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CISG CASE PRESENTATION

China 26 December 2005 CIETAC Arbitration proceeding (Heating system device case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/051226c1.html]

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Case identification

DATE OF DECISION: 20051226 (26 December 2005)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2005/21

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Germany (respondent)

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

GOODS INVOLVED: Heating system device


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

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

Classification of issues using UNCITRAL classification code numbers:

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

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: Avoidance ; Fundamental breach ; Damages

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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

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Case text (English translation)

Queen Mary Case Translation Programme

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

Heating system device case [26 December 2005]

Translation [*] by Jing Li [**]

Edited by Meihua Xu [***]

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

   -    The arbitration clause in Contract No. TPEDC02-12-019GM (hereinafter, the "Contract") signed by Claimant [Buyer], Petroleum Exploration & Development Corporation [of People's Republic of China] and Respondent [Seller], ___ GmbH [of Germany] on 17 April 2002;
 
   -    The written Application for Arbitration submitted by the [Buyer] on 8 May 2005.

The Arbitration Rules of CIETAC (hereinafter, the "Arbitration Rules"), which took effect on 1 May 2005, apply to this case.

ARBITRATION PROCEEDINGS

The Secretariat of CIETAC sent the Notice of Arbitration, the Arbitration Rules, and the Panel of Arbitrators to both parties, respectively, by express mail on 17 May 2005. Meanwhile, the Secretariat sent the Application for Arbitration and the attachments submitted by the [Buyer] to the [Seller].

The [Buyer] appointed ___ as Arbitrator. The [Seller] appointed ___ as Arbitrator. Since the parties did not jointly appoint a presiding arbitrator or authorize the Chairman to make such appointment, the Chairman, according to the Arbitration Rules, appointed Mr. ___ as the Presiding Arbitrator. On 27 June 2005, the above three arbitrators formed the Arbitral Tribunal (hereinafter the "Tribunal") to hear this dispute.

On 16 August 2005, the Tribunal commenced the arbitration proceedings in Beijing. Both parties appointed attorneys to attend. They made arguments on the material issues, answered questions raised by the Tribunal, and argued on the factual and legal matters of the case. After the hearing, both parties submitted relevant materials, memoranda, and written opinions of cross-examinations within the time limit.

All arbitral documents and materials related to this case have been effectively sent to both the [Buyer] and the [Seller] by the Secretariat of CIETAC according to the Arbitration Rules.

This dispute is now settled. The Tribunal issues its award within the regulated time period under the Arbitration Rules after discussion by the members of the Tribunal, based on the facts investigated, and the evidence provided by both parties.

The followings are the facts, the opinion of the Tribunal, and the award.

POSITIONS AND REQUESTS BY THE PARTIES

Facts

The [Seller], ___ Co. Ltd. of China ___ Oilfield Branch Company (hereinafter, "___ Oilfield"), and U.S. ___ Energy Service Co. Ltd. signed a Technology Agreement on 16 April 2002. On 17 April 2002, as commissioned by the ___ Oilfield, the [Buyer] signed the Contract in the present case with the [Seller]. In the Contract, the [Buyer], as the agent of ___ Oilfield, purchased from the [Seller] a set of ___ (hereinafter, the "Device"). After the conclusion of the Contract, the [Buyer] made payment as agreed. Upon the arrival of the Device at the ___ Oil Extraction Factory (a subsidiary of ___ Oilfield), the [Seller] and U.S. ___ Energy Service Co. Ltd. tested the Device as agreed. In the course of testing, the Device exploded. After negotiation, both parties could not reach a settlement, and therefore, the [Buyer] filed this Application for Arbitration.

[Buyer]'s claims

The [Buyer] requested the Tribunal to find that:

1. The Contract between the [Buyer] and the [Seller] dated 17 April 2002 was rescinded;

2. The [Seller] shall return to the [Buyer] the contract price in the amount of renminbi [RMB] 872,788.56 (calculated as: US $111,000 RMB/US $ = 8.2768 95% = RMB 872,788.56);

3. The [Seller] shall compensate the [Buyer] for the following loss totaling RMB 96,817.61:

   -    Fee for entry inspection and quarantine: RMB 13.00;
   -    Freight and miscellaneous charges, and insurance fee: RMB 19,442.50;
   -    Fee for H switching bill: RMB 250;
   -    Shifting and storage charges: RMB 360;
   -    Management procedure fee: RMB 2,756;
   -    Draw out, container demurrage, and broken container fee: RMB 1,634;
   -    Remitting fee: RMB 1,200;
   -    L/C procedure fee: RMB 3,162.11;
   -    Attorneys' fee: RMB 68,000;
 
   The above requests total 969,606.17.

4. The [Seller] shall compensate the [Buyer] for the arbitration fee it prepaid for this case.

[Buyer]'s position

1. Facts

After the conclusion of the Technology Agreement, ___ Oilfield concluded an Agreement on Agency of Importing Device (No. WTJK02-4-16) with the [Buyer], commissioning the [Buyer] to import from the [Seller] a ___ heating system device (i.e., the Device at dispute) under the Technology Agreement. The [Buyer] then concluded the Contract of this case with the [Seller].

After the explosion, the [Buyer] immediately requested evaluation from the Entry-Exit Inspection and Quarantine (hereinafter, "CIQ") of the People's Republic of China under the Contract. CIQ issued an Evaluation Certificate on 26 March 2003, indicating that "the device exploded in the course of testing, and the responsibility lies upon the consignor." The Device exploded before it was put into use, and the [Seller] borne full responsibility of the loss. Thus, the [Seller] shall be fully responsible for the loss the [Buyer] incurred from this explosion.

2. The nature of the Technology Agreement

The Technology Agreement was the attachment to the Contract in this case, and therefore, had the equal legal effect with the Contract. Only when the [Seller] had performed the obligations of testing, quality guarantee, training, as well as providing goods of the quality agreed in the Contract did it fulfilled all obligations accordingly.

The [Seller] argued that "the Contract was fully performed, and that there was no agreed or legal basis for rescission of the Contract." The [Buyer] submitted that this argument was wrong. The reasons were as follows:

      (1) Both parties agreed that the Technology Agreement was an attachment to the Contract, and thus had equal legal effect with the Contract.

Article 1 of the Contract clearly provides:

"For detailed description of the Device: see attachment."

Article 22 of the Contract provides:

"The attachment to this Contract is indivisible of the Contract, and has equal effect with the Contract."

Article 6 of the Technology Agreement also clearly provides:

"This Technology Agreement is a part of the Contract. It comes into effect when the Contract comes into effect."

From the above statements, it was obvious that the parties agreed that the Technology Agreement was a component of the Contract in the present case. Both documents had equal legal effect.

      (2) The Contract and the Technology Agreement contained express agreements on the quality of the goods, obligations of testing, quality guarantee, and training. Only when the [Seller] had performed the obligations of testing, quality guarantee, and training, as well as providing goods that were of the same quality as agreed did it fulfill its obligations under the Contract.

Under Incoterms 2000, A5 (transfer of risks) of the term CIF provides:

"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."

Therefore, the fact that "the Device has passed the ship's rail" only indicated that the risks of loss of or damage to the Device were transferred to the [Buyer]. As for whether the Contract was fully performed, it was determined by the agreement on rights and obligations under the Contract.

The [Seller] promised in Article 2.1 of the Technology Agreement that:

"The Device fully conforms to the technology requirements of the user."

The [Seller] also promised in Article 7 that:

"The ___ heating system provided by the [Seller] fully conforms to the design and operating requirements, and the [Seller] is willing to assume all liabilities incurred from problems related to the quality of the Device."

The [Seller] also promised in Article 4 that:

"After installation of the device, the [Seller] will provide free testing and operation training services for a week."

Therefore, the fact that "the Device has passed the ship's rail" did not indicate per se that the [Seller] had fulfilled all of its obligations under the Contract. Only when the [Seller] had performed its obligations of testing, quality guarantee, and training, as well as providing goods that were of the same quality as agreed did it fulfill its obligations under the Contract.

      (3) The [Buyer] had never put the Device under regular operation, and thus, had never performed all of its obligations under the Contract. The Contract of the present case was still in the course of performance.

3. Quality of the Device and rescission of the Contract

The Device provided by the [Seller] exploded in the course of testing, which demonstrated that this device was not of the quality agreed in the Contract. The [Seller], therefore, was in fundamental breach, and the [Buyer] was entitled to rescind the Contract.

      (1) The [Buyer] concluded the Contract in the present case for the purpose of purchasing a ___ device that was able to operate with the agreed quality data, not merely a device per se.

The [Buyer]'s purpose of purchasing the Device in the present case was for the Device to meet the quality requirements under the Contract. Hence, particular specifications were agreed on, such as the temperature of the vent shall be 210. The parties also agreed on the obligations of testing, training, and the quality guarantee of the [Seller]. The Contract was concluded only under the condition that the [Seller] agreed to the above obligations.

      (2) The Device provided by the [Seller] did not conform to the Contract.

According to Article 1 of the Technology Agreement:

"The temperature of conduction oil vent shall be 210."

Article 2.1 provides:

"The Device fully conforms to the technology requirements of the user."

Article 7 provides:

"The ___ heating system provided by the [Seller] fully conforms to the design and operating requirements."

However, according to the [Seller]'s testing record, the temperature of the Device was between 165 and 184, which did not reach the agreed temperature. The explosion further demonstrated that the device provided by the [Seller] could not meet the technology requirements, nor could it meet the design and operation requirements.

      (3) The Device exploded in the course of testing. The Device was not fit for the purpose of the Contract, and hence, the [Seller] fundamentally breached the Contract.

In the course of the testing of the Device, an explosion took place. The burner of the essential part was separated from the main body, departing 9.6 meters, and was broken; all screw bolts connecting the end caps were stripped; all pipelines connecting the burner were disconnected. Since the essence of the device was broken, the entire device was scrapped. The Device provided by the [Seller] was not fit for the purpose of the Contract due to the explosion. Therefore, the [Seller] fundamentally breached the Contract.

      (4) Since the [Seller] fundamentally breached the Contract, the [Buyer] was entitled to rescind the Contract according to the Contract Law of People's Republic of China (hereinafter, "Chinese Contract Law").

The explosion caused by the [Seller] constituted a fundamental breach of the Contract, leading to shutdown of the [Buyer]'s factory for 150 days. The [Buyer] had to purchase a device from another manufacturer. The [Buyer]'s contractual purpose was not realized. Article 148 of Chinese Contract Law provides:

"Where it is not able to realize the purpose of a contract because the quality of the object has not satisfied the quality requirements, the buyer may refuse to accept the object or may rescind the contract."

Therefore, the [Buyer] was authorized to rescind the Contract.

4. The nature of Evaluation Certificate

The [Seller] was fully aware of the duty of CIQ before it concluded the Contract with the [Buyer]. It was agreed in the Contract that the Evaluation Certificate issued by CIQ would be the basis for damages. However, when the [Seller] found that the Certificate was unfavorable towards itself, it then doubted CIQ's qualification for evaluation. The [Buyer] submits that this was unfounded, and that the [Seller] should completely respect the agreements under the Contract.

      (1) The application for evaluation from CIQ by the [Buyer] had legal basis. The [Buyer] was entitled to claim damages from the [Seller] based on the inspection report. The Evaluation Certificate was the basis of [Buyer]'s claim for damages under the Contract.

Under Articles 15 and 16 of the Contract, after the explosion of the Device, the [Buyer] was entitled to request evaluation from CIQ, and was entitled to claim damages based on the Evaluation Certificate issued thereby.

      (2) The [Seller] concluded the Contract knowing of the duty of CIQ.

At the conclusion of the Contract, the duty of CIQ was made certain. As one of the parties to the Contract, the [Seller] was fully aware of CIQ's duty. Knowing CIQ's duty, the intention expressed by the parties that CIQ was to evaluate was genuine. The intention was expressed that CIQ was responsible for evaluating accidents, and the parties' intention should be respected.

      (3) When the [Seller] found that the Certificate was unfavorable towards itself, it then doubted CIQ's qualification for evaluation. The [Buyer] submits that this was unfounded, and that the [Seller] should completely respect the agreements under the Contract.

      (4) The Center on Dealing with Special Equipment Accidents of Boiler Pressure Vessels and Pressure Pipeline was not the legal institution for investigation and evaluation of accidents of boiler pressure vessels.

Article 5 of Announcement No. 2, 2001, on Regulations on Dealing with Special Equipment Accidents of Boiler Pressure Vessels and Pressure Pipeline by General Administration of Quality Supervision, Inspection, and Quarantine (AQSIQ) provides:

"The main duties of the Center on Dealing with Special Equipment Accidents of Boiler Pressure Vessels and Pressure Pipeline, i.e., Center for Investigation and Treatment of Accidents of AQSIQ are:

-    To gather and analyze statistics of accidents;
 
-    To direct and supervise the investigations, treatment, and ratifications of accidents in all parts of the country;
 
-    To collect relevant materials on the accidents, and establish database on the accidents;
 
-    To study and put forward accident prevention measures;
 
-    To participate in the drafting of rules and regulations on investigation and treatment of accidents."

Under the supervision of Administration of Safety on Boiler Pressure Vessels of AQSIQ, the Center organizes the investigations of extraordinarily big accidents caused by boilers, pressure vessels, pressure pipelines, and special equipment, and participates in the investigations of especially major accidents. (Notes: Extraordinarily big accidents: death 10-29 persons, or injury 50-99 persons, or direct economic loss RMB 5,000,000; especially major accidents: death more than 30 persons, or injury more than 100 persons, or direct economic loss RMB 10,000,000)

In can be concluded that this Center was not the legal institution on the accident; accident investigation is not the Center's legal duty.

5. The [Seller]'s doubt as to the composition of the natural gas provided by the [Buyer] was unfounded

      (1) Before the installation and adjustment of the Device, the [Seller]'s engineer ___ and staff for testing had fully inspected the Device and relevant system. They had never objected to the gas, the pressure of the pressure-relief valve, or the filter.

The installation of the Device was directed by engineer ___ appointed by the [Seller]. In the course of the installation, engineer ___ appointed by the [Seller] did not object to the gas, the pressure of the pressure-relief valve, or the filter.

      (2) The [Seller] had the obligation to inspect before adjustment to the Device; however, the [Seller] had never objected to the gas.

According to the Manual on Operation of 2,000KW Conduction Oil Heating System provided by the [Buyer], Section 3.10 (Section on Gas) reads:

"[To start the system,] whether the gas pipeline of the Device is clear shall be checked; ... whether the pressure of the front of the pressure-relief valve is normal shall be checked; whether the pressure of the back of the pressure-relief valve is appropriately adjusted shall be checked."

It was clear from this section that before the [Seller] performed its adjustment to the Device, it ought to have checked the gas pipeline and pressure of the Device carefully. However, the [Seller] never objected to the gas.

      (3) The [Seller] suggested that other oil fields had had accidents of explosion caused by natural gas as well (regardless of the authenticity of this statement). Therefore, the [Seller] should have paid special attention to the components of the gas in this case.

In the course of the former hearing, the [Seller] indicated several times that other oil fields had had accidents of explosion caused by natural gas as well. If these statements were true, the [Seller], as a professional manufacturer, should have paid special attention to the gas in this case, and should have emphasized particularly thereon in the course of improving the techniques or adjustment. However, the [Seller] failed to do so. It referred to those accidents of other oil fields only after the explosion of the Device in order to mitigate its own responsibility.

      (4) During the adjustment which lasted for eight days, the Device did not explode because of the natural gas, and the [Seller] did not raise any objections to the natural gas.

From 20 September to 29 September (almost nine days), the Device was under adjustment. The [Seller] did not raise any objections to the natural gas. Although the Device was not operating regularly, it did not explode. On 27 September, the Device was shut down because of a Device failure, but it did not explode. During the eight days of adjustment, the Device did not explode, either. [Seller] was unable to explain why during these eight days of adjustment, the Device did not explode utilizing natural gas, and on the ninth day, the Device suddenly exploded "because of the natural gas." Consequently, it was not reasonable for the [Seller] to doubt the components of the [Buyer]'s natural gas.

      (5) In actuality, the [Buyer] provided qualified natural gas; ___ Oil Extraction Factory had been utilizing the Technological Flow Diagram of Light Olefins for ___ Oil Extraction Factory (hereinafter, "Diagram") designed by ___ Co. of Canada in 1991. Since 1991 when this Diagram was put into use, there had been no accidents. Further, one year after the accident occurred, the [Buyer] purchased another ___ device, and the same gas was used on this new device. This new device has been operating regularly.

The evidence provided by the [Buyer]:

      The Diagram indicated that the [Buyer] installed V-450 "Fuel Scrubber" for the entire ___ Oil Extraction Factory. Through this Fuel Scrubber, the impurities in the natural gas used by ___ Oil Extraction Factory were completely separated. Only filtered natural gas could go into the equipment such as the Device, feed gas compressor, and glycol regenerative furnace.

      Natural gas filtered by the V-450 "Fuel Scrubber" had been satisfying the needs of the equipment since the ___ Oil Extraction Factory came into business. No accidents had occurred.

6. The [Seller] should bear the burden of proof on the reasons for the explosion.

      (1) Before the operation of the Device, the [Seller] had the responsibility to examine whether the system and gas were qualified. The [Seller] was aware of accidents caused by natural gas in other oil fields. It should have focused its examination on the natural gas. Now that the Device exploded, the [Seller] shall bear the burden of proof on whether the above examination was qualified.

First of all, the evidence "Manual on Operation of 2,000KW Conduction Oil Heating System" provided by the [Buyer] already fully explained that before the [Buyer] started to adjust the Device, it had to check whether all systems were normal and were in conformity with the requirements. The [Buyer] had to carefully examine the gas pipeline and pressure of the Device as well. However, the [Seller] did not object to the gas.

Therefore, once the [Seller] started to operate the Device, it should be considered that the natural gas, the pressure of the pressure-relief valve, and the filter conformed to the requirements.

Second, if any situation existed that could cause abnormality of the Device, the [Seller] should have objected then and there. As a professional manufacturer, the [Seller] was fully aware of the accidents happened in other oil fields caused by natural gas (regardless of the authenticity thereof), and therefore, it should have focused its attention on the examination of the natural gas, instead of operating the Device, in order to prevent the enlargement of the loss.

Now that the Device exploded in the course of adjustment, if the [Seller] doubted the natural gas, it bore the burden of proof on the result of the examination of the natural gas.

      (2) According to the record on the process of adjustment provided as evidence by the [Buyer], before the explosion, the [Seller] had always been operating and in control of the Device in the entire process (from installation under direction, to examination before operation of the Device, to adjustment of the Device, to the shutdown of the furnace and separation of gas, to the breakdown of the Device, until the explosion). The [Buyer] was not aware of the status of the Device at all. The [Seller] bears the burden of proof as to the reasons for the explosion that occurred to the Device that was under its full control.

      (3) In the Technology Agreement, the [Seller] expressly promised that "the Device fully conforms to the design and technology requirements of the user;" and that "the system provided by the Seller shall be improved according to the user's design in order to satisfy the technology requirements of the user." However, the Device provided by the [Seller] exploded after the [Seller] initiated the adjustment upon its examination on the Device, and before the Device was handed over to the [Buyer]. The [Seller], therefore, should bear the burden of proof as to the reasons for the explosion.

      (4) The explosion demonstrated per se that the Device was severely defective. If the [Seller] could not prove that the explosion was caused by other reasons, it bears full responsibility for the explosion.

7. The [Buyer] requests the Tribunal to support its arbitral cflaims. The [Seller]'s breach of the Contract resulted in severe economic loss of the [Buyer].

The [Buyer] concluded the Contract with the purpose to purchase a device that operated normally, and that conformed to the quality agreement in the Contract. However, the explosion caused severe economic loss of the [Buyer] and ___ Oilfield: direct loss of twenty-six tons of conduction oil, and other direct economic loss of almost RMB 1,000,000. At the same time, the explosion resulted in the shutdown of the natural gas manufacturing process for almost half a year, with an indirect economic loss of almost RMB 10,000,000.

Within three years after the explosion, ___ Oilfield and the [Buyer] actively contacted the [Seller] several times, in the hope of the [Seller] replacing the entire Device or returning the contract price as agreed in the Contract. However, the [Seller] neither actively negotiated with the [Buyer] for a solution nor implemented any measures as agreed in the Contract, disregarding the loss of the [Buyer]. Instead, the [Seller] has been delaying taking actions and shuffling off its own responsibility referring to the pressure of the pressure-relief valve, the filter, and the components of the natural gas.

The [Buyer] submits that the loss of the [Buyer] was completely caused by the breach of the [Seller], and the [Buyer] requests the Tribunal to support its claims.

[Seller]'s response

1. Facts

The [Buyer] and the [Seller] concluded the Contract in the present case on 17 April 2002. According to this Contract, the [Seller] provided with a ___ (the Device). Both parties chose CIF as the trade term, i.e., the [Seller] fulfilled its obligation of the delivery of the Device when it passed the ship's rail at the port of shipment. Both parties agreed that the port of destination was Xingang, Tianjin, in China.

The quality warranty period was within eighteen months after the arrival of the Device at the port of destination, or within twelve months after both parties signed the inspection certificate. Under the Contract, the remedies for the [Buyer] to seek in the event of a quality problem are:

   -    to remove the fault,
   -    to exchange the goods entirely or partially, or
   -    to reduce the contract price according to the defect.

In accordance with the Contract, the [Seller] fully performed all of its obligations. However, the [Buyer] still had not make payment of arrearage of US $5,000, which amounted to 5% of the contract price.

At 7:50 on 29 September 2002, the Device alarmed and shut down during the test run. At 8:45, the burner of the heat carrier furnace exploded, fifty-five minutes after the alarm and the shutdown.

On 26 March 2003, Xinjiang CIQ, according to two inspections carried out on the eleventh and forty-fourth day after the explosion, maintained that the responsibility for the explosion lied with the [Seller] based only on the reason that the [Buyer] was not at fault. This judgment was not issued based on verification of facts, nor was it based on any technology analysis. It was issued under the condition that the reasons for explosion were not investigated, and the quality of the Device was not confirmed.

2. The [Buyer]'s argument that the Contract was rescinded should be rejected

The Contract had been performed completely, and the agreed and legal grounds for rescission of a contract did not exist in the present case. Therefore, the [Buyer]'s argument that the Contract was rescinded should be rejected.

The prerequisite for the rescission of a contract is that the contract has not been performed or has not been fully performed, as well as that the party who is seeking rescission must exercise its right of rescission according to relevant contractual agreements and legal provisions. As for the present case:

      (1) The Contract is an international trade contract. According to the trade terms of this Contract, the [Seller] already fulfilled its delivery obligation when the Device passed the ship's rail. After the Device passed the ship's rail, the only obligation the [Seller] had was to provide the agreed after-sale service under the Contract.

      (2) The Contract also did not provide the prerequisite for the rescission of the Contract. Therefore, the factual grounds that the [Buyer] alleged when it sought for rescission of the Contract did not conform to the laws.

Based on the above situation, the [Seller] submits that the [Buyer]'s claim that the Contract was rescinded should not be supported because this claim did not have factual or legal basis.

3. The Evaluation Certificate issued by the CIQ should not be considered effective evidence

The [Buyer] consigned the CIQ to issue an Evaluation Certificate. This Certificate could not prove that the [Seller] had provided the [Buyer] defective goods. Nor could this Certificate prove that the [Seller] was responsible for the Device. That is to say, this Evaluation Certificate should not be considered effective evidence in the present case.

      (1) As admitted by the [Buyer] during the hearing on 16 August 2005, up until the present, the reasons for the explosion had not been confirmed. Under this situation, Xinjiang CIQ maintained that the responsibility of the explosion lied on the [Seller] without any technology analysis. This conclusion was merely subjective judgment made by the Xinjiang CIQ.

      (2) The Evaluation Certificate issued by the CIQ did not conclude whether there were defects on the Device provided by the [Seller]. The [Seller] was found responsible for the explosion without verifying the reasons for the explosion. This Certificate did not conform to Chinese laws, and violated the contractual agreements.

            a. According to Articles 15 and 16 of the Contract, if the [Buyer] believes that the quality of the Device is defective, it shall require replacement with qualified goods or claim for damages from the [Seller] with an Inspection Certificate issued by CIQ. The fact in the present case was that CIQ had not issued any Inspection Certificate upon the quality of the goods provided by the [Seller]. Therefore, the [Buyer] did not have any factual or legal basis to claim or request from the [Seller].

            b. Xinjiang CIQ is the legal inspection institute for import and export goods. It is not an accident evaluation institute according to the laws. Thus, it does not have authority or capacity to issue evaluation of responsibility for accidents.

The Device in the present case is a type of boiler under Regulations on Dealing with Special Equipment Accidents of Boiler Pressure Vessels and Pressure Pipeline (2001) by AQSIQ. This kind of accidents shall be dealt with by the Center on Dealing with Special Equipment Accidents of Boiler Pressure Vessels and Pressure Pipeline, which was founded by AQSIQ. Inspection reports thereon shall also be issued by this Center. That is to say, that Center was the proper institute to investigate the boiler accident and verify responsibility for the accident according to the laws.

First, Xinjiang CIQ stated that it was the [Seller]'s responsibility on the accident when the reasons for the explosion were uncertain and the basic facts of the accidents were not described correctly. This conclusion was a subjective judgment without any factual basis. It does not have any accuracy.

Second, Xinjiang CIQ violated general principles of international trade and ignored the CIF trade terms as well as international trade usages. It wrongly affirmed that the Device was not delivered.

Third, Xinjiang CIQ did not arrive at the spot immediately after the explosion to collect evidence. Without any data or technology analysis, and without mentioning actual statistical standards, Xinjiang CIQ simply held that, based on its investigation on the eleventh day and forty-fourth day after the explosion, the [Buyer] used qualified natural gas on the Device. This is sufficient to prove that the revaluation report by Xinjiang CIQ had severe factual and technical mistakes, and that the judgment therein had obvious mistakes.

Fourth, Xinjiang CIQ did not investigate during the period between 7:50 and 8:45 on 29 September 2002 (from the running off of the alarm and shutdown of the Device to when the explosion occurred). It also did not inspect the control record of the Device during this period. This resulted in a huge defect in the verification of the facts and responsibility in the evaluation report. The changes that happened from 7:50 to 8:45 on 29 September 2002, as well as the computer control record of this period were the most significant evidence regarding the reasons for the accident and the responsibility for the accident.

Fifth, according to the testimony of the representative of the manufacturer of the Device, and the analysis on the reasons for the alarm and the shutdown of the Device that happened on 7:50 on 29 September 2002, the Device could not be restarted or be lit up unless it was manually lit up by someone based on the status of the Device. Since the lowest temperature for natural gas to spontaneous combustion is 600, it was impossible for the Device to reach such high temperature after its shutdown in accordance with the design of the body of the Device. However, regarding the components of the liquid light hydrocarbons, the lowest temperature for it to ignite spontaneously after it evaporates is 240. It was possible for the Device to reach this temperature after its shutdown in accordance with the design of the body of the Device.

Further, the burner of the system was designed and manufactured under German standards, and was equipped with safe components that had passed strict inspections according to German standards (which were higher than Chinese standards).

After cautious and complete investigations, the only reason that the Device exploded was that the gas used on the Device accidentally contained liquid light hydrocarbons.

4. Other facts that could have a material influence

Moreover, the [Seller] requested the Tribunal to note the following facts that could materially influence the case:

      (1) The Device was purchased in order to match with the light hydrocarbons manufacturing process. That is to say, while the Device was testing, the matching light hydrocarbons manufacturing process was testing as well. It is known to all that during the testing of the light hydrocarbons manufacturing process, it was deemed that the quality of gas would fluctuate, and the pressure of gas provision would not stablize. These uncertain elements could both be the biggest reasons for the explosion that occurred on 29 September 2002.

      (2) Similar factories that process light hydrocarbons of the end user had similar explosion accidents before. All confirmed reasons for those explosions were that liquid in the gas provided by the end user utilized on those systems exceeded the standard.

      (3) The [Buyer] repeatedly emphasized that the natural gas it used on the Device had no quality problems. However, it could be proved by the evidence obtained in the course of negotiation between the [Buyer] and the [Seller] that right before and after the explosion, the temperature of the natural gas provided by the [Buyer] changed obviously. This fact sufficiently proves that the natural gas provided by the [Buyer] obviously had quality problems.

      (4) As confirmed by the [Buyer] in the hearing, the reasons for the explosion had not been made certain. If the reasons for explosion could not be verified, it was impossible to pass judgment on who was responsible for the explosion. Fairly speaking, regarding the facts, there could be many reasons for the explosion: such as false operation, intentional damage, quality of the gas, etc. That is to say, the [Buyer], the [Seller], or a third party could be responsible. It is obviously unjustified to expect the [Seller] to take full responsibility for the explosion merely because the reasons for explosion were uncertain.

      (5) During the hearing, the [Buyer] confirmed that it was the burner that exploded first, which caused the explosion of the Device. Thereafter, the [Buyer] selected the same model of burner as the one that exploded. This means that the [Buyer] was confident about the quality of the burner as the major component of the Device.

Since the Contract was fully performed by the [Seller], there was no contractual or legal basis for the [Buyer] to rescind the Contract. Also, the [Buyer] did not request the agreed institute to evaluate the quality of the Device under the Contract. That being said, the [Buyer] had not the contractual or legal basis for requesting damages from the [Seller]. Further, the [Seller] noted that the third claim by the [Buyer] concerning attorneys' fee was not related to the current case, because the attorneys' fee in this claim was borne by ___ Oilfield, instead of the [Buyer]. In conclusion, the [Seller] objected to all arbitral claims by the [Buyer].

THE OPINION OF THE TRIBUNAL

1. Applicable law

In the Contract, the parties did not select the law applicable to the substance of this case. The [Buyer] is a Chinese legal person, and the [Seller] is a German legal person. Both China and Germany are Contracting States of the United Nations Convention on Contracts for the International Sale of Goods (1980) [hereinafter, "CISG"]. Therefore, the Tribunal finds that the CISG is applicable to the Contract of this case.

Issues that the CISG is not concerned with shall be determined by the conflict of laws rules the Tribunal considers applicable. The Tribunal finds that the conflict of laws rules of the situs, the i.e., conflict of laws rules of China are applicable to determine these matters. According to Article 145 of General Principles of the Civil Law of the People's Republic of China (hereinafter "General Principles of the Civil Law") and Article 126 of Chinese Contract Law, the rules are as follows:

"If the parties to a contract involving foreign interests have not made a choice (of the applicable law), the law of the country to which the contract is most closely connected shall be applied."

Since the place of business of the [Buyer] and the places of arbitration are both in China, and the place of the testing of the Device was also China, the country that has the closest connection to the Contract is China. Therefore, matters that are not concerned with by the CISG shall be determined by Chinese substantive laws.

Furthermore, under Article 142 of General Principles of the Civil Law:

"International practice may be applied to matters for which neither the law of the People's Republic of China nor any international treaty concluded or acceded to by the People's Republic of China has any provisions."

2. Validity of the Contract

The parties concluded the Contract in dispute on 17 April 2002. The parties agreed in Article 20 of the Contract that "[t]his Contract became effective the day when both parties signed." There are no situations that can affect the validity of this Contract. The parties did not object to the validity of the Contract during the hearings, either. Therefore, the Tribunal finds that the Contract indicates the true expression of both parties' intent, and that the Contract is valid.

3. The Contract and the Technology Agreement

The [Buyer] argued that on 16 April 2002, ___ Oilfield, the [Seller], and U.S. ___ Energy Service Co. Ltd. signed a Technology Agreement concerning the major technical parameters provided by ___ the [Seller] to Oilfield and after-sale services matters. Afterwards, ___ Oilfield and the [Buyer] signed an Agreement on Agency of Importing Device. With this commission, the [Buyer] concluded the Contract of the present case with the [Seller].

The [Buyer] submitted both the Technology Agreement and the Agreement on Agency of Importing Device as evidence. The Tribunal notes that the [Seller] as Party B and its agent, U.S. ___ Energy Service Co. Ltd., has signed the Technology Agreement. However, Party A ___ Oilfield has not signed the Agreement. During the cross-examination, the [Seller] did not object to the Technology Agreement. But the [Seller] objected to the authenticity of the Agreement on Agency of Importing Device, based on the fact that it was only signed by the other two parties. The [Seller] also suggested that this Agreement was not relevant to this case.

The Tribunal notes that the signature of Technology Agreement and that of the Contract in dispute was only one day apart; further, the parties did not object to the fact that the subject matter of these two documents is the same, and that the [Buyer] signed the Contract on behalf of ___ Oilfield. In the course of the performance of the Contract, the parties also performed part of the agreements under the Technology Agreement, including the testing of the Device.

It was agreed in Article 6 of the Technology Agreement that:

"This Technology Agreement is a part of the Contract. It comes into effect when the Contract comes into effect."

Based on the above facts, the Tribunal finds that the Technology Agreement is a part of the Contract, and both parties are obligated to perform agreements under the Technology Agreement.

4. The [Seller]'s obligation of delivery under the Contract

Article 30 of CISG provides:

"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 Tribunal finds that the trade terms of the Contract are CIF, and the parties disputed on whether the goods were delivered by the [Seller]. The [Buyer] submitted that in CIF contracts, the fact that "the Device has passed the ship's rail" only indicated that the risks of loss of or damage to the Device were transferred to the [Buyer]. As for whether the [Seller] had fully fulfilled the obligation of delivery under the Contract, it shall be determined by the agreement on rights and obligations under the Contract. The [Seller] submitted that its obligation of delivery had been fulfilled when the Device passed the ship's rail at the port of shipment.

The Tribunal finds that under A5 (transfer of risks) of the term CIF of Incoterms 2000:

"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."

Therefore, the dividing line for the risks undertaking of loss of or damage to the goods between both parties was when "[the goods] passed the ship's rail at the port of shipment." This is not the symbol of whether the [Seller] had completed its obligation of delivery. After the goods had "passed the ship's rail at the port of shipment," the [Seller] still had to performed obligations of handing over any documents relating to the goods and transferring the property in the goods in accordance with the CISG. At the same time, the [Seller] had to perform obligations such as providing the [Buyer] with technical quality requirements as required by the Contract.

5. Obligation of testing the Device by the [Seller] and the quality of the Device

As stated above, according to the provisions of the Technology Agreement (a part of the Contract), the [Seller] had to "deliver the goods at the agreed time and place: the inspection of the goods shall be performed according to the shipping list, and upon the installation of the Device by the Buyer, the Seller shall provide with services (one week) of testing and operation training free of charge. The [Seller] did actual testing on the Device under the Contract as well. Thus, the Tribunal finds that the [Seller] has the obligation to test the Device and provide with operation training.

The Device under the Contract exploded during the testing by the [Seller] on 29 September 2002. The [Seller] submitted that the only possible reason for the explosion was the liquid (qing qing) component in the gas provided by the [Buyer]. However, the [Seller] did not submit sufficient evidence to support this claim. More importantly, the explosion occurred while the [Seller] was testing the Device that was sold by the [Seller] itself. As a seller and a professional company, the [Seller] should have known various technology descriptions of the goods. It should have operated the Device in accordance with the manual. As for elements related to the testing, including the components of the gas and pressure of the pressure-relief valve, the [Seller] was obligated to examine. It shall try hard to make the operation of the Device reach the technology requirements under the Contract as well. Even if the Device was qualified in the beginning, the [Seller] still bears the responsibility if the Device exploded due to the [Seller]'s false operation while it was testing the Device. The [Seller]'s fault resulted in the explosion of the Device. The explosion not only caused loss of the [Buyer], but also in actuality deprived the [Buyer] of "what [it was] entitled to expect under the contract". According to Article 25 of CISG, the [Seller]'s conduct constituted a fundamental breach of the Contract.

The Tribunal notes that both parties held different opinions upon the Evaluation Certificate issued on 26 March 2003 by the Xinjiang CIQ. The Tribunal finds that the dispute on this matter does not affect the Tribunal's verification that the [Seller] had fundamentally breached the Contract. Therefore, the Tribunal does not comment on this Evaluation Certificate.

6. [Buyer]'s arbitral requests

      (1) Rescission of the Contract

      The [Buyer]'s first request was to rescind the Contract in the present case.

The Tribunal finds that the equivalent concept in CISG is provided in Article 49 of CISG, i.e., "to declare the contract avoided." According to this Article,

"[T]he 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 the present case, since due to the [Seller]'s reason, the Device exploded and vanished. This amounts to a fundamental breach of the Contract. Therefore, the Tribunal supports the [Buyer]'s first request.

      (2) Compensation of loss

      Under Article 74 of CISG, the Tribunal finds that the [Seller] shall compensate for the loss the [Buyer] incurred from the [Seller]'s breach of Contract, including contract price and other loss.

In the arbitral hearings, both parties confirmed to the Tribunal that an arrearage of 5% of the contract price, i.e., US $5,500 was unpaid. The Tribunal notes that the price on the L/C issued by the [Buyer] under the Contract deviates from the amount of 95% of the contract price (US $104,500). The actual amount shall be US $105,450. The [Seller] did not object to the fact that it had received the contract price under the L/C. Hence, the Tribunal finds that the [Seller] shall return to the [Buyer] the amount paid by the latter totaling US $105,450. The [Seller] is entitled to retrieve the remains of the goods from the [Buyer].

Further, the Tribunal supports the [Buyer]'s claims for

   -    Fee for entry inspection and quarantine: RMB 13.00;
   -    Freight and miscellaneous charges, and insurance fee: RMB 19,442.50;
   -    Fee for H switching bill: RMB 250;
   -    Shifting and storage charges: RMB 360;
   -    Management procedure fee: RMB 2,756;
   -    Draw out, container demurrage, and broken container fee: RMB 1,634;
   -    Remitting fee: RMB 1,200;
   -    L/C procedure fee: RMB 3,162.11;
   -    Totaling RMB 28,817.61.

According to Article 46(2) of the Arbitration Rules,

"The arbitral tribunal has the power to decide in the award, according to the specific circumstances of the case, that the losing party shall compensate the winning party for the expenses reasonably incurred by it in pursuing its case."

The Tribunal supports the [Buyer]'s request that the [Seller] shall compensate for its attorneys' fee of RMB 68,000.

      (3) Arbitration fee

      The Tribunal finds that the arbitration fee totaling RMB 48,936 shall be fully borne by the [Seller].

AWARD

The Tribunal unanimously hands down the following award:

   1.    Cancel the Contract (No. TPEDC02-12-019GM) concluded by the parties on 17 April 2002;
   2.    The [Seller] returns to the [Buyer] the contract price of US $105,450;
   3.    The [Seller] compensates the [Buyer] for its loss including attorneys' fee and other loss totaling RMB 96,817.61;
   4.    The arbitration fee of this dispute is RMB 48,936. It shall be fully borne by the [Seller]. The [Buyer] has prepaid the arbitration fee. Therefore, the [Seller] shall make payment of RMB 48,936 to the [Buyer].

The abovementioned amount of money shall be paid by the [Seller] to the [Buyer] within 45 days after this award is handed down. Interest on the rate of 0.21 shall be added on any overdue payment.

This is a final award. This award comes into effect on the day when it is handed down.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of ___ Petroleum Exploration & Development Corporation [of People's Republic of China] is referred to as [Buyer], and Respondent ___ GmbH [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].

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

*** 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 October 10, 2008
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