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CISG CASE PRESENTATION

China 18 December 2003 CIETAC Arbitration proceeding (AOE and PECVD machines case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/031218c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20031218 (18 December 2003)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2003/12

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Hong Kong [?] (claimant)

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

GOODS INVOLVED: AOE and PECVD machines


Classification of issues present

APPLICATION OF CISG: Yes, agreement of the parties

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 74 ; 78 ; 80 [Also cited: Articles 45 ; 53 ; 59 ]

Classification of issues using UNCITRAL classification code numbers:

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

78A ; 78B [Interest on delay in receiving price or any other sum in arrears; Rate of interest];

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

Descriptors: Damages ; Interest ; Failure of performance, other party

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

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Case text (English translation)

Queen Mary Case Translation Programme

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

AOE and PECD machines case (18 December 2003)

Translation [*] by Zheng Xie [**]

Edited by Meihua Xu [***]

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

PARTICULARS OF THE PROCEEDING

The China International Economic and Trade Arbitration Commission (hereafter, the "Arbitration Commission") accepted the case (Case number: M...) according to:

   -    The arbitration clauses in Contract No. 0-NET-0001 (the "Contract") signed by Claimant [Seller], __ Limited., and Respondent [Buyer], __ Technology (Shenzhen) Ltd., on 7 November 2000; and
 
   -    The written arbitration application submitted by the [Seller] on 18 February 2003.

The Arbitration Rules of the Arbitration Commission [hereafter, the "Arbitration Rules"], which took effect on 1 October, 2000, apply to this case.

On 10 March 2003 the Secretariat of the Arbitration Commission by express mail sent the Arbitration Notice (2003) CIETAC No.__ , the [Seller]'s arbitration application with evidentiary material attached, the Arbitration Rules, and the Arbitrators List to the [Buyer]. This package was returned, because "the receiver was out," and "the package was not picked up within the stipulated time."

The Secretariat noticed the [Seller] of the above situation and requested the [Seller] to check and provide the [Buyer]'s correct address. On 8 April 2003, the [Seller] re-provided the [Buyer]'s business place to the Arbitration Commission. The Secretariat re-sent the Arbitration Notice and relevant documents by express mail to the [Buyer]'s address the [Seller] re-provided. The package was returned again, because "the package was not picked up within the stipulated time," "the party moved, the new address should be provided," and "no one answered the phone," etc. According to Rule 87 of the Arbitration Rules, the package was deemed to be validly served.

On 3 June 2003, the Presiding Arbitrator, Dong __, appointed by the Chairman of the Arbitration Commission according to Article 24 of the Arbitration Rules, arbitrator, Zhang __ , appointed by the [Seller], and arbitrator, Wang __ , appointed by the Chairman for the [Buyer] according to Article 26 of the Arbitration Rules, formed the Arbitration Tribunal to hear this case. On the same day, the Secretariat sent the Notice of Formation of the Arbitration Tribunal (2003) CIETAC No. __ to the [Seller] and the [Buyer].

On 6 June 2003, the [Buyer] sent a letter to the Arbitration Commission alleging that it had already received the Notice of Formation of the Arbitration Tribunal sent by the Secretariat, but did not receive the Arbitration Notice, and provided its current address. Although the Arbitration Notice had been validly served, considering the actual situation in this case, on 9 June 2003 the Secretariat re-sent the Arbitration Notice and relevant documents to the [Buyer], and requested the [Buyer] to re-appoint an arbitrator and jointly with the [Seller] appoint or authorize the Chairman to appoint the Presiding Arbitrator, and to submit the Response on time.

On 3 July 2003, the [Buyer] informed the Arbitration Commission in writing that it appointed __ as arbitrator.

On 11 July 2003, the Presiding Arbitrator, Liu __, appointed by the Chairman of the Arbitration Commission according to Article 24 of the Arbitration Rules, arbitrator, Zhang __ , appointed by the [Seller], and arbitrator, Fu __, appointed by the [Buyer], constituted the Tribunal to hear this case. On the same day, the Secretariat by express mail sent the Notice (2003) CIETAC No.__ to the [Seller] and the [Buyer].

On 14 July 2003, the Secretariat sent the Court Session Notice (2003) CIETAC No.__ via fax and express mail, respectively, to the [Seller] and the [Buyer]. The court session was scheduled for 18 August 2003 in Beijing.

On 24 July 2003, the [Buyer] submitted its response and evidentiary material to the Arbitration Commission.

On 11 August 2003, the [Buyer] submitted a counterclaim and evidentiary material, and completed the procedure of counterclaim fee payment.

According to Article 18 of the Arbitration Rules, the [Buyer]'s counterclaim and the [Seller]'s claim were jointly heard in this case.

On 13 August 2003, the [Seller] submitted its response and evidentiary material with respect to the [Buyer]'s counterclaim.

On 18 August 2003, the Arbitration Tribunal opened the court session as scheduled in Beijing. The [Seller]'s legal representative and arbitration agent, and the [Buyer]'s arbitration agent attended the court session. In the court session, the parties presented the facts and opinions, cross-examined the evidence, made their arguments, and answered the Arbitration Tribunal's questions.

After the court session, the parties submitted supplementary opinions and evidentiary material. The Secretariat exchanged these documents between the parties, asked the parties whether they requested to open another court session to cross-examine the supplementary evidence. Neither party requested another court session within the stipulated time, but they submitted the written opinions on the evidence.

This case was closed. According to the facts ascertained in the court session, all written material and the relevant law, the Arbitration Tribunal handed down this award by consent.

The facts, the Arbitration Tribunal's opinion and award are as follows:

FACTS

On 7 November 2000, the [Seller] and the [Buyer] signed a Contract, which stipulates:

   -    Goods: The [Seller] shall sell to the [Buyer] a set of ___ Multiplex AOE ("AOE") and a set of ___ PECVD ("PECVD") machines;
 
   -    Total price: 661,797.84 CIF Shenzhen;
 
   -    Payment terms: "Deposit (cash) and L/C";
 
   -    Amount and time of payment: The [Buyer] shall pay 20,000 within two weeks after the Contract is executed, and pay the remaining amount by L/C after the goods arrive at Shenzhen Customs; the [Buyer] shall pay 90% of the remaining amount, i.e., 577,618.05 (it shall be 577,619.86: note by the Arbitration Tribunal) after the goods are delivered, and the L/C shall be issued one month before the goods are delivered; within 30 days after the goods arrive at the [Buyer]'s company, and the parties examine and accept the goods, and sign a confirmation or, within 60 days after the goods arrive, the [Buyer] shall pay the remaining 10%, i.e., 64,179.79 (it should be 64,179.98: note by the Arbitration Tribunal);
 
   -    Shipping time: The PECVD shipment shall arrive at Shenzhen Port before 10 April 2001, and the AOE shipment shall arrive at Shenzhen Port before 10 June 2001.
 
   -    Article 15. Claims: "Within 90 days after the goods arrive at the destination port, if the quality, specification, or quality of the goods are found inconsistent with the Contract except for the liability which an insurance company or carrier shall bear, the [Buyer] shall request replacement or claim damages with a certificate issued by a commodities inspection bureau."
 
   -    Article 18. Warranty: "Warranty period: one year (calculated from the day when the goods are installed, adjusted and operated). Within the warranty period, the [Seller] shall be responsible to supply and replace the parts (excluding vulnerable parts) for the machines (AOE and PECVD) due to damages caused by non-personal factors. The [Seller] shall bear all expenses (the transportation fee which the [Buyer] shall bear is only limited to the parts which could be delivered from Hong Kong, and could be delivered only from the headquarters in the UK). After the one year warranty period, the [Seller] shall supply parts within eight years. This provision shall not apply to any damages which are caused by negligence, misuse, clash, dropping, intentional destroying, and exposure to corrosive substances, etc."
 
   -    Article 20(d). Delay penalties: "If any delayed delivery is not caused by force majeure, the [Seller] shall pay the [Buyer] penalty for delay, i.e., 0.5% of the price of goods delayed per week, but the total penalty shall not exceed 5% of the price of goods delayed; if the delay is less than one week, it shall be calculated as one week. If the delay is longer than ten weeks, the [Buyer] is entitled to revoke the Contract, and the [Seller] shall refund the deposit (20,000) to the [Buyer]. However, the [Seller] shall still pay the [Buyer] the above stipulated penalty, and shall not refuse or delay."

The Contract also contains provisions on packaging, adjustment and testing, arbitration, etc.

During the performance of the Contract, disputes arose between the parties. No agreement was reached after negotiation. The [Seller] filed this arbitration application with the Arbitration Commission.

POSITION OF THE PARTIES

[Seller]'s claims

In the arbitration application, the [Seller] raised the following claims:

   (1)   The [Buyer] shall pay the [Seller] the unpaid contract price, i.e., 66,179.78;
 
   (2)   The [Buyer] shall compensate the [Seller] for loss of interest on the delayed payment, calculated at a 6.5% annual interest rate from 9 October 2001 to the day when the payment is actually made;
 
   (3)   The [Buyer] shall bear all expenses incurred due to this arbitration including the arbitration fee, and compensate the [Seller] for the actual expenses including the attorneys' fee of renminbi [RMB] 52,000 and traveling expenses, etc.

[Seller]'s support for its claims

The facts and reasons to support the [Seller]'s claims are as follows:

The Contract stipulates that the [Buyer] shall open a L/C one month before the goods arrive in Shenzhen, so the [Buyer] should have issued the L/C to the [Seller] before 10 March 2001. However, in this case, the [Buyer] did not issue the L/C until 18 May 2001, more than two months later than the stipulated time, which caused the delay of the [Seller]'s delivery; the goods arrived Shenzhen Port on 21 June and 9 August 2001, respectively. After the goods arrived at the port, the [Buyer] paid 90% of the contract price in accordance to the Contract, but failed to pay the remaining amount, i.e., 66,179.78. According to the Contract, the [Seller] was obligated to pay the remaining 10% of the contract price no later than 9 October 2001. According to Article 53 of United Nations Convention on Contracts for the International Sales of Goods (CISG), "The buyer must pay the price for the goods and take delivery of them as required by the contract and this Convention," The [Buyer]'s action constituted a breach of the Contract.

The [Seller] negotiated with the [Buyer] many times in order to resolve the issue of the remaining payment and mediate the economic loss, but the [Buyer] first postponed by alleging change of internal employees, and then refused to make payment by alleging that the delivery was delayed. The [Buyer] offered many excuses for its refusal to make the payment. Article 74 CISG states:

"Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach ..."

Article 78 of CISG stipulates:

"If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it, without prejudice to any claim for damages recoverable under article 74."

Accordingly, the [Buyer] should pay the [Seller] the remaining price and interest on it.

[Buyer]'s position

The [Buyer] alleged:

The [Seller] delayed the delivery first, and the condition for the remaining payment was not satisfied because of the [Seller]'s delayed delivery, so the [Buyer] has the reason for not paying the remaining price.

1. The [Seller] should be held liable for the delay of delivery. The [Buyer] issued the L/C on time and had no fault.

Article 6 of Contract No. 0-NET-001 signed by the [Seller] and the [Buyer] on 7 November specifies the time when the goods shall arrive at Shenzhen Port; however, according to the import date recorded in the Customs Declaration Form:

   -    The PECVD arrived at port on 22 June 2001, seventy-three (73) days (about eleven weeks) later than the time stipulated in the Contract (before 10 April 2001); and
 
   -    The AOE arrived at the port on 9 August 2001, sixty (60) days (about nine weeks) later than the time (before 10 June 2001) stipulated in the Contract.

It is unjustifiable for the [Seller] to allege that the delayed delivery was caused by the [Buyer]'s delayed issuance of the L/C; the fact is that at the beginning of 2001, because of the increasing demand in the market, the [Seller] could not deliver the goods on time, so it orally requested to postpone the delivery, but the [Buyer] requested the [Seller] to continue the performance of Contract and bear the liability for breach. Thereafter, the [Seller] informed the [Buyer] that the delayed delivery day was 18 June 2001. Accordingly, the [Buyer] issued the L/C on 18 May 2001, which is consistent with the stipulation in the Contract that "the L/C shall be issued one month before the goods are delivered," and with the relevant business customs. In addition, according to business customs regarding issuance of a L/C, the [Seller] should have informed the [Buyer] of the specific shipping time, so the [Buyer] could issue a valid L/C. However, in this case, the [Seller] did not send such notice in accordance with the Contract, but sent a notice of delayed delivery, so the [Buyer] properly issued the L/C according to the [Seller]'s notice and the stipulation in the Contract.

It is the [Seller]'s fault to request delay of delivery. The process of signing Contract No. 0-NET-0009 (the No. 9 Contract) between the [Seller] and the [Buyer] can prove this. On 14 March 2001 at 11:54 a.m., the [Buyer] received the [Seller]'s fax, which was a draft of a sales contract, i.e., the draft of the No. 9 Contract. The shipping time stipulated in Article 6 is, "the goods shall be shipped with those under Contract 0-NET-0001 on 10 June 2001," and the [Buyer] sent the signed and sealed draft via fax; when the [Seller] received this fax, the No. 9 Contract was established. At 14:32 of the same day, the [Buyer] received the fax of the No. 9 Contract with the [Seller]'s authorized representative's signature. Accordingly, the [Seller] requested to delay delivery in the form of an offer via fax, but the [Buyer]'s agreement should not be deemed as exemption of the [Seller]'s liability for breach. Therefore, in this case, the [Seller] is the supplier of the Contract, and its delay of delivery constituted the first breach of the Contract.

In sum, the [Buyer] should not bear any liability for the [Seller]'s delay of delivery. Furthermore, according to Article 20(d) of the Contract, the [Seller] shall pay the [Buyer] a penalty for delay of delivery, totaling 31,108.814, which is calculated as follows:

The delivery of the PECVD was eleven (11) weeks delayed, and the penalty shall be 5% of the total contract price (265,582.40 5%=13,279.12); the delivery of the AOE was nine (9) weeks delayed, and the penalty shall be 4.5% of the total contract price (396,215.44 4.5%= 17,829.694).

2. The remaining contract price was not paid due to the [Seller]'s breach, so there is a legal basis for the [Buyer] to refuse to make the payment.

      (1) The [Seller]'s delay in installing and adjusting the machines due to its own fault constituted a breach of the Contract.

Article 14 of the Contract stipulates that the [Seller] shall guarantee that the machines can perform their proper functions, and the [Seller] shall guarantee the machines run properly and, the [Seller] shall complete installation of the machines within 25 days and adjust to the design required by the [Buyer]. This Article also specifies the requirements of the design which the machines shall be adjusted to. The [Buyer] alleged that it is the [Seller]'s essential contractual duty to guarantee the design, and the [Seller] shall strictly follow and perform the requirements. However, the [Seller] failed to complete the above duties within the stipulated time (within 56 days), and breached the Contract again.

According to the Contract, since the PECVD machine arrived at the port on 22 June 2001, the installation and adjustment period for the AOE machine should start from the following day, and should have been completed on 17 August 2001; the installation and adjustment period should start from 10 August 2001, and should have been completed on 4 October 2001. However, the [Seller] completed installation and adjustment on 6 December 2001, far later than the stipulated time in the Contract, so the [Seller] breached the Contract. Therefore, the [Seller] was at fault and should be liable for its breach.

During the adjustment, because the frequent replacement of main parts of the PECVD and AOE machines severely affected the adjustment process, the [Seller] delayed completing the adjustment report. The delivery list signed by the [Buyer] from November 2001 to January 2002 recorded the arrival of the goods after the main parts were replaced.

      (2) The [Seller] stopped all warranty services and breached the Contract again.

      The [Seller] requested the approval of Certificate of Acceptance of the machines shortly after the adjustment was completed. However, because disputes arose regarding the starting time of the warranty period, and the [Seller] stopped all warranty services, the [Buyer] did not approve this Certificate.

The [Buyer] alleged that the warranty period should start from 1 January 2002, i.e., following the completion of adjustment and testing acceptance of the machines, because Article 18 of the Contract stipulates the warranty period "shall be calculated from the day when the machines start running after the adjustment and testing acceptance"; in addition, Article 9.3 of Item 2825 in Appendix I regarding amendment of quoted price stipulates definition "the machines start running," i.e., when the [Seller] installs and adjust the machines at the [Buyer]'s place, and the machines and design are consistent with the stipulations in Article 14 of the Contract, the machines can start running. However, the [Seller] refused to perform its promise, and rejected the [Buyer]'s reasonable requests.

When the parties failed reach any agreement after negotiation, on 6 May 2002 the [Seller] notified the [Buyer] that it was stopping all warranty services including the services for the equipment for which the payment had been made. As to this, the [Buyer] reserved its right to claim damages and requested the [Seller] to perform warranty services, but the [Seller] did not agree. Obviously, the [Seller] had apparent faults, so it should be liable for the breach.

      (3) The condition for the remaining payment was not satisfied, and the [Seller] severely breached the Contract, so the [Buyer] reasonably refused to make the payment.

      Article 4.2.3. regarding the time for the remaining payment, stipulates that when the goods arrive at the [Buyer]'s company and the parties sign and confirm after the acceptance according to the Contract, the remaining price (i.e., 10% of the total contract price) shall be paid within 30 days or 60 days after the goods arrive. This Article specifies two payment methods for the parties to choose. The [Seller] alleged that the remaining price should be paid no later than 9 October 2001, which was counted as the standard of "within 60 days after the goods arrive." This obviously lacks factual and legal basis, because Article 46 A of Notice of L/C (reciting the contents in the L/C issued by the [Buyer]) issued by Jia Hua Bank, Evidence II submitted by the [Seller], stipulates that the remaining price (i.e., 10% of the total contract price) should be paid off within 30 days after the applicant (the [Buyer]) and the beneficiary (the [Seller]) officially sign the certificate of acceptance. The [Buyer] alleged that parties had accepted the payment terms stipulated in the L/C, which proved that the [Seller] and the [Buyer] did not choose the method "60 days after the goods arrive," but "30 days after the parties sign and confirm the acceptance according to the Contract," as stipulated in Article 4.2.3.

Because the [Seller] delayed installation and adjustment of design, and stopped the warranty services even for the equipment for which the payment had already been made, it is the only remedial measure for the [Buyer] to refuse to approve the Certificate of Testing Acceptance; thus, the [Buyer] could not make the remaining payment according to the above payment terms agreed by the parties.

In a conclusion, the penalty which the [Seller] should pay to the [Buyer] due to its delayed delivery should be deducted from the remaining contract price. Because the [Seller] delayed performing its duty to install the machines and adjust the design, and refused to perform warranty services, the [Buyer] refused to pay the remaining amount; the [Seller] shall bear the liability. Thus, the [Buyer] justifiably refused to make the remaining payment without any fault. Therefore, the [Buyer] asked the Arbitration Tribunal to dismiss the [Seller]'s claim.

On 11 August 2003, the [Buyer] submitted a counterclaim application to the Arbitration Tribunal, and filed the following counterclaims:

[Buyer]'s counterclaim

   (1)   The [Seller] shall pay to the [Buyer] the penalty due to the delay of delivery, totaling 31,108.814;
 
   (2)   The [Seller] shall compensate the [Buyer] for the loss caused by the [Seller]'s stopping warranty services, totaling RMB 2,368,535.05;
 
   (3)   The [Seller] shall bear all expenses including the arbitration fee incurred due to this arbitration, and compensate the [Buyer] for the attorneys' fee, traveling expenses, etc., incurred due to this case. The attorneys' fee include the basic fee of RMB 30,000 and contingency (calculated according to actual amount); the round trip traveling expenses (including the round trip airfares of RMB 4,500, and the airport construction fee of RMB 200) which the [Buyer]'s agents Wang __ and Zuo __ incurred to attend the court session in Beijing, the accommodation expenses of RMB 1,920, and notarization fee of RMB 2,000 which the [Buyer] incurred in order to preserve the evidence.

The [Buyer]'s counterclaims are based on the following facts and reasons:

1. The [Seller] should be held liable for its delay of delivery, and pay the [Buyer] the relevant penalty.

According to the import date recorded in the Customs Declaration form, the time when PECVD machine actually arrived at the port was seventy-three (73) days (counted as eleven weeks according to the Contract) later than that stipulated in the Contract; and the time when the AOE machine arrived at the port was sixty (60) days (counted as nine weeks) later than that stipulated in the Contract. Therefore, the [Seller] should be held liable for its delay of delivery and pay the [Buyer] the penalty due to its delayed delivery.

According to business customs regarding issuing a L/C, the [Seller] as a supplier should have given the [Buyer] early notice of the shipping date, so the [Buyer] could issue a valid L/C. In this case, the [Seller] delayed its notice due to the delay of delivery, so it was proper for the [Buyer] to issue the L/C according to the [Seller]'s notice and the time stipulated in the Contract.

The [Seller] should not deny the fact that it breached the Contract first due to delay in delivering the goods; the process of signing the No. 9 Contract can prove this. The [Seller] requested to delay delivering the goods in the form of an offer in its former fax, and the [Buyer]'s approval should not be deemed as an exemption of the [Seller]'s liability for breach of the Contract, because the [Seller] is the supplier under the Contract. The [Seller] breached the Contract first due to delay of delivery; the [Buyer] did not give up its right to claim damages caused by delay of delivery according to the Contract.

In sum, the [Buyer] was not at fault regarding the [Seller]'s delay of delivery and, the [Seller] should be held liable for its breach. According to Article 20(d) of the Contract, the [Seller] shall pay the [Buyer] a penalty, totaling 31,108.814.

2. The [Seller] should compensate the [Buyer] for its damages caused by the [Seller]'s stoppage of warranty services.

      (1) The [Seller] stopped all warranty services to the [Buyer] without any reason, and severely breached the Contract.

Article 14 of the Contract stipulates that the [Seller] shall guarantee that the machines can perform their proper functions, and the [Seller] shall guarantee the machines run properly and, the [Seller] shall complete installation of the machines within 25 days and adjust to the design required by the [Buyer] within one month after the installation. However, the [Seller] failed to complete this task within the time stipulated in the Contract, and breached the Contract again. After the adjustment testing, the [Seller] requested the [Buyer] to approve the Certificate of Acceptance Testing. However, because the disputes regarding the starting day of warranty period arose, and the [Seller] stopped all warranty services, the [Buyer] did not approve this Certificate.

When the parties failed to reach any agreement after negotiation, on 15 March 2002 the [Seller]'s engineers in the [Buyer]'s company left, which severely affected the timely maintenance of the machines. Thereafter, the [Seller] sent a written notice to the [Buyer] on 6 May 2002 informing that the [Seller] would stop all warranty services. As to this, the [Buyer] reserved its right to claim damages, and requested the [Seller] to continue its warranty services, but the [Seller] did not agree.

The [Seller]'s above conduct directly caused the machines could not run normally, and caused the [Buyer] to suffer severe damages, and the machines which the [Buyer] bought for a large amount of money had stayed useless for one year. This breached the [Seller]'s contractual duty, because regardless of how one counts the starting day of warranty period, May 2002 was within the warranty period, and the [Seller] stopped warranty services of the PEVCD and AOE machines, and severely breached the Contract

      (2) The [Seller] should compensate the [Buyer] for the loss caused by stopping warranty services.

The [Seller] breached the Contract by arbitrarily stopping all warranty services. The [Seller]'s above conduct caused the machines to stop running from 6 May 2002, and it had been more than one year, and the [Buyer] suffered severe damages, which includes:

            a. The stoppage of operation meant that the AWG products could not be manufactured, and the fiber materials purchased for the production were wasted. The loss totaled HK $281,422.77 (equal to RMB 296,422.60).

            b. In order to manufacture AWG products, the [Buyer] had also purchased electric materials; because of the stoppage of operation, the quality warranty period expired, which caused the [Buyer] to suffer the total loss of RMB of 155, 673.

            c. From the stoppage of operation to the day when the counterclaim was filed, the [Buyer] incurred rent of RMB 123,750 to store the machines.

            d. The stoppage of operation caused the machines to stay without running for more than one year, and the [Buyer] suffered a total loss of RMB 1,792,689.45, for which the [Seller] should compensate.

According to Articles 33-35 and Article 29 of the Implementing Rules of Income Tax Law of Foreign Investment Enterprises and Foreign Enterprises of the People's Republic of China, and the relevant stipulations in Accounting Principles, the [Buyer]'s loss of the non-operating machines is calculated as follows:

   -    The depreciation per month = the original value X (1 - the remaining value)/60 months (five years); PECVD depreciation per month = RMB 3,197,545.05 X (1-10%)/60 months = RMB 47,963.18;
 
   -    AOE depreciation per month = RMB 4,769,963.08 X (1-10%) / 60 months = RMB 71,549.45. From May 2002 to the time when the [Buyer] filed the counterclaim, the machines stayed without running for 15 months.

Therefore, the loss of non-operation of the PECVD machine is RMB 719,447.70, and the loss of non-operation of the AOE machine is RMB 1,073,241.75; the total loss of the above two items is RMB 1,792,689.45.

Article 74 of CISG states:

"Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. 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 of which he then knew or ought to have known, as a possible consequence of the breach of contract."

Therefore, the [Seller] should compensate for the [Buyer]'s loss.

[Seller]'s response to [Buyer]'s counterclaim

On 13 August 2003, the [Seller] submitted the following opinions with respect to the [Buyer]'s counterclaim:

1. It lacks legal basis for the [Buyer] to request the [Seller] bear the liability for delay of delivery and pay the penalty; it should not be the [Seller] but the [Buyer] to bear the liability for breach.

      (1) The [Seller]'s delay of delivery was caused by the [Buyer]'s delayed issuance of the L/C.

      The [Buyer] does not have a correct view of its delayed issuance of L/C. The [Seller] performed its duty in accordance with the Contract. According to the Contract, the PECVD and AOE machines were to be delivered on 10 April and 10 June 2001, respectively, and the L/C was to be issued one month before the delivery. The [Seller] did not receive the L/C within the stipulated time, and sent a letter to urge the [Buyer] to issue the L/C as soon as possible; however, the [Buyer] neither made any response, nor issued the L/C until 18 May 2001. According to the relevant law, the [Seller] could claim damages for the [Buyer]'s breach, but in order to maintain good cooperation, the [Seller] still delivered the goods to the [Buyer] and did not claim damages. With respect to the [Buyer]'s allegation that the [Seller] should have informed the [Buyer] of the specific delivery time in advance, the [Seller] alleged that the Contract definitely specified the delivery time, so the [Seller] had no duty to inform the [Buyer] of the shipping time again, and the parties need only follow the stipulation and perform the duties under the Contract. According to the Contract, the [Seller] should have issued the L/Cs before 10 March and 10 May 2005, respectively, but it failed to issue the L/Cs on time, which caused the [Seller]'s delay of delivery.

According to Article 80 CISG:

"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."

Accordingly, the [Seller]'s delayed delivery was caused by the [Buyer]'s delayed issuance of the L/C. The [Seller] as a supplier could not deliver the goods when the [Buyer] did not issue the L/C. Therefore, it was the [Buyer] who caused the delay of delivery.

      (2) The Stipulation in Article 6 of the No. 9 Contract.

      The [Buyer] cited the shipping time "shipped on 10 June 2001 with the goods under the Contract No. 0-NET-0001" stipulated in Article 6 of the No. 9 Contract. This was cited by the [Buyer] in order to prove that the [Seller] agreed on the delay of delivery. This is a misunderstanding. Article 6 of the No. 9 Contract stipulates, "shipped on 10 June 2001 with the goods under Contract No. 0-NET-0001," and this proves that the [Seller] did not breach the Contract.

The Contract in this case stipulates, "AOE shall arrive on 10 June 2001," and the [Seller] included the same term in the No. 9 Contract, but did not specify PECVD or AOE. However, according to the Contract and the situation at that time, it is not hard to determine that the goods in this draft refer to AOE, but not PECVD. The reason for including this stipulation is that according to the Contract, the [Seller] should deliver two machines, one of which should arrive at Shenzhen Port before 10 June, and the contract term was CIF Shenzhen, so that the [Seller] could ship the goods under the No. 9 Contract together with AOE under the Contract in this case in order to save freight charges. Therefore, the correct understanding is that the goods should be shipped together with those under the No. 9 Contract, but it was not the [Seller] who requested to delay delivering the goods.

      (3) The penalty for the [Seller]'s delay of delivery alleged by the [Buyer].

      The Contract stipulates a penalty, but the [Seller]'s delay of delivery was caused by the [Buyer]'s delayed issuance of the L/C. When the [Buyer] issued the L/C two months later than the stipulated time, the [Seller] could not perform its plan, but it still tried its best to adjust the plan to deliver the goods to the [Buyer], and delivered the two machines to Shenzhen on 21 June and 9 August 2001, respectively. Thus, the [Seller] should not be held liable for this; it is the [Buyer] who should be liable.

2. It is the defense right of first performance for the [Seller] to stop the warranty services, because the [Buyer] failed to make the remaining payments after the [Seller] urged many times and gave sufficient and reasonable time for the [Buyer].

      (1) The time for payment of the remaining amount and the [Buyer]'s refusal.

      Regarding the internationally applied defense right of first performance, Article 80 of CISG stipulates:

"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."

According to the relevant stipulations in the Contract, after the [Seller] delivered the goods, the parties' respective duties are as follows: the supplier (the [Seller]: note by the Arbitration Tribunal) shall guarantee that the machines would run normally and bear the responsibility to repair the goods within a period of time; the buyer shall make the payment (including the remaining amount) on time. Therefore, the [Seller] had the duty to install, adjust, and start running the machines, and the [Buyer] should pay the remaining contract price. Article 4.2.3 of the Contract stipulates:

"After the goods arrive at the [Buyer]'s company, and the parties sign and confirm the acceptance, the [Buyer] shall pay the remaining 10% of the contract price within 30 days or 60 days after the goods arrive."

The [Buyer] alleged that the condition to pay the remaining amount stipulated in the L/C is "the [Buyer] shall pay off within 30 days after the applicant (the [Buyer]) and the beneficiary (the [Seller]) officially sign and confirm the Certificate of Acceptance Testing." The [Seller] alleged that L/C is only a payment method, and the condition to make the remaining payment stipulated in the L/C could not be used to determine the payment method for the remaining amount, i.e., only when the remaining payment is made by L/C, the payment conditions stipulated in the L/C apply, and the conditions could not be deemed as the amendment of the Contract. Therefore, the [Buyer] should have made the remaining payments for the PECVD and AOE machines on 21 August 2001 and 9 October 2001, respectively, but the [Buyer] refused to perform the duty to make the remaining payment.

Even if based on the payment method alleged by the [Buyer], the [Buyer] should "pay off the remaining amount within 30 days after the parties officially sign and confirm the Certificate of Acceptance." According to the letter sent by Mr. Dong Chengju of the [Buyer], "the parties signed the Certificate on 6 December 2001," so the [Buyer] should have paid the remaining price one month after 6 December, i.e., 6 January 2002. However, the [Buyer] failed to make the payment even after the [Seller] urged many times. Article 59 CISG stipulates:

"The buyer must pay the price on the date fixed by or determinable from the contract and this Convention without the need for any request or compliance with any formality on the part of the seller."

The [Seller] alleged that it had given the [Buyer] sufficient and reasonable time, and the [Buyer] should have performed its contractual duties within this period. On 6 May 2002, the [Seller] sent the last payment notice to the [Buyer], which was the exercising of defense right of first performance.

      (2) The starting time of the warranty period.

      Article 18 of the Contract stipulates:

"The warranty period is one year (counted from the day when the machines start running after installation and adjustment testing ..."

With respect to the construction of "start running," the parties held different opinions; the [Seller] did not want to dispute on this issue, and agreed to count the starting date based on the method alleged in the [Buyer]'s defense and counterclaim, i.e., the warranty period started from 6 December 2001 when the machines and design were consistent with the Contract. Therefore, when the [Buyer] did not breach the Contract, the [Seller]'s warranty period started from 6 December 2001 to 5 December 2002, respectively.

      (3) The replacement of parts during the adjustment testing.

      It was not as the [Buyer] alleged that the replacement of essential parts affected the process of adjustment testing. The fact was that most of the replaced parts were consuming products; as to a large machine, it is normal to replace the consuming parts.

      (4) The [Buyer] did not request warranty service during the warranty period.

      From 6 December 2001 (the starting time of the warranty period), the machines had been running normally, and no problem occurred; according to either the Contract or custom, the [Buyer] should have timely paid the remaining amount, but it failed to make the payment. After the [Seller] exercised the defense right of first performance and stopped the warranty services, the machines were still running normally, and the [Buyer] did not request the [Seller] or ___Factory in the UK to perform any warranty services. However, at present, the [Buyer] suddenly alleged that because the [Seller] stopped warranty services, the machines could not run. The [Seller] alleged that this had no basis. If the machine could not run because of stopping the warranty services, the [Buyer] should have immediately sent a letter to the [Seller] requesting warranty services or requested the manufacturer to impose pressure on the [Seller] to perform warranty services. However, the fact is that neither the [Seller] nor the manufacturer received any such information within the warranty period.

Meanwhile, the [Seller] raised suspicion on the Evidence X submitted by the [Buyer], and alleged that this evidence is meaningless to this case, and the [Buyer] did not use this evidence in its counterclaim at all.

[Buyer]'s clarification

On 2 September 2003, the [Buyer] submitted a clarification regarding the third element of its counterclaim application to the Arbitration Tribunal, and also provided its agent's opinion regarding the facts and legal issues in this case. The main contents are as follows:

1. The [Seller] should not deny its liability of breach due to delayed delivery.

The allegation that the [Seller]'s delayed delivery was caused by the [Buyer]'s delayed issuance of the L/C was not established due to following reasons:

      (1) According to the principle of good faith and trade practice of issuing L/Cs between the parties, the [Seller] was obligated to timely inform the [Buyer] of the determined shipping time.

      (2) The [Seller] misstated Article 6 of the No. 9 Contract, and its reason was not justifiable.

      Article 6 of the No. 9 Contract stipulates the shipping time as "shipped on 10 June 2001 with the goods under the Contract 0-NET-0001," and this shows that the [Seller] would delay delivering the goods including PECVD and AOE under the Contract. A reasonable and prudent person under the common circumstances would understand Article 6 of the No. 9 Contract as the shipping time of the PECVD and AOE machines as 10 June 2001. Therefore, the [Seller] sent a written notice of delayed delivery in form of offer for establishing a contract to the [Buyer], and requested that the shipping time of the PECVD and AOE machines be delayed to 10 June 2001. According to the custom regarding issuance of L/Cs as above described, the [Buyer] had to issue the L/C based on the delayed shipping time. However, the [Buyer]'s acceptance should not be deemed as an exemption of the [Seller]'s liability for breach, because the [Seller] as the supplier breached the Contract first because of delay in delivering the goods.

      (3) The [Seller]'s delay of delivery was caused by its own fault.

            a. The manufacturer clearly explained the essential reason for the [Seller]'s delayed delivery.

            On 23 May 2002, in the e-mail (Evidence X) to Yang __ of the [Buyer] responsible for this transaction, L__ __ the Asian market sales supervisor of the manufacturer of the PECVD and AOE machines, __ Company in the UK, admitted that increasing demand in the market was the essential reason that caused the [Seller]'s delay of delivery, and the [Buyer] should be compensated. The [Seller] argued that Evidence X was not related to this case, but its reason was not justified. Evidence X showed the essential reason for the [Seller] to delay delivering the goods. __ Company admitted that the increasing demands in the market caused the [Seller] to be unable to deliver the goods to the [Buyer] on time; under such circumstances, the [Seller] as the sales agent of __ could not deliver the goods to the [Buyer] on time at all. The evidence submitted by the [Buyer] also proved that the [Seller] had negotiated with the [Buyer] regarding the penalty for delayed delivery, and also cited Lu Lin's (the sales person of the [Seller] at that time) words, "he was not going to ask for the penalty if the delivery was delayed," in order to avoid its liability for breach.

            b. The [Seller] amended the shipping time many times and also revised the payment method stipulated in the Contract, which caused the [Buyer] to issue the L/C on 18 May 2001.

            In fact, the [Seller] amended the shipping time many times because it could not deliver the goods on time; the Evidence VI submitted by the [Buyer] could prove this. On 14 March 2001, the [Seller] informed the [Buyer] in form of an offer for the No. 9 Contract that the goods would be shipped on 10 June 2001. Thereafter, the [Buyer] faxed the main provisions in the L/C to the [Seller] for its confirmation in order to avoid delaying the delivery of the goods because if the [Seller] could not deliver the goods after the [Buyer] issued the L/C, the L/C had to be amended. According to the delayed shipping time, the [Buyer] proposed to stipulate in the L/C that the latest shipping time was 30 July, and expiration day was 30 October 2001. In the fax sent on 25 April of the same year, the [Seller] amended the latest shipping time as 15 August 2001, and the expiration date as 15 November 2001 (see E __ of the [Seller]'s amended handwriting), and sent back to the [Buyer]. This shows that when the shipping day had already been delayed, the [Seller] still failed to determine the specific date. In order to have sufficient time to prepare goods, the [Seller] again postponed the shipping time stipulated in the L/C.

At the court session, Mr. Xiao, the [Seller]'s president, alleged that because of the time difference between the two places, Shenzhen Bank needed more than one week to issue the L/C; this was the essential reason for the [Seller] to amend the shipping time stipulated in the [Buyer]'s fax regarding the provisions of L/C. However, it must be pointed out that there is no time difference between Shenzhen and Hong Kong at all, and Shenzhen Bank's working efficiency is very high, and only needs two working days to issue the L/C, so this should not be the essential reason for the [Seller] to postpone the shipping time.

There is another detail that the amount, in the L/C which was amended by the [Seller], was 641,797.84, which was not the contract price in this case; however, the amount in the L/C issued by the [Buyer] was 661,797.84, which was consistent with the amended Contract. After 25 April, the [Seller] requested the [Buyer]'s sales person to revise the payment method in the Contract as by L/C for 100% of the contract price, and then the parties signed a new Contract in this case revising the payment method as by L/C for the total contract price. In addition, because of the May first holiday, the [Buyer] finally issued the L/C on 18 May 2001.

In sum, the [Buyer] issued the L/C one month before the [Seller] delivered the goods in accordance with the Contract, and had no fault at all; the [Seller] delayed delivering the goods because of its own fault, and should not avoid its liability for the delay of delivery. The [Seller] should pay the [Buyer] the penalty for the delayed delivery according to the Contract. It should be pointed out that the [Buyer] requested the [Seller] to pay the penalty as early as February and April 2002.

2. The [Seller] arbitrarily exercised the defense right of first performance, and stopped all warranty services, so it should be liable for this.

      (1) The [Seller]'s stoppage of warranty services did not satisfy the conditions of exercising of defense right of first performance, and lacks legal basis.

            a. The [Seller] cited Article 80 of CISG as the basis to stop the warranty services to the [Buyer]; this was a misunderstanding and arbitrary application of this Article.

            b. In this case, the [Seller]'s stoppage of warranty services obviously did not satisfy the conditions of exercising of defense right of first performance.

The Contract and its Appendix stipulate that the [Buyer] shall make the payment for the remaining amount when some conditions are satisfied, and the [Seller] shall be responsible for warranty services within a period of time, which are the parties' respective obligations. The [Seller]'s obligation of warranty services is not conditioned on the [Buyer]'s payment of the remaining amount, and the [Buyer]'s payment of the remaining price is not the precondition for the [Seller] to perform the warranty services for the [Buyer]. These two obligations are neither conditioned nor related to each other, nor constitute "the parties' mutual obligations," and there is not a performance order for these two obligations. Therefore, the [Seller] was not entitled to the exercising of defense right of first performance stipulated in Article 80 CISG.

According to the Contract, it is an essential contractual duty for the [Seller] to perform warranty services; if the [Seller] failed to perform this obligation, the normal operation of the PECVD and AOE machines could not be guaranteed. This obligation was not the counterpart of the [Buyer]'s obligation to pay the remaining amount. The [Seller] knew the importance of the warranty service, so it stopped the warranty services.

      (2) The [Seller]'s stoppage of warranty services directly caused that the machines could not be operated.

      The [Seller] alleged that after stopping the warranty services, the [Buyer]'s machines had been working normally, and the [Buyer] had never requested the [Seller] or the manufacturer, __ Company in the UK to provide the warranty services; this is inconsistent with the facts. The Evidence XIII and XIV submitted by the [Buyer] prove that after stopping the warranty services, the [Seller] not only rejected the [Buyer]'s reasonable request for technical support, but also arbitrarily prevented the [Buyer] from taking reasonable measures to repair the machines.

      (3) The [Seller] should compensate the [Buyer] for the [Buyer]'s loss due to operation stoppage of machines.

Article 45 CISG stipulates:

"If the seller fails to perform any of his obligations under the contract or this Convention, the buyer may... claim damages as provided in articles 74..." and "[t]he buyer is not deprived of any right he may have to claim damages by exercising his right to other remedies."

Therefore, when the [Seller] severely breached the Contract by stopping the warranty services, the [Buyer] could take remedial measures which did not deprive its right to other remedies.

The [Buyer]'s loss could have been foreseen when the [Seller] breached the Contract; according to Article 74 of CISG, the [Seller] should compensate.

Regarding the [Buyer]'s claimed loss, the [Buyer] submitted the following supplementary opinions:

            a. The loss of fabric materials

            These materials were ordered by the [Buyer] for manufacturing AWG products, and the specification and size were specially designed and produced for the [Buyer]. Because the [Seller] stopped the warranty services, the PECVD and AOE machines could not run normally due to technical problems. This caused the [Buyer] to stop the production of AWG products; in addition, because the materials were specially designed, and could not be used for other products, they were wasted. The [Buyer] spent HK $281,422.77, equal to RMB 155,6722, on the fabric materials. The [Seller] should compensate for this loss.

            b. The loss of electric gas materials

                  (1) The [Buyer] spent RMB 86,165 on four kinds of electric gas materials for PECVD production.

                  (2) The [Buyer] spent RMB 69,508 on electric gas materials for AOE production.

According to technical standards, electric gas materials have a quality warranty period. Referring to the contract for purchase of the electric gas materials submitted by the [Buyer], the above gas materials arrived within the time stipulated in the contract, and all quality warranty periods had expired; so the gas materials were wasted.

            c. The factory building rented for the two machines and the calculation of rent

            The [Buyer] rented factory building for the two non-operation machines. According to the building plan, the space for the two machines was 50 m2, and other space for accessory facilities of operation and production was 100 m2, and the total space was 150 m2 (excluding the shared space).

The unit rent stipulated in the Building Renting Contract is RMB 65/m2/month; based on the actual unit rent incurred, i.e., RMB 55/m2/month, the monthly rent for PECVD and AOE was 55X 150 = RMB 8,250. It had been 15 months from May 2002, when the machines could not run normally after the [Seller] stopped warranty services, to the day when the [Buyer] filed the counterclaim. The total rent claimed was RMB 8,250 X 15 (months) = RMB 123,750.

3. Because the condition for the [Buyer] to make the remaining payment was not satisfied and the [Seller] had committed a fundamental breach of the Contract, it was a remedial measure that the [Buyer] had to postpone signing the Certificate of Acceptance and paying the remaining amount. However, the [Buyer] had never expressed that it would not pay the remaining amount.

Before filing the arbitration application, the [Seller] had never requested the [Buyer] to pay interest on the unpaid remaining amount; in addition, the condition for the remaining payment was not satisfied, so the [Buyer] did not delay the payment at all. Therefore, this request lacked factual and legal basis, and should be dismissed.

[Seller]'s rebuttal

The [Seller]'s arbitration agent alleged that:

1. The [Seller]'s delay of delivery was caused by the [Buyer]'s delayed issuance of L/C, so the [Buyer] should bear the liability for the delay of delivery.

      (1) According to either the shipping time stipulated in the Contract or international customs, the [Seller] was neither obligated to inform the [Buyer] to issue the L/C, nor obligated to notify the [Buyer] of the shipping time.

      (2) Since the [Buyer] should bear the liability for the delay of delivery, the [Seller] should not pay the alleged penalty.

      (3) When receiving the goods, the [Buyer] was obligated to make the payment.

2. After the [Seller] had satisfied the duty to perform warranty services for six months, the [Buyer] still refused to make the remaining payment; after the [Seller] gave the [Buyer] a reasonable period and urged many times, the [Buyer] still failed to pay; therefore, the [Seller] had to exercise the defense right of first performance.

OPINION OF THE ARBITRATION TRIBUNAL

1. The applicable law

The Arbitration Tribunal noted that Article 17 of the Contract stipulates that the United Convention on Contracts for International Sales of Goods (CISG) applies. The Arbitration Tribunal confirmed that CISG applies to this case.

2. The basic facts in this case

After hearing this case, the Arbitration Tribunal confirmed the following facts:

            a. On 7 November 2000, the [Seller] and the [Buyer] signed the Contract in this case stipulating:

   -    Goods: The [Seller] shall sell to the [Buyer] a set of __ Multiplex AOE ("AOE") and a set of __ PECVD ("PECVD") machines;
 
   -    Total price: 661,797.84 CIF Shenzhen;
 
   -    Payment terms: "Deposit (cash) and L/C";
 
   -    Amount and time of payment: The [Buyer] shall pay 20,000 within two weeks after the Contract is executed, and pay the remaining amount by L/C after the goods arrive at Shenzhen Customs; the [Buyer] shall pay 90% of the remaining amount, i.e., 577,618.05 (it shall be 577,619.86: note by the Arbitration Tribunal) after the goods are delivered, and the L/C shall be issued one month before the goods are delivered; within 30 days after the goods arrive at the [Buyer]'s company, and the parties examine and accept the goods, and sign a confirmation or, within 60 days after the goods arrive, the [Buyer] shall pay the remaining 10%, i.e., 64,179.79 (it shall be 64,179.98: note by the Arbitration Tribunal);
 
   -    Shipping time: PECVD shall arrive at Shenzhen Port before 10 April 2001, and AOE shall arrive at Shenzhen Port before 10 June 2001;
 
   -    Loading port: Hong Kong port;
 
   -    Arrival port: Shenzhen.
 
   -    Article 15. Claims: "Within 90 days after the goods arrive at the destination port, if the quality, specification, or quality of the goods are found inconsistent with the Contract except for the liability which an insurance company or carrier shall bear, the [Buyer] shall request replacement or claim damages with a certificate issued by a commodities inspection bureau."
 
   -    Article 18. Warranty: "Warranty period: one year (calculated from the day when the goods are installed, adjusted and operated). Within the warranty period, the [Seller] shall be responsible to supply and replace the parts (excluding vulnerable parts) for the machines (AOE and PECVD) due to damages caused by non-personal factors. The [Seller] shall bear all expenses (the transportation fee which the [Buyer] shall bear is only limited to the parts which could not be delivered from Hong Kong, and could be delivered only from the headquarters in the UK). After the one-year warranty period, the [Seller] shall supply parts within eight years. This provision shall not apply to any damages which are caused by negligence, misuse, clash, dropping, intentional destroying, and exposure to corrosive substances, etc."
 
   -    Article 20(d). Delay penalties: "If any delayed delivery is caused by force majeure, the [Seller] shall pay the [Buyer] penalty for delay, i.e. 0.5% of the price of goods delayed per week, but the total penalty shall not exceed 5% of the price of goods delayed; if the delay is less than one week, it shall be calculated as one week. If the delay is longer than ten weeks, the [Buyer] is entitled to revoke the Contract, and the [Seller] shall refund the deposit (20,000) to the [Buyer]. However, the [Seller] shall still pay the [Buyer] the above stipulated penalty, and shall not refuse or delay."

            b. In April 2001, after negotiation, the parties agreed to amend the original payment method, i.e., partial payment by L/C, to payment of the total contract price by L/C; the parties revised the corresponding article in the Contract as the payment method is by L/C, and after the goods arrive Shenzhen Customs, the [Buyer] shall make the payment by L/C; the [Buyer] should pay 90% of 661,797.84, the total contract price after the goods arrived, i.e., 595,618.05; the L/C should be issued one month before the goods were delivered; within 30 days after the goods arrived at the [Buyer]'s company and the parties signed and confirmed the Certificate of Acceptance or, within 60 days after the goods arrived, and the parties signed and confirmed the Certificate of Acceptance, the [Buyer] should pay 10% of the total contract price, i.e., 66,179.79.

            c. In April 2001, the parties negotiated the terms in the L/C; the [Buyer] faxed the essential terms of L/C to the [Seller]; the [Seller] revised the shipping time of 20 July 2001 to 15 August 2001, and the expiration date of 15 October 2001 to 15 November 2001.

            d. On 18 May 2001, the [Buyer] issued the irrevocable L/C with the [Seller] as beneficiary; the L/C stipulates that the amount is 661,797.84, the expiration day is 30 August 2001, the latest shipping time is 30 July 2001, and the remaining 10% of the invoice amount shall be paid within 30 days after the parties sign and confirm the the Certificate of Acceptance.

            e. Shenzhen Customs Import Declaration Form shows that the PECVD machine under the Contract arrived at Shenzhen Port on 22 June 2001, and the AOE machine arrived at Shenzhen Port on 9 August 2001.

            f. In March 2001 the [Seller] faxed the draft of the Contract No. O-Net-0009 ("No. 9 Contract, the other contract between the parties); which stipulates that the goods shall be shipped on 10 June 2001 together with those under the Contract in this case. On 14 March 2001, the [Buyer] sealed the No. 9 Contract and faxed back to the [Seller], and the [Seller] also signed and sealed it.

            g. During the adjustment testing, some parts had been replaced.

            h. The [Seller] sent many letters requesting the [Buyer] to pay the remaining amount, but the [Buyer] failed to pay. On 26 April 2002, the [Seller] sent another letter to the [Buyer] alleging that the [Seller] would not provide warranty services from the end of April, and after the end of April, the [Seller] would provide warranty services only if the [Buyer] paid the remaining amount. On 6 May 2002, the [Seller] sent a formal notice to the [Buyer] informing that it suspended all warranty services.

            i. On 8 May 2002, the [Buyer] sent a letter to the [Seller] requesting it to provide warranty services.

            j. The quality warranty period the [Buyer] alleged should be counted from 6 December 2001. The [Seller] did not agree on the [Buyer]'s opinion on the starting day of the warranty period first, and then during the arbitration process, expressly agreed that the starting day was 6 December 2001.

The above facts show that after signing the Contract, the parties actually performed; the [Seller] delivered the goods under the Contract to the [Buyer], but the delivery was later than the stipulated date; the [Buyer] accepted the goods and paid 90% of the contract price, but did not pay the remaining 10%; because the [Buyer] did not make the remaining payment, the [Seller] notified the [Buyer] that it was stopping the warranty services during the quality warranty period.

3. The liabilities

      (1) Whether the [Seller] breached the Contract

            a. The [Seller]'s delayed delivery

            The Arbitration Tribunal notes that the basic and essential duty as a seller under an international sales contract is to delivery complying goods at the time and place consistent with the contract.

According to the Contract, the [Seller] should have shipped the PECVD machine to Shenzhen Port before 10 April 2001, and the AOE machine to Shenzhen Port before 10 June 2001.

The fact is that the PECVD machine arrived at Shenzhen Port on 22 June 2001, and the AOE machine arrived at Shenzhen Port on 9 August 2001.

During the performance of the Contract, it is true that the [Seller] delivered the goods late. The issue is whether the [Seller]'s delayed delivery constituted a breach of the Contract and whether it should bear liability to the [Buyer].

The performance of the Contract shows that in April 2001, the parties amended the payment methods under the Contract as payment by L/C; the parties negotiated the terms in the L/C; thereafter, on 18 May 2001, the [Buyer] issued the irrevocable L/C with the [Seller] as the beneficiary stipulating the latest shipping time is 30 July 2001.

The Arbitration Tribunal noted that the [Seller] did not object to the terms in the L/C issued by the [Buyer]; this shows that after negotiation, the parties amended the latest shipping time under the Contract as 30 July 2001; the parties amended the Contract by revising the shipping time stipulated in the L/C. The PECVD machine under the Contract arrived at Shenzhen Port on 22 June 2001, which was within the period amended by the parties; the AOE machine arrived at Shenzhen Port on 9 August 2001, ten days later than the time amended by the parties. The Arbitration Tribunal noted that the time amended by the parties was shipping time, but 9 August 2001 was the time of AOE arrival at Shenzhen time. There may be a difference between shipping time and arrival time. However, the Arbitration Tribunal noted that the loading port stipulated in the Contract was Hong Kong Port, which is not far away from Shenzhen Port; usually shipping time and the arrival time are on the same day. Therefore, the Arbitration Tribunal held that the [Seller] delivered AOE ten days later than the stipulated time, so it should be liable for the delay of delivery. According to Article 20(d) of the Contract, the [Seller] should pay the [Buyer] the penalty for delayed delivery at 0.5% of the price of delayed goods per week, and if the delay is less than one week, it should be counted as one week, i.e., the value of AOE, 396,215.44 X 0.5% (per week) X 2 weeks = 3,962.15.

            b. Stoppage of the warranty services

            The Arbitration Tribunal held that to provide warranty services is one of the [Seller]'s essential obligations. Article 18 of the Contract stipulates that the quality warranty period is one year, which shall be counted from the day when the machines start running after installation and adjustment are completed; during the warranty period, the [Seller] shall supply and replace the damaged necessary parts (excluding the consuming parts) of the AOE and PECVD machines except for damages caused by personal reasons, and the [Seller] shall bear all expenses. During the arbitration process, the parties agreed that the warranty period started from 6 December 2001, so the warranty period under the Contract is from 6 December 2001 to 5 December 2002. During the one year warranty period, the [Seller] should perform the duty of warranty services stipulated in Article 18 of the Contract. However, the Contract does not stipulate if the [Buyer] failed to make the remaining payment, whether the [Seller] was entitled to suspend the warranty services. Therefore, it is inconsistent with the Contract that the [Seller] unilaterally suspended the warranty services. The [Seller]'s allegation that it exercised the defense right of first performance by suspending the warranty services when the [Seller] failed to pay the remaining amount, was not established.

      (2) Whether the [Buyer] breached the Contract

            a. The outstanding remaining amount

            The Arbitration Tribunal held that the [Buyer]'s basic and essential obligation under the Contract for international sales of goods is to take delivery of the goods and make the payment in accordance with the Contract.

After taking delivery of the goods under the Contract, the [Seller] paid 90% of the contract price, and failed to pay the remaining 10%.

According to the amended stipulation in the Contract, the [Buyer] should pay 10% of the contract price, i.e., 66,179.79 within 30 days after the goods arrived at the [Buyer]'s company, and the parties signed and confirmed the Acceptance, or within 60 days after the goods arrived.

The Arbitration Tribunal holds that according to the above stipulations, the [Buyer] should pay 10% of the contract price, i.e., 66,179.79 within 30 days after the parties signed and confirmed the Certificate of Acceptance, or within 60 days after the goods arrived. If any of the above two payment conditions was satisfied, the [Buyer] should pay the [Seller] the remaining amount. Although the parties did not sign the Certificate of Acceptance, the AOE machine arrived at the destination port, Shenzhen Port, on 9 August 2001. Therefore, the [Buyer] should have paid the remaining amount, i.e., 66,179.79, on 9 October 2001. Because the amount the [Seller] claimed in its arbitration claim was 66,179.79, the Arbitration Tribunal respected the [Seller]'s decision.

The Arbitration Tribunal noted that the [Buyer] alleged that the remaining 10% of the invoice value should be paid within 30 days after the parties signed the Acceptance. This should be deemed as the parties had already restricted the conditions for the remaining payment to this one only; if this condition was not satisfied, the [Buyer] need not pay the remaining amount.

The Arbitration Tribunal holds that L/C is only a payment method, and the above stipulation in the L/C should apply only when the payment was made by L/C; the [Buyer]'s duty to make the payment was not exempted because the conditions stipulated in the L/C were not satisfied. Because the parties did not sign the Certificate of Acceptance, the condition for the remaining payment stipulated in the L/C was not satisfied, and the [Seller] could not receive the remaining amount under the L/C; however, the condition for the remaining amount stipulated in the Contract was satisfied, so the [Buyer] should pay the [Seller] the remaining amount.

The Arbitration Tribunal also noted the [Buyer]'s allegation that because the [Seller] delayed performing its obligation of installation and adjustment, and stopped the warranty services, the [Buyer] refused to make the remaining payment; therefore, the [Seller] should be held liable.

The Arbitration Tribunal held that if the [Buyer] could prove that the loss incurred due to the [Seller]'s delayed performance of installation and adjustment and stoppage of warranty services, the [Buyer] could request the [Seller] to compensate. However, it lacks legal and contractual basis for the [Buyer] to refuse to make the remaining payment by alleging that the [Seller] delayed installing and adjusting the machines, and stopped the warranty services.

The [Buyer] breached the Contract, because it refused to make the remaining payment without justifiable reasons. Article 78 of CISG stipulates, "If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it ..." The [Buyer] should be held liable for its breach, and should compensate the [Seller] for interest on the outstanding amount. The outstanding amount should be 66,179.79, but the amount claimed by the [Seller] was 66,179.78; the Arbitration Tribunal respected the [Seller]'s request that the outstanding amount be 66,179.78; the interest should be calculated from 9 October 2001 to the day when the [Buyer] actually makes the payment, and the annual interest rate should be 5%.

            b. Whether the [Buyer]'s issuance of the L/C was delayed

            The [Buyer] did not issue the L/C before 10 March and 10 May 2001, one month before the goods arrived on 10 April and 10 June 2001.Because the parties amended the latest shipping time under the Contract as 30 July 2001, the Arbitration Tribunal held that this constituted an amendment of the original shipping time stipulated in the Contract; therefore, if the [Buyer] issued the L/C before 30 June 2001, it was consistent with the Contract. The [Buyer] issued the L/C on 18 May 2001, which was in compliance with the Contract and, and did not breach the Contract.

4. The [Seller]'s arbitration claims

      (1) The request that the [Buyer] should pay the remaining amount, i.e., 66,179.78, and the interest on it, calculated from 9 October 2001 to the day when the actual payment is made with the annual interest rate of 6.5%.

Based on the opinion stated in the above 3 (2) a, the Arbitration Tribunal sustained the [Seller]'s first and second claims, but held that the annual interest rate should be 5%.

      (2) The request that the [Buyer] should compensate the [Seller] for the attorneys' fee of RMB 52,000 and traveling expenses etc., incurred for this case.

Considering that the [Seller] also breached the Contract during the performance of the Contract, the Arbitration Tribunal held that the [Seller] should bear its own expenses including the attorneys' fee and traveling expenses, etc. The Arbitration Tribunal did not sustain this claim of the [Seller].

5. The [Buyer]'s counterclaims

      (1) The request that the [Seller] should pay the [Buyer] a delayed delivery penalty, totaling 31,108.814.

Based on the opinion stated in above 3 (1) a, the [Seller] should pay the [Buyer] a delayed delivery penalty of 3,962.15.

      (2) The request that the [Seller] should compensate the [Buyer] for the loss of RMB 2,368,535.05 caused by the [Seller]'s stoppage of warranty services.

The Arbitration Tribunal noted that the [Buyer] submitted the invoice of HK $281,422.77 for purchasing fabric materials, and the invoice and contract to purchase electric gas materials in order to prove that the loss of RMB 155,673 incurred because of the expiration of the warranty period of electric gas materials, and also submitted the house renting contract, invoice of rent, and the factory building plan, in order to prove space which the machines and accessory facilities occupied and the loss of rent.

The Arbitration Tribunal holds that although the [Seller] arbitrarily suspended the warranty services during the warranty period, and breached the Contract, the [Buyer]'s above evidence could not prove that the above loss expenses was incurred due to the [Seller]'s stoppage of warranty services or under or related to the Contract in this case. Therefore, the Arbitration Tribunal did not sustain the [Buyer]'s above counterclaims.

      (3) The request that the [Seller] should compensate for the [Buyer]'s attorneys' fee, traveling expenses, etc. incurred for this case.

The Arbitration Tribunal holds that because the [Buyer] also breached the Contract during the performance, it should bear the above expenses. The Arbitration Tribunal did not sustain this counterclaim.

6. The arbitration fee

Considering the actual situation in this case, the [Seller] should pay 20% of the arbitration fee, and the [Buyer] should pay 80%. As to the arbitration for the counterclaims, the [Seller] should pay 30%, and the [Buyer] should pay 70%.

AWARD

Based on the above facts and reasons, the Arbitration Tribunal handed down the following award:

(1) The [Buyer] should pay the [Seller] the remaining contract price, i.e., 66,179.78 plus the interest on it with the annual rate of 5% from 9 October 2001 to the day when the actual payment is made.

(2) The [Seller]'s other claims are dismissed.

(3) The [Seller] should pay the [Buyer] a delayed delivery penalty, totaling 3,962.15.

(4) The [Buyer]'s other counterclaims are dismissed.

(5) The arbitration fee is US $5,370, of which the [Seller] should pay 20%, i.e., US $1,074, and the [Buyer] should pay 80%, i.e., US $4,296.

The [Seller] had already paid US $5,370 to the Arbitration Commission, which was offset by the arbitration fee, so the [Buyer] should pay the [Seller] US $4,296 which was paid by the [Seller] in advance.

The arbitration fee for the counterclaim is RMB 79,564, of which the [Seller] should pay 30%, i.e., RMB 23,869.20, and the [Buyer] should pay 70%, i.e., RMB 55,694.80. The [Buyer] had already paid the Arbitration Commission RMB 79,564, which was offset by the arbitration fee for the counterclaim, so the [Seller] should pay the [Buyer] RMB 23,869.20, which the [Buyer] paid in advance.

The above amounts, which the [Buyer] should pay the [Seller] and the [Seller] should pay the [Buyer], should be paid within 20 days of this award.

This award is final, and will take effect when it is handed down.


FOOTNOTES

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

** Zheng Xie, LL.M. Washington University in St. Louis, LL.M., BA in Economics, University of International Business and Economics, Beijing.

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

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Pace Law School Institute of International Commercial Law - Last updated March 24, 2008
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