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CISG CASE PRESENTATION

China 21 October 2005 CIETAC Arbitration proceeding (Sheet metal producing system case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/051021c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20051021 (21 October 2005)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2005/03

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Japan (respondent)

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

GOODS INVOLVED: Sheet metal producing system


Classification of issues present

APPLICATION OF CISG: Yes. The tribunal stated: "The countries of the two contracting parties are China and Japan which are signing and ratifying States of the CISG. Therefore, the CISG will be applied to settle the disputes in connection with the contracts except for reservation articles declared by the two countries."

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 4 ; 39 ; 78

Classification of issues using UNCITRAL classification code numbers:

4B [Scope of Convention (issues excluded): fraud, unconscionability];

39A [Requirement to notify seller of lack of conformity: buyer must notify seller within reasonable time];

78B [Rate of interest]

Descriptors: Scope of Convention ; Fraud ; Lack of conformity notice, timeliness ; Interest

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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

English: Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=1202&step=Abstract>

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

Sheet metal producing system case (21 October 2005)

Translation [*] by WU Xiaoyu [**]

Translation edited by Meihua Xu [***]

China International Economic & Trade Arbitration Commission, South China Sub-Commission (previously CIETAC Shenzhen Sub-Commission, name changed to CIETAC, South China Sub-Commission after 18 June 2004, hereafter referred to as the "South China Sub-Commission") accepted this arbitration case in accordance with:

   -    The arbitration clause in the sales contract for equipment signed on 29 September 1999 between Claimant, P.R.C. limited liability company in Sichuan Province (hereinafter referred to as "Buyer"), and Respondent, Japanese limited liability company (hereinafter referred to as "Seller"); and
 
   -    The Arbitration Application filed by [Buyer] on 2 July 2004.

The China International Economic and Trade Arbitration Commission (CIETAC) Arbitration Rules (hereinafter referred to as Arbitration Rules), which were adopted by CIETAC on 1 October 2000, were applied in this case.

Pursuant to the Arbitration Rules, the South China Sub-Commission sent a Notice of Arbitration, together with one copy each of the [Buyer]'s Application for Arbitration and its attachments as well as the Arbitration Rules and the Panel of Arbitrators to the [Seller] by EMS on 9 July 2004. The relevant documents were sent to the [Buyer] as well.

The [Seller] submitted a written defense on 24 August 2004 and filed a counterclaim on 10 September 2004.

The [Buyer] named Mr. L as arbitrator, the [Seller] named Mr. S as arbitrator and Mr. C was appointed as the Chief Arbitrator of the case according to the Arbitration Rules of the Arbitration Commission. Together, on 17 September 2004, they formed an Arbitral Tribunal to hear this case.

The Secretariat of the South China Sub-Commission decided to hold the first oral hearing at the place where the South China Sub-Commission is located at 9 a.m. on 29 October 2004. The South China Sub-Commission notified the [Buyer] and the [Seller] of the time of the first oral hearing. Later, as the [Seller] filed a counterclaim, the [Buyer] requested a postponement of the hearing for preparation of its documents of defense. The Secretariat of South China Sub-Commission deemed this request justified and postponed the date of the first oral hearing to 3 December 2004. However, the [Buyer] failed to submit its written defense to the [Seller]'s counterclaim to the Arbitration Tribunal before the first oral hearing. The Arbitration Tribunal held the first oral hearing at the place where the South China Sub-Commission is located at 9 a.m. on 3 December 2004. The parties or their representatives appeared before the Tribunal, made full oral presentations and argued fully on the facts, their claims and on the basis for their claims in law and under the contracts. The Arbitral Tribunal raised questions to both parties. In addition to their answers and explanations, the parties submitted further supplemental written evidence or their representatives' statements.

On 30 December 2004, the [Buyer] submitted a written request to change the Chief Arbitrator. The [Buyer] alleged:

"The Chief Arbitrator, Mr. C, does not have enough knowledge, is incapable to hear the case, and he discriminated in favor of the [Seller], with the result, that the entire court session process was in disorder, that the contents of the arguments were shallow without focus, and that the case was concluded without clarifying the facts, causing severe damage to the [Buyer]'s arbitration rights."

The Chair of the Arbitration Commission thought that the reasons "Mr. C does not have enough knowledge and is incapable to hear the case" and the allegation of "his discrimination" were untenable and, on 31 January 2005, made the decision that the Chief Arbitrator not be changed.

On 20 April 2005, the [Buyer] asked the South China Sub-Commission to hold a second hearing since it had been unable to state its arbitration claims sufficiently at the first court session. The South China Sub-Commission accepted this request and scheduled the second oral hearing for 9 a.m., 27 May 2005. At the second oral hearing, the representatives of both parties appeared before the Tribunal, made full oral presentations, argued fully on the facts, and answered the Tribunal's questions. The [Buyer] submitted supplementary material at the court session and, after the court session, the parties submitted related materials.

On 15 September 2005, the Arbitral Tribunal requested permission to postpone its decision because the case is complicated. A revised deadline to decide the case was approved by the Arbitration Commission and set at 17 October 2005.

The Arbitral Tribunal has now made its award. The following are the details of the case, the opinion of the Arbitral Tribunal and the award.

I. DETAILS OF THE CASE

      (I) Outline of the Contract

      The [Buyer] and the [Seller] signed their contract on 29 September 1999. It stipulated that the [Buyer] agreed to purchase (and the [Seller] agreed to sell) a sheet metal production system unit. The total price was set at US $608,000. The following are the main provisions of the contract:

-     Article (1) Name, specification, quantity and price: The name of the unit is the "-brand sheet metal production system"; the specification is Model VECTRUM-3046a+FG-1250 (details in the attachment); the quantity is one unit; the price is CIF Beijing China US $608,000.
 
-     Article (2) Manufacturer: Japanese Company.
 
-     Article (3) Date of delivery: Late October 1999.
 
-     Article (4) Place of loading: Port of Nagoya, Japan.
 
-     Article (5) Place of discharge: Beijing, China International Exhibition Center (the low-tax zone).
 
-     Article (6) Insurance: Provided by the [Seller], the destination is the factory of the user.
 
-     Article (9) Payment: The [Buyer] shall pay 5% of the price to the [Seller] as a deposit before 15 October 1999 (also can pay in renmimbi [RMB] according to the exchange rate on the day of payment). The [Seller] shall return all of the deposit to the [Buyer] in seven working days after receiving the L/C from the [Buyer]. The [Buyer] shall open an irrevocable L/C valid until 30 July 2000 in favor of the [Seller] before 30 October 1999. The [Buyer] shall pay 60% of the price to the paying bank, negotiable against shipping documents and the agreement and pay the remaining 40% on 29 June 2000 unconditionally.
 
-     Article (11) Technical documents: See details in the agreement on the technique.
 
-     Article (12) Annex to the contract: See details in the annex, fifty-eight pages in total.
 
-     Article (14) Assurance of quality: The [Seller] shall assure that the goods are made from first-class material, brand new, unused and meet the specifications and function stipulated in the contract. The [Seller] shall assure that the unit runs well for twelve months after being put into service under ordinary usage.
 
-     Article (15) Examination and Claims:

a. The manufacturer shall examine the quality, specification and quantity/weight of the goods correctly and make a statement that the goods satisfy the requirements stipulated in the contract before the delivery. This statement is a part of the documents which will be submitted to the bank for negotiating/accepting payment. But the statement cannot be the final evidence of the quality, specification and quantity/weight of the goods.

b. When the goods arrive at the port of destination, the [Buyer] shall apply to the China Import and Export Commodity Inspection Bureau to examine the quality, specification and quantity/weight of the goods. If the [Buyer] finds any discrepancy in quality and/or quantity/weight with the contract, except for the liability of the insurance company and/or the carrier, the [Buyer] has the right to reject the goods or claim compensation from the [Seller] based on the test certificate issued by the China Import and Export Commodity Inspection Bureau within ninety days after the arrival of goods at the port.

c. If the [Buyer] finds any discrepancy in quality and/or quantity/weight with the contract or any defect caused by any reason, which includes internal defects or using bad raw material within the quality guarantee period as stipulated in article (14), the [Buyer] shall apply to the China Import and Export Commodity Inspection Bureau to conduct an examination and claim against the [Seller] based on the test certificate.

d. The [Seller] should reply within three working days after receiving the notification of the [Buyer]'s claims, otherwise, the [Seller] will be regarded as accepting every claim of the [Buyer].
 

-     Article (16) Settlement of claims: If the [Seller] is liable for lack of conformity of the goods under the contract and the [Buyer] claims against the [Seller] within the time limit stipulated in articles (14) and (15), the [Seller] shall make compensations by the following method with the consent of the [Buyer]:

a. To reduce the price according to the extent of the defect and damage of the goods and the loss of the [Buyer];

b. The [Buyer] can exchange defective goods for free. The exchanged goods must be brand new and meet the quality and quantity/weight stipulated in the contract. All of the expenses and the loss of the [Buyer] should be borne by the [Seller]. The [Seller] assures the quality of the exchanged goods for twelve months as stipulated in article (13).
 

-     Article (19) Resolution of disputes. All disputes in connection with the contract or the execution thereof shall be settled through friendly negotiations. In case no settlement can be reached through negotiations, the case should then be submitted for arbitration to CIETAC according to the arbitration rules of CIETAC. The decision rendered by the said Commission shall be final and binding upon both parties. The arbitration fee shall be borne by the losing party unless otherwise decided by the Arbitration Commission.

The contract also contained provisions on force majeure.

      (II) [Buyer]'s arbitration application, reasoning and claims

      In its arbitration application and presentation at the hearing, the [Buyer] alleged that:

A month after the [Buyer] and the [Seller] signed the contract, the [Seller] claimed that it had a "sheet metal production system" available at the exhibition in Beijing and asked to use this system to make the delivery in Beijing. As the [Buyer] is located in West China and developed from a small enterprise, whose principals do not know Japanese or English, the [Buyer] accepted the [Seller]'s request because of the urgency and only based on the [Seller]'s introduction. In December 1999 when the system was put in use, the [Buyer] found that the so-called "system" was far from the advanced technology that was advertised and promised by the [Seller]. The [Buyer] promptly claimed to reduce the price and change the payment method. The [Seller] agreed to change the payment method but was unwilling to reduce the price. In order to promote a smooth relationship and receive after-sales service, [Buyer] signed a Memorandum of Contract Amendment with the [Seller] on 30 December 1999 and paid a total of US $306,000 two installments based on the aforesaid Memorandum. On 25 July 2001, the [Seller] agreed to "calculate the price on the basis of Company's actual price, which is US $548,000." On 12 December 2002, the [Seller] agreed to reduce the price further, to US $480,000 but later retracted this promise. It is the [Buyer]'s position that, even if the price were US $480,000, that would be 10% higher than the normal price. [Buyer] alleges that, by using its dominant position in technology and information, the [Seller] concealed the facts and created a false impression to lure the [Buyer] to sign the contract, which violated THE GENERAL PRINCIPLES OF THE CIVIL LAW OF THE PEOPLE'S REPUBLIC OF CHINA and THE LAW OF THE PEOPLE'S REPUBLIC OF CHINA ON ECONOMIC CONTRACTS INVOLVING FOREIGN INTEREST, was fraudulent and harmed the [Buyer]'s interest.

The [Buyer] claims: (1) The initial price should be reduced by US $200,000, which means the total price should be US $400,000; and (2) The arbitration fees and the attorneys' fees should be borne the [Seller].

      (III) The [Seller]'s defense

      The [Seller] alleged in its written defense on 24 August 2004:

            (1) The [Buyer] and the [Seller] signed the sales contract on 29 September 1999, stipulating that the [Buyer] would purchase a unit of "sheet metal production system" from the [Seller] at the price of US $608,000 and the payment condition was that the [Buyer] opens a 100% value, irrevocable L/C in favor of the [Seller] before 30 October 1999.

            (2) The contract stipulated that the [Buyer] shall apply to the China Import and Export Commodity Inspection Bureau to examine the quality, specification and quantity/weight of the goods after the arrival of goods at the port of destination. If the [Buyer] finds any discrepancy in quality and/or quantity/weight with the contract, the [Buyer] has the right to reject the goods or claim compensation from the [Seller] based on the test certificate within ninety days after the arrival of goods at the port. Moreover, if the [Buyer] finds any discrepancy in quality and/or quantity/weight with the contract within twelve months after the system is operated, the [Buyer] shall apply to the China Import and Export Commodity Inspection Bureau to conduct an examination and claim to the [Seller] based on the test certificate. However, the [Buyer] did not submit any objection of the quality and quantity/weight of the goods within the time limit for inspection as stipulated in the contract.

            (3) On 30 December 1999, [Seller] and [Buyer] signed a Memorandum of Contract Amendment, changing the payment method from 100% value, irrevocable L/C to "the [Buyer] should make the payment to the [Seller] in cash in three installments":

-  For the first payment, the [Buyer] shall pay the [Seller] US $202,000 within three business days after receiving the letter of guarantee from the [Seller];

-  The second payment shall be made before the end of February 2000 in the amount of US $203,000;

-  The third payment shall be made before the end of March 2000 in the amount of US $203,000.

            (4) The [Buyer] accepted the goods on exhibition in Beijing on 28 January 2000.

            (5) As of 25 July 2001, the [Buyer] had paid a total of US $302,000 to the [Seller]. It is not true as the [Buyer] claimed in its arbitration application that the [Buyer] has already paid US $306,000 in two installments. In fact, the [Buyer] paid only US $302,000. The reason that the [Buyer] made the above mistake is that, in the memorandum signed on 25 July 2001, both parties confirmed that the [Buyer] had paid US $306,000, which was a mistake, because the parties confused the unpaid and the paid amount. The [Seller] signed the Memorandum of the Contract with the [Buyer] on 25 July 2001, stipulating that the [Buyer] should pay the remaining amount before 15 December 2001 and the [Seller] at that time reduced the total price to US $548,000. Meanwhile, both parties agreed that the ownership of the goods would not belong to the [Buyer] until the total amount was paid.

            (6) On 12 December 2002, both parties held a meeting because the amount was still owed. The [Buyer] confirmed that, as of 12 December 2002, US $302,000 had been paid. The [Buyer] said that it would pay the remaining amount through T/T within 15 days if the [Seller] reduced the total price to US $480,000. The [Seller] refused.

            (7) On 26 December 2002, the [Seller] sent a letter to the [Buyer], stating that the [Seller] cannot accept a reduction of the total price to US $480,000, but the [Seller] can reduce the price to US $500,000 if the [Buyer] can pay all of the remaining amount by the end of 2002.

            (8) The [Buyer] did not pay any arrears so far.

The [Seller] also alleged in its defense that the contract between the parties was valid and effective and that the [Buyer] must perform its obligation without modification. The main claim of the [Buyer] in its arbitration application is "to reduce the total price of the goods to US $400,000", which means to modify the contract. The [Seller] considers that the contract was signed by the [Buyer] and the [Seller] on 29 September 1999. Both parties' full capacity for civil behavior and both parties' genuine consent made the contract legally binding. Moreover, article (15) states that the [Buyer] shall apply to the China Import and Export Commodity Inspection Bureau to examine the quality, specification and quantity/weight of the goods after the arrival of goods at the port of destination. If the [Buyer] finds any discrepancy in quality and/or quantity/weight with the contract, the [Buyer] has the right to reject the goods or claim compensation from the [Seller] based on the test certificate within ninety days after the arrival of goods at the port. Moreover, if the [Buyer] finds any discrepancy in quality and/or quantity/weight with the contract within twelve months after the system is operated, the [Buyer] shall apply to the China Import and Export Commodity Inspection Bureau to conduct an examination and claim to the [Seller] based on the test certificate. However, it has been more than four years since the [Buyer] put the goods into service, which already exceeds the deadlines for inspection and compensation claim stipulated in the contract. The [Buyer] did not discover any problem or propose any objection during this period. The [Seller] performed its obligations completely. The [Buyer] does not have the right to claim that the goods do not conform to the contract.

      The [Seller] further alleged:

      The reasons that the [Buyer] claimed the right to modify the contract are: The [Buyer] took the position that the contract is unfair, that by using its dominant position in technology and information, the [Seller] committed fraud by hiding the real facts to lure the [Buyer] to sign the contract without true intention. However, it is the [Seller]'s position that the contract is not unfair. According to article 72 of Opinion of the Supreme People's Court on Several Issues concerning the Implementation of the General Principles of the Civil Law of the People's Republic of China, a contract is grossly unconscionable if "one party made use of his dominant position in the technology and information or lack of experience of the other party and thereby caused the violation of the principle of fairness and equivalence." It is the [Seller]'s position that its behavior in this case cannot constitute grossly unconscionable behavior for the following reasons:

-     First, the [Buyer] is a high-tech company, registered in a central city of Southwest China, which had been operating for more than three years when the [Buyer] signed the contract with the [Seller]. The transaction was an ordinary activity of the [Buyer] within its scope of business. Whether from the legal point of view or from the facts, the [Buyer] was a civil subject with full capacity. There is no factual or legal basis for the [Buyer] to claim that it could violate its contractual obligations for the reason that it was in a peripheral location and therefore its principals did not understand English or Japanese.
 
-     Second, the [Seller] does not have a "so-called" dominant position of technology and information. The goods that were delivered had been on exhibition in Beijing on 28 January 2000. They had been exhibited and demonstrated lively in public before the contract was signed. The materials distributed by the [Buyer] also contained detailed introductions and explanations. The [Buyer] got full knowledge of the goods through these methods. It is not true as the [Buyer] claimed that "its knowledge of the goods was only based on the [Seller]'s introduction." Moreover, the details and technical information are included in the annex to the contract, which disclosed all of the information to the [Buyer] before the conclusion of the contract. If the [Buyer] found any discrepancy in quality and/or quantity/weight with the contract or any defect caused by any reason, the [Buyer] should have submitted objections and claims within the time limit.
 
-     Finally, there is a lack of factual and legal basis to support the [Buyer]'s claim that the contract should be modified because of fraud. According to article 68 of Opinions of the Supreme People's Court on Several Issues concerning the Implementation of the General Principles of the Civil Law of the People's Republic of China, behavior is fraudulent if "one party tells the other party unreal information intentionally, or hides real facts intentionally, leading the other party draw untrue conclusions." In this case, the [Seller] never gave unreal information or hid real facts intentionally and thus did not lead the [Buyer] to wrong conclusions. In its arbitration application, the [Buyer] did not mention either how the [Seller] "gave the [Buyer] unreal information" or what information; how the [Seller] "hid the real facts" or what facts "led" the [Buyer] to wrong conclusions. The [Buyer] cannot provide any evidence to prove this allegation. [Buyer]'s claim that the contract should be modified on the ground of fraud lacks legal and factual basis. According to article 10 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest, which is claimed by the [Buyer] to apply, contracts that are concluded by means of fraud or duress shall be void. Therefore, the contract would be void in the first place and cannot be modified if there is fraudulent behavior. There is no legal basis for the [Buyer] to claim for the modification of the contract.

The Contract Law of the People's Republic of China and the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest do not have provisions on the time limit to exercise the right of modification. However, according to article 73 of the Opinions of the Supreme People's Court on Several Issues concerning the Implementation of the General Principles of the Civil Law of the People's Republic of China, "A party's alteration or cancellation right will be extinguished if it fails to exercise the alteration or cancellation right within one year, commencing on the date when the civil juristic act is instituted." Thus, the time limit to exercise the alteration right is one year. The case was commenced on 1 July 2004, which meant it was out of the one-year time limit. Therefore, the [Buyer]'s request to modify the contract should be dismissed.

      The [Seller]'s counterclaim

      (1) The [Seller] counterclaimed that [Buyer] should pay the [Seller] the remaining amount: US $246,000; (2) The [Buyer] should pay to the [Seller] a penalty [i.e., interest] on the overdue debt at the rate of 0.021% per day since 15 December 2001, the day that the entire amount should have been paid; and (3) The arbitration fees and the attorneys' fees should be paid by the [Buyer].

      The [Seller]'s reasoning

      The [Buyer] accepted the goods on exhibition in Beijing on 28 January 2000 and paid US $202,000 to the [Seller] in January 2000. Then the [Buyer] paid US $100,000 in June 2000. The total amount paid was US $302,000. The [Buyer] did not make any payment afterwards. The [Seller] and the [Buyer] signed a Memorandum of the Contract on 25 July 2001 which stipulated that the price of the goods would be reduced to US $548,000 and the [Buyer] would pay the remaining amount before 15 December 2001. However, after signing the memorandum, the [Buyer] did not pay any amount and requested to postpone the payment again and again. Though the [Seller] has asked many times, the [Buyer] has not paid the remaining amount. According to the facts mentioned above, it is the [Seller]'s position that the behavior of the [Buyer] violated the contract and harmed the [Seller]'s contractual interests. In accordance with the provisions of the Contract Law of the People's Republic of China, the [Seller] asked the Arbitral Tribunal to support all of the counterclaims of the [Seller].

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

      After the oral hearings, the [Buyer] submitted a supplemental statement to the Arbitral Tribunal on 30 December 2004, defending against the [Seller]'s counterclaims. The [Buyer] alleged that the [Seller]'s counterclaims are based on the fact that the contract ML990929 is real, valid and effective and that the contract has been actually performed. However, [Buyer] contends that basis does not exist. Therefore, there is no need to defend against the [Seller]'s counterclaims. The [Buyer]'s claim that the price should be reduced by US $200,000 is reasonable according to relevant legislation. The [Buyer] asks the Arbitral Tribunal to support this claim.

II. THE ARBITRAL TRIBUNAL'S OPINION

      (I) The applicable law

      The countries of the two contracting parties are China and Japan which are signing and ratifying States of the CISG. Therefore, the CISG will be applied.

The contracts in this case did not identify the laws by which the contracts would be governed and construed in the event of disputes. Since both parties quoted the provisions of the General Principles of the Civil Law of the People's Republic of China and the Contract Law of the People's Republic of China many times in their arbitration application, defense and at the oral hearings, the Arbitral Tribunal decides that the laws of the PRC should apply to this case.

      (II) The validity and effectiveness of the contract

      The [Buyer] has claimed many times in its arbitration application, in the documents submitted to the Arbitral Tribunal, and at two oral hearings that the [Seller] made use of its dominant position of technology and information to hide the real facts, leading the [Buyer] to sign an unfair contract. Therefore, the [Buyer] claimed that the contract was illegal and invalid. The Arbitral Tribunal checked relevant documents and heard the arguments of both parties during the oral hearings. The Arbitral Tribunal finds that there are literally only statements without any facts and proof relating the issue that the [Seller] hid the real facts and committed fraud.

The contract signed in Chengdu on 29 September 1999 was clear and sufficient. The contract was written in Chinese and English and was concluded by both parties' signatures. Both parties signed a memorandum on 30 December 1999 to revise the payment condition. The [Seller] performed his obligation of delivery on 28 January 2000. According to article 3 of the memorandum signed on 29 September 1999, the [Seller] sent two engineers to the [Buyer]'s factory, fixing, testing, inspecting and training, for ten days in all. The [Buyer] paid twice according to the memorandum. Therefore, the Arbitral Tribunal holds that the contract is valid and effective.

      (III) [Buyer]'s price reduction claim

      The main claim of the [Buyer] is to reduce the price of the goods. The [Buyer] alleged in its arbitration application that the [Seller]'s behavior was fraudulent because [Seller] made use of its dominant position in the field of the technology and information, hid the real facts and committed fraud, leading the [Buyer] to sign an unfair contract, which was typical of fraud. The [Buyer] therefore asked the Arbitral Tribunal to reduce the price of goods to US $400,000. The Arbitral Tribunal carefully checked the documents and relevant materials submitted by both parties and heard both parties' arguments, finding the following facts:

            a. The contract was signed in Chengdu on 29 September 1999. It had five pages, and twenty-one articles, including the goods' name, price, port of delivery, place of discharge, payment condition, examination, time limit of quality assurance and claims, etc. The contract also had a fifty-eight page annex, which included the goods' name, quantity, specifications, technical parameter, instructions and the list of spare parts. Both parties signed every page of the annex. The main part of the contract was signed by the legal representative of the [Buyer]. Article (5) of the contract stipulated that the place of discharge was Beijing, China International Exhibition Center (the low-tax zone). The Arbitral Tribunal holds that the [Buyer] paid attention to sign the contract. The [Buyer] was aware that the goods would be delivered to it after being exhibited in Beijing at the conclusion of the contract. The Arbitral Tribunal did not find the provisions grossly unconscionable or hiding the real facts in the contract.

            b. Articles (14) (15) and (16) of the contract stipulate quality assurance, examination, claims and the settlement of claims. The [Buyer] repeated in its arbitration application and oral hearings that the goods provided by the [Seller] had great deficiency in quality. However, the [Buyer] neither examined the goods according to the provisions in the contracts, nor presented written claims to the [Seller] within the time limit. No facts or relevant proof regarding the reduction of the price have been submitted to the Arbitral Tribunal.

            c. Article 157 of the Contract Law of the People's Republic of China states:

                  "Upon receipt of the subject matter, the buyer shall inspect it within the prescribed inspection period. Where no inspection period was prescribed, the buyer shall timely inspect the subject matter."

                  Article 158 states:

                  "Where an inspection period was prescribed, the buyer shall notify the seller of any non-compliance in quantity or quality of the subject matter within such inspection period. Where the buyer delayed in notifying the seller, the quantity or quality of the subject matter is deemed to comply with the contract. Where no inspection period was prescribed, the buyer shall notify the seller within a reasonable period, commencing on the date when the buyer discovered or should have discovered the quantity or quality non-compliance. If the buyer fails to notify within a reasonable period or fails to notify within two years, commencing on the date when it received the subject matter, the quantity or quality of the subject matter is deemed to comply with the contract, except that if there is a warranty period in respect of the subject matter, the warranty period applies and supersedes such two-year period."

                  Article 39(1) CISG states:

                  "The buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it."

                  Article 39(2) CISG states:

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

The [Buyer] received the goods on 28 January 2000. Afterwards, both parties had sent each other letters and signed documents such as the supplemental agreement and the memorandum. The quality problem was not mentioned in these documents. The [Buyer] only proposed the quality problem in its arbitration application for the first time on 2 July 2004. Until then, the [Buyer] had already used the goods for more than four years. The Arbitral Tribunal holds that, according to the provisions in the Contract Law of the People's Republic of China, the goods delivered by the [Seller] should be regarded as conforming to the contract; according to the provisions of the CISG, it should be regarded that the [Buyer] has lost the right to rely on a lack of conformity of the goods.

In view of these facts, the Arbitral Tribunal does not support the [Buyer]'s claim to reduce the price by US $200,000.

      (IV) The memorandum of 29 September 1999<

      The Arbitral Tribunal noted: The [Buyer] neither mentioned the memorandum of 29 September 1999 in its arbitration application on 2 July 2004, nor did [Buyer] submit a copy of the memorandum with the attached documents of the arbitration application. After the first oral hearing, the [Buyer] mentioned the memorandum without its copy in the supplemental statement which was submitted to the Arbitral Tribunal on 4 January 2005. The [Buyer] did not submit the copy of the memorandum until the second oral hearing on 27 May 2005. The Arbitral Tribunal held cross-examination in court. The [Seller] confirmed that the memorandum was signed by both parties. The full text follows:

-     " P.R.C. limited liability company in Sichuan Province [Buyer] and Japanese limited liability company [Seller] signed a contract for the transaction of a Fanuc16p Flexible Manufacturing System. The following items are in a supplemental memorandum of the contract, which is a part of the contract. The memorandum controls if the provisions in the contract and the memorandum are in conflict."
 
-     "1. The [Buyer] will send two engineers to the technology center of technique Company (Shanghai) to learn VGCTRLIM-3046a+FG-1250 through CAMPATH-2000E. There are seven working days and the date can be negotiated. All the fare for the transportation and accommodation shall be borne by the [Buyer]."
 
-     "2. The [Seller] shall provide the [Buyer] two sets of the following instructions and technical data in English:
  1. Operation manual
  2. Service manual
  3. Repair parts list
  4. Programming manual
  5. Tooling manual
  6. CAMPATH-2000 manual
  7. Foundation drawings
  8. Fanuc16p Operation manual
  9. Fanuc16p service(maintenance) manual
  10. Electrical drawings."
     
-     "3. After the goods are delivered, the [Seller] shall send two engineers to the [Buyer]'s factory, fixing, testing, inspecting and training within one week after receiving the notification from the [Buyer]. The period is ten days and the date can be negotiated. The relevant fees shall be borne by the [Seller]."
 
-     "4. The [Seller] shall provide the [Buyer] the Foundation drawings within two weeks after the conclusion of the contract."
 
-     "5. Both parties agree to reserve the making period and credits of 20 units of the ordinary modes (one up and one down). The [Buyer] can propose the requirements and the size to the [Seller] within half a year after the goods arrive at the factory. The [Seller] shall provide the modes for free."
 
-     "6. The contract is written in Chinese and English. It is subject to the Chinese version if a conflict occurs."
 
-     "7. The [Buyer] and the [Seller] shall settle unforeseen problems through friendly negotiations."

The [Buyer] alleged in its Supplemental Statement, "Both parties definitely confirmed that the equipment was a "Fanuc16p Flexible Manufacturing System" [FMS] in the memorandum. The memorandum is one part of the contract. The contract is subject to the memorandum if the provisions of the contract and the memorandum are in conflict." The [Buyer] alleges that the [Seller] "sold the [Buyer] a small production line which functions as an FMC for the high price of an FMS." The Arbitral Tribunal checked Contract ML-990929GL and the content of this memorandum, holding that the memorandum did not change the sort, type, standard or quantity stipulated in that contract. Paragraphs (1)-(5) of the memorandum are supplements to the original contract. The memorandum stated in the beginning that it was "supplemental statement" to Contract ML-990929GL.

      (V) The issue related to FMS vs. FMC

      The [Buyer] devoted much space and time in its documents and at the oral hearings to explain the difference between FMS and FMC. However, the [Buyer] did not mention FMS and FMC in its arbitration application of 2 July 2004. The representative of the [Buyer] mentioned FMS and FMC for the first time in the first oral hearing which was held on 3 December 2004. The first time that the [Buyer] explained the difference between FMS and FMC in writing was in its "Supplemental Statement" which was submitted to the Arbitral Tribunal on 4 January 2005. The [Buyer] alleged in the "Supplemental Statement" that "The FMS -- Flexible Manufacturing System -- is constituted from two FMCs. It is controlled by a DNC computer system. The FMC is a Flexible Manufacturing Cell, which can do the loading automatically. The production technology is simple. It does not have the equipment for transferring large flows of information. The essential difference between FMS and FMC is the quantity of production units that constitute the machine. If there are more than two production units, it is FMS; if there is only one production unit, it is FMC."

The [Buyer] claimed that the machine that the [Seller] delivered was an FMC instead of an FMS. Therefore, the [Buyer] requested the Secretariat of the South China Sub-Commission to examine the machine, respectively, on 15 December 2004 and 14 January 2005. The Secretariat of the South China Sub-Commission replied to the [Buyer] on 12 March 2005 to the effect that: "The case began to be heard on 3 December 2004. The Secretariat of the South China Sub-Commission received the [Buyer]'s request for examination of the machine twice, respectively, on 15 December 2004 and 14 January 2005 and forwarded them to the [Seller]. The Secretariat received the [Seller]'s written opinion of the [Buyer]'s request for examination, respectively, on 14 January 2005 and 27 January 2005. These two opinions have been sent to the [Buyer]. After examining the request and opinions submitted by the two parties, the Arbitral Tribunal refuses the [Buyer]'s request for the examination". The Arbitral Tribunal holds that if the [Buyer] found that the goods delivered by the [Seller] did not conform to the contract -- that they were FMC instead of FMS -- there is no reason for the [Buyer] not to have had the goods inspected or filed claims within the time limit stipulated in the contract. Instead, the [Buyer] claimed to examine the goods after more than four years' usage. The Arbitral Tribunal holds that the [Buyer]'s request neither conforms to articles 157 and 158 of the Contract Law of the People's Republic of China and article 39 CISG, nor does it conform to the customs of international trade. Therefore, the Arbitral Tribunal does not accept the [Buyer]'s request for the examination of the goods.

      (VI) [Seller]'s right to payment from the [Buyer] of the remaining amount

      In [Seller]'s counterclaim, the [Seller] seeks to have the [Buyer] required to pay the unpaid amount of US $246,000. After the conclusion of the contract on 29 September 1999, the [Buyer] did not satisfy its obligation of payment according to article (9) of the contract. Both parties signed the memorandum on 30 December 1999, modifying the payment condition. However, the [Buyer] only made the first payment of US $202,000 and part of the second payment, US $100,000, leaving the other part of the second payment of US $103,000 and the third payment of US $203,000 unpaid. The [Seller] and the [Buyer] signed another memorandum on 25 July 2001, stipulating that the price of the goods would be reduced from US $608,000 to US $548,000. According to this, the [Buyer] still owed US $246,000 to the [Seller]. This memorandum stated that the unpaid amount should "be paid by the [Buyer] in foreign currency before 15 December 2001." The [Buyer] has not performed the payment obligation in this memorandum. The Arbitral Tribunal holds that the [Buyer] did not perform its obligation and this behavior constitutes a breach of the contract. The Arbitral Tribunal, therefore, supports the [Seller]'s claim for the unpaid amount of US $246,000.

      (VII) The [Seller]'s claim to have the [Buyer] pay interest

      In [Seller]'s counterclaim, the [Seller] asked the [Buyer] to pay a penalty [interest] on the debt to the [Seller] which is overdue. The Arbitral Tribunal noted that it was because the [Buyer] breached the contract that the remaining amount was unpaid and overdue. Therefore, the Arbitral Tribunal supports the [Seller]'s claim for interest. However, the contract does not stipulate the specific method to calculate such interest. The [Seller] alleged in its counterclaim, "to calculate it at the rate of 0.021% per day, from 15 December 2001, which is the day that the entire amount should have been paid to the day of actual payment". The Arbitral Tribunal holds that the rate claimed by the [Seller] is too high and does not support that rate. Referring to the provisions in the judicial interpretation of the Supreme Court and the standard for calculating interest on late repayment, the Arbitral Tribunal decides that it is proper to calculate the interest at the rate of 5% per year, from 16 December 2001, which is the day after the day that the entire amount should have been paid to the day of actual payment.

      (VIII) Attorneys' fees and traveling expenses

      The [Buyer] mentioned attorneys' fees in its arbitration application and the [Seller] mentioned attorneys' fees and traveling expenses in its counterclaim. The Arbitral Tribunal holds that the [Buyer] is the party that breached the contract. Therefore, the Arbitral Tribunal does not support the [Buyer]'s claim for attorneys' fees. The [Seller] is the party that abided by the contract. Therefore, the Arbitral Tribunal will give proper consideration to the [Seller]'s claim for attorneys' fees and traveling expenses.

On 5 January 2005, the [Seller] submitted a copy of the agency agreement and relevant documents, showing that the attorneys' fees are US $28,652 (the [Seller] had already paid US $20,255.55) and the traveling fees for the first oral hearing are RMB 13,290. On 12 June 2005, the [Seller] submitted documents showing that, the attorneys' fees are US $12,022 and the traveling fees for the second oral hearing are RMB 7,064. The Arbitral Tribunal checked all the copies of the documents, tickets and the receipts of the hotels. The Arbitral Tribunal found that the [Seller] already paid Law Firm (Shanghai) US $20,255.55 for attorneys' fees through the Mitsubishi Bank in Tokyo, Japan. However, the remaining attorneys' fees only appeared in the payment notification of Jindu Law Firm (Shanghai) without the bank's money order. The traveling fees for a total of RMB 20,354 for two oral hearings are true. The Arbitral Tribunal supports the [Seller]'s claim for the attorneys' fees of US $20,255.55 and the traveling fees of RMB 20,354 but does not support the remaining claim for attorneys' fees because the [Seller] did not submit the bank's money order.

      (IX) The arbitration fees

      The [Buyer] is the party that breached the contract and the [Seller] is the party that abided by the contract. Therefore, the Arbitral Tribunal decides that all the fees caused by the arbitration application and the counterclaims shall be borne by the [Buyer].

III. THE AWARD

The Arbitral Tribunal hereby decides on the [Buyer]'s arbitration claims and the [Seller]'s counterclaims:

      (1)  [Buyer]'s claim to reduce the price of the contract to US $400,000 is dismissed.

      (2)  [Buyer]'s claim to have [Seller] pay the arbitration fees and the attorneys' fees is dismissed.

      (3)  [Buyer] should pay the [Seller] the unpaid price of US $246,000.

      (4)   [Buyer] should pay a fine [interest] for the delay of the payment, amounting to 5% of the sum of the corresponding delayed payment per year from 16 December 2001 to the day of actual payment.

      (5)  [Buyer] should pay the [Seller]'s attorneys' fees US $20,255.55 and traveling expenses of RMB 20,354.

      (6)  [Buyer] should pay the arbitration fees.

      (7)  In 30 days of the effective date of this award, the [Buyer] shall pay to the [Seller] the above payment in (3) (4) (5) (6). If the payment is in arrears, interest will be paid at 5% per annum.

The award is final.

Chief Arbitrator:____; Agent Arbitrator:____; Agent Arbitrator: ____

21 October 2005 in Shenzhen


FOOTNOTES

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

** WU Xiaoyu LL.M, University of Groningen, Netherlands; LL.B. East China University of Politics & Law, Shanghai, P.R. China.

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

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Pace Law School Institute of International Commercial Law - Last updated April 17, 2008
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