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CISG CASE PRESENTATION

China June 2006 CIETAC Arbitration proceeding (Italian textile machine case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/060600c2.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20060600 (June 2006)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2006/26

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Italy (claimant)

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

GOODS INVOLVED: Italian textile machines


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 8 ; 25 ; 35

Classification of issues using UNCITRAL classification code numbers:

8A ; 8B ; 8C [Interpretation of party's statements or other conduct: intent of party making statement or engaging in conduct; Interpretation based on objective standards; Interpretation in light of surrounding circumstances];

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

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

Descriptors: Intent ; Fundamental breach ; Conformity of goods

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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)

Queen Mary Case Translation Programme

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

Italian textile machine case of June 2006

Translation [*] by Lin Wah Tong [**]

Translation edited by Jing Li [***]

  1. Procedure
  2. Facts and Position of the Parties
  3. Arbitration Tribunal's Opinion
  4. Award

I. PROCEDURE

The China International Economic and Trade Arbitration Commission (hereinafter, "CIETAC", or the "Arbitration Commission", originally named the Foreign Trade Arbitration Commission of the China Council for the Promotion of International Trade, later renamed as Foreign Economic and Trade Arbitration Commission of the China Council for the Promotion of International Trade) accepted the case (Case No. M2005_____) according to:

-    The arbitration clause in Contract No. 2000SDRY-01IT (hereinafter, the "Contract"), signed by the Claimant AAA Corp. [of Italy] (hereinafter, the "[Seller]") and BBB Textile Import and Export Group Corp. [of the People's Republic of China]; and
 
-    The Application for Arbitration submitted by the [Seller] on 10 January 2005 against BBB Textile Import and Export Group Corp., BBB Technology Group Ltd. (formerly known as Shandong Textile Products BBB Group Ltd.) and BBB Textile Ltd., as Respondents.

The CIETAC Arbitration Rules (hereinafter, the "Arbitration Rules") which took effect on 1 October 2000 are applicable to this case.

On 14 January 2005, the Secretariat of CIETAC (the "Secretariat") forwarded the Notice of Arbitration, the Arbitration Rules and the List of Arbitrators to the parties, and relevant materials of the Application for Arbitration to the Respondents. The Secretariat requested the parties to appoint their arbitrators within a stipulated period and requested the Respondents to submit their defense and/or counterclaim.

On 27 January 2005, the Respondents sent a letter to CIETAC which stated that "our company, i.e., the Respondent in the present case - BBB Import and Export Co. Ltd. (the restructured enterprise of the former BBB Textile Group Import and Export Corp.) appointed Professor ___ as our arbitrator." The letter was sealed with the stamp of the "BBB Import and Export Co. Ltd."

On 25 February 2005, the Respondents submitted their Statement of Defense and relevant materials to the Arbitration Commission.

The parties did not appoint or entrust the Secretariat to appoint a presiding arbitrator within the stipulated period. On 23 March 2005, the Chairman of the Arbitration Commission therefore appointed Mr. ___ as the presiding arbitrator according to Article 24 of the Arbitration Rules. The presiding arbitrator together with the arbitrators appointed by the parties formed the Arbitration Tribunal for the case. On the same day, the Secretariat sent the Notice of Formation of the Arbitration Tribunal to the parties.

On 25 March 2005, after reviewing facts of the case and consulting the Secretariat, the Arbitration Tribunal decided to hold an oral hearing on 26 May 2005. On the same day, the Secretariat sent a Notice of Hearing to the parties.

On 20 April 2005, the Respondents submitted their Supplementary Opinion to the Arbitration Commission, stating that the three Respondents, i.e., "BBB Textile Import and Export Group Ltd.", "BBB Technology Group Ltd." and "BBB Textile Ltd." were not proper respondents in this case.

On 29 April 2005, the [Seller] submitted a Reply to the Respondents' Supplementary Opinion.

On 26 May 2005, the Arbitration Tribunal held an oral hearing in Beijing mainly to handle the issue of eligibility of the Respondents in consideration of the late submission of the Supplementary Opinion and the complexity of the issue. Representatives of the parties attended the hearing and presented their opinion stating, confirming, and clarifying the names and structural reform of the three Respondents.

After the oral hearing, the parties submitted Supplementary Opinions on the matter of eligibility. On 15 June 2005, the Respondents submitted their Statement of Counterclaim. The Secretariat timely forwarded these documents to the parties.

After reviewing the investigation by the Arbitration Tribunal with consideration of the written evidence submitted by the parties, CIETAC handed down a "CIETAC No. 00___ Decision on the Eligibility of the Respondents" (hereinafter, the "Decision") on 26 July 2005, ruling that BBB Import and Export Co. Ltd. (Arbitration Tribunal's note: originally named as BBB Textile Group Import and Export Co. Ltd.), as a successor in credit and debt of BBB Textile Group Import and Export Corp., should be regarded as a proper Respondent in the present case; BBB Technology Group Ltd. and BBB Textile Ltd. should not. Therefore, the arbitral proceeding of the present case should resume between the [Seller] and BBB Import and Export Co. Ltd. (hereinafter, the "[Buyer]").

On 27 July 2005, after reviewing the facts of the case and consulting the Secretariat, the Arbitration Tribunal decided to hold a second oral hearing on 1 September 2005. On the same day, the Secretariat sent a Notice of Hearing to the parties.

Due to the fact that the [Buyer] requested an extension, on 12 August 2005, after discussion, the Arbitration Tribunal notified the parties via Arbitration Commission that the second oral hearing would be postponed to 21 October 2005.

On 21 October 2005, the Arbitration Tribunal held the second oral hearing in Beijing as scheduled. Representatives of the parties attended. They made statements on the facts and their claims, provided original copies of the evidence, cross-examined, and answered inquiries of the Arbitration Tribunal. In addition, the Arbitration Tribunal affirmed that the [Buyer] waived its counterclaim at the hearing.

After the oral hearing, according to the decision made by the Arbitration Tribunal after inquiring both of the parties, the [Seller] re-confirmed its arbitral requests and submitted supplementary evidence; the [Buyer] also submitted supplementary evidence. The Secretariat exchanged the above documents with the parties. Both parties submitted their opinions on the supplementary materials within the stipulated time.

On 18 May 2006, after reviewing the case, the Arbitration Tribunal decided to hold a third oral hearing on 24 May 2006.

On 24 May 2006, the Arbitration Tribunal held the third oral hearing in Beijing as scheduled. Representatives of both parties attended and answered inquiries of the Arbitration Tribunal at the hearing. Negotiation took place between the parties under the facilitation of the Arbitration Tribunal. However, it did not lead to a resolution of the dispute.

All relevant materials were forwarded to the parties.

The Arbitration Tribunal could not render an award within the stipulated period according to the Arbitration Rules, i.e., by 23 December 2005, because of the complexity of the dispute. Upon the request of the Arbitration Tribunal, the Secretary-General of CIETAC extended the time limit for the award to 23 June 2006 according to Article 52 of the Arbitration Rules after reconsideration.

This case is now closed. The Arbitration Tribunal handed down the arbitration award based on the written documents submitted by the parties, verified facts and discussion of the Arbitration Tribunal.

The facts, position of the parties, and the Arbitration Tribunal's opinion and award are as follows.

II. FACTS AND POSITION OF THE PARTIES

On 11 May 2000, the [Seller] and the [Buyer] signed a contract for the sale of two sets of machines, i.e., AAA TECNOPLUS (hereinafter, "No. 1 Machine") and AAA CRABBING MACHINE MODEL PWS (hereinafter, "No. 2 Machine") for US $770,000, FOB Italian port. The key terms of the Contract stipulate:

Date of Shipment (Article 6): On or before 31 July 2000; and the [Buyer] is to issue the letter of credit (L/C) on or before 31 May 2000.

Payment (Article 12): By 100% irrevocable L/C at sight issued on or before 31 May 2000; 3% payable against shipment documents and 97% payable against acceptance protocol signed by the [Buyer].

Shipment (Article 14): The [Seller] shall ship the goods by direct freight from the port of loading to the port of China within the time limit stipulated in Article 6 of the Contract. No transshipment shall be allowed without permission of the [Buyer].

Quality Guarantee (Article 16): The [Seller] shall guarantee that the goods are produced with superior material and shall be excellent in workmanship. They must be brand-new, unused and in conformity with the quality, quantity and capacity stipulated in this Contract. Under proper installation, use and maintenance, the [Seller] shall guarantee the goods are good in performance. Such guarantee period shall be twelve months after the installation and shakedown test of the goods.

Inspection and Damages (Article 17):

      (a) The manufacturer shall, before delivery, carry out a precise and comprehensive inspection of the goods with regard to its quality, specifications, capacity and quantity/weight, and shall issue an inspection certificate certifying that the goods are in compliance with the Contract. The inspection certificate submitted to the bank as documents against payment shall only be part of the documentary collection, but not be considered an ultimate basis in proving the quality, specifications, capacity and quantity/weight of the goods. The manufacturer shall attach a written report specifying the details and results of the inspection to this inspection certificate.

      (b) After arrival of the goods at the port of destination, the [Buyer] shall apply to the China Commodity Inspection Bureau (hereinafter, the "CCIB") for an initial inspection as to the quality, specifications, quantity/weight of the goods. If the specifications or quantity/weight are not in conformity with the stipulations in this Contract, except when the responsibilities lie with the Insurance Company or Shipping Company, the [Buyer] shall, within 120 days after arrival of the goods at the port of destination, claim damages against the [Seller], or reject the goods relying on the inspection certificate issued by the CCIB.

      (c) During the guarantee period stipulated in Article 16 of the Contract, if the quality and/or specifications of the goods are not in conformity with the Contract, or if the goods are defective, regardless of the cause of defect, including inherent defect and defective materials being used to make the goods, the [Buyer] shall request the CCIB to conduct an inspection, and shall be entitled to claim damages against the [Seller] relying on this inspection certificate issued by the CCIB.

      (d) Unless reply is given by the [Seller] within 30 days after the notification of claims for damages by the [Buyer], the [Seller] shall be deemed to have agreed to any claims made by the [Buyer].

Resolution of damages (Article 18): The [Seller] shall be responsible for any non-conformity of goods under the Contract. The [Buyer] shall make its claim for damages within the time limit for such claim or within the guarantee period stipulated in Articles 16 and 17 of the Contract. Upon the [Buyer]'s consent, compensation shall be made by the [Seller] as follows:

      (a) If the [Seller] agrees to the return of goods, it shall refund the original payment at the transaction currency and shall be responsible for any damages and expenses directly incurred by the return of goods, including interest, bank charges, shipment, insurance, inspection, storage, mark handling and any other expenses necessary for the keeping and restitution of the goods.

      (b) The price of the goods shall be reduced according to the degree of defects, scope of damage and the losses suffered by the [Buyer].

      (c) Replacement of the defective goods, if any, shall be brand-new and in conformity with the specification, quality and capacity stipulated in the Contract. The [Seller] shall be responsible for any expenses incurred by the replacement and any losses directly suffered by the [Buyer]. The quality of the replaced goods shall be in conformity with Article 16 of the Contract and the guarantee period shall be twelve months.

Delay in delivery and fines (Article 20): In case of force majeure, the [Seller] shall not be liable for the delay in delivery. Otherwise, the [Seller] shall pay the [Buyer] a fine at 0.5% of the total value of the goods for the delay on a weekly basis, and a period shorter than a week shall also be counted as a week. The total amount of the fine shall not exceed 5% of the total value of the goods and shall be subtracted from the payment against document by the bank, or be subtracted by the [Buyer] at payment.

If the delay period exceeds 10 weeks, the [Buyer] shall be entitled to rescind the contract, and the [Seller] shall pay the [Buyer] the fine as stipulated above without any contest or delay.

Arbitration (Article 21): Any dispute arising from or in connection with the Contract shall be settled through friendly negotiation. If no settlement can be reached, the dispute shall be submitted to the China International Economic and Trade Arbitration Commission (CIETAC) for arbitration.

In the course of the performance of the Contract, a dispute arose and the parties could not reach a resolution of their dispute by negotiation, and thus, the [Seller] submitted the dispute to CIETAC according to the arbitration clause (Article 21) of the Contract.

The [Seller]'s position

After signing the Contract, the [Seller] delivered two sets of machines to the [Buyer] on 22 September 2000 as agreed in the Contract, and dispatched technicians to carry out shakedown tests on the machines from 30 September 2000 to 30 October 2000. On 31 October 2000, the [Buyer] claimed that the No. 2 Machine did not function and refused to pay the entire amount as stipulated in the Contract.

The [Seller] provided a two-year technical training to the [Buyer]'s staff, and the [Buyer] then signed an inspection report on 27 April 2002 declaring that the operation of the two sets of machines were regular. In addition, the Italian technician, Mr. C___, who was invited by the [Buyer] on 11 May 2002 as a third party to provide technical support, issued a valid certificate certifying good operational condition of the two sets of machines.

However, the [Buyer] still refused to settle the payment of the delivered machines which were already operating. In order to produce a specific type of textile products which were different from what could be produced by the No. 2 Machine as accepted by the [Buyer] by the time the order was placed, the [Buyer] requested the [Seller] to re-equip the No. 2 Machine.

Although the product expected to be produced by the above machine was different from the initial order placed by the [Buyer], the [Seller] accepted the request of the [Buyer] and signed an Agreement with the [Buyer] in December 2002 in order to settle the problem through a friendly negotiation and make the machine fit for the [Buyer]'s specific purpose. The [Seller] then delivered to the [Buyer] US $60,000 worth of necessary components and accessories for the No. 2 Machine and carried out re-equipment as concluded in the Agreement.

Apart from that, the [Buyer] had never raised any dispute regarding the No. 1 Machine. However, the [Buyer] refused to pay the Contract price of US $770,000 and the cost of the components and accessories of US $60,000.

Relief requested by the [Seller]

The [Seller] requested the following relief:

1. In order to respect the [Seller] and on the ground that the [Buyer] had never raised any dispute regarding the No. 1 Machine, the [Seller]'s contract obligations with respect to the No. 1 Machine should be regarded as thoroughly performed.

2. The Arbitration Tribunal should declare that the No. 2 Machine under the Contract and Quotation No. 100/M00 signed by the parties on 10 May 2000, had been in good operational condition.

3. Based on the [Buyer]'s joint and several liability, the [Buyer] should pay the [Seller] the Contract price and the cost of the components of US $770,000 and accessories of US $60,000, together with the bank interest calculated from the day on which the [Seller] should have received the payment under the Contract.

4. Based on the [Buyer]'s joint and several liability, the [Buyer] should pay for the arbitration fee, attorneys' fee and other actual expenses incurred throughout the proceeding of this case.

Amendment of the [Seller]'s claims

After amendment of claims, the [Seller] requested the following relief:

1. The [Buyer] should pay the [Seller] the amount due, i.e., US $830,100 in total, and the corresponding bank interest as calculated in Appendix 1; and

2. The [Buyer] should pay for the arbitration fee, attorneys' fee and other actual expenses paid by the [Seller] in this case as listed in Appendix 2.

APPENDIX 1
 
Calculation of Interest on Overdue Payment
According to the standard and practice commonly accepted and adopted by the major monetary authorities in China, the [Seller] calculated the interest on overdue payment at the London InterBank Offered Rate (LIBOR) which was announced by the Bank of China on 3 November 2005.
LIBOR Rate (Adjustment Interval 6 months)
Period of Loan
Rate
(1) 1 year (and < 1 year)
6.19%
(2) 1 to 3 years
6.44%
(3) 3 to 5 years
6.64%
(4) > 5 years
6.79%
Interest on Overdue Payment
Time Period
Amount
Rate
Interest
22/09/05 - 7/11/05
3% of 770,000 USD
6.79%
$     8,037.16
27/04/02 - 7/11/05
97% of 770,000 USD
6.64%
175,076.17
27/01/03 - 7/11/05
100% of 60,100 USD
6.44%
   10,737.63
Total Interest
$193,850.96
 
APPENDIX 2
Attorneys' Fee Paid by the [Seller]
Date
Amount
Purpose
Notification of Payment/ Bank Documents
27-Oct-04
19974.28 US$
Attorneys' fee
0262-04(BE) / IRTT000830040300
2-Nov-04
93,171.33 HK$
Attorneys' fee
0262-04(BE) / IRTT000830040300
27-Sep-05
10,000 EUR
Attorneys' fee
0214-05(BE) / TTHOSORTTSNC226868

The [Buyer]'s position

The [Buyer] ordered the newly developed product from the [Seller] because the [Seller] promised that the [Buyer] could use the full set of scouring and crabbing machines on a trial basis before paying for the machines. If the machines did not pass the test, the [Buyer] should not pay for them.

After signing the Contract, the [Buyer] paid the [Seller] a deposit of RMB 190,000. According to the Contract terms, the [Seller] should load the goods on 3 July 2000 and the goods should arrive at the end of the month. However, the [Seller] failed to perform its obligation and postponed the delivery to the end of December 2000.

The machines were installed in late December and the shakedown test was carried out in January 2001. However, more than six months had elapsed and the performance of the machines still did not conform to the quality requirement of the Contract. The machines failed to produce qualified products and the production could not reach the quantity as required. Analysis showed that the design and manufacturing of the machines were severely defective, and the technical defects of the machines resulted in serious quality problem of the products. A considerable amount of defective products and scraps were produced throughout repeated tests of the machines and incurred serious economic loss to the [Buyer].

Under such circumstances, the [Buyer] notified the [Seller] of return of goods on 2 April 2001, but no reply was made by the [Seller]. Until the last third of December 2002, Mr. B___, the President of the [Seller] made a special-purpose trip to the [Buyer], suggested that a thorough re-equipment should be made to the machines in order to solve the technical problems, and signed an agreement with the [Buyer] in December 2002 (hereinafter, "Agreement 2002"). According to Agreement 2002, the [Buyer] shall pay after the technical problems of the machines have been settled. If the problem cannot be resolved, the [Buyer] will reserve the right to return the machines and claim damages.

Thereafter, the [Seller] carried out complete re-equipments of the machines in February, June and December 2003, respectively. However, the problems remained unsolved and the quality of the production was not in conformity with the Contract. In December 2003, new problems were found with the machines. The machines failed to start up because of PLC programming error. Although an expert was sent by the [Seller] to restore the machines, the same problem which was found ten days later led to another breakdown on 29 February 2004. The [Seller] no longer provide technical support. Thus, the [Buyer] claimed damages against the [Seller] and requested to return the machines on 9 January and 13 March 2004.

Based on the above facts, the [Buyer] alleged that it had performed its obligations stipulated in the Contract. The defective design of the machines provided by the [Seller] did not conform to the requirements of the Contract, which resulted in an economic loss to the [Buyer]'s that was much greater than the cost of purchasing the machines.

The major claims of the [Seller]

1. Whether the machines are defective

During the visit to the [Buyer]'s factory, Mr. B___, the [Seller]'s President told the [Buyer] that the problems resulted from defective textile materials, not from defects of the crabbing machine. Mr. B___ first inserted one end of the textile material in the crabbing machine, it shifted abnormally from the left to the right of the machine; then he inserted the other end of the same material, it shifted from the right to the right (Translator's note: It can be judged from the context that it should be "left"). Several tests had been done repeatedly and the results indicated that the operation of the crabbing machine was normal. The problem indeed was caused by the poor balance of the textile materials. Otherwise, textile materials should shift in the same direction no matter which way they were inserted. The reason that the [Buyer] requested the [Seller]'s technicians to install an additional component (Automatic Balancer-Angora Treatment) was actually for the use of low-quality textile materials. Apart from that, the crabbing machine was designed and sold to the [Buyer] according to the [Buyer]'s initial request. However, the [Buyer] requested a modification of the machine after realizing its own mistake.

The [Buyer] refused to pay the contract price, alleging defects of the machines. The [Seller] submitted that the two inspection reports signed by the [Buyer] on 27 April 2002 after the delivery of the machines on 22 September 2000 indicated a final acceptance of the machines, and that the [Buyer] had agreed to the late delivery by the [Seller]. Although no definite technical standard was stipulated in the Contract for acceptance, the [Buyer] issued a correspondent inspection report for each machine and the details of performance of each machine could be verified by the documents. It showed that the parties both agreed to the standard stated in these documents. Additionally, the quotation of the machines actually stated that the [Seller] reserved the right to modify the details of the technology.

Regarding the discrepancy of the terms in different documents, i.e., between the signed inspection reports and the Contract, the term "Inspection Report" clearly indicated "acceptance of goods" in the English version because the report had a final effect.

In addition to the two inspection reports, the technician, Mr. C___, who was invited by the [Buyer] to carry out inspection on the machines, also certified that the machines purchased from the [Seller] were in good condition. It is the [Seller]'s position that the [Buyer] accepted the machines delivered by the [Seller].

Moreover, the [Buyer] had never provided an inspection certificate issued by the CCIB proving that the machines were defective and not functioning. This indicated that the [Buyer] accepted the machines delivered by the [Seller].

2. The [Buyer]'s request for return of the goods

According to the [Buyer]'s claim, notifications of return of goods and claims for damages were made to the [Seller] on 2 April 2001, 9 January 2004 and 13 January 2004, respectively. However, the [Seller] alleges that it had never received these notifications, and the [Buyer] could not prove that those notifications had been delivered to the recipient listed on the said notifications. In fact, the recipient of the notifications was not the [Buyer] in the present case.

In addition, Article 17 of the Contract (also referred to in Article 18) clearly stipulates that the period for the refusal of goods should be within 120 days after the issuance of the inspection certificate by the CCIB, or within twelve months after the installation and shakedown test of the goods under Article 16 of the Contract. CCIB had never issued such an inspection certificate. Moreover, the terms of the Contract stipulated that such inspection certificate should be the basis on which the [Buyer] could claim defects of the goods or request return of goods. In the present case, the [Buyer] received the goods on 22 September 2000, and the [Seller] has not received any notification regarding return of goods up until the present. Under Article 158 of the Contract Law of China, the period of notification was already time-barred.

3. Agreement 2002

The reasons the parties signed Agreement 2002 were:

      (1) To provide a twelve-month guarantee period of the machines from the date of acceptance, i.e., 27 April 2002, under Article 17 of the Contract. The technical content of Agreement 2002 was different from that of the inspection reports because Agreement 2002 summarized the maintenance terms within the guarantee period required by the [Buyer] upon acceptance of the goods as stipulated in the Contract. It was not necessary to contain such a summary of the maintenance terms in this supplementary agreement. However, the fact that the [Seller] included it explicitly demonstrated that it was acting in good faith to perform its obligations under the Contract.

      (2) An additional component, Angra Treatment (Arbitration Tribunal's note: a typo, it should be "Angora Treatment"), was required in Agreement 2002 in order to fulfill the additional technical requirement by the [Buyer]. The comparison between the Contract and Agreement 2002 inferred that the [Seller] was trying to resolve the problem through a friendly negotiation, and thus, the re-equipment of the crabbing machine was agreed by the [Seller] in order to make the machine fit for a purpose which was neither the initial purpose nor a consideration in the initial design of the machine.

The [Seller] had completely performed its obligations as required by Agreement 2002. However, the [Buyer] ignored the fact that the maintenance was completed and that the delivery was made in compliance with the agreement, and refused to settle the payment of the Contract and Agreement 2002.

4. Deposit paid by the [Buyer]

The [Buyer] alleged that RMB 190,000 was paid as a deposit. However, it was the [Seller]'s position that:

      (1) The document provided by the [Buyer] showed that the payment was made to another payee (DDD Industrial Co. Ltd., hereinafter, "DDD Company") which was not the other party to the Contract, i.e., the [Seller]. Only the [Seller] and the [Buyer] were involved in the Contract, and thus, be bound by the Contract. The Contract did not concern a third party.

      (2) The [Buyer] failed to prove the deposit it claimed to have paid. Moreover, this deposit should not be regarded as a valid payment because Articles 3 and 4 of the Contract explicitly stated that the payment made to the [Seller] should be in foreign currency instead of RMB.

5. The relationship among the [Seller], the [Buyer], DDD Company and CCC Company

The [Buyer] claimed that DDD Company was the agent of the [Seller], and that the deposit was paid to DDD Company in that capacity. In fact, DDD Company was only a third party which served as a middleman and dealer between the [Seller] and the [Buyer]. DDD Company received instructions from both parties regarding matters having to do with the Contract and contacted the parties. In addition, an agreement was signed between DDD Company and the [Buyer] proving that DDD Company was acting on behalf of the [Buyer] for the purchase of the machines from the [Seller], and that the [Buyer] paid DDD Company RMB 190,000 for this service rendered by DDD Company. It clearly indicated that DDD Company was an agent of the [Buyer].

6. Payment was not a pre-requisite of the shipment

The [Buyer] cannot claim that the goods were shipped upon the receipt of the payment because payment was not a pre-requisite for loading and shipping the goods. The [Seller] made the shipment of goods and additional components before any payment was made because the [Seller] trusted the [Buyer].

The major claims of the [Buyer]

1. Chronology of events

      (1) On 11 May 2000, the parties signed the Contract.

      (2) On 14 September 2000, the No. 2 Machine arrived at the port; on 19 September 2000, the machine was delivered to the company. On 28 November 2000, the No. 1 Machine arrived at the port; on 6 December 2000, the machine was delivered to the company.

      (3) In late December 2000, the full set of continuous full-width scouring and crabbing machines was installed; and the shakedown test of the machines started in January 2001. After repeated tests of the machines, they failed to produce qualified products.

      (4) On 2 April 2001, the [Buyer] formally notified the agent of the [Seller], DDD Company of the return of goods.

      (5) In the last third of December, Mr. B___ of the [Seller] and Mr. He of CCC Company, its new agent, signed an agreement with the [Buyer] regarding the technical problem with the machines and the payment. The parties agreed that the [Buyer] should pay after all the problems had been settled. If the problem remained unsolved, the [Buyer] should reserve the right to return the goods and claim for damages.

      (6) In February 2003, the [Seller] delivered a batch of components and dispatched technicians to re-equip the machines, but the problems were not thoroughly settled.

      (7) In the end of 2003, the [Seller] delivered another batch of components and dispatched technicians to re-equip the machines, but the original problems remained and new problem arose which consequently led to a breakdown of the machine.

      (8) On 9 and 13 January 2004, notifications regarding return of goods and claim for damages were made by the [Buyer] to CCC International Development Co. Ltd. (hereinafter, "CCC Company") and the [Seller].

2. The quality of the machines

Article 16 of the Contract stipulates that:

"The [Seller] shall guarantee that the goods are produced with superior material and shall be excellent in workmanship. They must be brand-new, unused and in conformity with the quality, quantity and capacity stipulated in this Contract. Under proper installation, use and maintenance, the [Seller] shall guarantee the goods are good in performance. Such guarantee period shall be twelve months after the installation and shakedown test of the goods."

In fact, considerable evidence submitted by the [Buyer] proved that the machines provided by the [Seller] were not in conformity with the quality, quantity and capacity stipulated in this Contract. Notifications to the [Seller] that were made by the [Buyer] in a timely manner fulfilled the obligation of notice of the [Buyer] stipulated in the Contract. The performance of the machines was not accepted by the [Buyer], and thus, the [Buyer] was entitled to refuse to pay and to claim damages against the [Seller].

3. The payment for the goods

According to the Contract, 3% of the payment shall be payable against shipment documents and 97% payable against acceptance protocol signed by the [Buyer]. 3% of the payment, i.e., RMB 191,730, was paid by the [Buyer] on 18 May 2000. The rest of the payment, i.e., 97% of the payment, should not be made because the machines had been under the tests and failed to operate as expected. Since the pre-requisite of the payment was not satisfied and the [Buyer] did not even sign an acceptance protocol, the [Buyer] should be allowed to refrain from payment.

The two signed inspection reports that were provided by the [Seller] were simply a proof of the tests on those interim stages and should not be regarded as equivalent to the acceptance protocol as required by the Contract. In addition, it was groundless for the [Seller] to claim that the term "Inspection report" in the English version indicated an acceptance of the goods. The Chinese translation of the inspection report was provided by the [Seller] and the term "Inspection report" did not carry the meaning of "acceptance of goods" in Chinese. Therefore, the inspection reports could not serve as the final acceptance protocol. The English translation of Article 12(3) of the Contract stipulated that "97% Payable against acceptance protocol signed by the buyers." The term "Acceptance protocol" carries the same meaning as "acceptance" in both the English and Chinese translations. "Acceptance" definitely means "to accept" in the Chinese translation. The [Seller]'s submission of inspection reports, instead of the acceptance protocol, was contrary to the purpose of the Contract and it was also unfair to the [Buyer]. Therefore, the two inspection reports failed to prove that the machines had satisfied the quality required and could operate regularly. Hence, the [Seller] should not be entitled to the payment from the [Buyer].

In addition, Agreement 2002 proved that the two inspection reports were simply a proof of the tests at those interim stages and could not serve as the acceptance protocol because the performance of the machines was not up to a qualified standard. Apart from that, Agreement 2002 also stated that:

"Party B [Buyer] agrees to pay for the machines supplied by Party A [Seller] until all the major problems and other minor problems have been thoroughly settled. The method of payment should be negotiated by the parties by the time. If the aforesaid mentioned problems remain unsolved, Party B reserves the right to return the goods and claim for damages."

Therefore, the [Seller] should not be entitled to request the payment from the [Buyer] when the problems remained unsolved. The [Buyer] did not have an obligation to pay for a set of machines which could neither operate regularly nor produce qualified products, neither.

4. Return of goods and claim for damages

The [Buyer] had never issued any acceptance protocol to the [Seller]. Therefore, the guarantee period had not yet started. Hence, it was groundless for the [Seller] to allege that the [Buyer] did not request a return of goods within the guarantee period.

Agreement 2002 further affirmed the [Buyer]'s right to return the goods and to claim for damages. Under the circumstances that the [Seller] failed to perform its obligations stipulated in the Contract and Agreement 2002, the [Buyer] was entitled to return the goods and claim for damages. In fact, the [Buyer] had issued to the [Seller] three formal notifications concerning return of goods and claim for damages. DDD Company (Beijing Representative Office) and CCC Company were the agents of the [Seller]. Therefore, notifications issued by the [Buyer] to the aforesaid agents should be considered as notifying the [Seller]. In addition, Article 17(d) of the Contract regarding inspection and damages stipulated that:

"Unless reply is given by the [Seller] within 30 days after the notification of claims for damages by the [Buyer], the [Seller] shall be deemed to have agreed to any claims made by the [Buyer]."

The [Buyer] had performed its obligation of notification several times. However, the [Seller] did not give any reply. Consequently, the [Seller] should be deemed to have agreed to the claims made by the [Buyer].

Therefore, the [Seller] should not be entitled to request the payment for the machines from the [Buyer]. Instead, it should perform the obligation upon return of goods and compensate the [Buyer]'s loss according to the notifications issued by the [Buyer] on 9 and 13 January 2004.

5. The [Seller]'s request for a payment for the components (US $60,100) from the [Buyer] should be dismissed

The [Seller] provided the additional components in order to resolve the problems that arose from the defective No. 2 Machine. It was a kind of remedy for the breach of Contract by the [Seller]. Therefore, the [Seller] should bear the loss incurred. Moreover, the two re-equippings of the machines provided by the [Seller] not only failed to settle the problems listed in Agreement 2002, but also resulted in a series of more serious problems which led to a breakdown of the machine. Under such circumstances, it was unfair for the [Seller] to claim the additional loss against the [Buyer].

6. The [Seller]'s claim for bank interest and attorneys' fee

According to Agreement 2002 and the facts of this case, the [Buyer] should be allowed to refrain from paying for the machines. Therefore, it was groundless for the [Seller] to claim the bank interest.

The present case resulted from a breach of contract by the [Seller]. The additional loss of attorneys' fee was caused by the [Seller]'s unreasonable claim, and thus the [Seller] should bear such loss.

III. ARBITRATION TRIBUNAL'S OPINION

1. Applicable law

The contract did not contain any provision on the applicable law.

According to the [Seller]'s submission, Article 142 of the General Principles of the Civil Law of China stipulates that:

"If any international treaty concluded or acceded to by the People's Republic of China contains provisions differing from those in the civil laws of the People's Republic of China, the provisions of the international treaty shall apply, unless the provisions are ones on which the People's Republic of China has announced reservations."

In addition, Article 1 of United Nations Convention on Contracts for the International Sale of Goods (1980) (the "CISG") stipulates that:

"This Convention applies to contracts of sale of goods between parties whose places of business are in different States: (a) when the States are Contracting States; or (b) when the rule of private international law lead to the application of the law of a Contracting State."

In the present case, both requirements are satisfied, so the CISG shall be the applicable law. If the applicable law was not selected by the parties when signing the Contract, Chinese laws should be applied in any contractual dispute outside the scope of the CISG. According to Article 126 of the Contract Law of China and Article 145 of the General Principles of the Civil Law of China, the Contract shall be governed by the law which has the closest connection. In the present case, the law which has the closest connection is the law of China because: (i) the [Buyer] is a legal entity in China; (ii) the port of destination is in China; and (iii) the place of arbitration is in Beijing, China.

The [Buyer] did not raise any dispute against the above submission by the [Seller].

The Tribunal regards the [Seller]'s position on the applicable law as reasonable. It is in compliance with the principle adopted by the Arbitration Commission when handling cases where the parties had not made a choice on the applicable law. Therefore, the applicable law in the present case shall be the CISG and the Contract Law of China.

2. Whether a non-conformity of the machines existed

-    The [Seller]'s position

The [Seller] alleged that the machines were delivered on 22 September 2000, and that the two inspection reports signed by the [Buyer] on 27 April 2002 indicated a final acceptance and acknowledgement of the performance of the machines.

-    The [Buyer]'s position

The [Buyer] alleged that the machines were installed at the end of 2000 and the shakedown tests started in January 2001, but the machines failed to operate regularly from the beginning. After several re-equipments and tests provided by the [Seller], the machines still failed to perform regular production. The [Buyer] alleged that the machines provided by the [Seller] were not in conformity with the quality, specifications and capacity stipulated in the Contract. Such non-conformity, which was contrary to the terms of Article 16 of the Contract, constituted a breach of contract. The two inspection reports submitted by the [Seller] were simply a proof of the tests at those interim stages and should not be regarded as the acceptance protocol required by the Contract.

-    The Arbitration Tribunal's findings

Upon the hearing, the Arbitration Tribunal made the following determinations on facts.

      1. On 11 May 2000, the parties signed a contract for the sale of "a continuous scouring machine and a crabbing machine", i.e., the Contract.

Article 12 of the Contract covering the terms of payment stipulates that "97% of the price shall be payable against acceptance protocol signed by the [Buyer]."

Article 16 of the Contract covering the terms of the quality guarantee stipulates that:

"The [Seller] shall guarantee that the goods are produced with superior material and shall be excellent in workmanship. They must be brand-new, unused and in conformity with the quality, quantity and capacity stipulated in this Contract. Under proper installation, use and maintenance, the [Seller] shall guarantee the goods are good in performance. Such guarantee period shall be twelve months after the installation and shakedown test of the goods."

Article 17(c) of the Contract covering the terms of inspection and damages stipulates that:

"During the guarantee period stipulated in Article 16 of the Contract, if the quality and/or performance of the goods are not in conformity with the Contract, or if the goods are defective, regardless of the cause of defect, including inherent defect and defective materials being used to make the goods, the [Buyer] shall request the CCIB to conduct an inspection, and shall be entitled to claim damages against the [Seller] relying on this inspection certificate issued by the CCIB."

      2. Article 1 of the Contract covering the goods and specifications stipulates that the goods shall be "a continuous scouring machine and a crabbing machine" (Refer to the attachments for details: Quotation No. 100/M00 dated 10 May 2000 and Image No. 35-01-139A).

Quotation No. 100/M00 dated 10 May 2000 and Image No. 35-01-139A stated that "the [Seller] reserves the right to modify the specifications of the machine upon the development of technology."

      3. On 20 July 2000, the [Seller] sent a fax to Mr. Zhang of DDD Company, stating that:

"This is to confirm that the No. 2 Machine will be delivered by the end of July according to the agreement made with Ms. Jiang. As the schedule is really tight, we will arrange the cargo and delivery, and bear the expenses."

On 21 July 2000, Mr. Zhang of DDD Company forwarded the fax to the [Buyer] and notified the [Buyer] of the arrangement.

      4. On 31 October 2000, Mr. Gu Jinzhao of the [Buyer]'s firm sent a fax to Mr. B___, the President of the [Seller]'s firm, stating that:

"The No. 2 Machine was delivered to the [Buyer] on 22 September 2000. The [Seller]'s technicians carried out shakedown tests for the machine from 30 September to 30 October. However, the machine failed to operate without high quality textile materials, and some problems existed in the machine."

After listing eleven problems, he suggested that:

"Your machine did not satisfy our requirement of high quality, and the tests were not up to our expectation. … Please send technicians to solve the existing problems in order to avoid negative impact on your company's reputation."

      5. On 17 March 2001, Mr. Zhang Zhenhui of DDD Company sent a fax to Mr. Gu of the [Buyer]'s firm, stating:

"We regret to receive your notification concerning a return of the above-mentioned machine to the supplier. In fact, it is almost at the last stage of the shakedown test. After the Italian technicians have equipped the machine with the necessary components, production could start at once. The Italian technicians will arrive at your company to handle the equipment on next Wednesday (awaiting for the approval of visa). If the machine still fails to start the production, it means that the shakedown test fails. The above-mentioned machine shall be returned to the Italian supplier and no claim for damages can be made by the [Seller]."

      6. On 27 April 2002, the technicians of the [Seller] and the person-in-charge of the [Buyer]'s dyeing department signed the inspection reports of TECNOPLUS 2000 and PWS PERMANENT SETTING (Editor's note: i.e., No. 1 Machine and No. 2 Machine). It was reported that "[t]his letter attests that the erection and the final inspection have been done with satisfaction." The items in the report included "unpack and check", "assembly and installation", "water linkage test", "steam test", "wire connection", "stone slab and wire connection", "compressed air connection", "mechanical inspection", "electricity inspection", "air-power inspection", "physical test". "Done" or "Yes" were filled in on every column indicating that relevant inspection was done on every item.

      7. In January 2003, Mr. He of CCC Company signed an agreement with the [Buyer] on behalf of the [Seller], i.e., the aforesaid Agreement 2002. The date of signature was not indicated in the agreement, but it should be in January 2003 according to its context. The preface of the Agreement 2002 stated that:

"In the last third of December, Mr. B___ of the [Seller]'s firm paid a special-purpose visit the [Buyer] and had an honest discussion and exchange of opinion with the latter's technicians concerning all the problems of both machines. The [Seller] will deliver all components and electronic devices necessary for the re-equipment to the [Buyer] by air freight within ten days. When the delivery arrives at the [Buyer] at the end of February, the [Seller] will dispatch technicians to thoroughly resolve all of the remaining problems."

The Agreement 2002 listed four component lists and seven major problems of the machines. At the end of the Agreement 2002, it was stated that:

"The [Seller] will resolve the aforesaid major problems first and the remaining problems such as bearings and motor breakdown would be resolved by compensation according to the terms of the quality guarantee stipulated in the Contract.

"The [Buyer] agrees to pay for the machines supplied by the [Seller] until all the major problems and other minor problems have been thoroughly settled. The method of payment should be negotiated by the parties. If the aforesaid problems remain unsolved, the [Buyer] reserves the right to return the goods and claim for damages."

      8. On 9 January 20004, the [Buyer] sent a fax to Mr. He of CCC Company, stating that:

"Same problem arose from the breakdown of the [Seller]'s machines. Based on the frequent breakdowns of the machines, we request a refund of the deposit and compensation of any economic loss incurred. All the machines will be returned."

      9. On 25 May 2004, Mr. B___ of the [Seller]'s firm sent a letter to Han Yuqun, the Governor of Shandong Province, stating that:

"We received a receipt of delivery on 27 April 2002 from the factory which is the end-user, but we did not receive any payment. Notwithstanding the unsettled payment, they continued to complain about the problems of the machine. We had already dispatched technicians to provide technical support and necessary components, and those regular consumables should not be included in maintenance. We have already stopped providing technical support for the company at this stage."

      10. A letter entitled "Matters Concerning [Seller]'s Full-width Scouring Machine and Crabbing Machine" sent by the [Buyer] on 3 February 2005 stated that:

"The necessary components for re-equipment were delivered in February 2003. The [Seller] dispatched technicians for the re-equipment of the machine, but some design problems remained unsolved. Therefore, the payment was not settled. Another batch of components was delivered by the [Seller] in June 2003 for another re-equipment. By the end of December 2003, the problem remained unsolved. At that time, the [Seller] dispatched another technician for the re-equipment of the transmission control system installed in the scouring part. Since then, new problems arose, i.e., a PLC programming error caused a breakdown of the machine. We contacted Mr. He of CCC Company, the [Seller]'s agent. The [Seller] suggested that it was a matter of the PLC software. We were told to connect the telephone wiring so that a set of good programming protocol could be sent through the teleconnect system and we could be able to operate the machine after receiving the protocol. After ten days, a breakdown of the machine happened again. We contracted the [Seller] for the delivery of the programming protocol for a second time. At the same time, Mr. He told us that the [Seller] required us to settle the payment and a discount could be offered, i.e., only the amount of the full-width scouring part would be charged and the continuous scouring part would be considered a free gift to the [Buyer]. However, the [Seller] stated that if the payment is not settled, the [Seller] would not provide any technical support from then on. Another breakdown of the machine occurred on 29 February 2004, but the [Seller] no longer provided any technical support to the [Buyer]. (We suspected that the [Seller] set a password during the modification of the program, i.e., program trap.)"

During the course of investigation of the above facts, the [Buyer] alleged that the machines sold by the [Seller] in the present case were newly developed products of the [Seller]. The [Buyer] purchased the machines because the [Seller] promised that the [Buyer] could use the machines on a trial basis. The [Buyer] could pay after the installation and qualified test of the machines. The Arbitration Tribunal notes that the quotation as an attachment of the Contract signed by the [Seller] on 10 May 2000 before the Contract stated that "[t]he [Seller] reserves the right to modify the specifications of the machine upon the development of technology." The Arbitration Tribunal finds that the [Seller] should guarantee that the quality of the machines it sold was up to a certain standard when signing a Contract for the sale of the machines in the present case, and the specifications of the machine should be explicitly stated in the Contract. If the [Seller] reserves the right to modify the specifications of the machine, it indicates that the specifications of the machine will be changed, and the capacity as well as the quality will be affected. However, if the [Buyer] accepted the terms suggested by the [Seller], it indicated that the [Buyer] was aware of these potential changes when signing the Contract. On one hand, it was reasonable for the [Buyer] to claim that the machines sold by the [Seller] were its newly developed products. The fact that the [Seller] reserved the right to modify the specifications of the machine may be because the technology of the machines was not yet mature. Problems might arise during the test of the machine so continuous test and improvement was necessary. On the other hand, the parties should perform the obligations as agreed when they signed the Contract. The matter concerning whether the [buyer] shall settle the payment after the machine has reached a qualified standard shall be based on the terms of the Contract and the provisions of the applicable law.

The parties held different opinions concerning whether the "Inspection report" signed on 27 April 2002 should be a proof of acceptance in this case. Judging from the content, the Arbitration Tribunal finds that the inspection reports only indicated that the installation, tests and trial operations of the machines were done. If these reports served as the acceptance protocol signed by the parties, they should have contained relevant data indicating a pass or fail in the tests and trial operations, and they should be signed by the technician in-charge. However, on one hand, the [Seller] only submitted the text of the inspection reports without any relevant data logging of the tests and trial operations; on the other hand, Article 12 of the Contract covering the payment terms stipulates that "97% of the payment shall be payable against acceptance protocol signed by the [Buyer]." The Contract requires an "acceptance protocol". However, the [Seller] submitted "Inspection reports". "Inspection" does not mean "acceptance". Therefore, the Tribunal is of the opinion that the "Inspection reports" submitted by the [Buyer] are not a sufficient proof of acceptance. The signature of the [Buyer] on the inspection reports should neither be considered as an acceptance protocol required by the Contract, nor indicate a final acceptance of the goods by the [Buyer]. These reports should not be submitted to demonstrate that the machines in the present case do not have problems in operating, and that the performance of the machines was up to a qualified standard in production. Instead, these reports indicated that the [Buyer] signed the reports confirming that the installation and tests of the machines were done. In fact, before the parties signed the inspection reports, the facts concerning "some problems existed in the machines" and "the [Buyer]'s request for a return of goods to the supplier" were verified in the aforesaid statements. Based on the verified fact that the parties signed an agreement in January 2003 listing four component lists and seven major problems and other minor problems of the machines after signing the two inspection reports, the Arbitration Tribunal finds that:

      The parties confirmed the problems regarding the quality of the machines in the agreement signed by the parties in January 2003. The problems confirmed were serious. Otherwise, the [Seller] would not have agreed to allow the [Buyer] to pay after all the major and minor problems were thoroughly resolved in this agreement. If the problems were not serious, the [Seller] would not have agreed to allow the [Buyer] to reserve its right to a return of goods and claim for damages if the problems could not be thoroughly resolved.

      Have all these problems been resolved? The Arbitration Tribunal observes that apart from the two aforesaid inspection reports submitted by the [Seller] during the course of proceedings as evidence to prove the final acceptance of the machine by the [Buyer], the [Seller] did not provide further evidence indicating whether the major and minor problems listed in the agreement signed in January 2003 had been completely, mostly or partially resolved. On the contrary, the investigation of the aforementioned facts indicated that the problems concerning the quality of the machine existed anyway. On 9 January 2004, the [Buyer] sent a fax to Mr. He of CCC Company referring to "the frequent breakdowns of the machine", "requesting a refund of the deposit and compensation" and "return of all machines."

On 25 May 2004, the [Seller] sent a letter to Mr. Han Yuqun, the Governor of the Shandong Province, accusing the [Buyer] for its continuous complaint that problems existed in the machine. The letter mentioned that the [Seller] had provided technicians and necessary components for technical support. Therefore, it can be concluded that the problems concerning the quality of the machines still existed, and the [Seller] admitted that its company had stopped providing technical support to the [Buyer]. The termination of technical support admitted by the [Seller] was explicitly stated in the letter entitled "Matters Concerning the [Seller]'s Full-width Scouring Machine and Crabbing Machine" prepared and sent by the [Buyer] on 3 February 2005. It was stated that the [Seller] dispatched technicians and delivered the necessary components for re-equipments in February, June and December 2003, but some of the problems in the design could not be thoroughly resolved. It was mentioned in the letter that:

"The problems remained unsolved in December 2003. Until then, the [Seller] dispatched another technician for the re-equipment of the transmission control system in the full-width scouring machine. A new problem arose, i.e., the machines failed to operate because of PLC programming error. … The machines could operate regularly after receiving the new programming protocol, but the same problem happened again after 10 days. … Therefore, the [Seller] stopped providing technical support since another breakdown of the machine on 29 February 2004."

According to the submission by the [Buyer] at the oral hearing, the problems concerning the quality of the machines could not be thoroughly resolved and since the [Seller] stopped providing any technical support, the machines could no longer operate. The [Buyer] also submitted further evidence indicating that a combination machine of full-width scouring and continuous crabbing with a dryer roller was purchased by the [Buyer] from CIMI (Italian) Company to replace the machines in the present case.

Article 25 of the CISG stipulates that:

"A breach of contract committed by the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract … ."

Article 35(1) stipulates that:

"The seller must deliver goods which are of the quantity, quality and description required by the contract."

Article 60 of the Contract Law of China stipulates that:

"Each party shall fully perform its obligations in accordance with the contract."

According to the stipulations of the CISG and the Contract Law of China, relevant provisions of the Contract listed in the above verified facts, and all the relevant verified facts, the Arbitration Tribunal finds that the goods provided by the [Seller] should be in conformity with the quality and specifications stipulated in this Contract; and under proper installation, use and maintenance, the [Seller] should guarantee the goods are good in performance for twelve months after the installation and shakedown test of the goods. The [Seller] may allege that the guarantee period of the machine started to run since 27 April 2002 when the parties signed the inspection reports. However, the [Seller] failed to guarantee a good performance of the machine within such guarantee period. Apart from that, the parties signed an agreement during the guarantee period in January 2003 affirming that serious problems existed in the machines. The agreement not only included the component lists delivered by the [Seller], and reference to the major and minor problems of the machines, but also included the [Seller]'s agreement to an arrangement of technicians for resolving the remaining problems. However, the [Seller] failed to provide further evidence on whether the problems had been thoroughly resolved or not. On the contrary, the [Seller] had stopped providing any technical support to the [Buyer]. The [Buyer] could only purchase another machine for substitution due to the failure in attempting to start up the machines. The [Seller] had actually deprived the [Buyer] of the right expected by the [Buyer] under the Contract. Therefore, the Arbitration Tribunal finds that the [Seller]'s acts constituted a fundamental breach of contract.

3. The [Seller]'s claims

      1. Request for US $830,100.00 and corresponding bank interest from the [Buyer]

      The [Seller] requested the [Buyer] to settle the payment of the contract, i.e., US $770,000.00, and to make an additional payment of US $60,100.00 for the components and device.

The [Buyer] claimed that 3% of the Contract price (RMB 191,730) was paid on 18 May 2000; and 97% of the payment should not be settled because the payment terms were not satisfied, because the machine had been under a trial stage and it failed to operate regularly, and thus, the [Buyer] did not sign any acceptance protocol and it should be allowed to refrain from paying for the machines. The [Buyer] also suggested that the [Seller] should not enjoy the right to request the payment. Instead it should perform the obligation of return of goods and compensate the [Buyer] according to the notification sent by the [Buyer] on 9 and 13 January 2004. The [Buyer] alleged that the [Seller]'s claim of an amount of US $60,100 for the components should be dismissed as well because the components provided by the [Seller] were actually a resolution to the quality of the machines which was a remedy for the breach of contract by the [Seller] itself, and hence, the [Seller] should bear such an additional cost. On the other hand, the [Seller] claimed that the deposit of RMB 190,000 was made by the [Buyer] to another payee, DDD Company, but not to the proper party to the Contract, the [Seller]. Moreover, the payment should be in foreign currency, not in RMB. DDD Company, as a third party, which followed the instructions from both parties to make contact only served as an middleman and a dealer between the parties. The amount of US $60,100 was the additional expenses for the extra components provided by the [Seller] other than those stipulated in the Contract, especially for the Angora Treatment and for Mr. Cecchin's technical training given regarding the new device and other relevant arrangement.

The Arbitration Tribunal verified that an amount of US $770,000 requested by the [Seller] was the Contract price in the present case. Regarding the 3% of the payment made by the [Seller] as a deposit, i.e., RMB 190,000, the [Buyer] submitted an agreement that it signed with DDD Company, in which the [Buyer] and DDD Company agreed that the [Buyer] would pay RMB 190,000 to DDD Company as a confirmation of the purchase of the machines in dispute by 19 May 2000 for the [Seller] to get the machines ready for production. It was also agreed that after DDD Company receiving a valid L/C issued by the [Buyer] stipulated in the Contract, DDD Company would refund the aforesaid deposit to the [Buyer] within five days. The [Buyer] paid a deposit of RMB 190,000 according to this agreement and the payment voucher submitted by the [Buyer] proved that this amount was paid. However, the Arbitration Tribunal finds that it was difficult to verify whether DDD Company was an agent of the [Seller] simply based on the content of this agreement because the [Seller] denied the fact that DDD Company was its agent and the [Buyer] failed to provide evidence proving that DDD Company was authorized by the [Seller] at the time of and after signing the aforesaid agreement with the [Buyer]. Therefore, it was insufficient for the Arbitration Tribunal to conclude that the obligation of 3% payment or the deposit under the Contract had been fulfilled by the [Buyer] based on the payment of RMB 190,000 made to DDD Company. The nature of the agreement signed between the [Buyer] and DDD Company was different from that of the Contract. The [Buyer] may claim a creditor's right against DDD Company. However, such claim is not within the jurisdiction of the Arbitration Tribunal.

Regarding the payment terms of 97% of the Contract price, the Contract stipulates that "97% of the payment shall be payable against acceptance protocol signed by the buyer." With reference to Part 2 of the Arbitration Tribunal's opinion, the [Seller] submitted two inspection reports signed by the parties. Inspection is not equivalent to acceptance. The [Seller]'s submission of the inspection reports shall not be regarded as a sufficient acceptance protocol. Therefore, the Arbitration Tribunal finds that the [Buyer]'s non-performance or refusal of payment was reasonable.

However, at issue is the role that these inspection reports play in determining the obligations of the parties under the Contract. As the aforementioned opinion, the Arbitration Tribunal suggests that the inspection reports regarding the installation and tests done can be used to confirm that the twelve-month guarantee period of the Contract has begun. Generally, the [Buyer] shall settle the payment of goods when the guarantee period has started running.

However, during the course of the Contract, in less than twelve months since the parties signed the inspection reports, they signed an agreement in January 2003 listing the major and minor problems of the machines. The parties reached an agreement at the end of this agreement that "Party B (the [Buyer]) agrees to pay for the machines until all the major problems and other minor problems have been thoroughly settled supplied by Party A (the [Seller]). The method of payment should be negotiated by the parties by the time." The agreement indicated that the parties had concluded new terms of payment. Part 2 of the Arbitration Tribunal's opinion affirmed that the [Seller] failed to provide further evidence on whether the remaining problems had been thoroughly resolved or not. Therefore, the conditions precedent under the terms of payment concluded by the parties in the agreement were not satisfied. The Arbitration Tribunal, therefore, cannot support the [Seller]'s claim for the Contract price, i.e., US $770,000 and the corresponding bank interest against the [Buyer].

Regarding the expenses of the additional components and the device, i.e., US $60,100, the Arbitration Tribunal observes that the additional components and technical support were provided by the [Seller] based on the agreement signed in January 2003 by the parties. This agreement was signed within the twelve-month guarantee period as affirmed by the Arbitration Tribunal. The agreement clearly stated that the [Seller] "shall compensate according to the requirement of quality stipulated in the Contract"; but it did not require the [Buyer] to bear such expenses. Therefore, the [Seller]'s claim for payment of US $60,100 and the corresponding bank interest is not supported by the Arbitration Tribunal.

The Arbitration Tribunal also notes that the [Buyer] reserved the right to return the goods and claim for damages under the agreement if the remaining problems could not be thoroughly resolved. However, the agreement did not provide details on how this right could be exercised. According to the Contract, the [Buyer] shall submit its claim within the guarantee period and apply for an inspection certificate from CCIB when exercising its right to return the goods and claim for damages. In the present case, the [Buyer] had submitted its counterclaims to the Arbitration Tribunal regarding the return of goods and claim for damages, but later on revoked the counterclaims. The Arbitration Tribunal finds that since the [Seller]'s claim for payment of contract price is not supported, the [Buyer] should return the machines at the [Seller]'s disposal. However, in returning the goods, the [Buyer] should provide necessary assistance.

      2. The claim against the [Buyer] for attorneys' fee and the arbitration fee

      Based on the verified facts in this case, the Arbitration Tribunal finds that the [Seller] should be fully responsible for the arbitration fee and its own attorneys' fee incurred in the present case.

IV. AWARD

1.    The [Seller]'s claims are dismissed.
 
2.    The [Seller] shall bear the entire arbitration fee of US $24,669, which has been paid to the Arbitration Commission by the [Seller] in advance.

This is the final award. It takes effect on the day of the award.


FOOTNOTES

* For purposes of this translation, Claimant of Italy is referred to as [Seller] and Respondent of the People's Republic of China is referred to as [Buyer]. Amounts in U.S. currency (dollars) are indicated as [US $]; amounts in the currency of the People's Republic of China (renminbi) are indicated as [RMB].

** Lin Wah Tong, JD student, City University of Hong Kong; Bachelor of Arts in Language Studies, Associate Degree of Arts in Bilingual Communications Studies.

*** Jing Li, Associate, Institute of International Commercial Law, Pace University School of Law; LL.M., University of Texas at Austin, School of Law; Master of Law and LL.B., Sun Yat-Sen University School of Law, China; Participant, Thirteenth Annual Willem C. Vis International Commercial Arbitration Moot (2006); Participant, Fifth Annual Willem C. Vis (East) International Commercial Arbitration Moot (2008).

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