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CISG CASE PRESENTATION

China 31 May 2006 CIETAC Arbitration proceeding (Diesel generator case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/060531c1.html]

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

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Case identification

DATE OF DECISION: 20060531 (31 May 2006)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2006/01

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Singapore (respondent)

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

GOODS INVOLVED: Diesel generators


UNCITRAL case abstract

PEOPLE'S REPUBLIC OF CHINA: China International Economic & Trade Arbitration
Commission (CIETAC) (now South China Branch) 31 May 2006 (Diesel generator case)

Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/114],
CLOUT abstract no. 1117

Reproduced with permission of UNCITRAL

Abstract prepared by Haocen Shi

A Chinese buyer and a seller from Singapore signed a contract for the purchase of diesel power generation units. The buyer made full payment for and took delivery of the goods according to the contract. However, the units started to have problems while under warranty. The buyer contacted the seller several times to seek remedies, but the latter refused to honour its guarantee obligations. As a result, the buyer initiated arbitration proceedings, asking the Arbitration Tribunal to order the seller to accept responsibility for damages. The buyer also claimed that the seller (first respondent) was an agent of Company K (the second respondent) and Company D (the third respondent) in Singapore. They should therefore accept joint liability.

Both the second and the third respondents disputed jurisdiction. The Tribunal decided on the basis of prima facie evidence that the Tribunal had jurisdiction over the second respondent but not over the third respondent.

The seller (the first respondent) argued that in selling the power generation units it had acted as an agent of the second respondent. The provisions of the agreement for the purchase of the units that it had signed with the buyer should thus be directly binding for the second respondent. The liability both for breach of contract and for tort ought therefore to be assumed by the second respondent.

The second respondent argued that no arbitration agreement or clauses existed between it and the buyer, and that its relationship with the first respondent was not one of agency. Furthermore, the problems that the machines had were caused by inappropriate operation by the buyer rather than production. If the buyer wished to claim damages for breach of the contract, the second respondent was not the proper subject for such a claim. If the buyer sued for tort liability, its claim should be rejected as the machine did not have any defects.

According to the Tribunal, the relationship between the seller (the first respondent) and the second respondent should be governed by the law of Singapore, since both parties had their place of business in Singapore. The Tribunal found that, under Singaporean law, no relationship of agency by agreement existed between them.

As for the rules regarding the international sale of goods, the seller and the buyer had not established in the contract the law by which the contract would be governed. In view of the fact that the places of business of both parties were in States Parties to CISG, the Tribunal ruled that, under article 142 of the General Rules of the Civil Code of the People's Republic of China, the case should be governed first and foremost by the Convention. Matters not provided for in the Convention should be governed by the law of the State most closely connected with the case, which was Chinese law.

Regarding liability for the failures of the machines, the Tribunal established that since the seller was not an agent of the second respondent it should be responsible for repairing any defects in the goods. Because of its refusal to do so, and because of the non-conforming goods, the buyer had suffered damages. Under article 45, 46(3) and 74 of the Convention, the Tribunal ruled that the seller should compensate the buyer for damages, which in the case at hand consisted of the costs of repairing the machines.

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Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Article 4 [Also cited: Articles 45 ; 46(3) ; 74 ]

Classification of issues using UNCITRAL classification code numbers:

4B [Scope of Convention (issues excluded): agency issues];

46C [Buyer's right to require repair of non-conforming goods];

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

Descriptors: Scope of Convention ; Agency issues ; Repair ; Damages

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Editorial remarks

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

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

Diesel generators case (31 May 2006)

Translation [*] by Meihua Xu [**]

Translation edited by William Zheng [***]

The China International Economic and Trade Arbitration Commission, Huanan Commission (formerly known as the China International Economic and Trade Arbitration Commission, Shenzhen Commission; on 18 June 2004, renamed as the China International Economic and Trade Arbitration Commission, Huanan Commission, hereafter, the "Huanan Commission") accepted the case according to:

   -    The arbitration clause in the Purchase Agreement signed by the Claimant [Buyer], China __ Non-woven Products Company and Respondent Singapore __ Power System Co., Ltd.; and
 
   -    The written arbitration application submitted by [Buyer].

This case is qualified to use the Arbitration Rules of the Arbitration Commission (hereafter, the "Arbitration Rules"), which became effective on 1 October 2000.

In the arbitration application, the [Buyer] listed Singapore __ Power System Co., Ltd. as the First Respondent, Singapore K Power System Company (hereafter, "K Company") as the Second Respondent, and D Company as the Third Respondent.

On 26 January 2005, the Huanan Commission sent to the aforesaid three Respondents respectively, the arbitration notice, the [Buyer]'s arbitration application and attached evidence, the Arbitration Rules, arbitration fee list, and the arbitrators' name list by express mail. The corresponding arbitration documents were sent to the [Buyer] on the same day.

On 22 February 2005, D Company raised a jurisdiction objection and, on 1 March 2005, K Company also raised a jurisdiction objection. On 30 March 2005, the [Buyer] submitted a counter statement responding to the jurisdiction objections. Thereafter, the parties submitted further opinions and statements on the jurisdiction issues.

On 16 June 2005, the Arbitration Commission issued a (200X) China Mao Zhong Jing Zi No. __ Jurisdiction Decision, concluding that:

  1. The evidence shows a prima facie case for an arbitration agreement between the [Buyer] and K Company; therefore, the Arbitration Commission has jurisdiction over K Company;

  2. However, there was no arbitration agreement between the [Buyer] and D Company; therefore, the Arbitration Commission has no jurisdiction over D Company;

In this Jurisdiction Decision, the Arbitration Commission ruled that whether or not there was an agency relationship between the [First Respondent] and K Company should be determined after the Arbitration Tribunal completes the substantive hearing.

On 17 June 2005, the Secretariat of the Huanan Commission sent the aforesaid Jurisdiction Decision to the parties, informing them that, based on the decision, D Company, the former Third Respondent, would no longer be party to the arbitration process, and asked the other parties to appoint arbitrators and prepare their arguments.

Based on the Arbitration Rules, the [Buyer] appointed Mr. Z as its arbitrator. Since the First and Second Respondents failed to jointly appoint or ask the Chairman of the Arbitration Commission to appoint an arbitrator within the stipulated time, the Chairman of the Arbitration Commission appointed Mr. L as their arbitrator. Since the parties failed to jointly appoint or ask the Chairman of the Arbitration Commission to appoint a Presiding Arbitrator within the stipulated time period, the Chairman of the Arbitration Commission appointed Mr. S as the Presiding Arbitrator based on the Arbitration Rules. On 3 August 2005, the aforesaid three arbitrators formed the Arbitration Tribunal to hear this case.

The Arbitration Tribunal originally scheduled a court session at 9 a.m. on 13 September 2005 at the Huanan Commission. However, on 23 August, Second Respondent K Company sent a letter, asking for a postponement of the court session. On 29 August 2005, the [Buyer] and the [First Respondent] sent letters, respectively, disagreeing with K Company's request for postponement. In order to give sufficient time to the parties to provide related evidence and written opinions, which would be beneficial for an efficient court session, after discussion, the Arbitration Tribunal decided to postpone the court session to 27 September 2005.

The aforesaid Arbitration Tribunal Formation notice, court session notice, and court session postponement notice were sent to the parties in accordance with the Arbitration Rules.

On 27 September 2005, a court session was held in Shenzhen. The [Buyer] and the [First Respondent] and the Second Respondent (K Company) sent representatives to the court session, however, K Company was still raising jurisdiction objections. The parties made statements, presented arguments, answered the Arbitration Tribunal's questions, and verified and confirmed the related evidence.

After the court session, the [Buyer], the [First Respondent], and K Company submitted representation statements, respectively, with the [Buyer] objecting to K Company's representation statement. The [Buyer] also submitted a request for an interim decision.

On 30 April 2006, based on the Arbitration Rules, the Secretariat of the Huanan Commission agreed to postpone the deadline for issuing an award on this case to 31 May 2006 after being requested by the Arbitration Tribunal.

This case has been concluded, and the Arbitration Tribunal issued its award by consent based on the evidence provided by the [Buyer] and the two Respondents, the court session, and the stipulations in relevant laws.

The following are the facts, the Tribunal's opinion and award.

I. FACTS

(1) Stipulations in the parties' agreement

On 1 March 2004, the [Buyer] and the [First Respondent] signed a Purchase Agreement (hereafter, the "Contract") in J City, Fujian Province with the following main terms:

  1. Goods: [Buyer] shall purchase one imported brand new D brand 2000DP5 1600KW/2000KVA diesel generators set (hereafter referred to as, the "Genset") with original Germany D brand generator, with a value of US $220,000;

  2. Payment: After the conclusion of the contract, the [Buyer] shall pay 20% of the contract price, i.e., US $44,000 to K Company by T/T; and shall pay 80% of the contract price, i.e., US $176,000 two weeks prior to the shipment;

  3. Delivery deadline: The Genset shall be shipped from the manufacturer in Singapore within five weeks;

  4. The [First Respondent]'s responsibility: The [First Respondent] guarantees that the Genset is original imported with a D brand engine and France Leroy Somer (LSA51.2L70) electrical ball, and that the size and performance of the Genset are conforming;

  5. Items which should be delivered by the [First Respondent]:

    (1) Genset (each should include diesel engine, generator, radiator, auto control box, shock absorber, and chassis);

    (2) Attachment: charger, exhaust silencer, bellow, exhaust elbow (one on each generator), new machine testing report, certificate of origin, battery and connecting cable (one set on each generator), and one set of documents;

  6. Quality guarantee period: One year under normal operation or a total of 1,000 hours of operation, whichever comes first;

  7. After-sales service: The [First Respondent] shall respond within forty-eight hours after receiving a repair request if the Genset breaks down;

  8. Arbitration and compensation: An arbitration application shall be filed with the Arbitration Commission if the goods are found to be non-conforming after they arrive at the destination port. The decision made by the Arbitration Commission shall be final and binding;

  9. This agreement has four copies. Each party will keep one English and one Chinese version (unclear parts should be explained based on the Chinese version), which become effective after being signed with seals affixed thereto, and they have the same legal effect.

(2) [Buyer]'s arbitration claims

The [Buyer] alleges that it has paid the entire price for the goods and accepted the goods; however, after 110 hours of operation after installation, the Genset broke down. The [Buyer] applied to Entry & Exit Inspection and Quarantine Bureau (hereafter, "JIQB") for inspection in J City, where the goods arrived. The conclusion was that:

"The explosion on cylinder A1 and scorching heat on other cylinders were caused by the fact that the oil lubricating system was not functioning well and the fact that the warning and auto protection system did not work. This was caused by manufacturing defects."

The [Buyer] alleges that it repeatedly sought to negotiate a mitigation of damages with the [First Respondent], but that the [First Respondent] refused to perform in accordance with the contract and the quality stipulations in the relevant laws, which constituted an infringement and a fundamental breach of the contract. Therefore, the [Buyer] filed the arbitration application. In its arbitration application, the [Buyer] alleges that Second Respondent K Company, Third Respondent D Company and the [First Respondent] have an agency relationship; therefore, the aforesaid three parties should be regarded as Respondents. The [Buyer] asks the Arbitration Tribunal to rule that:

  1. The three Respondents shall bear joint liability to compensate the economic loss of the [Buyer] in the amount of US $220,000;

  2. The three Respondents shall bear joint liability to pay the [Buyer]'s attorneys' fee in the amount of US $4,500;

  3. The three Respondents shall bear joint liability to pay the [Buyer]'s traveling fee for processing this case;

  4. The three Respondents shall bear joint liability to pay the arbitration fee which has been paid by the [Buyer] in advance.

(3) [Buyer]'s main position

      1. The [Buyer] alleges that:

      -    Chinese law should be applied to this case;
      -    The [First Respondent] and K Company have an agency relationship;
      -    On 8 September 2003, K Company signed a Letter of Certification; and
      -    The reliability, the relationship with this case, and the legality of the evidence of this have been confirmed.

      The [Buyer] further alleges that:

      -    On 15 September 2004, Second Respondent K Company signed another Letter of Certification, by which K Company authorized / appointed / entrusted the [First Respondent] to sell generators, and that the [First Respondent] has the authority of an agent to provide technical support and after-sales service. Whether the [First Respondent] and K Company had an agreement on commission does not affect the existence of their agency relationship. Evidence provided by the [First Respondent] and the [Buyer] prove each other, indicating the existence of the agency relationship and that K Company was the party to the Contract.
 
      -    In order to avoid its liability for violation of the contract and to disguise its fraud of providing used goods as brand new goods and defective goods as conforming goods, Second Respondent K Company denied its legal liability, raising that there was no agency relationship between it and the [First Respondent]. However, K Company not only entrusted the [First Respondent] to sell the goods in this case, but also authorized it to start up the machine during test running. K Company alleged that it had been entrusted; however, the evidence provided by K Company failed to prove its allegation.

      2. The quality certificate provide by the [Buyer] indicates that:

      -    After 110 hours of operation, the Genset provided by Second Respondent K Company broke down, which was caused by manufacturing defects after being inspected by JIQB.
 
      -    As an authorized inspection agency in China, the equality and authority of the quality inspection certificate issued by JIQB have been established and confirmed, and it is more powerful than other written evidence or evidence provided in other forms.

On 1 April 2004, K Company failed to provide the test running report with delivery as required by the Contract, which was obviously a violation of the Contract. In addition, there was an issue of the reliability of this test running report. Therefore, even if the quality of the goods had been confirmed prior to delivery, it could not prove the conformity of the goods.

It is an undeniable fact that the Genset had a cylinder explosion within 110 hours of operation, which was within the quality guarantee period. Second Respondent K Company argues that the problem on the Genset was caused by the [Buyer]'s improper operation and the [First Respondent]'s improper maintenance, but failed to provide supporting evidence. After the problem occurred, Mr. LC, the Manager of K Company, Mr. H, the Manager of Third Respondent D Company, and the [Buyer] took a sample of lubricating oil to inspect, with the result that the lubricating oil was conforming and that the problem was not caused by the lubricating oil. The evidence provided by K Company indicated that Mr. H of D Company, the manufacturer of the engine, insisted that the problem on Genset was an internal problem.

Because K Company sold non-conforming goods and refused to take responsibility to repair, disguising the fact that the engine quality guarantee period had expired, the Genset purchased by the [Buyer] was like scrap iron. It could not be used to realize the purpose of the Contract, causing severe losses to the [Buyer].

(4) The [First Respondent]'s main position

      1. The [First Respondent] alleges that it sold the Genset in this case as an agent entrusted by Second Respondent K Company, therefore, K Company bears legal responsibility. The Letter of Certification issued by K Company to the [First Respondent] on 8 September 2003 indicted that the [First Respondent] was a sales agent authorized / appointed / entrusted by K Company, and that the [First Respondent] could sell products and provide after-sales service as authorized / appointed / entrusted by K Company. K Company is therefore liable for any legal consequences incurred by the [First Respondent]'s resale performance within the scope of the agency as authorized / appointed / entrusted by K Company. Thus, the stipulations in the Contract have binding effect directly on K Company, and K Company should bear legal responsibility.

The arbitration clause in the Contract is not beyond the scope of the agency relationship as authorized / appointed / entrusted by K Company. Therefore, the [First Respondent] supports the Arbitration Commission's decision that it has jurisdiction over Second Respondent K Company.

K Company's assertion that it has only a sales relationship with the [First Respondent], and not an agency relationship, is erroneous. If the [First Respondent] had not been authorized / appointed / entrusted by K Company, it would have been unable to start and finish the sales process. In fact, K Company has not terminated the authorization / appointment / entrustment of the [First Respondent]. This is evidenced by the Letter of Certification issued by K Company to the [First Respondent] on 15 September 2004, by which K Company authorized / appointed / entrusted the [First Respondent] to perform maintenance on K Company's products. K Company's shipment and delivery of the goods does not change the [First Respondent]'s position as an agent of K Company.

At the conclusion of the Contract, the [Buyer] knew or should have known that K Company was the seller of the Genset, and that the [First Respondent] sold the goods only as the agent of K Company.

      2. Second Respondent K Company is the supplier and manufacturer of the Genset in this case. It should bear the entire liability for quality of the goods. The [Buyer]'s asking the [First Respondent] to bear the responsibility for quality problem has no factual and legal basis. If the [Buyer] chooses to investigate liability for violation of the Contract, it should claim against the supplier in the Contract (the supplier of the Genset), namely, K Company. If the [Buyer] chooses to investigate quality liability, K Company should be held responsible for that as well;

      3. The problem on the Genset was caused by manufacturing defects, which has no causal relationship with the [First Respondent]'s sales act as an agent of K Company. Therefore, the [First Respondent] should not be held liable for this. As to Second Respondent K Company's allegation that the problem was caused by the [First Respondent]'s improper maintenance, the [First Respondent] states that there is no supporting evidence for this, and that even though the [First Respondent] had performed maintenance on the goods, it was performed as entrusted by K Company, and K Company shall bear the legal result;

      4. The [Buyer] failed to provide any legal and effective evidence to support its loss of US $220,000. The parties in this case failed to reach an agreement on the charge for repairs. Therefore, this claim should be dismissed and the [Buyer] should claim only after the amount is confirmed. The [Buyer]'s claim for compensation based on the purchase price lacks legal and contractual basis; and

      5. The [Buyer]'s claims for attorneys' fee of US $4,500 and traveling fee have no basis.

(5) Second Respondent K Company's main position

      1. The facts show that there is no arbitration clause or arbitration agreement between K Company and the [Buyer]. The [First Respondent] and K Company have an independent sales relationship, and K Company has actually performed the purchase order sent by the [First Respondent]. The parties to the Contract were the [Buyer] and the [First Respondent], but not K Company. The [Buyer] did not sign the Contract based on the awareness that the [First Respondent] was the dealer or the agent of K Company. The arbitration clause in the Contract has binding effect only upon the [Buyer] and the [First Respondent], and there is no agreement between K Company and the [Buyer], nor is there any arbitration clause or arbitration agreement between them. Second Respondent K Company signed and performed an independent sales contract with the [First Respondent].

The facts prove that there is no agency relationship between K Company and the [First Respondent], and [Buyer]'s assertion of "agency relationship" has no legal basis no matter whether based on Singapore law or Chinese law. The [Buyer] alleges an agency relationship based on the Letter of Certification. This Letter of Certification of 8 September 2003 was a certificate issued by the manufacturer to the dealer, by which an agency relationship could not be established.

In China, authorized distribution arrangements are quite common. This method has also been recognized and addressed under the relevant laws of China. The Letter of Certification issued on 15 September 2004 was also a certificate to a dealer, which was issued after the sales of the Genset had been completed. Therefore, it had nothing to do with the sales of the Genset in this case, and it only set forth that a dealer had the right to provide K Company's standard maintenance plan. The instrument panel delivery list issued by K Company on 23 April 2004 had no effect on the legal relationship in this case. Mr. W of the [First Respondent] signed the Start-up Notification, which should be filled in by the dealer. Therefore, the [First Respondent]'s signing on this document indicated its position as a dealer.

No matter whether based on Singapore law or Chinese law, [Buyer]'s allegation of agency relationship has no legal basis.

      2. The facts in this case indicate that the Genset was conforming and is accompanied by a manufacturer's conditional guarantee clause. The Genset has no defect, and performs the entire functions it was supposed to perform, which was in accord with the quality description indicated in the Chinese version of the Operating Instructions. The Genset had performed normally for three months, totaling 110 hours. We have provided evidence showing that the problem on the goods was caused by the [Buyer]'s improper operation and removal of parts that had problems.

The only evidence to prove that the Genset was non-conforming was the quality certificate issued by JIQB on 30 September 2004. This evidence has several defects and is rebutted by other evidence proved by the [Buyer]. Therefore, K Company alleges that this evidence cannot support the [Buyer]'s aforesaid allegation.

The facts indicate that the performance of the Genset had been inspected before K Company delivered it to the [First Respondent], with the result that the goods were found conforming. When delivering the Genset, K Company provided to the [First Respondent] technical documents, including Operating Instructions in Chinese, a Certificate of Origin, and D brand Engine Operating Instructions. Second Respondent K Company had performed its obligations stipulated in the purchase order sent by the [First Respondent]. More importantly, the final client, the [Buyer], has used and operated the machine for 110 hours. The parties have no dispute on three months, totaling 110 hours of operating time. Therefore, according to article 26 of the Product Quality Law of the PRC, the goods have the functions which they should have, and the quality conforms to the stipulations in the Operating Instructions. Therefore, the quality of the goods is conforming.

It needs to be mentioned that the [Buyer] failed to sign on the Start-up Notification. The items which should be inspected have been completed. This further indicated that the Genset has been properly installed and adjusted to perform normally, and that the [Buyer] has accepted the conforming Genset.

The problem was caused by the [Buyer]'s improper use and operation, for which K Company provided the following evidence:

      -    An e-mail sent by Mr. W of the [First Respondent], reporting the damage on the fuel oil solenoid valve;
 
      -    The [First Respondent]'s purchase order to buy the fuel oil solenoid valve on 19 July 2004;
 
      -    D brand's report issued in August 2004, and the D engine Operating Instructions.

      3. The [Buyer]'s compensation claims lack legal and contractual basis no matter whether they were filed based on contract violation or infringement. Therefore, they should be dismissed. If the [Buyer] filed claims based on contract violation, then since K Company is not the subject in this case, the [Buyer]'s claims lack legal and factual basis; therefore, they should be dismissed. If the [Buyer] filed claims based on infringement, considering the aforesaid facts that the Genset had no defect with all functions it should have, and that the damage was caused by the [Buyer]'s improper operation, the [Buyer]'s compensation claim is not in accordance with the stipulations in the Product Quality Law of the PRC, and should be dismissed.

II. OPINION OF THE ARBITRATION TRIBUNAL

(1) The applicable law

The dispute in this case involves two legal relationships, i.e., agency and international sales.

Law applicable to an agency relationship

Whether there was an agency relationship between the [First Respondent] and Second Respondent K Company, and whether the [First Respondent] was K Company's agent? The Arbitration Tribunal notes that the two Respondents were companies in Singapore. Therefore, it rules that the law of the two Respondents' places of business, the law of Singapore, shall be applied to determine whether there was an agency relationship,

Law applicable to the international sales of goods

The Contract has no stipulation on the applicable law. The [Buyer]'s place of business is in China and the Respondents' are in Singapore, and both China and Singapore are Contracting States of the United Nations Convention on Contracts for the International Sales of Goods (hereafter referred to as, the "CISG"). Therefore, based on Article 142 of the Civil Code of the PRC, the CISG shall apply and has priority. As to the issues beyond the scope of the CISG, the Arbitration Tribunal deems that China has the closest relationship with the dispute in this case. Therefore, based on Article 145 of the Civil Code of the PRC, the proximate connection principle, Chinese law shall be applied to those issues.

(2) Interim decision

Based on the jurisdiction decision, the Arbitration Commission has jurisdiction over Second Respondent K Company. External evidence indicates that the [First Respondent] was K Company's agent, and the arbitration agreement has binding effect on K Company. However, the Arbitration Commission notes that the agent relationship is an issue that should be finally decided by the Arbitration Tribunal after making decision on the subject matter of this case.

As to Third Respondent D Company, the Arbitration Commission has ruled that it has no arbitration agreement with the [Buyer]. Therefore, the Arbitration Commission has no jurisdiction over it. Based on the aforesaid decision, the Arbitration Commission did not notify D Company to attend the court session. Even though Second Respondent K Company preserves the right to raise jurisdictional objections, the Arbitration Commission notified it to attend the court session.

After the court session, the [Buyer] asked the Arbitration Tribunal to make an interim decision on the issue of jurisdiction over Second Respondent K Company. However, considering that the jurisdiction decision made by the Arbitration Commission clearly indicated that the agency relationship between the [First Respondent] and K Company shall be determined after the Arbitration Tribunal makes its decision on the subject matter of this case, and considering that the Arbitration Tribunal was investigating and discussing the agent relationship between the [First Respondent] and K Company at that time, the Arbitration Tribunal was unable to make an interim decision.

(3) Agency relationship

During the substantive hearing, in order to prove that there was an arbitration agreement between the [Buyer] and Second Respondent K Company, the [Buyer] provided a Letter of Certificate issued by K Company to the [First Respondent], and a Manufacturer's Warranty and Start-up Notification issued by K Company, which reported that "the [First Respondent] is an authorized dealer in Singapore. As such, they are authorized to sell and service our products". The [Buyer] explained the word "dealer", stating that " 'dealer' has various meanings, it generally refers to distributors for various kinds of commodities, retailer, distributor, trader, or agent. There are different definitions in English - Chinese dictionaries". The [Buyer] did not provide any further evidence to support its explanation. In order to investigate the facts, the Arbitration Tribunal examined the related dictionaries, but failed to find the explanation for dealer as "agent" or "agency". The Arbitration Tribunal therefore, holds that the [Buyer]'s translating "dealer" into the Chinese word "Jingxiaoshang" is correct.

The Manufaccturer Warranty signed by K Company indicated that "the goods shipped in the above referenced description are to be brand new and manufactured by K Company Singapore (K Company)" without any content regarding the agency issue. In the Start-up Notification, the "Authorized Representative Performing Start-up" was indicated as the [First Respondent], based on which, the [First Respondent] alleges that it was K Company's agent. After examining this document, the Arbitration Tribunal holds that K Company did not designate the [First Respondent] as its agent, but only authorized the [First Respondent] as its representative to perform the start-up of the machine.

After investigation, it was found that the [First Respondent] purchased the Genset in this case directly from K Company. After bargaining, K Company issued an invoice giving the [First Respondent] the title, and the [First Respondent] paid the price by check. After the Genset broke down, the [First Respondent] called itself a dealer or a mere middleman in the corresponding letters sent to K Company. In these letters, the [First Respondent] was trying to avoid liability, but never called itself an agent.

During the negotiation on the issue of repair, the [First Respondent] had never alleged that it was an agent, but emphasized that the contract between the [First Respondent] and K Company was a sales contract. The [First Respondent] sent an e-mail to K Company, stating that "our sales contract is clearly drawn in between T (the [First Respondent] - translator's note) and K (Second Respondent K Company - translator's note) and not D (Third Respondent D Company - translator's note), so please have a clear understanding."

The [Buyer] alleges that the Purchase Order sent by the [First Respondent] to Second Respondent K Company for the purchase of the Genset cannot prove the sales relationship between the two parties. Compared with the Letter of Certification, the Purchase Order is less powerful, which cannot repudiate the content in the Letter of Certification. The [Buyer] makes the aforesaid argument without providing further evidence. The [First Respondent] makes argument on the Purchase Order as well, alleging that "the Purchase Order was only a B/L sent by a consignor to a consignee, which does not have the nature of a sales contract". As to why this Purchase Order is a B/L which does not have the nature of a sales contract, the [First Respondent] failed to make further argument.

K Company provided a legal opinion by the __ Law Firm of Singapore regarding relevant laws of Singapore, with the conclusion that:

"Based on the material we examined and the aforesaid content, our opinion is that K Company (Second Respondent K Company - note by the Arbitration Tribunal) and Singapore __ Company (the [First Respondent] - note by the Arbitration Tribunal) have no agency relationship. In addition, based on Singapore law, there is no legal basis for the [Buyer]'s allegation."

[First Respondent] and the [Buyer] raised objection to this document, but failed to provide a legal opinion regarding the stipulations in Singapore law.

Based on the above, the Arbitration Tribunal concludes that the [Buyer] and the [First Respondent]'s assertion that the [First Respondent] and K Company had a sales relationship during the sales of Genset is not a sufficient basis for determining that an agency relationship

Since the [Buyer] and the [First Respondent]'s allegation that the [First Respondent] and K Company had an agency relationship cannot be supported based on the evidence in this case, the Arbitration Tribunal does not accept that the [First Respondent] concluded the Contract as the agent of Second Respondent K Company.

The Arbitration Tribunal notes that since the [First Respondent] was not the agent of K Company, and the Contract was signed by the [Buyer] and the [First Respondent], therefore, the arbitration clause was the agreement between the [Buyer] and the [First Respondent], which has nothing to do with Second Respondent K Company.

(4) Responsibility for the problem on the Genset

The Arbitration Tribunal ascertained that on 1 March 2004, the [Buyer] and the [First Respondent] signed the Contract with the following terms:

   -    Goods: The [First Respondent] was to provide a Model TBD620V16 imported original brand new D Diesel Generators set;
 
   -    Price: US $220,000;
 
   -    Quality guarantee period: Within one year under normal operation or operating for a total of 1,000 hours, depending on which comes first;
 
   -    After-sales service: The [First Respondent] shall respond within forty-eight hours after receiving a request for repair if the machine breaks down;

After the conclusion of the contract, the [Buyer] paid the entire contract price, and the Genset was installed and operated. The manufacturer of the goods, K Company, issued a Manufacturer's Warranty, assuring that the goods were made by K Company and were brand new.

The Genset broke down after running for 110 hours, and after being repaired by the [First Respondent], problems occurred on the connecting rod and piston. During the arbitration process, the parties in this case had different opinions on the cause of the problems. The [Buyer] alleges that they were caused by manufacturing defects. However, the [First Respondent] alleges that they were caused by improper operation. The [Buyer] provided an inspection certificate issued by JIQB. During the verification of the evidence, the [First Respondent] raised objection to this evidence without submitting supporting evidence. Second Respondent K Company submitted a maintenance report issued by Third Respondent D Company as evidence.

After investigation, a part of the conclusions in the aforesaid items of evidence is the same:

K Company's conclusion is that:

"Lack of lubricating oil caused bearings to bite into each other and overheat, which led to severe damages by continuous operation. This increased the space between the connecting rod and axle neck, causing the connecting rod bolt to fall off."

The aforesaid conclusion indicated that the accident was caused by lack of lubricating oil. As to the reason for the lack of lubricating oil, there was only a speculation in the conclusion that "the lack of lubricating oil might be caused by failing to lubricate engine before start up, or low volume of lubricating oil after prior operation."

However, the [Buyer]'s conclusion is that:

"The explosion on cylinder A1 and the scorching heat on the other cylinders were caused by the fact that the oil lubricating system was not functioning well and the fact that that the warning and auto protection system did not work. This was caused by manufacturing defects."

This conclusion indicated that the overheating on the connecting rod of cylinder was caused by a lubricating problem, which was similar to the [First Respondent]'s conclusion. Meanwhile, the [Buyer] pointed out that the reason for the overheating was that "the oil lubricating system was not functioning well and that the warning and auto protection system did not work" and that "[t]his was caused by manufacturing defects."

Regarding the aforesaid situation, the [First Respondent] provided evidence too, which was an e-mail Mr. L, the Manager of Training Department of Asian Area Power System Service of K Company, sent to Mr. H (Beng Chong Ang) of D Company at 2:46 p.m. on 26 July 2004. During the verification of evidence, K Company raised objection to this evidence's connection with this case without raising objection to its reliability. In this e-mail, Mr. L stated that "the Genset has been operated less than two months. We believe that this is an internal defect. D Company should take this special situation into account, please restart repairing period and give notification". The [First Respondent] also deems that this was caused by internal defect.

Based on the above, the [First Respondent] and the [Buyer] allege that the problem was caused by manufacturing or internal defect. However, K Company argues that it was caused by improper operation.

It has been confirmed that the Contract in this case was signed by the [Buyer] and the [First Respondent], and the Arbitration Tribunal does not accept that the [First Respondent] was the agent of Second Respondent K Company. Therefore, the [Buyer] and the [First Respondent] shall be the subjects of the rights and obligations under the Contract. Any dispute arising from the Contract shall be settled between the [Buyer] and the [First Respondent].

Since both the [Buyer] and the [First Respondent] deem that the problem on the Genset was caused by manufacturing, the Arbitration Tribunal notes that the parties to the Contract have no dispute on the cause of the problem with the goods. Therefore, based on the quality guarantee clause in the Contract, the [First Respondent] shall take responsibility to repair the goods.

Article 6 (Guarantee Period) of the Contract stipulates that "the quality guarantee period is within one year of proper operation or a total of 1,000 hours of operation, depending on which comes first."

The quality certificate issued by JIQB indicates that:

   -    The goods arrived and were unloaded on 12 April 2004;
   -    Later, under the supervision of the [First Respondent], the goods were installed and operated for 110.7 hours;
   -    On 25 July 2004, the engine had a problem;
   -    The inspection date was 29 September 2004.

On 26 January 2005, the [Buyer] filed the arbitration application.

Based on the above, the Arbitration Tribunal rules that the contract goods in this case are still within the quality guarantee period. Therefore, the [First Respondent] shall be responsible for repair.

As to whether the [First Respondent] had an agreement with other parties, that is another legal relationship, which is beyond the scope of this case.

(5) [Buyer]'s first claim for economic loss

The [Buyer] alleges that the [First Respondent] and Second Respondent K Company refused to perform in accordance with the contract and quality stipulations in accordance with the law and failed to take measures to remedy the damages caused by contract violation or infringement, with the result that the Genset was like scrap iron, and that the [Buyer] was unable to realize the purpose of the contract and suffered severe losses.

As stated above, the [First Respondent] shall be responsible for repair. However, the Arbitration Tribunal notes that the [First Respondent] refused to take the responsibility for repair alleging that:

   -    Second Respondent K Company should be responsible for any legal consequences caused by the [First Respondent]'s sales performance;
 
   -    K Company is the supplier and manufacturer of the goods in this case, therefore, it should be 100% responsible for the quality of the goods. [Buyer]'s claim that the [First Respondent] shall be responsible for quality defect has no legal and factual basis;
 
   -    The reason for the problem on the Genset was caused by manufacturing, which has no causal relationship with the [First Respondent]'s sales act as an agent, and the [First Respondent] should not be liable.

However, based on the analysis in section 3(1), (2), and (3) above, the Arbitration Tribunal rules that the [First Respondent]'s aforesaid reasons have no legal and factual basis. Therefore, the [First Respondent] is liable for contract violation and should bear the consequences for failing to honor its repair responsibilities.

Based on relevant provisions of the CISG, the Arbitration Tribunal rules that because the [First Respondent] refused to take the responsibility to repair the goods, using various unacceptable excuses, the [Buyer] is entitled to compensation.

The [Buyer] seeks to have the [First Respondent] compensate its economic loss of US $220,000. The [First Respondent] argues that the total price for the goods is US $220,000, which should not be equal to the losses; the losses of the [Buyer] are the cost for repair or other related costs, but not the entire price for the goods. However, the [Buyer] failed to provide detailed evidence showing how to repair or how much the repair would cost.

The Arbitration Tribunal rules that the [First Respondent] was not the agent of K Company. As a seller, the [First Respondent] shall be responsible for repairing the defective goods based on Article 6 of the Contract. Evidence provided by the parties shows that this responsibility is clear. The Arbitration Tribunal concludes that the [Buyer] has suffered damages due to the defects on the goods and the [First Respondent]'s refusal to take responsibility for repair of the goods. Article 45(1), (2) and Article 46(3) stipulate that:

"If the seller fails to perform any of his obligations under the contract or this Convention, the buyer may require the seller to remedy the lack of conformity by repair or claim damages. The buyer is not deprived of any right he may have to claim damages by exercising his right to other remedies."

Pursuant to this provision, the Arbitration Tribunal rules that the [Buyer]'s claim may include the cost for repair or other damages.

As to the amount of the damages, Article 74 of the CISG states that:

"Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach, Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters he then knew or ought to have known, as a possible consequence of the breach of contract."

The [Buyer] provided a repair quotation by D Company's Beijing Office (TBD620(2202545) repair quotation). The Arbitration Tribunal notes that this quotation was attached to the fax sent by the [First Respondent] to the [Buyer] on 12 August 2004, with the following list:

   -    Total parts: EUR: 95,084;
   -    Labor fee for one German engineer: EUR 17,646;
   -    Labor fee for two Chinese engineers: renminbi [RMB] 95,000;
   -    Space and equipment rental fee: RMB 20,000.

The Arbitration Tribunal ascertained at the court session that when the problem occurred on the goods, the [Buyer] and the [First Respondent] contacted each other for the repair of the goods, which indicated that the two parties' were intending to receive and arrange for repair. The Arbitration Tribunal notes that unless the [Buyer] proves that there are other damages, the damages caused by the defect on the goods are related costs for repair under the circumstance that the parties had accepted and arranged for repair. The [First Respondent] expresses its opinion that the damages of the [Buyer] should be limited to the cost for repair and other expenses related to repair. In the instant case, the [Buyer] failed to provide evidence showing the existence of other damages. Therefore, the Arbitration Tribunal should consider a reasonable amount for compensation based on the cost for repair.

As stated above, the [First Respondent] shall take the responsibility for repair and bear any consequences caused by its refusal to repair. Since the [First Respondent] failed to take the responsibility to repair, the [Buyer] had to repair the goods by itself and at its own cost, which constituted a loss of the [Buyer]. The [First Respondent] failed to provide other evidence to prove the possibility that there might be a cost for repair lower than D Company's quotation. Therefore, the Arbitration Tribunal deems that the aforesaid quotation is an important reference to determine the [Buyer]'s cost for repair.

The Arbitration Tribunal also notes that a quotation is only an offer, which is the expression of one party during the business transaction, and that the charge for repair agreed by the parties does not have to be the cost listed in the quotation. Therefore, based on the principle of equity, the Arbitration Tribunal holds that 80% of the price listed in the quotation should be the cost for repair which should be borne by the [First Respondent] (based on the exchange rate on the day of the award). The total amount in the quotation is EUR 112,730 and RMB 115,000, totaling RMB 1,280,876, i.e., US $159,635, and 80% of the aforesaid amount is US $127,708.

It needs to be mentioned that the cost for fixing the problems which have occurred as determined by the Arbitration Tribunal is correct and final, and that the [Buyer] shall not ask the [First Respondent] to fix these problems again, which the [Buyer] shall repair by itself at its own cost.

(6) [Buyer]'s second and third claims for attorneys' fee and traveling fee.

The [Buyer] asks the [First Respondent] to bear its attorneys' fee of US $4,500 and traveling fee. The Arbitration Tribunal deems that the [Buyer] entrusted an attorney for arbitration and had to attend non-local activities including the court session, therefore, corresponding expenses would be incurred. Based on the Arbitration Rules, and considering the situation in this case, the Arbitration Tribunal holds that the [First Respondent] shall bear a reasonable part of the expenses (including attorneys' fee) incurred by the [Buyer] for processing this case, i.e., US $1,000.

(7) [Buyer]'s fourth claim for the arbitration fee

Considering the extent to which the Arbitration Tribunal supports the [Buyer]'s claims and other circumstances, the Arbitration Tribunal holds that the [Buyer] shall bear 40% of the arbitration fee and the [First Respondent] shall bear 60%.

III. THE AWARD

Based on the aforesaid facts and the Arbitration Tribunal's opinion, the Tribunal rules that:

(1) The [First Respondent] shall compensate [Buyer]'s economic loss of US $127,708;

(2) The [First Respondent] shall bear part of the reasonable expense for processing this case (including the attorneys' fee) of US $1,000 incurred by the [Buyer];

(3) The [Buyer] shall bear 40% of the arbitration fee and the [First Respondent] shall bear 60%;

(4) The other claims of the [Buyer] are dismissed.

The [First Respondent] shall pay the aforesaid items (1), (2), and (3) within twenty days of this award.

This is the final award, which shall be effective as of the day of this award.

Presiding Arbitrator: ___

Arbitrator ___

Arbitrator ___

31 May 2006 in Shenzhen


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], the First Respondent of Singapore, __ Power System Co., Ltd, is referred to as the [First Respondent], and the Second Respondent of Singapore, K Power System Company, is referred to as K Company. Amounts in the currency of the United States (dollars) are indicated as [US $]; amounts in the currency of the European Union (euro) are indicated as [EUR]; amounts in the currency of the People's Republic of China (renminbi) are indicated as [RMB].

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

*** William Zheng is a graduate of the Pace University School of Law. He is Special Counsel with the Shanghai office of Sheppard Mullin Richter & Hampton, LLP.

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Pace Law School Institute of International Commercial Law - Last updated January 18, 2012
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