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CISG CASE PRESENTATION

China 2005 CIETAC Arbitration proceeding (Engine block case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/050000c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20050000 (2005)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2005/25

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Italy (claimant)

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

GOODS INVOLVED: Engine blocks


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 49 ; 72 ; 74

Classification of issues using UNCITRAL classification code numbers:

49A1 [Buyer's right to avoid contract (grounds for avoidance): fundamental breach of contract];

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

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

Descriptors: Avoidance ; Fundamental breach ; Anticipatory breach ; Damages ; Profits, loss of

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Editorial remarks

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Unavailable

Translation (English): 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 and Trade Arbitration Commission
CIETAC (PRC) Arbitration Award

Engine block case (2005)

Translation by [*] Farah Poon [**]

Edited by William Zheng and Jingyuan Sun [***]

The China International Economic and Trade Arbitration Commission ("CIETAC") accepted the case (Case no. M2004____) according to:

   -    The Technical Agreement, dated 25 May 2002, signed by Claimant AAA Company [of Italy] and Respondent BBB Company [of the People's Republic of China] and the arbitration clause of Purchase and Sales Contract No. AQGSHT2002231/PD118, dated 4 June 2002, signed by Claimant AAA Company and Respondent CCC Company [of the People's Republic of China]; and
 
   -    The written Application for Arbitration submitted by Claimant AAA Company.

[For purposes of this presentation, Claimant AAA Company is hereinafter referred to as [Claimant Seller] and Respondent BBB Company and Respondent CCC Company are hereinafter referred to as either [Respondent Buyer BBB] and [Respondent Buyer CCC] or, when referred to together, as [Respondent Buyers]. ]

The China International Economic and Trade Arbitration Commission Arbitration Rules effective as of 1 October 2000 (the "Arbitration Rules") apply to the arbitral proceeding in this case.

The Secretariat of CIETAC sent to the [Claimant Seller] and the [Respondent Buyers] by express mail the Notice of Arbitration, the Arbitration Rules and the List of Arbitrators. The Application for Arbitration and its attachment submitted by the [Claimant Seller] were sent to the [Respondent Buyers] under the same cover.

The [Claimant Seller] appointed Mr. ___ as an arbitrator. The [Respondent Buyers] jointly appointed Mr. Weng Guo-min as an arbitrator. As he was not domiciled in Beijing, the [Respondent Buyers] paid to CIETAC in advance for his expenses to hold the proceeding in Beijing. The [Claimant Seller] and the [Respondent Buyers] failed to jointly appoint or jointly entrust the Chairman of CIETAC to appoint a presiding arbitrator within the time limit. Therefore, the Chairman of CIETAC, in accordance with Article 24 of the Arbitration Rules, appointed Mr. ___ as the presiding arbitrator. The three arbitrators formed an Arbitral Tribunal on 2 August 2004 and heard the case.

On 27 August 2004, [Respondent Buyer BBB] filed a Counterclaim with CIETAC and prepaid the fee for the counterclaim according to the Arbitration Rules.

On 22 September 2004, the Arbitral Tribunal conducted the first hearing in Beijing. Both the [Claimant Seller] and the [Respondent Buyers] sent representatives to attend the hearing. The parties stated the case and argued on the facts and legal issues. They also examined relevant evidence and answered the inquiries of the Tribunal.

After the hearing, both the [Claimant Seller] and the [Respondent Buyers] submitted supplementary opinions. The [Claimant Seller] and one of the [Respondent Buyers], [Respondent Buyer CCC], also submitted additional evidence. The Secretariat of the Arbitral Tribunal then exchanged the arbitration documents with the parties and sent out written notice to them on 1 November 2004. The written notice stated that, "Requests for another hearing to examine the additional evidence must be submitted to the Commission by 8 November 2003 by fax or express mail. If no such request is made, written comments and opinions regarding the abovementioned documents and evidence must be submitted to the Commission by 20 November 2004.

Neither party requested another hearing, but one of the [Respondent Buyers], [Respondent Buyer BBB], filed written comments on the additional evidence submitted by the [Claimant Seller] after the hearing.

On 23 December 2004, one of the [Respondent Buyers], [Respondent Buyer BBB], submitted to the Arbitral Tribunal evidence regarding a change in its company name. The Secretariat of the Arbitral Tribunal sent this evidence to the [Claimant Seller] and the [Claimant Seller] confirmed the change.

The case is closed. Based on the written materials submitted by the parties, and the facts and evidence examined in the hearing, the Arbitration Tribunal makes the arbitration awards.

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

FACTS

[Claimant Seller]'s Application for Arbitration and [Respondent Buyer BBB]'s counterclaim

The [Claimant Seller] and [Respondent Buyer BBB] signed a Technical Agreement on 25 May 2002. The [Claimant Seller] and [Respondent Buyer CCC] later signed Purchase and Sales Contract No. AQGSHT2002231/PD118 on 4 June 2002. The [Claimant Seller] and the two [Respondent Buyers] disputed over the execution of the aforesaid contracts and the [Claimant Seller] applied for arbitration.

[Claimant Seller]'s position

The statement of the [Claimant Seller]:

On 25 May 2002, the [Claimant Seller] signed a Technical Agreement with [Respondent Buyer BBB] and agreed that it was an attachment to the Purchase and Sales Contract, which would be signed by both parties subsequently. According to the Technical Agreement:

   -    [Respondent Buyer BBB] should order one mold of die casting cylinder block of car engines (Model no: SQR489-1002015);
 
   -    [Respondent Buyer BBB] should provide the [Claimant Seller] with the catalogue of the engine cylinder block, 3-D modeling CD, the blank drawing of the steel cover, and two 489 engine cylinder block samples. These items are to be used as a basis for the [Claimant Seller] to design and manufacture the mold.

On 4 June 2002, [Respondent Buyer BBB] signed the Purchase and Sales Contract with the [Claimant Seller] in the office of [Respondent Buyer CCC]. The Contract stipulates that:

   -    The [Claimant Seller] should provide one sample of the engine cylinder block mold and be responsible for its design, manufacturing, logistic, installation and fine-tuning.
 
   -    The contract price is US $315,000. The [Respondent Buyers] would pay 15% of the contract price, i.e., US $47,250, within ten working days after the signing of the Contract. The rest would be paid in the form of L/C.
 
   -    The [Respondent Buyers] should provide the drawings and the samples on the 23rd week of 2002 and the [Claimant Seller] should finish the first three samples before 20 October 2002.
 
   -    Any disputes arising from the execution of the Contract shall be resolved by amicable negotiation. If the dispute cannot be so resolved, it shall be referred to CIETAC for arbitration according to its procedures.

After signing the aforesaid Technical Agreement and Purchase and Sales Contract, the [Claimant Seller] received the first payment of US $47,205 (the discrepancy with the amount agreed in the contract could be caused by the deduction of administrative fee by the Bank) from [Respondent Buyer CCC] on 25 July 2002. In accordance with the schedule stipulated in the Technical Agreement and the Purchase and Sales Contract, the [Claimant Seller] started the design and manufacturing of the mold. As of November 2002, the expenses and cost incurred from the design, the purchase of the material and the production of the mold amounted to Euro [€] 102,819.85 and US $67,120.

Since the [Respondent Buyers] did not provide to the [Claimant Seller] all of the drawings and samples as stipulated in the Technical Agreement and the Purchase and Sales Contract, the [Claimant Seller] could not manufacture as scheduled. The [Claimant Seller] negotiated with the [Respondent Buyers] concerning the above issues.

On 23 September 2002, the [Claimant Seller] learned from other suppliers of the [Respondent Buyers] that [Respondent Buyers] had given written notice to them to stop the development of the SQR4892400CC gasoline engine. The [Claimant Seller] immediately confirmed with [Respondent Buyer BBB] by phone that it had stopped the development of the item 489 engine cylinder block. On 24 September 2002, [Respondent Buyer BBB] sent a letter to the [Claimant Seller] stating that the parts development for item 489 was suspended and that they would like to discuss the relevant issues with the [Claimant Seller].

Since then, the [Claimant Seller] had contacted and negotiated with [Respondent Buyer BBB] by letters and through meetings, requesting the [Respondent Buyers] to compensate the expenses and cost incurred from the production because it had executed the Technical Agreement and the Purchase and Sales Contract accordingly. However, the [Claimant Seller] did not receive any concrete response from the [Respondent Buyers].

The [Claimant Seller] believes that the [Respondent Buyers] unilaterally terminated the Technical Agreement and the Purchase and Sales Contract because of their own problems. This action constitutes a breach of the abovementioned Contract and Agreement. Therefore, the [Respondent Buyers] should compensate the [Claimant Seller] for its economic loss according to the law. According to the provisions and execution of the Technical Agreement and the Purchase and Sales Contract, [Respondent Buyer BBB] and [Respondent Buyer CCC] enjoy the same rights and obligations in the transaction with the [Claimant Seller]. Therefore, the two respondents should duly perform the aforesaid Contract and Agreement.

Furthermore, [Respondent Buyer BBB] was the buyer and the end user of the subject of the Technical Agreement and the Purchase and Sales Contract, and the [Claimant Seller] has contacted only [Respondent Buyer BBB] from the beginning. Therefore, the [Claimant Seller] believes the two [Respondent Buyers] should be jointly and severally liable to compensate the [Claimant Seller] for any loss incurred from their breach of the contracts.

The [Claimant Seller] filed the following arbitration request:

   1)    The [Respondent Buyers] should reimburse the [Claimant Seller] for the economic loss of € 102,819.85 and US $67,120 and pay 5% p.a. interest starting from 18 November 2002 as a late payment charge.
   2)    The [Respondent Buyers] should pay 10%, i.e., US $315,000, of the subject amount of the contract as the [Claimant Seller]'s expected profit.
 
   3)   The [Respondent Buyers] should bear the cost of arbitration.

[Respondent Buyer BBB]'s counterclaim

On 27 August 2004, one of the [Respondent Buyers], [Respondent Buyer BBB], filed a counterclaim to [Claimant Seller]'s Application for Arbitration.

[Respondent Buyer BBB] states:

According to the Technical Agreement and the Purchase and Sales Contract, the [Respondent Buyers] required the [Claimant Seller] to design the cylinder block mold and agreed to purchase the mold from the [Claimant Seller] . However, the [Claimant Seller] breached the contract by delay in performance, which made the fulfillment of the contract impossible. In order to prevent the losses from increasing, the [Respondent Buyer] had to terminate execution of the contract.

During mid-June of 2002 to early-July of 2002, in order to avoid its contractual obligations, the [Claimant Seller] unreasonably demanded that the [Respondent Buyers] add draft angles in the catalogue or pay the [Claimant Seller] to do so. According to Article B2 of the Technical Agreement, the seller shall make the blank drawing of the product using the drawing of the casting products provided by the buyer. The blank drawing of the product will be used as the basis to design and manufacture the mold after the parties confirm. The [Respondent Buyers] believes that the [Claimant Seller] should add the draft angles in the drawing of casting product to complete the blank drawing of the product. As the [Claimant Seller] breached the contracts, the [Respondent Buyers] had to overtake the work of adding the draft angles. As a result, the delivery time of drawing of the casting products was affected.

In mid-July 2002, the [Claimant Seller] should have provided an official document containing the usage of water, electricity and gasoline, the fundamentals of the equipment, the catalogue of installation and other technical information. However, the [Claimant Seller] did not provide any such documents. Thus the [Claimant Seller] has breached the contracts.

During mid-July 2002 to 20 August 2002, the preliminary period for the development of the design, the [Respondent Buyers] could not reach the [Claimant Seller] since their Shanghai office was closed for holiday without prior notice. The development of the design was forced to stop due to the[Claimant Seller]'s breach of the Technical Agreement.

On 22 August 2002, the [Respondent Buyers] negotiated with the [Claimant Seller] in a meeting concerning the above issues and listed seven items in the Memorandum on the Development Schedule regarding the [Claimant Seller]'s liabilities of its delay in the preliminary periods and measures to prevent further delay. Due to the Shanghai office of the [Claimant Seller]'s later request, the memorandum was reduced to four items.

After the memorandum was complete, the [Claimant Seller] again delayed in performing the contract. The [Respondent Buyers] received the Schedule of Design and Production of the Mold in early-September 2002 from the [Claimant Seller]. At that time, both parties had not finished the design of the mold. This deviated from the schedule stipulated in the Purchase and Sales Contract. According to the Contract, the delivery should be made before 20 October 2002.

Before the design was completed, the [Claimant Seller] refused to modify it, alleging that the mold parts were already being manufactured. Due to the delay in the design and manufacture of the mold, the [Respondent Buyers] suffered losses in cost and expected profit. In order to prevent the losses from increasing, the [Respondent Buyers] decided to terminate the development of the gasoline engine in mid-September 2002. It notified the [Claimant Seller] of the decision.

The [Respondent Buyers] received the bank guarantee of the [Claimant Seller] on 3 July 2002 and wired 15% of the Contract price, i.e., US $47,250 to the [Claimant Seller] according to Article 10.2 of the Contract. The [Respondent Buyers] also fulfilled the obligations of the [Claimant Seller] and provided the [Claimant Seller] with the 3-D mold drawing with draft angles.

The [Claimant Seller]'s conduct constituted a fundamental breach of the Contract. According to Article 15.3 of the Contract, the [Claimant Seller] shall refund the first payment made by the [Respondent Buyers] and compensate the [Respondent Buyers] for the design fee, i.e., US $14,000 and the attorneys' fees, i.e., RMB₯ 50,000.

[Respondent Buyer BBB], filed the following requests in its counterclaim:

   1)   The [Claimant Seller] should refund the payment of US $47,250 that [Respondent Buyer BBB] made on 19 July 2002 and pay the interest on it from 20 July 2002 to the date of judgment;
 
   2)   The [Claimant Seller] should compensate the [Respondent Buyer BBB] for design fee of US $14,000;
 
   3)   The [Claimant Seller] should compensate [Respondent Buyer BBB] for attorneys' fees of RMB₯ 50,000;
 
   4)   The [Claimant Seller] should bear all the arbitration cost.

Summary of the [Claimant Seller]'s opinion

The [Claimant Seller] had filed several supplementary opinions. They may be summarized as follows:

1. Before the [Respondent Buyers] unilaterally terminated the project, the Purchase and Sales Contract and the Technical Agreement had been duly executed and the parties had never mentioned the breach of contract by the [Claimant Seller]. The [Respondent Buyers]' claim that the [Claimant Seller] breached the contract is groundless.

Since there were some problems in the performance of the contract, the parties held a meeting on 22 August 2002 and formulated a memorandum. According to the memorandum, both parties agreed to continue to perform the contract, and postponed the date of completion of the mold. The first trial of mold would be no later than 10 December 2002.

2. In response to the [Respondent Buyer BBB]'s counterclaim that the [Claimant Seller] breached the contract, the [Claimant Seller] submitted the following rebuttal:

      (1) No provisions in the Purchase and Sales Contract and the Technical Agreement stated that the [Claimant Seller] should be responsible for the draft angles of the mold. Therefore, there is no legal basis to allege that the [Claimant Seller] breached the contract because it did not add the draft angles.

      (2) The [Claimant Seller] would have provided official documents regarding the usage of water, electricity and gasoline, the fundamental facilities, the installation sample and other technical information. However, according to the Contract, the documents would rely on the 3-D sample drawings provided by the [Respondent Buyers]. However, the [Respondent Buyers] had failed to provide the sample drawings as required by the Contract.

      (3) Regarding the allegation that by closing for the holidays, the [Claimant Seller]'s Shanghai office had breached the contract. This has no legal or factual basis. There was no provision that restricted a contracting party from closing for a holiday.

      (4) The delivery of the Schedule of Design and Production of the Mold was based on the deadline of the first trial of the mold. The deadline of the first trial was 10 December 2002 rather than 20 October 2002 as alleged by the [Respondent Buyers]. 20 October 2002 was the date prescribed in the first agreement.

      (5) The [Claimant Seller] did not refuse to modify any design as alleged by the [Respondent Buyers].

3. The termination of contract merely resulted from the [Respondent Buyers]' change in its engine development strategy, not from the so-called breach of contract by the [Claimant Seller].

4. The [Claimant Seller] performed the Purchases and Sales Contract and the Technical Agreement until the [Respondent Buyers] gave it written notification to terminate the contracts on 24 September, 2002. The [Claimant Seller] had completed the stir and die of rough cuts and manufacture of the mold and incurred a cost of € 102,819.85 and US $67,120. Offset by the first payment of US $ 47,250, the actual loss of the [Claimant Seller] would be € 102,819.85 and US $19,870. The followings are the details of the actual costs incurred:

      (1) In order to perform the contract, the [Claimant Seller] bought steel from the supplier and assigned the design and ancillary processing to the supplier, which cost € 102,819.85. The [Claimant Seller] had settled most of the payment. The details of the actual cost incurred are as follows:

   -    The invoice price of the design fee of DDD Company was Euro € 31,000 and the [Claimant Seller] has paid € 19,650;
 
   -    The invoice price of the steel from EEE Company was € 1,970.32 and the [Claimant Seller] has paid € 1,970.32.
 
   -    The invoice price of the steel from FFF Company was € 38,190.97 and the [Claimant Seller] has paid € 38,190.97.
 
   -    The invoice price of the steel and the processing fee of GGG Company was € 31,658.56 and the [Claimant Seller] has paid € 31,658.56.

      (2) The [Claimant Seller] had paid US $67,120 for the design, manufacture and processing of the mold before the [Respondent Buyers] gave notification to terminate the contract. The [Claimant Seller] had finished the rough cuts of the frame and parts of the mold and kept them in its storage. As these parts and frame were custom-made according to requirements of the [Respondent Buyers], they could not be used for other molds.

5. In its second claim, the [Claimant Seller] sought 10% of the contract price, i.e., US $ 31,500, as compensation for its expected profit from the [Respondent Buyers]. This claim was brought according to Article 113 of the Contract Law of the People's Republic of China, which stipulates that:

"Where a party fails to perform its obligations under the contract or its performance fails to conform to the agreement and losses to the other party, the amount of compensation for losses shall be equal to the losses caused by the breach of contract, including the interest receivable after the performance of the contract, provided it does not exceed the probable losses caused by the breach of contract which has been foreseen or ought to have been foreseen when the party in breach concluded the contract."

According to the general practice in the mold design and production industry, the [Claimant Seller] could receive at least 10% of the contract price as profit after the completion of the contract.

Summary of the [Respondent Buyers]' defense

In regards to the Application for Arbitration of the [Claimant Seller], the [Respondent Buyers] replied as follows:

1. The [Respondent Buyers] terminated the contract before the expiration of the performance because the [Claimant Seller] delayed the performance of its obligation and breached the contract. In order to prevent the losses from increasing, the [Respondent Buyers] was forced to terminate the gasoline engine project in mid-September 2002. It has notified the [Claimant Seller] subsequently.

2. Regarding the legal consequences of the termination of the contract:

      Since the termination of the contract was mainly caused by the breach of the contract by the [Claimant Seller], the [Respondent Buyers] should not bear any legal responsibilities for terminating the contract. On the other hand, the [Claimant Seller] should return the first payment made by the [Respondent Buyers] and be responsible for the direct economic losses suffered by it. Even if the [Claimant Seller] terminated the contract for its own reasons, it only needs to be responsible for the [Respondent Buyers] direct losses.

      The [Claimant Seller]'s claims, including the claim for direct economic losses, do not have any factual or legal basis. The parties had not confirmed the design in writing before the termination of the contract. Therefore, the fee for assigning the processing could not be incurred. In addition, it is not stipulated in the Contract that the [Claimant Seller] can entrust other suppliers to develop and process the mold. The cost of steel should not be included in the [Claimant Seller]'s direct losses. It's claim for expected returns is also groundless.

3. Regarding the changes in the time of delivery stipulated in the Contract, the [Claimant Seller] alleged that the time of delivery stipulated in the Contract was extended in the case. However:

      (1) The [Claimant Seller] had breached the contract, and thus the [Respondent Buyers] had no choice but to accept the extension;

      (2)The [Respondent Buyers] did not waive the right to seek damages for the [Claimant Seller]'s breach of contract by accepting the extension;

      (3) The [Claimant Seller] breached the contract again during the extension period;

      (4) The [Claimant Seller]'s delay in performance under the new schedule has made it impossible to fulfill the contract on time.

      (5) In order to prevent the losses from increasing, the [Respondent Buyers] had to terminate the project before the expiration of the period of performance and notified the [Claimant Seller] of the above decision.

      (6) The notification by the [Respondent Buyers] to the other suppliers of the termination of the project was in response to the "strategy adjustment" proposed by the suppliers. The [Respondent Buyers] did not waive the right to seek damages for the [Claimant Seller]'s breach of contract.

4. Regarding whether the compensation requested by the [Claimant Seller] conforms to the direct economic loss" stipulated in the contract:

      The [Respondent Buyers] believe that the so-called direct economic loss should involve only direct and lawful cost and it should not include any expected return. The parties had not confirmed the design in writing before the termination of the contract. Therefore, the fee for assigning the processing work could not be incurred. The contract in this case is a contract for work. The steel the [Claimant Seller] bought is ordinary material which can be used in other projects or sent to the [Respondent Buyers]. Therefore, the cost of the steel is not a direct economic losses.

OPINION OF THE ARBITRAL TRIBUNAL

1. Applicable law

Article 19.7 of the Purchase and Sales Contract stipulates that "This contract is bound byINCOTERMS 2000." As China and Italy are both parties to the United Nations Convention on Contracts for the International Sales of Goods ("CISG"), and the contracting parties did not exclude the applicability of the CISG in the contract, the provisions of the CISG are the governing law to resolve the dispute. Moreover, the Tribunal has considered that China was the place of performance of the Contract and the Agreement and that both parties had chosen a Chinese arbitration center. Under the principle of the closest connection, for any matter not covered in the CISG, the law of the People's Republic of China shall apply.

2. The relationship between the Technical Agreement and the Purchase and Sales Contract

The Arbitral Tribunal notes that Article 2 of the Purchase and Sales Contract states that: "Please see the attachment: Technical Agreement.". According to the Technical Agreement, the purchaser is [Respondent Buyer BBB] and the seller is the [Claimant Seller], while in the Purchase and Sales Contract, the purchaser is [Respondent Buyer CCC], and the seller is the [Claimant Seller].

For the same purpose with the same subject, the two [Respondent Buyers] signed the Contract and the Agreement with the [Claimant Seller], respectively. During the execution of the contract, only [Respondent Buyer BBB] or its designated entities have contacted the [Claimant Seller] regarding the technical problems. Moreover, it was [Respondent Buyer BBB] who notified the [Claimant Seller] of the termination of the contract. Therefore, the Arbitration Tribunal holds that the Purchase and Sales Contract and the Technical Agreement form a complete agreement between the [Claimant Seller] and the [Respondent Buyers]. The two Respondents are buyers in the complete agreement. Therefore, they are entitled to the rights jointly and should jointly and severally bear the responsibilities under the contract, including the liability for breach of contract. The Arbitration Tribunal sustains the [Claimant Seller]'s claim that the [Respondent Buyers] should bear joint and several responsibilities under the contract.

3. The issue concerning breach of contract

In this case, the [Respondent Buyers] argued the [Claimant Seller] had breached the contract and the [Respondent Buyers] had the right to stop the development of the mold and terminate the Contract.

The [Respondent Buyers] claimed that the following actions by the [Claimant Seller] constituted breach of contract:

   1)    The [Respondent Buyers] alleged that the [Claimant Seller] did not add draft angles and this constituted a breach of contract.
 
   2)    The [Respondent Buyers] alleged that the [Claimant Seller]'s failure to submit the information about the usage of water, electricity and gas according to the schedule stipulated in the Contract constituted a breach of contract.
 
   3)   Since the [Respondent Buyers] could not contact the [Claimant Seller] in that the [Claimant Seller]'s Shanghai office closed for summer holiday, the performance of contract was delayed for three weeks.
 
   4)    After the meeting of the new schedule, the [Claimant Seller] postponed the time of delivery of the design several times and refused to modify the draft of design.

Regarding the above allegations, the Tribunal's opinions are:

            Re 1). The responsibility for adding the draft angles is not stipulated in the Contract and Agreement, and there is no general understanding regarding it. Therefore, the Tribunal holds that the [Claimant Seller] has not breached the contract.

            Re 2). The [Respondent Buyers] believe that the [Claimant Seller] had not complied with Article 12.1.2. of the Contract, stating that the [Claimant Seller] should have provided the [Respondent Buyers] with technical information on the water, electricity and gas usage within 35 working days after the conclusion of the Contract. Therefore, the [Respondent Buyers] alleged that the [Claimant Seller] had breached the contract.

However, the [Claimant Seller] believed that a prerequisite of the above requirement is for the [Respondent Buyers] to provide the 3-D drawing and sample within the abovementioned time limit according to Article 7.1. Since the [Respondent Buyers] failed to provide the drawing and sample timely, the [Claimant Seller] could not complete the design of the mold and thus failed to provide the required information as stipulated in the contract. Moreover, Article 12.1.2 stated "if necessary…" in the English version of the Contract. Therefore, the [Claimant Seller] believed that there was no obligation to provide the abovementioned technical information. According to the above the discussion, the Tribunal gives the following opinions regarding the dispute over Article 12.1.2.

      1) The Tribunal holds that the dispute over the reason for the delay was resolved on 22 August 2002 when the parties rescheduled the performance through negotiation. The Contract no longer required that the technical information be provided within 35 working days after the conclusion of the contract. The Tribunal also notes that the English version of Article 12.1.2. has the expression "if necessary", while there is no corresponding expression in the Chinese version. According to Article 19.6 of the Contract, the two versions have the same legal effect. Considering that the [Claimant Seller], who bears the above obligation, would understand and confirm the Contract by the English version, the Tribunal concludes that it was reasonable to interpret the contract according to the English version. The Tribunal holds that the "if necessary" in the English version of the contract indicates that the parties should communicate about the obligation to provide certain information.

      2) The [Respondent Buyers] has not proved that it has demanded the technical information within 35 working days after the establishment of the contract.

      3) As the party who is obliged to provide the technical information, the [Claimant Seller] has not submitted any evidence proving that it had communicated with the [Respondent Buyers] regarding to the expression of "if necessary" in the English version of the contract. Neither did it provide evidence to prove it has informed the [Respondent Buyers] that it could not provide the technical information in a timely manner due to the [Respondent Buyers]'s delay in providing the drawing and the sample.

The Tribunal does not support the [Claimant Seller]'s allegation that it did not need to provide the technical information because of the expression "if necessary." However, since there was delay in performance and the parties has rearranged performance in the Memorandum on the Development Schedule, the [Claimant Seller]'s failure to provide the technical information does not constitute a fundamental breach of contract and thus is not a valid excuse for the [Respondent Buyers] to terminate the contract.

            Re 3). The Tribunal notes that the Contract does not cover the holidays of the parties and that the address, telephone number and fax number of the [Claimant Seller] is listed in the Contract. Therefore, the closing of the [Claimant Seller]'s Shanghai office did not constitute a breach of contract as alleged by the [Respondent Buyers].

The Tribunal notes that after the above incident, the parties held a meeting and made the Memorandum on the Development Schedule on 22 August 2002. The memorandum covered the schedule of the design of the mold, and stipulates that the [Claimant Seller] should deliver the design to Wuhu CCC Motor Spares Ltd Company and make sure to complete the first trial of the mold by the end of November 2002 (no later than 12 December 2002). It is also stipulated in the memorandum that the [Claimant Seller] should modify the mold according to the first trial and deliver the 25 samples of cylinder block to [Respondent Buyer BBB] by 12 December 2002.

The Tribunal holds that the Memorandum on the Development Schedule is a summary of the execution of the agreement between the parties and has modified the schedule of the design and delivery of the mold. It reflects the intent of the parties and is legally binding on the parties. Therefore, the Tribunal will decide the rights and responsibilities of the parties according to the Contract, the Agreement, and the Memorandum on the Development Schedule.

            Re 4). Regarding the allegation that the [Claimant Seller] refused to modify the design plan, after the Tribunal had reviewed the evidence provided, the Tribunal notes that:

      1) On 30 August 2002, the [Claimant Seller] sent the draft for the structure of the mold to the [Respondent Buyers] and requested the [Respondent Buyers] to comment on the draft within three days. The [Respondent Buyers] did not address any comment, but the Shanghai Automobile Accessories Company Ltd made five comments. The [Claimant Seller] replied and agreed to four out of the five comments. Comment two was denied because the frame of the mold was already in process of manufacture.

      2) The [Claimant Seller] provided a schedule for the design and construction of the mold. In the schedule, it was stated that the mold parts would be processed in the factory in the second week of September 2009 and the manufacture for the frame of the mold and the rough cuts of the mold would be done in the third week of September 2009. The [Respondent Buyers] had never raised any objection to the above schedule.

      3) It was stated in the facsimile on 11 September 2002 from the Shanghai Automobile Accessories Company Ltd and [Respondent Buyer BBB]'s Cylinder Team to Wuhu CCC Motor Spares Ltd Company that "the reason we are unable to accept the amendment in Comment two was the delay in the notification from your company to Karibo Company."

According to the evidence mentioned above, it is true that the [Claimant Seller] could not follow the changes in Comment two because the frame of mold was already in process of manufacture in the second week of September 2009. Moreover, the Shanghai Automobile Accessories Company Ltd and [Respondent Buyer BBB]'s Cylinder Team both confirmed that the amendment in Comment two was not accepted because of the late delivery of the information from the [Respondent Buyers]. Thus, the Arbitral Tribunal does not support the [Respondent Buyers]' allegation that the contract was breached because the [Claimant Seller] refused to modify the draft of design.

Regarding its allegations that [Claimant Seller] delayed in finishing the design after the progress meeting, the [Respondent Buyers] did not present adequate evidence to support this. The Arbitral Tribunal does not accept [Respondent Buyers]' arguments that it terminated the Purchase and Sale Contract in order to avoid "possible failure of performing the contract causing the most serious kind of breach of the contract" and to "prevent the losses from increasing."

4. Regarding the damages sought by [Claimant Seller]

      1. Regarding [Claimant Seller]'s claims that the [Respondent Buyers] pay for the loss of € 102,819.25 and US $19,870 plus a late payment charge of 5% per annum starting from 18 November 2002, the Tribunal notes that the [Claimant Seller] alleged that:

      The [Claimant Seller] had completed the stir and die of rough cuts and manufacture of the mold and incurred cost of € 102,819.85 and US $67,120. Offset by the first payment of US $ 47,250, the actual loss of the [Claimant Seller] would be € 102,819.85 and US $19,870. The followings are the details of the actual costs incurred:

      In order to perform the contract, the [Claimant Seller] bought steel from the supplier and assigned the design and ancillary processing to the supplier, which cost € 102,819.85. The [Claimant Seller] had settled most of the payment. The details of the actual cost incurred are as follows:

      1) The invoice price of the design fee of DDD Company was € 31,000 and the [Claimant Seller] has paid € 19,650;

      2) The invoice price of the steel from EEE Company was € 1,970.32 and the [Claimant Seller] has paid € 1,970.32.

      3) The invoice price of the steel from FFF Company was € 38,190.97 and the [Claimant Seller] has paid € 38,190.97.

      4) The invoice price of the steel and the processing fee of GGG Company was € 31,658.56 and the [Claimant Seller] has paid € 31,658.56.

      5) The [Claimant Seller] has paid US $67,120 for the cost incurred in the design, production and ancillary processing. The rough cuts of the frame and parts of the mold were kept in the storage of the [Claimant Seller]. Since they were custom-made according to the request of the [Respondent Buyers], they could not be used for other molds.

In response to the above claims and evidence, the [Respondent Buyers] cited Article 11 of Some Provisions of The Supreme People's Court on Evidence in Civil Procedures which states that "if the evidence submitted by the parties concerned is formed beyond the territory of the People's Republic of China, the evidence shall be subject to the certification of the notarization organ of the country concerned and shall be authenticated by the embassy of the People's Republic of China stationed in the said country…", and alleged that the [Claimant Seller]'s documents such as commercial invoices and payment records which have not been notarized or authenticated cannot be used as evidence in the case.

The Tribunal holds that the provisions mentioned by the [Respondent Buyers] are not binding in international commercial arbitrations.

Moreover, the Tribunal notes that the [Respondent Buyers] stated the contract is a contract for work and there was no provision allowing the [Claimant Seller] to assign the development and the manufacture of the mold. The Tribunal notes that the Contract and the Agreement do not specify any restrictions on assigning the contractual obligations. Therefore, the Tribunal does not accept this allegation of the [Respondent Buyers].

Article 15.3 of the Contract states that "during the execution of the contract, if any contracted party unilaterally terminates the contract other than for reasons caused by the other party, the party who terminates the contract should bear all the direct economic loss of the other party caused by the termination." The Tribunal holds that it is reasonable for the [Claimant Seller] to request compensation from the [Respondent Buyers] for its direct economic loss.

After reviewing the written evidence provided by both parties, the Tribunal believes that the design, preparation of the raw material and parts, and rough cuts of the mold have been fulfilled. The finishing and trials could not be completed because of the termination of the contract. Regarding the [Claimant Seller]'s claim that the [Respondent Buyers] should be liable for the cost of € 102,819.85 and US $67,120, the Tribunal does not support the claim for the difference between the invoice price of € 31,000 and the paid amount € 19,650 for the design fee for DDD Company. Moreover, the first payment of US $[47,250] should be deducted. The Tribunal rules that the [Respondent Buyers] should compensate the [Claimant Seller] all the amount paid, which is € 91,469.85 and US $19,870.

The Tribunal notes that the [Respondent Buyers]' allegation that since the steel the [Claimant Seller] bought was ordinary material which can be used in other projects or be sent back to the [Respondent Buyers], the cost of the steel is not a direct economic loss. The Tribunal also notes that the [Claimant Seller]'s allegation that it finished the rough cuts of the frame and parts of the mold and kept them in its storage, and that as these parts and frame were custom-made according to requirements of the [Respondent Buyers], they could not be used for other molds. The Tribunal holds that the [Claimant Seller] should turn the finished parts over to the [Respondent Buyers] and the [Respondent Buyers] shall be responsible for the cost of transpiration and custom clearance.

Since there is no basis in the contract or in the relevant laws, the Tribunal does not support the [Claimant Seller]'s claim regarding to the late payment charge.

      2. Regarding the [Claimant Seller]'s claim that the [Respondent Buyers] should compensate it for the expected return of US $31,500;

       Article 15.3 of the Contract states that, "during the execution of the contract, if any contracted party unilaterally terminates the contract not because of reasons caused by the other party, the party who terminates the contract should bear all the direct economic loss of the other party caused by the termination.". This provision clearly states that the responsibility is limited to the direct economic loss. Therefore, the Tribunal does not support this claim.

      3. Since not all of the [Claimant Seller]'s claims are supported, the Tribunal holds that the [Claimant Seller] bears 30% of the arbitration fee and the [Respondent Buyers] would bear 70% of it.

The actual cost incurred from the appointment of a foreign arbitrator should be borne by the [Respondent Buyers] on their own.

5. The counterclaim by the [Respondent Buyer BBB]

The Tribunal concludes that the [Respondent Buyers] were responsible for terminating the Contract. Thus the Tribunal does not support any counterclaim submitted by the [Respondent Buyers]. The extra cost incurred from the counterclaim should only be borne by [Respondent Buyer BBB].

AWARD

From the above analysis, the Tribunal makes the following decisions:

   1)   The [Respondent Buyers] should compensate the [Claimant Seller] for economic loss of € 91,469.85 and US $19,870;
 
   2)   The other claims made by the [Claimant Seller] are rejected;
 
   3)   The counterclaim submitted by the [Respondent Buyer BBB] is rejected;
 
   4)   The [Respondent Buyers] appointed a foreign arbitrator. The actual cost incurred is RMB₯ 3,829.20. This should be borne by the [Respondent Buyers]. After deducting the prepayment of RMB₯ 8,000 by the [Respondent Buyers], the remaining amount of money should be rebated.
 
   5)   The cost of arbitration for this case is US $7,150. The [Claimant Seller] should bear 30% of it, i.e., US $2,145. The [Respondent Buyers] should bear 70% of it, which is US $5,005. The [Claimant Seller] has prepaid the cost. Therefore, the [Respondent Buyers] should pay US $5,005 to the [Claimant Seller] as reimbursement.

The cost for the counterclaim is RMB₯ 21,259 and this should be borne by [Respondent Buyer BBB]. The above cost has been offset by the prepayment by the [Respondent Buyer BBB].

The [Respondent Buyers] should bear the liabilities jointly and severally. The [Respondent Buyers] should pay the [Claimant Seller] according to the Tribunal's decisions within 45 days after the award is made. Interest at the annual rate of 6% will accrue on delay in the payment.

The award is final and comes into effect today.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. Amounts in the currency of the United States (dollars) are indicated as [US $]; amounts in the common European currency (Euro) are indicated as [€]; amounts in the currency of the People's Republic of China (renminbi) are indicated as [RMB₯].

** Farah Poon grew up and studied in Hong Kong. She is a freelance translator and interpreter who has just finished her studies in the Juris Doctor program.

*** William Zheng is a graduate of the Pace University School of Law. He is Special Counsel with the Shanghai office of Sheppard Mullin Richter & Hampton LLP and Editor of the Shephard Mullin China Law Update. Jingyuan Sun is an Associate with the New York office of the firm.

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Pace Law School Institute of International Commercial Law - Last updated October 30, 2009
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