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CISG CASE PRESENTATION

China 13 June 2005 CIETAC Arbitration proceeding (Industrial general equipment case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/050613c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20050613 (13 June 2005)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2005/12

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Singapore (respondent)

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

GOODS INVOLVED: Industrial general equipment for the photoelectric communications industry


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 3 ; 14 ; 47 ; 49 ; 77 ; 81(2)

Classification of issues using UNCITRAL classification code numbers:

3A1 [Goods to be manufactured: buyer supplies substantial part of necessary materials];

14A [Criteria for offer];

47A2 [Buyer's right to fix additional period for avoidance: basis for avoidance for delay in delivery];

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

77A [Obligation to take reasonable measures to mitigate damages];

81C [Restitution by each part of benefits received]

Descriptors: Materials supplied by buyer ; Offers ; Nachfrist ; Avoidance ; Mitigation of loss ; Restitution

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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 & Trade Arbitration Commission
CIETAC (PRC) Arbitration Award

Industrial general equipment case [13 June 2005]

Translation [*] by Jing Li [**]

Edited by Zheng Xie [***]

The China International Economic and Trade Arbitration Commission (originally named the Foreign Trade Arbitration Commission of the China Council for the Promotion of International Trade, later renamed the Foreign Economic and Trade Arbitration Commission of the China Council for the Promotion of International Trade, and currently called the China International Economic and Trade Arbitration Commission, hereinafter, "CIETAC"), accepted the case (Case number: M____) according to:

   -    The arbitration clause in Sales Contract No. PO-ZYSB2K-030084 (hereinafter, the "Contract") signed by Claimant [Buyer], ___ Co. Ltd. [of the People's Republic of China], and Respondent [Seller], ___ Technologies ___ Pte. Ltd. [of Singapore], on 4 August 2003; and
 
   -    The written Application for Arbitration submitted by the [Buyer] on 10 May 2004.

The Arbitration Rules of CIETAC (hereinafter, the "Arbitration Rules"), which took effect on 1 October 2000, apply to this case.

Since the [Buyer]'s claim on 10 May 2004 totaled not more than RMB 500,000, according to Article 64 of the Arbitration Rules, the Summary Procedure provided thereof shall be applicable to this dispute. However, the [Seller]'s counterclaim on 1 July 2004 totaled more than RMB 500,000, according to Articles 64 and 72 of the Arbitration Rules, and the [Seller] requested "to change the Summary Procedure to the Ordinary Procedure," CIETAC therefore determined on 12 July 2004 that the applicable procedure shall be changed from the Summary Procedure to the Ordinary Procedure.

ARBITRATION PROCEEDINGS

The Secretariat of CIETAC sent out the Notice of Arbitration, the Arbitration Rules, and the Panel of Arbitrators to both parties, respectively, by express mail on 27 May 2004. Meanwhile, the Secretariat sent the [Buyer]'s Application for Arbitration to the [Seller], requesting the [Seller] to appoint an arbitrator within the time limit and submit its opinion. The receipt of the express mail company shows that the arbitration materials sent to the [Buyer] were successfully received on 1 June 2004.

On 23 June 2004, the [Seller] faxed to CIETAC, requesting that every relevant time limit in the Notice of Arbitration be extended for additional 30 days, due to the fact that its General Headquarters is in ___ (State), U.S., and that the General Headquarters received the Notice of Arbitration on 7 June 2004 and did not finish the translation until 15 June 2004.

On 1 July 2004, the [Seller] submitted its opinion for Respondent, Request for Counterclaim, Request for Modification of Arbitration Procedure, and other attached materials.

The [Buyer] appointed Mr. ___ as Arbitrator. The [Seller], however, did not appoint any arbitrator within the time limit provided in the Arbitration Rules, nor did it authorize the Chairman of CIETAC to appoint an arbitrator. The Chairman, in accordance with Article 26 of Arbitration Rules, appointed Ms. ___ as Arbitrator. Since both parties failed to jointly appoint or authorize the Chairman to appoint the presiding arbitrator within the time limit, the Chairman, in accordance with Arbitration 24 of Arbitration Rules, appointed Ms. ___ as the Presiding Arbitrator. The above three arbitrators formed the Arbitral Tribunal (hereinafter the "Tribunal") on 21 October 2004 to hear this dispute. On the same day, the Secretariat of CIETAC sent out the Notice of Formation of the Tribunal to both parties, respectively.

While filing its Counterclaim, the [Seller] paid the arbitration fee in advance. According to the Arbitration Rules, the [Seller]'s Counterclaim shall be heard by the Tribunal as per the [Buyer]'s Request for Arbitration.

The agreed place of arbitration in the Contract is the city of Wuhan. In accordance with the decision by the Secretariat, the court session shall be held on 28 December 2004. The Secretariat sent out the Notice of Court Session by express mail to both parties on 17 November 2004.

On 28 December 2004, the Tribunal held the court session in Wuhan. Both parties appointed attorneys. The [Buyer] submitted supplementary evidence, and the Secretariat forwarded this evidence to the [Seller] then and there. At the beginning of the court session, the parties raised no objection to the formation and the place of arbitration. At the hearing, the parties submitted Statements and Response on the factual and legal issues, cross-examined the evidence, and viewed the DVD presented by the [Buyer] on the second inspection (live) with the Tribunal. At the end of the court session, after inviting the parties' comments, the arbitration proceedings thereafter were arranged as follows:

1.    Both parties shall submit Statements and evidence after the court session;
 
2.    Both parties shall cross-examine the supplementary evidence submitted after the court session in writing;
 
3.    Within one month after receiving the supplementary opinions and evidence forwarded by the Secretariat, the parties shall, respectively, submit their written opinions of cross-examination.

Since both parties were willing to seek settlement, the Tribunal sought to settle the dispute. However, this was not successful.

After the court session, both parties submitted supplementary evidence. The Tribunal, through the Secretariat, forwarded the materials. Thereafter, the [Buyer] submitted written opinions of cross examination, whereas the [Seller] did not submit any supplementary opinions of cross examination.

This case is completed. The Tribunal rendered the award based on the materials presented by the parties and the facts verified by the Tribunal.

The followings are the parties' claims , the opinion of the Tribunal, and the award.

CLAIMS AND REQUESTS BY THE PARTIES

[Buyer]'s claims

The [Buyer] issued the ___ Announcement of auction on its ___ webpage in July 2003, and opened the auction at the end of July. The [Seller]'s agent, Wuhan ___ Technology Engineering Co. Ltd, won the bidding.

On 15 August 2003, the [Buyer] and the [Seller] concluded the ___ sales contract. The Contract stipulated that the [Seller] shall deliver goods before 25 October 2003.

After the conclusion of the Contract, the [Buyer] made the requisite down payment of US $30,000, which is 10% of the contract price. For its part, the [Seller] bore the obligation of delivering qualified goods of the stipulated amount within the stipulated delivery time. Both parties agreed to examine and accept the goods for the first time in December 2003. However, the [Seller] did not arrange the first examination and acceptance until 17 December 2003. The examination revealed that the goods were "severely not in conformity with the examination and acceptance criteria of the contract." On 15 January 2004, the parties arranged a second examination and acceptance. The result was still that the goods were "severely not in conformity with the examination and acceptance criteria of the contract."

Article 13 of the Contract stipulates:

"If the goods provided by the Seller do not conform to the contract criteria after two examinations fo;r acceptance, the Buyer has the right to reject the entire equipment ;and the Seller will be responsible for the losses of this project."

Article 16 of the Contract stipulates:

"In case the period of delay exceeds 10 weeks after the stipulated delivery date, the Buyer have the right to terminate this Contract, but the Seller shall not thereby be exempted from the payment of penalty."

Since the [Seller] has severely breached the contract, and has failed to perform the obligations under the Contract, the [Buyer] has incurred a loss of US $299,390. To avoid enlarging the loss, the [Buyer] decided to avoid the Contract. However, after the avoidance of the Contract, the [Seller] refused to return the down payment of US $30,000 the [Buyer] has paid. The [Seller] also refused to pay the examination and acceptance fee and the payment of penalty. According to Article 17, the arbitration clause of the Contract, the [Buyer] applied for arbitration.

The [Buyer]'s arbitration claims are to have the [Seller]:

1.    Compensate the [Buyer] for the down-payment of US $30,000, as well as the examination fee of US $1,589.39;
 
2.    Compensate the [Buyer] for the payment of penalty of US $15,000 in accord with the law; and
 
3.    Bear the arbitration fee and expenses that arose from the application for arbitration by the [Buyer].

[Seller]'s response

In response to the [Buyer]'s statements and requests, the [Seller] stated:

The [Buyer]'s avoidance of the Contract was unjustified. The [Buyer]'s claim of the [Seller]'s delay was in actuality due to the [Buyer]'s own delays. These delays by the [Buyer] were:

      (1) The [Buyer] delayed the submission of the draft of design to the [Seller], and the draft of design was not complete;

      (2) The raw materials provided by the [Buyer] to the [Seller] were not consistent;

      (3) The components provided by the [Buyer] did not include ___, nor did the [Buyer] include bottom lining, nor was the lining board pre-tin;

      (4) The [Buyer] did not issue the L/C according to the Contract;

      (5) The [Buyer] delayed the application for a visa for visiting the General Headquarters of the [Seller] in the U.S., and therefore, missed the scheduled time as stipulated in the Contract to send its staff to witness the purchase.

The [Seller] rejected the [Buyer]'s arbitration claims alleging that the [Buyer]:

   -    Severely breached the Contract;
   -    Severely breached the Contract clauses stipulating the examination and acceptance, and the clauses agreed on by both parties in the Acknowledgement of Order;
   -    Delayed performing the Contract obligations of providing the draft of design, raw materials, L/C, and the obligations of examination and acceptance at the plant in the U.S.

At the same time, the [Seller] submitted that the Contract in the present case was signed based on the Quotation (the [Seller]'s company ___2003Q064, 3rd ed. Quotation) provided by the [Seller] on 17 July 2003. The "Cancellation of Order" provided in this Quotation includes standard clauses as follows:

(a)    Cancellation before delivery. Before delivery, if the [Buyer] requests the cancellation of an order or part of an order, and the [Seller] agrees to such cancellation, the [Seller] shall terminate that order or part of that order. In this situation, the [Buyer] agrees to make payments of: (1) the loss incurred from the part of the goods that has been manufactured by the [Seller]; (2) the loss incurred due to the [Buyer]'s cancellation of order, including but not limited to the loss that arose from the cancellation of the contract with the supplier and with the contractor; and (3) the reasonable profits. Moreover, the price of the remaining part of the order that has not been terminated shall increase in order to reflect the increased cost.
 
(b)    Cancellation after delivery. Customized products: after delivery, cancellation of an order is prohibited after shipment of the customized products; standard products: after delivery, if the [Buyer] intends to cancel or partially cancel the order, and the [Seller] agrees thereto, the [Buyer] shall make payment to the [Seller] on the withdrawal of the products, i.e., 35% of the invoice net worth of the returned standard products. However, after 90 days of shipment date, the standard products shall not be returned in any case.
 
(c)    Modification of delivery time. If the [Buyer] intends to modify the time of delivery, the [Buyer] shall notify the [Seller] of such intention 30 days before shipment, regardless of customized products or standard products, and the [Seller] agrees thereto, the [Buyer] shall make payment to the [Seller] of the redelivering fee, i.e., 3% of the invoice net worth of the products per month. Such redelivering fee is nonrefundable, and is calculated from the 31st day after the agreed shipment date to the modified delivery date. Furthermore, the [Seller] is entitled to collect from the [Buyer] storage fee and insurance of the products.

The [Seller] sent two responses to the [Buyer] on 25 March and 6 April 2004, respectively, explaining in detail the fact that the cancellation of the Contract was caused by the [Buyer].

In view of the above mentioned facts, and the lack of justification of the cancellation of the Contract, the [Seller] argued that it was the [Buyer] who caused the delay of the performance of the Contract for 12 weeks, and therefore, caused the situation "the Contract obligations were not performed" claimed by the [Buyer]. Therefore, the [Buyer] should compensate the Seller for its actual loss.

Accordingly, the [Seller]'s counterclaims are:

1. The [Buyer] shall compensate the [Seller] for the actual loss of US $68,475 incurred from the cancellation of the contract for manufacture, work, and customization. The [Buyer] shall also compensate the [Seller] for the labor cost of US $75,000 incurred from the process of the [Buyer]'s application to visit the U.S., as well as the down payment of US $30,000 paid by the [Buyer].

2. The [Buyer] shall compensate the [Seller] for the translation fee of US $626.40 incurred from the present case.

3. The [Buyer] shall compensate the [Seller] for its attorneys' fee.

4. The [Buyer] shall bear the arbitration fee.

[Buyer]'s defense to the [Seller]'s counterclaims

In response to the [Seller]'s counterclaims, the [Buyer] submitted the following defense:

1. In its Statement of Counterclaim, the [Seller]'s allegation of the Quotation was fabricated, and this Quotation was not legally effective. A Quotation without legal effectiveness cannot be the basis of the [Seller]'s claim for damages. The rights and obligations of both parties should be determined by the Contract signed on 15 August 2003.

From the date when the [Buyer] announced the auction ___ (2 July) until now, the [Buyer] has not seen or received the alleged Quotation mentioned in the [Seller]'s counterclaim. The [Seller]'s bidding was generally tendered by its general agent in Hubei Province, China, "Wuhan ___ Technology Engineering Co. Ltd." (hereinafter "___ Co."). ___ Co. sent out its bid to the [Buyer] on 26 July 2003. It would impossible for the [Seller] to provide a Quotation on 17 July 2003 before bidding. This allegation by the [Seller] is not consistent with the facts. Assuming but not conceding, even if the [Seller] provided a Quotation to the [Buyer] on 17 July 2003, Article 14 of the United Nations Convention on Contracts for the International Sale of Goods (1980) (hereinafter "CISG") states:

"A proposal for concluding a contract addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price"

and, in accordance with this provision, the Quotation provided by the [Seller] was merely an offer. Since the [Buyer] did not accept the offer thereafter, this offer was not legally effective. Moreover, under Article 15 of the Chinese Contract Law:

"An invitation for offer is a proposal for requesting other parties to make offers to the principal. Price forms mailed, public notices of auction and tender, prospectuses and commercial advertisements, etc. are invitations for offer."

The Quotation provided by the [Seller] was merely an invitation for an offer, and was not legally effective. A Quotation without legal effectiveness cannot be the basis of the [Seller]'s claim for damages. Further, on 15 August 2003, both parties signed the Contract in dispute, and the rights and obligations of both parties were explicitly stipulated therein. The [Buyer] avoided the Contract according to the stipulations in the Contract, in lieu of cancelling the order as the [Seller] argued. Hence, the [Buyer] was not liable to compensate the [Seller] for its loss based on the order.

2. The Contract signed by both parties was a sales contract, not a contract for manufacture and work.

The ___ equipment subject matter of the Contract is industrial general equipment. In the past decade, along with the development of the photoelectric communication industry, there are numerous factories producing and utilizing such equipment worldwide, since it is a necessary equipment of this industry. In the present case, the design and materials provided by the [Buyer] were not those for the ___ equipment. This dispute did not involve the technical problems of the equipment itself. The standards and technical parameters for the equipment were explicitly stipulated in the bidding document, bidding proposal, and the sales contract.

The Contract in dispute did not stipulate that the [Buyer] had the obligation of providing the design and materials in the process of the [Seller]'s manufacturing the equipment. The conduct of the [Buyer]'s providing the [Seller] with design and materials was a conduct of actitvely assisting the [Seller] to perform its contractual obligations. These design and materials were purchased by the [Buyer] at home and abroad, which means that such design and materials can generally be found at home and abroad. In order to realize the standards stipulated in the bidding document, bidding proposal, and Contract, the [Seller] could have purchased such design and materials from a public market. Moreover, the provision of the design and materials by the [Buyer] did not cause the disqualification of the equipment. This means that, for the determination whether the [Seller] provided qualified equipment, whether the [Buyer] provided desgin and materials was not relevant.

3. It was reasonable for the [Buyer] to avoid the Contract with the [Seller]. The [Buyer] was implementing its right of relief, protecting its interests, and preventing the enlargement of its loss

Article 13 of the Contract in dispute provides:

"If the first delivery was not accepted, the sellers shall find out the reasons for the failure and start the second delivery afterwards. ... If the result of the second examination do not conform, the Buyer have the right to reject the whole equipment ..."

On 16 December 2003, the equipment was found disqualified by the [Buyer] in the first examination; on 12 January 2004, a second examination was performed, and the equipment was found disqualified due to the problem with the design of the program. Due to such defect, the equipment fell into an infinite loop. It could not be terminated, nor could it continue operating. The speed and accuracy could not reach the requirements according to the clause of inspection and acceptance. In this application, the [Buyer] still actively performed the Contract to mitigate the loss of both parties. On 10 March 2004, the [Buyer] met with the [Seller]'s agent in its conference room. The content of the conference was that the [Seller] was given two more weeks to improve the equipment, and that the [Seller] shall provide the [Buyer] with qualified equipment at the end of this period. However, Mr. ___ (representing the [Seller]) indicated that the [Seller] could not provide equipment that satisfied the requirements. In this situation, the [Buyer] avoided the Contract in accordance with Article 13 ("the buyer is entitled to reject the goods if the goods do not conform to the contract criteria after two examinations") and Article 16 ("if the seller delivers the goods after 10 weeks of the agreed delivery time, the buyer is entitled to avoid the contract").

Moreover, Article 49 of CISG also provides:

"(1) The buyer may declare the contract avoided: [...] (b) in case of non-delivery, if the seller does not deliver the goods within the additional period of time fixed by the buyer in accordance with paragraph (1) of article 47 or declares that he will not deliver within the period so fixed."

In the present case, the [Seller] could not deliver qualified goods, and indicated that it could not deliver qualified goods within the additional period; the [Buyer], therefore, was entitled to declare the Contract avoided in order to protect its interests and prevent the enlargement of its loss.

4. In the course of the performance of the Contract, the [Buyer] completely performed in good faith without fault, and should not be responsible for breach of Contract. Furthermore, the [Buyer] should not be held responsible for the loss claimed by the [Seller].

      (1) The [Buyer] was under no obligation to provide the [Seller] with raw materials and drafts of design. The [Seller]'s allegation that the delay of providing the materials and design caused the delay of the delivery was unfounded. Moreover, the raw materials and design provided by the [Buyer] were not materials and design of the equipment. Whether these materials and drafts of design were qualified did not affect the equipment manufactured by the [Seller].

      (2) The [Buyer] did not delay the issuance of the L/C, and it did not breach the Contract. Article 13 of the Contract provides that "the irrevocable L/C shall be issued 30 days before the goods are shipped." In the present case, the equipment was found disqualified in two examinations. Since the equipment was disqualified, the shipment shall not be made, and the delivery date could not be determined, and therefore, the L/C could not be issued. Hence, the non-issuance of the L/C was because of the [Seller] itself.

      (3) The [Buyer]'s delay in obtaining the U.S. visiting visa was due to reasons beyond its control. Instead, it was due to force majeure. The [Buyer] was not at fault. The [Buyer] has borne all relative fees of passports and visas. The [Seller]'s claim of labor cost in the amount of US $75,000 incurred from the process of the [Buyer]'s application to visit the U.S. was unfounded.

      (4) The [Buyer] completely fulfilled its Contract obligations in good faith, and made the down payment of US $30,000 after the conclusion of the Contract. Also, the [Buyer] was under no obligation to provide raw materials and drafts of design, but did so nevertheless. After two examinations, the equipment was still disqualified. In order to cooperate with the [Seller], the [Buyer] fixed an additional time period (70 days) for the [Seller] to improve the equipment. However, the [Seller] rejected to improve the equipment within the period. Therefore, the [Buyer] was not at fault, and was not responsible for the breach of Contract.

The evidence list submitted by the [Buyer] after the hearing emphasized the above statements as well.

[Seller]'s evidence list

Whereas the [Seller] submitted its evidence list claiming:

1.   The [Buyer] was obligated to provide materials and drafts of design including but not limited to draft of design, detector, and laser;

2.   The materials and drawings provided by the [Buyer] were disqualified, insufficient, or delayed, and the [Seller] had explicitly notified the [Buyer] thereof;

3.   Many parts of the equipment under the Contract were designed, tested, and manufactured accordingly to the particular requirements of the [Buyer];

4.   The [Seller] had the capacity to manufacture ___ equipment, i.e., the equipment under the Contract;

5.   The reason for the disqualification of the equipment under the Contract was the modification on the original photographs by a third party;

6.   The [Buyer] postponed the performance of the Contract several times;

7.   The materials, output, and efficiency cost of the equipment under the Contract were increased when the equipment was produced and utilized extensively, and the purpose of the [Buyer]'s purchase of the equipment was for extensive production;

8.   Hitherto the [Buyer] had not issued a formal Report of Examination and Acceptance, and had not formally dissented with the quality of the equipment;

9.   The [Seller] had fulfilled the Contract obligations of notifying and cooperating with the [Buyer] on the visiting visa for the examination and acceptance;

10.   The [Seller] had notified the [Buyer] to issue the L/C without delay, but the [Buyer] did not issue the L/C accordingly, which resulted in non-shipping the goods;

11.   The [Seller] suffered actual loss therefrom.

THE OPINION OF THE TRIBUNAL

1. Applicable law

The parties did not stipulate the law applicable to the present dispute. The places of business of the [Buyer] and [Seller] are in China and Singapore, respectively. Both China and Singapore are Contracting States of the CISG. Further, the parties did not exclude the application of the CISG. Therefore, CISG shall be applicable to the present dispute. Matters for which the CISG does not provide, e.g., the validity of the contract, shall be governed by the relevant Chinese laws in accord with the doctrine of most proximate connection.

2. The validity of the Contract

The Contract was concluded upon the parties' agreed intent through auction. Since the parties did not claim the invalidity of the Contract, and the Tribunal did not find situations that violate the mandatory provisions in Chinese laws, the Tribunal finds that the Contract in dispute was a genuine expression of the parties' intent. Therefore, the Contract is valid, and is legally binding on both parties. The parties shall strictly follow the Contract, and enjoy rights and assume obligations accordingly. Therefore,, the Tribunal will decide the rights and obligations of the parties on the basis of the Contract.

The Tribunal notes that the [Seller] in its Response and Counterclaim argued that the Contract was concluded based on the Quotation (___2003Q064, 3rd ed. Quotation) provided by the [Seller] on 17 July 2003. Nevertheless, the [Seller] could not submit evidence supporting this claim. Since the Contract does not indicate that this Quotation is an effective component of the Contract, and the [Seller] could not demonstrate that the [Buyer] had accepted the Quotation and been bound by it, the Tribunal will not decide the rights and obligations of the parties or decide on the issues of remedies on the basis of this Quotation.

3. Nature of the Contract

The Tribunal notes that the [Seller] submitted that many parts of the equipment under the Contract were designed, tested, and manufactured according to the particular requirements of the [Buyer], and therefore, the Contract was a contract for work and customization. The [Buyer] alleged that the material provided by the [Seller] did not support this claim, and that before the conclusion of the Contract, the [Seller] had sold the equipment under the Contract, which means the equipment was general equipment. Therefore, the Contract was a sales contract.

The Tribunal finds that the nature of the Contract shall be determined by its content. The Contract in dispute is not only explicitly named as a sales Contract, but also contains agreements that the Claimant (as the [Buyer]) purchased the stipulated ___ equipment from the Respondent (as the [Seller]). From the tendering to the conclusion of the Contract, the [Buyer] had proposed certain requirements on the performance index of the equipment; however, it shall not be necessarily considered that the equipment was customized, and therefore, the Contract shall not be considered as a contract for work and customization.

Article 3 of the CISG provides:

"Contracts for the supply of goods to be manufactured or produced are to be considered sales unless the party who orders the goods undertakes to supply a substantial part of the materials necessary for such manufacture or production."

In the present case, except for some of the necessary materials before shipment provided by the [Buyer], the remaining materials and spare parts needed were entirely produced or purchased by the [Seller]. On these grounds, as well as the fact that the Contract in dispute did not contain stipulations necessary for a work contract, e.g., method of the work, and that the Contract contains stipulations of rights and obligations of the parties as the buyer and the seller, the Tribunal finds that the Contract in dispute is a sales contract.

4. Performance of the Contract

Article 3 of the Contract provides:

"REQUESTED DELIVERY SCHEDULE: within 11 weeks ARO, before 25 October 2003."

Article 11 of the Contract provides:

"TERMS OF PAYMENT: 10% down-payment, and the Sellers shall notice the Buyers to open an irrevocable L/C at sight for 90% of Contract value in favor of the Sellers against the following 30 days prior to the delivery. 85% of the LC value shall be paid against documents specified in clause 9(1) to 9(6), 5% of the LC value shall be paid against the Final Acceptance Protocol signed by the both parties, 10% of the LC value, as quality guarantee money, shall be paid after the guarantee period."

Article 13 of the Contract provides:

"Before shipment of the goods, the buyers will go to the manufactory of the sellers to execute manufacturing acceptance (2 persons 2 weeks). The cost must be included in total prices of contract."

The above agreements show that both parties merely agreed on the time of delivery as before 25 October 2003, but did not agree on the time of examination and acceptance, the time of payment of the 10% down payment, and even the time of the issuance of the L/C.

During the performance of the Contract, the [Buyer] made the down payment of US $30,000 to the [Seller] on 10 October 2003, to which the [Seller] did not object. Both parties communicated with each other regarding the date of examination and acceptance before delivery, the date of issuance of the L/C, and the date of delivery through mail or through the [Seller]'s agent in Wuhan city. Lastly, the [Buyer]'s representatives participated in the examination performed at the [Seller]'s plant on 17 December 2003. There is no evidence to show that the technical indication of the equipment designed and produced by the [Seller] has met the acceptance standards stipulated in the Contract and the tender document. On 14 January 2004, the parties arranged another examination at the [Seller]'s plant. However, the equipment provided by the [Seller] was still found disqualified. Until the [Buyer] notified of the avoidance of the Contract on 22 March 2004, the [Seller] still could not demonstrate that the equipment had met the acceptance standards stipulated in the Contract and the tender document.

5. [Buyer]'s arbitration claims

      (1) Return of the down payment of US $30,000 and reimbursement of the examination and acceptance fee of US $1,589.39

In its Application for Arbitration, according to Article 13 of the Contract, if the goods provided by the seller do not conform to the contract criteria after two examination and acceptance, the buyer is entitled to reject the goods, and the seller is responsible for the loss incurred thereby.

The Tribunal notes that Article 13(5) of the Contract provides:

"After conclusion of the contract, the [Seller] shall deliver the equipment in accordance with the contract and the acceptance terms stipulated by the buyers and the sellers. If the [Buyer] did not accept the equipment for the first time, the [Seller] shall find out the reasons of failure and start the second delivery afterwards. Delivery time will be within one week after end of the first delivery and the sellers shall bear all the cost incurred. If the result of the second delivery cannot satisfy the buyers, the buyer has the right to reject the entire equipment and the sellers will be responsible for all the losses of this project. ..."

Taking into account other clauses of Article 13 of the Contract, the Tribunal finds that the situation stipulated in Article 13(5) is that the equipment does not satisfy the requirements stipulated in the Contract at [Seller]'s place of installment. In the present case, the time of shipment agreed by both parties had expired long before the equipment was actually shipped and examined. Afterwards, the two examinations were not accepted, and therefore, the Contract could not continue to be performed. Hence, it is not appropriate for the [Buyer] to directly cite this Article to support its claim for rights. The Tribunal also notes that the Contract lacks agreement on the remedies for breach of contract or violation of rights and obligations arising out of the disqualification of the equipment at the on-site examination.

The Tribunal finds that both parties did not explicitly agree on the date of examination before shipment, on top of which the [Buyer] encountered difficulties on the visiting visas and the [Seller] encountered the resignation of its engineer. The parties later fixed the examination date after the conclusion of the Contract. However, this examination date, which shall be before shipment, was far beyond the agreed date of shipment stipulated in the Contract. Therefore, both parties shall be responsible for the fact that the equipment was not examined and was not timely shipped within the time of shipment. On the other hand, the equipment provided by the [Seller] could not pass the two examinations according to the technical indication stipulated in the Contract and the bidding document. This is the fundamental reason why both parties could not continue to perform the Contract. Hence, the [Seller] shall not only restitute the down payment prepaid by the [Buyer], but also compensate for the damages incurred from its failure to perform the Contract. The [Seller] did not object to the evidence of fees incurred from the examination and acceptance of the equipment provided by the [Buyer]. Consequently, the Tribunal agrees with the [Buyer]'s requests for refund of the down payment of US $30,000 and compensation of the acceptance fee of US $1,589.39.

      (2) Compensation of the payment of penalty of US $15,000

      The [Buyer] in its Application for Arbitration claimed that accordingly to Article 16 of the Contract, if the [Seller] delivers the goods after 10 weeks of the agreed delivery time, the [Buyer] is entitled to avoid the contract, and such avoidance shall not release the seller from its obligation to pay the buyer a penalty, i.e., 5% of the contract price.

The Tribunal notes that Article 16 provides:

"LATE DELIVERY AND PENALTY: In case of delayed delivery, except for Force Majeure cases, the Sellers shall pay to the Buyers for a penalty amounting 0.5% of the total value of the goods delayed per week. Any fractional part of a week is to be considered a full week. The total amount of penalty shall not, however, exceed 5% of the total value of the goods involved in late delivery and is to be deducted from the amount due to the Sellers by the paying bank at the time of negotiation, or by the Buyers direct at the time of payment. In case the period of delay exceeds 10 weeks after the stipulated delivery date, the Buyers have the right to terminate this Contract but the Sellers shall not thereby be exempted from the payment of penalty."

According to the analysis of the above opinions, the date of delivery had expired before the examinations took place. However, the parties did not agree on a new delivery date. Although later the equipment was not delivered to the [Buyer] due to the reason that it could not meet the technical specification stipulated in the Contract and the bidding document, the Article cited by the [Buyer] apparently does not apply to the situations in the present case. Hence, the Tribunal does not support the [Buyer]'s claim of compensation for the penalty of US $15,000 based on Article 16.

      (3) Payment of the arbitration fee

      Since this claim by the [Buyer] for payment of the arbitration fee is not concrete enough, and at the same time, the [Buyer] did not submit relevant evidence, the Tribunal does not support such claim.

6. [Seller]'s Counterclaim

      (1) The compensation of [Seller]'s loss

      The [Seller] requested compensation from the [Buyer] for the actual loss of US $68,475 incurred from the avoidance of the contract for manufacture, work, and customization. The [Seller] also requested compensation for the labor cost of US $75,000 incurred from the process of the [Buyer]'s visa application to visit the U.S., as well as the down-payment of US $30,000 paid by the [Seller].

The Tribunal notes that the [Seller] claimed that the [Buyer] delayed providing the draft of design and raw materials and delayed issuing the L/C, and therefore, the examination of the equipment was delayed. The [Seller], however, did not submit evidence supporting its claim on the obligation of the [Buyer] to provide with draft of design. The [Seller] did not submit sufficient evidence demonstrating that the [Buyer] delayed in providing examination materials, and therefore, the examination was delayed. As for the delayed issuance of the L/C, the Contract did not stipulate a concrete time of issuance, but merely that the L/C shall be issued by the [Buyer]. The Tribunal notes that the parties have negotiated about the issuance of the L/C, and even the payment of the Contract price, but did not eventually agree thereon. Therefore, the [Seller]'s claim that the delay of the issuance of the L/C was caused by the delay of the examination of the equipment is not supported by the Tribunal.

Based on Opinions 2-5, this counterclaim of the [Seller] is not supported by the Tribunal because (a) the Quotation alleged by the [Seller] is not a valid component of the Contract, and is not binding on the [Buyer]; (b) the Contract in this dispute is a sales contract, not a contract for manufacture, work, and customization; and (c) the fundamental reason why the performance of the Contract was delayed was that the [Seller]'s equipment does not meet the technical specification stipulated in the Contract and the bidding document.

      (2) The compensation for the translation fee of US $626.40 incurred from the present case, and [Seller]'s attorneys' fee

      Since the main points claimed by the [Seller] in its Response and its Counterclaim are not supported by the Tribunal, the translation fee of US $626.40 and the attorneys' fee shall not be paid by the [Buyer].

7. Arbitration fee and actual expenses

In light of the situations of this case, the [Buyer] shall bear 20% of the arbitration fee, and the [Seller] shall bear 80% of the arbitration fee. The [Seller] shall bear the fee of the Counterclaim. Since the court session is held in Wuhan, China, the actual expenses shall be borne by both parties evenly.

AWARD

The Tribunal hands down the following award according to the aforementioned:

   (1)   The [Seller] shall refund the down payment of US $30,000 and compensate for the examination fee of US $1,589.39.
 
   (2)   The Tribunal dismissed the [Buyer]'s other claims.
 
   (3)   The Tribunal dismissed the [Seller]'s claims.
 
   (4)   The arbitration fee of this dispute is RMB 23,534. The [Buyer] bears 20% thereof, i.e., RMB 4,706.80, and the [Seller] bears 80% thereof, i.e., RMB 18,827.20. The [Buyer] has prepaid this arbitration fee, and therefore, the [Seller] shall pay the [Buyer] RMB 18,827.20.

The counterclaim fee of this dispute is RMB 5,557. The [Seller] bears the total amount thereof. The [Seller] has prepaid the exact amount.

This court session was held in Wuhan, China, and the actual expenses are RMB 17,860, of which the parties bear evenly, i.e., RMB 8,930. Since the [Buyer] has prepaid RMB 20,000. Therefore, the [Seller] shall make payment to the [Buyer] of RMB 8,930, and the remaining RMB 2,140 shall be restituted to the [Buyer] by CIETAC.
 

   (5)   The abovementioned payments by the [Seller] to the [Buyer] shall be made within 15 days after this award is handed down. Otherwise, interest shall be added at an annual rate of 4%.

This is a final award.


FOOTNOTES

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

** Jing Li, LL.M., University of Texas at Austin, School of Law; Master of Law, Sun Yat-Sen University School of Law, China; LL.B., Sun Yat-Sen University School of Law, China.

*** 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 29, 2008
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