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CISG CASE PRESENTATION

China 18 September 2006 CIETAC Arbitration proceeding (Polyester spinning machine case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/060918c1.html]

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

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Case identification

DATE OF DECISION: 20060918 (18 September 2006)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2006/24

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Switzerland (respondent)

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

GOODS INVOLVED: Polyester FDY spinning machine


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 25 ; 51 ; 81

Classification of issues using UNCITRAL classification code numbers:

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

51B [Non-conformity of part of goods: avoidance of entire contract];

81C [Effect of avoidance on obligations: restitution of payment, return of defective goods]

Descriptors: Fundamental breach ; Avoidance ; 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) [second draft]

Queen Mary Case Translation Programme

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

Polyester FDY spinning machine case [18 September 2006]

Translation [*] by Jing Li [**]

I. ARBITRAL PROCEEDINGS

A. Acceptance of Case, Composition of Tribunal and Evidence Presented

The China International Economic & Trade Commission (hereinafter, "CIETAC") accepted the case (Case no. M2004____) according to:

-    The arbitration clause in Contract No. SHJWRETECH2003101601 (hereinafter, the "Contract") signed on 16 October 2003 by Claimant Shanghai ___ Fiber Machinery Co. Ltd. [of the People's Republic of China] (hereinafter, "[Buyer]"), and Respondent ___ Co. [of Switzerland] (hereinafter, "[Seller]"); and
 
-    The written Request for Arbitration submitted to CIETAC by the [Buyer] on 9 December 2004.

The "China International Economic & Trade Arbitration Commission Arbitration Rules" (hereinafter, "Arbitration Rules"), which took effect on 1 October 2001, apply to this case.

On 10 December 2004, the Secretariat of CIETAC (hereinafter, the "Secretariat") sent the Notice of Arbitration, the Arbitration Rules, and the Panel of Arbitrators to both parties via express mail. Meanwhile, the Secretariat of CIETAC sent the Request for Arbitration and its annexes submitted by the [Buyer] to the [Seller].

On 16 March 2005, the [Seller] submitted a written objection to the jurisdiction of CIETAC. The Secretariat forwarded this objection to the [Buyer].

On 4 April 2005, the [Buyer] submitted a Reply to the [Seller]'s objection to the arbitral jurisdiction. The Secretariat forwarded this Reply to the [Seller].

On 27 April 2005, the [Seller] submitted a Response to the [Buyer]'s Reply regarding the arbitral jurisdiction. The Secretariat forwarded this Response to the [Buyer].

On 30 May 2005, the [Buyer] submitted a Second Reply to the [Seller]'s objection to the arbitral jurisdiction. The Secretariat forwarded this Second Reply to the [Seller].

After studying the written opinions and relevant materials submitted by the parties with regard to the arbitral jurisdiction, CIETAC rendered a Preliminary Award on jurisdiction on 6 June 2005, in which CIETAC decided that CIETAC's jurisdiction over the case is legally justified based on the arbitration clause in the Contract. CIETAC noted that both the arbitration clause in the Contract and the arbitration agreement in the Memorandum of Understanding signed by the parties on 12 October 2004 conformed to the requirements for arbitration agreements under Article 16 of the Arbitration Law of the People's Republic of China, and thus, were binding upon the parties. CIETAC also noted that the related arbitration agreements between the parties were legal and valid, and that the Request for Arbitration submitted by the [Buyer] concerned a dispute arising out of the Contract. Therefore, CIETAC dismissed the jurisdictional objection raised by the [Seller] and decided that CIETAC had jurisdiction to hear this case. This case proceeded to the next stage. The Secretariat sent the above Preliminary Award to both parties.

The [Buyer] appointed Mr. ___ as arbitrator. The [Seller] appointed Mr. ___ as arbitrator. Since the parties did not appoint the presiding arbitrator jointly, or entrust the Chairman of CIETAC to make this appointment within a specified time, the Chairman of CIETAC, pursuant to the Arbitration Rules, on 18 July 2005 appointed Mr. ___ to be the presiding arbitrator. On the same day, the Secretariat sent the Notice of Composition of the Arbitral Tribunal (hereinafter, the "Tribunal") to the parties via express mail.

After examining the materials of the present case, with the permission of the Secretariat, the Tribunal decided to hold the oral hearing on 31 August 2005 in Beijing. On 28 July 2005, the Secretariat sent the Notice of Oral Hearing to the parties via express mail.

On 9 August 2005, the [Seller] submitted its Statement of Defense and Counterclaim; on 22 August 2005, the [Seller] submitted a Clarification, modifying its Counterclaim. The Secretariat forwarded these documents to the [Buyer].

B. Oral Hearing

On 31 August 2005, the Tribunal held an oral hearing in Beijing. Representatives of the [Buyer] and the [Seller] participated in the hearing. Before the hearing was held, the [Buyer] submitted supplementary evidence to CIETAC. The Secretariat forwarded the evidence to the [Seller] on the spot. At the hearing, the parties presented the facts and issues, examined the evidence, and answered questions of the Tribunal. At the closing of the hearing, with the concurrence of the parties, the Tribunal decided that, if the parties had other supplementary materials, they should submit the materials before 30 September 2005.

After the oral hearing, the [Seller] submitted supplementary materials within the agreed time period. The Secretariat forwarded these materials to the [Buyer]. The [Buyer] submitted supplementary materials on 14 November 2005. However, since these materials were submitted after the agreed time period, the Secretariat returned the materials to the [Buyer].

Due to the complexity of the present case, the Chairman of CIETAC approved the Tribunal's request to extend the time limit for rendering the final award to 18 September 2006.

This case is now closed. The Tribunal, after discussing jointly, based upon the written documents and the facts identified in the oral hearing, rendered its arbitral award.

II. FACTS AND ISSUES

A. Facts

On 16 October 2003, the parties concluded a Contract in Shanghai, China, stipulating that the [Seller] was to provide the [Buyer] a thirty-four position complete core machine for polyester FDY spinning, i.e., hot godets, separator rolls, and their controlling system device (hereinafter, "Machine"). Article 9 of the Contract provided that:

"Delivery Date: Delivery is to be in two installments of equal quantity of goods. The first installment is to be delivered before 25 February 2004 (air freight), and the second installment is to be delivered before the end of March 2004 (sea freight)."

Article 18 of the Contract provided that:

"Quality Assurance: The [Seller] is to guarantee that the goods sold are processed in his top-rated workshop with the best materials, and that the goods have not been used. The [Seller] is also to guarantee that the goods are of the same quality, description, and function as required by this contract. With reasonable maintenance by the [Buyer], the [Seller] is to provide a quality assurance period of twelve months, which should be calculated from the date on which the goods start operating. This quality assurance period should not exceed eighteen months after the delivery of goods. This quality assurance does not cover the defects due to inappropriate maintenance after opening containers or normal wear."

After the conclusion of the Contract, the [Seller] delivered the first seventeen positions of the Machine in two installments to Shanghai Port, both of which were delayed excessively according to the Contract. However, the [Buyer] still made full payment to the [Seller] for the first seventeen positions of the Machine. The [Buyer] also made a down payment to the [Seller] in the amount of EUR 40,875 for the second installment.

After receiving the first installment, the [Buyer] immediately delivered the goods to Wujiang ___ Corp. After examining and confirming the workshop provided by Wujiang ___ Corp., the technicians sent by the [Seller] guided, assisted, and tested the assembling and debugging of the Machine. However, in the course of operations, the Machine could not perform according to the technical standards and parameters required by the Contract and promised by the [Seller]. The Machine malfunctioned repeatedly. One was caused by the malfunctions of the electrical apparatus control system of the Machine that led to the shutdown of the entire production line. Within one week after the operations, two SR2 separator rolls were destroyed. The main malfunction was that the electric motors of the GR2 hot godets and the SR2 separator rolls of the Machine were defectively designed, which resulted in having the temperature soar in the bearings of these rolls while spinning ar high speed. This led to abnormal high temperature of the electric motors of these rolls, which dried the lubricants for the bearings, and eventually caused a shutdown and damages to the bearings.

These malfunctions demonstrated that the Machine provided by the [Seller] was not fit for the Contract, which stipulated that the lifespan of the inner bearings of the GR2 hot godets shall be 8,000 hours and that the poles of the electric motors of the SR2 separator rolls shall be two (the motor poles of the delivered Machine were four, which doubled the frequency of the electric motors when they reached the same speed). More importantly, the damages of the bearings resulted in the shutdown of the Machine which produced a considerable fiber waste that led to a production stop of Wujiang ___ Corp., product quality accidents, and personnel injury accidents. Eventually, the malfunctions caused great financial losses to the end-user and to the [Buyer].

After the problems arose, the [Buyer] immediately notified the [Seller]. The [Seller] then sent its engineers to the workshop of Wujiang ___ Corp.'s to inspect the Machine and confirm the malfunctions. At the same time, the parties communicated with each other about the problems, upon which the parties signed a Memorandum of Understandings on 28 July 2004, specifying that the [Seller] was obligated to repair and replace the problematic Machine and return the down payment for the second installment of seventeen positions in the amount of EUR 40,875. The parties also agreed therein to stop performing the Contract. Thereafter, the [Seller] sent its engineers again to inspect and repair the Machine.

The [Seller]'s engineers brought with them a pair of samples of GR2 hot godets and SR2 separator rolls for the purpose of testing the Machine for its malfunctions in the presence of the [Buyer] and the end-use. However, because of the design defects of the inner motors and the cooling systems of the problematic GR2 hot godets and SR2 separator rolls, as well as the wrong choice of models of the bearings, the repair and replacement of the GR2 hot godets and SR2 separator rolls could not essentially solve the problem. The bearings were still damaged during operation. The economic losses of the [Buyer] and the end-user were still enlarging.

The [Seller] then started to realize that the Machine it delivered could operate normally in polypropylene spinning where a lower motor spinning speed was required, but the Machine could not operate normally in polyester FDY spinning where a higher motor spinning speed was required. It was the first time that the [Seller] had ever provided machines for polyester FDY spinning purpose. Therefore, the [Seller] alleged that the pair of samples of hot godets and separator rolls had to be tested with another testing device that was not cleared at the China Customs, and thus, the testing of the Machine for malfunctions had to be postponed.

At the same time, the [Seller] refused to pay for the customs bond for the testing device. In the end, the [Seller] withdrew all of its engineers and the testing device, and left its pair of samples of hot godets and separator rolls at Wujiang ___ Corp. The testing eventually failed. Thereafter, the ceramic surface of the SR2 separator rolls fell off during operation, and the separator rolls could not be used any more. The [Buyer] did not have spare parts to replace the damaged separator rolls. Thus, the [Buyer] had to replace them with passive separator rolls that were made in China. After this replacement, the Machine was able to operate stably without malfunctions.

With the [Seller]'s instruction, the [Buyer] adjusted the parameters of the inverter and replaced the SR1 separator rolls and GR2 hot godets. However, the SR2 separator rolls and GR2 hot godets were still malfunctioning. In the end, the [Buyer] ran out of spare SR2 separator rolls and GR2 hot godets, and had to purchase new SR2 separator rolls at its own cost for replacement. Moreover, the [Buyer] had to remodel the bearings, lubricant, and cooling system of GR2 hot godets. Eventually, the replaced SR2 separator rolls and the remodeled GR2 hot godets could perform normally.

At the same time, the [Buyer] sent attorney's letters to the [Seller] several times in September and October of 2004 suggesting approaches to take in order to resolve the dispute between them. However, after receiving the first letter, the [Seller] declared that it did not bear any responsibility for the problem, and alleged that the quality assurance period for the goods had expired. Moreover, the [Seller] responded that it was no longer obligated to repair the Machine and refused to return the down payment of EUR 40,875 for the second installment of seventeen positions of the Machine paid by the [Buyer].

Thereafter, the [Seller] ignored the [Buyer]'s request to resolve the dispute and refused to come to China to perform testing on the Machine to find out the causes of machine malfunctions. Conversely, the [Seller] required the [Buyer] to bear the expenses incurred from performing the obligations of repair and replacement. At this point, the parties could not resolve their dispute via negotiation. The [Buyer] had to send to an authorized accrediting institution for electric motors in China the unpacked pair of samples of SR2 separator rolls and GR2 hot godets as well as their unitized inverter -- components that were made in Denmark which were brought and left at the workshop by the [Seller]. They were tested under the same condition of electric motor temperature that was agreed in the Memorandum of Understanding signed by the parties on 28 July 2004. The result showed that the bearings of the electric motors of the separator roll and hot godet did not meet the standard temperature requirements, which further support the [Buyer]'s judgment regarding the defects of the Machine.

Due to the fact that the goods provided by the [Seller] did not conform to the relevant technical standards and the contractual technical parameters, the goods were defective. Moreover, the [Seller] refused to provide further services of repair and replacement. The [Buyer] submitted the present dispute to this Tribunal according to the Contract between the parties.

B. [Buyer]'s claims

The [Buyer] in its Request for Arbitration requested that:

1. The [Seller] should perform its obligations under the Contract to deliver the spare parts for the first installment of seventeen positions

Pursuant to the spare parts list of the Contract's annex, the [Seller] should deliver the relevant spare parts for the fifth to twelfth positions of the Machine, which were not delivered by the [Seller], along with the first installment of the seventeen positions that included GR1 and GR2 hot godets, SR1 and SR2 separator rolls, and their controlling system device. Alternatively, the [Seller] should make payment of EUR 11,922 to the [Buyer], equivalent to the value of these undelivered spare parts.

2. The [Seller] should return the payment for those goods that could not be repaired, stop performing the Contract, and return to the [Buyer] the down payment for the second installment

      (1) According to the Contract and the Memorandum of Understanding signed by the parties on 28 July 2004, the [Seller] should retrieve the SR2 separator rolls included in the first installment of the seventeen positions of the Machine which could not be repaired and refund to the [Buyer] the payment for these goods, which were worth RMB 391,000;

      (2) The parties were released from the Contract;

      (3) The [Seller] should return to the [Buyer] the down payment in the amount of EUR 40,875, i.e., 15% of the price for the second installment of the seventeen positions of the Machine including hot godets, separator rolls, and their controlling system device;

3. The [Seller] should pay for the [Buyer]'s losses incurred from the [Seller]'s breach of contract and the malfunctions of the goods delivered by the [Seller]

      (1) According to Article 15 of the Contract, the [Seller] should pay for liquidated damages for late delivery of the first installment in the amount of EUR 16,601.22;

      (2) The [Seller] should be responsible for the cost of RMB 510,000 that the [Buyer] incurred in order to remodel all of the GR2 hot godets that were defective;

      (3) The [Seller] should be responsible for the economic losses of RMB 683,306.20 that the [Buyer] incurred from the shutdown, repair, and replacement of the Machine due to the defective goods delivered by the [Seller].

4. The [Seller] should be responsible for the fees arising out of this arbitration

      (1) The [Seller] should pay the [Buyer] the fee for quality evaluation of the GR2 hot godets and SR2 separator rolls in the amount of RMB 10,000.

      (2) The [Seller] should pay the [Buyer] the attorneys' fee for this arbitration in the amount of RMB 120,000.

      (3) The [Seller] should pay the [Buyer] the arbitration fee for this arbitration.

C. [Seller]'s counterclaim

The [Seller] in its Statement of Defense and Counterclaim requested the Tribunal to find that:

1. The Tribunal did not have jurisdiction over the present dispute

The [Seller] alleged that the parties did not validly conclude an arbitration agreement that appointed an arbitration institution. The [Seller] argued that the Preliminary Award rendered by CIETAC lacked explanation. In actuality, the parties did not sufficiently enter into a contract. The Contract submitted by the [Buyer] to the Tribunal did not contain the [Buyer]'s signature. Moreover, the representative that signed the Contract on behalf of the [Seller] was not authorized by the [Seller]. The [Buyer] was aware of this fact, which could be demonstrated by the fact that the [Buyer] required the [Seller] to explicitly authorize K&E Co. Ltd. to handle all matters related to the hot godets.

On 25 September 2003, the [Seller] concluded a contract No. SHJWRETECH2003092501 (hereinafter, the "2501 Contract") with Wujiang ___ Corp. The [Buyer] was obviously not one of the parties to this contract. However, the [Buyer]'s claims were based on this 2501 Contract taking into account the essential facts the [Buyer] stated. Therefore, all the claims against the [Seller] should have been brought by Wujiang ___ Corp., instead of the [Buyer]. Additionally, Article 16 of the 2501 Contract provided that the arbitral tribunal should be formed by the International Chamber of Commerce in Paris. To sum up, CIETAC did not have jurisdiction over the present dispute.

2. Should the Tribunal find that it had jurisdiction over the present case, the [Buyer]'s arbitral claims should be dismissed

First, the [Buyer]'s claims should not be based on the Contract at issue. Instead, it should be based on the 2501 Contract. In fact, one of the parties to this 2501 Contract was Wujiang ___ Corp., not the [Buyer]. Therefore, the [Buyer] did not have the right to file this arbitration. The 2501 Contract was valid and binding, not the Contract at issue. The [Buyer]'s requests were based on the Annex I it submitted as Evidence exhibit 1. Under Article 18 of the 2501 Contract, the Contract in dispute was not valid, and thus, not final. This invalid contract was signed by a staff member who was not authorized by the [Seller]. The [Seller] merely agreed on modifying the terms concerning the quantity of the products. The [Seller] had never agreed on substituting the contracting party. However, the [Seller] did not object to receiving payment from the contracting party's parent company, especially the parent company who was the actual importer with a valid import and export license. It was obvious that the [Buyer] was trying to forge the Annex I, i.e., the spare parts list, which was supposed to be part of the 2501 Contract and a technical specification as the annex of the Contract. This conduct is not protected by the law. Therefore, it is the [Seller]'s position that the Tribunal should dismiss the [Buyer]'s claims.

Second, should the Tribunal find that it had jurisdiction over the present case and that the Contract was valid and binding on the parties, the [Seller] performed all of its obligations under the Contract. Therefore, the [Seller] was not obligated to compensate any of the [Buyer]'s losses.

3. Should the Tribunal find that it had jurisdiction over the present case and that the Contract was valid and binding on the parties, the [Buyer] should pay the [Seller] the balance of the contract price in the amount of EUR 231,625 within thirty days after the arbitral award is rendered (first counterclaim)

Neither of the parties to the Contract was authorized to arbitrarily avoid the Contract or any of the contractual terms. The [Seller] expressly objected to the [Buyer]'s request to terminate the Contract. In actuality, the [Buyer] did not avoid the Contract, because it also requested the [Seller] to perform its obligations under the Contract.

In addition, the [Buyer] was responsible to pay for the balance of the contract price in the amount of EUR 231,625, which was already due on 31 December 2003 under the Contract. Hitherto the [Seller] had delivered half of the goods under the Contract. The reason that the other half was not delivered was that the [Buyer] merely required the [Seller] to deliver the first half to the workshop but did not issue the letter of credit for the second half. Pursuant to Article 14 of the Contract, the [Buyer] was obligated to issue an irrevocable letter of credit payable at sight in the amount of 85% of the contract price before 31 December 2003 (the remaining 15 % of the contract price was paid as the down payment). The [Buyer] eventually issued a letter of credit of EUR 231,625, i.e., half of the required price in the spring of 2003 (translator's note: it should be the spring of 2004 judging from the context), which was excessively delayed. Therefore, the [Seller] had to provide only half of the contractual goods.

The [Seller] stored the remaining goods that the [Buyer] and Wujiang ___ Corp. purchased and has been prepared to deliver these goods after the [Buyer] performed its contractual obligations. The [Buyer] was obligated to first pay for the balance in the amount of EUR 231,625 and issue the relevant letter of credit.

4. Should the Tribunal find that it had jurisdiction over the present case and that the Contract was valid and binding on the parties, the [Buyer] should compensate for the [Seller]'s additional expenses of EUR 108,300 and the interest of 8% thereon calculated from the date of 15 November 2004 totaling EUR 164,166 (second counterclaim)

The [Seller]'s additional expenses included:

   -    Additional cost on cables (Sfr 7,680, approximately EUR 5,419);
   -    Additional cost on software design (EUR 2,840);
   -    Additional cost on the extra hours of the [Seller]'s staff (the connection and replacement of the additional cables required by the [Buyer], which cost Sfr 2,000, approximately EUR 17,411; the extra nineteen hours that the engineers worked on, which cost Sfr 19,000, approximately 13,405);
   -    Additional cost on packing and shipping (Sfr 13,000, approximately EUR 9,172);
   -    Additional cost on plane tickets (Sfr 5,360, approximately EUR 37,781);
   -    Additional analysis cost, additional expenses on the components left at Wujiang ___ Corp., and additional working hours and project expenses due to the [Buyer]'s uncooperative conduct;
   -    Internal scientific research expenses, further analysis cost, and technology preparation cost (EUR 167,070);
   -    Cost on the testing report issued by the University of Munich (EUR 3,768).

With regard to the project expenses of EUR 108,300, the [Seller] had sent the [Buyer] a payment order on 1 November 2004, within which stated:

"Payment Method: immediate payment upon receipt of this order. If payment is delayed for more than ten days, please notify our treasury department. The [Buyer] is responsible for the balance of the contract price that it refused to pay without any good cause. The [Buyer] is also responsible for an 8% interest thereon."

The [Buyer] received the payment order before 15 November 2004 and did not object to this order with any reasonable grounds. Therefore, the [Buyer] should be responsible for an 8% interest on the arrears of EUR 108,300 calculated from the date of 15 November 2004.

5. Should the Tribunal find that it had jurisdiction over the present case, the [Buyer] should pay for the down payment of EUR 120,000 and the two letters of credit, i.e., EUR 331,112 and EUR 496,668 under Contract No. SHJWRETECH2004010801 signed by the parties on 8 January 2004 (hereinafter, the "801 Contract") (third counterclaim)

The 801 Contract was signed because the [Buyer] wished to purchase two extra FDY hot godets for Wujiang ___ Corp. (sixty positions and two extra positions) on top of the machine purchased under the 2501 Contract. The 801 Contract had the same arbitration clause as the Contract at issue. Thus, if CIETAC has jurisdiction over the present case, CIETAC shall have jurisdiction over the disputes arising out of the 801 Contract too. According to the 801 Contract, the [Buyer] should have made a down payment in January 2004. However, the [Buyer] failed to make this payment. Moreover, the [Buyer] had never issued any letter of credit. This conduct fundamentally breached the contract. The [Buyer] was obligated to perform its obligations under the 801 Contract. Therefore, the [Buyer] was obligated to pay this down payment and issue the letter of credit. The [Seller] then could deliver the goods under the 801 Contract. Consequently, the [Buyer] should pay the [Seller] the contract price totaling EUR 947,780.

6. In any event, the [Buyer] should bear the arbitration fee, if any, and compensate for the [Seller]'s expenses and losses arising out of this arbitration, including the attorneys' fee

The [Seller] has thus far incurred internal expenses of EUR 30,000 (EUR 150 200 hours) due to this arbitration. The [Seller] spent Sfr 50,000 on attorneys' fee on this arbitration. The final fees arising out of this case would be confirmed after the closing of this arbitration. It is the [Seller]'s position that the [Buyer]'s first claim was unfounded. The [Seller] alleged that the Contract at issue did not mention any spare parts as the subject matter. The Annex I submitted by the [Buyer] merely mentioned that the total contract price included EUR 15,000 worth of spare parts. In actuality, in its first installment, the [Seller] already delivered:

   -    four extra hot godets (including one hot godet of Model 220 350mm [GR2] and one separator roll of Model 110 420mm [SRl]) [Translator's note: It is unclear how this became four extra godots] and six heating rolls of different models (including two PT100 frequency inverter 350;
 
   -    two PT100 frequency inverter 420, one CR-03 pressure regulator, and one TTR-3 transmitter).

If the Contract and the Annex I were confirmed as authentic, the spare parts that were not delivered were worth EUR 10,920 (EUR 15,000-EUR 4,080), instead of the EUR 11,922 as claimed by the [Buyer]. The [Buyer] submitted Annex I, spare parts list, and the Contract as Evidence exhibit 1. The [Seller] already demonstrated that the above-mentioned documents were part of the 2501 Contract, instead of the Contract at issue.

Moreover, the parties did not agree on the spare parts list, nor did the parties sign on this list. Therefore, this list should not be admitted as evidence. Contrarily, the [Buyer] alleged that these documents were part of the Contract. The [Buyer]'s claims in its Request for Arbitration were contradictory. Neither the Contract, Annex I, nor the unbinding spare parts list stipulated that the [Seller] was obligated to deliver the Machine along with the first installment of the hot godets. The Contract merely stipulated that the [Seller] was obligated to deliver the goods in two installments.

Furthermore, the spare parts list explicitly referred to the 2501 Contract, not the Contract in dispute. Hence, the [Seller] was not obligated to deliver the spare parts under the spare parts list with the first installment of the goods, because there was no such provision. In addition, the [Seller] had never signed the spare parts list, and thus, this list was not binding on the [Seller]. According to the Annex I between the [Seller] and Wujiang ___ Corp., the price did not include the EUR 15,000 worth of spare parts, and there was no detailed explanation on the spare parts. Annex I expressly stated that "Spare parts list will be provided after ordering."

Neither the content of the Contract nor that of Annex I mentioned the delivery date of the spare parts. Hence, the [Seller] was not obligated to deliver the spare parts with the first installment in May and June of 2004. The notification for amendment of letter of credit signed by the Wujiang ___ Corp. demonstrated that Wujiang ___ Corp. believed that not all of the spare parts should be delivered with the goods delivered in May 2005 [Translator's note: May 2004?]. The [Seller] was merely obligated to deliver one position of spare parts. After the fulfillment of the prerequisites of the Contract by the [Buyer], such as issuing the letter of credit on the unpaid contract price, the [Seller] then would deliver the rest of the spare parts, even if the [Seller] did not agree with its obligations under the Contract.

It is the [Seller]'s position that the [Buyer]'s second claim is unfounded. The [Buyer] was not authorized to avoid the Contract. The [Buyer] in its first arbitral claim requested the [Seller] to perform the obligations to deliver the rest of the goods. At the same time, the [Buyer] in its second arbitral claim requested that the parties should cease performing the Contract. These claims are contradictory and unacceptable. If the [Buyer] alleges that the Contract was valid and binding, it should not claim to avoid the part of the Contract that it did not wish to perform. Neither the 2501 Contract nor the Contract at issue provided this right for the parties. If the [Buyer] alleges that the Contract was binding on the [Seller], the Contract should be binding on the [Buyer], too. Therefore, the [Buyer] was obligated to perform the Contract, i.e., to perform other part of the order and pay for the contract price.

As long as the [Buyer] fulfilled its obligations under the Contract and Annex I, i.e., to issue the letter of credit and to pay for the balance of the Contract, the [Seller] would deliver the second installment according to the Contract and Annex I. Furthermore, the [Buyer]'s claim of damages was unfounded. The inappropriate operations on the hot godets did authorize the [Buyer] to request the return of the contract price, and the [Seller] was not obligated to return the contract price or to be held responsible for any damages.

The goods delivered by the [Seller] were fit for the Contract and all of the [Seller]'s users were satisfied with the quality of the [Seller]'s goods. Under Article 18 of the Contract, the [Seller] guaranteed that the goods sold were processed with the best materials, and that the goods were of the same quality, description, and function as required by the Contract. However, this assurance was made on condition that the goods were reasonably maintained. This assurance did not cover "defects due to the inappropriate maintenance after opening containers or normal wear." The goods delivered by the [Seller] were not defective as claimed by the [Buyer]. However, they were inappropriately maintained and operated. The [Seller] had repeatedly warned the [Buyer] that it was absolutely necessary to operate the Machine according to the operation guidance delivered with the Machine. According to relevant evidence, it could be concluded that the malfunctions of the Machine resulted from the wrong operations on the hot godets, not the defects of the Machine.

It should also be noted that the [Buyer] did not order an entire set of device from the [Seller]. Instead, the [Buyer] ordered some products necessary for operating hot godets. A very important part of the device that the [Buyer] wanted was the frequency inverter. Normally, the [Seller] provides frequency inverters to its users. However, in order to cut cost, the [Buyer] chose to assemble and set up the frequency inverter on its own. However, the [Seller] still provided the [Buyer] with a detailed guidance in how to operate hot godets to obtain a favorable performance, and correctly gave directions to the [Buyer]'s staff. Since the frequency inverter was not tested by the [Seller], if the testing went wrong, it was not within the scope of the [Seller]'s control. Because of the [Buyer]'s uncooperative conduct, the [Seller] could not diagnose the problems of the Machine remotely.

The [Seller] had sent two technicians to China to replace the bearings in the shortest time in case the malfunctions were caused by the bearings. However, after the uninstallation of the original bearings in the SR2 electric motors and the assembly of the new bearings, the problems and the malfunctions of the SR2 hot godets remained. Thus, it could be concluded the bearings were not defective and the malfunctions of the hot godets were caused by other reasons. After the technicians went back to Switzerland, the [Seller] spent considerable resources trying to figure out the real causes for the malfunctions of the hot godets and the bearings. The experts and technicians of the [Seller] determined that the problems were not caused by the products or the materials provided by the [Seller], but by the incorrect operations on the hot godets, especially the wrong parameter used on the frequency inverter.

On 27 and 28 July 2004, the [Seller] sent another technician to Wujiang ___ Corp. to explain the analysis that the [Seller] had. During this visit, the technician inspected the parameters and recorded his observed result. The [Seller] realized that the parameter for the frequency inverter was not correctly set up. The [Seller] immediately produced a more appropriate parameter table. The parameter provided in this table was obviously better than the one that was used by the [Buyer], and thus, the Machine operated better. However, to figure out a better parameter, the [Seller] would have to perform more testing. All damages to the electric motors were not caused by any defects of the Machine, but by the inappropriate operations the [Buyer] did to the Machine. The main cause of the problems was that the parameter set for the frequency inverter was wrong. Because the parameter was wrong, the electric motors were overheated over a long period of time, which led to the malfunctions of the bearings and the SR2 hot godets.

At the very start, the [Buyer] was not willing to find out the real cause in order to solve the problem with the bearings. On the other hand, the [Seller] suspected that it was the incorrect operations that resulted in the malfunctions, instead of the bearings. The [Seller] had to send its technician to the workshop in July 2004 to inspect in finding out the reason for the problems because the [Buyer] did not respond to many questions that the [Seller] asked and the information that the [Buyer] provided to the [Seller] was inaccurate and contradictory. Hence, the [Seller] was unable to solve the problems remotely.

Although the [Buyer] and Wujiang ___ Corp. did not cooperate, the [Seller] was willing to solve the problems, and therefore, the [Seller] sent technicians to China to inspect. However, even if the [Seller] provided support and suggested a solution to correctly set up the parameter of the frequency inverter, the [Buyer] was not interested in obtaining a technical solution to correctly operate the Machine. On the other hand, the [Buyer] suggested to avoid the Contract and requested the [Seller] to return the down payment.

In order to provide the best suggestions to its users, the [Seller] prepare to deliver eight positions of components to the [Buyer], including measuring tools. The [Seller] prepared to send one pair of heating rolls 110350mm (SR2), one pair of heating rolls 220 350mm (GR2), and two frequency inverters, including cables and other spare parts (6-8 positions). However, the [Buyer] did not provide the necessary assistance to the [Seller] in importing special testing device, which made it impossible to clear customs.

Because the [Seller] did not have the necessary testing device to perform the planned testing, the [Seller] had to use new godets and frequency inverters. The [Seller] requested the [Buyer] and the end-user not to use the new products, because the new products were not produced by the [Seller]. Although the end-user agreed not to use these new products, the [Buyer] insisted in using them. The [Seller] then replied to the [Buyer] via e-mail emphasizing that the [Buyer] was not authorized to use the spare parts that the [Seller] stored at the workshop. However, the [Buyer] sent those products to Shanghai Testing Institute of Electrical Equipment for testing, and it was possible that the [Buyer] would deliver other spare parts for testing.

It should be noted that the testing report submitted by the [Buyer] could not prove whether the goods delivered were defective. First, this testing report lacked the thirtieth page, and an incomplete report should not be admitted as evidence. Second, the testing data was not detailed enough, and the [Seller] speculated that the result was based on wrong testing conditions. In order to determine whether the testing data was correct, a reliable testing report had to explain its testing conditions. Since this testing report did not mention its testing conditions, the result was obviously not reliable. Third, it was evident that the testing data was concluded based on the incorrect parameter of the frequency inverter. Only if a correct parameter was selected could the Machine and the electric motors be operated regularly. It was not the case in this dispute. Finally, the Model SKDF112 MG 354FI motor was not defective.

The testing result on this Model was beyond comprehension. The [Seller] submitted the testing report on which the [Buyer] based its refusal to accept the goods, in order to prove to the [Buyer] that the electric motors it rejected were not defective, and that the reason that the problems arose was the inappropriate handling of the Machine and disregard of the guidance, instead of the goods being defective. The rejected electric motors were of Model SDKF90SR354FL produced by the [Seller]'s supplier Thien. The [Seller] submitted a testing report by Professor Gerling explaining in detail all the devices being used and all of the relevant data. This report indicated that under normal conditions, the Machine could operate regularly when the parameter of the frequency inverter was correctly adjusted.

The [Buyer] changed the products without the [Seller]'s authorization. Since the [Buyer] refused to accept the tools and testing device that the [Seller] delivered to China especially for the testing, the [Seller] was unable to analyze and resolve the problems that the Machine had. The technician was not able to perform the testing on the Machine without a measurement scale. Eventually, the technician changed the parameter to substantially reduce the temperature of the electric motors. The technician discovered that the [Buyer] not only incorrectly adjusted the parameter, but also operated the Machine inappropriately by remodeling the SR2 electric motors and assembling them with other external products. Since the [Buyer] remodeled the SR2 electric motors without the [Seller]'s agreement, the [Seller] should not be held responsible for any malfunctions.

Due to the fact that the [Buyer] repeatedly refused to send its staff members to Switzerland for training to master hot godets, the parties had a meeting in Beijing on 12 December 2004. However, the [Buyer] was not interested in discussing the technical problems and solving the problems. At this meeting, representatives from Wujiang ___ Corp. confirmed many times that the GR1 and GR2 hot godets and the SR1 electric motors were of high quality, and only the SR2 electric motors were defective. Wujiang ___ Corp. and the [Buyer] did not accept the solutions submitted by the [Seller], let alone solving the problems accordingly. In actuality, the [Seller] had already repaired and configured the Machine according to the mode tested at the [Seller]'s workshop. In addition, the [Seller] could provide technical evidence proving that all of the spare parts could operate regularly including the SR2 electric motors. The problems did not arise out of the quality of the SR2 electric motors, but the fact that the [Buyer] inappropriately remodeled the products without the authorization of the [Seller].

It is the [Seller]'s position that the [Buyer]'s third arbitral claim is unfounded. The [Seller] did not bear any responsibility to the [Buyer]'s losses. The [Seller] had already delivered half of the contractual goods to the [Buyer] as agreed in the Contract according to the [Buyer]'s request, i.e., seventeen positions of separator rolls for the FDY spinning device. The goods were delivered after the [Buyer] issued the letter of credit. In the field of business, especially the field of international trade, the issuance of the letter of credit is the condition precedent for the seller to deliver goods. Since the [Buyer] was unable to issue the letter of credit in a timely manner, the [Seller] had to delay the delivery of these goods. It should be noted that although the [Buyer] issued the letter of credit, the amount therein was merely part of the amount agreed in the Contract, i.e., EUR 231,625.

The contractual goods included GR1 hot godets and GR2 hot godets, and the respective SR1 electric motors and SR2 electric motors as the electric device, along with control panel MMI and its temperature controller. However, the parties had already explicitly agreed that the [Seller] need not deliver the frequency inverter panel (engine control) cable frequency inverter panel. As for the second installment, the [Buyer] had never come to an agreement with regard to the delivery date, nor had the [Buyer] issued a letter of credit as agreed. Furthermore, the [Buyer] sought to have the Tribunal rule that the [Seller] was responsible for the [Buyer]'s losses arising out of the alleged quality problem with the replacement of the hot godets. The [Buyer] also requested the [Seller] to compensate for the [Buyer]'s looses arising out of the shutdown of the Machine. These requests should be denied. None of the hot godets were defective. The bearings had no quality problems. The problems that the [Buyer] encountered resulted from the [Buyer]'s inappropriate operations on the Machine.

To sum up, the [Buyer]'s arbitral claims are unfounded. Thus, the [Seller] should not be held responsible for the fees and expenses arising out of the present dispute. The [Buyer] should be responsible for these fees and expenses.

The [Seller] submitted a Clarification later withdrawing its third counterclaim. The position stated in [Seller]'s final counterclaim was:

1)    CIETAC does not have jurisdiction over the present case;
 
2)    Should CIETAC find that it has jurisdiction over the present case, all of the [Buyer]'s claims shall be dismissed;
 
3)    Should CIETAC find that it has jurisdiction over the present case and that the Contract is valid and binding on the [Buyer] and the [Seller], the [Buyer] should pay the [Seller] the balance of the contract price in the amount of EUR 231,625 within thirty days after the award is rendered (first counterclaim);
 
4)    Should CIETAC find that it has jurisdiction over the present case and that the Contract is valid and binding on the [Buyer] and the [Seller], the [Buyer] should compensate for the [Seller]'s additional expenses of EUR 108,300 and the interest of 8% thereon calculated from the date of 15 November 2004 totaling EUR 1,647,166. [Translator's note: It would appear from the context that the intended amount is EUR 164,166.]
 
5)    In any event, the [Buyer] should be held responsible for the expenses of CIETAC, if any, and compensate for the [Seller]'s expenses and losses arising out of this arbitration, including the attorneys' fee. For an accurate calculation, the exact amount will not be submitted until the closing of this arbitration.

D. [Seller]'s supplementary opinion

After the hearing, the [Seller] submitted the following supplementary opinion.

1. Technical interpretation

In its written and oral statements, the [Buyer] merely mentioned that the SR2 products were defective with regard to their components. If the Tribunal found that it had jurisdiction over the present case, it was only authorized to render an award concerning the SR2 products. The damages to the SR2 products were undisputed. However, the reason for the damages was disputed. The [Seller] alleged that the damages resulted from the [Buyer]'s inappropriate setting of the parameter of the frequency inverter. The motor control box, including frequency inverter was designed and produced by the machinery manufacturer (not the [Seller]). Therefore, it was unreasonable to hold the [Seller] responsible for the incorrect setting of the frequency inverter parameter.

The [Seller] did not have any opportunity to set up the parameter. Only the [Buyer] or the supplier of the frequency inverter, i.e., Danfoss, was able to set up the parameter. The [Seller] should be held responsible only to the obligations under the relevant contracts. According to the technical description stipulated in the 2501 Contract, the [Seller] was only obligated to deliver Model 220 420mm [SR2], Model 110 420mm [SR1], 220 350mm [GR2], 110 350mm [SR2], temperature control cabinet, and the cable connecting the temperature control cabinet and the roller (thirty meters). According to the separate spare parts list, the EUR 15,000 worth of spare parts was not included in the Contract. Therefore, the [Seller] was not responsible for the frequency inverter cabinet (electrical control) and the cable connecting the frequency inverter cabinet and the roller.

The [Seller] had already informed the [Buyer] of the detailed content about the electric motors. The [Buyer] decided to utilize the Danfoss (VLT2875) frequency inverter. However, the [Seller] believed that, in principle, this frequency inverter was suitable for the [Seller]'s motors. The [Seller] was not responsible for or intended to change the setting of the parameter of the Danfoss frequency inverter. The above-mentioned delivery scope expressly demonstrated the following:

      1) The goods delivered by the [Seller] merely constituted part of the entire system with the electrical control components (___ frequency inverter cabinet) that the [Buyer] intended to purchase;

      2) The goods delivered by the [Seller] merely constituted part of the entire machine (___ spinning machine);

      3) It was obvious that the manufacturer of the ___ spinning machine (i.e., the [Buyer]) was to determine the use of the components according to the technical specification and standards and be ultimately responsible for it.

The SR2 bearings became problematic soon after the operations started. After testing, it was demonstrated that the problems occurred internally (i.e., the setting of the parameter of the frequency inverter, in lieu of the product layout). Due to the [Buyer]'s noncooperation, the [Seller] spent a long period of time trying to figure out the real cause for the problems. In the course of arbitration, it was confirmed that the main reason cause of the problem with SR2 bearings was the parameter setting; this setting did not conform to the technical specification requirements of the electric motors.

The explanation for the result caused by the wrong setting of the parameter (411) was:

   -    The rotor of the electric motors overheated in the course of the wrong operation of the electric motors.
 
   -    Under this condition, the inner rings of the bearings were overheated causing the high temperature between the inner rings and outer rings, which resulted in the operation of the ball in a narrow space and the rise of the temperature of the lubricant, and eventually led to the damages to the bearings.

These technical facts were undisputable.

2. Other important matters

According to the stipulations of the Contract, the [Seller] should appoint a technician to direct the assembly and debugging of the Machine for no more than five working days. The [Seller] had already fully fulfilled this obligation. In actuality, the [Seller] spent twenty-six working days (instead of five) on the Machine. It should be further noted that the [Seller]'s responsibility was limited to the products delivered by the [Seller], not including the products produced by other manufacturers, such as frequency inverter panel and/or the entire spinning device.

The [Seller] did not have the authority to set up the parameter of the frequency inverter. At the oral hearing, the [Buyer] tried to claim that it did not know about electric motors, and that even if the [Seller] did not have the authority to change the frequency inverter, the [Seller] was still responsible for the setting thereof. These allegations were irrelevant and incorrect. They were irrelevant because if the [Buyer] wished to manufacture and sell a device that it did not know of technically, that was the [Buyer]'s own responsibility. These allegations were incorrect because the [Buyer] did not purchase the frequency inverter panel from the [Seller]. Instead, the [Buyer] decided to manufacture the frequency inverter on its own. The [Buyer] informed the [Seller] of the brand and model of the frequency inverter the [Buyer] selected. The [Seller] merely responded that it was possible for this type of frequency inverter to drive the electric motors. Therefore, it could be reasonably concluded that the [Seller]'s technicians did not have the authority with respect to the frequency inverter panel or the authority to set up the relevant parameter.

In the course of assembly and debugging, it was completely possible for the [Buyer] to run a simple test to examine the performance of heating of the hot godets with the temperature control panel. Even if the [Seller] were responsible for the frequency inverter panel, it was possible that the wrong setting of the parameter could not be found in the course of assembly and debugging, especially when the frequency inverter was not finished. It was not until later that it was possible for the [Seller]'s staff to see the frequency inverter penal and discover several operations that were not in accordance with the manual provided by Danfoss, i.e., the panel supplier.

It was undoubted that the frequency inverter panel supplier (Danfoss and/or the [Buyer]) was responsible for correctly setting up the electric panel and the parameter, because the supplier was the only one that was allowed to operate and set up the machine. Before the problems arose, the [Seller] had never obtained the authority to set up the speech of the hot godets (GR1, SR17GR2, SR2) [Translator's note: It appears that this should be GR1, SR1, GR2, SR2], or the authority to modify the relevant parameter for the panel.

At the oral hearing, the [Buyer] doubted whether it had received hot godets for testing. The [Seller] had submitted evidence to prove that these hot godets for testing were delivered to the [Buyer]. The truth was that the [Buyer] had received these hot godets but had not paid for them. The [Seller], therefore, reserved the right to claim this payment. Further, the terms of assurance in the Contract explicitly stipulated that any assurance provided by the [Seller] should be based on the [Buyer]'s reasonable maintenance of the Machine. It was evident that the present case did not fall into this category. Hence, the [Seller] was not liable for the malfunctions of SR2, because the [Seller] was not authorized to modify the Machine under the general terms and conditions of sale or the purported contract.

In addition, the quality assurance was promised on condition that the [Buyer] appropriately operated the Machine. However, the [Buyer] did not operate the Machine appropriately. Conversely, the [Buyer] operated it under the improper modulation frequency (i.e., wrongly setting the parameter of the frequency inverter to 411).

III. OPINION OF THE ARBITRAL TRIBUNAL

A. The applicable law

The [Buyer] was established under the law of and with its place of business in the People's Republic of China. The [Seller] was established under the law of and with its place of business in Switzerland. In light of the nature of the Contract, i.e., an international sales contract and the fact that the places of business of the parties are in two different Contracting States of the United Nations Convention on Contracts for the International Sale of Goods (hereinafter, the "CISG"), the Tribunal finds that the CISG applies to the present dispute. With regard to matters not concerned with or excluded from the CISG, the Tribunal finds that Chinese law applies according to the international private law principle of closest connection, because of the fact that the port of delivery is Shanghai Port, China, the Claimant [Buyer]'s place of business is in China, and the arbitration institution chosen by the parties is located in China.

Article 4 of the CISG provides that

"This Convention governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this Convention, it is not concerned with: (a) the validity of the contract or of any of its provisions or of any usage; (b) the effect which the contract may have on the property in the goods sold."

Accordingly, the Tribunal finds that the CISG is not concerned with the validity of the Contract. Hence, the Tribunal rules on the validity of the Contract in accordance with Chinese law.

B. The Contract at issue

1. The Contract

Although the subject matter of the dispute between the parties is a thirty-four position complete set of core machine equipment for polyester FDY spinning, i.e., hot godets, separator rolls, and their controlling system device, the parties dispute over the Contract that creates this subject matter and the relevant rights and obligations. The [Buyer] alleges that the case on hand arose out of the Contract at issue. However, the [Seller] objects to this allegation and submits that the case on hand is not related to the Contract at issue. Rather, [Seller] alleges that this case arose from a 2501 Contract between the [Seller] and a third party Wujiang ___ Corp. This different position concerns a fundamental question of whether this Tribunal has jurisdiction over the present case. Therefore, this Tribunal first discusses the issue of jurisdiction.

The evidence submitted by the [Seller] shows that the 2501 Contract and its annexes concluded between the [Seller] and Wujiang ___ Corp. on 25 September 2003 provided that the [Seller] was to deliver twenty-four positions of hot godets and two positions of spare parts in two installments to Wujiang ___ Corp. for the price of EUR 420,000.

The Contract at issue submitted by the [Buyer] as the arbitration basis and evidence shows that the parties agreed that the [Seller] was to provide the [Buyer] thirty-two positions of hot godets, separator rolls and their controlling system device and two positions of spare parts for the price of EUR 545,000, and that the [Buyer] was to pay for a 15% of down payment in the amount of EUR 81,750. The parties do not object to the existence of the 2501 Contract. Hence, the Tribunal has to investigate under which contract the [Seller] delivered the goods.

After investigation, the Tribunal finds that the [Buyer] wired a payment of a 15% of the contract price in the amount of EUR 81,750 to the [Seller] on 8 March 2004. Thereafter, the [Buyer] issued a letter of credit in order to pay for the 85% of the contract price in the amount of EUR 231,625. The [Seller] then delivered seventeen positions of device to the [Buyer] in two installments. The [Buyer], the [Seller], and Wujiang ___ Corp. examined the goods together on 20 May 2004. Judging from the performance, including the amount of the payment by the [Buyer] and the quantity of the goods delivered by the [Seller], it was identical to the requirements under the Contract at issue.

Moreover, although the [Seller] submits that the performance was in accordance with the 2501 Contract, the [Seller] did not provide evidence proving the 2501 Contract between the [Seller] and Wujiang ___ Corp. The [Buyer] admits that it knows of the negotiation and conclusion of the 2501 Contract by Wujiang ___ Corp. However, Wujiang ___ Corp. is not authorized to import and export, while the [Buyer] is authorized to sign contracts involving import of goods. Therefore, the [Buyer] negotiated with the [Seller] based on the 2501 Contract and signed the Contract at issue with the [Seller]. This statement by the [Buyer] conforms to the objective situations that two contract exist. To sum up, it can be concluded that the Tribunal has jurisdiction over the present dispute which arose from the Contract at issue between the [Buyer] and the [Seller].

The [Seller] does not object to the existence of the Contract. However, the [Seller] alleges that the person who signed the Contract was not authorized by the [Seller], and therefore, the Contract is invalid. After investigation, the Tribunal finds that, as alleged by the [Seller], this Contract was not signed by the [Seller] itself. It was signed by the representative of K&E Co. Ltd. "for and on behalf of the [Seller]". The [Buyer] did not submit evidence to prove that this representative was authorized by the [Seller] at the conclusion of the Contract, and thus, the Contract is not binding on the [Seller] for that matter.

However, the Tribunal also ascertains the fact that the [Buyer] made payment of the 15% of the contract price as agreed on 8 March 2004, and applied to its bank to issue a letter of credit on which the contract number of the Contract was indicated. Additionally, the packing list provided by the [Seller] indicated the Contract at issue, instead of the 2501 Contract. These facts demonstrate that not only was the [Seller] aware of the fact that the representative of K&E Co. Ltd. concluded the Contract with the [Buyer], but the [Seller] also performed the obligations under the Contract. The Tribunal finds that the [Seller]'s conduct has constituted ratification of the signature of the representative of K&E Co. Ltd. Article 48 of the Contract Law of the People's Republic of China states that:

"Absent ratification by the principal, a contract concluded on his behalf by a person who lacked agency authority, who acted beyond his agency authority or whose agency authority was extinguished is not binding upon the principal unless ratified by him, and the person performing such act is liable."

The Tribunal finds that the Contract signed by the person who lack authority is binding on the [Seller] due to the [Seller]'s ratification. Further, the content of the Contract does not violate any mandatory provisions under the Chinese law. Therefore, the Contract came into effect upon its conclusion. Therefore, the parties are bound to the rights and obligations under the Contract.

2. Annexes of the Contract

Another focus of the dispute is the annexes of the Contract. The [Buyer] alleges that the "Shanghai ___ Fiber Machinery Co. Ltd PET FDY Spin draw machine l set of draw rolls no. SHJWERETECH200392501 Annex I" (hereinafter, "Technical Specification") and the "Contract SHJWRETECH 2003092501 Spare Parts" of 25 September 2003 (hereinafter, "Spare Parts List") submitted by the [Buyer] as evidence were part of the Contract and were legal documents that affirmed the rights and obligations of the parties. The [Seller] objected to this allegation claiming that these two documents are annexes of the 2501 Contract, not the annexes of the Contract at issue. Therefore, the arbitral requests of the [Buyer] based on these documents should be dismissed.

These two documents did not have the signatures of the [Buyer] or the [Seller]. With regard to the content, they referred to merely the 2501 Contract, not the Contract at issue. Therefore, considering the prima facie evidence, these two documents are not the annexes of the Contract at issue between the parties. However, the Tribunal notes that:

      With regard to the Technical Specification, under "I. Product Name and Description", it is stated that "Hot godet for FDY spinning Detail as per Annex I". The [Buyer] alleges that the parties did not produce another Annex I, but adopted the Annex I of the 2501 Contract, i.e., the Technical Specification as the Annex I of the Contract at issue. The Tribunal notes that although the [Seller] objected to this position, the [Seller] did not provide an Annex I that it recognizes. Therefore, the Tribunal finds that the parties expressly adopted Annex I of the 2501 Contract as part of the Contract at issue; in light of the facts, if Annex I did not exist, the [Seller] would not have delivered the device the parties intended. The Tribunal also notes that during the negotiation of the quality of the goods, the parties based their negotiation upon the 2501 Contract. For instance, the [Seller] in its Technology Memorandum to the [Buyer] dated 14 September 2004 mentioned that the "temperature sensors" adopted by the Machine were "PT100". This statement is identical to the "sensor: PT100" wording in the Technical Specification. On the other hand, the Contract at issue has no specification concerning the sensor. Furthermore, the second counterclaim submitted by the [Seller] claimed that the [Seller] delivered cable that exceeded the length agreed upon under the Technical Specification, and therefore, the [Buyer] had to pay for the extra length. It can be concluded that the [Seller] considered the Technical Specification as part of the Contract as well. Therefore, the Tribunal finds that the Technical Specification is the Annex I under the Contract at issue.

      With regard to the Spare Parts List, there is no agreement concerning this List in the Contract at issue. However, the Tribunal notes that in the course of performing the Contract, the [Seller] delivered spare parts, and the [Buyer] and the end-user examined these spare parts. The Tribunal finds that as a manufacturer in business, it was impossible for the [Seller] to deliver spare parts without any agreement between the parties. Taking into account the fact that the [Seller] delivered the spare parts according to the terms of the Spare Parts List, it is reasonable for the Tribunal to find that the Spare Parts List was a legal document recognized by both parties.

After confirming the contract and legal documents that the present dispute is based on, the Tribunal will move on to analyze each of the other disputed matters and render the Tribunal's opinion.

C. Late delivery

The [Buyer] alleges that the first installment of seventeen positions arrived at Shanghai Port much later than the contractual delivery date, and that the [Seller] should be responsible for the liquidated damages. The [Seller] responded that the [Seller] did not breach the Contract because the [Buyer] failed to issue the letter of credit and that the original delivery date stipulated by the letter of credit was modified to a later date.

The Tribunal finds that the [Buyer] was obligated to issue the letter of credit for 85% of the contract price before 31 December 2003 and the [Seller] was obligated to deliver the first installment of seventeen positions of goods before 25 February 2004. However, the [Buyer] issued the letter of credit on 8 March 2004 and the [Buyer] did not present reasonable grounds for the delayed issuance. The [Buyer] applied to modify the letter of credit on 30 March 2004 and postponed the delivery of the first installment to 8 May 2004, and the second installment to 31 May 2004. The [Buyer] did not call the [Seller] to account for the late delivery at or after modifying the letter of credit.

The Tribunal therefore finds that the [Seller] did not breach the Contract by late delivery. Moreover, the evidence submitted by the [Buyer] demonstrates that on 20 May 2004 and 4 June 2004, the [Buyer], the [Seller], and Wujiang ___ Corp. examined together the first installment of goods that was delivered on two occasions. However, it does not proves the [Seller]'s late delivery. The dates agreed upon by the parties in the Contract and the letter of credit should be the dates for shipping, instead of the arrival date or examination date. It was contractually and factually unfounded for the [Buyer] to claim that the [Seller] delivered the goods late. Therefore, the Tribunal does not support the [Buyer]'s request that the [Seller] should pay liquidated damages because of the late delivery.

D. Quality of the Machine

Since several arbitral requests of the [Buyer] concerns the quality of the Machine and the parties had substantial differences regarding the quality of the Machine, the Tribunal will first investigate whether the Machine was defective, then decide whether and how much the Tribunal will support the [Buyer]'s requests.

1. Quality of the Machine

The Tribunal finds that on 4 June 2004, the [Buyer] and the [Seller] signed a Memorandum of Understanding confirming that the Machine had the following problems:

   -    The [Seller] was to deliver two installments of hot godets to the workshop of Wujiang ___ Corp. in early May of 2004 and 4 June 2004. In the course of operations, the switch of the control cabinet tripped for five times, some positions of the hot godets heated and tripped for three times, the bearings of two SR2 were damaged, and the run-out of the ninth position of GR1 was 0.11mm; the entire production line shut down because of the above problems for five times.
 
   -    The [Seller] also stated in the Memorandum that the shutdown was caused by the voltage instability of the electric network in the area, and that if the switch of the primary power source tripped again, the [Seller] would replace it. Moreover, the [Seller] stated that some positions tripped because of the shutdown of the primary power source, and that the two SR2 rolls should be replaced as soon as possible and the [Seller] would replace them for the [Buyer]. Moreover, the [Seller] agreed that the run-out of the ninth position was 0.11mm.
 
   -    The [Buyer] and the [Seller] signed the "Minutes of meetings between the [Buyer] and the [Seller] and DiFu (hereinafter, the "Minutes")" stating the problem of the electric motors being overheated.

Based on the facts that the parties ascertained, the Tribunal finds that the Machine delivered by the [Seller] had the following problems: malfunctions of the platinum resistance, tripping of some of the positions of the hot godets, damages of the bearings, shutdown of the production line, and overheating of the electric motors.

2. Causes of the malfunctions and responsibility

The parties disputed over the causes of the malfunctions. The [Buyer] alleged that the malfunctions were caused by the internal defects of the Machine, while the [Seller] alleged that the [Buyer]'s incorrect assembly and wrong operations resulted in the malfunctions. Both parties provided testing reports to support their own opinion. The [Buyer] submitted the testing report No. WY04-310 issued by Shanghai Testing Institute of Electrical Equipment. The electric motors of the SDKF 90SR 0354S FL 2.6KW separator rolls were tested and the result was "the temperature of the bearings of the electric motors of the separator rolls did not conform to the standards for JB/7118-2004 set out by the Specification for YVF2 series (IP54) Variable Frequency Adjustable Speed Definite Purpose Converter-Fed Three-Phase Induction Motors (Frame size 80-315)"; the electric motors of the SDKE 112 MG 354 F1 2.6KW separator rolls were tested and the result was "the temperature of the bearings of the electric motors of the separator rolls did not conform to the standards for JB/7118-2004 set out by the Specification for YVF2 series (IP54) Variable Frequency Adjustable Speed Definite Purpose Converter-Fed Three-Phase Induction Motors (Frame size 80-315)". [Translator's note: The original refers to "Frame size"; it is obvious that the intended text should read "Frame size 80-315".]

This testing report confirmed the fact that the temperature of the bearings did not conform to the standards. However, the report did not analyze or determine the cause of the non-conformity. Therefore, the Tribunal cannot determine whether the [Buyer] or the [Seller] was responsible for this non-conformity. The [Seller] provided the testing report written by Dr. -lng D. Gerling from University of Munich, Electroplating Technology College. This report stated that "the relevant demodulating equipment operates regularly with the correct parameter of the frequency inverter." However, this report did not base the testing on the Machine delivered by the [Seller]. This report did not take into account the factors claimed by the [Seller] concerning the defects of the bearings and the layout (or design) of the Machine, neither. Therefore, the Tribunal cannot determine the cause of the malfunctions therefrom.

In light of the fact that there is no evaluation by third party professional institute, the Tribunal determines the causes and responsibility of the malfunctions based on the evidence and statements presented by the parties.

      (1) The bearings and the layout of the Machine

      The Tribunal has confirmed that the bearings were damaged. The parties dispute on the reason for the damages. At first, the [Seller] believed that it was because of the layout of the bearings, the incorrect operations performed on the hot godets, or the wrong setting of the parameter of the frequency inverter. The Tribunal notes that the [Seller] indicated in its letter to the [Buyer] dated 15 July 2004 that "of course we made a mistake by using the wrong bearing on the fast unheated rolls." The [Seller] admitted that it used the wrong bearing.

On 21 June 2004, the [Seller] sent the [Buyer] a letter stating "the bearing wasn't laid out in the correct way from the bearing manufacture." The Tribunal notes that the wording layout can be translated to design or layout in Chinese. Therefore, the [Buyer] used the wording "design", and the [Seller] used the wording "layout" in their claims, respectively. However, no matter whether the wording "design" or "layout" is used, the [Seller] admitted that the bearings were defective, and the responsibility lies in the manufacturer. Taking into account the buyer-seller relationship in the present case, the [Seller] is responsible for the defects of the goods that it delivered.

Thereafter, from 30 June to 10 July, the [Seller] sent its technicians to China to replace the bearings. However, the malfunctions continued. The [Seller] therefore determined that the bearings were not the cause of the malfunctions, but that they were due to other reasons, mainly the incorrect setting of the parameter of the frequency inverter. However, the Tribunal notes that in August 2004, the [Seller] sent another technician to China for testing. After adjusting the parameter, the malfunctions still occurred. Therefore, the [Seller] failed to prove that the problems with the defects of the bearings were resolved. Hence, the Tribunal cannot exclude the possibility that the defects of the bearings caused the malfunctions of the Machine. The Tribunal also notes that the [Seller] sent an "official statement" to the [Buyer] on 14 September 2004 stating that "The performance problem is caused mainly by wrong inverter adjustments. In addition the mechanical layout of the machine is not ideal to assure a good cooling effect for the rolls." It can be concluded that the [Seller] believed that besides the wrong inverter adjustments, the inappropriate mechanical layout (or design) was one of the other reasons causing the malfunctions.

To sum up, the Tribunal finds that the Machine delivered by the [Seller] was defective, and that the [Seller] is responsible for such defects.

      (2) Parameter of the inverter

      As for overheated electric motors, the [Seller] emphasized that it was caused by the incorrect setting of the parameter of the inverter by the [Buyer], while the [Buyer] alleged that it was caused by the internal quality problem of the motors. The [Buyer] alleged that the setting was not inappropriate, and even if the setting was wrong, the [Seller] was responsible for it, because the [Seller] assembled and debugged the Machine.

After investigation, the Tribunal finds that

      On 7 July 2004, the [Seller] pointed out the problem with the inverter to the [Buyer] and advised that the electric motors could be adjusted to operate normally, and that the temperature would reduce. Before that, the [Seller] had required the [Buyer] to provide relevant informational data on the electric motors. However, the [Buyer] did not provide such data.

      On 15 July 2004, the [Seller] sent the [Buyer] a letter indicating that the inverter parameter was not the most appropriate. However, the [Buyer] replied on 15 July 2004 that the Danfoss inverter experts confirmed that the parameter was appropriate.

      Thereafter, the [Seller] sent its technician to Wujiang ___ Corp.'s workshop for testing, and the [Buyer], the [Seller], and Wujiang ___ Corp. signed a Memorandum of Understanding on 28 July 2004. The [Seller] stated therein that it would perform testing on the parameter of the inverter and tried to reduce the temperature of the bearings from 130 degrees to 70 degrees with a room temperature of 50 degrees. However, the [Buyer] required the [Seller] to resolve this overheating problem within four weeks. This Memorandum also stated that "if the [Seller] cannot solve the problem, the [Buyer] will avoid the present contract; if the [Seller] is successful, the [Buyer] will continue using the [Seller]'s machine."

      The [Seller] sent a letter to the [Buyer] on 4 August 2004, providing the inverter parameter that the [Seller] believed to be appropriate and requesting the [Buyer] to adjust the inverter accordingly.

      In late August 2004, the [Seller] sent its technician to Wujiang ___ Corp.'s workshop and adjusted the parameter of the inverter. On 14 September 2004, the [Seller] produced a Technology Memorandum based on the report by this technician after his return and sent it to the [Buyer]. This Memorandum indicated that the [Seller] adjusted the inverter and the temperature of the electric motors was reduced. It was also indicated that, due to the damages of the bearings occurred at the disassembly in the course of the testing performed by the [Buyer], the broken bearings still caused damages to the electric motors after the adjustment of the parameter. The Tribunal notes that after this adjustment, the problem with the overheated electric motors was not solved.

      The [Buyer] sent a letter to the [Seller] stating that the [Buyer] did not accept the Technology Memorandum dated 14 September, and required the [Seller] to send its staff to China again for testing before 7 October 2004. Otherwise, the [Buyer] would send the Machine to a government accredited institute for evaluation.

      The [Seller] alleged that in December 2004, the [Seller] again sent technicians to China for testing and discovered that the [Buyer] not only was using the wrong parameter for the inverter, but also had remodeled the Machine. The Tribunal notes that the [Buyer] denied that the parameter was incorrect, and the [Seller] failed to submit evidence proving that the parameter was incorrect. Therefore, the Tribunal does not support the [Seller]'s claim that the parameter adjustment was incorrect. On the other hand, the Tribunal finds that the Machine was remodeled because the [Seller] did not object to this fact.

The above evidence demonstrates that the parties had not solved the problem with the parameter of the inverter after negotiation, testing, and adjustment. The Tribunal finds that:

      (1) Taking into account the Contract, Article 19 provides that "the [Seller] should appoint a technician to direct the assembly and debugging of the Machine for no more than five working days; the [Seller] is responsible for the expenses (including two-way plane tickets, food and accommodation)." This provision indicated that the [Seller] was responsible for directing the assembly, debugging and the normal operation of the Machine. Since the inverter is a necessary component for the operation of the Machine, the setting of the inverter is essential to the normal operation. Therefore, the responsibility for directing the adjustment of the parameter of the inverter cannot be separated from the responsibility for directing the assembly and debugging of the Machine. Even if the inverter was not provided by the [Seller], the [Seller] was obligated to direct the adjustment of the parameter and provide the matching device for the normal operation of the entire machine in order to achieve the effect and fulfill the purpose of directing the assembly and debugging. However, the [Seller] did not dutifully direct the [Buyer] and did not object to the parameter adjusted by the [Buyer]. Therefore, the Tribunal finds that, even if the parameter was incorrectly adjusted, the [Seller] was at fault, and the [Seller] should be held responsible for it.

      (2) Taking into account the process, the [Seller] realized on 7 July that the parameter of the inverter might be wrong and that the adjustment should be identical to the regular correct parameter, because the [Seller] agreed with the purchase of the Danfoss inverter before the [Buyer] ordered it. However, the [Seller] did not immediately notify the [Buyer] of the regular appropriate parameter. The [Buyer] was at fault in not cooperatively providing to the [Seller] the necessary data on the electric motors and should be held be partly responsible for the [Seller]'s failure to provide the appropriate parameter. However, on 28 July, the [Seller] sent two technicians to the workshop. Knowing the parameter, the technicians did not perform testing and adjusted the inverter to the parameter that the [Seller] believed to be appropriate. It was obvious that the [Seller] was not confident in the parameter that it believed to be appropriate.

Together with the fact that the bearings were defective, the [Seller] may believe that the parameter of the inverter was not the only reason causing the malfunctions. Since this testing could not solve the problems, it was understandable that the [Buyer] required the [Seller] to solve the problems within four weeks. On 5 August, the [Seller] sent the [Buyer] the parameter that the [Seller] believed to be appropriate. On 25 August 2004, the [Seller] sent its technicians to the workshop to adjust the parameter, but the problem with the overheated electric motors was not solved. The [Seller] alleged that the [Buyer] was uncooperative, which led to the [Seller]'s inability to replace the damaged bearing and the malfunctions of the Machine were therefore not taken care of. However, the Tribunal finds that the [Seller] is responsible for the malfunctions (for theTribunal's reasoning, see below). Therefore, the Tribunal finds that even if the adjustment of the inverter parameter was incorrect, due to the fact that the [Seller] was not able to effectively solve the problem immediately or within a short period of time, the [Seller] is responsible for the unfavorable results arising therefrom.

      (3) Cooperation for testing

      The parties dispute over the matter whether the [Buyer] was cooperative for the testing on 25 August. The [Seller] alleged that the [Buyer]'s lack of cooperation in adjusting the parameter caused the [Seller]'s inability to replace the damaged bearings in order to perform testing. Neither of the parties submitted sufficient evidence to support their claims. The Tribunal cannot ascertain the facts merely upon the statements of the parties. However, the Tribunal notes that both parties mentioned the matter of the testing device, and the fact that the device was not declared at the China Customs was the main reason that the testing could not be performed and the malfunctions could not be examined and analyzed. The Tribunal finds that:

On 1 September 2004, the [Buyer] sent a letter to the [Seller] stating that:

"We agree to make the test of the hot rollers of Retech Co. But till now, our customer Difu Co. didn't get the tools from DHL. Without the tools, your engineers could not start their work. Now, the tool case is in Shanghai Customs, they need the deposit of the tool case. We sincerely hope that you immediately ask for your agent 'K&E Company Limited (Shanghai Representative Office)' in China to fetch toll case that you sent by DHL so that your engineers could start their testing work timely."

On 2 September, the [Buyer] sent another letter to the [Seller] requesting the [Seller] to send K&E Co. Ltd. (Shanghai Representative Office) to handle the issue of the tool case.

On 3 September 2004, the [Seller] replied that the [Seller] had notified K&E Co. Ltd. of the situation and requested K&E Co. Ltd. to contact the [Buyer]. In actuality, the case tool had not been picked up from the Customs until the [Seller]'s technicians were sent to perform the testing.

The Tribunal finds that this testing was scheduled to figure out and demonstrate the reason for electric motors being overheated. The [Seller] should be responsible for figuring out this problem. Otherwise, the [Seller] was not able to determine whether the overheating problem was caused by the incorrect adjustment of the inverter parameter. Therefore, the [Seller] should have been actively prompting this testing. When the Customs were not cleared and the tool case was not picked up, and the [Buyer] repeatedly requested the [Seller] to contact the [Seller]'s agent K&E Co. Ltd. (Shanghai Representative Office) to handle this issue, there exists no evidence proving that the [Seller] had taken the necessary actions to prompt K&E Co. Ltd. to contact the [Buyer] and pick up the tool, even if the [Seller] alleged that it had done so. Therefore, the [Seller] is responsible for its inability to perform the testing. Although the Machine was at the workshop of the end-user and the testing could not have been performed without the cooperation of the [Buyer], the parties disputed over whether the [Buyer] was cooperative. Neither of them provided sufficient evidence proving their own claim. It can be confirmed by the Tribunal that without the tool and the testing device, the testing could not be performed. Therefore, the [Seller] should be held responsible for it.

      (4) Assembly of the Machine

      The [Seller] alleged that the [Buyer] purchased and assembled the inverter on its own, which was the main cause of the malfunctions. As stated above, the Tribunal finds that even if the [Buyer] purchased and assembled the inverter on its own, the [Seller] was still responsible for directing the assembly. However, the [Seller] failed to direct with reasonable care, especially after realizing the problem with the parameter; the [Seller] did not effectively handle the problem. Therefore, the [Seller] is responsible for the unfavorable consequences.

      (5) Inappropriate operations

      The problem with the operations includes the following:

a)    The adjustment of the parameter is a main part of the operations, and the Tribunal has discussed this matter and the responsibility in the above opinion;
 
b)    The abnormal booting and shutdown mentioned by the [Seller] is not proven by the [Seller]'s evidence, and therefore, the Tribunal cannot affirm the [Buyer]'s responsibility;
 
c)    The [Buyer] remodeled the electric motors. The remodeling of the motors occurred after the overheating and at the end of the negotiation between the parties concerning the overheating problem. It was obvious that the remodeling was not the cause of the overheating problem.
 

      (6) The responsibility for the malfunctions of the Machine

      Based on the Contract, the operations of the electric motors, and the conducts of the parties in handling the problems, the Tribunal finds that:

First, as admitted by the [Seller], the bearings provided by the [Seller] were defective, and the layout of the machine was improper. Until the filing of this arbitration, there is no evidence proving that the layout had been adjusted or perfected. The [Seller] is responsible for that.

Second, the parameter of the inverter was a significant content of the [Seller]'s counterclaims. Even if the setting of the parameter was inappropriate, the [Seller] did not direct the assembly of the Machine with reasonable care in the beginning. The [Seller] did not immediately or within a short period of time after realizing the wrong setting of the parameter effectively solve the problem with the setting. The [Seller] is responsible for that.

Third, in the testing performed in September, the [Seller] did not appropriately handle the matter of the tool, which resulted in its inability to perform the testing, and the fact that the problems were not solved.

In conclusion, the [Seller] delivered defective goods. In the course of performing the Contract, the [Seller] failed to fulfill its obligation to direct the assembly with reasonable care and effectively solve the problems that arose. Therefore, the [Seller] is responsible for the malfunctions of the Machine and the [Seller]'s own inability to solve the problems.

E. The [Buyer]'s claims

1. The [Buyer]'s claim for the delivery of the spare parts of the fifth to twelve positions, or the payment for these spare parts in the amount of EUR 11,922

The Tribunal has found that the Spare Parts List was one of the legal documents of the Contract. Therefore, the [Buyer] is authorized to require the [Seller] to deliver EUR 15,000 worth of spare parts under the Spare Parts List. In the present case, the [Buyer] alleged that it had received the first to fourth supply of spare parts, i.e.:

-   First position: EUR 480 two temperature sensors = EUR 960;
-   Second position: EUR 520 two temperature sensors = EUR 1,040;
-   Third position: EUR 1,065;
-   Fourth position: EUR 1,015.

The total of the above is EUR 4,080. The [Seller] has not delivered EUR 11,922 (EUR 15,000 - EUR 4,080) worth of goods. The [Buyer] alleged that the EUR 15,000 worth of spare parts should have been delivered in the first installment. However, the [Seller] alleged that it was not obligated to deliver the spare parts under the Spare Parts List (including the first to twelve positions) along with the first installment.

The Tribunal finds that nothing in the Contract, the Spare Parts List, or the Technical Specification indicated the deliver time and installments for the spare parts. It was unfounded for the [Buyer] to require the [Seller] to deliver these EUR 15,000 worth of spare parts with the first installment. The Tribunal notes that these spare parts were for the entire thirty-four positions of the Machine under the Contract, and the EUR 15,000 is included in the contract price. Delivering these spare parts to the [Buyer] in the first installment would have transferred the risk to the [Buyer] too early, and was against the purpose of the agreement by the parties that the goods should be delivered in two installments. Therefore, the Tribunal finds that based on the fact that the goods were to be delivered in two installments, the spare parts should be delivered in two installments. Hence, the [Seller] is obligated to pay the [Buyer] the price on the undelivered spare parts in the amount of EUR 3,420 (EUR 15,000/2 - EUR 4,080 = EUR 7,500 - EUR 4,080).

2. The [Buyer]'s claim that the [Seller] should retrieve the RMB 391,000 worth of first installment of seventeen positions of SR2 separator rolls that could not be repaired and refund the [Buyer] RMB 391,000, and that the parties were released from the Contract with the [Seller] returning the 15% of the price on the second installment of EUR 40,875

With regard to the termination of the Contract, as stated above, the Tribunal has confirmed that the [Seller] admitted to the defects of the bearings, as well as the layout (design) of the Machine. The Tribunal also found that the [Seller] failed to fulfill its obligation of directing the assembly and the debugging of the Machine with reasonable care and to immediately or within a short period of time effectively solve the problem of the alleged incorrect setting of the inverter parameter. The [Seller]'s conduct caused the losses of the [Buyer] and prevented the [Buyer] from performing normal operations. The [Buyer] had to spend extra time, labors, and money thereon. More importantly, the end-use's purpose of purchasing the Machine was not fulfilled. Therefore, the Tribunal finds that the [Seller] breached the Contract. Under Article 25 of the CISG,

"A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result."

Under Article 51(2) of the CISG,

"The buyer may declare the contract avoided in its entirety only if the failure to make delivery completely or in conformity with the contract amounts to a fundamental breach of the contract."

The Contract at issue should be terminated, and the parties are discharged from the obligations under the Contract. The parties did not dispute over the RMB 391,000 worth of the seventeen positions of the SR2 separator rolls, the down payment of the 15% of price for the second installment in the amount of EUR 40,875, and the fact that the [Buyer] had made payment. Moreover, the Contract is terminated by the Tribunal. Therefore, the Tribunal supports the [Buyer]'s claim that the [Seller] should retrieve the RMB 391,000 worth of first installment of seventeen positions of SR2 separator rolls that could not be repaired and refund the [Buyer] RMB 391,000, and that the [Seller] should returning the 15% of the price on the second installment in the amount of 40,875.

3. The [Buyer]'s claim that the [Seller] should pay for the liquidated damages and the losses that the [Buyer] incurred due to the malfunctions of the goods, i.e., liquidated damages of EUR 16,601.22, expenses arising out of the remodeling of the Machine of RMB 510,000, and losses that the [Buyer] incurred from the shutdown, repairs, and replacement of the Machine because of the malfunctions in the amount of RMB 683,306.20

First, as for the liquidated damages, the Tribunal has denied the late delivery alleged by the [Buyer]. Therefore, the Tribunal does not support the [Buyer]'s claim for the liquidated damages.

Second, as for the expenses claimed by the [Buyer] for the remodeling of the Machine and the economic losses for the shutdown, repairs, and replacement of the Machine, the evidence on hand does not sufficiently demonstrate the alleged losses by the [Buyer]. Therefore, the Tribunal does not support this claim.

4. The [Buyer]'s claim that the [Seller] should pay for the fees and expenses arising out of this arbitration, i.e., quality evaluation fee of RMB 10,000, attorneys' fee of RMB 120,000, and the arbitration fee that the [Buyer] paid in advance

The Tribunal finds that although the testing report the [Buyer] submitted proved that the Machine malfunctioned, it did not prove the cause of the malfunctions. Thus, this evidence cannot support the [Buyer]'s claim. Therefore, the [Buyer] should bear the quality evaluation fee. Since not all of the [Buyer]'s claims are supported by the Tribunal, the [Buyer] should be responsible for the attorneys' fee. According to how much the Tribunal supports the [Buyer]'s claims as well as the facts of the present case, the [Buyer] is responsible for 30% of the arbitration fee, while the [Seller] is responsible for 70% thereof.

F. The [Seller]'s counterclaims

1. The [Seller]'s counterclaim that the [Buyer] should make payment of EUR 231,625 under the Contract.

The Tribunal finds that this payment is the unpaid contract price for the second installment. The Tribunal finds that the Contract is terminated. Therefore, the [Buyer] is not obligated to make this payment. The Tribunal does not support this counterclaim by the [Seller].

2. The [Seller]'s counterclaim that the [Buyer] should compensate for the [Seller]'s additional expenses of EUR 108,300 and the interest of 8% thereon calculated from the date of 15 November 2004 totaling EUR 164,166

After investigation, the [Seller]'s counterclaim of EUR 164,166 includes the following:

      (1) The [Seller] claimed that it delivered more cable than the contractually agreed length under Annex I. Annex I required the [Seller] to deliver thirty meters, while the [Seller] delivered eighty meters of cable. Therefore, the [Buyer] should pay for the consideration, i.e., EUR 5,419. The [Buyer] required the [Seller] to provide the original copy of the evidence. However, the [Seller] did not submit this document at the oral hearing or after the oral hearing. Moreover, the [Seller] failed to provide evidence demonstrating the length of cable that the parties confirmed. Therefore, the Tribunal does not support this counterclaim.

      (2) The [Seller] claimed that when the [Seller] was assembling the delivered goods, the [Buyer] wished to obtain software design that was beyond the contract price. Per the [Buyer]'s request, the [Seller] accomplished the first new software design after the goods were delivered. The [Seller] further advanced the design in the course of the first assembly of the hot godets and per the [Buyer]'s request thereafter. The [Seller] claimed that the [Buyer] should pay for the relevant fee in the amount of EUR 2,840.

The Tribunal finds that the [Buyer] sent a letter on 26 August 2004 requiring new software from the [Seller]. The [Seller] replied on 26 August 2004 that the [Seller] would charge extra fees on the new software. Although the [Buyer] objected to the standards and calculation of the fee, the [Buyer] did not deny the fact that the [Seller] had already accomplished the design of the software, nor did the [Buyer] provide the standards and calculation of the fee that it believed to be appropriate. In light of the above facts, the Tribunal finds that the [Buyer] is responsible for the fee calculated according to the standards provided by the [Seller]. Therefore, the Tribunal supports this counterclaim by the [Seller].

      (3) The [Seller] alleged that the [Buyer] required the [Seller] to first assemble the ninth to sixteenth positions, instead of the first to eighth positions, which led to the [Seller]'s extra effort. The [Seller] alleged that the [Buyer] should pay for the additional expenses of EUR 1,411.

However, the [Seller] did not provide evidence demonstrating that the parties originally intended to assemble the ninth to sixteenth positions before the first to eighth positions. Moreover, the first to eighth positions were in fact assembled first, which caused extra effort. Therefore, the Tribunal does not support this counterclaim by the [Seller].

      (4) The [Seller] alleged that under the Contract, the goods were to be shipped in two installments with equivalent amounts of spare parts of the Machine. However, the [Buyer] required the [Seller] to deliver the first installment in two separate shipments. This resulted in additional expenses in packing and shipping in the amount of EUR 9,172. The [Seller] alleged that the [Buyer] should be responsible for the additional expenses.

After investigation, the Tribunal finds that the [Buyer] required the [Seller] to submit the original copy of the relevant evidence to prove the [Seller]'s claim at the oral hearing. The [Seller] failed to submit such original copy or any other evidence at the oral hearing or after the hearing. Therefore, the Tribunal does not support this counterclaim by the [Seller].

      (5) The [Seller] alleged that the [Buyer] was responsible for the expenses for the extra hours that [Seller]'s engineers worked on and their travel, the value of the spare parts and the components for testing, the transport charges, and the inspection expenses for proving that the malfunctions were not caused by the internal defects of the products, in total amount of EUR 145,324.

Since the reason that the [Seller] sent its engineers and technicians to China was to perform inspection and testing on the Machine that malfunctioned, and since the Tribunal has already confirmed that the [Seller] is subject to liability for the malfunctions of the Machine, the fees and expenses arising out of this inspection should be borne by the [Seller]. Therefore, the Tribunal does not support this counterclaim by the [Seller].

3. The counterclaim that was withdrawn by the [Seller]

When filing its counterclaims, the [Seller] sought to require the [Buyer] to pay for the down payment under the 801 Contract in the amount of EUR 120,000, as well as the two letters of credit, i.e., EUR 331,112 and EUR 496,668. Thereafter, the [Seller] withdrew this claim on 19 August 2005. Hence, this Tribunal does not discuss this issue.

4. The [Seller]'s counterclaim that the [Buyer] should be responsible for the fees arising out of this arbitration, if any, including the attorneys' fee.

According to responsibility that the Tribunal confirms and the extent to which the Tribunal supports the [Seller]'s counterclaims, the Tribunal finds that the [Seller] is subject to 90% of the arbitration fee for counterclaim (i.e., US $13,718) in the amount of US $12,346.20, while the [Buyer] is subject to 10% thereof in the amount of US $1,371.80.

IV. AWARD

According to the above opinion, the Tribunal renders the following award:

1)    The [Seller] should refund the [Buyer] the contract price on the spare parts in the amount of EUR 3,420;
 
2)    The [Seller] should retrieve the RMB 391,000 worth of the entire first installment of seventeen positions of SR separator rolls that cannot be repaired, and refund the [Buyer] the contract price in the amount of RMB 391,000; the parties are released from the Contract; the [Seller] should refund the [Buyer] the down payment for the second installment of seventeen positions of hot godets, separator rolls, and their controlling system device, i.e., 15% of the price for the second installment in the amount of EUR 40,875;
 
3)    All other claims by the [Buyer] are dismissed;
 
4)    The [Buyer] should make payment to the [Seller] of EUR 2,840 for additional expenses;
 
5)    All other counterclaims by the [Seller] are dismissed;
 
6)    The arbitration fee for this arbitration is RMB 80,207. The [Buyer] is responsible for 30% of the arbitration fee, i.e., RMB 24,062.10, while the [Seller] is responsible for 70% thereof, i.e., RMB 56,114.90. Since the [Buyer] has paid the entire sum in advance, the [Seller] should make payment of RMB 56,144.90 to the [Buyer]. The [Buyer] should pay for the travel expenses for the out-of-town arbitrator in the amount of RMB 3,118. Since the [Buyer] has paid RMB 8,000 in advance, the [Buyer] should be refunded for RMB 4,882. The counterclaim fee for this arbitration is US $13,718. The [Buyer] is responsible for 10% thereof, i.e., US $1,371.80, while the [Seller] is responsible for 90% thereof, i.e., US $12,346.20. Since the [Seller] has paid the entire sum in advance, the [Buyer] should make payment of US $1,371.80 to the [Seller].
 
7)    The above payments should be made within thirty days from the date this award is handed down.

This award is the final decision and shall come into effect upon being handed down.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant, Shanghai ___ Fiber Machinery Co. Ltd. of the People's Republic of China, is referred to as [Buyer] and Respondent, ___ Co. of Switzerland, is referred to as [Seller]. Amounts in the currency of the European Union (Euro) are indicated as [EUR]; amounts in the currency of the People's Republic of China (renminbi) are indicated as [RMB]; amounts in the currency of Switzerland (Swiss francs) are indicated as [Sfr]; amounts in the currency of the United States (dollars) are indicated as [US $].

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

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Pace Law School Institute of International Commercial Law - Last updated March 29, 2010
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