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CISG CASE PRESENTATION

China May 2007 CIETAC Arbitration proceeding (Hammer mill case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/070500c1.html]

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

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Case identification

DATE OF DECISION: 20070500 (May 2007)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2007/06

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Germany (respondent)

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

GOODS INVOLVED: Hammer mill


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 25 ; 46 [Also cited: Articles 34 ; 35 ; 45 ; 74 ; 79 ]

Classification of issues using UNCITRAL classification code numbers:

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

46B1 [Buyer's right to compel performance (requiring delivery of substitute goods): remedy available only for fundamental breach]

Descriptors: Fundamental breach ; Substitute goods

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Editorial remarks

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation) [second draft]

Queen Mary Case Translation Programme

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

Hammer mill case [May 2007]

Translation [*] by John W. Zhu [**]

The China International Economic and Trade Arbitration Commission (hereafter, the "Arbitration Commission") accepted the case (Case no. M2006____) according to:

   -    The arbitration clause under the Contract no.: MINDACAUB-LONGYAN-2004-125 (hereafter the "Contract") signed by and between the Claimant [Buyer], ___ Development Company [of the People's Republic of China], and the Respondent [Seller], ___ Technology GmbH [of Germany] (previously known as the ___ Maschinenfabrik GmbH), on 25 March, 2004; and
 
   -    The written arbitration application submitted by the [Buyer] on 30 August 2006.

The Arbitration Rules of the Arbitration Commission which took effect on 1 May 2005 (the "Arbitration Rules") shall apply to this case.

ARBITRATION PROCEDURE

On 12 October 2006, the Secretariat of the Arbitration Commission sent the notice of arbitration, the Arbitration Rules and the List of Arbitrators to the [Seller] and the [Buyer], respectively, by express mail and sent the arbitration materials filed by the [Buyer] to the [Seller] as well.

It is agreed in the Contract that the language for the arbitration shall be English. On 22 November 2006, both parties agreed to amend this provision and change the language to Chinese.

Mr. ___, the arbitrator appointed by the [Buyer], together with Mr. ___, the arbitrator appointed by the [Seller], and Mr. ___, the presiding arbitrator appointed by the Chairman of the Arbitration Commission (the "Chairman") as the parties failed to jointly appoint or authorize the Chairman to appoint a presiding arbitrator within the time limit, formed the Arbitration Tribunal on 22 November 2006 to hear this case.

The [Seller] submitted its responses and the relevant evidence to the Arbitration Tribunal on 25 January 2007.

On 7 February 2007, the Arbitration Tribunal held a court session in Beijing to hear this case. Both parties sent their arbitration agents to attend. The agents of both parties stated the facts of the case, presented and cross-examined the evidence and answered the Arbitration Tribunal's queries.

After the court session, both parties submitted their supplemental statements and evidence. As agreed by both parties, they cross-examined the supplemental evidence in writing without a session.

This case has been completed. Based on the facts verified during the court session and the evidence submitted by the parties, the Arbitration Tribunal handed down the award.

The following are each party's allegations and evidence, and the Arbitration Tribunal's opinion and award.

I.  FACTS OF THE CASE

According to the evidence submitted and cross-examined by the parties, the Arbitration Tribunal finds that:

The Claimant [Buyer] and the Respondent [Seller] executed a Sale and Purchase Agreement (the "SPA") and a Technical Support Agreement (the "Technical Agreement") on 25 March 2004. According to these two agreements, the [Seller] shall supply two hammer mills (the "Equipment") to the [Buyer].

The technical specifications for the two hammer mills were set out in the Technical Agreement as follows:

Weight of each hammer head: 9.5 kilograms;
 
Material of the hammer head: Special compound casting produced by ___Company;
 
HRC of the hammer head: 60;
 
Working life: 8000 to 12,000 hours.

The Equipment was shipped on 3 November 2004.

The end-user started to test and adjust the Equipment from the end of May 2005 to the beginning of June 2005.

The Equipment started operation since September 2005.

During October and November of 2005, the Equipment broke down mainly because (1) three impact boards were broken; (2) hammer heads and clamping rings on the heads fell apart; and (3) pins and hammer heads wore out.

During the 14th to the 16th of October 2005, engineers of the [Seller] examined and repaired the Equipment. To resolve the above problem, the [Seller] agreed to provide three impact boards, two hammer heads, eight hammer heads jibs, fifty pins and twenty bolts for free.

The end-user changed several hammer heads on 3 December 2005.

However, in February 2006, the Equipment broke down again because (1) the hammer heads wore out and could not be used; and (2) the cable lines in the electrical heating system of the auxiliary equipment broke down. The [Buyer], the [Seller] and the end user have negotiated to resolve such problems.

In May 2006, the [Seller] agreed to provide more spare parts to the [Buyer] / the end-user for free, which included six sets of hammer heads (including 648 hammer heads, 648 hammer bolts and 1,296 safety pins).

The [Seller] delivered six sets of hammer heads to the place of the end-user on 31 October 2006.

In January 2007, the end-user claimed that the hammer heads delivered by the [Seller] were unqualified because:

   -    The wearproof layer on the hammer heads was not thick enough;
 
   -    The two square iron blocks welded on sides of the hammer head were not casted and did not form a complete part with the heads;
 
   -   There was a shortage of 648 hammer heads bolts; and
 
   -   There was a shortage of 1,196 hammer safety pins.

II.  DISPUTES BETWEEN THE PARTIES

According to the evidence submitted by the parties and the court session, the main disputes between the parties have to do with:

1. The quality of the hammer heads

The [Buyer] claimed that the quality of the hammer heads delivered by the [Seller] in November 2004 did not comply with the specifications in the contract, and that this was the main cause for break down of the Equipment. The [Buyer] alleged that, according to the contract, the weight of each hammer head should be 9.5 kilograms; however, the hammer heads supplied by the [Seller] only weighed 8.5 kilograms each at most. The deficiency in weight caused the hammer head's shortage in size.

The size of the hammer heads was in compliance with the specifications in base-side and height but was in a shortage of 6 mm in width of the working surface of the heads (which was 78 mm as compared with 84 mm as stipulated by the contract). The space between hammer heads was supposed to be 8 mm; however, as the width of the working surface of the heads was decreased by 6 mm, the actual space between the hammer heads amounted to 18 mm. The wider the space between the hammer heads, the more coal would enter into the gaps between the heads. While more coal blocks entered into the gaps and went deeper in depth, the hammer heads bolts and safety pins were suffering more abrasion than they should be.

In addition, the [Buyer] claimed that the hammer heads, hammer heads bolts and safety pins supplied by the [Seller] did not match with each other, which accelerated their abrasion. The [Buyer] alleged that with the thickness of the hammer heads becoming thinner, the bolt slots on the hammer heads were also getting shallower, which caused a mismatch with the regular bolts supplied by the [Seller]. The above problems caused part of the bolts and the safety pins to stand out of the surface of the hammer heads, which as a consequence, caused more impact and abrasion than normal to them. After the hammer heads bolts and safety pins fell apart, the hammer heads were not able to be connected with the hammer jibs and fell apart as well.

The [Buyer] also claimed that as the six sets of hammer heads delivered by the [Seller] to the end-user on 31 October 2006 contained flaws, such as: they were welded but not casted and the producer was not ___Company as agreed in the Contract; therefore, the six sets of hammer heads were not in conformity with the [Buyer]'s purchase order.

In response to these allegations, the [Seller] admitted that the weight of the hammer heads delivered by it in November 2004 was not in compliance with provisions of the contract. However, the [Seller] considered that the [Buyer] had exaggerated the negative effects caused by such minor deficiency in weight, which should not be the main cause for abnormal operation of the Equipment. The [Seller] claimed that the real causes of the accidents that occurred to the Equipment were material defects in design of the feeding system of the end-user and the fact that the coal used by the end-user was too hard.

2. The design of the feeding system

The [Seller] alleged that, according to the provisions of the contract, the maximum height for the coal to fall into the hammer mill was 1.5 meters; however, the feeding system of the end-user was defective in design; although the end-user added a distribution gate and several splash boards in the feeding system, a lot of coal might still fall from high into the hammer mill and such coal would impact the rotators strongly; particularly, as there was a distance of several meters between the distribution gate and the hammer mill, a lot of coal might fall into the hammer mill through the middle of the distributor with high speed and strongly impact the hammer heads in the mill. The slash boards were ineffective to slow the coal that falls though the middle of the distributor. The [Seller] claimed that this should be the main cause for the accidents that happened to the Equipment.

As to the [Seller]'s allegations above, the [Buyer] rebutted that it was a soft connection part 0.4 meters above the hammer mill and the distributor which was 2.1 meters in height was installed above the soft connection part. There were a number of splash boards from the top to the bottom of the distributor and there was a buffer board in the inlet of the distributor (also called the "distribution gate"). When the coal entered into the distributor through the distribution gate, it would pile on the upper splash board first and would fall to the lower splash board only when the weight of the coal reaches a certain amount. The distributor and a number of splash boards in the distributor ensured that the coal would not fall directly which met the operation requirements of the Equipment.

The coal would only fall into the hammer mill from the outlet of the distributor, which was only 0.4 meters high (the height of the soft connection part). Therefore, the height for the coal to fall did not exceed the 1.5 meter limit, which was in line with the provision of the Technical Agreement.

3. The hardness of the coal

The [Seller] alleged that the coal used by the end-user was too hard in the following respects, which constituted an important contributor to the break down of the Equipment:

   -   The coal that was too hard would impact the hammer mill strongly;
 
   -   The DSC of the coal used by the end-user reached as high as 40;
 
   -   Damages caused to the hammer heads would increase in case the hard coal falls from high and with high speed.

In response to the [Seller]'s allegation above, the [Buyer] rebutted that there was no agreement between the parties on the hardness of the coal; the hammer mill supplied by the [Seller] was designed according to the sample coal provided by the [Buyer]; therefore, the design and material of the mill should be accommodated to quality of the sample coal; it was unreasonable to require the [Buyer]'s coal to fit the quality of the Equipment supplied by the [Seller]; after its receipt of the sample coal delivered by the [Buyer], the [Seller] delivered a test report on the sample coal to the [Buyer] in which the [Seller] confirmed that, according to its test on the sample coal (including the Hardgrove Grindability Index and the water element), the technical specifications of the Equipment that it devised was able to fit the qualities of the sample coal.

III.  CLAIMS OF THE [BUYER]

The [Buyer] filed this arbitration according to the arbitration provision in the Contract with the Arbitration Commission on 30 August 2006 and made the following claims:

      1. The [Buyer] requested the Arbitration Tribunal to order the [Seller] to deliver six sets of hammer heads (including 648 hammer heads, 648 hammer bolts and 1,296 safety pins) in compliance with the technical specifications under Clause 3.1.6 of the Technical Agreement. The number, weight, hardness, working life, material and producer of the hammer heads should comply with the provisions of the Technical Agreement.

The [Buyer] also requested the Arbitration Tribunal to order the [Buyer] to ship the defective hammer heads delivered by it to the end-user on 31 October 2006 back at its own costs within 15 days of the arbitration award; otherwise, the end-user would charge warehouse fees; as the end-user needs to keep the operation of its production lines and for the purpose of avoiding further losses in production, the above hammer heads should be delivered to the place of the end-user within six months; in case the [Seller] was not able to deliver the qualified six sets of hammer heads to the end-user within the above time limit, the [Buyer] requested the Arbitration Tribunal to order the [Seller] to pay an amount of RMB 855,360 (number of the hammer heads (648)×Unit price RMB 1320 for each head as offered by another Germany hammer heads producer) to the [Buyer].

      2. Pursuant to Clause 9.2 of the SPA, Clause 2.4.5, 5.1 and 10 of the Technical Agreement, the [Buyer] requested the Arbitration Tribunal to order the [Buyer] to deliver the relevant documents in relation to the 10 splash boards delivered to the end user on 28 December 2006 and the relevant documents in relation to the six sets of hammer heads claimed by the [Buyer] in claim (1) above. The relevant documents should include evidence of payment of import tax, customs clearing documents, certificate of origin, evidence of weight, hardness testing report, quality inspection certificate, testing report on material of the goods, customs declaration forms, invoices, packing list and other documents as required by the SPA and the Technical Agreement.

      3. The [Buyer] requested the Arbitration Tribunal to order the [Seller] to bear all transportation fees occurred or to be occurred in performing its obligations under claim (1) and (2) above.

      4. The [Buyer] requested the Arbitration Tribunal to order the [Seller] to pay travelling fees of RMB 14,869.43 and labor fees (EUR180 per person per day) which totals EUR 2,700.

      5. The [Buyer] requested the Arbitration Tribunal to order the [Seller] to confirm that the warranty period for the hammer mills and all parts thereof should be one year starting from the date that the qualified goods have been delivered to and accepted by the end user.

      6. The [Buyer] requested the Arbitration Tribunal to order the [Seller] to pay the arbitration fee for this case (for claim (2) above, the fee paid to the Arbitration Commission was RMB 20,000) paid by the [Buyer] in advance and the legal fees of RMB 10,000 incurred by the [Buyer].

IV.  THE ARBITRATION TRIBUNAL'S OPINION

1. The applicable law

The parties did not agree on the applicable law in the Contract. Since both the [Seller] and the [Buyer] are located in Contracting States of the United Nations Convention on Contracts for the International Sales of Goods (the "CISG") and the parties did not exclude its application, the dispute under this arbitration should be determined by provisions of the CISG.

2. The [Seller]'s obligation to deliver the goods in conformity with the contract

      (1) Hammer heads delivered by the [Seller] in November 2004

      Hammer heads are critical parts of the hammer mills and the hammer heads supplied by the [Seller] do not comply with the provisions of the contract. The difference is over 10% in the weight of the goods, which is much higher than the permitted difference of 2%. Therefore, the Arbitration Tribunal finds that the breach of contract by the [Seller] constitutes a fundamental breach under the CISG.

Since the [Buyer] has required the [Seller] to provide the hammer heads customized to its needs upon conclusion of the contract and has paid extra fees for this, the [Seller]'s defense that it was not able to obtain the hammer heads form ___ Company cannot convince the Arbitration Tribunal to believe that the performance of the [Seller] falls into the exemption as provided under Article 79 of the CISG (exemption for impediment) because the [Seller] should have the chance to change the contract terms to avoid this upon negotiating the contract.

Considering the lack of conformity of the hammer heads delivered by the [Seller] with the provisions of the contract, which has constitute a fundamental breach, the [Buyer] shall have the right to require the [Seller] to provide substitute goods complying with the requirements of the contract. It is unnecessary to further discuss the actual or main cause for the Equipment's break down in such case. In addition, the materials and evidence submitted by the [Seller] cannot convince the Arbitration Tribunal to believe that the break down would have happened even if hammer heads in conformity with the Contract had been installed on the Equipment.

      (2) Hammer heads redelivered by the [Seller] in October 2006

      With respect to the hammer heads welded with two square iron blocks on sides thereof redelivered by the [Seller] in October 2006, the Arbitration Tribunal considers that the parties' agreement on the casting manufacturing method and the specific producer of the goods is closely related to the quality of the hammer heads. As the hammer heads redelivered by the [Seller] did not comply with the casting manufacturing method and the specific producer in the contract, the Arbitration Tribunal holds that this lack of compliance constituted a fundamental breach of contract; therefore, the [Buyer] is entitled to require the [Seller] to deliver hammer heads complying with the parties' agreement.

      (3) Other claims of the [Buyer]

      With respect to the [Buyer]'s request to order the [Seller] to ship the defective hammer heads back from the warehouse of the end-user and the request that the [Buyer] may purchase substitute goods in the event the [Seller] cannot deliver qualified hammer heads in time, considering that no circumstances support such requests yet, the Arbitration Tribunal dismisses these requests.

With respect to the [Buyer]'s request to require the [Seller] to supply six sets of hammer heads in six months, according to the facts of this case, the Arbitration Tribunal holds that the [Seller] shall deliver the hammer heads in a reasonable period.

With respect to the [Buyer]'s request to require the [Seller] to deliver the relevant documents, which is line with the provisions of the contract and Article 34 of the CISG, the Arbitration Tribunal accepts this request.

As it is quite clear under the contract that the [Seller] should bear the transportation fees, it is not necessary for the Arbitration Tribunal to make a decision on this point.

As to the [Buyer]'s request to require the [Seller] to pay the relevant travelling fees, as these fees were caused by the [Seller]'s breach of contract, according to Article 45 of the CISG, the Arbitration Tribunal accept this request; for the [Buyer]'s request for labor fees, as there is no evidence and legal basis, the Arbitration Tribunal dismisses this request.

As the [Buyer]'s request on the warranty period applicable to the goods has been set out in the contract clearly, it is not necessary for the Arbitration Tribunal to make a decision on this point.

For the [Buyer]'s request to require the [Seller] to pay the arbitration fee for this case, as a majority of the [Buyer]'s claims are accepted, the Arbitration Tribunal holds that it is reasonable to require the [Seller] to bear 80% of the arbitration fee. The Arbitration Tribunal also accepts the [Buyer]'s request for legal fees incurred for this case as such fees are not overly high.

V.  AWARDS

According to the facts of this case and the relevant laws, the Arbitration Tribunal holds that:

   1.   The [Seller] shall deliver six sets of hammer heads (including 648 hammer heads, 648 hammer bolts and 1,296 safety pins) complying with the technical specifications in the contract to the [Buyer] within a reasonable period;
 
   2.   The [Seller] shall deliver the relevant documents in relation to the ten splash boards delivered to the end-user on 28 December 2006 and the relevant documents in relation to the six sets of hammer heads in paragraph (1) above to the [Buyer] according to the contract;
 
   3. The [Seller] shall pay transportation fees totaling RMB 14,869.43 to the [Buyer];
 
   4. The [Seller] shall pay attorneys' fees totaling RMB 10,000 to the [Buyer];
 
   5. The [Buyer]'s other claims are dismissed;
 
   6.   The arbitration fee is RMB 61,753, of which the [Seller] shall bear 80% (RMB 49,402.40) thereof and the [Buyer] shall bear 20% (RMB 12,350.60). Since the [Buyer] had already pre-paid the entire arbitration fee, after set-off, the [Seller] shall pay the [Buyer] RMB 49,402.40.

This is the final award. It shall take effect when handed down.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, amounts in the currency of the European Union (Eurodollars) are indicated as [EUR]; amounts in the currency of the People's Republic of China (renminbi) are indicated as [RMB].

** John W. Zhu, LL.M. China University of Political Science and Law on a national graduate scholarship. He received his Bachelor of Laws degree from Southwest University of Political Science and Law and Double Degree of English Literature from Sichuan International Studies University in Chongqing, China. His focus is on International Economic Law.

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