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CISG CASE PRESENTATION

China December 2005 CIETAC Arbitration proceeding (Heat transfer oil furnace case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/051200c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20051200 (December 2005)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2005/23

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Germany (respondent)

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

GOODS INVOLVED: Heat transfer oil furnace


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 25 ; 35 ; 36 ; 49 ; 74 [Also cited: Article 30 ]

Classification of issues using UNCITRAL classification code numbers:

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

35A [Conformity of goods to contract: quality, quantity and description required by contract];

36B1 [Lack of conformity occurring after passage of risk: caused by seller's breach of any of his obligations];

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

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

Descriptors: Fundamental breach ; Avoidance ; Conformity of Goods ; Damages ; Incoterms ; Passage of risk ; Burden of proof

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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) [second draft]

Queen Mary Case Translation Programme

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

Heat transfer oil furnace case (December 2005)

Translation [*] by Zheng Xie [**]

PARTICULARS OF THE PROCEEDING

The China International Economic and Trade Arbitration Commission (hereafter, the "Arbitration Commission") accepted the case (Case number: M2005____) according to:

   -    The arbitration clause in Contract No. TPED02-12-019GM [the "Contract]
signed by AAA Petroleum Exploration & Development Corporation [the "Buyer"]
[of Germany] and BBB [the "Seller"] [of the People's Republic of China]
on 17 April 2002; and
 
   -    The written arbitration application submitted by the [Buyer] on 8 May 2005.

The Arbitration Rules of the Arbitration Commission [hereafter, the "Arbitration Rules"], which took effect on 1 May, 2005, apply to this case.

On 17 May 2005, the Secretariat of the Arbitration Commission by express mail served the [Seller] and the [Buyer] the Arbitration Notice, the Arbitration Rules and the Arbitrators List, and also served the [Seller] the [Buyer]'s arbitration application and attachments.

The [Buyer] appointed Mr. ___ as its arbitrator, and the [Seller] appointed Mr. ___ as its arbitrator. Because the [Buyer] and the [Seller] did not jointly appoint a Presiding Arbitrator within the time limit, pursuant to the Arbitration Rules, the Chairman of the Arbitration Commission appointed Mr. ___ as the Presiding Arbitrator. On 27 June 2005, these three arbitrators formed an Arbitration Tribunal to hear this case.

On 16 August 2005, the Arbitration Tribunal opened the court session in Beijing. Each party's representatives appeared in the court session, and stated their opinion and facts, presented evidentiary material and submitted pertinent evidence, answered the Arbitration Tribunal's questions, and made arguments regarding pertinent facts and law.

After the court session, each party submitted its Attorneys' Opinion to the Arbitration Tribunal and evidentiary material, and also filed a written opinion cross-examining the evidence.

Based on the facts verified in the court session and all written material, the Arbitration Tribunal entered this award by consent.

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

FACTS

On 17 April 2002, the [Seller] signed a Technology Agreement with China AAA Petroleum ("AAA") and American CCC Resources Co. ("CCC"). Thereafter, on that same day, the [Buyer], which was entrusted by AAA, executed the Contract with the [Seller] that is the subject of this case. The [Buyer], on behalf of AAA, purchased a Heat transfer oil furnace from the [Seller]. After signing the Contract, the [Buyer] paid the contract price as stipulated in the Contract. When the Heat transfer oil furnace arrived at AAA's subsidiary, and AAA-Sub and the [Seller] and CCC sent their staff to adjust the furnace pursuant to the Technology Agreement, the furnace exploded. The [Buyer] and the [Seller] failed to resolve the dispute by negotiation. Thereafter, the [Buyer] filed this arbitration application.

THE POSITION OF THE PARTIES

The [Buyer]'s claim

The [Buyer] prayed for the following:

1.   The Contract executed by the [Buyer] and the [Seller] on 17 April 2002 should be revoked;
 
2.   The [Seller] should refund to the [Buyer] RMB 872,788.56 (calculated as US $111,000 X 8.2768 RMB / US $ X 95%, which the [Buyer] had already paid to the [Seller] under the Contract;
 
3.   The [Seller] should compensate the [Buyer] for damages of RMB 96,817.61 including the following items:
 
     (1) Import inspection fee: RMB 13.00;
     (2) Transportation and insurance fee: RMB 19,442.50;
     (3) H documents exchange fee: RMB 250;
     (4) Inland transportation and storage fee: RMB 360;
     (5) Supervision fee: RMB 2,756;
     (6) Unpacking and detention fee: RMB 1,634;
     (7) Wire transfer fee: RMB 1,200;
     (8) Letter of credit fee: RMB 3,162.11;
     (9) Attorneys' fees: RMB 66,000.

The total amount is RMB 96,817.61.
 

4.   The [Seller] should bear the arbitration fee.

The [Buyer]'s position

1. Pertinent facts

After signing the Technology Agreement, AAA executed with the [Buyer] an Agency Agreement for Import of Equipment No. WIJK02-4-16 with AAA entrusting the [Buyer] to purchase from the [Seller] a Heat transfer oil furnace in accordance with the Technology Agreement. Thereafter, the [Buyer] and the [Seller] signed the Contract that is the subject of this case.

After the explosion of the furnace, the [Buyer] immediately requested the China Entry-Exit Inspection and Quarantine Bureau (the "Bureau") to conduct an inspection. The Bureau issued an Inspection Certificate on 26 March 2003 It stated that "the [Seller] should bear full liability for the explosion of the heat transfer oil furnace during the process of adjustment and test." The heat transfer oil furnace exploded before it was used, and the damages were caused by the [Seller]. Therefore, the [Seller] should be held fully liable for any damages which the [Buyer] incurred.

2. The Technology Agreement was an Appendix to the Contract and had equal validity with the Contract. The [Seller] would fulfill its contractual obligations only when it completed its duty of adjusting and testing, warranty, training and delivering complying goods pursuant to the Contract.

The [Seller]'s position

The [Seller] alleged that the Contract had been fully performed, and that there was no legal ground to revoke the Contract.

The [Buyer]'s response

(1) The [Buyer] and the [Seller] stipulated that the Technology Agreement was an Appendix to the Contract, and that it had equal validity with the Contract.

   -    Article 1 of the Contract expressly stated, "see the specification of the goods in the Appendix;"
 
   -    Article 22 of the Contract stipulated that "the Appendix of the Contract is an indivisible part of the Contract and has the equal validity with the Contract;"
 
   -    Article 6 of the Technology Agreement expressly stated that "this Agreement is part of the Sales Contract and takes effect when the Sales Contract takes effect."

The aforementioned stipulations demonstrate that the parties agreed that the Technology Agreement was part of the Contract that is the subject of this case, and was equally valid with the Contract.

(2) The Contract and the Technology Agreement expressly stipulated the quality of the goods, duty of testing and adjusting, duty of warranty and duty of training. The [Seller] would fulfill its contractual obligations only when it completed its duty of adjusting and testing, warranty, training and delivering complying goods pursuant to the Contract.

Pursuant to CIF A5 Transfer of Risk of INCOTERM 2000, which states that "the seller must bear all risks of loss of or damage to the goods until such time as they have passed the ship's rail at the port of shipment," the [Buyer] should bear the risk when the Heat transfer oil furnace passed the ship's rail. As to the issue of whether the Contract had been fully performed, it should be determined by the rights and obligations stipulated in the Contract.

   -    In Article 2(1) of the Technology Agreement, the [Seller] promised to "completely satisfy the user's design requirements;"
 
   -    In Article 7, the [Seller] promised to "provide a set of heat transfer oil furnace to completely satisfy the design and usage requirements, and bear all liabilities caused by the quality problems;"
 
   -    In Article 4, the [Seller] promised to "provide one week free testing and training services after the furnace is installed."

Therefore, the goods' passing the ship's rail did not mean that the [Seller] had completely fully performed its duty under the Contract. The [Seller] fulfilled its contractual obligations only when it completed its duty of adjusting and testing, warranty, training and delivering complying goods pursuant to the Contract.

The [Seller] failed to adjust and test the furnace to normal operation. Therefore, the [Seller] had not completed its contractual duty, and the Contract had still been in the process of performance.

(3) The furnace exploded when the [Seller] adjusted and tested it. This demonstrated that the quality of the furnace did not satisfy the requirements stipulated in the Contract. Therefore, the [Seller] fundamentally breached the Contract, and the [Buyer] was entitled to revoke the Contract.

      1. The reason the [Buyer] signed the Contract was to purchase a Heat transfer oil furnace which satisfied the quality and data requirements, not simply the equipment itself.

The [Buyer] intended to purchase a Heat transfer oil furnace which satisfied the quality and data requirements. For this purpose the parties stipulated the specifications of the furnace such as the temperature of exit should be 210F, etc., and also stipulated the [Seller]'s duty of testing and adjusting, duty of training and duty of warranty. After the [Seller] promised to comply with the stipulations, the [Buyer] executed the Contract.

      2. The furnace delivered by the [Seller] did not comply with the Contract.

-    Article 1 of the Technology Agreement stipulated, "the temperature of exit should be 210F;"
 
-    Article 2(1) stipulated, "the furnace should fully satisfy the user's design requirements;"
 
-    Article 7 stipulated, "the [Seller] should provide a set of heat transfer oil furnace to completely satisfy the design and use requirements."

However, the [Seller]'s adjusting and testing record showed that the temperature of the heat transfer oil furnace waved from 165C to 184C, and could not reach the stipulated temperature. The explosion of the furnace proved that the [Seller] failed to deliver the goods complying with the [Buyer]'s specification, design and usage requirements.

      3. The furnace exploded when tested and adjusted. The [Buyer]'s purpose of the Contract could not be fulfilled; therefore, the [Seller] fundamentally breached the Contract.

The furnace exploded when the [Seller] tested and adjusted it. The explosion caused the core part to fly 9.6 meters away from the furnace, and the connections were completely broken. Since the core parts were broken, the entire furnace could not be used. The explosion caused the [Buyer]'s purpose of the Contract to be frustrated. The [Seller] fundamentally breached the Contract.

      4. When the [Seller] fundamentally breached the Contract, the [Buyer] was entitled to revoke the Contract pursuant to the Contract Law of the People's Republic of China.

The explosion of the furnace constituted the [Seller]'s fundamental breach of the Contract, and caused that the [Buyer] had to buy another furnace from another supplier after 150 days' stoppage of operations. The [Buyer]'s purpose to execute the Contract could not be fulfilled. Article 148 of the Contract Law provides that "[w]here the purpose of the contract is frustrated due to failure of the subject matter to meet the quality requirements, the buyer may reject the subject matter or terminate the contract." The [Buyer] was thus entitled to terminate the Contract.

(4) The [Seller] executed the Contract with the full knowledge of the function of the China Entry-Exit Inspection and Quarantine Bureau (the "Bureau"), and the Inspection Certificate was the final basis of claim as stipulated in the Contract. It was unjustified that the [Seller] doubted the Bureau's qualification, when the Inspection Certificate issued by the Bureau was against the [Seller]. The [Seller] should honor the stipulation of the Contract.

      1. The [Buyer] applied for inspection with the Bureau on the express ground and was entitled to claim damages from the [Seller] with the Inspection Certificate. The Inspection Certificate was the basis for claim stipulated in the Contract.

Pursuant to Articles 15 and 16 of the Contract, after the explosion the [Buyer] was entitled to request the Bureau to conduct an inspection and to claim damages based on the Inspection Certificate.

      2. The [Seller] executed the Contract with the full knowledge of the function of China Entry-Exit Inspection and Quarantine Bureau.

When the Contract was executed, the function of the Bureau had already been determined. The [Seller] had full knowledge of the Bureau's function. It was the parties' true intent to stipulate the Bureau as the inspection agency when they knew the Bureau's function. It was the parties' true intent to invite the Bureau to inspect the explosion, and the parties should honor their stipulation.

      3. It was unjustified that the [Seller] doubted the Bureau's qualification, when the Inspection Certificate issued by the Bureau was against the [Seller]. The [Seller] should honor the stipulation of the Contract.

      4. The Furnace and Container Pressure Inspection Center was not an agency designated by law to inspect furnace accidents.

China National Quality Supervision and Quarantine Bureau issued the Ordinance No.2 (2001), i.e., Furnace and Container Pressure Facilities Accidents Resolution Regulations, Article 5 of which provides, "the functions of the Furnace and Container Pressure Facilities Accidents Resolution Inspection Center (the "Center"), i.e., National Quality Inspection and Accident Resolution Center are as follows: to analyze accidents and collect data, to instruct and supervise local accidents inspections and resolution, to establish an accidents data base, to research and propose preventive measures, to make accidents inspection and resolution regulations. Under the supervision of National Quality Supervision and Quarantine Bureau Furnace Pressure Container Safety Supervision Bureau, the Center is authorized to organize inspection of severe accidents of furnace, pressure containers, pressure tunnels and special facilities (notes-severe accidents: causing 10-29 deaths or 50-99 injuries, or economic loss of more than RMB 5,000,000; extremely severe accidents: causing more than 30 deaths, or more than 100 injuries, or economic loss of more than RMB 10,000,000).

In view of the above, the Center was not an inspection center provided by law, and it was not the Center's legal responsibility to inspect accidents.

(5) It was baseless for the [Seller] to doubt the elements of natural gas provided by the [Buyer].

      1. Before the process of testing and adjusting the furnace, the [Seller]'s engineer and staff fully inspected the facilities and equipments, and did not raise any issue regarding the natural gas, pressure, filter, etc.

      2. The [Seller] bore the duty of inspection before testing and adjusting the furnace. However, it did not raise any issue of the nature gas.

The [Buyer] submitted the Instruction of Operation of 2000KW Heat Transfer Oil System as evidence, 3. 10 of which stated, "before the system starts running, the gas tunnel pressure monitor " This Instruction indicated that the [Seller] should inspected gas tunnel, pressure, etc. before testing and adjusting the furnace. However, the [Seller] did not raise any issue regarding the natural gas.

      3. The [Seller] alleged that some explosion accidents in other factories were caused by natural gas (this was not verified). Accordingly, it should have paid full attention to the elements of natural gas.

In the court session the [Seller] alleged several times that some explosion accidents in other factories were caused by natural gas. If this allegation were true, the [Seller] as a professional manufacturer should have paid special attention to such problems, and should have improved design and paid attention during the process of testing and adjusting. However, the [Seller] failed to do so, but only alleged other factories' explosion accidents as an excuse to reduce its own liabilities.

      4. During the eight days' testing and adjusting, the furnace did not explode due to natural gas, and the [Seller] did not raise any issue of the natural gas.

During the nine days' testing and adjusting, i.e., from September 20 to 29, the [Seller] had not raised any issue regarding the natural gas. Although the furnace did not run normally, it did not explode. On September 27 when the furnace stopped running, it did not explode. During the eight days' testing and adjusting, the furnace did not explode. Why had not the furnace exploded during the eight days' use of the nature gas, but did explode on the ninth day due to the natural gas? Therefore, it was groundless for the [Seller] to doubt the element of the natural gas.

      5. In fact, the quality of the natural gas supplied by the [Buyer] was good. AAA-Sub had been using Canadian TDE Co.'s AAA-Sub Natural Gas Use Instruction since 1991, and no accidents had ever occurred. In addition, the [Buyer] purchased another furnace one year after the explosion, and still used the natural gas, and the furnace ran normally.

The [Buyer]'s evidence showed that Canadian TDE Co.'s AAA-Sub Natural Gas Use Instruction demonstrated that the [Buyer] installed a V-450 Filter, through which the natural gas used by AAA-Sub could be filtered, and only the filtered natural gas could enter the furnace and other facilities.

The natural gas filtered by the V-450 Filter had been satisfying the requirements of all furnaces and equipment since 1991 when the AAA-Sub started operation, and no accidents have ever taken place.

(6) The [Seller] should bear the burden of proof regarding the cause of the explosion

      1. Before the furnace started running, the [Seller] bore the duty to inspect whether the quality of the system and natural gas had been reached. With the knowledge of some explosion accidents at other factories, the [Seller] should have intensively inspected the natural gas. When the explosion occurred, the [Seller] should bear the burden of proof regarding whether the quality of the natural gas had been satisfied when inspected.

            First, Canadian TDE Co.'s AAA-Sub Natural Gas Use Instruction sufficiently indicated that before the furnace started running, the [Seller] bore the duty to inspect whether all facilities had been running normally and had satisfied the requirements, and should also inspect the gas tunnel and pressure, etc. However, the [Seller] did not raise any issue of the natural gas.

Therefore, when the [Seller] started running the furnace, it showed that the natural gas, pressure and filter satisfied the requirements of the furnace.

            Second, if there was any problem which might affect the operation of the furnace, the [Seller] should have immediately raised the issue. When knowing that some explosion accidents in other factories were caused by natural gas (this had not been verified), the [Seller] as a professional manufacturer should have paid special attention to such problems, and should have improved design and paid attention during process of the natural gas, and should not started running the furnace to enlarge damages.

When the furnace exploded during the process of testing and adjusting, the [Seller] should bear the burden of proof regarding the inspection result.

      2. The Inspection Record submitted by the [Buyer] indicated that before the explosion and during the process of installing, inspecting, testing and filtering, the furnace was completely under the [Seller]'s operation and control, and the [Buyer] could not know the status of operation. Therefore, the [Seller] should bear the burden of proof with respect to cause of the explosion.

      3. In the Technology Agreement the [Seller] expressly promised to "completely satisfy the user's design requirements" and to "provide a Heat transfer oil furnace to completely satisfy the design and usage requirements." However, the furnace exploded during the process of testing and adjusting sand before delivery to the [Buyer]. Therefore, the [Seller] should bear the burden of proof of the cause of explosion.

      4. The explosion itself proved that the furnace had severe quality problems. The [Seller] should be completely liable for the explosion if it could not prove that the explosion was caused by other reasons.

(7) The [Buyer] requested the Arbitration Tribunal to sustain its arbitration requests and to order the [Seller] to compensate the [Buyer] for its economic loss caused by the [Seller]'s breach of the Contract.

The reason the [Buyer] executed the Contract was to purchase a furnace that would comply with the quality standards stipulated in the Contract, and should run normally. However, the explosion caused the [Buyer] to incur severe economic loss including direct loss of 26 tons of heat transfer oil and other direct economic loss of RMB 1,000,000, and also caused the [Buyer]'s stoppage of operation for about half a year and indirect economic loss of RMB 10,000,000.

During about three years after the explosion, the [Buyer] and AAA actively contacted the [Seller] several times requesting either to exchange the goods or refund the contract price as stipulated in the Contract. However, the [Seller] neither actively negotiated with the [Buyer] to resolve the dispute nor took any remedial measures as stipulated in the Contract, and ignored the [Buyer]'s requests. On the contrary, the [Seller] tried to escape its liabilities by alleging the problem of pressure, filter, etc. as excuses.

The [Buyer] contended that its damages were completely caused by the [Seller]'s breach and requested the Arbitration Tribunal to sustain its arbitration requests.

The [Seller]'s position

(1) The pertinent facts

On 17 April 2002, the [Seller] and the [Buyer] executed the Contract which stipulated that the [Seller] should deliver a Heat transfer oil furnace to the [Buyer] by CIF, i.e., the [Seller] completed its duty of delivery when the furnace passed the ship's rail at the port of lading. The stipulated port of destination was Xingang, China.

The Contract stipulated that the warranty period was eighteen (18) months after the furnace arrived at the port of destination or twelve (12) months after each party's representative signed an acceptance certificate. The Contract stipulated that the remedial measures included repair, full or partial refund, or reduction of the contract price based on the degree of defects. The [Seller] had fully completed its duty under the Contract, but the [Buyer] failed to pay the remaining US $5,000, i.e., 5% of the contract price.

On 29 September 2002, at 7:50 the Heat transfer oil furnace stopped running and alarmed. At 8:45 the furnace exploded after the furnace stopped running and alarmed for about 55 minutes.

On 26 March 2003, Xinjiang Entry-Exit Inspection and Quarantine Bureau ("Xinjiang Bureau") determined that the [Seller] should be held liable for the explosion because the [Buyer] did not act negligently or wrongfully. Xinjiang Bureau made this decision only after two inspections conducted on the 11th day and 44th day after the explosion, without verifying the facts, without analyzing technical issues, without finding the cause of the explosion, and without deciding whether the furnace supplied by the [Seller] had defects.

(2) The Contract had been completely performed. The [Buyer]'s request to revoke the Contract was not supported by any law or any stipulation in the Contract, and therefore, should be dismissed.

The preconditions to revoke a contract are that it has not been performed or fully performed, and the right to revoke a contract should be grounded on law or the contractual stipulations. In this case:

      1. The Contract was an international trade contract. Pursuant to the trade term stipulated in the Contract, the [Seller]'s duty of delivery was completed when the Heat transfer oil furnace passed the ship's rail; after the furnace passed the ship's rail, the [Seller]'s only duty was to provide post=sale services.

      2. The Contract did not stipulate conditions for termination. Therefore, the facts on which the [Buyer]'s request to revoke the Contract were grounded did not conform to the pertinent law.

In view of the above, the [Seller] contended that the [Buyer]'s request to revoke the Contract had no factual or legal basis, and therefore, should not be sustained.

(3) The Inspection Certificate issued by Xinjiang Bureau could not prove that the furnace supplied by the [Seller] had quality defects or that the [Seller] was liable for the explosion. Therefore, it should not be admitted as evidence in this case.

      1. As the [Buyer] admitted in the court session on 16 August 2005, the cause of the explosion had not been found. When the cause of explosion was not found, and when no technical analysis was conducted, Xinjiang Bureau held that the [Seller] should be held liable for the explosion. This decision was not justified.

      2. Xinjiang Bureau held that the [Seller] should be held liable for the explosion without inspecting and finding any defects of the furnace supplied by the [Seller] and without verifying the cause of explosion. Therefore, its inspection did not comply with the pertinent law or the stipulation in the Contract.

            1) Pursuant to Articles 15 and 16 of the Contract, if alleging any defects of the goods, the [Buyer] should request the [Seller] to exchange for satisfying goods or claim damages with an inspection certificate issued by an inspection and quarantine bureau. The facts showed that Xinjiang Bureau did not issue any certificate to the [Buyer] demonstrating that the furnace which the [Seller] delivered had defects. Therefore, it lacked legal or factual basis for the [Buyer] to claim damages or request compensation.

            2) Xinjiang Bureau was an agency authorized by law to inspect entry-exit goods but not to inspect accidents, and it was not qualified or capable to inspect an accident.

The Heat transfer oil furnace is categorized as a furnace. Pursuant to Furnace and Container Pressure Facilities Accidents Resolution Regulations issued by China National Quality Supervision and Quarantine General Bureau (the "General Bureau") in 2001, furnace accidents inspection certificates should be issued by the Furnace and Container Pressure Inspection Center (the "Center") established by the General Bureau. The Center is authorized by law to inspect furnace accidents and issue accident inspection certificates.

                  First, in terms of facts, Xinjiang Bureau concluded that the [Seller] was liable for the explosion without verifying the cause of the explosion or correctly describing the basic facts. This conclusion lacked factual basis and inappropriately made; therefore, it could not be determined whether the conclusion was accurate.

                  Second, Xinjiang Bureau violated the basic principle of international trade, and did not consider CIF terms or international trade customs, and mistakenly determined that the furnace had not been transferred.

                  Third, Xinjiang Bureau failed to inspect the explosion on spot promptly, but only conducted two inspections on the 11th day and 44th day, respectively; failed to conduct technical statistical analysis; failed to provide any data standards; but simply concluded that the natural gas supplied by the [Buyer] satisfied the quality requirements. Therefore, the Inspection Certificate was issued with severe factual and technical defects, and the conclusion was mistakenly made.

                  Fourth, Xinjiang Bureau did not inspect the accidents which occurred during the period from 7:50 of 29 September 2002 to 8:45 or obtain any furnace controlling record during this period. These failures caused severe defects of the conclusion on facts and liabilities made in the Inspection Certificate. The variation of the furnace and the computer control records are for the period of 7:50 of 29 September 2002 to 8:45.

                  Fifth, according to the affidavit and opinion of the Heat transfer oil furnace manufacturer's representative, when the furnace temporarily stopped running and alarmed on 29 September 2002 at 7:50, it would not restart or re-burn unless it was returned manually. The lowest temperature for natural gas to naturally burn is 600C, which could not be reached with the design of the furnace when it stopped running. The lowest naturally burning temperature of evaporated liquid lighter hydrocarbon is 240C, which could be reached with the design of the furnace when it stopped running.

The burning system of the furnace was designed and manufactured to German standards, and equipped with safety parts strictly certified by German standards (which are higher than Chinese standards).

After thorough investigation and inspection, the only reason for the explosion was that the natural gas accidentally carried lighter hydrocarbon.

(4) The [Seller] requested the Arbitration Tribunal to note the following:

      1. The Heat transfer oil furnace was purchased for the lighter hydrocarbon factory. When the furnace was tested and adjusted, it was also the lighter hydrocarbon factory's testing and adjusting period. It is well known that the quality and pressure of gas is not stable when a lighter hydrocarbon factory is in test or operation. The unstable quality and pressure of gas was the most probable reason to cause the explosion of 29 September 2002.

      2. Similar explosion accidents had occurred before in some other end-users like the lighter hydrocarbon factory, and it was proved that the explosions were caused by liquid elements in the gas supplied by the end-users exceeding the standards.

      3. The [Buyer] repeatedly alleged that the quality of the natural gas it supplied had no quality defects. However, the evidence obtained during the parties' negotiation could prove that the temperature of the natural gas which the [Buyer] supplied apparently changed before and after the explosion, which demonstrated that the quality of the natural gas supplied by the [Buyer] had apparent defects.

      4. As the [Seller] repeated verified in the court session, the cause of the explosion had not been found. If the cause was not found, how to determine who should bear liabilities? In fact, it is fair to say that there might be many causes of the explosion, such as negligent operation, intentional conduct, quality of the gas, etc., i.e., for any of which the [Seller], the [Buyer] or a third party might be liable. It was unfair to hold the [Seller] only liable when the cause of the explosion could not be verified.

      5. In the court session, the [Buyer] confirmed that the burning system exploded first, which caused the Heat transfer oil furnace to explode. Thereafter, the [Buyer] purchased another similar burning system. This demonstrated that the [Buyer] had confidence in the quality of the burning system, which was a main part of the Heat transfer oil furnace.

Because the Contract had already been fully performed, there was no legal or contractual basis to revoke the Contract. In addition, the [Buyer] failed to request the inspection agency as stipulated in the Contract to inspect the furnace and determine whether it had quality defects. Therefore, the [Buyer] had no legal or factual basis to claim damages from the [Seller]. In addition, the [Buyer]'s third request, i.e., claim for the attorneys' fees, was not related to this case, because the attorneys' fees claimed was paid by AAA but not the [Buyer]. In sum, the [Seller] objected to all of the [Buyer]'s requests.

THE ARBITRATION TRIBUNAL'S OPINION

(1) Applicable law

The Contract did not stipulate the applicable law. Since the [Buyer] was a Chinese company, and the [Seller] was a German company, and both China and Germany are Contracting States of the United Nations Convention on Contracts for International Sales of Goods (CISG), the CISG should apply to this case.

As to the matters which CISG does not provide, the Arbitration Tribunal should make its determination pursuant to the rules of the applicable conflict law. The Arbitration Tribunal held that the conflict law of the arbitration place, i.e., China, should apply. The applicable provisions were Article 145 of the General Rules of Civil Law of the PRC and Article 126 of the Contract Law of the PRC, i.e., "the law of the most closely connected nation should apply if a foreign related contract does not stipulate applicable law." Since the [Buyer]'s place of business, the place of arbitration, and the place of testing and adjusting the goods under the Contract were in China, the most closely connected nation was China. Therefore, as to the matters CISG does not provide, the substantive law of China should apply.

In addition, Article 142 of the General Rules of Civil Law provides, "as to matters not addressed by either the Chinese law or the conventions which China signed, international customs may be referred to."

(2) Validity of the Contract

The parties signed the Contract on 17 April 2002. Article 20 of the Contract stipulated, "the Contract will take effect when both parties sign it." There was no existing factor to affect the validity of the Contract, and neither party objected to the validity of the Contract in the court session. Therefore, the Arbitration Tribunal held that the Contract was the parties' true intent and valid.

(3) The relationship between the Contract and the Technology Agreement

The [Buyer] asserted that the [Seller], AAA and American CCC Resources Co. ("CCC") signed a Technology Agreement on 17 April 2002 which stipulated that the [Seller] should provide technical data and after-sale service to the AAA. Thereafter, AAA and the [Buyer] signed an Import Agency Agreement. Entrusted by AAA, the [Buyer] executed with the [Seller] the Contract that is the subject of this case.

The [Buyer] submitted the Technology Agreement and the Import Agency Agreement.

The Arbitration Tribunal noted that the [Seller] and its sales agent, CCC, on one side, executed the Technology Agreement, but AAA, on the other side, did not execute it. During the cross-examination, the [Seller] did not object to the Technology Agreement. As to the Import Agency Agreement, the [Seller] asserted that because it was not a party of this Agreement, it could not verify the truthfulness of the Agreement, and furthermore, it was not relating to this case.

The Arbitration Tribunal also noted that the Technology Agreement and the Contract were executed on the two consecutive days, and the parties did not object to the fact that the Agreement and the Contract were signed for the same subject matter, and that the [Buyer] signed the Contract as the agent of AAA. During the performance of the Contract, the parties also partially performed the Technology Agreement, such as testing and adjusting the furnace, etc.

Article 6 of the Technology Agreement stipulated that "this Agreement is part of the Sales Contract, and will take effect when the Sales Contract takes effect." In view of the aforementioned facts, the Arbitration Tribunal held that the Technology Agreement was part of the Contract, and the parties should perform the pertinent stipulations of the Technology Agreement.

(4) The [Seller]'s duty of delivery under the Contract

Article 30 of the CISG provides that "the seller must deliver the goods, hand over any documents relating to them and transfer the property in the goods, as required by the contract and this Convention."

The Arbitration Tribunal noted that the Contract stipulated CIF trade terms, and that the parties disputed the issue whether the [Seller] had performed its duty of delivery.

   -    The [Buyer] contended that the fact that the goods passed the ship's rail could only demonstrate that the risk of the goods had been transferred to the [Buyer], and whether the [Seller] had performed its duty of delivery should be determined by the Contract.
 
   -    On the other hand, the [Seller] asserted that it had completed the duty of delivery when the goods passed the ship's rail.

The Arbitration Tribunal held that Pursuant to CIF A5 Transfer of Risk of INCOTERM 2000, which stipulates, "the seller must bear all risks of loss of or damage to the goods until such time as they have passed the ship's rail at the port of shipment," the risk of the goods was transferred to the [Buyer] when the goods passed the ship's rail, but the goods passing the ship's rail did not mean that the [Seller] completed its duty of delivery. After the goods passed the ship's rail, the [Seller] should "deliver the goods, hand over any documents relating to them and transfer the property in the goods, as required by the contract and this Convention" and should also perform other duties including duties regarding technical services, quality warranty, etc.

(5) The [Seller]'s duty of testing and adjusting and the quality of the goods

As aforementioned, the Technology Agreement as part of the Contract stated that the [Seller] should deliver the goods at the time and place stipulated in the Contract, and the inspection of the goods should be conducted by the packing list, and after installing the furnace, the [Seller] should provide one-week's free testing training. The [Seller] did test and adjust the furnace pursuant to the Contract. Accordingly, the Arbitration Tribunal held that the [Seller] bore the duty to provide testing and training services pursuant to the Contract.

The furnace that is the subject of the Contract exploded on 29 September 2002 when the [Seller] tested and adjusted it. The [Seller] contended that the only possible cause of the explosion was that the gas contained liquid lighter hydrocarbon. However, the [Seller] did not submit sufficient evidence to sustain this allegation. More importantly, the explosion occurred during the [Seller]'s testing and adjusting process. The [Seller] as a professional company should know the technical specifications of the goods, and should operate the furnace according to the Operation Instructions, and should bear the duty to inspect all factors relating to the testing and adjusting, including elements of the gas, pressure, etc., and should endeavor to run the furnace to satisfy the technical requirements stipulated in the Contract. Even if the quality of the furnace originally satisfied the requirements stipulated in the Contract, the [Seller] should bear the liabilities if its negligence caused the explosion when testing and adjusting the furnace. The [Seller]'s negligence caused the explosion of the furnace, and the [Buyer] incurred damages and was deprived of rights it expected when signing the Contract. According to Article of 25 of CISG, the [Seller] fundamentally breached the Contract.

The Arbitration Tribunal noted that the parties disputed the Inspection Certificate issued by Xinjiang Bureau on 26 March 2003. The Arbitration Tribunal held that this dispute did not affect its holding that the [Seller] fundamentally breached the Contract, and therefore, would not issue any opinion on that dispute.

(6) The [Buyer]'s requests

      1. To revoke the Contract.

      The [Buyer] requested the revocation of the Contract. The Arbitration Tribunal held that the corresponding definition provided in the CISG for this request was "to declare the contract avoided" in Article 49, which provides that the buyer may declare the contract avoided "if the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract." In this case, the [Seller]'s negligence caused the explosion, and therefore, the [Seller] fundamentally breached the Contract. The Arbitration Tribunal sustained this request of the [Buyer].

      2. Damages

      Pursuant to Article 74 of CISG, the Arbitration Tribunal held that the [Seller] should compensate the [Buyer] for damages it suffered including the contract price and other loss.

In the court session, the parties verified that the remaining 5% of the contract price, i.e., $5,500, had not been paid. The Arbitration Tribunal noted that the [Buyer] opened a letter of credit for the amount of 95% of the contract price, i.e., $104,500, but the [Buyer] actually paid $105,450, and the [Seller] did not object to the fact that it received that amount under the letter of credit. Therefore, the Arbitration Tribunal held that the [Seller] should refund the [Buyer] the amount of $105,450. The [Seller] was entitled to request the [Buyer] to return the remaining parts of the goods.

In addition, the Arbitration Tribunal also sustained the [Buyer]'s request for import inspection fee of RMB 13.00, transportation and insurance fee of RMB 19,442.50, H documents exchange fee of RMB 250, inland transportation and storage fee of RMB 360, supervision fee of RMB 2,756, unpacking and detention fee of RMB 1,634, wire transfer fee: RMB 1,200 and letter of credit fee of RMB 3,162.11, totaling RMB 28,817.61.

Pursuant to Article 46(2) of the Arbitration Rules, which stipulate that the Arbitration Tribunal may order the losing party to pay the winning party reasonable expenses incurred due to the subject case, the Arbitration Tribunal sustained the [Buyer]'s request for the attorneys' fees of RMB 68,000.

      3. Arbitration fee

      The Arbitration Tribunal held that the [Seller] should bear the entire arbitration fee in the amount of RMB 48,936.

AWARD

(1)   The Contract signed by the [Seller] and the [Buyer] on 17 April 2002 was revoked;
 
(2)   The [Seller] should refund the [Buyer] RMB 105,450, the contract price paid;
 
(3)   The [Seller] should compensate the [Buyer] for its economic loss including the attorneys' fee, totaling RMB 96,817.61;
 
(4)   The [Seller] should bear the entire arbitration fee of RMB 48,936, which was offset by the [Buyer]'s prepayment of RMB 48,936. Therefore, the [Seller] should pay the [Buyer] RMB 48,936.

The [Seller] should pay the [Buyer] the above amounts within 45 days after the awards were entered; otherwise, interest at the rate of 2.1/10000 per day should by paid.

The awards were final and took effect when entered.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of the People's Republic of China is referred to as [Buyer]; Respondent of Germany 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 (renminbi) are indicated as [RMB].

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

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Pace Law School Institute of International Commercial Law - Last updated June 29, 2009
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