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CISG CASE PRESENTATION

China April 2006 CIETAC Arbitration proceeding (Water heater production line case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/060400c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20060400 (April 2006)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

CASE NUMBER/DOCKET NUMBER: CISG/2006/20

CASE NAME: Unavailable

CASE HISTORY: Unavailable

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

BUYER'S COUNTRY: United States (respondent)

GOODS INVOLVED: Solar water heater production line


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Article 50 [Also relevant: Articles 8 ; 35 ; 80 ]

Classification of issues using UNCITRAL classification code numbers:

50A [Buyer's right to reduce price for non-conforming goods]

Descriptors: Reduction of price, remedy of

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Editorial remarks

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation) [second draft]

Queen Mary Case Translation Programme

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

Water heater production line case (April 2006)

Translation [*] by Weidi LONG [**]

PARTICULARS OF THE PROCEEDINGS

The China International Economic and Trade Arbitration Commission (hereinafter CIETAC) accepted this case (Case No. M2004___) according to:

   -    The Import Agency Agreement concluded by Claimant [of the People's Republic of China] (hereinafter the "[Buyer]") and Agent Company [of the People's Republic of China] (hereinafter the "[Agent]") on 2 June 2002; and
 
   -    The arbitration clause in the Contract No. CUSQTBJ-S020627CR for the sale of a Water heater production line (hereinafter the "Contract") concluded by [Agent] (on behalf of [Buyer]) and Respondent [of the United States] (hereinafter "[Seller]") on 16 June 2002; and
   -    The Arbitration Application submitted by [Buyer] on 6 November 2004,

The arbitration procedure is governed by the 2000 CIETAC Arbitration Rules (hereinafter the "Arbitration Rules") which took effect as of 1 October 2000.

On 17 December 2004, the Secretariat of CIETAC (hereinafter the "Secretariat") forwarded to [Buyer] and [Seller] by express mail the Notice of Arbitration, the Arbitration Rules and the List of Arbitrators. The Secretariat also forwarded to [Seller] the Arbitration Application and its appendix.

[Buyer] chose Mr. A as its arbitrator, and [Seller] nominated Mr. B as its arbitrator. Since [Buyer] and [Seller] failed to select or authorize the Director of CIETAC to select a presiding arbitrator within the specified time period, Mr. C was appointed as the presiding arbitrator by the Director of CIETAC according to Article 24 of the Arbitration Rules. The Arbitral Tribunal was formed on 25 January 2005.

On 25 February 2005, [Seller] submitted its Statement of Counterclaim to CIETAC, and, in accordance with the Arbitration Rules, advanced the arbitration costs in terms of the counterclaim. Accordingly, the Arbitral Tribunal decided to consolidate the arbitration of the [Buyer]'s claims and that of the [Seller]'s counterclaim.

On 4 April 2005, [Buyer] applied to the Arbitral Tribunal to modify its claims, and advanced the arbitration costs for the additional claims accordingly.

With respect to [Seller]'s counterclaim against [Buyer] and [Agent], on 10 May 2005 CIETAC notified [Seller] in writing:

"In the present proceeding, you can only file counterclaims against the [Buyer], but not against the [Agent] which is not a party to the arbitration clause. Therefore, your Statement of Counterclaim should be modified. Your claims against the [Agent] may be heard in another arbitration if possible."

On 18 May and 21 June 2005, respectively, two oral hearings were held in Beijing. The counsel for [Buyer] and counsel for [Seller] both appeared at the hearings. During these hearings, both parties presented their cases, and had debates over the issues. The evidence was examined, and inquiries were conducted by the Arbitral Tribunal.

On 24 June 2005, the Arbitral Tribunal notified the parties in writing that they should submit before 11 July 2005 their respective written opinions on the other parties' evidence, supplemental evidence, and finalized presentations of the case. It was also stated in this notice that any evidence submitted after the deadline would be rejected. Relevant issues were also listed in the above notice. The Arbitral Tribunal pointed out that the list was only intended to assist in establishing the facts, and that it should not be taken as an indication that the Arbitral Tribunal had formed an opinion on the case. Arguments beyond the scope of the list would also be permitted.

On 20 July 2005, on behalf of the Arbitral Tribunal, the Secretariat notified the parties that a third oral hearing would be held on 2 August 2005.

On 2 August 2005, the third oral hearing was held in Beijing. Counsel for [Buyer] and counsel for [Seller] both appeared. The parties further presented their cases, debated the issues, and examined the evidence produced by each other.

During the third oral hearing, [Seller] filed an oral application to the Arbitral Tribunal for appointment of an institution to inspect whether the tank liners of [Buyer]'s water heaters, bought by [Seller] from the market, were produced by the equipment provided by [Seller]. On 3 August 2005, [Seller] submitted to the Arbitral Tribunal a written Inspection Application for Case No. M2004_____ (hereinafter the "Inspection Application"), which restated its application for inspection. The Secretariat communicated this Application to [Buyer] who subsequently submitted a written statement of objections to the Inspection Application. On 22 August 2005, based on the statements of both parties, the Arbitral Tribunal notified the parties in writing:

"Since the Secretariat's Notice of Arbitration was issued on 17 December 2004, three oral hearings have been held, and a large number of written statements and evidentiary documents have been submitted by the parties. As required by CIETAC Beijing Notice (2005) No. 00____ issued on 24 June 2005, the parties should produce all the evidence before 11 July 2005. According to this Notice, any evidence submitted after the deadline will not be accepted, unless the parties agree or the Arbitral Tribunal decides to the contrary. Accordingly, the Arbitral Tribunal deems that the Inspection Application filed by [Seller] on 2 August 2005 was late and hence should not be considered."

Owing to the complexity of the case at hand, the Arbitral Tribunal could not make the arbitral award within the time period required under the Arbitration Rules. Upon the Arbitral Tribunal's request, the Secretary-General of CIETAC granted various extensions of the time period for making the award. This period was finally extended to 25 April 2006.

The Secretariat has communicated to both parties all the documents and other materials submitted by their counterpart.

The case is now closed. Based on the established facts and examined evidence, and in accordance with the applicable law, the Arbitral Tribunal makes the award after deliberations.

FACTS AND POSITIONS OF THE PARTIES

On 5 June 2002, [Buyer] and [Agent] concluded an Import Agency Agreement, under which [Agent] was bound to import on behalf of [Buyer] "dedicated thermal processing equipment for producing thermal-collecting glass tubes", as well as "equipment for a production line with annual production capacity of 150,000 solar water heaters."

On 16 June 2002, on behalf of [Buyer], the [Agent] entered into the Contract with [Seller], according to which [Agent] should, on [Buyer]'s behalf, purchase from [Seller] a dedicated production line for producing tanks of solar water heaters with evacuated glass tubes (hereinafter the "Production Line").

Subsequently, disputes arose out of the performance of the Contract, and [Buyer] commenced the arbitral proceedings.

I. [Buyer]'s position: Submissions in the Arbitration Application

[Buyer] alleges that:

In April 2002, [Buyer] commissioned the Beijing International Tendering Co., Ltd to organize tendering for a dedicated production line for producing tanks of solar water heaters with evacuated glass tubes. [Seller] submitted its tender document and consulted with [Buyer]. Later, [Buyer] decided that [Seller] won the bid, and commissioned [Agent] to conclude a contract with [Seller] on [Buyer]'s behalf for the purchase of the Production Line.

On 16 June 2002, on behalf of [Buyer], [Agent] entered into the Contract with [Seller] in Beijing. Under the Contract, [Seller] was to provide [Buyer] with the Production Line at the price of US $2,188,000. In June 2002, [Agent] paid US $218,800 as 10% of the price to [Seller] on behalf of [Buyer]. In September 2002, [Buyer] transferred US $1,969,200 as 90% of the price to [Agent]'s bank account, and opened a documentary L/C at the China Merchants Bank.

According to the Contract, in order to negotiate the documentary L/C, [Seller] had to provide a pre-acceptance inspection certificate issued by [Buyer] and open a standing L/C for an amount of US $328,200 accounting for 15% of the price as a guarantee for the Contract performance.

In January 2003, upon [Seller]'s request, [Buyer] went to the United States to conduct a pre-acceptance inspection of some equipment of the Production Line at the factory of JETLINE. Since the machines inspected were only part of the Production Line, [Buyer] only issued a pre-acceptance report in terms of these machines but not the entire Production Line. [Buyer] stated in the report that the inspected machines basically conformed to the Contract. Moreover, [Buyer] pointed out orally the problems which might arise in the operation of the Production Line. [Seller] promised that these possible problems would be solved when the complete Production Line was installed.

On 20 February 2003, [Seller] opened at the Los Angeles Branch of the Bank of China a standing L/C for US $328,200 in favor of the [Agent], accounting for 15% of the price.

In February 2003, the above pre-accepted machines arrived at the Tianjin New Harbor, and subsequently arrived at the Chaoyang Port near the Shibali Dian County on 28 February 2003. [Agent] made the customs declaration and fulfilled the preliminary commodity inspection procedures. [Agent] also made to [Seller] a one-time payment of US $1,969,200 as 90% of the price.

From February to 17 March 2003, the other parts of the Production Line were continually delivered to [Buyer]. During this period, [Buyer] discovered non-conformities of the goods and obvious defects in the design and installation of the Production Line. [Buyer] raised its doubts to [Seller] at once. Since previously the parties agreed that the Production Line should be inspected again after its installation, [Buyer] still expected that the Production Line would operate properly when installed.

However, by October 2003, [Seller] was still not in a position to deliver the Production Line for final inspection before acceptance. The parties could not reach agreement on the inspection issues despite their constant consultations. Despite the fact that the final inspection had not been conducted, [Seller] withdrew all of its installers. Although [Buyer] repeatedly urged [Seller] by phone and by fax to take further measures, [Seller] remained silent in reply.

In view of the non-performance of [Seller], at the end of December 2003 [Buyer] applied to negotiate the proceeds under the standing L/C as guarantee for the Contract performance. In the meantime, upon [Buyer]'s application in early February 2004, the Beijing Entry-Exit Inspection and Quarantine Bureau (hereinafter the "Beijing Bureau") inspected the Production Line and issued an inspection report (hereinafter the "Inspection Report"). After noting thirty-six points of non-conformity of the Production Line, the Inspection Report concluded that "... the Production Line is not ready for final inspection".

On 26 April 2004, the proceeds under the standing L/C as guarantee for the Contract performance were transferred to [Agent]'s bank account.

[Buyer] repeatedly urged [Seller] by fax and by mail to remedy the lack of conformity of the Production Line. However, by the time the Arbitration Application was filed, [Seller] has not made any response or taken any measure to fix the above problems. [Seller]'s non-performance has constituted a serious breach of the Contract.

Pursuant to Article 17 of the Contract, [Seller] should "... reduce the price in view of the extent of the defects, the degree of damage of the goods, and [Buyer]'s losses," and pay the damages incurred by [Buyer] due to the non-conformity.

In its Modified Arbitration Application [Buyer] further alleges:

The Contract prescribed that [Seller] should provide [Buyer] with the Production Line at the price of US $2,188,000. However, there was a serious lack of conformity of the goods which was confirmed by the Beijing Bureau. Due to the defects of the equipment, the complete Production Line was not ready for final acceptance inspection. Although repeatedly requested by [Buyer], [Seller] failed to take any measure to remedy the lack of conformity, which rendered the complete Production Line unavailable for use till now. The serious non-conformity of the Production Line has frustrated the whole Contract. Therefore, [Buyer] submits that all the goods provided by [Seller] (except for the two automatic TIG longitudinal-seam welders) should be restituted to [Seller], and US $1,859,800 should be reimbursed to [Buyer], as a result of reduction of the total price by US $328,200.

The goods to be restituted should not include the two automatic TIG longitudinal-seam welders (hereinafter the two "TIG Welders") for the following reasons:

On 12 October 2001, [Buyer] and [Seller] signed a contract (Contract No. PHT211012JTL) for the sale of two TIG Welders (Model No. LWS-60Z) at the price of US $150,000.

In the meantime, the parties concluded a supplemental agreement which provided:

1. [Buyer] should pay to [Seller]'s Chinese subsidiary, Asia-Pacific Oriental Electrical Technology (Beijing) Co., Ltd., 10% of the total price in Chinese renminbi (RMB) as down payment.

2. If [Buyer] managed to obtain duty-free quotas and relevant approval documents before the dispatch of the equipment, [Seller] would dispatch the two TIG Welders as the first batch of equipment of the Production Line. The text of the contract, the buyer, shipping mark, payment, and other clauses should be adjusted in accordance with the Contract for the Production Line. The parties should cooperate in obtaining necessary documents to clear Customs.

3. If [Buyer] could not obtain relevant approval documents before the dispatch of equipment, [Seller] would assist [Buyer] in clearing the customs of the two TIG Welders through its own import procedures. [Buyer] agreed to advance the payment for the welders in Chinese renminbi to [Seller]'s Chinese subsidiary. After [Buyer] fulfilled duty-free procedures and paid the price in US dollars, [Seller]'s Chinese subsidiary would reimburse the above down payment and advance at one time.

On the same day when the Contract No. PHT211012JTL was concluded, [Buyer] paid to [Seller]'s Chinese subsidiary 10% of the price, i.e., RMB 123,000, as down payment. On 12 December 2001, [Buyer] paid the rest of the price, i.e., RMB 1,100,000, to [Seller]'s Chinese subsidiary.

As stated above, on 16 June 2002, [Buyer] commissioned [Agent] to conclude with [Seller] the Contract for the sale of the Production Line at the price of US $2,188,000. Since the TIG Welders under Contract No. PHT211012JTL formed part of the Production Line, their price was also included in the total price of US $2,188,000 which has been paid by [Buyer]. Therefore, [Buyer] paid twice for the two TIG Welders. Since [Buyer] had already paid for the two TIG Welders in accordance with Contract No. PHT211012JTL, and [Seller] has delivered them as agreed, [Buyer] is entitled to the ownership of the two welders. Accordingly, the two TIG Welders should be excluded from the goods to be restituted by [Buyer].

[Buyer] submits that, if the above claims are only partly sustained by the Arbitral Tribunal, in view of the serious non-conformity and defects of the goods, the price of the goods should be reduced by US $1,200,000. Since previously [Buyer] has negotiated US $328,200, [Seller] should reimburse US $871,800.

Due to the [Seller]'s serious breach of contract, [Buyer] filed the Arbitration Application on 5 December 2004. Subsequently, [Buyer] increased the number of its counsel, and consequently incurred additional attorneys' fees of RMB 500,000 which should be borne by [Seller].

In view of the facts stated above, [Buyer] adjusts its claims and requests that the Arbitral Tribunal:

1. AWARD restitution of all the goods (except for the two TIG Welders) to [Seller], and US $1,859,800 should be reimbursed to [Buyer], as a result of reduction of the total price by US $328,200.

2. Alternatively, if the above relief cannot be fully granted, ORDER that the price of the goods should be reduced by US $1,200,000. Since previously [Buyer] has negotiated US $328,200, [Seller] should reimburse US $871,800.

3. AWARD US $109,400 as liquidated damages to be paid by [Seller].

4. ORDER that [Seller] shall indemnify [Buyer] for its counsel fee of RMB 700,000 (initial RMB 200,000 plus additional RMB 500,000).

5. ORDER that [Seller] shall bear the arbitration costs and other expenses.

Requests 1, 3 and 4 amount to a total of RMB 16,985,284 (1 USD = 8.27 CNY).

II. [Seller]'s position: Statement of Counterclaim

[Seller] alleges in its Statement of Counterclaim that:

Seeing that:

1. The Contract concluded by [Seller] and [Agent] contained an arbitration clause;

2. [Agent] was acting on behalf of [Buyer];

3. [Buyer] filed the Arbitration Application as a party to the Contract;

4. [Buyer] and [Agent] have a common interest in the present arbitration, and had joint negligence in performing the Contract and negotiating the proceeds under the L/C which led to damages sustained by [Seller];

5. Article 67 of the General Principles of Civil Law of P.R. China provides: "If an agent is aware of the illegality of the matter entrusted to him but nevertheless proceeds with the matter...the principal and the agent shall bear joint liabilities";

[Seller] files counterclaims against [Buyer] and [Agent].

[Seller] further alleges that:

On 16 June 2002, after tendering, [Agent], acting on [Buyer]'s behalf, concluded with [Seller] the Contract for the sale of the Production Line. The Production Line could be used to produce tank liners of solar water heaters with evacuated glass tubes (hereinafter "tank liners"). The total price was US $2,188,000 CIF Tianjin. Payment of 10% of the price was required after the Contract entered into effect, and the remaining 90% would be due after the goods were accepted. In the meantime, [Seller] was bound to open a standing L/C for an amount of money amounting to 15% of the price as a guarantee for the quality of the goods for one year. It was further stipulated in the appendix of the Contract that the period of guarantee commenced when the goods were accepted. If the equipment could not be assembled and tested because of [Buyer], the period of guarantee should be 18 months starting from the day when the goods arrive at the port of delivery.

After the Contract was concluded, [Seller] began to prepare the needed equipment. On 8 August 2002, [Buyer] completed the design of the tank liners and gave the blueprint (hereinafter the "Blueprint dated 8 August 2002") to [Seller] for design of the Production Line and purchase of the needed equipment.

In October 2002, [Seller] adjusted the production procedures and equipment, and completed the design of the Production Line based on the Blueprint dated 8 August 2002. The adjusted delivery list was sent to Xue Zuqing, General Manager of [Buyer]. The price of the goods was raised by US $170,000 because of three main adjustments.

In early January 2003, four employees of [Buyer] conducted a comprehensive pre-acceptance test of the Production Line in the United States. The plates and parts used in the test were provided by [Buyer]. The result showed that basically the Production Line conformed to the Contract, and hence [Buyer] indicated that the goods could be dispatched.

In late February 2003, the Production Line arrived in Beijing, and passed the Beijing Bureau's inspection. [Seller] subsequently opened a standing L/C for an amount of US $328,200 as a guarantee for the Contract performance, and received payment for the goods.

In late March 2003, the Production Line was installed at [Buyer]'s place of business and the testing started.

In late April 2003, [Buyer] inspected the tank liners produced during the pre-acceptance test, and found that the welding points could possibly be eroded. In order to solve this problem, the tank liners had to be redesigned, which should be completed by [Buyer] with [Seller]'s assistance. In the meantime, the technique used for the Production Line had to be adjusted and additional equipment was needed, which led to additional costs of US $55,000.

On 27 December 2003, the parties concluded minutes of their consultative meeting (hereinafter the "Minutes") regarding the final inspection of the Production Line. According to the Minutes, [Buyer] should provide a finalized blueprint of the tank liners by 1 January 2004 for approval by both parties in another meeting. In addition, [Buyer] promised to provide ten sets of spare parts before 2 February 2004 for the testing of the Production Line, and to continually provide materials for producing 100 solar water heaters after 2 February 2004. The pre-production trial would last from 16 February to 2 March 2004. During this period, [Buyer] should provide materials and parts on a daily basis for a total of 2,000 sets.

On 6 February 2004, [Buyer] expressly refused to fulfill its promise in the Minutes, i.e., to provide a finalized blueprint of the tank liners as well as materials and parts needed for the pre-production trial.

Therefore, the failure to conduct the pre-production trial and final inspection resulted from [Buyer]'s non-performance.

On 26 April 2004, based on fabricated defects of the Production Line, [Buyer] and [Agent] transferred the proceeds of US $328,200 under the standing L/C to [Agent]'s bank account and later to [Buyer]'s account.

It can be seen from the above that [Seller] has fulfilled its obligations under the Contract. The failure to conduct the pre-production trial and final inspection was a result of [Buyer]'s non-performance. Under this circumstance, the period of guarantee under the Contract should be 18 months from February 2003 to August 2004. Accordingly, [Buyer] and [Agent] should reimburse the guarantee money. Furthermore, owing to [Buyer]'s modification of the pattern of tank liners, the tank liners were redesigned and certain machines were added, which raised the price.

[Seller] requests that the Arbitral Tribunal:

1. ORDER [Buyer] and [Agent] to reimburse US $328,200 which was guarantee for the Contract performance and the interest thereon (calculated from 26 April 2004 at the bank loan rate over the same period);

2. ORDER [Buyer] to pay US $225,000 for the added machines;

3. DECIDE that [Buyer] shall indemnify [Seller] for its counsel fee of RMB 800,000;

4. DECIDE that [Buyer] shall bear the arbitration costs and other expenses.

The above requests amount to a total of RMB 5,374,964 (1 USD = 8.27 CNY).

III. [Seller]'s position: Response to [Buyer]'s Claims

1. Summation of the facts

On 4 April 2002, [Buyer] opened a tender for a production line to produce three types of tank liners. The envisaged tank liners were innovative, for there had been no manufacturers in the world which produced such products. Hence, at the time of tendering, [Buyer] had neither a sample product nor even a specific blueprint of the product. The only descriptions about the product in [Buyer]'s tender document related to the materials, and the diameter and length of the products. The so-called "Product Diagram" in the tender documents was a rather general one. According to the Product Diagram, the envisaged Production Line was intended to produce split-style tank liners. [Buyer] required that the tank liners produced by the Production Line have a pass rate of 90%, and that the efficiency of the assembly line should be two minutes per tank liner.

On 28 April 2002, [Seller] completed the design of the Production Line based on the Product Diagram, and submitted to [Buyer] as its bidding document the Initial Blueprint of the Water Heater Tank Liners Forming and Welding Production Line (hereinafter "[Seller]'s Initial Blueprint"). With respect to the undecided aspects of the products in [Buyer]'s Product Diagram, [Seller] stated in its bidding document that since the [Seller]'s Initial Blueprint only served the purpose of bidding, a finalized specific blueprint would be provided two months after [Seller] received [Buyer]'s order, and that [Seller] retained the right to modify the [Seller]'s Initial Blueprint. The price quoted by [Seller] for the Production Line was US $1,813,000, CIF Tianjin.

After comparing several bidders, [Buyer] finally declared that [Seller] won the bid. In further negotiations, [Buyer] proposed another type of tank liner - a joint-style tank liner with twenty-one uniformly distributed water nozzles. The new requirement entailed additional equipment and necessary adjustment of the layout of the Production Line, and thus [Seller] raised the price.

On 16 June 2002, [Seller] and [Agent] on behalf of [Buyer] concluded the Contract for the sale of the Production Line at the price of US $2,188,000 CIF Tianjin. Although the price was altered according to [Buyer]'s new requirement, the layout of the Production Line had yet to be finalized. Hence, the contents of the [Seller]'s Initial Blueprint were copied in the annex to the Contract entitled Technical Description of the Production Line (hereinafter the "Technical Description").

It was not until 8 August 2002 that [Buyer] completed the design of the tank liners and gave the new blueprint to [Seller] for design of the Production Line and purchase of the needed equipment. The Blueprint dated 8 August 2002 was quite different from the Product Diagram and [Seller]'s Initial Blueprint at many points - the positions of different parts were more specific, and another new type of tank liner with twenty-eight uniformly distributed water nozzles was added. The Production Line was redesigned in accordance with this new blueprint, and more dedicated machines were added.

In October 2002, [Seller] completed the design of the Production Line based on the Blueprint dated 8 August 2002, and adjusted the production procedures and the equipment. The adjusted delivery list was sent to Xue Zuqing, General Manager of [Buyer].

In early January 2003, four employees of [Buyer] conducted a comprehensive pre-acceptance test of the Production Line in the United States. The plates and parts used in the test were provided by [Buyer]. The result showed that basically the Production Line conformed to the Contract, and hence [Buyer] indicated that the goods could be dispatched. Subsequently, [Buyer] brought the liners produced during the test back to China for fatigue test and anatomical analysis.

In late February 2003, the Production Line arrived in Beijing, and passed the inspection of the Beijing Bureau. In late March 2003, the Production Line was installed at [Buyer]'s place of business and the testing started.

In late April 2003, [Buyer] inspected the tank liners produced during the pre-acceptance test, and found that the welding points could possibly be eroded. However, this problem did not arise from the welding equipment of the Production Line, but resulted from the defective structure of the liners. In order to solve this problem and adjust the structure of the liner, technology experiments were necessary and the tank liners had to redesigned, which should be completed by [Buyer] with [Seller]'s assistance.

On 26 May 2003, to solve the problems generated by the Blueprint dated 8 August 2002, [Seller] agreed to add certain machines, and manufactured a capped-ended necking-in machine which was supplied to [Buyer] in October 2003. During this period, [Buyer] conducted numerous technology experiments on the liners.

On 27 December 2003, the parties concluded Minutes of their consultative meeting on final inspection of the Production Line. According to the Minutes, [Buyer] should provide a finalized blueprint of the tank liners before 1 January 2004 to be countersigned by the parties. In addition, [Buyer] promised to provide ten sets of spare parts by 2 February 2004 for the testing of the Production Line, and to continually provide materials for producing 100 solar water heaters after 2 February 2004. The pre-production trial would last from 16 February to 2 March 2004. During this period, [Buyer] should provide materials and parts on a daily basis for a total of 2,000 sets.

On 6 February 2004, [Buyer] expressly refused to fulfill its promise in the Minutes, i.e., to provide a finalized blueprint of the tank liners as well as materials and parts needed for final inspection and pre-production trial. Consequently, the final inspection of the Production Line was suspended.

2. Admissibility of the Specifications and Quality Inspection Report No. 110300103003227 as evidence

[Seller] submits that the Specifications and Quality Inspection Report (hereinafter the "Inspection Report") issued by the Beijing Bureau should not be admitted as evidence in favor of [Buyer].

First, [Buyer] hid relevant technical materials, and hence the conclusion of the Inspection Report was not based on sufficient materials.

The contents of the [Seller]'s Initial Blueprint were actually copied in the annex to the Contract entitled Technical Description. At the time of tendering, the pattern of the Production Line had yet to be finalized. [Seller] made it clear that the design of the Production Line had to be based on the finalized pattern, which was also agreed by [Buyer]. After [Seller] won the bid, [Buyer] altered its requirement for the tank liners. After the parties' consultations, on 16 June 2002 when the Contract was concluded, the delivery list and the price indicated in the tender documents were adjusted. Seeing that the pattern of the Production Line had yet to be finalized and so it was with the Production Line, the contents of the [Seller]'s Initial Blueprint were copied in the annex to the Contract entitled Technical Description.

It was not until [Buyer] completed the Blueprint dated 8 August 2002 that [Seller] began to design the production procedures and layout of the Production Line based on this blueprint, and completed a new blueprint in October 2002 (hereinafter "[Seller]'s New Blueprint"). [Seller]'s New Blueprint completely differed from [Seller]'s Initial Blueprint (and the Technical Description), and altered the delivery list. These alterations were accepted by [Buyer]. Therefore, the Production Line was mainly assembled according to the [Seller]'s New Blueprint. The pre-acceptance test of the Production Line was also conducted by [Buyer]'s four employees in accordance with the [Seller]'s New Blueprint.

After it arrived in Beijing, the Production Line was further adapted to adjusted pattern of the tank liners, which was also accepted by [Buyer].

It can be seen from the above that apart from the Technical Description which copied the [Seller]'s Initial Blueprint, the design documents related to the Production Line also include the [Seller]'s New Blueprint that was based on the Blueprint dated 8 August 2002, as well as the chart of adjustments made after the Production Lined arrived in China.

However, when applying to the Beijing Bureau for inspection, [Buyer] did not disclose the fact that the Technical Description actually copied the [Seller]'s Initial Blueprint, the fact that the constant adjustments of the pattern of tank liners prevented the finalization of the Production Line, the fact that the new blueprint of tank liners was not given to [Seller] until 8 August 2002, the fact that [Seller]'s New Blueprint was provided in October 2002, and the fact that after its installation, the Production Line was continually adapted because of adjustments of the liners techniques. Instead, [Buyer] only submitted the Technical Description to the Beijing Bureau which reached the unfounded conclusion that the Production Line had thirty-six points of non-conformity.

Second, in making the Inspection Report, the Beijing Bureau exceeded its authority conferred by the Chinese law.

Article 16 of the Statute Implementing the Entry-Exit Commodity Inspection Act of P.R. China provides:

"The inspection of imported commodities in terms of which an inspection application is filed should be completed by the inspection organ within the indemnity period. For commodities which are up to standard, a notice of the inspection result should be given; for commodities which are substandard or are submitted for inspection by the parties to contracts for international trade, an inspection report should be issued."

Article 18 provides:

"For imported substandard complete equipment and related materials, the inspection organ should issue a notice prohibiting the installation and use of such equipment. If, after technical adjustments, the equipment becomes up to standard and passes the commodity inspection, it can be installed for use."

Accordingly, the inspection organs can either conclude that the goods are "up to standard" or conclude that they are "substandard". In the latter case, a notice prohibiting installation of the equipment is required. However, when conducting the inspection in the light of limited technical references, the Beijing Bureau did not conclude that the Production Line was "up to standard". Nor did it conclude that the Production Line was "substandard" or issue a notice prohibiting its installation. Rather, it reached a somewhat strange conclusion that the Production Line is "not ready for final acceptance inspection". [Seller] submits that the pre-production trial and final acceptance inspection are matters to be decided by the parties, and thus are free from the intervention by the Beijing Bureau as an administrative organ.

Therefore, the Beijing Bureau not only failed to evaluate whether the Production Line was up to standard, but also interfered with the parties' autonomy by commenting on the conditions of the final acceptance inspection which should be decided by the parties. Therefore, the Beijing Bureau exceeded its authority conferred by the law, and its Inspection Report should not be admitted as evidence in favor of [Buyer].

Third, [Seller] did not promise that every single part of the Production Line would be produced in the U.S. Rather, it indicated that some parts of the Production Line would come from China. Therefore, the fact that a few parts of the Production Line were made in China does not constitute a breach of the Contract by [Seller].

True, Article 5 of the Contract provides: "Country of Origin and Manufactures: American". However, this provision only required that the Production Line as a complete set of equipment was to be manufactured in the U.S. It did not require every single part of the Production Line to be produced in the U.S. Furthermore, [Seller] had never promised that every single part of the Production Line would be produced in the U.S.

Contrarily, at the time of tendering, [Seller] explicitly stated that a considerable number of parts of the Production Line would be provided by manufactures from all over the world including China (See Statement on the Integrator's Qualifications). [Buyer] had not made any objection to this Statement before it commenced the present arbitration. However, when it applied to the inspection organ for examination, [Buyer] hid this tender document, inducing the Beijing Bureau to conclude that the Chinese origin did not conform to the Contract.

Therefore, the fact that a few parts of the Production Line were made in China does not constitute a breach of the Contract by [Seller]. The conclusion reached in the Inspection Report was based on insufficient materials and is hence unfounded. It lacks objectivity and cannot support [Buyer]'s claims.

3. Non-conformity of the Production Line

Because of [Buyer], a non-conformity of the Production Line to the Contract is unavoidable. The lack of conformity did not go against the purpose of the Contract. Rather, it optimized [Buyer]'s interest.

As repeatedly pointed out above, the contents of [Seller]'s Initial Blueprint were copied in Technical Description annexed to the Contract. Moreover, [Seller] stated in its bidding document that it retained the right to alter the layout of the Production Line based on the finalized product. At the following stages -- i.e., tendering, then further negotiations, then contract formation, then completion of the Blueprint dated 8 August 2002, then installation of the Production Line in March 2003 -- the product was in a process of gradual finalization.

The Production Line was tailored to [Buyer]'s tank liners. The constant adjustments of the pattern of liners entailed constant adjustments of the Production Line. These adjustments included the addition of a four-headed water nozzle welder, adjustment of the production techniques, adjustment of the position of the flanging machines, etc. These adjustments delayed the finalization of layout of the Production Line. To help [Buyer] finalize the product, [Seller] assisted [Buyer] in conducting many technology experiments on the liners.

The Technical Description was merely the parties' preliminary description of the technical characteristics of the Production Line when the Contract was concluded on 16 June 2002. At that time, [Buyer] had neither concrete requirements nor a blueprint of the tank liners. The so-called "tank liner" was a very vague concept. Therefore, the Technical Description dated 16 June 2002 was necessarily subject to adjustments.

It was not until [Buyer] completed the Blueprint dated 8 August 2002 that [Seller] began to design the production procedures and layout of the Production Line based on this blueprint, and completed [Seller]'s New Blueprint. [Seller]'s New Blueprint differed considerably from the Technical Description in terms of the layout and production procedures. There were far more than thirty-six points of adjustment, which were all accepted by [Buyer]. Even now many of the major adjustments are still recognized by [Buyer].

Therefore, in view of the constant adjustment of the tank liners, the adjustments of the Production Line were necessary. The specifications under the Contract should not be taken rigidly, and should be subject to necessary changes, so as to produce tank liners that satisfy [Buyer]'s requirements, and to ensure that the efficiency of the assembly line reaches two minutes per tank liner. It was for this purpose that [Seller] constantly adjusted the configuration and layout of the Production Line in accordance with [Buyer]'s adjustments. [Seller]'s adjustments were necessary and in [Buyer]'s interest.

In other words, it is insensible to require that the Production Line remain static while the tank liners were being constantly adjusted.

Specifically, with respect to the thirty-six points of non-conformity, twenty-three of them were necessary adjustments based on the Blueprint dated 8 August 2002, seven of them were unfounded, and six of them did not affect the capabilities of the Production Line but were a result of exercise of [Seller]'s right to adjustment which was retained at the time of tendering.

Finalization of the tank liners was [Buyer]'s responsibility. Therefore, the adjustments of the Production Line, as well as the discrepancies between the layout of the Production Line and the specifications under the Contract, were attributable to [Buyer]. Such adjustments and discrepancies were in [Buyer]'s interest.

4. Failure to conduct the Final Acceptance Inspection

[Buyer] was aware of the purported non-conformity of the Production Line when it agreed to conduct the pre-production trial and final acceptance inspection. It was because of [Buyer] that the final inspection failed to be conducted.

[Buyer] was aware that [Seller] had to adapt the Production Line to the constantly changing pattern of the tank liners. Since November 2003, the parties had been disputing several technical matters. [Buyer] complained that the Production Line did not conform to the Contract. These complaints were reiterated in [Buyer]'s letter to [Seller] on 10 December 2003. The problems pointed out by [Buyer] in that letter covered all of the thirty-six points of non-conformity stated in the Inspection Report in April 2004. Apparently, [Buyer] was well aware of the so-called "non-conformity" before the Inspection Report was issued.

Although it was aware of the non-conformity, [Buyer] concluded the Minutes with [Seller] on 27 December 2003. In the Minutes, the parties agreed on the time and steps of the pre-production trial and final inspection, as well as the parties' respective responsibilities before the final inspection. It can be seen that [Buyer] did not think that the alleged "non-conformity" could affect the final inspection of the Production Line. In fact, during the pre-acceptance test in the U.S., the Production Line was already capable of producing tank liners. As it turned out in the present case, it was not the alleged "non-conformity" that stood in the way of the final inspection.

After January 2004, [Buyer] underwent changes of top management, and its attitude towards the market changed. If the production were put to the pre-production trial then, it would have produced 12,600 products in thirty business days. However, [Buyer]'s assembly line and other follow-up facilities were not in a position for this purpose, and therefore [Buyer] was not able to bear the costs of materials and storage. For this reason, on 6 February 2004, [Buyer] expressly refused to fulfill its promise made in the Minutes. It did not provide a finalized blueprint of the tank liners. Nor did it provide necessary materials and parts for the pre-production trial and final inspection. This is the main reason why the final inspection was not conducted.

Therefore, the failure to conduct the final inspection did not result from the "non-conformity" as alleged in the Arbitration Application, but was due to [Buyer]'s non-performance of its obligations under the Contract.

5. Lack of evidence to support [Buyer]'s claims

As stated above, [Buyer]'s breach of the Contract halted the final inspection of the Production Line. [Buyer] does not have any evidence to prove the defects of the Production Line, and hence its claims are unfounded.

In its Arbitration Application, [Buyer] argued that the price of the goods should be reduced by US $1,200,000, and that US $871,800 should be reimbursed to [Buyer]. It also claimed for US $109,400 accounting for 5% of the price as liquidated damages to be paid by [Seller].

The reduction of US $1,200,000 in the price has no bearing on the alleged thirty-six points of non-conformity. Nor is this claim supported by any evidence. Exhibit No. 8 is just [Buyer]'s speculation. [Buyer]'s assessment of the present value of the goods is unfounded. Furthermore, [Buyer]'s argument for a signification reduction of the price of twenty-eight machines is based on the purported "lack of practical value". However, these machines were expressly included in the Delivery List annexed to the Contract. How could [Buyer] breach the Contract?

In addition, Article 19 of the Contract which deals with punitive damages accounting for 5% of the price applies only to late delivery. In the instant case, however, [Seller] did assemble the Production Line at [Buyer]'s plant in the agreed time period. The matter disputed by the parties was the pre-production trial and final inspection, but not late delivery. Therefore, [Buyer] erred in invoking Article 19 when calculating the damages.

6. Performance of Contract No. PHT211012JTL and its Supplemental Agreement

[Buyer] alleged that on 12 October 2001, it concluded with [Seller] Contract No. PHT211012JTL and a supplemental agreement for the purchase of two TIG welders at the price of US $150,000. The two welders were claimed to be included in the equipment for the Production Line. [Buyer] claimed that it had paid twice for the two TIG Welders, and hence the goods to be restituted should not include these two machines.

[Seller] submits that the present arbitration was commenced to settle the disputes arising out of Contract No. CUSQTBJ-S020627CR concluded on 16 June 2002. Contract No. CUSQTBJ-S020627CR contained an arbitration clause, and the parties designated the arbitrators accordingly. Therefore, the Arbitral Tribunal is only empowered to arbitrate the disputes arising out of Contract No. CUSQTBJ-S020627CR from 16 June 2002 to the present. Any dispute arising before 16 June 2002 does not fall within the jurisdiction of the Arbitral Tribunal. If [Buyer] intends to dispute the payment and other issues under Contract No. PHT211012JTL and its Supplemental Agreement, it should initiate another arbitration for this purpose. In that event, another arbitral tribunal should be organized based on the parties' choice. At the present stage, [Seller] submits that the disputes out of the two contracts should be arbitrated separately, and that this would not prejudice [Buyer]'s interest. Accordingly, pursuant to the principle of party autonomy, [Seller] challenges the consolidation of proceedings concerning the respective disputes out of the two contracts.

Nevertheless, to present a clearer picture of the case to the Arbitral Tribunal, [Seller] clarifies that the contract dated 12 October 2002 has been performed, and [Buyer] has received the two TIG Welders. The Contract dated 16 June 2002 has also been performed in February 2003, and [Buyer] has received all the machines for the Production Line including another two welders, which is confirmed by the packing list and customs declaration. In other words, [Buyer] has received four longitudinal seam welders. The report of double payments for the two TIG Welders was fabricated. [Buyer]'s claim that the goods to be restituted should not include these two welders should be dismissed.

IV. [Buyer]'s position: Response to [Seller]'s Counterclaim

1. Proceeds under the standing L/C

Since the Production Line did not conform to the Contract and had serious defects, [Buyer] was entitled to negotiate the proceeds under the standing L/C which served as a guarantee for [Seller]'s performance of the Contract. There is no factual or legal basis for [Seller]'s claim for restitution of the proceeds and the interest thereon.

As agreed in the Contract, [Seller] received full payment for the goods after it (a) received a pre-acceptance inspection certificate signed by [Buyer] after the pre-acceptance inspection in January 2003; and (b) opened a standing L/C for an amount of money accounting for 15% of the price as a guarantee for the Contract performance. [Buyer] has fulfilled its obligations under the Contract. In contrast, the goods provided by [Seller] did not conform to the Contract and had serious defects as follows.

(a) Country of origin

Most of the machines were produced in China rather than the U.S.

Article 5 of the Contract provides: "Country of Origin and Manufactures: American". The certificate of origin provided by [Seller] on 21 January 2003 shows that the complete Production Line was produced, inspected and tested by [Seller] in the U.S. As a matter of fact, however, only parts of the Production Line were made in the U.S. They were dispatched from the U.S., and passed the Beijing Chaoyang Entry-Exit Inspection and Quarantine Bureau on 26 February 2003. On 27 February 2003, the first batch of machines from the U.S., consisting of fourteen containers of flanging machines, circular seam welders, coiling machines, etc., arrived at [Buyer]'s plant. On 28 February 2003, the second batch of machines from the U.S. arrived, consisting of eight containers of plate bending rolls, longitudinal seam welders, water nozzle welders, assemblers, tube coilers, etc. The names of the machines in [Seller]'s shipping list were consistent with those in the Delivery List, which indicated that the U.S. was the place of origin, and the value of the goods corresponded to the total price under the Contract. In fact, however, only some machines were made in the U.S. Many other machines were made in China and transported to [Buyer]'s plant from Shanghai and Xuzhou.

(b) Specifications of the Production Line

Pursuant to Article 15 of the Contract, [Seller] promised that the goods would be made of the best materials with first-class techniques, new, unused, and fully conformed to the Contract in terms of quality, specifications and capabilities. The quality certificate provided by [Seller] also shows that the machines were made of the best materials with first-class techniques. In fact, however, the Production Line provided by [Seller] did not conform to the Contract at numerous points, which undermined the capabilities of the equipment. There were more than ten problems of this type.

For example, according to the List of Machines for the Liners Welding and Transferring Production Line included in the General Specifications of the Liners Welding and Transferring Production Line (Annex 4 to the Contract, hereinafter the "General Specifications"), the length of the legs of preparatory brackets for coil tubes should be "L=3000mm, 10". However, the actual length of the bracket legs was 1900mm each. The total length of the ten legs was 19 meters, much shorter than 30 meters as required under the Contract. These short legs narrowed the preparatory area of the brackets for coil tubes. Thus the brackets could not produce longer joining tubes, undermining the capabilities of the equipment.

The above List of Machines for the Liners Welding and Transferring Production Line also stipulated that the tube coilers should have stainless tabletops. Actually, however, the tabletops were made of carbon steel coated with lacquer, which undermined the quality of the tabletops. Indeed, stainless tabletops are far better than these tabletops in terms of corrosion resistance, wear resistance and visual effects. Moreover, stainless steel is much more expensive than carbon steel, and the processing costs of the stainless steel are also higher.

According to the Technical Capabilities of the Automatic Tracking Double-Headed Circular-Seam Welding System annexed to the Contract, the major system configuration included "an automatic welding smoke recycling system (for the two welding guns)". This annex expressly provided that the recycling system should be installed on the equipment, and [Buyer] has paid for it in accordance with the Contract. However, [Seller] did not provide such a system.

(c) Inappropriate configuration of the Production Line

The configuration of the Production Line was inappropriate. Consequently, the capabilities of the Production Line did not conform to the Contract, and the Production Line could not produce products that meet the requirements of the Contract. There are twenty-five problems of this type in total.

For example, according to Part II (entitled Capped-Ended Stamping Feed and Charge Line) of the General Specifications, the suction cranes' "... lateral movement is driven by geared motors of 0.2kw; the cars are driven by gears and racks; effective stroke L=1250mm; the conveyor's speed is controlled by inverters." In fact, however, when configuring the conveyor and controller, [Seller] used cylinder push instead of gears, racks and inverters to control the conveying speed. The speed of the cylinder is variable due to the compressibility of the air. This conveyor is inferior to conveyors with gears and racks in terms of positioning accuracy and stability. Its convenience, stability, accuracy and loading capacity in terms of speed adjustment is also inferior to conveyors with gears, racks and inverters. This configuration is seriously defective, leading to great discrepancies between the quality of the Production Line and the specifications under the Contract.

According to the welding procedures of the capped-ended water nozzles in the Technical Description, "the capped ends should be supported by reasonably designed bearings made of copper alloy, to ensure the molding of the back of the welding seam, and let out excessive heat." However, the required "reasonably designed bearings made of copper alloy" were actually not installed on the operation table, which slowed down the cooling of stainless steel when welding, and which gave rise to the overheating problems with the heat-affected zone. For austenite welding, overheating would lead to the precipitation of carbide on the grain boundaries, reduce the corrosion resistance of the zone, and shorten the useful life of the products. Therefore, when conducting austenite welding, the welding procedures should in principle be appropriately adjusted to reduce heat input, and reasonably designed copper linings should be placed on the back of the welding ends. Thus, the fine thermal conductivity of copper would let out excessive heat, avoid overheating in the welding zone, and maintain the corrosion resistance of the stainless steel in the welding zone. For stainless water containers, the container walls that touch the water would be easily corroded if they were not properly designed. Hence, the specifications on this point under the Contract impliedly required a guarantee of the product quality. When delivering the equipment, [Seller] arbitrarily removed the cooling device needed for austenite welding, which would be seriously detrimental. If put to use, this would undermine the corrosion resistance of the welding joints of capped-ended water nozzles, which would be detrimental to the customers' interests. Moreover, [Seller]'s arbitrary removal of a critical device is indeed jerry-building, which was detrimental to the [Buyer]'s interests.

The goods delivered by [Seller] did not conform to the Contract. After long-time adjustment and testing, they were still not available for final inspection and production. When the L/C opened by [Seller] was about to expire, [Seller] suspended the installation and testing of the production, and withdrew all of its installers, placing [Buyer] in the danger of a failing investment of over US $2,000,000. The consequent detriment to [Buyer] would be irreparable.

Since [Seller] could not solve the problems above, [Buyer] applied to the Beijing Bureau for inspection of the Production Line in accordance with the Contract and relevant Chinese statutes. After inspection, the Beijing Bureau issued an Inspection Report, which stated that, due to the Production Line's non-conformity and defects, the Production Line was not ready for the final acceptance inspection.

Since [Seller] failed to fulfill its obligations under the Contract to deliver a conforming production line, [Buyer] was entitled to negotiate the proceeds under the L/C. There is no factual or legal basis for [Seller]'s claim for restitution of the proceeds and the interest thereon.

2. Other sums

The statistical adjustments made in the figures of model products did not modify the Contract, and hence the additional costs of adjustment were already covered by the total price under the Contract. [Seller] should bear the costs of adjustment due to the non-conformity of the Production Line. There is no factual or legal basis for [Seller]'s claim for payment for the added machines.

In August 2002, [Buyer] provided a blueprint of series products (i.e., the Blueprint dated 8 August 2002), including the figures of two types of model products, for final inspection purposes. As stated above, the model products were aimed to test the capabilities of the Production Line and its conformity to the Contract. Adjustments of the model products should be allowed insofar as they were within the sphere of processing of the Production Line under the Contract. These adjustments would not lead to the uncertainty of the Production Line. The figures of model products dated 8 August 2002 were consistent with the Technical Description annexed to the Contract. A few statistical adjustments, viz., the capped-ended water nozzles of 39mm in diameter, fell within the scope of processing of the Production Line under the Contract. Therefore, they did not modify the Technical Description annexed to the Contract. [Seller] made it clear that the final blueprint of Production Line was based on the Blueprint dated 8 August 2002. If [Seller] believed that the few statistical adjustments made in the figures of model products modified the specifications of equipment and production procedures under the Contract, it should have proposed to modify relevant technical requirements under the Contract. In fact, [Seller] never proposed modification of relevant technical requirements, which well indicated that it did not consider the above adjustments as modifying the technical requirements under the Contract. In other words, as long as the adjustments were within the sphere of processing of the Production Line under the Contract, they would not modify the Contract.

Any modification of the Contract should be made upon agreement of both parties after consultations. Before [Buyer] commenced the present arbitration, [Seller] has never asked [Buyer] for payment for the added machines. [Seller] alleged that the adjusted Delivery List was sent as a notice to the General Manager of [Buyer]. However, [Buyer] has never received the adjusted Delivery List. Moreover, the signature of the dispatcher is absent from the Delivery List provided by [Seller]. Nor is there the signature of the General Manager of [Buyer]. In addition, [Seller] cannot produce [Buyer]'s note acknowledging receipt of the List. Therefore, this document may be forged. Further, in regard to [Seller]'s claim for payment for the added machines, there is no written document signed by both parties which shows that the parties reached a supplemental agreement on this matter. Seeing that [Buyer] has made all the payments under the Contract, it is not bound to pay US $170,000 for the added machines. Even if [Buyer] is bound to make such a payment, the necessity of the added machines is doubtful, and their price should be determined upon the parties' agreement rather than merely on the basis of [Seller]'s quotation.

Due to the non-conformity of the machines, they needed to be adjusted in numerous aspects during the installation and testing of the Production Line. For example, the present blueprint adopted the tank liners flaring and flanging technique. With this technique, after stretching and trimming, the springback of the capped ends would be big and irregular, and would lead to elliptical tolerance between the tank liners and capped ends when assembling. Since the capped-ended integer provided by [Seller] could not solve this problem, [Seller] proposed to make a capped-ended necking-in former. Since the existing equipment could not produce products that met the expected standard, [Seller] proposed to adjust the equipment. It can be seen here that the need for a capped-ended necking-in former was because of the non-conformity of the equipment provided by [Seller]. Since [Buyer] has fulfilled its obligation of payment under the Contract, [Seller] is bound to deliver goods conforming to the Contract. It is [Seller]'s obligation to remedy its inappropriate performance of the Contract. Hence, [Seller] should bear the resulting additional costs.

To summarize, [Buyer] has fulfilled its obligation of payment under the Contract. In contrast, there is a serious non-conformity of the goods provided by [Seller]. Since to date the equipment is still not in a position to be inspected and put to use, [Buyer] has incurred serious damages. Under these circumstances, [Buyer] is entitled to negotiate the proceeds under the standing L/C which served as a guarantee for the Contract performance. Moreover, the few statistical adjustments in the Blueprint dated 8 August 2002 fell within the scope of processing of the Production Line under the Contract. Therefore, they did not modify the Contract. Therefore, the additional costs resulting from [Seller]'s adjustments are already covered by the total price under the Contract. [Seller] shall also bear the additional costs arising from the adjustments because of non-conformity of the Production Line. Therefore, there is no factual or legal basis for [Seller]'s claim for the costs of adjustments and payment for the added machines. [Buyer] requests that the Arbitral Tribunal reject all of [Seller]'s counterclaims.

V. [Buyer]'s position: Supplemental Submissions

During the proceedings, [Buyer] submitted the following supplemental submissions.

1. The technical requirements under the Contract

In the Contract concluded on 16 June 2002, [Buyer] and [Seller] made very detailed stipulations on the capabilities and technical requirements for the Production Line. Thus, at the time of contract formation, the parties determined the production procedures of the Production Line, the constituent parts, the capabilities of the equipment, and other major parameters. Therefore, the technical requirements were definite at the time of conclusion of the Contract. Moreover, according to the Contract, [Seller] was responsible for the installation and testing of the Production Line, and [Buyer] was to take the delivery of the Production Line on 15 June 2003 as agreed in the Contract (the date of delivery was changed to 15 August 2003 by the Supplemental Agreement). The Blueprint dated 8 August 2002 and the Blueprint dated 14 January 2004 could not serve as an excuse for [Seller]'s failure to provide an acceptable production line before 15 August 2003.

(a) From the tendering and the conclusion of the Contract, it can be seen that the Contract specified the parties' rights and obligations. In particular, it defined the constituent parts of the Production Line, the specifications of and qualitative requirements for the equipment, and the standard for final acceptance inspection. The tendering documents did not constitute part of the Contract.

(b) The standards for the quality and specifications of the Production Line under the Contract are as follows:

      (i) According to Article 15 of the Contract, the qualitative requirements for the Production Line were in the first place concerned with the materials and techniques, namely, that the best materials and first-class techniques should be employed.

      (ii) The Contract not only set forth standards for each part of the Production Line, but also stipulated detailed requirements for the Production Line as a whole. It contained specific provisions on the basic capabilities of the Production Line, the basic production procedures, the assembly of the line, and the operation of the system.

With respect to the processing capability of the Production Line, the Contract expressly provided: "The system should have sufficient flexibility, and should be able to produce the existing various types of solar water heater tanks." As for the specific products which demonstrated the capability and quality of the Production Line, the Contract provided: "The q360 series water tanks should be no more than 2,000mm in length; the q540 series water tanks should be less than 1,500mm in length." These were the requirements for the tank processing machines as part of the Production Line. The Contract further required that Production Line have processing efficiency of two minutes every tank liner which is 540mm in diameter and 1,180mm in length, and should be able to sustain working load of twenty-four hours per day. The efficiency of the automatic water nozzle welders should be 110 seconds per each of the twenty-one water nozzles. The efficiency of the water nozzle welding station should be no more than two minutes per liner.

      (iii) Detailed descriptions of the quality, specifications and capabilities of the Production Line and its constituent parts were embodied in the Technical Description (Annex 3 to the Contract) and the General Specifications (Annex 4 to the Contract).

(c) The Blueprint dated 8 August 2002 dealt with various types of series of products. The product envisaged in the figures of model products Blueprint was only one type of the products to be produced by the Production Line. The model products were intended to test the capabilities of the Production Line and its conformity to the Contract. The Blueprint dated 8 August 2002 transformed the textual descriptions of the products under the Contract into graphic descriptions. The two kinds of descriptions were consistent with each other, and hence the Blueprint dated 8 August 2002 would not require changes of the Production Line. Therefore, [Seller]'s argument that the finalization and adjustment of the Production Line depended on the finalization and adjustment of the products, was unfounded. Even if there were discrepancies between the Blueprint dated 8 August 2002 and the Contract, since [Seller] alleged that its design was based on the Contract and the Blueprint dated 8 August 2002, such discrepancies could not serve as an excuse for [Seller]'s failure to provide a conforming Production Line.

(d) On 26 June 2003, [Buyer] and [Seller] concluded the Supplemental Agreement, which identified the problems of the Production Line and postponed the date of final inspection by two months to 15 August 2003.

(e) The Blueprint dated 14 January 2004, consisting of the original twenty figures and ten redacted figures, was a result of modifications of the Blueprint dated 8 August 2002 in accordance with [Seller]'s requests. The modifications were made at [Seller]'s request, in order to adapt to the current production techniques. Therefore, these modifications would not lead to changes of the Production Line. The final acceptance inspection of the Production Line should follow the standards set forth in the Contract. With a cooperative attitude, [Buyer] expressly indicated that the inspection could be conducted either in the light of the Blueprint dated 8 August 2002 or pursuant to the Blueprint dated 14 January 2004. Since [Seller] accepted the Blueprint dated 8 August 2002 without any objections and claimed that the Production Line was designed and manufactured in accordance with this blueprint, it is fair to conduct the inspection pursuant to this blueprint. Apparently, the Blueprint dated 14 January 2004 could not excuse the failure to conduct the final inspection of the Production Line.

In sum, the Contract expressly stipulated that [Seller] should provide an acceptable Production Line before 15 June 2003, and was responsible for the installation and testing of the Production Line. [Buyer] was to take the delivery of the Production Line in due time. The Blueprint dated 8 August 2002 transformed the textual descriptions of the products under the Contract into graphic descriptions. The two kinds of descriptions were consistent with each other, and hence the Blueprint dated 8 August 2002 would not require changes of the Production Line. Since the Production Line was seriously defective, [Buyer] kindly modified the product blueprint at [Seller]'s request, in order to adapt to the current techniques. Even if there were discrepancies between the Blueprint dated 8 August 2002 and the Contract, since [Seller] accepted the Blueprint dated 8 August 2002 without any objections and claimed that the Production Line was designed and manufactured in accordance with this blueprint, it is fair to conduct the inspection pursuant to this blueprint. With a cooperative attitude, [Buyer] also indicated that the inspection could be conducted either in the light of the Blueprint dated 8 August 2002 or pursuant to the Blueprint dated 14 January 2004. Therefore, it is clear that in the instant case, the Production Line provided by [Seller] did not conform to the Contract and was seriously defective, for which [Seller] should be liable. For this reason, [Buyer] submits that [Seller]'s repeated discussion on the Blueprint dated 8 August 2002 and the Blueprint dated 14 January 2004 is pointless.

2. Reimbursement of payment and damages

From the conclusion and performance of the Contract, it can be seen that [Buyer] has fulfilled its obligations, whereas [Seller] did not provide a conforming Production Line. The Production Line could not operate properly and was not in a position for final acceptance inspection. To date it still cannot be put to use, which has led to [Buyer]'s severe losses. In view of [Seller]'s serious breach of contract which frustrated the purpose of the Contract, [Buyer] is entitled to reimbursement of its payment as well as damages.

(a) [Seller] failed to deliver an acceptable Production Line for final inspection within the time period determined by the Contract and the Supplemental Agreement. This constitutes a breach of the Contract for which [Seller] should be liable.

(b) As evidenced by the Supplemental Agreement, the Report on the Pressure-bearing Line and Its Equipment, and the Inspection Report, the Production Line provided by [Seller] did not conform to the Contract. The specifications were non-conforming and the quality was defective. All these defects were admitted by [Seller], and were completely attributable to [Seller]. Therefore, [Seller] should bear the liability.

(c) The defects of the equipment not only prevented the Production Line from producing products that met the standards under the Contract, but also disabled the Production Line from automatic production as required by the Contract, not to mention that it failed to reach the production efficiency of two minutes per tank liner. All these have frustrated the purpose of the Contract, and [Seller] should reimburse [Buyer]'s payment.

(d) In view of [Seller]'s serious breach of the Contract, [Buyer] is also entitled to damages.

3. The Inspection Report

As the legal inspection organ, the Beijing Bureau was empowered to inspect the imported Production Line upon [Buyer]'s application, and issue the Inspection Report. Since [Seller] could not complete the testing and deliver the Production Line within the time period determined by the Contract, [Buyer] applied to the Beijing Bureau for inspection. Thus, the Beijing Bureau was actually asked to conduct the acceptance inspection on behalf of [Buyer]. The inspection conclusion of the Beijing Bureau was objective, legal and valid. Since [Seller] could not complete the testing and deliver the Production Line on time, [Buyer] was entitled to request reimbursement of its payment based on the Inspection Report.

(a) According to the Statute Implementing the Entry-Exit Commodity Inspection Act of P.R. China (hereinafter the "Implementation Statute") and the Beijing Regulation of Inspection of Imported Complete Equipment, the Beijing Bureau was empowered to inspect the Production Line, and issue the Inspection Report on the specific defects of the Production Line.

(b) The inspection conclusion made by the Beijing Bureau was objective, legal and valid. [Seller]'s allegation that [Buyer]'s hided relevant technical materials and deduced the Beijing Bureau to reach an unfounded conclusion should be rejected.

4. The Testing and Final Inspection of the Production Line

The Production Line could not produce products that met the standards under the Contract. Moreover, it was disabled from automatic production, and failed to reach the production efficiency. It was for this reason that the final acceptance inspection of the Production Line was not conducted. Further, [Buyer] did not refuse "to provide a finalized blueprint of the tank liners as well as materials and parts needed for the pre-production trial" as purported by [Seller]. Rather, since November 2003 [Seller] has been refusing to continue the testing of the Production Line.

(a) The time period and standard for the Final Inspection

      (i) The time period for Final Inspection

      According to the Contract, the testing of the Production Line should be completed no later than 15 June 2003. Seeing that the Production Line was seriously defective, [Buyer], with a cooperative attitude, concluded with [Seller] a supplemental agreement which postponed the date of final inspection by two months to 15 August 2003.

      (ii) The standard for Final Inspection

      Each of the constituent parts of the Production Line should conform to the Contract. What [Buyer] ordered was a Production Line consisting of a number of machines. Only when every single machine conformed to the Contract and functioned normally, could the Production Line operate properly and reach the production efficiency of two minutes per product as required under the Contract. When inspecting the Production Line, the constituent machines of the line should be inspected in terms of their specifications, capabilities, and conformity to the Contract. The efficiency of the Production Line should be two minutes per tank liner which is 540mm in diameter and 1,180mm in length. The Production Line should also be able to sustain a work load of twenty-four hours per day.

An important standard is whether the efficiency of the Production Line can reach two minutes per tank liner. As mentioned above, the purpose of the Contract was not only to produce tank liners, but to realize the production efficiency of two minutes per tank liner, so as to increase productivity, reduce costs, and obtain greater profits. If the Production Line could not realize the above efficiency, [Buyer]'s purpose of importing the Production Line would be frustrated. According to the Inspection Clause annexed to the Contract, during the pre-production trial, the Production Line would produce 100 products for each of the two diameters. If the products had a pass rate of 90%, the Production Line would pass the inspection.

(b) The Production Line provided by [Seller] was seriously defective. Despite long-time testing, it could not produce tank liners automatically and hence was not ready for the acceptance inspection. According to the Contract, [Seller] was responsible for the installation and testing of the Production Line, and [Buyer] was only to take the delivery of the Production Line within the time period specified by the Contract. [Seller] should be liable for the failure to conduct the final acceptance inspection of the Production Line.

(c) [Buyer] did provide a finalized blueprint of the tank liners. In particular, [Buyer] expressly indicated that the inspection could be conducted either in the light of the Blueprint dated 8 August 2002 or pursuant to the Blueprint dated 14 January 2004. Since [Seller] claimed that the Production Line was designed and manufactured in accordance with the Contract and the Blueprint dated 8 August 2002, it is thus fair for both parties to conduct the inspection pursuant to this blueprint. [Seller]'s argument that the failure to conduct the final acceptance inspection of the Production Line was due to the lack of a finalized blueprint, is unfounded.

(d) The Contract did not stipulate that the materials for the acceptance inspection should be provided by [Buyer]. The fact that [Buyer] provided a few materials during the pre-acceptance test could not lead to the conclusion that the materials for the final acceptance inspection were also to be provided by [Buyer]. Furthermore, at the meeting on 27 December 2003, the parties did not reach an agreement that the materials for the acceptance inspection were to be provided by [Buyer]. Even if the materials were to be provided by [Buyer], they would not be provided for free and would only be provided on certain conditions. Since the parties had not agreed on the acceptance inspection of the ends capping line, the tubes coiling line, and the liner welding line, and in particular [Seller] had not fixed the problems of the Production Line recognized by both parties on 19 December 2003, it was way too early move on to the inspection of the complete Production Line. This situation was evidenced by the Inspection Report which stated: "In view of the non-conforming specifications and defective quality of the equipment, the Production Line is not ready for final acceptance inspection." Hence, [Seller]'s persistent request for a large number of materials was not sensible.

5. The alleged use of the Production Line by [Buyer]

Because of the serious defects of the Production Line, it has not been able to operate automatically to date. Most of the machines are unused, and the paint on the surface of the machines remains untouched. The Production Line cannot even produce one single product, not to mention that it cannot operate with the efficiency required under the Contract. There is no factual or legal basis for [Seller]'s allegation that [Buyer] has accepted the production and put it to use.

(a) [Buyer] has never used the Production Line. In fact, the whole line remains the same as it was confirmed in the Report on the Pressure-bearing Line and Its Equipment signed by the respective engineers of the parties on 19 December 2003.

(b) [Buyer] has never used the Production Line to produce water heaters. Although [Seller] submitted the Notarial Certificate, the product manuals and the purchased water heaters to show that [Buyer] had fully recognized the quality of the Production Line and put it to use. [Seller]'s argument is unfounded.

6. The TIG welders

[Buyer] received two automatic TIG welders, but actually paid the price of four welders. Therefore, [Buyer] submits that the goods provided by [Seller] on 16 June 2002 did not include the two TIG Welders.

7. The guarantee money

The guarantee period stipulated in the Contract has not expired, and hence there is no factual or legal basis for [Seller]'s claim for the restitution of the guarantee money.

8. The costs of adjustment

[Buyer] submits that it is not obliged to bear the costs of US $225,000 resulting from adjustment of the design as alleged by [Seller].

(a) There is no factual or legal basis for the claim for US $80,000 as result of the transformation of the three-headed water nozzle welder to a four-headed water nozzle welder.

(b) [Buyer] has never received the purportedly added universal-positioned automatic tube welder from [Seller], and there is no evidence to support [Seller]'s claim for additional costs of US $40,000.

(c) [Buyer] has never received the purportedly added water nozzle welder from [Seller], and there is no evidence to support [Seller]'s claim for additional costs of US $50,000.

(d) The capped-ended necking-in machine was added because the non-conforming equipment provided by [Seller] could not produce acceptable products. Therefore, [Seller] should bear the costs of US $55,000 for the added machine. In addition, there is no evidence to support [Seller]'s claim for additional costs of US $55,000.

To summarize, [Buyer] has fulfilled its obligations of payment under the Contract, whereas [Seller] did not provide a conforming Production Line. To date, the Production Line has not been in a position for final acceptance inspection and still cannot be used, which has led to [Buyer]'s severe losses. Therefore, it is reasonable and legitimate for [Buyer] to claim for restitution of its payment or reduction of the price, as well as consequential damages for [Seller]'s breach of the Contract. Moreover, it is legitimate for [Buyer] to negotiate all the proceeds under the standing L/C which served as a guarantee for the Contract performance.

VI. [Seller]'s Position: Supplemental Submissions

During the proceedings, [Seller] submitted the following supplemental submissions.

1. Lack of evidence to prove the non-conformity of the Production Line

[Buyer] argued that the Production Line did not conform to the Contract based on the following evidence. First, the Inspection Report issued by the Beijing Bureau stated that "... the Production Line is not ready for final acceptance inspection". Second, some parts of the Production Line were made in China rather than the U.S. as required under the Contract. Third, [Seller] withheld its action in the U.S. concerning the proceeds under the standing L/C, and should bear the litigations costs including [Buyer]'s counsel fee.

(a) Conclusion of the Contract and its modification

The purpose of the Contract was to purchase a production line which could produce liners that had a pass rate of 90%, and which had production efficiency of two minutes per tank liner.

[Seller] notes that during the oral hearings, both parties had no dispute over the following matters:

   -    The tendering, consultations, and conclusion of the Contract as of 16 June 2002;
 
   -    The contents of the Contract; the fact that [Buyer] completed and provided the blueprint of the tank liners on 8 August 2002. However, [Buyer] denied that it received the layout chart of the Production Line drawn by [Seller] in October 2002, and that it received the List of Machines and Prices for the machines added after the Contract was modified on 16 June 2002.

According to [Buyer], the Blueprint dated 8 August 2002 did not modify the Contract and its annex, and was only intended for the final inspection to see whether the Production Line could produce the products required by this Blueprint.

[Seller] submits that the Blueprint dated 8 August 2002 is an important document that adjusted the relevant techniques, and hence is important evidence of modification of the parties' rights and obligations.

      (i) Two adjustments were established during the oral hearings:

(1)     The Contract and its annex required that the tank liner should have 21 uniformly distributed water nozzles (See [Buyer]'s Exhibit No. 3 "Technical Description", pp. 1-10). Yet the Blueprint dated 8 August 2002 required another new type of tank liner with 28 uniformly distributed water nozzles (See [Buyer]'s Exhibit No. 6, i.e., the Blueprint dated 8 August 2002).
 
(2) The Contract and its annex required that the coil tubes of the liners should be 1 inch (25.4mm) in diameter, and that their wall should be 1mm thick. Yet the Blueprint dated 8 August 2002 required coil tubes of 27mm in diameter and 1.5mm in thickness.

The increase of the number of water nozzles led to the use of the four-headed welder replacing the three-headed welder that was originally required under the Contract, which was already a remarkable change of the equipment and production techniques. Further, the changes in diameter and thickness required more time for welding and adjustment of the welding pace. To maintain the production efficiency of one tank liner per two minutes, adjustments of the equipment and production techniques were necessary.

      (ii) The adjustments brought by the Blueprint dated 8 August 2002 were far more than the two points above. The Contract and its annex did not contain specific technical requirements for the tank liners, while the Blueprint dated 8 August 2002 set forth much more detailed requirements for the products. Only when [Seller] followed these very detailed requirements, could it design a production line that could produce the required products with the efficiency of one tank liner per two minutes.

When concluding the Contract, the parties did not deal with the diameters of the water nozzle and the water relief outlet. Thus, [Seller] assumed that their diameters should be the same, and arranged the equipment and production procedures accordingly. Yet later the Blueprint dated 8 August 2002 adjusted the diameters stipulating that the water nozzles and the relief outlet should be 24.2mm and 30.2mm in diameter, respectively. To meet these requirements and to realize the production efficiency of one tank liner per two minutes, relevant equipment should be added and the production techniques had to be adjusted.

      (iii) Even the Blueprint dated 8 August 2002 itself was being constantly changed. [Buyer] admitted that on 14 January 2004 it changed ten of the figures. These changes would also lead to adjustment of the Production Line.

Since it could not deny these changes, [Buyer] argued that these changes fell within the required sphere of "flexibility" of the products required by the annex to the Contract. [Seller] submits that the "flexibility" of any product has a limit. As established during the oral hearings, the "flexibility" in the instant case refers to the variation of the length of tank liners to an agreeable extent. For this reason, only two model products would be inspected at the final acceptance inspection. Nevertheless, it does not stand to say that any changes of the production techniques would fall within the scope of "flexibility". As in the case at hand, all the above changes required either an addition to oran adjustment of relevant machines and technologies. These changes departed from the Technical Description, and went beyond the sphere of "flexibility".

Therefore, the Blueprint dated 8 August 2002 and its revised version dated 14 January 2004 indeed constituted modifications of the Contract and its annex. Any changes of the techniques would result in adjustment of specifications and design of the Production Line, as well as addition of machines. Hence, as the original technological document, the Technical Description is "outdated" and cannot be relied upon in assessing the conformity of the Production Line.

(b) The standard for the quality, specifications and conformity of the Production Line should be the layout chart drawn in December 2002.

(c) The relationship between the Blueprint dated 8 August 2002 and the Production Line

The present Production Line was assembled in accordance with the layout chart drawn in October 2002. It had no problem in producing tank liners required by the Blueprint that is dated 8 August 2002, and indeed produced such liners, e.g., the liners produced during the pre-acceptance test, and the liners promoted and sold by [Buyer]. For this reason, the Production Line fully conforms to the Blueprint dated 8 August 2002.

(d) Country of origin

      (i) Article 5 of the Contract provides: "Country of Origin and Manufactures: American". This provision only required that the manufacturer and provider of the Production Line as a whole should be from the U.S. It did not, however, require every single part (including every screw) to be made by an American corporation. Rather, at the time of tendering, [Seller] made it clear that it was tendering to provide a production line for [Buyer] as an integrator. It also expressly stated that the major parts and fragile parts of the Production Line would be procured from enterprises all over the world. In particular, it was indicated that the conveyors would be from China. The consistency of the machines which were made in China was also mentioned in the annex to the Contract. At the time of contracting, both parties expressly agreed that the conveyors would be from China.

      (ii) At the time of delivery, as shown by the pre-acceptance test, the US $1,600,000 worth of major parts of the Production Line, including the plate bending rolls, flanging machines, assemblers, longitudinal seam welders, water nozzle welders, tube coilers, etc, were imported from the U.S.. Only US $500,000 worth of stamping molds, edge trimmers, pounding machines, hydraulic presses, interactive tabletops and other conveying machines were from China. The machines that were made in China fully conformed to the Contract.

Therefore, from the statements made at the time of tendering and in the Contract Performance Schedule, and the conduct of the parties during the performance of the Contract, both parties agreed that the conveying machines were to be made in China. With this agreement, it does not stand to conclude that [Seller] breached the Contract by providing some made-in-China conveyors.

(e) Standard for Final Inspection

[Seller] submits that the layout chart drawn in October 2002 should be the technological reference for the final acceptance inspection. In the foregoing submissions, [Seller] has proved that [Buyer] received this layout chart and assembled the Production Line accordingly. Although [Buyer] denied the receipt of this layout chart, it would not benefit from such argument. The reason is that the Blueprint dated 8 August 2002 has modified the Contract and its annex. Thus, if the layout chart in October 2002 cannot serve as the reference for the final inspection, the technical annex in June 2002 should not be relied on as reference either, because they have already been modified.

The truth is, the parties have not conducted the final inspection, and hence it is an open question whether the Production Line conforms to the Contract.

(f) The Inspection Report

According to [Buyer], the non-conformity of the Production Line is evidenced by the Inspection Report issued by the Beijing Bureau stating that "the Production Line was not ready for final acceptance inspection."

However, [Buyer] failed to prove that it initiated the inspection within 120 days after the goods arrived and that within this period the inspection organ issued a report confirming the non-conformity of the goods. Since Article 16 of the Contract conferred on [Buyer] a unilateral right, seeing that [Buyer] did not refuse the delivery of the goods or claim for damages based on the Inspection Report within 120 days after the goods arrived, it is reasonable for [Seller] to assume that [Buyer] applied for preliminary inspection of the goods after their arrival and the goods were considered conforming.

With respect to the inspection after use of the Production Line, pursuant to the Contract, the inspection should be conducted within one year after the Production Line is put to use. In the case at hand, the Production Line has not been accepted and put to use, and hence the period of "one year after the Production Line was put to use" has not begun to run. Accordingly, the precondition to this inspection has not yet been satisfied. Therefore, [Buyer]'s application to the inspection organ for an inspection report derogated from the Contract.

Even if the inspection organ was empowered to inspect the goods, what it examined was whether the Production Line met the standards under the Contract, i.e., whether the Production Line could produce tank liners required by the Contract. In any event, no one had authorized the inspection authority to evaluate the precondition to the final inspection of the goods.

Finally, [Buyer] did not provide all the technical materials to the Beijing Bureau. It hid relevant technical materials and induced the Beijing Bureau to reach a faulty inspection report which therefore could not be used as evidence.

(g) With respect to the problems numerated in the Report on the Pressure-bearing Line and its Equipment signed by the respective engineers of the parties, this document only showed that the engineers believed that there were the so-called "problems" during the testing of the Production Line. This, however, could not lead to the conclusion that the Production Line is non-conforming.

(h) Delivery of the two TIG welders

      (i) According to [Buyer], the present two TIG Welders were the goods under Contract No. PHT211012JTL dated 12 October 2001, and constituted part of the goods under the instant Contract No. CUSQTBJ-S020627CR. [Seller] received payment for another two longitudinal seam welders, but did not deliver these two welders.

As stated by [Buyer], Contract No. PHT211012JTL has been fully performed. As to the question whether this contract constituted part of Contract No. CUSQTBJ-S020627CR, the answer is to be found within Contract No. CUSQTBJ-S020627CR. Since Contract No. CUSQTBJ-S020627CR does not stipulate that the goods under Contract No. PHT211012JTL are part of the goods under the present Contract, [Buyer]'s argument is unfounded.

Accordingly, Contract No. PHT211012JTL and the present Contract No. CUSQTBJ-S020627CR are two separate contracts.

      (ii) The Customs Declaration for the Imported Goods and the Customs Clearance Form show that the goods have been delivered.

[Buyer] was to make a Customs Declaration for the goods under the Contract. The Customs Declaration and the Form of Entry listed US $2,188,000 worth of goods under Contract No. CUSQTBJ-S020627CR.

As pointed out by [Buyer], for the sake of taxation, the forty-four sets of equipment were not declared according to the order arranged by the List of Machines and Prices. Rather, the goods were categorized into a number of systems for declaration. Nevertheless, this was not [Seller]'s liability, but was a result of [Buyer]'s tax (customs and added-value tax) avoidance. For this reason, the machines were not listed separately in the Customs Declaration for Imported Goods and the Form of Entry. Nonetheless, the total price of the goods was indicated, which showed that all the US $2,188,000 worth of goods were declared and imported to China.

      (iii) The evidence also shows that the two TIG longitudinal seam welders were delivered.

It should be noted that the two TIG longitudinal seam welders were indicated in [Buyer]'s Customs Declaration. At the end of the list of goods in the Customs Declaration stood "TIG/MIG automatic welders" which referred to the two TIG longitudinal seam welders. Moreover, in the Notice of Indemnity ([Buyer]'s supplemental Exhibit No. 6) and the List of Pre-Accepted Equipment and Prices, [Buyer] listed fourteen items which had been pre-accepted but were later found to be defective, and claimed for reimbursement of the price or substitute goods. The twelfth item was the TIG longitudinal seam welders worth of US $150,000.

This shows that [Buyer] not only received these two TIG longitudinal seam welders, but also pre-accepted them in early January 2003, and claimed for reimbursement of the price or substitute goods in April 2004. Again, this indicates that the two TIG longitudinal seam welders have nothing to do with the already-performed contract dated 12 October 2001. Therefore, it is false to allege that that the two TIG longitudinal seam welders under the present Contract have not been delivered.

2. Failure to conduct the Final Inspection

[Seller] has submitted sufficient evidence to show that the failure to conduct the final acceptance inspection was attributable to [Buyer], and that [Buyer] has used the Production Line and benefited from such use while the line has not been inspected as agreed in the Contract.

As stated above, [Buyer] did not produce sufficient evidence to prove that the Production Line was non-conforming. At this stage it is fair to say that it is an open question whether the Production Line conforms to the Contract. The main reason for this is that to date the Production Line has not been inspected as agreed in the Contract.

(a) Methods and preconditions to inspection

[Seller] submits that "final acceptance inspection" should be so defined as to suit the purpose of the Contract. The inspection should be dynamic, namely, that the Production Line should be started up to see whether it can reach the production efficiency of one tank liner per two minutes, and whether the products have a pass rate of 90%.

This interpretation is supported by the following evidence.

      (i) As shown by the tendering documents, the Contract and its annex, [Buyer]'s

purpose of entering into the Contract was to purchase a production line that could produce the specially designed tank liners.

      (ii) The Contract had a special annex entitled Inspection Clause which provided:

"After the equipment arrived, [Seller] will send its employees to install and test the equipment at [Buyer]'s factory. The installation and testing will last two months, and the pre-production trial will last one month. During the pre-production trial, the Production Line will produce 100 products for each of the two diameters. If the products have a pass rate of 90%, the Production Line will be accepted."

Accordingly, the Contract also required that the conformity of the Production Line depend on the quality of the products.

      (iii) During the pre-acceptance test in the U.S. in early 2003, the conformity of the Production Line was also judged based on the quality of the products (See [Seller]'s Exhibit No. 7).

      (iv) During the oral hearing on 18 May 2005, when denying the modification of the Contract brought by the Blueprint dated 8 August 2002, the counsel for [Buyer] stated that "the sole purpose of the Blueprint dated 8 August 2002 was to be used for the final acceptance inspection."

From the wording of the Contract, the parties' previous conduct and [Buyer]'s statements, it can be seen that both parties agreed that the inspection of the Production Line was to test whether the Production Line could produce the designated tank liners with the efficiency of one liner per two minutes.

Another question concerns the preconditions to the final acceptance inspection. According to the Minutes signed by both parties at the meeting on 27 December 2003, the blueprint of the products should be countersigned by the parties and the stainless plate and other materials should be in position for the inspection. Thus, apart from the relevant equipment, employees, energies such as water, electricity and gas, the most important preconditions are: (i) the blueprint of the products to be countersigned by the parties; and (ii) the needed stainless plates and accessories.

The purpose of countersigning was to make final confirmation of the technical requirements, in order to provide a standard for the products. The stainless plates and other materials were intended to start up the Production Line, and test the conformity of the Production Line.

(b) Liability for the failure to conduct Final Inspection

The liability for the failure to conduct final inspection should be determined based on the Minutes countersigned on 27 December 2003. The Minutes confirmed that the Production Line should be tested and inspected before acceptance. However, it did not raise any doubts as to the quality of the Production Line. The title of the Minutes was "Minutes of the Meeting on the Final Inspection of the Pressure-Bearing Line". Line 5 of the Minutes expressly stated that the meeting was intended for consultations concerning the testing, pre-production trial and final acceptance inspection of the Production Line. This indicates that the parties' consultations revolved around the testing and inspection. In other words, the Production Line was ready for testing and inspection. Moreover, the preconditions to the acceptance inspection were not met because of [Buyer]'s negative conduct. The most important preconditions are: (i) the blueprint of the products to be countersigned by the parties; and (ii) the needed stainless plates and accessories.

On 14 January 2004, [Buyer] provided [Seller] with a blueprint of the tank liners consisting of thirty figures including ten modified figures. Seeing that the product should be tailored to [Buyer]'s needs and hence [Buyer]'s request should be respected, [Seller] agreed that this blueprint could be countersigned, although it believed that the ten modified figures did not reflect all of the adjustments agreed by the parties at the meeting. Thus, the first precondition to the inspection was satisfied. With respect to the second precondition, it concerns the question of which party should provide the plates for the inspection. In this regard, the Contract of June 2002 and its annex indeed did not clarify this matter. However, in view of the facts of the instant case and subsequent documents, [Seller] submits that these materials were to be provided by [Buyer]. In the Minutes, [Buyer] stated:

"Ten sets of equipment should be ready before 2 February 2004;

From 2 February to 15 February 2004, the materials for the production of 100 products should be provided to [Seller] in succession; and

From 16 February to 2 March 2004, the materials for the production of 2,000 products should be provided to [Seller],"

Furthermore, the undetermined issues such as the inspection of the capped-ended line and tubes coiling line did not prevent [Buyer] from providing the materials for the inspection.

Therefore, based on the parties' agreement, [Buyer] should be responsible for the provision of the materials. However, on 6 February 2004, [Buyer] expressly refused to provide any materials for no good reason.

Since [Buyer] expressly refused to provide these materials, thereby denying the agreement formed in the Minutes, further consultations between the parties in this respect were impossible. This necessarily dissatisfied the second precondition to the acceptance inspection, which finally resulted in the failure to conduct the pre-production trial and final acceptance inspection. Under this circumstance, it is pointless for [Buyer] to blame [Seller] for withdrawing its employees.

[Buyer] should be liable for the failure to conduct the final acceptance inspection which was its own fault. The Contract provided: "If the equipment cannot be duly assembled and tested because of [Buyer], the period of guarantee should be 18 months starting from the day when the goods arrive at the port of delivery." In the present case, [Buyer]'s failure to provide relevant materials halted the pre-production trial and final acceptance inspection. This constitutes the situation described in the Contract, i.e., "the equipment cannot be duly assembled and tested because of [Buyer]". Accordingly, the guarantee period of 18 months should start to run from the Customs Declaration of the goods on 25 February 2003. Thus, this period expired on 25 June 2004. Therefore, [Buyer] should reimburse the deposit of US $328,200 to [Seller].

(c) [Buyer]'s use of the Production Line

Although the Production Line was not inspected for acceptance as agreed under the Contract, [Buyer] nevertheless used the Production Line and benefited from that. [Buyer] should bear the consequences of such use.

In sum, it was attributable to [Buyer] that the acceptance inspection was not conducted. As 18 months have passed since the goods arrived at the port, the goods should be presumed to be conforming. Even if it is unclear which party should be liable for the failure to conduct the final inspection, since the inspection has not been conducted, [Buyer] should not have used the Production Line. Now that the Production Line has been used, [Buyer] should bear all the consequences of such use and should not claim that the line is nonconforming.

3. Calculation of damages

[Buyer] did not produce sufficient evidence to prove that it is entitled to refuse the delivery of the goods in the Delivery List. Nor did it have evidence to support the damages arising from the purported depreciation of the goods. Moreover, Article 19 of the Contract which deals with punitive damages accounting for 5% of the price only applies to late delivery. In the case at hand, however, [Seller] did deliver the Production Line to [Buyer]'s factory within the agreed time period. Hence, there was no late delivery of the goods in the instant case. Therefore, [Buyer] is not entitled to rely on this provision.

More importantly, although the Production Line was not inspected for acceptance as agreed under the Contract, [Buyer] nevertheless used the Production Line and sold the products. [Buyer] should be liable for its breach of the Contract, and is not entitled to the alleged damages or substitute goods at all.

[Seller] has proved that it fulfilled its contractual obligations and delivered all the machines for the Production Line. The failure to conduct the final inspection was [Buyer]'s fault, and [Seller] is entitled to the payment for the goods and for the added machines.

The following is an account for [Seller]'s claim for US $225,000 for the added machines.

(a) The transformation of the three-headed water nozzle welder into a four-headed water nozzle welder cost additional US $80,000. Initially the Contract required a type of tank liner with twenty-one water nozzles to be processed by a three-headed water nozzle welder. In the Blueprint dated 8 August 2002, another type of tank liner with twenty-eight uniformly distributed water nozzles was added.

The Contract stipulated that the price of the three-headed water nozzle welder was US $240,000, i.e., US $80,000 per welding head. Since a fourth head was added, the price was accordingly raised by US $80,000.

Upon [Seller]'s inquiry, the foreign welder manufacture JETLINE replied that at the contemporary international market, the manufacturer's price of a four-headed water nozzle welder was US $400,311, and the manufacturer's price of a three-headed water nozzle welder was US $306,712, the price difference being US $93, 599. Therefore, it is legitimate for [Seller] to claim US $80,000 for the transformation of the three-headed welder into the four-headed welder.

(b) An additional US $40,000 was charged for the added universal-positioned automatic tube welder intended for tubes and joints welding. At the time of contracting, the parties agreed that the coil tubes of the liners should be 25mm in diameter, and that their wall thickness should be 1mm. The length of a coil tube is 6m. The length of three joint tubes would be 18m, and after coiling the length would be 16m. After coiling the edges would need to be cut off and polished, and the tube ends would need to be welded. The Technical Description designed a universal-positioned automatic tube welder to meet the need of welding both joint tubes and tube ends.

Yet the Blueprint dated 8 August 2002 made remarkable adjustments by requiring coil tubes of 27mm in diameter and 1.5mm in thickness. Since the adjustments in diameter and thickness required more time for welding, the original universal-positioned automatic tube welder could not meet the need of welding both joint tubes and tube ends. Another universal-positioned automatic tube welder needed to be added, so that they can weld joint tubes and tube ends separately. The additional tube welder was delivered along with other machines.

The price of a universal-positioned automatic tube welder was US $40,000. Therefore, the addition of such a welder required additional US $40,000.

(c) Costs of US $50,000 arose from an additional water nozzle welder to fix the difference in diameter between the water nozzle of the tanks and those of the relief water outlet. When concluding the Contract, the parties did not specify the diameters of the water nozzle and the water relief outlet. Thus, [Seller] assumed that their diameters should be the same, and used the same welder to weld the two nozzles.

Yet later the Blueprint dated 8 August 2002 adjusted the diameters stipulating that the diameters of the water nozzle and the relief outlet should be 24.2mm and 30.2mm respectively. If [Seller] still used only one welder, the welding time would be longer, and the production efficiency of one tank liner per two minutes could not be ensured. Therefore, another water nozzle welding head, relevant power supply and control system had to be added to weld the two nozzles respectively. These added machines were delivered along with other parts of the Production Line.

The price of an automatic water nozzle welding system was US $82,000. The addition of a single water nozzle welding head without the framework was US $50,000.

Upon [Seller]'s inquiry, the foreign welder manufacture JETLINE replied that the manufacturer's price of a water nozzle welding head, relevant power supply and control system was US $59,372. Therefore, it is legitimate for [Seller] to claim for US $50,000 for the additional water nozzle welding head and control system.

(d) An additional US $55,000 was charged for the capped-ended necking-in machine. After the goods arrived, to adapt to the changed welding procedures, [Seller] added an automatic necking-in machine, and adjusted the configuration. [Buyer] agreed to indemnify [Seller]. Later, [Buyer] received and accepted this capped-ended necking-in machine. To keep to the time schedule, [Seller] purchased this machine from its Chinese branch at the price of US $55,000 for which [Buyer] should indemnify [Seller].

OPINION OF THE ARBITRAL TRIBUNAL

I. Applicable law

The parties did not choose the law applicable to the Contract. The Arbitral Tribunal notes that [Buyer] had its place of business in Beijing, China, and [Seller]'s place of business was in the U.S.. The Contract was for the international sale of goods. Since both China and the U.S. are Contracting States of the United Nations Convention on Contracts for the International Sale of Goods (hereinafter the "CISG"), the CISG applies to the present case.

Moreover, since the place of delivery and installation, [Buyer]'s place of business and the seat of arbitration are all in China, and both parties invoked Chinese law to support their respective claims during the arbitral proceedings, the Arbitral Tribunal rules that China is the country with the closest connection to the Contract. Therefore, Chinese law shall apply to issues not governed by the CISG.

II. Validity of the Contract

Since the CISG does not regulate the validity of contracts for the sale of goods, the Arbitral Tribunal applies the Contract Law of the P.R. China (hereinafter the "Contract Law") to determine the validity of the Contract at hand. The Arbitral Tribunal finds that the clauses of the Contract reflected the true intent of the parties, and were signed by [Seller] and [Agent], on behalf of [Buyer] after detailed consultations between the parties. In addition, the Contract did not violate the Chinese mandatory rules. Therefore, the Arbitral Tribunal rules that the Contract is valid. As shown by the relevant evidence, at the time of contracting, [Seller] was aware of the agency relationship between [Buyer] and [Agent]. According to Article 402 of the Contract Law, the Contract is directly binding on [Buyer] and [Seller], and both parties should diligently perform the contract.

III. Summation of the Contract performance

The Arbitral Tribunal finds that after the conclusion of the Contract, [Buyer] made a timely advanced payment of US $218,800 accounting for 10% of the total price of the goods. In addition, [Buyer] opened an irrevocable documentary L/C at sight for an amount of US $1,969,200 as 90% of the price at the opening bank. This sum was paid to [Seller] in February 2003 after the goods arrived, the Customs Declaration was made, and the Commodity Inspection was conducted.

The Arbitral Tribunal notes that according to the Contract Performance Schedule, [Seller] was bound to provide a blueprint and a layout chart of the Production Line before 20 August 2002. However, since [Buyer] did not provide [Seller] with the blueprint of the series product until 8 August 2002, [Seller] did not complete the design of the Production Line based on the Blueprint dated 8 August 2002 until October 2002. [Seller] delivered the Production Line on time in February 2003.

In late March 2003, the Production Line was assembled, and the testing started.

IV. Issues concerning the Contract performance

The Arbitral Tribunal reviewed the Supplemental Agreement concluded by the parties' on 26 June 2003 concerning the welding and testing of pressure-bearing water tankers. From this agreement, it can be seen that the installation and testing did not prove to be successful. The Supplemental Agreement identified "the problems arising out of the installation and testing of the Production Line." However, the parties reached agreement on the solutions to these problems, and stated in the Supplemental Agreement that "[t]he parties agree to postpone the date of final acceptance inspection by two months to 15 August 2003. Other dates in the schedule should be adjusted accordingly."

Apart from the problems above, the Supplemental Agreement also indicated the solutions thereto:

(a) After stretching and trimming, the springback of the capped ends was big and irregular, and would lead to the elliptical tolerance between the tank liners and capped ends when assembling. As stated in the Supplemental Agreement, "[Seller] proposed to make a capped-ended necking-in former to solve this problem."

(b) With the originally designed assembling machine and its molds, it was difficult to make the circular-seam lap joint of 3mm as required by the original blueprint. Thus, the machine needed to be redesigned. [Seller] stated that it would "... redesign and test this machine."

(c) Since the length of the plate bending rolls did not meet [Buyer]'s requirements, [Seller] agreed to reimburse the payment for that bending machine to [Buyer].

(d) In view of the unbalanced loading of the punching molds, [Seller] agreed to change the molds after [Buyer] finalized the blueprint of the product, and to bear the consequent costs.

(e) [Seller] promised to add an automatic welding smoke recycling system to the automatic circular-seam welding system.

According to the Supplemental Agreement, the parties should conduct the "final acceptance inspection" of the "complete Production Line" on 15 August 2003. Based on the oral hearings and the exhibits submitted by the parties, the Arbitral Tribunal finds that the parties did not conduct the final acceptance inspection on 15 August 2003 as agreed in the Supplemental Agreement. This was because [Seller] did not complete the redesign and production of the capped-ended necking-in former and the assembling machine on time. It was not until 27 December 2003 that [Buyer], [Agent] and [Seller] had consultations in terms of the testing, pre-production trial and final acceptance inspection of the Production Line, and subsequently concluded the "Minutes of the Meeting on the Acceptance Inspection of the Pressure-Bearing Line".

In the Minutes, the parties only reached agreement on countersigning the blueprint and the date of acceptance inspection. Yet with respect to the testing of the complete Production Line, the standard for pre-production trial, the number of needed materials and spare parts, and the party to bear the costs of waste products, the Minutes only recorded the respective positions of the parties. Thus, the Minutes did not advance the final acceptance inspection, but subsequently gave rise to the disputes between the parties as listed below:

  1. Whether the description of the Production Line in the Contract was finalized, and whether the Blueprint dated 8 August 2002 modified the description; the standard for final inspection of the Production Line;

  2. The cause of and liabilities for the failure to conduct the final acceptance inspection of the Production Line;

  3. The dispute arising from the fact that, on the one hand, the Contract provided: "Country of Origin and Manufactures: American" and, on the other hand, some of the machines were not made in the U.S.;

  4. The authority of the Beijing Bureau to issue the Inspection Report; the qualification of the Inspection Report as the reference for evaluating the quality of the Production Line;

  5. Whether [Buyer] has put the Production Line to use; the liabilities arising out of such use;

  6. The conformity of the Production Line to the specifications and qualitative requirements under the Contract;

Having fully examined the above issues and considered the parties' arguments, the Arbitral Tribunal hereby rules as follows:

1. The Description of the Production Line in the Contract and the Blueprint dated 8 August 2002

The Contract was concluded after [Seller] won the bid. It identified the requirements for the capabilities and basic procedures of the Production Line. It also contained the Contract Performance Schedule. Accordingly, the Arbitral Tribunal deems that the finalization of the Production Line and performance of the Contract should be judged in the light of the Contract. Also, the Arbitral Tribunal deems that the Contract can be modified, but only by virtue of the parties' agreement and fulfillment of relevant procedures.

The Arbitral Tribunal notes that after the conclusion of the Contract, [Buyer] provided a blueprint of various types of products on 8 August 2002. [Seller] states that it has "no argument over ... the fact that [Buyer] completed and provided the Blueprint dated 8 August 2002." However, [Buyer] denied that it received the layout chart of the Production Line drawn by [Seller] in October 2002, and that it received the List of Machines and Prices for the machines added after the Contract was modified on 16 June 2002." [Seller] alleges that "... the Blueprint dated 8 August 2002 is an important document that adjusted the relevant techniques, and hence is important evidence of the modification of the parties' rights and obligations." It also argues that "... the layout chart drawn in October 2002 should be the technological reference for the final acceptance inspection." On the other hand, [Buyer] claims that "[t]he Blueprint dated 8 August 2002 transformed the textual descriptions of the products under the Contract into graphic descriptions. The two kinds of descriptions were consistent with each other..." Moreover, [Buyer] argues that "... the technical requirements were definite when the Contract was concluded. The Technical Description annexed to the Contract identified the specifications, constituent machines and qualitative requirements for the Production Line. Contrary to [Seller]'s argument that the Blueprint dated 8 August 2002 serves as the basis for the design of the Production Line and the choice of machines, [Buyer] alleges that the Contract should be considered as such a basis, and that the few statistical adjustments made in the figures of model products fell within the scope of processing of the Production Line under the Contract; therefore, they did not modify the technical descriptions annexed to the Contract."

The Arbitral Tribunal also notes that in its Statement of Counterclaim [Seller] stated that "[a]fter the conclusion of the Contract, [Seller] began to prepare the needed equipment. On 8 August 2002, [Buyer] completed the design of the tank liners and gave the blueprint to [Seller] for [Seller] to design the Production Line ... In October 2002, [Seller] completed the design of the Production Line based on the Blueprint dated 8 August 2002, and made necessary adjustments of the production process and the equipment. The adjusted delivery list was sent to Xue Zuqing, General Manager of [Buyer]. The price of the goods was raised by US $170,000 because of three main adjustments." In response, [Buyer] claimed that "[a]ny modification of the Contract should be made upon agreement of both parties after consultations. Before [Buyer] commenced the present arbitration, [Seller] has never asked [Buyer] for payment for the added machines. [Seller] alleged that the adjusted Delivery List was sent as a notice to the General Manager of [Buyer]. However, [Buyer] has never received this list. Moreover, the signature of the dispatcher was absent from the Delivery List provided by [Seller]. Nor was there the signature of [Buyer]'s General Manager. In addition, [Seller] cannot produce [Buyer]'s note acknowledging receipt of the List. Therefore, this document may be forged. Further, in regard to [Seller]'s claim for payment for the added machines, there is no written document signed by both parties which shows that the parties reached a supplemental agreement on this matter. Seeing that [Buyer] has made all the payments under the Contract, it is not bound to pay US $170,000 for the added machines.

In view of the parties' arguments above, having fully examined the exhibits, the Arbitral Tribunal is of the following opinion.

(a) After [Buyer] provided the Blueprint dated 8 August 2002, if [Seller] considered this blueprint as modifying the Contract, it could have and should have expressly indicated that "the Blueprint dated 8 August 2002 modified the Contract," and consulted with [Buyer] concerning the modifications. However, [Seller] has never raised such an argument to [Buyer].

(b) With respect to the Account for Additional Equipment and the annexed List of Added Machines and Prices dated 20 January 2005, [Buyer] denied that it received these documents, and challenged the admissibility of such documents as evidence, as they did not have stamps, signatures or dates. The Arbitral Tribunal has examined these documents and is of the view that they cannot be admitted as evidence.

Therefore, the Arbitral Tribunal rejects [Seller]'s allegation that the Blueprint dated 8 August 2002 modified the Contract. The Arbitral Tribunal also dismisses [Seller]'s counterclaims for payment for the added machines.

2. The failure to conduct the Final Testing and Inspection

Shortly after [Seller] delivered the machines of the Production Line in February 2003, it started to assemble and test the Production Line. On 26 June 2003, the parties reached the Supplemental Agreement. This agreement listed the problems arising from the installation and testing of the Production Line, and indicated the solutions to these problems. The parties agreed to postpone the date of final inspection by two months to 15 August 2003.

On 15 August 2003, the final acceptance inspection was not conducted as agreed in the Supplemental Agreement. After inquiries to the parties at the oral hearings, the Arbitral Tribunal finds that the failure to conduct the final inspection resulted from [Seller]'s failure to provide a capped-ended necking-in former and a modified assembling machine. Actually, it was not until October 2003 that these two machines were manufactured. Therefore, the Arbitral Tribunal deems that the testing of the Production Line did not prove to be successful, and the production failed to be inspected on 15 August 2003 as agreed by the parties, for which [Seller] is liable.

At the Meeting on the Acceptance Inspection of the Pressure-Bearing Line on 27 December 2003, the parties failed to reach agreement on the number of materials for the testing of the complete Production Line, the number of materials and standard for pre-production trial, the number of materials and spare parts as well as the standard for final acceptance inspection. Rather, the Minutes recorded the respective positions of the parties.

The Arbitral Tribunal notes that, despite the lack of the parties' agreement on the number of materials for the testing of the complete Production Line, the number of materials and standard for pre-production trial, the number of production materials and spare parts, and the standard for final acceptance inspection, the parties did agree on the date of final inspection, the products to be inspected (tank liners of 540mm in diameter and liners of 360mm in diameter), and the time of confirmation of the blueprints. On 14 January 2004, [Buyer] provided [Seller] with a blueprint consisting of thirty layout charts of the tank liners to be countersigned. [Buyer] indicated that "the inspection could be conducted either in the light of the Blueprint dated 8 August 2002 or pursuant to the Blueprint dated 14 January 2004." In its Statement of Submissions dated 11 July 2005, [Seller] also agreed that "... the changed blueprint provided (on 14 January 2004) by [Buyer] can be countersigned", and it deemed that "[t]he first precondition to the acceptance inspection was satisfied." The Arbitral Tribunal deems that until then the parties were proceeding as agreed in the Minutes dated 27 December 2003.

Subsequently, the final inspection was halted because of the parties' disagreement on the issues above including the number of spare parts, and the standard for acceptance inspection.

[Seller] requested that during the testing of the complete Production Line:

"The [Buyer] should continually provide the materials, parts and conforming coil tubes to [Seller] for the production of 800 products. Irrespective of whether the products are waste products, [Buyer] shall bear the costs. With the materials from [Buyer], [Seller] should start to test the complete Production Line and finish the testing no later than 15 February 2004."

[Buyer] promised to:

"provide materials for the production of 100 solar water heaters. With these materials, [Seller] should start to test the complete Production Line and finish the testing no later than 15 February 2004."

[Seller] requested that:

"After the testing of the complete Production Line, phase evaluation should be conducted. The Production Line should continually produce 100 sets of tank liners of 540mm in diameter. If the products have a pass rate of 75%, the Production Line can be put to the pre-production trial."

[Buyer] made no response to this request in the Minutes.

[Seller] proposed that:

"The pre-production trial should last from 16 February to 2 March 2004. During this period, [Buyer] should provide 220 sets of parts, materials and coil tubes on a daily basis for a total of 3,300 sets. The tank liners of 540mm in diameter produced by this production will be inspected on 4 March 2004. The Production Line should continually produce 100 sets of tank liners of 540mm in diameter. If the products have a pass rate of 90%, the Production Line will be accepted."

In response, [Buyer] proposed that:

"The pre-production trial should last from 16 February to 2 March 2004. During this period, [Buyer] should provide parts, materials and coil tubes on a daily basis for a total of 2,000 sets. The tank liners of 540mm in diameter produced by this production will be inspected on 4 March 2004. The Production Line should continually produce 100 sets of tank liners of 540mm in diameter. If the products have a pass rate of 90% and the production efficiency reaches one tank liner per two minutes, the Production Line will be accepted."

Despite the above divergent propositions, the parties agreed that "[Seller] shall bear the costs of waste products."

Based on the Contract, the attached technical description, the Account for Installation and Testing, the Contract Performance Schedule, the Inspection Clause, the Minutes dated 27 December 2003 and other relevant documents, the Arbitral Tribunal holds the following opinion.

(a) As evidenced by the Supplemental Agreement dated 26 June 2003, the installation and testing of the pressure-bearing tank welding line was unsuccessful.

(b) Although on 26 June 2003 the parties agreed in the Supplemental Agreement that "... the final acceptance inspection should be conducted on 15 August 2003," the inspection was not conducted due to [Seller]'s failure to provide a new machine and a modified machine.

(c) The Minutes dated 27 December 2003 confirmed the provision and countersigning of the blueprint of tank liners of 540mm and of 360 mm in diameter, determined that "[Seller] shall bear the costs of waste products", expressly stated that "[Seller] proposed to [Buyer] the approaches to the inspection of the capped-ended line, the tube coiling line, and the liner welding line", and reflected the parties' agreement that "[i]ssues such as the acceptance inspection of the capped-ended line, the tube coiling line, and the liner welding line shall be discussed later."

On 14 January 2004, [Buyer] provided [Seller] with the thirty figures of the products of 540mm and of 360mm in diameter for countersignatures. In its Statement of Submissions dated 11 July 2005, [Seller] stated that "... [Buyer]'s request should be respected. Hence, the changed blueprint provided by [Buyer] can be countersigned, and the first precondition to the acceptance inspection was satisfied." However, after checking the parties' correspondence in January and February 2004 and the Minutes of the Coordination Meeting on 21 February 2004, the Arbitral Tribunal finds that [Seller] did not sign the Blueprint dated 14 January 2004 of tank liners of 540mm and of 360 mm in diameter. In the Minutes of the Coordination Meeting on 21 February 2004, [Seller] stated that "... two meetings were held in accordance with the Minutes dated 27 December 2003. [Buyer] failed to provide the blueprint of tank liners of 540mm and of 360mm for countersignatures. [Buyer] did not reply to [Seller]'s questions, which halted the acceptance inspection. "We feel regrettable for this situation, and urge [Buyer] to provide as soon as possible the blueprint in accordance with our agreement, so as to the complete the countersigning." Subsequently, the final acceptance inspection was halted.

Although the cause of the failure to conduct acceptance inspection was multifold, the Arbitral Tribunal is of the opinion that this is mainly caused by the failure to assemble and test the Production Line as agreed in the Contract, which in turn led to the failure to inspect the complete Production Line on 15 August 2003 as agreed in the Supplemental Agreement. Moreover, the Inspection Clause was phrased too generally and did not specify relevant responsibilities. All this finally resulted in the suspension of the acceptance inspection due to the lack of the parties' mutual trust and willingness to cooperation. In view of the parties' responsibilities at different stages of the contract performance, and the fact that the [Seller]'s failure to sign the Blueprint dated 14 January 2004 has led to the suspension of the inspection, the Arbitral Tribunal rules that [Seller] shall bear the major liability for the failure to conduct the final acceptance inspection.

3. Country of origin and manufacture

The Arbitral Tribunal finds that the Contract provided: "Country of Origin and Manufactures: American". The Delivery List annexed to the Contract also indicated that the country of origin of the ten systems of the Production Line should be the U.S., and the total price was also US $2,188,000.

[Buyer] stated that "... twenty-eight of the forty-nine sets of equipment provided by [Seller] were made in China, which constituted a serious breach of the Contract," and provided the List of Machines and Assessment, arguing that "US $1,200,000 should be reduced from the original price of the goods." In response, [Seller] argued that "[t]he Contract only required that the manufacturer and provider of the Production Line as a whole should be from the U.S. It did not, however, require that every single part of the Production Line be made by an American corporation. At the time of contracting, both parties expressly agreed that the conveyors of the Production Line would be from China." Further, [Seller] argued that [Buyer]'s List of Machines and Assessment should not be admitted as evidence. From the Customs Declaration for the Imported Goods dated 25 February 2003, the Arbitral Tribunal finds that the country of origin of the goods of seven systems in the instant case was the U.S., and the price was exactly US $2,188,000. These goods have passed the commodity inspection and arrived at [Buyer]'s factory. According to [Buyer], however, the Customs Declaration for the Imported Goods was made in terms of the whole Production Line rather than each of the constituent parts. Moreover, during the oral hearings, [Seller] also admitted that "[o]nly US $500,000 worth of stamping molds, edge trimmers, pounding machines, hydraulic presses, interactive tabletops and other conveying machines were indeed from China. The machines which were made in China fully conformed to the Contract." The Arbitral Tribunal finds that the price of the Production Line was calculated based on the clause of the Contract which provided: "Country of Origin and Manufactures: American". Since some of the delivered machines were made in China, the price calculated based on US dollars is definitely higher than the actual value of the goods. Therefore, it is reasonable to lower the price of the Production Line by US $250,000.

In response to [Seller]'s allegations regarding the transformation of the three-headed water nozzle welder into a four-headed welder in order to adapt to the Blueprint dated 8 August 2002, as well as the addition of a universal-positioned automatic tube welder and a water nozzle welder, [Buyer] claims that it has never had correspondence with [Seller] in this respect. Since the parties did not have any consultations on this matter, and the Blueprint dated 8 August 2002 is within the sphere of adjustment of the Production Line, the Arbitral Tribunal deems that the machines above were covered by the total price under the Contract.

4. The Inspection Report issued by the Beijing Bureau

In regard to the parties' dispute over the Inspection Report issued by the Beijing Bureau, the Arbitral Tribunal has examined the Inspection and Indemnity Clause, and considered the parties' examination of relevant evidence. The Arbitral Tribunal notes that it was upon [Buyer]'s application that the Beijing Bureau conducted the inspection on 25 February 2004. Under the Entry-Exit Commodity Inspection Act of P.R. China (as amended on 28 April 2002), [Buyer] was entitled to file such an application, and the Beijing Bureau had the authority to conduct the inspection upon [Buyer]'s application. If [Seller] had doubts about the Inspection Report, it could have, as permitted by the Entry-Exit Commodity Inspection Act, raised its doubts to the Beijing Bureau or applied for review of the Inspection Report. In fact, [Seller] did apply to the Beijing Bureau in March 2005 for revocation of the Inspection Report. The Beijing Bureau received the application on 17 March 2005 and decided on 29 March 2005 that the Inspection Report should not be revoked. In reply, the Beijing Bureau informed [Seller] that the Inspection Report complied with the Chinese law.

As evidenced by the Minutes of the Coordination Meeting on 21 February 2004, the Production Line had not been inspected before that, and its inspection was subsequently suspended, the liabilities for which have been discussed in IV No. 2 of the Arbitral Tribunal's Opinion. [Seller] admitted that some parts of the Production Line were made in China as confirmed by the Inspection Report. This issue has been dealt with in IV No. 3 of the Arbitral Tribunal's Opinion. Therefore, the Arbitral Tribunal does not make further comments on the present issue.

5. [Buyer]'s use of the Production Line and relevant liabilities

According to [Seller]:

"[Buyer] has used the Production Line and benefited from such use while the line has not been inspected as agreed in the Contract. ... When promoting its products to the public on the Internet, [Buyer] spoke highly of the Production Line and described it as a first-class Production Line introduced from the U.S. ... On 6 March 2005, [Seller]'s Chinese subsidiary was able to purchase split-style solar water heaters of 300 L (i.e., 540mm in diameter) produced by [Buyer] on 31 December 2004. This shows that [Buyer] has been using the Production Line and benefiting from such use. ... To protect [Seller]'s justified interests, the goods should be presumed to have passed the final acceptance inspection. This would not prejudice [Buyer]'s interests."

In response to [Seller]'s allegations, [Buyer] stated that:

It did not "have the capability to assemble and modify the Production Line ... Even [Seller] itself was not able to provide a conforming production line or modify the Production Line for that purpose. Thus it does not stand to assume that [Buyer] has modified the Production Line and put it to use. ... [Buyer]'s online promotion of its water heaters cannot lead to the conclusion that the promoted products were produced by the disputed Production Line. [Buyer] was able to produce the products promoted on the Internet even before the introduction of the Production Line."

[Buyer] further argued that:

"When promoting [Buyer]'s products on the Internet, the statements made by the distributors were often exaggerated. One example is the statement 'the production efficiency of two products per minute.' Even if [Seller] has provided a conforming production line, it can only reach the production efficiency of one product per two minutes, not to mention that the Production Line is non-conforming. The distributors' statements only represented their own positions, and are not binding on [Buyer]."

The Arbitral Tribunal has noted the dispute above. In the Arbitral Tribunal's opinion, the parties' dispute over the use of the Production Line before inspection essentially revolves around the question as to whether the Production Line conforms to the Contract. This question has been dealt with in IV No. 2 and 3 of the Arbitral Tribunal's Opinion. Nevertheless, the Arbitral Tribunal should highlight the fact that [Seller] has delivered the Production Line to [Buyer], and [Buyer] has made all the payments to [Seller]. Therefore, [Buyer] is entitled to the ownership of the Production Line, and may use it and dispose of it.

[Seller] alleged that "[Buyer] has used the Production Line and benefited from such use while the line has not been inspected". In response, [Buyer] argued that "even [Seller] itself was not able to provide a conforming Production Line or modify the Production Line for that purpose. Thus it does not stand to assume that [Buyer] has modified the Production Line and put it to use. ... [Buyer] was able to produce the products promoted on the Internet even before the introduction of the Production Line." The Arbitral Tribunal deems that [Seller]'s argument is unfounded, and the Production Line should not be "presumed to have passed the final acceptance inspection."

6. The conformity of the Production Line

The Contract has not been fully performed, and the Production Line has not been accepted to date. Neither of the parties produced persuasive evidence to prove the (non)conformity of the Production Line. Moreover, [Seller]'s application for inspection was not made within the time period and hence was rejected. Therefore, based on the evidence at hand, the Arbitral Tribunal holds that at this stage it is unclear whether the Production Line conforms to the specifications under the Contract.

V. The two Automatic TIG Longitudinal Seam Welders

[Buyer] claims that "[t]he packing list and customs declaration provided by [Seller] did not indicate that the two longitudinal seam welders were included in the equipment for the Production Line. These two longitudinal seam welders were delivered by [Seller] in accordance with Contract No. PHT211012JTL dated 12 October 2001 before the conclusion of the Contract for the Production Line". [Seller] challenges the Arbitral Tribunal's jurisdiction over the dispute concerning the two longitudinal seam welders, and argues:

"As to the question whether this contract constituted part of Contract No. CUSQTBJ-S020627CR, the answer is to be found within Contract No. CUSQTBJ-S020627CR. Since Contract No. CUSQTBJ-S020627CR does not stipulate that the goods under Contract No. PHT211012JTL are part of the goods under the present Contract, [Buyer]'s argument is unfounded. Accordingly, Contract No. PHT211012JTL and the present Contract No. CUSQTBJ-S020627CR are two separate contracts."

Since the goods under the present Contract have been declared and the Customs are cleared, the Arbitral Tribunal establishes that the goods under the present Contract have been delivered. The Arbitral Tribunal will not hear the dispute arising out of Contract No. PHT211012JTL.

VI. [Buyer]'s claims and [Seller]'s counterclaims

1. [Buyer]'s claims are: (a) restitution of all the goods to [Seller], or alternatively, reduction of US $1,200,000 from the original price of the goods, and reimbursement of US $871,800 as a result of reduction of US $328,000; (b) US $109,400 as liquidated damages to be paid by [Seller]; (c) total counsel fee of RMB 700,000 and arbitration costs to be borne by [Seller].

With respect to these claims, based on the Contract and relevant documents, the Arbitral Tribunal rules as follows.

(a) Restitution of the goods and reimbursement of the payment

In the light of the Indemnity Clause, and based on the fact that the acceptance inspection of the Production Line has not been conducted, the Arbitral Tribunal holds that at this stage it is not clear whether the Production Line conforms to the Contract. Seeing that the Contract has not been fully performed, and the inspection has not been conducted, [Buyer]'s claim is dismissed. Nevertheless, if in the future the final inspection or other evidence shows that the Production Line is indeed non-conforming, [Buyer] is still entitled to file this claim.

(b) Reduction of US $1,200,000 from the price of the goods

According to the Indemnity Clause, the price reduction depends on "...the extent of the defects, the degree of damage of the goods, and [Buyer]'s losses". [Buyer]'s claim for reduction of US $1,200,000 is based on the purported fact that "...the equipment provided by [Seller] was seriously defective and non-conforming." The Arbitral Tribunal is of the opinion that since some of the delivered machines are from China, the price calculated based on US dollars is definitely higher than the actual value of the goods. Therefore, it is reasonable to lower the price of the Production Line by US $250,000. However, since the acceptance inspection has not been conducted, the extent of the defects of the goods and the damages incurred by [Buyer] cannot be determined. Therefore, [Buyer]'s claim is dismissed.

In addition, since US $328,000 was a guarantee for the quality of the goods for a period of one year starting from acceptance of the goods, and the Production Line has not been accepted, the period of guarantee has not expired. Accordingly, [Buyer] is entitled to retain US $328,000. After the acceptance inspection is conducted, or if there is other evidence proving the (non)conformity of the goods, either party may resort to arbitration to settle their dispute over the sum.

(c) US $109,400 as liquidated damages to be paid by [Seller]

The Arbitral Tribunal notes that [Buyer]'s claim is based on Article 19 of the Contract. However, Article 19 deals with punitive damages for late delivery rather than non-conformity of the goods. Therefore, the Arbitral Tribunal dismisses [Buyer]'s claim.

(d) Attorneys' fee

The Arbitral Tribunal considers it reasonable to rule that [Seller] shall pay RMB 250,000 as counsel fee to [Buyer].

2. [Seller]'s Counterclaims are: (a) reimbursement of US $328,000 as guarantee for the Contract performance and the interest thereon; (b) payment of US $225,000 by [Buyer] for the added machines; [Seller]'s counsel fee of RMB 800,000 as well as arbitration fee and expenses to be paid by [Buyer].

In the light of the holdings above, the Arbitral Tribunal rules that [Seller]'s counterclaims are dismissed.

3. In view of the respective liabilities of the parties and the above rulings regarding their claims and counterclaims, the Arbitral Tribunal rules that with respect to the main claims, [Buyer] shall bear 20% of the arbitration costs, while [Seller] shall bear 80%; as for the counterclaims, [Seller] shall bear 75% of the arbitration costs, while [Buyer] shall bear the other 25%.

AWARD

The Arbitral Tribunal rules as follows:

1.    The price of the goods should be lowered by US $250,000, and hence [Seller] shall reimburse US $250,000 to [Buyer];
 
2. [Seller] shall pay RMB 250,000 to [Buyer], in order to indemnify [Buyer] for part of its counsel fee;
 
3. The arbitration costs for the main claims are RMB 289,853. [Buyer] shall bear 20% of the costs, i.e., RMB 57,970.60, while [Seller] shall bear 80%, i.e., RMB 231,882.40. The costs are set off by [Buyer]'s advance at CIETAC. Therefore, [Seller] shall pay RMB 231,882.40 to [Buyer].

The costs of arbitration for the counterclaims are RMB 140,624. [Buyer] shall bear 25% of the costs, i.e., RMB 35,156, while [Seller] shall bear 75%, i.e., RMB 105,468. The costs are set off by [Seller]'s advance at CIETAC. Therefore, [Buyer] shall pay RMB 35,156 to [Seller].
 

4. Other claims of [Buyer] and other counterclaims of [Seller] are dismissed.

After the above payments to be made by the parties are set off, [Seller] shall pay RMB 446,726.40 and US $250,000 to [Buyer].

This payment is to be made by [Seller] within 30 days after this arbitral award is made. If the payment is made after this period has expired, interest will be charged at an annual interest rate of 6%.

This arbitral award is final and binding, and takes effect from the date it is made.


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 the United States 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].

** Weidi LONG, Ph.D. candidate, Wuhan University, China; LL.B., Sun Yat-sen University, China.

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