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CISG CASE PRESENTATION

China 3 August 2006 CIETAC Arbitration proceeding (Water pump case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/060803c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20060803 (3 August 2006)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2006/15

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: United States (respondent)

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

GOODS INVOLVED: Water pumps


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 ; 49 ; 74 ; 77

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];

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

74A ; 74A1 ; 74B [General rules for measuring damages: loss suffered as consequence of breach; Includes loss of profit; Outer limits of damages: foreseeability of loss];

77A [Obligation to take reasonable measures to mitigate damages]

Descriptors: Avoidance ; Fundamental breach ; Conformity of goods ; Damages ; Foreseeability of damages ; Profits, loss of ; Mitigation of loss

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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) Arbitration Award

Water pump case (3 August 2006)

Translation by [*] Wang Minna [**]

Edited by Li Jie [***]

ARBITRAL PROCEEDINGS

1. Acceptance of the case, composition of Arbitral Tribunal and procedural rules

The China International Economic and Trade Arbitration Commission ("CIETAC") accepted the case (Case M2005____) according to:

   -    The arbitration clause contained in Sale-Purchase Contract No. 04CCMELD04/J (the "Contract") signed between Claimant China AAA Co. Ltd [of the People's Republic of China] (hereinafter: the "[Buyer]"), and Respondent BBB Industries [of the United States] (hereinafter: the "[Seller]") on 23 August 2004; and
 
   -    The written application submitted to CIETAC by [Buyer] on 11 July 2005.

The arbitration rules of the China International Economic and Trade Arbitration Commission (hereinafter: the "CIETAC Arbitration Rules"), in effect since 1 May 2005, apply to this proceeding.

On 21 July 2005, the Secretariat of CIETAC sent the Notice of Arbitration, CIETAC Arbitration Rules and the Panel of Arbitrators to [Buyer] and [Seller] separately by EMS. The Request for Arbitration and attachment submitted by [Buyer] were also sent to [Seller].

On 15 September 2005, [Seller] submitted its statement of defense and related evidence which were forwarded to the [Buyer] by the Secretariat on the same day.

[Buyer] appointed Mr. ___, and [Seller] appointed Mr. ___ as the arbitrator for each side. Since the parties did not appoint the presiding arbitrator jointly, or entrust the Chairman of the CIETAC to make such appointment in a specified time, pursuant to the CIETAC Arbitration Rules, the Chairman of CIETAC appointed Mr. ___ as presiding arbitrator. These three arbitrators composed the Arbitral Tribunal on 3 November 2005 to hear and decide the present case. On the same day, the Secretariat of CIETAC sent the Notice of Composition of Arbitral Tribunal to [Buyer] and [Seller] by EMS.

Later, [Buyer] challenged Mr. ___ appointed by [Seller] and Mr. ___ asked to be relieved. After receiving the notice to this effect, [Seller] appointed Mr. ___ as his arbitrator. The final Tribunal for this case was composed of the presiding arbitrator Mr. ___, appointed by CIETAC and Arbitrators Mr. ___ and Mr. ___.

2. The Hearing

After reviewing the documents of this case, the Tribunal decided to have an oral hearing in Beijing on 24 February 2006 with the permission of the Secretariat of CIETAC. On 25 January 2006, the Secretariat sent a Notice of Oral Hearing to both parties by EMS. Due to the time schedule of Arbitrator Mr. ___, the Arbitral Tribunal postponed the oral hearing to 10 March 2006. The Secretariat sent a separate Notice of Postponed Oral Hearing to both parties on 14 February 2006.

On 9 February 2006, [Buyer] submitted its Supplementary Statement in response to the Statement of Defense provided by [Seller] on 12 September 2005 and amendments to [Buyer]'s request for arbitration, with relevant evidence submitted together. The Secretariat of CIETAC forwarded this material to [Seller]. Later, [Buyer] paid the fees for the arbitration according to the CIETAC Arbitration Rules.

On 9 March 2006, [Seller] submitted its Statement of Defense and Rebuttal to [Buyer]'s Request of Modification of the Requests for Arbitration, with relevant documents.

On 10 March 2006, the Arbitral Tribunal held an oral hearing in Beijing. Representatives of [Buyer] and [Seller] participated. The parties made oral presentations and rebuttals concerning both the legal and factual issues, examined all the submitted evidence and answered questions of the Arbitral Tribunal in the investigation process.

3. Documents submitted after the Hearing

After the hearing, [Buyer] submitted the following statements and relevant documents:

   (a)    "Supplementary Opinion after the Hearing," dated 28 March 2006;
 
   (b)    "Rebuttal to [Seller]'s Supplementary Opinion after the Hearing" (made on 5 April 2005), dated 10 April 2006.
 
   (c)    "Rebuttal and Clarification on [Seller]'s Rebuttal" (made on 13 April 2006)", dated 21 April 2006.
 
   (d)    "Explanation and Evidence to prove that the goods delivered by [Seller] were completely made in China, not in the USA", dated 23 May 2006.

[Seller] submitted the following statements and relevant documents:

   (a)    "Supplementary Opinion after the Hearing by [Seller]", dated 31 March 2006.
 
   (b)    "Rebuttal to [Buyer]'s Supplementary Opinion after the Hearing", dated 13 April 2006.
 
   (c)    "Defense to [Buyer]'s Supplementary Opinion after the Hearing", dated 28 April 2006.

Because the document "Explanation and Evidence proving that the goods delivered by [Seller] were completely made in China, not in the USA." dated 23 May 2006 was submitted too late, the Tribunal decided not to accept it and the Secretariat of CIETAC sent [Buyer] the written notice on 1 June 2006. As to the other written statements and documents, the Secretariat did all the transfers accordingly.

Because of the complexity of this case, the Tribunal was unable to make an award before 3 May 2006. With the permission of the Chairman of CIETAC pursuant to Article 42 Section 2 of the CIETAC Arbitration Rules, the time period for decision was extended for another three months, ending on 3 August 2006. On 29 April 2006, the Secretariat of CIETAC sent the written notice of time extension to both parties.

This case has finished all of its proceedings. Based upon the written documents and the facts identified in the oral hearings, the Tribunal made this award jointly.

FACTS AND ISSUES

1. Facts

Acting as agent of import for Beijing EEE Technology Limited Company ("EEE"), the [Buyer] entered into a Sale-Purchase Contract with [Seller] on 23 August 2004. The reference number of the Contract is 04CCMELD04/J.

A. Contents of the Contact

The terms and conditions of the Sale-Purchase Contract are as follows.

   -    Goods. [Buyer] shall purchase eight water pumps from [Seller], including one MF30 (350hp) pump, two AF24 pumps, one MF30 (400hp) and four MF36 pumps, all of which shall be originated in the USA;
 
   -    Price. The total price shall be $ 580,000, CIF Tianjin New Port;
 
   -    Payment. 20% of the sales price shall be prepaid by [Buyer] in T/T, while the remaining 80% shall be paid in the form of an irrevocable letter of credit at sight;
 
   -    Delivery. The [Seller] must arrange delivery within twenty weeks after the receipt of letter of credit;
 
   -    Non-conformity. If the [Buyer] finds any lack of conformity of the goods received with the contract with respect to the quality, size or quantity, the [Buyer] may request [Seller] for repair, replacement or remedies for loss;
 
   -    Arbitration. Clause 18, the Arbitration clause, stipulates that if any disputes arise between the two parties with respect to their performance of this Contract, the disputes are in the jurisdiction of CIETAC;
 
   -    Appendix. The Appendix deals with the materials of the main parts of the water pumps. According to the Appendix, the cover of pumps and electric motor, diffuser and intake chamber, must be made of GG25 Gray Cast-Iron.

B. Performance of the contract

During their performance, the two parties negotiated and agreed to extend the period for delivery and [Buyer] made corresponding changes on the letter of credit.

[Seller] made the delivery on 27 March 2005. The goods arrived at Tianjin New Port on 14 April 2005.

Disputes arose with respect to the materials of the goods. The disputes could not be solved by negotiation; consequently, [Buyer] submitted its application for arbitration.

2. Issues

A. Texts of the Contract

[Seller] alleges that the copy of the Contract submitted by [Buyer] as evidence for the arbitration is not the copy signed by the two parties.

In August 2004, [Seller] signed each page including the signature page and then delivered that copy of the Contract to [Buyer]. [Buyer] notified [Seller] that it also signed that copy on 23 August 2004, but did not return that copy with both parties' signatures to [Seller].

[Seller] alleges that there are seven differences between the copy submitted by [Buyer] and the copy signed by [Seller]. In the submitted copy, only the signature page has [Seller]'s signature and the signatures on the other pages are missing. Accordingly, [Seller] alleges that [Buyer] made unauthorized changes on the copy delivered by [Seller] and failed to notify [Seller] about that. [Seller] refuses to recognize any inconsistent part between the submitted copy and the copy signed by [Seller].

In its Statement of Defense, [Seller] further alleges that 10 September 2004 is the date that two parties made changes to the contract, not the date on which the contract was made. The letter of credit can be used to evidence the validity of the contract. Since the letter of credit was issued on 15 September 2004, containing all material clauses of the contract, [Buyer]'s allegation that the contract was made on 19 September 2004 is not truthful.

In response to [Seller]'s argument, [Buyer] alleges that it had never made any change to any clause of the contract. The copy of contract provided by [Seller] was only signed by [Seller]. It is not the copy agreed and signed by both parties. Therefore, it is not legally binding. The fact is that the copy signed and delivered by [Seller] with signatures on each page was never recognized by [Buyer]. Accordingly, [Buyer] did not sign that copy. The final copy of the Contract was made after several times of amendments. Until the final agreement was entered, it was [Buyer] who first signed and stamped the final copy then mailed it to [Seller].

As for the letter of credit, the reason why [Buyer] issued it before entering the Contract was due to [Buyer]'s trust in the [Seller] and with the purpose to urge [Seller] to arrange the delivery as soon as possible. Since the Contract was not concluded between two parties, in order to issue the 20% pre-paid letter of credit, [Buyer] had asked [Seller] for the final copy. That indicates that the Contract was never concluded before the issuance of letter of credit.

B. Late Delivery

[Buyer] alleges that the date of delivery is the 20th week after the receipt of the letter of credit, 2 February 2005.

On 15 January 2005, [Seller] e-mailed to [Buyer] asking to postpone the delivery to the end of May. [Buyer] refused this request and insisted on due delivery under the contract. [Seller] finally delivered the goods on 27 March 2005. The goods arrived at Tianjin New Port on 14 April 2005, fifty-three days later than the date required by contract.

The fact that [Buyer] accepted the late delivery does not affect [Buyer]'s right to declare damages caused by the late delivery. Tianjin No. 2 Intermediate People's Court had ordered [Buyer] to pay RMB 389,000 because of the later delivery. Since the late delivery was caused by [Seller], [Buyer] requires compensation of that amount.

In response to [Buyer]'s argument, [Seller] alleges that it never failed to perform its duty under the contract. On 6 February 2005, [Seller] asked [Buyer] to postpone the delivery to April 2005 and extend the validity period of the letter of credit from 13 March 2005 to 16 May 2005. After negotiation, [Buyer] agreed to postpone the delivery to 31 March 2005, and to extend the validity of the letter of credit to 21 April 2005. On 27 March 2005, [Seller] delivered the goods and the goods arrived at [Buyer] within the period specified by [Buyer], before 31 March 2005.

All the letters regarding negotiation and confirmation about the change of delivery became a new agreement under the United Nations Convention on Contract for the International Sales of Goods (the CISG) and the Amendment to the Contract, made a substantial change regarding the delivery period. Since [Seller] delivered the goods within the final period agreed by both parties, there was no late delivery. Therefore, [Buyer]'s allegation of late delivery lacks both factual and legal basis.

C. Conformity of the goods

      a. Materials

The issue of materials of the equipment is the core issue in this case.

            (a) [Buyer]'s position

            [Buyer] alleges that the materials of the pumps provided by [Seller] are not consistent with requirements of this Contract. According to the Contract, the cover for both the water pumps and their electric motors, diffusers and intake chambers, must be made of GG25 Gray Cast-Iron, in order to avoid erosive saline and alkaline. However, the cover for the water pumps and their electric motors, diffusers and intake chambers pumps provided by [Seller] are all made of Q235 Ordinary Carbon Steel, which fails to meet the requirement for prevention of erosion and cannot be used in Tianjin. This failure made [Buyer] fail to perform its duty to its ultimate client and caused irreparable loss to the ultimate client.

[Seller] alleges that the two different materials are equal in their function and that the anti-erosion purpose could be achieved by an antiseptic process. However, the fact is that [Seller] delivered another material that is not required by the Contract. Even if the antiseptic process is taken, it can never affect the fact that [Seller] failed to perform its duty under this Contract. Although [Seller] submitted an Expert Opinion, it is a comparison between Q235 and HT 250, which cannot be used to prove that Q235 equals GG25. Therefore, the Expert Opinion fails to be of any evidential value and should not be accepted as evidence.

During its performance of the contract, [Seller] never notified [Buyer] of the fact that it had changed the materials without authorization. It was not until 9 June 2006 that [Seller] finally admitted that the materials delivered were not the materials required by the contract. Knowing that there were obvious inconsistencies, [Seller] provided [Buyer] a Certificate that the materials were the same. After discovering the failure of materials, [Buyer] tried to keep negotiating with [Seller] and several times insisted on the seriousness of such failure; however, [Seller] neither answered nor took any action. Since the goods could not be used for flood control any longer, the ultimate client, Tianjin GGG Municipal Company refused to accept the goods and terminated its contract with [Buyer]. The reason for the ultimate client's insisting on GG25 material is that GG25 is the best material that proved to be useful according to its twenty-year experience. Since the ultimate client refused to take the goods, [Buyer] failed its purpose for resale and was deprived of expected profits which could have been achieved under the Contract. According to the CISG, [Seller]'s failure amounts to a fundamental breach of the Contract.

It is true that [Buyer] had discussed compromise proposals with the permission of the ultimate client. However, the proposals never admitted that the loss could be remedied by replacement. Since no agreement has been reached between [Seller] and [Buyer], any suggestion or measure proposed by [Buyer] is only a unilateral allegation and not binding. In addition, [Buyer] had exercised its utmost efforts to persuade the ultimate client to accept the goods. Therefore [Buyer] had already fulfilled its duty to mitigate the loss as required by the CISG.

            (b) [Seller]'s position

            [Seller] admits that part of the materials are made of Q235 Carbon-Steel, however, the steels have been antisepticized on the surface. In addition, according to the Expert Opinion "Opinion that Q235 Steel is equal to HT 250 Cast-Iron (which is equal to GG25) in anti-erosiveness -- in response to Mr.Zhao __ of ___ Law Firm, although the materials are not the ones required by the contract, there are no significant differences between them in the function of anti-erosiveness. The function could be further improved by different antisepticizing processes. Therefore, [Buyer]'s allegation that Q235 Carbon-Steel substantially fails to meet the anti-erosiveness purpose lacks theoretical foundation.

[Seller] later submitted another Expert Opinion "Opinion regarding the relationship between HT250 and GG25 -- in response to ___ Law Firm", testifying that HT 250 and GG25 are different names for the same material. HT 250 is the name used in China while GG 25 is referred to in Germany. [Seller] argues that the Expert Opinion has a close connection with this case, therefore is of great significance.

[Buyer] alleges that the prices for the two materials differ greatly but fails to provide any supporting evidence. [Seller] alleges that even if the price of Q235 is lower than that of GG25, since the anti-erosiveness function is about the same, the purpose of flood control could be fulfilled and the purpose of the contract was not affected by the differences of materials.

[Seller] has tried its best to remedy and solve the dispute. On 15 June 2005, [Seller] proposed to extend the one-year Quality-Guarantee Period as a remedy. In August 2005, [Seller] also proposed to replace part of the materials or to take metalation measures on the water pumps. However, [Buyer] insisted on replacement of all of the goods. On 1 September 2005, [Buyer] required [Seller] to either take metalation measures and pay an additional $300,000 or replace part of the equipment and pay $20,000 additionally. The proposal raised by [Buyer] was neither legal nor reasonable and [Seller] refused.

      b. Product inspection

            (a) [Buyer]'s position

            [Buyer] argues that [Seller] failed to fulfill its duty to have the products inspected which is required by the Contract. The Inspection Report provided by [Seller] only deals with the general techniques and appearances. [Seller] failed to take any inspection that meets the standard of this Contract, failed to provide any inspection report or material certificate, therefore failed to prove that the goods that [Seller] provided meet the standards required by the Contract. After discovering the differences between the goods provided and goods purchased, [Buyer] invited the China Commodity Inspection Bureau to make a re-inspection of the goods and notified [Seller] for its cooperation. However, [Seller] refused [Buyer]'s request for inspection.

After the receipt of the goods, [Buyer] took an inspection of materials of some other parts such as the pump spindles and impellers and found that, here too, there were inconsistencies with the requirements of the Contract. According to the Contract, the materials of the pump spindle and impeller shall be stainless steel 1.4057 and duplex phase stainless steel 1.4517. However, [Seller] only provided ordinary stainless steels. [Buyer] called for re-inspection but [Seller] refused unilaterally.

            (b) [Seller]'s position

            [Seller] argues that in the "Standard and Rules for Inspection and Acceptance" clause of this Contract, there is no requirement as to which institution or company may make the inspection. The Certificate report provided by [Seller] does not constitute a breach of contract. Additionally, [Seller] neither prevented nor obstructed [Buyer] from exercising its right of re-inspection.

      c. Samples and goods delivered

            (a) [Buyer]'s position

            [Buyer] alleges that, the water pumps in the sample pictures provided by [Seller] were nice and exquisite, which satisfied [Buyer] as the goods to be purchased. Following the numbers, illustrations and prices of those samples, [Buyer] then entered into the Contract with [Seller]. The number references listed on the first page and illustrations provided on the sixth page of this Contract demonstrate that the water pumps are to be made in accordance with the sample provided by [Seller], not the specific products that [Seller] designed and produced especially for [Buyer]. There is no evidence to prove that the products numbered MF and AF were produced in accordance with the instructions from [Buyer]. On the contrary, they are also standard products made by [Seller], in accordance with the samples provided. Therefore, since there is no specific requirement in the Contract, [Buyer] reasonably believed that [Seller] would produce the goods in accordance with the standards set forth in the Product Description Catalogue. The pictures and description in the sample Product Description Catalogue which was shown by [Seller] to [Buyer], are binding upon the unambiguity of this Contract.

[Buyer]'s requirements regarding the quality and material of the water pump originated from the requirement of the ultimate client and all these requirements are exactly the same as the bidding document between [Buyer] and ultimate client. The fundamental reason that Tianjin No. 2 Intermediate People's Court ordered that the contract be terminated is that the materials of equipment supplied by [Seller] are problematic.

            (b) [Seller]'s position

            [Seller] argues that, the Contract in this case is not for a sale by sample but a Contract following [Buyer]'s instruction. Therefore, the sample pumps cannot be used to testify the quality of pumps delivered. The difference between them does not lead to the conclusion that [Seller] breached the Contract. The main reason why the court ruled [Seller] in breach of contract is that the requirements set out by [Buyer] in the Contract are different from those in the bidding document.

      d. Packaging

            (a) [Buyer]'s position

            [Buyer] alleges that the packaging provided by [Seller] fails to meet the non-wooden packaging standards set out in the Contract.

            (b) [Seller]'s position

            [Seller] rebuts that the standard in this Contract is that the packages must be fit for long-distance shipping. The Contract further requires [Seller] to use none-wooden packaging. If the package is wooden, a certificate from the corresponding bureau in the exported country that the wooden packages have already been fumigated is needed. In this case, what [Seller] provided is the wooden-fumigated certificate. Therefore the packages meet the standards of this contract.

      e. The cables

            (a) [Buyer]'s position

            [Buyer] alleges that associated cables provided by [Seller] were made in Jiangsu, China. The cable is the main associated equipment of the goods, which must also meet the requirement of this Contract. However, [Seller] failed to notify [Buyer] of the fact that the cables are not made in the USA. This was a breach of contract. [Seller] provided the model size, offtrack statistics several times in its e-mails to [Buyer] as well as in the random documents. However, the cables received by [Buyer] are substantially different from those statistics provided before, failing to match all the cable exit sealcaps which were prepared for the cables.

            (b) [Seller]'s position

            [Seller] rebuts that, neither in the contract nor in any of those documents between the two parties is there any agreement regarding the origin of cables. Since the cable is not the main part of the equipment, [Seller] is under no obligation to notify [Buyer] of the specific fact that the cables are not made in the USA. In addition, in the e-mails [Buyer] also emphasized several times that the associated equipment could be purchased from other countries. As a result, no matter whether the cables are made in China or not, this does not constitute a breach of contract in this case.

      f. Origin of electronic motor

            (a) [Buyer]'s position

            [Buyer] alleges that an inspection shows that the electronic motors for the pumps delivered by [Seller] were made in China, not in the USA. The Certificate of Origin provided by [Seller] could only prove that the pump as a whole is an American product, yet fails to prove that the electronic motor, as the main part of the pump is also made in the USA. According to the Contract, such inconsistency constitutes a substantial breach of contract. Since the electronic motor could be purchased separately from the pump, a separate certificate of purchase is also required. [Buyer] has raised this problem several times, however, [Seller] refused to provide any documents about the origin of the electronic motors. To make things worse, [Seller] removed the logo of the producer intentionally, hiding the instructions in order to conceal the country of origin.

            (b) [Seller]'s position

            [Seller] rebuts that, the Certificate of Origin was issued in accordance with Clause 2 and Clause 10 Section 7 of the Contract, as well as following the American rules and the Rules of the People's Republic of China on the Origin of Export Goods. According to the rules, if accessories are imported from foreign countries but processed and assembled in the USA, resulting in the changes of the custom tariff category, then the USA could be marked as the Country of Origin. Consequently, the origin as the USA fulfills the requirement that the nationality of the pump producer shall be the USA. In light of Clause 13 of this Contract, [Seller] must provide instructions for both water pumps and the accessories and [Seller] had already provided all the above documents. Since the electronic motor is an indispensable part of the water pump, there are no special instructions available.

The Certificate of Origin issued by the American DDD Chamber of Commerce meets the requirement of the Contract. According to international practice, the Certificate of Origin is issued by the Chamber of Commerce upon the certification of the producer's voucher of production. Therefore, the Certificate of Origin issued by American DDD Chamber of Commerce is completely legally binding and evidences the USA as Country of Origin without any doubt.

D. Written Agreement signed between EEE and FFF

            (a) [Seller]'s position

            [Seller] alleges that on 15 June 2004, EEE and FFF entered an agreement which stipulates that both parties jointly submit a bid in the name of FFF. Later the bid was won and the two parties agreed to conclude the contract in the name of FFF, while the contract would actually be performed by EEE. The content of this agreement violates the compulsory regulations of the Tendering and Bidding Law of the People's Republic of China; therefore, it should be deemed invalid. Accordingly, the clause regarding deposit of performance is invalid and could not be used as the legal base for remedy. All the loss that FFF alleges lacks sufficient legal base. As a result, [Seller] is not responsible for liquidated damages which the court ordered as to the ultimate client.

            (b) [Buyer]'s position

            According to the supplementary opinion submitted on 28 March, the cooperation agreement made between EEE and FFF neither equals a joint bidding nor constitutes any transfer. Therefore, the Tendering and Bidding Law is not applicable and the agreement between EEE and FFF is valid and binding. In addition, the "Sales and Purchase Contract" concluded between FFF and Tianjin GGG Municipal Company was pronounced valid by Tianjin No.2 Intermediate People's Court. The cooperation stipulated by the agreement between EEE and FFF with respect to the bid has been fulfilled with no objection from any third party. Consequently, the effect of the agreement should be recognized.

E. Fundamental breach

            (a) [Buyer]'s position

            [Buyer] submits that, in light of Article 25 of CISG, [Seller] failed to deliver goods in conformity with the requirements of the Contract, which, obviously breached the agreement between the parties and deprived [Buyer] of what it was entitled to expect under the Contract. Because of the refusal of the ultimate client, [Buyer] has suffered a great loss and its purpose for this Contract failed. Therefore, there is a fundamental breach of contract.

It may be possible that the equipment with another material provided by [Seller] is workable. However, since more than 80% of the materials have suffered a complete change, the pumps provided can no longer be the ones [Buyer] needs. On one side, [Seller] admits that the change of materials is against the Contract. On the other side, [Seller] refused to arrange a replacement, finally resulting in the refusal of the ultimate client. Therefore, it is the [Seller] who should take full responsibility for the failure of contract, not [Buyer]. As for any proposals raised by [Seller], although they are unreasonable, [Buyer] has never missed any chance of negotiation. To mitigate the loss, [Buyer] has also actively negotiated with the ultimate client for a better solution. What [Seller] did constitutes a fundamental breach of the Contract.

            (b) [Seller]'s position

            The purpose of this contract is to provide equipment with the function of anti-erosiveness in an erosive environment. Although the materials provided are different from the materials ordered, the function of anti-erosiveness is of no difference; it is sufficiently qualified to work in rain with seawater content. Therefore, the purpose of this contract is fulfilled. According to [Buyer]'s logic, a presumption that [Seller] is expected to understand that the water pumps are to be used in the sea water could be drawn from the words "rain water with sea water content" under the "Working Conditions" clause in the Contract. However, it is noted that rain water with sea water is totally different from a pure sea water environment, while the erosivity of the latter is much higher than the former one. If the engineers of [Seller] had knowledge that the water pumps were to be used in the seawater, they would have had suggested that [Buyer] adopt a kind of stainless steel material with the greatest anti-erosiveness function.

Since it is remediable as to the materials, there is no fundamental breach on [Seller]'s side. The ultimate client's refusal is due to the fact that the water pumps [Buyer] ordered in this contract are different from the ones required by the bidding document. As to the differences in materials, [Seller] proposed several remedial measures but they were refused by [Buyer]. In light of Article 77 of CISG, while other parts of the equipment meet the requirement of the contract and the equipment itself could work properly to fulfill the purpose of the contract, [Buyer] is not authorized to demand replacement for all the equipment. [Buyer]'s failure to perform its duty of mitigating the loss makes itself responsible.

F. Foreseeability of the loss

            (a) [Seller]'s position

            [Seller] alleges that both [Buyer] and EEE are new clients to it, hence [Seller] had no chance to learn that the ultimate client is GGG, nor did [Seller] know that FFF was also involved in this case. As a result, the loss FFF suffered because of GGG's refusal of the goods is a loss that could not have been foreseen by [Seller] and [Seller] is not responsible for such loss.

[Buyer] submitted Evidence Exhibit No. 7, which contains three invitation letters sent by [Seller] to three engineers alleging that these letters prove that [Seller] clearly knew that GGG was the ultimate client of the Contract. However, the letters were sent at the request of [Buyer] to help the engineers with their visa applications. The purpose of providing those letters was to cooperate with [Buyer]. This does not lead to the presumption that [Seller] knew the ultimate client for those water pumps.

[Buyer] also submitted a video tape recording that both [Buyer] and the ultimate client visited [Seller]'s plant. [Seller] calls attention to the fact that this visit was in December 2004, after the contract had been concluded. Even if [Seller] had knowledge of the ultimate client at the time of that visit, such knowledge was not present when the contract was signed. Hence, the loss regarding the ultimate client could not have been reasonably foreseen.

            (b) [Buyer]'s position

            EEE and FFF cooperated with the ultimate client to purchase the equipment. Although it appears to be FFF which suffered a partial loss, in fact it was EEE which bore it all. During the whole process, EEE was responsible for purchasing equipment from [Buyer] and selling it through FFF. Even if FFF was not engaged in this transaction, EEE would suffer the same loss, which was reasonably foreseeable by [Seller].

[Seller] knew that the purpose for which [Buyer] purchased the equipment was for bidding and that [Buyer] could never be the ultimate client. It is [Buyer]'s position that [Seller] must have and could have reasonably foreseen that its breach of contract would be responsible for the loss suffered by the ultimate client, no matter whom the ultimate client will be and where they are.

2. Relief

A. Request of [Buyer]

After amendment, [Buyer] requests the Tribunal to order [Seller] to:

   (1)    Return RMB 4,807,573.60 that [Buyer] has already paid for the purchase and to take all the unqualified water pumps back at [Seller]'s own cost;
 
   (2)    Pay RMB 2,972,536.4 as the price difference between purchase and resale;
 
   (3)    Pay RMB 24,190,000 for the electronic cabinets and pitshafts purchased by [Buyer], the ownership of which will be transferred to [Seller] after the payment;
 
   (4)    Pay RMB 389,000 liquidated damages which [Buyer] had paid to the ultimate client under the judgment of Tianjin No.2 Intermediate People's Court, plus RMB 48,910 for the first trial, RMB 50,000 for the attorneys and RMB 48,910 for the appeal;
 
   (5)    Pay RMB 2,334,033 for the loss of deposit for performance;
 
   (6)    Pay the storage fees and storage charge for enter/out warehouse that were incurred from 8 June 2005 to the date of payment. Up to the end of January 2006, the storage fee incurred was RMB 237,000 and the storage charge for enter/out warehouse was RMB 3,200;
 
   (7)    Pay RMB 400,000 as attorneys' fees incurred in this case;
 
   (8)    Pay the cost of arbitration.

B. Rebuttal to [Buyer]'s Request

In response to [Buyer]'s request, [Seller] makes the following statement of defense.

            (a) Concerning the price differences between purchase and resale

            [Buyer]'s request to take back all equipment is equal to a declaration to avoid the contract. However, the anti-erosiveness function of Q235 Carbon Steel is mainly the same as that of GG25 Gray Cast-Iron, therefore, no actual loss has been caused to [Buyer]. The difference in materials does not constitute a fundamental breach of contract. Also, [Seller] was willing to proceed with an antisepticizing process as a remedial measure. Accordingly, [Buyer] is not entitled to declare the Contract avoided and require [Seller] to take back the equipment.

When the Contract was concluded, [Seller] did not know that GGG was the ultimate client and did not recognize the relationship between FFF and this current case. The only thing known was that EEE would be the client of this equipment. The price difference between purchase and resale was not foreseeable.

            (b) Concerning the associated equipment

            EEE had a contract with Beijing Zhengqiqingyuan Water Supplier Co. Ltd. for purchasing electronic controllers. That contract was signed on 15 April 2005, which is the period in which EEE tried to cancel the letter of credit. EEE failed to provide a reasonable explanation why it intended to avoid the contract with [Seller] while continuing to purchase associated accessories. In addition, [Buyer] also fails to explain how the contract between EEE and Tianjin Tanggu HHH Decoration Co. Ltd. affects this case. Furthermore, the loss for associated equipment was not foreseeable when the contract was concluded. Since [Buyer] got the accessories that were needed, there was no loss suffered in this respect.

[...]

OPINION OF THE ARBITRAL TRIBUNAL

1. Applicable law

The parties did not choose any applicable law for dispute settlement in their contract. [Buyer] is a Chinese entity and [Seller] is American. Since both China and the USA are members of CISG and both parties referred to relevant provisions of the CISG in the oral hearings as well as written statements, the applicable law in this case shall be the CISG.

With respect to the issues not regulated by the CISG, the Tribunal may decide according to the proper rules for choice of law. According to Article 145 of the "General Provisions of the Civil Law of the People's Republic of China" and Article 126 of the "Contract Law of the People's Republic of China," if the parties to a contract involving foreign interests have not made a choice of law, the law of the country to which the contract is most closely connected shall be applied. Since the locations of the buyer, places of the equipment installation and the location of the Tribunal are all within the territory of China, China is the country that has the closest connection with this contract. Therefore, in the absence of effective CISG Articles, Chinese domestic law that shall be the applicable law.

2. Validity of the Contract

This contract was concluded between the two parties willingly and freely. No conditions or time limitation have been attached to its validity. In addition, in this case there does not exist any occasion listed from Article 52 to Article 54 which makes the contract invalid or revocable. In fact, both parties have performed the contract and neither challenged the validity of this contract. Therefore, the Tribunal finds that the contract in this case is a valid contract based on party autonomy.

The parties have divergent views on the validity of the Agreement signed between EEE and FFF on 15 June 2004. However, because neither EEE nor FFF is a party to this case, the Tribunal has no jurisdiction over the validity of the agreement between them, although it may be of relevance to the performance of this Contract.

3. Texts of the Contract

The parties have disputes over the texts of the Contract. The Tribunal finds that the copy alleged effective by [Seller] does not contain the signature of [Buyer]. Though [Seller] alleges that [Buyer] signed this copy on 23 August 2004, [Seller] failed to provide evidence to support this allegation.

To the contrary, the copy submitted by [Buyer] contains both the signature of [Seller] which is dated 23 August 2004 and the signature of [Buyer] which is dated 19 September 2004. [Seller] has never challenged the validity of this copy, but only alleges that the two parties once made changes on this copy on 19 September 2004. The Tribunal finds that, even if the real contract is the copy signed on 23 August 2004 as [Seller] alleges, the copy signed by both parties on 19 September 2004 is a newer version which is binding on the two parties.

[Buyer] submitted a "Rebuttal to [Seller]'s Defense made on 12 September 2005 and Modification of the Requests for Arbitration." It attached Evidence Exhibit No. 5, the copy of an e-mail sent by [Seller] to [Buyer] at 1:40 p.m. on 15 September 2004. In that e-mail, the content of the Contract was changed, such as modifying the new Quality Guarantee Period as "18 months from the date of shipment or 3,000 hours operation whichever comes first." This modification is consistent with the copy submitted by [Buyer], not by [Seller]. It also indicates that [Seller] has participated in the negotiation and modification process of the contract and made a final agreement based on party autonomy on 19 September 2005.

In addition, the Tribunal is of the opinion that it may be possible to issue a letter of credit before a contract is concluded. Accordingly, [Seller]'s argument that the time to conclude the contract must be prior to the issuance of a letter of credit cannot be supported.

To conclude, the Tribunal holds that the copy dated 19 September 2004, which was submitted by [Buyer], is the Contract binding on the two parties in this case.

4. Late delivery

The time limit for delivery is within twenty weeks after the receipt of the letter of credit, that is, before 2 February 2005. Evidence Exhibit No. 16 attached to the "Rebuttal to [Seller]'s Defense made on 12 September 2005 and Modification of the Requests for Arbitration" contains e-mails between [Buyer] and [Seller] dated 5 January 2005 and 17 February 2005. On 5 January 2005, [Seller] asked to postpone the delivery, but [Buyer] refused since the equipment must be made available for the rainy season. After negotiation, the parties agreed to arrange the delivery before the end of March 2005 and extend the validity period of the letter of credit to 21 April 2005. [Seller] finally delivered the goods on 27 March 2005, within the newly negotiated time for delivery. Both parties agree on this fact.

The Tribunal notes that during their negotiation for rescheduling the delivery, [Buyer] once raised the issue of compensation for loss caused by late delivery, but there was no consent to this.

[Buyer] argues that its acceptance of late delivery does not deprive it of the right to claim compensation from [Seller], which was the RMB 389,000 of liquidated damages paid to the ultimate client pursuant to the court's judgment. The Tribunal will determine whether [Seller] should be responsible for this part of the compensation in the following text.

5. Materials

The problem of the materials of the water pumps is the core issue in this case. According to [Buyer]'s submission, the materials provided are not the materials required by the Contract. Under the Contract, the cover for both the water pumps and their electric motors, diffusers and intake chambers, must be made of GG25 Gray Cast-Iron, while what [Seller] provided were all made of Q235 Ordinary Carbon Steel. [Buyer] alleges that this fails to meet the purpose of erosiveness prevention. [Seller] agrees with the fact that it changed the materials, yet argues that the anti-erosiveness function of Q235 and GG25 is about the same, and that the function could be better if an antisepticizing process is taken.

It is the Tribunal's opinion that the difference in materials itself has already constituted a breach of contract. As to the issue of fundamental breach, further evidence shall be checked regarding the degree of difference, the agreement about materials and the relationship between materials and the purpose of this contract.

[Seller] submitted a document with the title "Expert Opinion that Q235 Steel is equal to HT 250 Cast-Iron (which equals to GG25) in anti-erosiveness" -- in response to Mrs. Zhao __ of ___ Law Firm". The expert opinion states that it is very complicated to evaluate the difference in anti-erosiveness function between Q235 Steel and HT 250 Cast-Iron. Furthermore, the expert opinion also points out that the corrosion rate for Q235 Steel and HT 250 Cast-Iron is about the same in the typical medium such as ordinary atmosphere, fresh water and sea water. The Tribunal notices that the expert opinion claims that Q235 Steel is equal to HT 250 Cast-Iron. Later, in another expert opinion with the title "Opinion regarding the relationship between HT250 and GG25" -- in response to ___ Law Firm, the expert states that both HT 250 and GG25 are names for Gray Cast-Iron: HT 250 is the name used in China while GG 25 is the name used in Germany and they share a similar chemical composition and mechanical structure. However, the Tribunal cannot draw the conclusion from the two expert opinions that HT 250 is GG25. Therefore, [Seller]'s allegation that its breach of contract did not affect the purpose of contract cannot be supported.

The Tribunal has considered the evidence submitted by [Buyer], including the Letter of Authorization dated 21 April 2004 for [Seller], the e-mail sent to EEE by [Seller] on 13 September 2004 and the Invitation Letter, which are contained in Evidence Exhibits No. 6 and No. 7 in the "Rebuttal to [Seller]'s Defense made on 12 September 2005 and Modification of the Requests for Arbitration". In addition, EEE was also mentioned several times in the faxes between two parties. And they also sent copies of their relevant communication to EEE. All the abovementioned evidence sufficiently indicates that [Seller] knew the role that EEE played in this transaction, relevant information about FFF as well as the fact that Tianjin GGG Municipal Co. Ltd. was the ultimate client.

Aware of the fact that the materials provided were not the materials required by the Contract, [Seller] still provided a Material Certificate stating that the water pumps are made of GG25 Grey Cast-Iron (see Appendix 22 of "Rebuttal to [Seller]'s Defense made on 12 September 2005" submitted by [Buyer]).

It is a fact agreed by both parties that the ultimate client refused to accept the goods. Before the refusal took place, the two parties once tried to negotiate on this dispute. [Seller] expressed its willingness to make remedies but refused to replace all unqualified equipment and disagreed with the compensation requirement. Because of the lack of conformity of the goods and the missing of the rainy season, no agreement was reached.

The judgment issued by Tianjin No.2 Intermediate People's Court holds that:

"Because the goods provided failed to meet the requirements in the bidding documents and contract and the equipment imported became unable to be used and could not be fixed or repaired anymore, the purpose of the contract failed."

Based on this finding, the ultimate client had the right to terminate its purchase contract with FFF. This holding was confirmed by the Appellate Court. From the judgment, the Tribunal finds that the lack of conformity of materials was the main reason that the court supported the avoidance of contract.

It is the Tribunal's opinion that the purpose of the Contract at issue in this case, with profits expected under this Contract, was that [Seller] deliver goods as agreed by both parties. This was to enable EEE, as the consigner of [Buyer], to fulfill its obligation under a contract between EEE and the ultimate client Tianjin GGG Municipal Co. Ltd. Because of the lack of conformity of the goods, the ultimate client refused to accept them and sued EEE for liquidated damages. In that sense, the purpose of this Contract has failed and the [Buyer] has been deprived of the profits it expected under its contract with the [Seller]. [Seller] failed to provide goods that are in conformity with the Contract, and this constituted a fundamental breach in accordance with Article 25 of the CISG.

6. Other issues

Other issues include the origin of electronic motors and associated cables, the alleged lack of conformity with samples, the problem of wooden packages, and so on.

Since the lack of conformity of materials has already constituted a fundamental breach of the Contract, even had [Seller] performed all of its duties regarding the above matters [Seller] shall still be responsible for its fundamental breach of Contract.

The Tribunal delivers its findings on the above issues as follows:

      a. Origin of electronic motors and associated cables

The Tribunal notes that:

(a)   The Country of Origin agreed in this Contract is the USA;
(b)   The agreement on the Certificate of Origin is that "the Producer shall provide the Certificate of Origin, and mark the USA as the country of Origin for both electronic motors as well as water pumps;"
(c)   The agreement in the attachment to the Contract is that "all major parts not made in USA should be declared to us, all labels and marks showing original maker should be removed;" and
(d)   In the e-mail to EEE on 24 August 2004 (in Evidence Exhibit No. 11 attached to the Statement of Defense), [Seller] acknowledged that there have been no water pumps which were completely made in the USA.

Based the above findings, it is the Tribunal's opinion that [Seller] did not breach the Contract by providing cables made in China. The first reason is that two parties did not mention the cables in their agreement on the Certificate of Origin. Second, the cables are not the main parts of water pumps in this Contract. Third, before the conclusion of the Contract, [Seller] had already notified [Buyer] that not all parts of the goods were made in the USA.

As to the origin of the electronic motors, according to the Contract, [Seller] is obliged to provide electronic motors made in the USA. However, [Buyer] cannot sufficiently prove that the electronic motors provided by [Seller] are not made in the USA. Therefore, the Tribunal finds that [Seller] did not breach its duty on the issue of the origin of electronic motors.

      b. Conformity with the samples

      It is the Tribunal's finding that, although [Seller] once showed the samples to [Buyer] before they signed the Contract, neither in the Contract nor in the communications between two parties was there express agreement indicating that [Seller] should deliver goods in conformity with the samples. As a result, [Buyer]'s allegation on this issue is dismissed.

      c. Packaging

      It is the Tribunal's finding that since [Seller] provided the wooden-fumigated certificate issued by the American government, the packages for the goods meet the requirement of this Contract.

7. Relief

[Buyer]'s first request is that [Seller] should return the RMB 4,807,573.60 that [Buyer] has already paid for the purchase and that [Seller] take back all the unqualified water pumps at its own cost.

Since [Seller]'s failure to provide goods in conformity with the Contract constitutes a fundamental breach of the Contract, [Buyer] may declare the Contract avoided and request return of the payment and goods, pursuant to Article 49(1) of the CISG. Therefore, the Tribunal supports [Buyer]'s request that [Seller] return the payment and take back all the goods with the cooperation of [Buyer].

Article 74 of CISG states that:

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

Therefore, in addition to returning the payment that [Buyer] has already paid, [Seller] shall also compensate [Buyer] the lost profits of EEE, since [Buyer] is EEE's agent of import.

In this case, it was foreseeable that the electronic cabinets and pitshafts were purchased to complete the necessary installations for the equipment. EEE purchased the electronic cabinets and pitshafts on April 2005 which is around the time that the goods arrived at the port. In Evidence Exhibit No. 18 of the "Rebuttal to [Seller]'s Defense made on 12 September 2005 and the Modification of the Requests for Arbitration," there are the e-mails between [Buyer] and [Seller] dated 18 April 2005 and 19 May 2005. [Buyer] asked for a Material Certificate in those e-mails. This indicates that [Buyer] had no idea about the lack of conformity of goods at that time. Accordingly, [Buyer]'s purchase of an electronic controller at that time did not breach the duty to mitigate the loss under Article 77 of CISG. As a result, the Tribunal supports [Buyer]'s third request that [Seller] shall pay RMB 24,190,000 for the electronic cabinets and pitshafts purchased by [Buyer], the ownership of which will be transferred to [Seller] after the payment.

In the same vein, pursuant to the principle under Article 74 of CISG, the Tribunal supports the [Buyer]'s Sixth Request that [Seller] shall pay the storage fees and storage charge for enter/out warehouse which were directly caused by [Seller]'s breach of contract. These are the fees and costs incurred from 8 June 2005 to the date that this award is made, [Seller] shall pay [Buyer] RMB 421,000 (RMB 1,000 daily) as the storage fee and RMB 3,200 as the storage charge for enter/out warehouse.

[Seller] further requests compensation for loss of expected profit as well as loss of deposit for performance (See the second and fifth request). As stated above, the Tribunal finds that [Seller] had known that Tianjin GGG was the ultimate client and of the relationship between EEE and FFF before the conclusion of this contract. However, the amount that [Buyer] requests is too high to be expected at the time the [Seller] signed the contract. Therefore, [Buyer]'s second and fifth requests are not granted.

The [Buyer]'s fourth request is for liquidated damages paid to the ultimate client under the judgment of Tianjin No.2 Intermediate People's Court and the fees for the first trial, legal representatives and appeal. It is the Tribunal's opinion that, although that litigation is related to this case, it is between the ultimate client and FFF. There is no necessary connection between FFF's breach of that contract (did not provide Chinese Instructions, for example) and [Seller]'s breach of this Contract. Hence, the [Buyer]'s fourth request is also dismissed.

As to the fees for legal representatives, [Buyer] shall bear 30% and [Seller] bears the remaining 70%.

AWARD

The Arbitral Tribunal made the awards as follows:

   (a)    [Seller] shall return to [Buyer] the payment of RMB 4,807,573.60 and take back all the goods under this Contract at [Seller]'s own cost;
 
   (b)    [Seller] shall pay [Buyer] RMB 2,419,000 for the electronic controllers and pitshafts, the ownership of which will be transferred to [Seller] after the payment;
 
   (c)    [Seller] shall pay [Buyer] RMB 421,000 as the storage fee and RMB 3,200 as the storage charge for enter/out warehouse that was incurred from 8 June 2005 to the date that this award is made;
 
   (d)    The Tribunal dismisses the other arbitration requests of [Buyer];
 
   (e)    The fee for arbitration is RMB 257,102. [Buyer] shall pay RMB 77,130.60 as 30% while [Seller] shall pay RMB 179,971.40 as 70%. Since [Buyer] has prepaid the RMB 257,102, [Seller] shall pay [Buyer] RMB 179,971.40;
 
   (f)    [Seller] shall finish all the above payments within 45 days after this award is made.

This award is the final decision and takes effect from the date it is made.


FOOTNOTES

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

** Wang Minna, Tsinghua University representative in the "Fifteenth Annual Willem C. Vis International Commercial Arbitration Moot in 2008 (Counsel for both sides); Third Place in "Fifth Annual CIETAC International Commercial Arbitration Moot" in 2007 (Counsel for Respondent).

*** Li Jie, Master degree of Law, Tsinghua University in Beijing, BA in Law, Tsinghua University, Beijing.

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