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CISG CASE PRESENTATION

China August 2006 CIETAC Arbitration proceeding (Chilling press case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/060800c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20060800 (August 2006)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2006/13

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: United States (respondent)

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

GOODS INVOLVED: Chilling press


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 25 ; 35 ; 39 ; 49 ; 73 ; 81 [Also cited: Articles 74 ; 84 ]

Classification of issues using UNCITRAL classification code numbers:

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

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

39A [Requirement to notify seller of lack of conformity: buyer must notify seller within reasonable time];

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

73B12 [Avoidance in installment contracts (refusal of future installments): when breach in one installment gives grounds to expect fundamental breach with respect to future installments];

81C [Effect of avoidance on obligations: restitution by each part of benefits received]

Descriptors: Fundamental breach ; Avoidance ; Conformity of goods ; Lack of conformity notice, timelines ; Installment contracts ; Restitution

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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 & Trade Arbitration Commission
CIETAC (PRC) Arbitration Award

Chilling press case (August 2006)

Translation [*] by Zheng Xie [**]

Edited by Farah Poon [***]

PARTICULARS OF THE PROCEEDING

The China International Economic and Trade Arbitration Commission (hereafter, the "Arbitration Commission") accepted the case (Case number: M2005___) according to:

   -    The arbitration clause in Contract No. JISH-200211 (the "Contract") signed by Claimant [of the People's Republic of China] (the "[Buyer]" and Respondent [of the United States] (the "[Seller]") on 17 July 2003; and
 
   -    The written arbitration application submitted by the [Buyer on 20 September 2005.

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

On 9 October 2005, the Secretariat of the Arbitration Commission by express mail served the [Seller] and the [Buyer] the Arbitration Notice, the Arbitration Rules and the Arbitrators List, and also served the [Seller] the [Buyer]'s arbitration application and attachments. The post office record indicates that the [Seller] signed the receipt and received the documents on 14 October 2005.

Since the appendix, i.e., the Contract and Supplement, was not clear, the [Buyer] submitted additional copies of the pertinent documents. On 17 October 2005, the Secretariat sent the aforementioned documents to the [Seller] by express mail. Thereafter, the post office notified the Secretariat via telephone that the [Seller] refused to accept the documents. Considering this situation, after obtaining the [Buyer]'s approval, the Secretariat requested the post office to leave the documents at the [Seller]'s address. Thereafter, the post office issued a tracking slip indicating, "Since the company at the recipient's address refused to accept the documents, at the sender's request, we left these documents at the recipient's address on 14 November 2005."

Except for the documents noted as sent via facsimile, all documents were thereafter sent to the [Seller] by express mail. However, the [Seller] refused to accept any documents, and the post office left all documents at the [Seller]'s address. Pursuant to Article 68 of the Arbitration Rules, all documents sent to the [Seller] by the Secretariat were deemed appropriately served.

On 21 November 2005, the Secretariat received an Objection to Jurisdiction signed by Mr. R.A.G and attached evidentiary material. In the Objection to Jurisdiction, the [Seller] raised its objection to the jurisdiction of the Commission over this case. The Secretariat served the [Buyer] the aforesaid Objection to Jurisdiction. On 28 November 2005, the [Buyer] filed a Response to the [Seller]'s Objection to Jurisdiction. This document was left at the [Seller]'s address on 14 December 2005.

On 25 January 2006, pursuant to Article 6(1) of the Arbitration Rules, the Arbitration Commission issued Decision on Jurisdiction No. 000856 CIETAC (2006), which states:

"1. The Arbitration Commission has jurisdiction over this case;
"2. The Arbitration Commission will continue this arbitration proceeding."

Since the [Buyer] has already appointed its arbitrator, the [Seller] shall appoint its arbitrator according to the Arbitrators List or authorize the Chairman of the Arbitration Commission to appoint an arbitrator within seven (7) days after receipt of this Decision; otherwise, the Chairman will appoint an arbitrator for the [Seller]. On 14 February 2006, the Secretariat left this Decision on Jurisdiction at the [Seller]'s address.

The [Buyer] appointed Mr. ___ at its arbitrator. Since the [Seller] neither appointed nor authorized the Chairman of the Arbitration Tribunal to appoint an arbitrator within the time limit, the Chairman of the Arbitration Commission appointed Mr. ___ as the [Seller]'s arbitrator pursuant to the Arbitration Rules. Since the [Seller] and the [Buyer] neither jointly appointed nor authorized the Chairman of the Arbitration Tribunal to appoint a presiding arbitrator within the time limit, the Chairman of the Arbitration Commission appointed Ms. ___ as the presiding arbitrator pursuant to Article 22 of the Arbitration Rules. The aforementioned three arbitrators formed the Arbitration Tribunal on 2 March 2006 to hear this case.

On 2 March 2006, after consultation with the Secretariat, the Arbitration Tribunal decided to open a court session in Beijing on 3 April 2006 at 9:30 a.m. On the same day, the Secretariat by express mail sent the Notice of Formation of Arbitration Tribunal and Notice of Court Session to the [Seller] and the [Buyer], respectively, and also sent the two documents to the [Seller] via facsimiles. On 10 March 2006, the aforementioned documents were left at the [Seller]'s address.

On 3 April 2006 at 9:30 a.m., the Arbitration Tribunal opened the court session in Beijing. The [Buyer]'s representatives were present. Although the Secretariat had sent written notice of the court session to the [Seller], the [Seller] neither appeared nor provided to the Arbitration Tribunal any reason for its absence. Pursuant to Article 34(2) of the Arbitration Rules, the Arbitration Tribunal heard the case by default. In the court session, the Arbitration Tribunal heard the [Buyer]'s statements, asked the [Buyer] some questions regarding the facts, and verified the original copies of evidence.

On 4 April 2006, the Arbitration Tribunal via facsimiles sent a letter to both parties, and informed the [Seller] of the default court session, and notified the parties of further proceedings as follows:

"1. If the [Buyer] intends to submit further evidence, it shall be submitted within 15 days to the Secretariat; otherwise, the Arbitration Tribunal will not accept any supplementary evidence unless otherwise arranged;

"2. The Secretariat will go to the place of business of CCC Steel and Iron (Zhongshan) Ltd. in Zhongshan, Guangdong ("[End User]") to investigate the disputed machine, and the parties shall send their representative on the scene; otherwise, the parties are deemed to waive their right to investigate the machine."

In the meantime, the Arbitration Tribunal notified the parties of the [End User]'s address, contact person and contact information. Thereafter, the Arbitration Tribunal changed the inspection date several times, and finally decided to inspect the machine on 15 April 2006 at 10:00 a.m. Via facsimiles, the Secretariat notified the parties of the change of the inspection date.

On 15 April 2006, the Arbitration Tribunal arrived at the place where the machine is located (i.e., at [End User]'s place of business). Since neither [Buyer] nor [Seller] appeared, the Arbitration Tribunal by itself inspected the machine of the first installment at the [End User]'s place of business. On 17 April 2006, the [Buyer] submitted its Supplementary Opinion on the Dispute Regarding the Chilling Press in M2005___ and supplementary evidence, which includes photos demonstrating the quality of the machine (the original photos were kept by the Secretariat). The [Buyer] also submitted the Agency Agreement which was signed between the [Buyer] and [End User], as import agent for the chilling press that is the subject of this arbitration.

On 29 April 2006, the Arbitration Tribunal through the Secretariat notified the parties that the Arbitration Tribunal had inspected the machine on spot, and sent all of [Seller]'s documents and supplementary evidence including copies of photos of the machine to the [Seller], and also notified the [Seller] that:

"1. If the [Seller] requests another court session or requests to cross-examine the [Buyer]'s supplementary evidence, it shall notify the Secretariat in writing before 18 May 2006; otherwise, the supplementary evidence will be cross-examined in writing;

"2. If the [Seller] intends to submit any further opinion or evidence, it shall submit that in writing to the Secretariat before 18 May 2006; otherwise, unless otherwise provided, the Arbitration Tribunal will not accept any material submitted by either party;

"Finally, if any party has any objection to the procedure, it shall notify the Arbitration Commission in writing before 15 May 2006."

The aforementioned documents were sent by express mail and left at the [Sender]'s address on 8 May 2006. Thereafter, neither party submitted any written opinion and/or evidence or raised any defense or objection to either substantive or procedural aspects of this proceeding.

Based on the facts verified in the court session and all written material, the Arbitration Tribunal entered this award pursuant to Article 42 of the Arbitration Rules.

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

FACTS

On 20 June 2003, the [Buyer] and [End User] entered into an Agency Agreement entrusting the [Buyer] to import a chilling press from the [Seller].

On 17 July 2003, the [Buyer] and the [Seller] signed Contract No. JISH-200211, at Shenzhen, China, the subject of the instant case, which stipulates that the [Buyer] will purchase a chilling press from the [Seller] for CIF US $3,380,000 by letter of credit.

The Contract includes the following terms:

Article 2. Country of origin (Manufacturer): US (MKATTY) U.S.A., INDIA, and many others;

Article 6. Port of Shipment: U.S.A., India and others;

Article 7. Port of destination: Guangdong Port, Huang Pu, China;

Article 12. Quality warranty: The seller guarantees that the quality, specification and usage comply with the Contract: the warranty period is 18 months after the goods arrive at the port or 12 months after the goods pass inspection, the earlier expiration date of these two periods shall govern.

Article 13. Inspection and claims: (1) Before shipping the goods, the manufacturer shall fully inspect quality, specifications, usage and quantity/weight of the goods, and shall issue a quality certificate to state inspection conclusion and technical data; (2) After the goods arrive at the port of destination, the buyer shall re-inspect the specifications and quantity of the goods, and if the buyer finds any defect or specification and/or quantity discrepancy with the Contract, except for liabilities of insurance companies or shipping companies, the buyer shall issue an inspection certificate within three days after the goods arrived at the port of destination to claim damages from the seller or to reject the goods; (3) Within the warranty period, if the goods have any discrepancy in terms of quality and usage, or are broken due to any design or manufacturing defects, the buyer shall entrust China Commercial Inspection General Bureau to inspect the goods, and shall claim damages (including replacing the goods) with the seller by presenting an inspection certificate issued by the China Commercial Inspection General Bureau, and the seller shall bear all expenses and costs that are incurred hereof; (4) If the seller does not respond to the aforementioned claims, it is deemed that the seller accepts the buyer's claims.

Article 15. Arbitration: For all disputes arising during the performance of the Contract or related to the Contract, the parties shall resolve the dispute through amicable negotiation; if the parties fail to resolve the disputes through amicable negotiation, the parties agree to arbitrate the disputes by China International Economic and Trade Arbitration Commission Beijing Sub-Commission pursuant to its arbitration rules. The arbitration award shall be final and binding on both parties. The losing party shall bear the arbitration fee.

Article 16. Supplementary clause: The Contract takes effect when executed. The seller's delivery date shall be computed by the date of the buyer's first payment. The Contract has two originals in both Chinese and English, and the two languages have equal power. After signing the Contract, each party maintains one original.

On 20 November 2003, the parties signed a Supplementary Agreement to change some terms in the Contract and Appendix, for example, the port of destination "Huangpu Port, Guang Dong, China" stipulated in Article 7 was changed to "Zhongshan Port, Guangdong, China."

Thereafter, disputes arose during the performance of the Contract. The parties failed to resolve the disputes through negotiations; the [Buyer] then submitted the arbitration application.

POSITION OF THE PARTIES

The [Buyer]'s position

The Contract stipulates that the goods shall be delivered in installments, and the payments shall be by letters of credit. The value of the first installment is US $676,000. Letter of Credit No. 675-01-0000405-S was issued by Standard Chartered Bank (Hong Kong), and the [Seller] successfully negotiated the L/C by presenting pertinent documents.

The first installment (total 13 items) arrived on 15 April 2004. The shipper was an Indian company, DDD Engineering Works (P) Ltd. ("DDD"). After initial inspection, the [End User] found that the goods contain severe defects. On 26 April 2004, the [End User] sent a fax to [Seller] and DDD inquired of some problems and requesting that engineers be sent to the spot. However, there was no response to this.

On 7 May 2004, [End User] sent a letter to the [Seller] stating;

       "1. Your engineers did not come, which caused our operation to stop for more than twenty days ... We request that you and your subcontractor (DDD) send representatives to attend end-user's and suppliers' meetings which we would schedule for 15 May;
       "2. [...];
       "3. You shall bear our loss due to the halt in operation from 19 April to the date when your engineers arrive and resolve the problem;
       "4. [...]"

However, the [Seller] did not appear at the meeting.

On 17 May 2004, the [Buyer] sent a letter to the [Seller] demanding that the [Seller] perform the Contract. On 18 May, the [Seller] responded stating:

"We are sorry to have wrongfully selected a subcontractor -- DDD. DDD ruined our Chinese project. DDD has made terrible mistakes in performing the Contract. First, DDD did not stated the truth nor kept any promise, and has been telling lies. We cannot understand DDD's behavior. We believe that DDD cannot finish this project. Our engineers in India confirmed that DDD has ruined the project, especially the second installment, and it has not completed the second installment, and the project has been delayed ... which is not what DDD promised to all of us. We apologize for this terrible situation, but we will try our best to complete the project."

Thereafter, the [Seller] agreed to go to Shenzhen to have a meeting with the [End User] in order to resolve the aforementioned problems. The [End User] listed problems with the first installment in order to negotiate with the [Seller].

On 20 June 2004, the [Seller] and [End User] had a meeting and reached a Six-Term Memorandum. However, the [Seller] did not provide pertinent technical material or the quality certificate for the first installment, or a detailed plan for future installments, which caused frustration of the Six-Term Memorandum.

On 4 November 2004, the [Buyer] sent an official letter to the [Seller] stating that since the first installment has severe quality defects, and since the [Seller] is reluctant to take any remedial measure, and since the following two installments are related to the first installment, the purpose of the Contract cannot be fulfilled. Therefore, the [Buyer] offically notifies the [Seller] to end the project, and requests the [Seller] to resolve the remaining problems; otherwise, the [Buyer] will file a legal action against the [Seller].

The [Seller] was aware of the severity of the problem after obtaining the [Buyer]'s official letter. On 16 November 2004, the [Seller]'s CEO, Mr. VS, went to Shenzhen and reached another Memorandum with the [Buyer]. They discussed issues regarding reselling the first installment, refunding, and the [Seller]'s new plan to continue this project. All participants signed the Memorandum. However, three weeks later, i.e., on 7 December 2004, Mr. VS denied the Memorandum.

On 28 December 2004, the [Buyer] notified the [Seller] that if the [Seller] continued delaying the process and failed to resolve the problem, the [Buyer] will commence legal action. The [Seller] did not respond. The [Seller]'s breach directly caused the [End User]'s operation to come to a stop, and above and beyond the amount which has already been paid to the [Seller], the [End User] incurred a direct loss of RMB 3,000,000 including project expenses, labor costs, etc.

On 18 July 2005, the [Buyer]'s attorneys sent a demand letter to the [Seller] requesting it to resolve the problem. On 26 July 2005, the [Seller]'s attorney sent a response letter that avoided talking of any substantive issue and contended that the [Buyer] is not entitled to commence an arbitration, and stated that the Arbitration Commission has no jurisdiction over this matter, and that even if the Arbitration Commission enters an arbitration award, the [Seller] will firmly object to it.

In sum, the [Buyer] maintains that the [Seller] has not only breached its delivery duty under the Contract, but also violated basic commercial ethics and shown contempt to international trade customs, international conventions, etc.

In view of the above, the [Buyer] prays for the following relief:

   1.    The [Seller] shall refund the [Buyer] US $676,000 and interest of US $60,840Totaling US $736,840;
 
   2.    The [Seller] shall pay the [Buyer] 10% of the above requested amount as a compensation of the [Buyer]'s expenses incurred in this case;
 
   3.    The [Seller] shall bear the arbitration fee.

The [Buyer] made the following points in its Supplementary Opinion Regarding the Chilling Press in M2005___:

1. The [Seller] substantially breached the Contract: the factual evidence of this is sufficient.

The first installment delivered by the [Seller] has severe quality defects, which were proved not only by the inspection certificate of China Inspection and Quarantine Agency but also by the [Seller]'s admitting in its response that the project was a mess. The severe defects of the machine include the following: (1) some parts are severely rusty, and some rust even occurred under the painting. Obviously, the rust did not occur after the machine was delivered, but the machine was used before. The [Seller] re-painted a used machine and delivered it to the [Buyer]; 2) the steel plate is not flat, which causes that the plate does not reach quality requirements; (3) the heights of bottom A and bottom B do not comply with the design, and are more than 10-25mm than those designed, thus the machine could not be installed properly; (4) other parts are not consistent with the design to some extent.

2. The [Buyer] has already entrusted [End User] to open a letter of credit and paid US $676,000 for the first installment. The chilling press was imported by the [Buyer] on behalf of [End User]. The price for the first installment in the amount of US $676,000 has already been paid. The [Seller] successfully negotiated the L/C no. 675-01-0000405-S with Standard Chartered Bank (New York).

The aforementioned letter of credit number and amount are consistent with the invoice provided by the [Seller]. If the [Seller] did not receive the payment, it would not avoid arbitration, but would commence an arbitration or actively respond to the [Buyer]'s pleadings.

3. The [Seller] violated international trade customs and United Convention for Contracts on International Sales of Goods ("CISG"").

The Contract was executed in Shenzhen, China. The Contract does not stipulate applicable law. Therefore, Chinese law and CISG shall apply. Article 73 of CISG prescribes

"(1) In the case of a contract for delivery of goods by instalments, if the failure of one party to perform any of his obligations in respect of any instalment constitutes a fundamental breach of contract with respect to that instalment, the other party may declare the contract avoided with respect to that instalment.

"(2) If one party's failure to perform any of his obligations in respect of any instalment gives the other party good grounds to conclude that a fundamental breach of contract will occur with respect to future installments, he may declare the contract avoided for the future, provided that he does so within a reasonable time.

"(3) A buyer who declares the contract avoided in respect of any delivery may, at the same time, declare it avoided in respect of deliveries already made or of future deliveries if, by reason of their interdependence, those deliveries could not be used for the purpose contemplated by the parties at the time of the conclusion of the contract."

The [Buyer] contends that the goods delivered by the [Seller] contain severe defects and that the [Seller] has never taken any remedial measure and substantively breached the Contract, which caused frustration of the entire project and a huge economic loss to be incurred by the end user. The [Seller] severely violated international trade customs and the CISG. Even if the [Seller] refunds the amount which the [Buyer] has paid, the [Buyer] will still suffer loss due to the exchange rate.

4. On 20 June 2004, the parties signed the first Memorandum, and on November 16 signed the second Memorandum. Because the [Buyer] was awaiting the [Seller] to perform the first Memorandum, the parties did not communicate a lot.

The [Buyer] changed its arbitration requests and finally prays for the following relief:

   1.    [Seller] fundamentally breached the Contract. The first installment and following installments are voided. The [Buyer]'s purpose of the Contract cannot be satisfied. Therefore, the [Buyer] requests to avoid the Contract.
 
   2.    The [Seller] shall refund the [Buyer] US $676,000 and interest of US $60,840. Totaling US $736,840; the [Seller] shall pay the [Buyer] 10% of the above requested amount as a compensation of the [Buyer]'s expenses incurred in this case;
 
   3.    The [Seller] shall ship the machine back at its own expenses. If the [Seller] fails to ship the machine back within three months after the award entered in this proceeding, the [Buyer] is not obligated to maintain the machine for free, and the [Seller] shall bear risk for any damage of the machine.
 
   4.    The [Seller] shall bear the arbitration fee and expenses which the arbitrators incurred to hear this case.

THE OPINION OF THE ARBITRATION TRIBUNAL

1. Applicable law

Neither the Contract nor the Supplementary Agreement stipulates the applicable law. The [Buyer] contends that Chinese law and the CISG shall apply. The [Seller] did not raise any opinion regarding this.

The Arbitration Tribunal holds that since the parties' places of business are located in China and the United States. respectively, and both countries are Contracting States of the CISG, the CISG shall primarily apply. The Arbitration Tribunal also notes that the Contract was signed and performed in China, and that the place of delivery and the situs of the arbitration are in China. Accordingly, pursuant to internationally recognized principles -- closest proximate connection -- with respect to matters which the CISG does not prescribe, the Arbitration Tribunal may refer to Chinese law. In addition, according to the generally applied principle of conflict law, "validity of an arbitration clause shall be determined pursuant to the conflict law of the place of arbitration."

2. Validity of the Contract and jurisdiction of the Arbitration Commission

The Contract is for an international sale of goods, and reflects the parties' true intent. The subject matter is not excluded from the CISG, and the parties have not objected to validity of the Contract. The Arbitration Tribunal holds that the Contract was duly and validly established. The parties shall perform the Contract accordingly and are entitled to the rights stipulated in the Contract.

Article 16 of the Arbitration Law of the People's Republic of China ("Arbitration Law") prescribes necessary elements of a valid arbitration agreements as follows: (1) the parties' expression for arbitration; (2) matters subject to arbitration; (3) arbitration commission designated. Article 15 of the Contract in the instant case contains the aforementioned three elements, and is a valid arbitration agreement. As to the [Seller]'s objection to theArbitration Commission's jurisdiction, pursuant to Article 20 of the Arbitration Law and Article 6 of the Arbitration Rules, the Arbitration Commission shall make a decision on the [Seller]'s objection. The Arbitration Commission decided that it has jurisdiction over this case. The Arbitration Tribunal honors and agrees with the Arbitration Commission's decision on jurisdiction.

3. The performance of the Contract

Neither party denies that the Contract has actually been performed. The [Buyer] instructed the end user to open the L/C for the first installment in the amount of US $676,000, and the [Seller] has negotiated the L/C. The first installment was delivered on 15 April 2004. The [Seller] did not deny that the first installment contains severe defects.

The Arbitration Tribunal verified that on 15 April 2004 the [End User] received the first installment and found that the goods have severe quality defects (mainly rust and are inconsistent with the design), and claimed damages from the [Seller] through the [Buyer] and, pursuant to Article 13 of the Contract, rejected the goods before 18 April 2004, i.e., within three days after the goods arrived at the port of destination. The [End User] sent a letter to the [Buyer] informing it of the quality problem on April 19, and on 26 April 2004 the [Buyer] notified the [Seller] of the defects of the machine. This was eight days later than the date stipulated in the Contract. The Arbitration Tribunal holds that regarding the obvious defects, such as apparent damages, rust and apparent inconsistence with the design, etc., the [Buyer] should have notified the [Seller] within three days after the goods arrived at the port of destination pursuant to Article 13 of the Contract. However, the Arbitration Tribunal also notes that the machines not only contain apparent defects such as rust and visible inconsistent with the design, but they also have severe concealed defects, such as the heights of the bottoms are not consistent with the design. The invisible defects fall within the scope of the warranty. Therefore, the Arbitration Tribunal holds that the [Buyer]'s notifying the [Seller] of the defects of rust, damages, etc. not within three days after the goods arrived at the port of destination but eight days thereafter does not substantively affect the assessment of the entire facts and quality of the goods, and the delay can be ignored. On 26 April 2004, the [Buyer] notified the [Seller] of the substantive quality defects, such as the heights of bottoms are not consistent with the design, within the warranty period. After the quality issues arose, the parties to the Contract and the [End User] negotiated and discussed several solutions including resale, compensation and refund, etc. And to some solutions, the parties had already reached agreements, but failed to perform the agreements. The parties also discussed continuing performance of the Contract as follows: Considering the problem of the first installment, the [Seller] promised that the second and third installments would not be performed by the subcontractor DDD, but by the [Seller] itself. The Memorandum reached by the parties on 20 June 2004 stipulates that the [Seller] shall first provide technical material, quality certificate and plan of future installments, and thereafter, the parties will negotiate compensation regarding the first installment. However, the [Seller] did not perform the Memorandum. The evidence indicates that the [Seller] should be held entirely responsible for the non-performance of the Contract and other solutions, and that the [Buyer] bears no fault.

The Arbitration Tribunal holds that the [Seller] was obligated to deliver goods with quality, quantity and specifications complying with the Contract pursuant to Article 35(1) of the CISG; however, the goods which the [Seller] delivered contain severe defects. In addition, the [Seller] has shown no intent to resolve the problem which caused the stoppage of operation and severe loss incurred by the [Buyer]'s end user. This is contrary to the purpose of the Contract. Pursuant to Article 73 of the CISG, the [Seller]'s failure to deliver technical material for the first installment and failure to deliver further installments constitute a fundamental breach of the Contract. The [Buyer]'s purpose of the Contract cannot be realized. Therefore, the Arbitration Tribunal holds that the [Buyer] is entitled to avoid the Contract.

4. The [Seller]'s liability for breach

Since the Arbitration Tribunal has decided that the [Seller] fundamentally breached the Contract, the [Seller] shall be liable for its breach. Although the first installment was subcontracted to the Indian subcontractor, the [Seller] still is obligated to deliver the goods and guaranty the quality to comply with the Contract, and the [Seller] does not object to this.

In order to prove the defects of the goods, the [Buyer] submitted the inspection certificate issued by China Entry and Exit Inspection and Quarantine Bureau on 25 August 2005, which indicates that the first installment contains severe rust, most of which is under the painting, and some plates are not flat, and the heights of bottoms are not consistent with the design, and the plates have apparent defects. The inspection certificate was issued within the warranty period stipulated in Article 13 of the Contract (18 months after the goods arrived at the port or 12 months after the goods passed inspection. The Contract stipulates that with respect to any design or manufacturing defects, the [Buyer] shall entrust the China Commercial Inspection Bureau to inspect the goods, and that the [Buyer] is entitled to claim damages with the inspection certificate. The Arbitration Tribunal's inspection on 15 April 2006 also demonstrates that the goods have the aforementioned defects.

The Arbitration Tribunal holds that as to the [Buyer]'s commercial purpose to import the entire set of machine, the first installment has severe quality defects, and the [Seller] has not provided technical material and quality certificate. Moreover, the second and third installments have not been performed due to the [Seller]'s own reason. The [Buyer]'s purpose of the Contract is frustrated and the [Buyer] incurred severe direct loss. The [Seller] shall be held liable for its breach. Article 74 of the CISG provides:

"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 of which he then knew or ought to have known, as a possible consequence of the breach of contract."

The Arbitration Tribunal holds that the [Seller] fundamentally breached the Contract, and shall compensate the [Buyer] for any damages including loss of profits.

5. The [Buyer]'s requests

      (1) To avoid the Contract, According to the above Opinion 2, the Arbitration Tribunal holds that the [Buyer] is entitled to avoid the Contract.

      (2) The [Seller] shall refund the [Buyer] US $676,000 and interest of US $60,840. As discussed above, the [Seller] fundamentally breached the Contract and the first installment has severe quality defects, and thus the [Buyer] cannot use the machines. Although the parties reached some solutions to resolve the problems, the [Seller] again failed to perform those solutions. Therefore, the [Buyer] is entitled to return the goods, and the [Seller] shall accept the goods which do not comply with the Contract, and shall refund US $676,000 to the [Buyer] and shall also pay interest. The [Buyer] claims interest on US $676,000. Considering that the [Seller] has kept the US $676,000 since negotiation in April 2004 and for about two years and four months; the annual interest rate of 3.6% is reasonable. Therefore, the Arbitration Tribunal sustains the [Buyer]'s claim for US $676,000 and interest of US $60,840.

      (3) The [Seller] shall pay the [Buyer] 10% of the above requested amount as a compensation of the [Buyer]'s expenses incurred in instant case. The [Buyer] did not submit any explanation, breakdown, computation or specific amount, nor did it provide any evidence, and therefore, the Arbitration Tribunal does not sustain this request.

      (4) The [Seller] shall ship the machine back at its own expenses. If the [Seller] fails to ship the machine back within three months after the award entered in this proceeding, the [Buyer] is not obligated to maintain the machine for free, and the [Seller] shall bear risk for any damage of the machine. Since the goods shall be returned, and the three-month period is reasonable, the Arbitration Tribunal sustains this request.

      (5) The [Seller] shall bear the arbitration fee and expenses which the arbitrators incurred to hear this case. The Arbitration Tribunal holds that the disputes were caused by the [Seller]'s breach, and most of the [Buyer]'s requests are sustained, and therefore, pursuant to Article 69 of the Arbitration Rules, the Arbitration Tribunal sustains the [Buyer]'s request that the [Seller] shall bear the arbitration fee and other expenses which the arbitrators incurred when they went to the [End User] in Zhongshan Guangdong to inspect the goods.

AWARD

   1.    Contract No. JISH-200211 entered into on 17 July 2003 is avoided.
 
   2.    The [Seller] shall refund the [Buyer] US $676,000 and pay interest of US $60,840, totaling US $736,840.
 
   3.    The [Seller] shall take back or dispose of the goods within three months after this award; otherwise, the [Seller] shall bear the risk of any loss and damages of the goods.
 
   4.    The [Buyer]'s other request is dismissed.
 
   5.    The Arbitration fee is RMB 168,479, which shall be paid by the [Seller]. The [Buyer] has prepaid such amount; therefore, the [Seller] shall compensate the [Buyer] RMB 168,479.
 
   6.    The expenses incurred by the Arbitration Tribunal to go to Zhongshan, Guangdong to inspect the goods are RMB 6,061.40, which shall be paid by the [Seller]. The expenses were offset by the payment of RMB 15,000 which the [Buyer] prepaid to the Secretariat, and the remaining balance of the prepayment is RMB 8,938.60, which the Secretariat will return to the [Buyer]. The [Seller] shall compensate the [Buyer] RMB 6,061.40.

The [Seller] shall pay the amounts in the above Items 2, 5 and 6 totaling US $736,840 and RMB 174,540.40 to the [Buyer] within 30 days of the award; otherwise, interest shall be paid at the annual rate of 6%.

This award is final and takes effect when entered.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of the People's Republic of China is referred to as [Buyer]; Respondent of the United States is referred to as [Seller]. Amounts in the currency of the United States (dollars) are indicated as [US $]; amounts in the currency of the People's Republic of China (renminbi) are indicated as [RMB].

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

*** Farah Poon grew up and studied in Hong Kong. She is a freelance translator and interpreter who has just finished her studies in the Juris Doctor program.

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Pace Law School Institute of International Commercial Law - Last updated September 8, 2009
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