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CISG CASE PRESENTATION

China 14 January 2004 CIETAC Arbitration proceeding (Printing machine case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/040114c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20040114 (14 January 2004)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2004/01; Case No. Shen M2003016

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Hong Kong (respondent)

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

GOODS INVOLVED: Printing machine


Classification of issues present

APPLICATION OF CISG: The contract stipulates that it "is governed and should be explained by Chinese law. The CISG and other international usages and practices could be referenced."

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 8 ; 25

Classification of issues using UNCITRAL classification code numbers:

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

25B [Definition of fundamental breach: substantial deprivation of expectation, etc.]

Descriptors: Intent ; Fundamental breach

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

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

Printing machine case (14 January 2004)

Translation [*] by Meihua Xu [**]

Translation edited by Zheng Xie [***]

The China International Economic and Trade Arbitration Commission Shenzhen Sub-Commission (hereafter, the "Shenzhen Commission") accepted the case (Case number: Shen M2003016) according to:

   -    The arbitration clause in Sales Contract No. 7B - 56274 signed by Claimant [Buyer], China Hubei __ Company, and Respondent [Seller], Hong Kong __ Company; and
 
   -    The written arbitration application submitted by [Buyer].

The Arbitration Rules of China's International Trade and Economic Arbitration Commission [hereafter, the Arbitration Rules], which took effective on 1 October 2000, apply to this case

On 3 March 2003 the Secretariat of the Shenzhen Commission sent the notice of arbitration, [Buyer]'s application with appendix, the Arbitration Rules and the list of arbitrators, etc. to [Seller]. The relevant arbitration documents were sent to [Buyer] at the same time.

The [Buyer] appointed Mr. Xu, A as its arbitrator, and the [Seller] appointed Mr. Cao as its arbitrator. The Chairman of the Arbitrator Commission appointed Mr. Xu, B 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 within the time stipulated in the Arbitration Rules. On 29 April 2003, the aforesaid three arbitrators formed the Arbitration Tribunal to hear this case.

On14 July 2003, the Arbitration Tribunal held a court session in Shenzhen. The [Buyer]'s attorney and the [Seller]'s attorney attended the court session. The Arbitration Tribunal heard the parties' statements and arguments, investigated the relevant facts and examined the relevant evidence. After the court session, the parties submitted supplementary materials. After the Secretariat solicited opinions, the parties submitted written comments on the evidence.

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

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

I. FACTS

In June 2001, in order to buy a double-color single-sheet gravure printer, the [Buyer] authorized Hubei J Bidding Company to invite public bidding.

On 8 August of the same year, the [Seller] submitted Bidding Document No. 0616-WH012038 (hereafter, the "bidding document"), with the following contents:

   -    Item model: double-color "740 1040";
   -    Usage: for high quality package printing;
   -    Overprint precision: 0.03mm;
   -    Price: CIF Shanghai 2,850,000 Deutsche Mark [DM].

Later, [Buyer], J Company (import agent) and [Seller] signed Sales Contract No. 7B3 - 56274 (hereafter, the "Contract") without indicating the date of signing. The Contract has the following terms:

Type of goods: Model 740 1040 double-color MG single-sheet gravure press printing Machine (hereafter, "the Machine");
Price: CIF Wuhan 2,850,000 DM;
Shipping: The goods shall be shipped within one week after 100% L/C is received;
Payment: Within four weeks of the conclusion of the Contract, the [Buyer] shall issue a 100% irrevocable L/C for the total price of the Contract with the [Seller] as the beneficiary. The L/C shall be negotiated by presenting the documents listed in Article 4 of the general terms of the Contract.

The general terms of the Contract have definite stipulations on packaging, shipping, inspection, claims for compensation, quality guarantee, liability, contract termination, applicable law, and arbitration. Appendix I of the Contract, the components list, clearly indicated that "overprint precision should be 0.03mm".

On 16 September 2001, the parties agreed to revise the destination port from Wuhan to Shanghai.

After the conclusion of the Contract, the [Buyer] asked Huaxia Bank to issue a 100% irrevocable L/C with the [Seller] as the beneficiary and paid 2,850,000 Deutsche Mark [DM] (i.e., renminbi [RMB] 10,899,038.69).

In October 2001, the goods arrived at Shanghai port. After import commodity inspection and customs clearance, the [Buyer] transported the goods to its factory on November 3.

Later, the [Seller] sent staff to install the Machine and performed four adjustments. These four adjustments are described as follows:

1. From 14 November 2001 to 8 December 2001, the [Seller] sent staff to do the installation and the first adjustment, and the test runnings were performed from 5 to 8 December. In "Memo on MOOG Machine installation and adjustment" (hereafter, "MG Memo"), it was clearly stipulated that "overprint precision is about 0.1mm and there is a 0.5 ~ 0.6mm space error".

2. From 29 January 2002 to 1 February, the [Seller] sent staff to test run the Machine. On 1 February, the two parties signed the MG Memo with the conclusion that "the printing space error was over 0.15mm, and the double-color overprint precision error was 0.15mm", and that "because the printing space error and overprint precision error did not satisfy the [Buyer]'s requirement, which is 0.03mm as stipulated in the Contract, therefore, the [Buyer] does not accept this Machine."

3. On 27 May 2002, the [Buyer] authorized its lawyer to send a letter to the [Seller], requesting the return of the Machine and a compensation against the damages. On 4 June 2002, the [Seller] sent staff to the [Buyer] to negotiate the quality issue, but did not reach any agreement. On 18 June 2002, the [Buyer] and its attorney sent a letter to the [Seller] again, stating that:

"We agree to give you another chance to adjust the Machine, and you must guarantee that the Machine will be acceptable by 25 July 2002 ... If the Machine is not acceptable at that time, you must promise to accept the return of the Machine and compensate against damages suffered by us. If the Machine passes the acceptance test, we would accept it. However, you should compensate against our economic loss caused by your late performance."

From 28 June 2002 to 1 July 2002, the [Seller] sent staff to adjust the Machine on double-color overprint precision. The MG Memo signed by the two parties on 1 July indicated that:

"The printing speed is stabilized at 8,000 pages/hour; the overprint precision error on operating side is 0.10mm and on transmission side is 0.08mm; this adjustment failed to pass the acceptance test."

4. On 23 August 2002, the [Seller] again sent staff to adjust the overprint precision error and printing effect. The conclusion in the MG Memo indicated that:

"The overprint precision error is 0.07mm; ink color was uneven, which needs further inspection; the aforesaid two results do not satisfy the [Buyer]'s requirements and the Machine is not accepted."

On the same day of adjustment, the Commodity Inspection Bureau of Hubei Province inspected the Machine, and issued an inspection certificate on 10 October 2002, which stated that:

"Based on the Contract, the overprint precision should be 0.03mm. However, the actual precision is 0.07mm. The aforesaid Machine does not conform to the contract. The defect is attributed to the manufacturing of this printing machine"

Since the conclusions of the four adjustments and the commodity inspection indicated that the Machine was not conforming, on 13 September 2002, the [Buyer] sent a letter to the [Seller] again, requesting to return the Machine.

On 28 September, the [Seller] replied, asking to do another test printing and promising that it would ask the manufacturer to compensate against the loss of the [Buyer].

On 29 September, the [Buyer] replied to the [Seller], alleging that:

"Another test printing would only increase expenses of both parties ... Certainly, you should make compensation to us.However, compensation has no meaning to us at all if the printing machine cannot perform normally to pass the acceptance test. We insist on no more acceptance tests and test runs, and only after acceptance test is passed should we discuss compensation. We now only request returning or exchanging the Machine."

On 30 September, the [Seller] sent a letter to the [Buyer] alleging that, the Machine had been used to print more than 2,000,000 pages, which was a considerable use; therefore, the [Seller] would not accept the return of the Machine, but only agreed to make compensation. However, the [Buyer] insisted on return or exchange of the Machine. Later, the two parties sent staff to negotiate this issue, but failed to reach any agreement. Therefore, the [Buyer] filed the arbitration application on 19 February 2003.

[Buyer]'s claim

The [Buyer] asks the Arbitration Tribunal to rule that:

1. The [Seller] shall refund RMB 10,899,038.69 paid by the [Buyer] (except as otherwise specified, the currency mentioned in this award is RMB -- note by the Arbitration Tribunal), and take back the goods at its own expense;

2. The [Seller] shall pay the losses of the [Buyer], including the L/C issuance fee, import agency fee, transportation expenses, loading and unloading expenses, customs clearance fee, commodity inspection and quarantine fee, totaling RMB 204,754; loss on test running of RMB 1,190,537.17; loss on bank loan interest of RMB 72,535.53/month; which totals RMB 1,233,104.01 calculated to February 2003;

3. [Seller] shall pay for the entire arbitration fee and the [Buyer]'s attorneys' fee.

[Seller]'s defense

The [Seller] submitted its response, alleging that the [Buyer]'s claims could not be established and asking the Arbitration Tribunal to dismiss those claims.

The main disputes of the two parties are as follows:

(A) Overprint precision

POSITION OF THE PARTIES

[Seller]'s position

The [Seller] alleges that there was a typo in its description of overprint precision mentioned both in the bidding document and in the Contract appendix I; however, this typo has no influence on the performance of the Machine. After the first adjustment conducted on 8 December 2001, the Machine was operating normally to produce conforming printed matter. Therefore, the [Seller]'s typo did not violate the Contract, nor did it cause any actual damages for the following reasons:

1. When the [Buyer] contacted the [Seller] for the purchase of the Machines in this case, it only stated that "after research, we think only the machine in one printing factory in Chongqing satisfies our requirements, and we want to purchase the same model." At that time, the [Buyer] had no requirement on overprint precision; therefore, the [Seller] did not specify the overprint precision in the purchase order, which it sent to the manufacturer of the Machine.

It needs to be mentioned that at that time, the duty-free period for importing this Machine nearly expired, and in order to enjoy the duty-free treatment, the [Buyer] concluded the Contract with the [Seller] first and asked the [Seller] to deliver the goods as soon as possible. Later, they completed the tender procedure. However, in order to avoid investigations conducted by relevant government agency, the [Buyer] did not date the Contract and asked the [Seller] to do the same thing (it was abnormal and a violation of international customs not to include the date in a contract, which was not in accordance with the [Seller]'s business practice because the [Seller] always puts a date at the beginning and end of its contracts). Therefore, the fact that the [Buyer] had concluded the Contract with the [Seller] could only be speculated by the following:

On 10 August 2001, the [Seller] sent a purchase order to MG Company (the manufacturer). However, it was not until 9 September 2001 that the [Seller] received the notice of winning the bid from J Company. As a general international trade practice, the tendering process should have the procuring bid first, then the parties conclude the contract, and then the export agent sends the purchase order to the manufacturer. The reason that the [Seller] had the courage to order the goods from its supplier before receiving the notice of winning the bid was that it had already signed the Contract with the [Buyer]. The aforesaid facts indicated that:

      a. The [Buyer] purchased the Machine based on the sample model in Chongqing, but not as it alleged at the court session that "it decided to purchase this Machine after doing lots of research";

      b. The [Seller] placed the purchase order with MG Company based on the quality of the Machine in Chongqing;

      c. Since the tender procedure was completed after the conclusion of the Contract, therefore, the typo in the Contract directly caused the error in the tendering document.

2. MG Company is the only manufacturer in the world to manufacture double color single sheet gravure printers. Compared with production equipments of other color gravure printing machines manufacturers, the single-sheet gravure printing is MG's unique technology, which is world wide leading in terms of specification of sheet printed and compatibility of printing materials, and much higher than the standard required in the solicitation of bids. Accordingly, the overprint precision is not the main reason for the [Buyer] to purchase this printing machine. The [Seller] did not include the overprint precision in the order placed with MG Company.

In addition, the [Seller] has never put overprint precision as a technical requirement into contracts for sales of machines of the same model that it signed with other clients in China, and those clients have never made any request for this or raised any objection. The [Seller] has sold more than ten machines of the same model in China, and no contract has the stipulation that "the overprint precision should be 0.03mm".

3. Pursuant to GB9851.5 - 90 printing technical terminology/gravure printing terminology, the so-called overprint means to print with two or more colors, with each color reaching and staying in an accurate position. Based on Section 8 of "Printing Theory and Technology" (hereafter "PTT") edited by Feng, Ruiqian, and published by Printing Industry Publisher, the description on how to overprint correctly and control overprint precision, states that:

"Overprinting correctly is a quality requirement for all printings. However, to duplicate one piece of printing, there must be a pre-printing process to make an original plate for copying or carving, and then using the original plate to copy or to carve a printing plate, which would be installed onto the printing machine to produce printed matter. Because the printing process is complicated and a lot of material and equipments are used, it is impossible to print without error with the current technology. The so-called overprint precision is just a range for overprint error under different printing conditions and for different types of printings."

Therefore, all printings produced by color printing Machines have overprint error, and as long as the error is within the stipulated range, the printing is conforming and acceptable.

Technically speaking, overprint error is caused by many factors, which mainly include: error on circumference of roller, error on paper, errors on other devices. In addition, moisture of paper, temperature and humidity at the time of printing, etc., can possibly affect the printing precision.

The relevant standard in China allows overprint error in gravure printing. The national industry standard of the PRC, CY/T 6-91, "Quality Requirements for gravure Printing and Inspection Methods", clearly stipulates the acceptable error on main part and general part of a printing (according to national standard CB7707 - 87 of the PRC, the explanation on gravure printing, the so-called main part means the part that reflects the theme, such as pictures, characters, or marks). The acceptable error on main part for fold section (620mm 445mm) is < 0.10mm; for 1/2 fold section size is < 0.15mm; for whole section is < 0.20mm; as to general part, for 1/4 fold section is < 0.15mm; for 1/2 fold section is < 0.20mm; for whole section is < 0.30mm.

The maximum specification of the MG single sheet gravure which the [Seller] sold to the [Buyer] is 740 X 1040 mm, and the minimum is 370 X 520 mm; the maximum specification of sheet is between whole section (890mm X 1240mm) to 1/2-fold section (620mm X 890mm); the minimum specification of sheet is less than 1/4-fold section (620mm X 445mm). Thus, the maximum permitted error of the main part is between 0.15mm to 0.20mm, and the minimum is less than 0.10mm; the maximum permitted error of the general part is between 0.20mm to 0.30mm, and the minimum is less than 0.15mm.

The aforesaid PTT also states that "theories and practices prove that within a normal visible scope, a person can detect 0.1mm thin lines. Normally, a printing consists of dots, and the diameter of each dot is less than 0.1mm, which is not recognizable by human vision. Therefore, 0.1mm is usually considered the basis for overprint precision."

Based on the aforesaid technical factors, technical standards and the descriptions on overprint precision in authoritative books, if the overprint precision of the Machine provided by the [Seller] could reach 0.10mm, it satisfies the quality requirement for gravure printings and falls within the minimum error stipulated in the inspection method. Therefore, the printing and the Machine should be considered conforming.

4. According to supplementary evidence II, Dr. H, a German technical expert asserted that printing precision error is caused by many complicated factors, and it is impossible to get 100% accuracy. A double color gravure printing machine can print matter up to general business standard, if its precision reaches 0.10mm; it is impossible that the printing precision could reach 0.03mm. Dr. H also proved that there are no printing precision standards in Europe. Dr. H asserted that no country has adopted printing precision standards as far as he knows.

According to supplementary evidence III, the manufacturer of the Machine, MG Company, also proved that if the overprint precision reaches 0.10mm, it will satisfy the requirement for ordinary business purposes, and a precision of 0.03mm was impossible to reach by this Machine. In addition, in Germany or in Europe, no standard on overprint precision has been adopted. MG Company also proved that the Machine was been manufactured in March 2001.

Based on the above facts, there is no overprint precision requirement of 0.03mm for color gravure printing in China or in Europe, or in Germany, and the [Seller] had never included the precision as a technical requirement in contracts with other clients. It was a typo that the [Seller] put the overprint precision which is technically impossible to reach in the Contract signed with the [Buyer].

The precision of the Machine was in compliance with Chinese standards and international customs and Article 8, a general term in the Contract on quality guarantee, and satisfied the [Buyer]'s requirements of this Machine. Therefore, the [Buyer]'s allegation that the printings printed by this Machine could not satisfy its clients' requirements has no legal and factual basis.

[Buyer]'s position

The [Buyer] alleges that:

The [Seller] failed to make its statement consistent for the following reasons:

1. Based on the evidence, the [Seller] clearly put an overprint precision of 0.03mm twice in its tendering documents and the Contract, using four lines of words written in both English and Chinese. As a top international company, the [Seller]'s allegation of repeated mistakes in a contract with the price of more than RMB 12,000,000 does not make sense.

2. At the court session, the [Seller] failed to answer for how many millimeters it allowed mistakes. The [Seller] was unable to answer what the accurate precision was without typo and failed to confirm where the typo was. Therefore, the allegation of typo is sheer nonsense.

3. The evidence provided by the [Seller] proves that the precision could reach 0.01mm, and the text book published in China as evidence II provided by the [Seller], clearly indicates that "overprint precision can reach 0.01mm". Therefore, the precision can reach 0.03mm. As a top international company, the [Seller] could have made the precision reach 0.03mm.

4. The [Seller] was promising that the precision could reach 0.03mm during the five adjustments. After the [Buyer] claimed for compensation, the [Seller] promised in the last fax sent on 26 December 2002, that "after repeatedly testing on a two-color machine, MG Company informed us of the good news that it had found a solution." This fax also indicated that precision of 0.03mm could be reached.

5. In its supplementary material, the [Seller] submitted opinions on precision by the German expert and the [Seller]'s CEO. Regarding this submission, we do not refer to whether the documents could be used as evidence because they are interested persons in this case, but only discuss whether their opinions could repudiate the standard agreed by the two parties.

First, the two parties did stipulate a 0.03mm standard, but did not fail to stipulate clearly. By submitting the aforesaid material, the [Seller] is discussing the precision issue without considering the stipulation in the Contract. Would the Contract not then be protected by law?

Second, we have never doubted the authority of the [Seller] and its expert. Because the [Seller] is a top international company, and has excellent experts, the [Buyer] believed that they could reach 0.03mm precision and therefore purchased the Machine. The law is definite. Can experts' opinions negate the stipulation of law?

Article 153 of the Contract Law of the PRC stipulates that "a [Seller] shall deliver goods in accordance with the contract." Thus, the [Buyer] asserts that it violates the Contract Law that the [Seller] disregarded the specification in the contract.

6. The main issue in the evidence and the opinions provided by the [Seller] is whether there was a typo. We consider that a typo is within the scope of material mistake stipulated in the Contract Law of the PRC. Article 54 of the Contract Law states, "A party shall have the right to request the people's court or an arbitration institution to modify or revoke contracts concluded as a result of serious misunderstanding." If the [Seller]'s assertion of typo could be established, it could only ask the Arbitration Tribunal to modify or revoke the Contract in this case, but not use it as a defense to avoid liability. Now the [Seller] has not even asked the Arbitration Tribunal to revise or revoke the contract. Therefore, the Arbitration Tribunal should not support its defense.

7. The [Seller] promised the precision of 0.03mm when signing the Contract. As a top international company with excellent experts, the [Seller] should have known the precision standard. Promising a standard which it was unable to reach is a typical civil fraud. If the precision could not reach 0.03mm, the [Seller] should be held liable. If the precision can reach within 0.03mm, the [Seller] shall be liable for breach of the Contract. In this case, the [Seller] denies the precision standard of 0.03mm, so the [Seller] has the motive to commit fraud in order to induce the [Buyer] to purchase the printer.

(B) Printed pages

POSITION OF THE PARTIES

[Seller]'s position

The [Seller] alleges that the [Buyer] has fully used this Machine; therefore, it has accepted it in fact.

In the fax sent to the [Buyer] on 30 September 2002, the [Seller] stated,

"The Machine has printed 2,000,000 pages, which could not simply be explained as for adjusting and testing. In accordance with trade practice, if a client wants to return the goods, he must guarantee that the goods are in original condition and have not been sufficiently used. However, 2,000,000 pages should be a sufficient use. It is not acceptable in international practice that, on the one hand, the [Buyer] claimed that the Machine did not work well; on the other hand, it continued using the Machine."

In the arbitration application, the [Buyer]'s explanation for the printed pages was that "they were for adjusting and test running." This statement was not in accordance with the facts in this case.

   -    According to the No. P00376 maintenance service report signed by the two parties, after the first adjustment, 85,000 pages were printed by 8 December 2001, and 559,139 pages were printed during the second adjustment conducted from 15 January to 20 January 2002. The [Buyer] printed more than 470,000 pages within half a month.
 
   -    There were 1,370,336 pages printed during the third adjustment conducted on 1 February 2002 based on the maintenance report. Deducting the 58,700 pages confirmed in the memo signed by the two parties on 1 February 2002, within one week from 21 January 2002 to 28 January 2002, the [Buyer] printed 752,497 pages without the presence of the [Seller]. Calculating based on 8,000 pages/hour, the [Buyer] had printed for 94 hours with 12 hours/day.
 
   -    Until 2 July 2002, based on the maintenance report, 2,100,000 pages had been printed with a 729,664 pages increase. There were 2,180,000 pages printed by 23 August 2002.

The above facts indicate that the [Buyer] has fully used the Machine for its production, which further proves that even though the [Buyer] did not sign to accept the Machine, it has in fact accepted it and confirmed that the precision satisfied the [Buyer]'s requirement and that the products printed were confirmed by the [Buyer]'s clients. There is no factual basis for the [Buyer]'s allegation that the quality of the Machine was not in accordance with the Contract.

[Buyer]'s position

The [Buyer] alleges that printing 2,000,000 pages is normal.

1. Each of the following calculation methods can prove that printing 2,000,000 pages is normal.

      (1) The Machine can print 12,000 pages/hour. Based on a normal speed of 8,000pages/hour, it can print 2,000,000 pages within 250 hours. The warranty period for the Machine is twelve months, and based on two shifts of 16 hours/day, it can print 2,000,000 pages in less than 16 days, which is far less than twelve months.

      (2) Based on the maintenance report submitted by the [Seller], there were a total of five adjustments (except for the three days for the installation), totaling 364 hours. If calculated at 8,000 pages/hour, it can print 2,900,000 pages.

      (3) It was noted in the maintenance report that the [Buyer] had requested twice a two-week test running, which was accepted by the [Seller]. If calculated at 16 hours/day, it can print to 1,790,000 pages.

2. The large amount of pages printed was caused by the [Seller]'s repeated and long time adjustments. [Seller] was seeking to avoid liability by alleging the number of pages printed. The [Seller] committed fraud.

      (1) Pursuant to the maintenance report, the Machine had printed 2,100,000 pages on 2 July 2002, and the [Seller] did not raise objection to this fact at that time. At the end of August, when the adjustment failed (2,110,000 pages had been printed as indicated in the maintenance report), and the [Buyer] again claimed for compensation. The [Seller] did not mention the issue on the number of printed pages until September 30, but agreed to compensate. This fact indicates that the [Seller] had been aware of the number of pages printed, and that the [Seller] used it as an excuse after the [Buyer] repeatedly claimed for compensation. The [Seller] lied about its lack of awareness of the fact that the [Buyer] had printed 2,000,000 pages;

      (2) After knowing that 2,100,000 pages had been printed, the [Seller] stated in the letter sent to the [Buyer] on 28 September that it would send its staff to help the [Buyer] to produce one type of printing, and in December, the [Seller] sent another letter, asking to do another adjustment. If the [Buyer] had accepted the [Seller]'s aforesaid suggestions, the number of pages printed would have exceeded 3,000,000 pages. The [Seller] had repeatedly asked to do adjustments and to help produce a new type of printing, which shows that the [Seller] did this intentionally to cause the [Buyer] to operate the Machine consistently, and then to avoid its liability by alleging the number of printed pages issue. The [Seller] committed fraud.

(C) Time for filing claims

POSITION OF THE PARTIES

[Seller]'s position

The [Seller] alleges that the [Buyer] has lost its right to request returning the goods for the following reasons:

On 8 November 2001, the [Buyer] sent a letter to the [Seller] (it was to urge the [Seller] to send staff to install the Machine and to revise the Contract), asking to:

"1. Send staff to our factory as soon as possible; and

"2. Revise Article 7, the general term of the Contract, from 'within 30 days after the goods are delivered to the end-user, the [Buyer] has the right to claim for compensation or exchange of the goods without charge by providing the inspection certificate issued by China Import and Export Commodities Inspection Bureau to 'within 30 days when the adjustment is completed, the [Buyer] has the right ...'."

This letter was sent by the [Buyer] unilaterally, which could not constitute a modification to the Contract. In fact, except for the first request in the letter, i.e., "please send staff to our factory as soon as possible," the [Seller] did not accept the other requests of the [Buyer].

The Machine arrived at the [Buyer]'s place on 3 November 2001, and according to Article 7, the general term in the Contract, the [Buyer] should have filed claims for damages or exchange with the inspection certificate issued by China Import and Export Commodities Inspection Bureau within 30 days. However, the [Buyer] did not get the inspection certificate until 10 October 2002, when the time for filing claims had already expired. Thus, the [Buyer] lost its right to claim for damages, or return or exchange the goods.

[Buyer]'s position

The [Buyer] counter argues that:

During the adjustments, the [Seller] willfully prolonged the time period between each of the two tests and always promised that the precision could reach 0.03 mm. Even in December 2002, the [Seller] sent a letter to the [Buyer], asking to perform another adjustment. This indicates that the [Seller] willfully prolonged the testing period, so that the time for filing claims expired.

(D) [Buyer]'s claims

POSITION OF THE PARTIES

[Buyer]'s position

The [Buyer] alleges that it spent a huge amount of money buying this printer in order to produce printed matter with top international quality; however, the test result shows that the precision could not reach 0.03mm as the [Seller] promised, and the printed matter was not as good as that printed by domestically manufactured printing machines. The supplementary evidence submitted by the [Buyer] proves that during the tendering process, the price offered by Mitsubishi, Japan, was 40% lower than the price offered by the [Seller], and domestic printing machines were sold for only RMB 1,290,000. Therefore, the fundamental purpose for the [Buyer]'s purchase of this Machines has not been realized.

Because of the [Seller]'s fundamental breach of the contract, the [Buyer] cannot get any benefits from this huge investment, and the printing machine cannot be used. The [Buyer]'s loss is enlarging and it faces bankruptcy. Thus, the [Buyer] requests the Arbitration Tribunal support its claims.

[Seller]'s position

The [Seller] defends that:

The [Buyer]'s assertion in the arbitration application that the quality of the Machine delivered by the [Seller] did not conform to the requirements in the Contract has no factual basis. The [Buyer] asks the [Seller] to refund the price, take back the goods, and compensate the [Buyer] against L/C issuing fee, import agency fee, transportation expenses, loading and unloading expenses, customs clearance fee, commodity inspection and quarantine fee, adjustments and test running expenses, loan interest, the entire arbitration fee, and the [Buyer]'s attorneys' fee. However, as stated above, the [Buyer] has actually accepted the Machine, and no damage has occurred. In addition, the last paragraph of Article 8 general term of the Contract stipulates, "in no event, is the [Seller] liable for loss of actual or expected profits, or indirect loss." Therefore, the [Seller] should not bear any expenses claimed by the [Buyer] no matter whether based on facts or the Contract in this case.

IV. OPINION OF THE ARBITRATION TRIBUNAL

The following is the opinion of the majority of the arbitrators.

      (I) The applicable law

      Article 15 of the contract stipulates, "This contract is governed and interpreted by the laws of the People's Republic of China, and can also refer to United Nations Convention on Contracts for the International Sale of Goods (1980) (CISG) and other international conventions and customs." According to the above stipulation, the Arbitration Tribunal decides that the laws of the People's Republic of China shall apply to this case; if these laws have no definite stipulation, CISG and other international conventions and customs can be referred to.

      (II) [Seller]'s allegation of a "typo"

      It was stipulated in the Contract that the overprint precision of the Machine was 0.03mm. However, after repeated adjustments, the precision could only reach 0.07mm. It was the [Buyer]'s position that the goods delivered by the [Seller] were not conforming. The [Seller], however, alleges that the stipulation of 0.03mm was a typo.

The Arbitration Tribunal holds that the [Seller]'s typo allegation cannot be established for the following reasons:

1. When writing or typing, a person cannot guarantee the accuracy of the entire text, especially when the content is long. Usually, we call a mistake in writing a miswriting, and in typing a typo. For the convenience of describing them, we call the aforesaid two types of mistakes "typo".

Generally, there are two situations for the occurrence of a typo; one is a mistake in writing itself. For example, we can see in many cases in L/C , " - " was missing when writing "t". This kind of mistake is also common in texts written in Chinese, for example, "at the court session" has been written as "after the court session". The other situation is failure to write or writing something which should have been included. For example, when failing to write "not" when writing "we do not agree with your suggestion", the meaning turns out to be the opposite. No matter in which situation, from a legal perspective, they are unconscious expressions without true intent, which means the person is unaware that his intention and expression are inconsistent. The expression is caused by mistake; therefore, it is called wrong expression.

As to the legal effectiveness of a wrong expression, some countries adopt a "void principle" and some adopt a "voidable principle". According to Article 15 of the general terms of the Contract, Chinese laws apply to this case. Even though there is no stipulation in detail regarding expression under the Civil Law of the PRC and other Chinese civil law regulations, the Arbitration Tribunal can still settle the disputes based on the principles of fairness, honesty and credibility set forth in the Civil Law of the PRC and stipulations in the Contract Law of the PRC.

Based on Articles 52~54 of the Contract Law of the PRC -- stipulations on void contracts and voidable contracts -- contracts signed due to fraud, duress or undue influence, are voidable. Logically, the contract in this case shall fall within the category of a voidable contract. The party, who claims to revoke the contract, shall bear the burden to prove that all of the necessary elements of mistake are met. In order to revoke a contract signed by mistake, the party seeking to revoke the contract, shall act in good faith and compensate the bona fide other party or third party.

2. In the instant case, the [Seller] alleges that it should not be held liable for breach of the Contract because of a typo. From a legal perspective, the [Seller] actually requests to revoke the precision 0.03mm stipulated in the contract due to mistake in order to avoid liability for breach of the contract. Therefore, the Arbitration Tribunal shall consider whether the [Seller] has the right to revoke the contract.

The Arbitration Tribunal notes whatever the answer is to the question whether precision 0.03mm is technically practicable is not a factor to decide whether the [Buyer] has the right to revoke the contract due to the following reasons.

      (1) If the conclusion is that, with today's technology, 0.03mm precision is impossible to reach, then there are two possibilities. One is that the [Seller] included the 0.03mm precision when signing the contract knowing this conclusion. This constitutes a fraud; the other possibility is that the [Seller] was unaware of this conclusion when signing the contract, but discovered it during the performance of the contract, thus is incapable to perform. No matter under which situation, the [Seller]'s defense cannot be established. Under the first situation, the party committing fraud certainly has no right to revoke the contract; under the second situation, a contract which cannot be performed is void, in which event it is not necessary revoke it.

      (2) The evidence provided by the [Seller] does not prove that 0.03mm precision is impossible to reach today.

            a. The [Seller] provided section 8 of PTT, which is edited by Feng, Ruiqian and published by Printing Industry Publisher in June 2002 as evidence and the [Buyer] cited the first paragraph of part 8 section 1, alleging that 0.03mm precision can be reached. The original text is:

"Nowadays, the technology and manufacturing level of printing machines are high, and overprint precision can be controlled within 0.01mm; therefore, as long as the machine is well adjusted, the precision requirement can be satisfied."

The [Seller] admitted at the court session that the PTT was written based on offset printing and the [Seller] was inferring the data for gravure printing based on this book. Since the [Seller] only submitted part 8 of the book as evidence, the Arbitration Tribunal is unable to determine whether the book was written based on offset printing. Therefore, the conclusion in part 8 of this book should not be applied to precision of gravure printing.

            b. As to the quality requirement and inspection method for gravure printing (CY/T 6 - 91) mentioned in Industry Standard of the PRC, the Arbitration Tribunal notes that this industry standard was approved by the Administration of Press and Publication of the PRC and became effective on 1 October 1991. Article 1 of the Industry Standard, "Main Contents and Scope of Application", states, "this standard stipulates the quality requirement and inspection methods for gravure printed matter, and applies to books, newspaper and magazines. However, other printed products may also refer to this standard." Therefore, the industry standard is applicable to printed books, newspaper and magazines, and is not mandatory to other printed matter.

In the components list attached to the tendering statement submitted by the [Seller] on 8 August 2001, the [Seller] clearly indicated, "the Machine is suitable for high quality printings, which are mainly used for packaging cosmetics and tobaccos. The Machine can perform partial or entire polishing and reverse printing", which indicates that the Machine in this case was mainly used for package printing, but not for books, newspaper and magazines. Therefore, this industry standard is not mandatory. In addition, this standard did not prove that 0.03mm precision cannot be reached with today's technology, because it only stiputes the range of overprint precision; in other words, as long as the error is within the range, it will be considered conforming. However, this standard does not mention whether 0.03mm precision can be reached.

            c. According to the testimonies provided by the two experts, we can see that the experts confirmed the following three points:

   -    There is no standard for overprint precision in Germany or Europe;
   -    If the Machine in this case can reach 0.1mm precision, it can satisfy the requirement for ordinary business purpose, and 100% precision is not realistic and is meaningless;
  - 0.03mm precision is not easy to reach.

The two experts used the word "almost impossible" but not "impossible."

Back to the issue whether the [Seller] has the right to revoke the contract.

A. The party who insists on revoking the contract due to mistake, shall bear the burden to prove that all of the elements of mistake are established and that the party does not know the mistake when making the expression In the instant case, the [Seller] was trying to prove that the 0.03mm precision agreed by the two parties was not its true intention because this precision had never been included in the contracts it entered into with its other clients. This defense is very weak. Logically speaking, no stipulation on precision in other transactions does not exclude the possibility that the two parties in this case might have stipulated one. Therefore, the [Seller] failed to prove that the 0.03mm precision is not its true intention.

B. Even if all elements of mistake are established, the [Seller] violated the principle of good faith when performing the contract. Therefore, the [Seller] has lost its right to revoke the Contract because:

   -    It was the [Seller] who stated 0.03mm precision first, and in the components list attached to the tendering document submitted on 8 August 2001, the [Seller] clearly wrote "overprint precision :0.03mm".
 
   -    During the first adjustment, the [Buyer] raised the objection to the precision which could not reach 0.03mm. If 0.03mm precision was a wrong expression, then the [Seller] should have been aware that its expression was wrong and executed its right to revoke the Contract. However, the [Seller] failed to do so during the adjustments afterwards and in the corresponding letters. On the contrary, the [Seller] was trying to adjust the Machine to comply with the Contract. A reasonable third party of the same kind as the [Buyer] and in the same circumstances would have expected that the precision could be reached by adjustment based on the [Seller]'s conducts.
 
   -    In addition, after the [Buyer] request returning the goods, the [Seller] did not raise the assertion of mistake. The [Seller] first raised this defense when this arbitration started. It is obvious that the [Seller] has violated the principle of good faith. Therefore, the [Seller] has lost its right to revoke the Contract.

Based on the above analysis, the Arbitration Tribunal holds that the [Seller]'s allegation of a typo cannot be established, and that 0.03mm precision stipulated in the Contract is valid and should be followed.

      (III) Disputes on the return of the goods and compensation

      As stated above, 0.03mm precision is valid. However, the [Seller] failed to reach this precision after repeated adjustments, so it breached the Contract. What measures could the [Buyer] take to mitigate the loss? The Arbitration Tribunal finds that the [Buyer]'s first claim is for the return of the goods and the refund of the payment; in essence this claim is to revoke the contract. Article 7 general terms of the Contract, inspection and compensation clause, only stipulates that claims can be filed when quality, specification or quantity is not complying with the requirements of the contract, and does not mention revoking the contract. Therefore, the Arbitration Tribunal will decide this issue according to Chinese laws when there is no stipulation in the Contract.

Article 148 of the Contract Law of the PRC stipulates, "Where it is not able to realize the purpose of a contract because the quality of the goods has not satisfied the quality requirements, the buyer may refuse to accept the goods or may rescind the contract " According to Article 148, the [Buyer] has the right to return the printer only when the [Seller]'s breach caused that the purpose of the Contract could not be realized, i.e., there is a fundamental breach as described in Article 25 of CISG.

Did the fact that the Machine delivered by the [Seller] could not reach a 0.03mm precision cause the [Buyer]'s purpose in signing the Contract to fail to be realized? Or, in other words, has the [Seller] fundamentally breached the contract?

As stated aforesaid, a 0.1mm precision can satisfy the requirement for ordinary business purposes, to which the [Buyer] did not raise any objection. Therefore, the Arbitration Tribunal deems that 0.1mm precision can be the business standard for common two-color gravure printing Machines. The Machine delivered by the [Seller] reached 0.07mm precision, which indicated that this Machine can satisfy the requirement for ordinary business purposes. However, does this mean the purpose of this Contract has been realized? In order to answer this question, the Arbitration Tribunal needs to answer the question what the purpose of the Contract is. Was the [Buyer]'s purpose to buy a machine for ordinary business purposes or a special machine with 0.03mm precision? If the answer is the former, then the purpose of the Contract has been realized, and if the answer is the latter, then it has not been realized.

The Arbitration Tribunal finds that:

First, the 0.03mm precision was first mentioned by the [Seller] in its components list attached to the tendering document submitted on 8 August 2001. The components list also mentioned that the Machine is "suitable for high quality printings for packages, which are mainly used in the cosmetic or tobacco industry; the Machine can perform polishing partially or entirely and can print on the reverse side." In this list, the two parties quoted the precision mentioned in the tendering document, stating that "the overprint precision is 0.03mm". This indicated that the [Buyer]'s purpose in concluding the contract with the [Seller] who offered a higher price at tendering was to purchase a machine which was suitable for high quality printings rather than for ordinary business purposes.

Second, paragraph 1 point 3 section 1 part 8 of the PTT, the description on overprint precision, clearly states, "to increase 1% precision would cost a lot." This indicates that The cost for precision of 0.03mm is much higher than that for precision of 0.07mm. In the instant case, the contract price is 2,850,000 DM; however, the price for the same type of machine without a specific print precision offered by Mitsubishi Business Beijing Office (hereafter, "Mitsubishi Beijing"), who attended the tender at that time, was only US $800,000. This indicates that there is a severe difference among machines with different precision.

Third, there is no stipulation on print precision in the purchase order provided by Mitsubishi Beijing, or in the sales contract the [Seller] entered into with D Company, or the contract signed by B Company and J Company. However, in the instant case, the [Seller] mentioned the precision of 0.03mm in its tendering document, and the two parties agreed on the precision of 0.03mm in the Contract. In addition, during the four adjustments, the [Buyer] was insisting that it could not accept a precision lower than 0.03mm.

The above facts indicate that the [Buyer]'s purpose of signing the Contract was to buy a printing machine with the precision of 0.03mm and not to buy one for ordinary business purposes; if otherwise, it is not necessary for the [Buyer] to include special requirements on precision in the Contract and to buy a printing machine for ordinary business purpose with such a high price. Thus, even though the Machine delivered by the [Seller] satisfies the requirement for ordinary business purposes, it did not reach the precision of 0.03mm. Therefore, the Arbitration Tribunal holds that the purpose of the Contract has not been realized and that the [Seller] has fundamentally breached the Contract.

As to the dispute on the time for filing claims, the Arbitration Tribunal finds that even though it was stipulated in Article 7 general term of the Contract, the inspection and compensation clause, that the [Buyer] shall file claims for compensation within 30 days after the goods arrive at the factory, and the modification requested by the [Buyer] on 8 November 2001 was not accepted by the [Seller]; on 23 August 2002, the [Seller] was still adjusting and test running the Machine. Any third party of the same kind as the [Buyer] in the same circumstances would have reasonably expected that the adjustment and test running would be successful. Thus, the [Seller]'s defense that the time for filing claims for compensation had expired, made after the fourth adjustment and during the arbitration process, was not in accordance with the principle of good faith and is not supported.

As to the number of pages printed, the Arbitration Tribunal finds that in as long as nine months of adjustments, the [Seller] had never mentioned that the [Buyer] could not operate the Machine before the acceptance test was passed. Any third party of the same kind as the [Buyer] in the same circumstances would have expected in good faith that the [Seller] could adjust the Machine to a conforming precision and would not stop test running. In addition, a considerable amount of pages had been printed during the adjustment and test running. The [Seller] was aware of this fact and had never raised any objection. The result of the acceptance test was that the Machine was non-conforming and the [Buyer] requested returning the goods. After that, the [Seller] refused to take back the goods and asserted that the Machine had printed more than 2,000,000 pages. This obviously violated the principle of good faith, so the Arbitration Tribunal cannot support this defense.

Based on the aforesaid analysis, the Arbitration Tribunal holds that the [Seller] has fundamentally breached the Contract, and that the [Seller]'s defenses that the time for filing claims expired and that a large number of pages were printed cannot be established.

According to article 148 of the Contract Law of the PRC, the [Buyer] has the right to revoke the contract, return the goods and get refund of the contract price. Therefore, the Arbitration Tribunal supports the [Buyer]'s first claim.

Article 97 of the Contract Law of the PRC stipulates, " If it has been performed, a party to the Contract may, in light of the performance and the character of the contract, request that the original status be restored or other remedial measures be taken." Accordingly, the Arbitration Tribunal supports the [Buyer]'s second claim for the L/C issuance fee, import agency fee, transportation expenses, loading and unloading expenses, customs clearance changes, and commodity inspection and quarantine fee, totaling RMB 204,754.

As to the [Buyer]'s claim for loss of expenses on test running of RMB 1,190,537.17, since the [Buyer] only provided a material purchase list without evidence to prove that the products printed during test running had no value at all, the [Buyer] failed to prove that this expense has actually been incurred, and the Arbitration Tribunal does not support this claim.

The [Buyer] also claims for loss of interest based on a bank loan agreement, requesting the [Seller] compensate against the loss of interest on a bank loan at the rate of RMB72, 535.53 per month. The Arbitration Tribunal holds that because the claim for refund of the contract price is supported, the [Buyer] is certainly entitled to the compensation against the loss of interest on the loan. However, based on Article 113 of the Contract Law of the PRC, the amount of compensation for the loss shall not exceed the probable losses caused by the breach of contract which has been foreseen or ought to be foreseen when the party in breach concludes the contract. Therefore, the Arbitration Tribunal supports the [Buyer]'s claim for loss of interest. However, the interests shall be based on the annual interest rate of The People's Bank of China at that time, i.e., 2.25%, calculated from 22 October 2001 (the [Buyer]'s payment day) to the day when actual payment was made by the [Seller].

The [Buyer] claims for attorneys' fee without providing any amount in detail or corresponding evidence. Therefore, this claim is not supported.

(IV) [Seller] shall bear the arbitration fee.

III. THE AWARD

Based on the aforesaid facts and the Arbitration Tribunal's opinion, the Tribunal rules that:

      (1) [Seller] shall refund the [Buyer] the contract price for the goods of RMB 10,899,038.69 and the interest on the loan calculated from 22 October 2001 to the day when actual payment is made at a 2.25% annual interest rate, and the [Seller] shall take back the goods at its own expense;

      (2) [Seller] shall pay the [Buyer]'s losses of L/C issuance fee, import agency fee, transportation expenses, loading and unloading expenses, customs clearance charges , and commodity inspection and quarantine fee, totaling RMB 204,754;

      (3) [Buyer]'s other claims are dismissed;

      (4) [Seller] shall bear the entire arbitration fee

[Seller] shall pay the aforesaid item (1), (2), and (4) within 30 days after this award is made.

This is the final award.

Presiding Arbitrator: ___

Arbitrator ___

Arbitrator: ___

14 January 2004 in Shenzhen


FOOTNOTES

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

** 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.

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

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Pace Law School Institute of International Commercial Law - Last updated August 9, 2007
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