligations of seller: deliver the goods as required by the contract and the Convention];

35A ; 35B1 [Conformity of goods: quality, quantity and description required by contract; Requirements implied by law: fitness for purposes for goods of same description];

39A ; 39B [Requirement to notify seller of lack of conformity: buyer must notify seller within reasonable time; Cut-off period of two years];

74A ; 74A1 ; 74B [General rules for measuring damages: loss suffered as consequence of breach; Includes loss of profit; Outer limits of damages: foreseeability of loss]

Descriptors: Intent ; Conformity of goods ; Lack of conformity notice, timeliness; Damages ; Foreseeability of damages

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Editorial remarks

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

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

Clothes case (3 June 2003)

Translation [*] by Meihua Xu [**]

Edited by John Zhu [***]

The China International Economic and Trade Arbitration Commission Shenzhen Sub-Commission (hereafter, the "Shenzhen Sub-Commission") accepted the case on 18 July 2002 according to:

   -    The arbitration clause in Sales Contract No. HL0001 (hereafter, the "Contract") signed by Claimant [Buyer], Australia __ Company, and Respondent [Seller], China __ Company; and
 
   -    The written arbitration application submitted by [Buyer].

The Arbitration Rules of the Arbitration Commission (hereafter, the "Arbitration Rules"), which became effective on 1 October 2000 are applicable to this case.

On 5 August 2002, the Secretariat of the Shenzhen Sub-Commission sent the arbitration notice, the [Buyer]'s arbitration application and the evidence, the Arbitration Rules and the attached list of arbitration fees, and the arbitrators' name list to the [Seller] by express mail. Corresponding documents were sent to the [Buyer] as well.

On 31 July 2002, by written document, the [Buyer] appointed Mr. Yu as its arbitrator, and on 27 August 2002, the [Seller] appointed Mr. Weng as its arbitrator by written document. The Chairman of the Arbitration Commission appointed Mr. Huang as the Presiding Arbitrator since the two parties failed to jointly appoint or ask the Chairman of the Arbitration Commission to appoint a Presiding Arbitrator. On 3 September 2002, the aforesaid three arbitrators formed the Arbitration Tribunal to hear this case.

The Secretariat of the Shenzhen Sub-Commission decided to schedule a court session on 11 October 2002. The Arbitration Tribunal formation notice and the court session notice were sent to the two parties by express mail. Because Mr. Weng had to attend an import meeting, the Secretariat of the Shenzhen Sub-Commission postponed the court session to 30 October 2002. The court session postponement notices were sent to the two parties on 30 September 2002. They have been received by the parties.

On 30 October 2002, a court session was held in Shenzhen. The Legal Representative and agent of the [Buyer] and the agent of the [Seller] attended the court session.

The Arbitration Tribunal heard the parties' statements, verifications on evidence, and arguments, and made investigations on the facts of this case. The parties presented final statements and on 6 November 2002, they submitted written statements on the dispute in this case.

This case has been concluded and the Arbitration Tribunal handed down this award by consent.

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

I. FACTS

On 23 May 2000, the [Buyer] and the [Seller] signed the Contract with the following terms:

   -    Goods: Clothes in various designs;
   -    Quantity: Various quantities from 1,664 pieces to 2,080 pieces to 2,080 suits;
   -    Price: The total price is US $27,102.40;
   -    Packaging: See manufacturing list (i.e., manufacturing and processing list - note by the Arbitration Tribunal);
   -    Loading marks: See manufacturing list (same note as above);
   -    Loading date: 20 June 2000;
   -    Loading port: China;
   -    Destination port: Sydney, Australia;
   -    Insurance: [Buyer] shall purchase the insurance by itself;
   -    Payment: 30% shall be paid as a deposit and 70% shall be paid upon delivery;
   -    Quality guarantee: Based on the client's confirmation;
   -    Loading notice: After loading, the [Seller] shall inform the [Buyer] of the contract number, item number, goods name, quantity, ship's name, and shipment date; if the [Seller] fails to perform the aforesaid obligations, it shall compensate reasonable losses and damages incurred thereof;
   -    Arbitration: Any dispute arising from this Contract shall be settled by negotiation. If the negotiation fails, the dispute shall be submitted to the Arbitration Commission to arbitrate in accordance with the Arbitration Rules. The decision of the Arbitration Commission shall be final and have binding effect on the parties then in effect. The arbitration fee shall be borne by the losing party;
   -    Supplementary clause: There are two original contracts. Each party keeps one as evidence.

POSITION OF THE PARTIES

[Buyer]'s position

The [Buyer] alleges that:

      The [Buyer] had resold the goods to its client, G Company, for Australian dollars [AUD] 112, 444.80, i.e., US $66,556.00. If the transaction had been performed smoothly, the [Buyer] would have earned a profit of US $35,117.00.

After the conclusion of the Contract, the [Buyer] paid the entire contract price and transportation fee, totaling US $31,438.28. However, the [Seller] did not deliver the goods until one month later (on 20 July 2000 by air shipment). The clothes delivered by the [Seller] had severe defects, and G Company returned the goods to the [Buyer] and refused to make payment for the goods. Later, the [Buyer] had the goods inspected by an inspection agency, with the result that the quality of the goods was poor.

Due to the [Seller]'s severe contract violation, the [Buyer] has suffered losses, including the price for the goods, transportation fee, customs charge, inspection fee, storage fee, and profit. The [Buyer] negotiated with the [Seller] in a timely manner orally, or via telephone, or by sending staff to the [Seller]'s place, and on 21 April 2001 and 13 October 2001, the [Buyer] sent two written documents to the [Seller] asking to settle the dispute by negotiation. However, the [Seller] did not cooperate actively. As a result, the dispute could not be settled. Therefore, pursuant to the arbitration clause in the Contract, the [Buyer] filed the arbitration application, seeking to have the Arbitration Tribunal rule that:

  1. [Seller] shall compensate the price for the goods, transportation fee, and loss of profit of the [Buyer], totaling US $66,556.00; and

  2. [Seller] shall bear the arbitration fee.

The [Seller] submitted a written defense.

The disputes

The following are the parties' disputes.

1. The applicable law

A letter sent by Attorney N in Australia to the Arbitration Tribunal on 22 May 2002 was attached to the [Buyer]'s arbitration application. It states that:

"Based on Australian law, our client is entitled to claim damages for the losses caused by it directly (i.e. caused by the [Seller]'s contract violation - note by the Arbitration Tribunal)".

In the written statement submitted by the [Buyer] at the court session (hereafter "the first statement"), the [Buyer] alleged that no matter whether based on the Contract Law of the People's Republic of China (hereafter, "Contract Law of the PRC") or the United Nations Convention on Contracts for the International Sales of Goods (hereafter, the "CISG"), the [Seller] should be held liable. In this document, the [Buyer] quoted article 113 of Contract Law of the PRC and Article 74 of the CISG to support its claim. The [Buyer] alleges that based on Article 47 of the CISG, it was entitled to claim damages caused by the [Seller]'s delay in performance and that based on Article 39 of the CISG, the [Buyer] gave notice to the [Seller] of the lack of conformity of the goods in a timely manner, which was not beyond the two-year limitation.

At the court session, the agent of the [Buyer] alleged that regarding quality issue, Australian law shall be applied since the consumers were Australian.

In the written supplementary statement submitted after the court session (hereafter, "the supplementary statement"), the [Buyer] mentioned article 62 of the Contract Law of the PRC regarding the specifications of the goods, alleging that related Australian law shall be applied to the quality problem in this case.

On 22 September 2002, the [Seller] submitted its defense, alleging that the CISG should be applied, not the Contract Law of Australia or other laws, because both China and Australia are Contracting States of the CISG, and the sale of goods in this case was within the scope of the CISG.

At the court session, the [Seller]'s attorney restated the aforesaid opinion, and after the court session, in the written statement, he mentioned the aforesaid opinion again, alleging that since there is no stipulation on the applicable law in the Contract, the CISG should be applied automatically.

2. The price term in the Contract

In the first statement, the [Buyer] mentioned that the Contract had no stipulation on transportation fee. Based on article 62(6) of the Contract Law of China, if the party responsible for the expenses of performance was not clearly prescribed, the obligor shall bear the expenses, which means the [Seller] shall bear the transportation fee; meanwhile, the Contract stipulates that the destination port is Sydney, indicating that the Contract in this case is not under an FOB term.The [Buyer] alleged at the court session that it had concluded the contract of insurance and paid the insurance fee, therefore, the Contract in this case was under the CNF term.

The [Seller], however, alleged in its defense that the delivery term in the Contract was FOB Shanghai. In the written documents submitted at and after the court session, the [Seller] stated that the Contract in this case was under the FOB term for the following reasons:

   -    "FOB Shanghai" was clearly indicated in the invoice, and the [Buyer] accepted the invoice (No. 9239HL119) without raising objection;
   -    The [Buyer] had paid the transportation fee, and an important characteristic of the FOB term was that the [Buyer] shall pay the transportation fee."

3. The manufacturing and quality of the goods

The packaging and loading marks clauses clearly state: "details see manufacturing list", i.e., the manufacturing and processing list. The list was sent by the [Buyer] to the [Seller], and the [Seller] was obligated to manufacture the goods based on the specifications in detail. The [Buyer] presented this list at the court session, which the [Seller] confirmed. However, the two parties failed to formally provide this list to the Arbitration Tribunal as a record.

The [Seller] alleged in its defense that during the manufacturing process, Ms. Li [as the Buyer's representative] supervised the whole process to control the quality of the goods, including checking on the purchase of material and sub-material, manufacturing, and packaging. Prior to delivery, Ms. Li inspected the goods and issued a final inspection report on specifications of the goods (under the name of [Buyer]'s agent in Quanzhou). This report described the inspection result in detail. The [Buyer] did not raise objection to the conformity of the goods, but accepted and paid for the goods. It could be concluded that the [Buyer] confirmed the quality of the goods when there was no clear requirement on the quality of the goods.

The [Buyer], however, alleged in the first statement that Ms. Li could not control, supervise, or check the whole process from purchasing material to manufacturing. Five inspection reports on specifications indicate that on 8 July 2000, the day of spot checking, the [Buyer] raised quality objections. The reason why the [Buyer] accepted and paid for the defective goods was that the [Buyer] was not allowed to accept the goods without making payment and that the [Buyer] would have violated the contract with its client in Australia if it had not accepted the goods.

The [Seller] delayed in making delivery, and in order for the [Buyer] to deliver the goods to its client in Australia on time, the [Buyer] had to use air shipment. It was unable to take measures to remedy the defects on the goods; therefore, the [Buyer]'s acceptance and making payment for the goods did not indicate that the goods were conforming.

4. Quality standard and the inspection conducted at the destination port

The [Seller] alleges that:

      The stipulation in the Contract that "the quality should be based on the client's confirmation" is not clear. At the time of the conclusion of the Contract, the [Buyer] did not inform the [Seller] of who the client was, nor did it provide quality specifications or manufacturing standards in detail; therefore, the quality standard should be determined based on Chinese law, which has the closest connection with the Contract.

The inspection report submitted by the [Buyer] has defects; it lacks the legal quality it should have. The inspection was conducted two years after the delivery of the goods, and the [Buyer] failed to discuss the inspection agency with the [Seller] in advance. Therefore, the conclusion of the inspection report lacks objectivity and equity.

On 23 July 2000, the [Buyer] received the second delivery, and on 28 July, its client rejected the goods. The [Buyer] alleged that it gave notice to the [Seller] of the severe defects on the goods on 21 April 2001, which was nine months later. Article 39 of the CISG stipulates that the [Buyer] shall specify the nature of the lack of conformity. However, it was not until August 2002 that the [Seller] knew from the document sent by the Shenzhen Sub-Commission that the written inspection report issued by the [Buyer] was issued beyond the stipulated time. Therefore, the [Buyer] has lost the right to rely on the lack of conformity of the goods and to ask compensation from the [Seller].

The [Buyer], however, counter argues that:

      The [Seller] signed the Contract and made arrangement for manufacturing, which indicated that the [Seller] understood the meaning of "quality should be based on the client's confirmation" and actually performed. The destination port in the Contract was Sydney; therefore, the [Seller] should have been aware that the "client" was a buyer in Australia. When a quality requirement is not clear, it should be decided based on general standards or a special standard in accordance with the purpose of the Contract.

On 8 July 2000, prior to the delivery of the goods, the [Buyer] sent staff which inspected the goods by sampling and raised quality objection. Spot checking was conducted at that time, and it was unexpected that the client would reject the entire goods. Damages which had not been incurred were unable to be estimated; therefore, the [Buyer] did not ask for compensation at that time.

On 28 July 2000, the buyer's client notified that it was returning the goods, and the [Buyer] repeatedly asked the [Seller] to negotiate the quality problems. The quality problems mentioned in the inspection report issued in Australia were almost the same as those discovered upon the spot checking conducted by the [Buyer].

On 21 April 2001, the [Buyer] asked for compensation by written document, and had to file this arbitration application without receiving response from the [Seller]. This claim was filed within the two-year limitation; therefore, the [Buyer] did not lose the right for compensation.

5. [Seller]'s claim for reasonable costs for processing this case

The [Seller]'s attorney asks the [Buyer] to pay its attorneys' fee of renminbi [RMB] 10,000, and traveling fee, food and hotel expenses of RMB 70,000. The [Seller] alleges that, based on the Arbitration Rules, the [Seller] need not file a counterclaim specifically for these reasonable expenses.

II. OPINION OF THE ARBITRATION TRIBUNAL

1. Applicable law

The parties failed to stipulate the applicable law in their contract. The [Buyer]'s places of business and registration are in Australia and the [Seller]'s are in China. Both China and Australia are Contracting States of the CISG. Since the parties did not exclude the application of the CISG, therefore, according to article 1 of the CISG, the CISG shall be applied.

2. Contract performance

Based on investigations made at the court session and the written material submitted by the parties, the Arbitration Tribunal ascertained the following facts:

      (1) Prior to the conclusion of the Contract in this case, the [Buyer] signed three Purchase Orders with G Company in Australia, in which the entire specifications and quantity of the goods were the same as those in its Contract with [Seller], totaling AUD 112,444.80. The delivery deadline in one purchase order was on 14 July 2000 and in the other two were on 15 July 2000.

      (2) The parties signed the Contract on 23 May 2000. The loading date stipulated in the Contract was on 20 June 2000. Therefore, there were only twenty-eight days between them. The goods under the Contract were delivered by two shipments. The first shipment was made on 25 June 2000 from Shanghai by sea transportation, and the second was made on 9 July 2000 from Shanghai by air shipment. The actual delivery dates were later than the dates stipulated in the Contract, to which the [Buyer] raised no objection.

      (3) On 25 May 2000, the [Buyer] paid US $8,130.72 by telegraphic transfer as a deposit to the [Seller], which was 30% of the entire contract price; on 5 July 2000, again by telegraphic transfer, the [Buyer] paid US $12,743.38; and on 28 July, the [Buyer] paid another US $10,564.18, totaling US $31,438.28. Deducting the contract price, i.e. US $27,102.40, the [Buyer] has paid an extra US $4,335.88, which was the transportation fee paid to the [Seller] as alleged by the [Buyer].

      (4) After receiving the goods, [Buyer]'s client, G Company, inspected them, and on 28 July 2000, G Company sent a letter to the [Buyer], refusing to accept the entire goods raising quality problems, which included defects on cloth, printing, specifications, and cutting. G Company alleged that the manufacturer ignored manufacturing responsibility and market acceptance by providing clothes with obvious and un-recoverable defects, which could not be resold even at a discounted price.

      (5) The [Buyer] had tried to resell the goods to Best & Less (hereafter, "B Company") and Coneport Pty Ltd (hereafter, "C Company"). However, on 6 March 2001 and 20 September 2001, respectively, the [Buyer] was notified that due to the severe defects on the goods, they could not accept the goods no matter how low the price was. The aforesaid two companies even deemed that the goods could not be resold in Australia no matter ar what price.

      (6) On 21 April 2001, the [Buyer] sent a letter to the [Seller] through its Quanzhou Office, alleging that:

"In June last year (2000), we purchased a series of mesh clothes (Purchase Orders 006-016, 017, 018, 019, 020, 021, 022); however, the goods delivered by you had severe defects, such as:

1. Part of the skirts were made by two pieces of cloth (it should have been one piece of cloth as required by the Contract). Edges of cloth were also sewed into the clothes;

2. Meshes without printing were cut into the clothes;

3. On part of the clothes, the printings on top and bottom were in different colors, which was beyond the scope of acceptability;

4. After opening the boxes, the entire clothes were sticking together.

Due to the aforesaid severe defects, our client refused to accept the goods. Therefore, the goods are still stored in our warehouse in Australia, which has caused severe economic loss to us. We therefore ask you to compensate our losses incurred thereof."

On 13 October 2001, the [Buyer] sent another letter through its Quanzhou Office, alleging that:

"We concluded a sales contract for clothes in May 2000, by which we purchased a batch of women's mesh skirts. We have paid the entire price based on the Contract, however, the goods delivered by you had severe defects, which our client refused to take, with the result we have suffered severe economic loss. We have contacted you repeatedly by written documents and phone calls, seeking to settle this quality problem by negotiation. However, the negotiation has not been conducted since you were alleging that you were too busy to determine the negotiation time. Therefore, we notify you by this written document again, hoping that you could manage to find time for negotiation which would settle this issue equitably and be beneficial for our future business cooperation."

      (7) Regarding the contract goods in this case, [Buyer]'s client, G Company, issued an Inspection Report Summary on 20 May 2002, indicating that there were problems such as inconsistent printings, stains, uneven elasticity, and unsafe buttons.

3. The price term in the Contract

At the court session, the Arbitration Tribunal ascertained that the first delivery was made by sea transportation, for which the [Buyer] has paid the transportation fee, and that the second delivery was made by air shipment, for which the [Seller] has paid in advance and the [Buyer] has refunded the fee to the [Seller]. In addition, "FOB Shanghai" was indicated in the invoice for the first delivery issued by the [Seller] to the [Buyer]. Therefore, the two parties' intentions were to adopt FOB term, and the second delivery was modified to air shipment due to the pressing time.

4. Quality of the goods

      (1) Stipulations on the quality of the goods in the Contract

      The [Buyer] and the [Seller] had agreed that the quality of the goods shall be based on the client's confirmation, and stated: "details see manufacturing list" in the packaging and loading marks clauses in the Contract. The manufacturing and processing list submitted by the [Buyer] at the court session had stipulations on material, design, and technical requirements which should be regarded as the quality standard of the goods, and the [Seller] was obligated to manufacture the clothes based on this. As to whether the goods were conforming, it should be based on the client's confirmation.

      (2) Quality of the goods under the Contract

      At the court session, the [Buyer] acknowledged that Ms. Li was its employee who was in charge of the checking and inspecting the contract goods; however, she was also in charge of ordering goods from other manufacturers. The Arbitration Tribunal ascertained that Ms. Li was performing her responsibilities throughout the whole manufacturing process. The [Seller] submitted five inspection reports issued by Ms. Li on 8 July 2000, in which there were descriptions based on sample inspection conducted on the goods in the second delivery. These inspection results indicated that the goods had defects, such as: "the surface of mesh cloth was not goods; lint drops from velvet belt; connecting lines on part of the skirt were not pressed; waist sizes had severe errors and the elasticity was uneven." Mr. Zhang of the [Seller] signed each inspection report, confirming the existing problems. At the court session, the [Seller] admitted that the goods it delivered had defects.

After receiving the goods, [Buyer]'s client, G Company, conducted its inspection, listing quality problems on fabric, printing, size, and cutting. It was G Company's position that the manufacturer ignored manufacturing responsibility and market acceptance by providing goods with obvious and un-recoverable defects which could not be resold even at a discounted price.

Later, the [Buyer] tried to resell the goods to B Company and C Company, but was informed that due to the severe defects on the goods, they were unable to accept the goods even at a low price, and that the goods could not be sold in Australia no matter at what price.

The inspection report issued by G Company indicated that there were defects such as inconsistent printing, stains, uneven elasticity, and unsafe buttons, which was added evidence to show the severe defects in the goods.

Based on the aforesaid facts, the Arbitration Tribunal holds that the goods delivered by the [Seller] had severe defects.

      (3) Which party shall be liable for the defects on the goods

      Pursuant to Article 30 of the CISG, the fundamental obligation of the [Seller] is to deliver the goods as required by the contract and the CISG.

Article 35(2) of the CISG stipulates that:

"The goods must fit for the purpose for which goods of the same description would ordinarily be used".

Which means the goods must be merchantable.

The facts ascertained by the Arbitration Tribunal indicate that the goods delivered by the [Seller] were in poor quality and that they could not be resold even at a discounted price. Therefore, the goods delivered by the [Seller] were not resalable. Due to the severe defects on the goods, the [Buyer]'s client refused to take the goods, and the goods were unable to be resold.

Even though the [Seller] sent Ms. Li to spot check the goods, this cannot exempt the [Seller] from bearing liability for the defects. The Contract stipulates that the quality of the goods shall be based on the client's confirmation. As a contract party, the [Seller] should have known that the opinions of Ms. Li or the [Buyer] could not be the final basis to determine the quality of the goods. The [Buyer] performed as a middle man in this case, and its sending staff to the manufacturing site was to spot check and to know the quality of the goods. Pursuant to the Contract, the quality should be finally decided by the client.

The [Seller] alleges that the [Buyer] did not raise quality objection at that time, but has accepted and paid for the goods. In fact, the evidence shows that the [Buyer] had raised quality objection when spot checking the goods; however, whether the defects were severe enough to the extent that the client was unable to accept was to be decided by the client.

In addition, based on contract stipulation, the price for the goods must be paid upon delivery of the goods, but not that the [Buyer] shall make payment after the client confirms the goods. Thus it could not be concluded that the [Buyer] accepted the goods and, therefore, could not raise objection on the quality of the goods just because the [Buyer] has made payment for them.

As the manufacturer of the contract goods, the [Seller] should have had its own quality control system. However, the [Seller] failed to provide any evidence showing its effort to guarantee the quality of the goods. In accordance with the CISG and the Contract, delivering conforming goods is an obligation of the [Seller]. However, due to the [Seller]'s fault, the goods had severe defects, causing the dispute in this case. Therefore, the [Seller] shall be held liable.

5. Whether the [Buyer] has lost its right to claim compensation

      Article 39 of the CISG states that:

"(1) the [Buyer] loses the right to rely on a lack of conformity of the goods if he does not give notice to the [Seller] specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it.

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

The Contract stipulates that the quality should be based on the client's confirmation; therefore, whether the goods were conforming should be determined by the client's opinion.

On 28 July 2000, due to severe defects on the goods, the client, G Company, refused to accept the goods. It was confirmed at that time that the [Seller] violated the Contract by providing non-conforming goods. The [Buyer] alleges that it had notified the quality problem to the [Seller] orally or via telephone many times. However, the [Seller] alleges that it has never received those notices from the [Buyer], but does not deny that on 21 April 2001, it received notice regarding quality problem from [Buyer]'s Quanzhou Office. Even though there is no evidence showing that between 28 July 2000 and 21 April 2001 the [Buyer] had sent notice to the [Seller] asking for compensation, there is no evidence showing the contrary either.

Based on common sense, the [Buyer] would have notified the [Seller] if the goods had been rejected. Moreover, it is only nine months from 28 July 2000 to 21 April 2001, and there is still one year to the two-year limitation. Therefore, the [Buyer]'s notice regarding the lack of conformity of the goods was sent within the two-year limitation, and the [Buyer] has not lost its right to rely on the lack of conformity.

6. [Buyer]'s claim

      The first claim of the [Buyer] was to have the [Seller] pay the contract price, transportation fee, and loss of profit, totaling US $66,556. The Arbitration Tribunal notes that this amount is actually the contract price for which the [Buyer] resold the goods to its client, i.e., AUD 112,444.8 (US $66,556).

Since the goods delivered by the [Seller] had severe defects, which were not resalable, according to Article 45 of the CISG, the [Buyer] may claim damages as provided in articles 74 to 77.

Article 74 stipulates that:

"Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters which he then knew or ought to have known, as a possible consequence of the breach of contract."

The Arbitration Tribunal deems that even though the [Seller] ought to have known that the [Buyer] was to resell the goods to its client in Australia at the time of the conclusion of the Contract, there is no evidence to prove that the [Buyer] had notified the [Seller] the total price of the resale contract, which means that the [Seller] was unaware how much the [Buyer] would receive as a profit. The [Seller] was unable to know that the [Buyer] was to receive a profit that exceeded the contract price by 100% in this case. Therefore, the [Buyer]'s claim for loss of profit is too high under the circumstance that the [Seller] was unaware of it. The loss of profit should be adjusted accordingly. The contract price and the transportation fee, plus a 20% profit would be reasonable, totaling US $37,725.94.

Furthermore, since the goods are not merchantable, return of the goods would only add to the costs of the two parties. The Arbitration Tribunal deems that return of the goods has no practical meaning, and that if the [Seller] requests the return of the goods, it should bear the entire costs incurred thereof.

As to the arbitration fee, since the [Buyer]'s claims are not accepted entirely, it should bear part of the arbitration fee, i.e., [Buyer] shall bear 20% of the arbitration fee and the [Seller] shall bear 80%.

7. [Seller]'s claim for compensation on the expenses incurred for processing this case

      The Arbitration Tribunal notes that the [Seller] retained an attorney for this case, even though it failed to provide the entrustment contract it entered into with the attorney and related documents showing that it has paid attorneys' fees, and that the [Seller] has paid other expenses for this case. However, the dispute in this case was caused by the defects in the goods delivered by the [Seller] for which the [Seller] is held liable. Therefore, the Arbitration Tribunal does not accept this claim of the [Seller].

III. THE AWARD

The Arbitration Tribunal rules that:

      (1) [Seller] shall pay the damages of the [Buyer] of US $37,725.94 within 30 days of this award, otherwise, a 7% annual interest shall be added; and

      (2) [Buyer] and [Seller] shall bear the arbitration fee jointly;

This is the final award.

Presiding Arbitrator:

Arbitrator:

3 June 2003 in Shenzhen


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of Australia is referred to as [Buyer] and Respondent of the People's Republic of China is referred to as [Seller]. Amounts in the currency of the United States (dollars) are indicated as [US $]; amounts in the currency of the People's Republic of China (renminbi) are indicated as [RMB]; amounts in the currency of Australia (dollars) are indicated as [AUD].

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

*** John Zhu, LL.M. China University of Political Science and Law on a national graduate scholarship. He received his Bachelor of Law degree from Southwest University of Political Science and Law and Double Degree of English Literature from Sichuan International Studies University in Chongqing, China. His focus is on International Economic Law.

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Pace Law School Institute of International Commercial Law - Last updated January 20, 2012
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