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CISG CASE PRESENTATION

China 30 June 2007 CIETAC Arbitration proceeding (Color concrete block production line case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/070630c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20070630 (30 June 2007)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2007/04

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Germany (respondent)

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

GOODS INVOLVED: Color concrete block production line


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 6 ; 25 ; 80 [Also cited: Article 74 ]

Classification of issues using UNCITRAL classification code numbers:

6A [Convention yields to contract: modification of Convention by contract];

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

80A [Failure of performance caused by other party (party causing non-performance): loss of rights]

Descriptors: Autonomy of parties ; Fundamental breach ; Failure of performance, other party

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

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

Color concrete block production line case (30 June 2007)

Translation by [*] Fan Yao [**]

Edited by Wang Minna [***]

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. M2006____) according to:

   -    The arbitration clause in the "Type R9001XL Color Concrete Block Production Line Order Contract" signed on 16 September 2002 by Claimant ___ Building Materials (Tianjin) Co. Ltd. [of the People's Republic of China] (hereinafter: "[Buyer]"), and Respondent ___ Aktiengesellschaft AG [of Germany] (hereinafter: "[Seller]"); and
 
   -    The written arbitration application submitted to CIETAC by [Buyer] on 21 February 2006.

The "China International Economic & Trade Arbitration Commission Arbitration Rules" (hereinafter: "Arbitration Rules"), which took effect on 1 May 2005, apply to this case.

On 27 February 2006, the Secretariat of CIETAC sent the Notice of Arbitration, the Arbitration Rules, as well as the Panel of Arbitrators to [Buyer] and [Seller] separately by EMS. Meanwhile, the Secretariat sent the Request for Arbitration submitted by [Buyer] and its attachments to [Seller].

On the same day, the Secretariat forwarded [Buyer]'s Application for Preservation of Property and Attachment to the Tianjin First Intermediate People's Court upon the request of [Buyer]. On 10 March 2006, the Secretariat received the No. 1 [2006] Civil Award Concerning the Preservation of Property from the Tianjin First Intermediate People's Court.

On 24 April 2006, [Seller] sent a letter to CIETAC to request an extension of the time for filing its Statement of Defense. On 27 April 2006, CIETAC extending this time period for 20 days, until 17 May 2006.

On 17 May 2006, [Seller] submitted its "Statement of Defense", "Request for Counterclaim" and related evidence. The next day, the Secretariat of CIETAC forwarded these documents to the [Buyer].

[Buyer] appointed Mr. ___ as arbitrator. However, as Mr.___ was too busy to accept this appointment. [Buyer] then appointed Mr.___ as arbitrator. [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 in a specified time, pursuant to the "Arbitration Rules", the Chairman of CIETAC appointed Mr. ___ to be the presiding arbitrator. These three arbitrators composed the Arbitral Tribunal on 30 June 2006 to hear and decide the case together. On the same day, the Secretariat of CIETAC posted the Notice of Composition of the Arbitral Tribunal to the parties.

On 7 July 2006, [Buyer] submitted its "Supplementary Statement", its "Statement of Defense to [Seller]'s Counterclaim" and relevant evidence. The Secretariat of CIETAC forwarded these documents to [Seller].

After the Tribunal examined the materials of the present case, with the permission of the Secretariat of CIETAC, it decided to hold the first oral hearing on 9 August 2006 in Beijing. On 18 July 2006, the Secretariat of CIETAC sent the Notice of Oral Hearing to the parties by EMS.

On 3 August 2006, [Seller] submitted its "Supplementary Statement of Defense" and related evidence. The next day, [Buyer] submitted an "Exhibit on the Losses and Costs Incurred by [Seller]'s Breach of Contract" and related evidence. T

All of the above documents were transferred to the parties by the Secretariat of CIETAC.

B. First Hearing

On 9 August 2006, the Arbitral Tribunal held an oral hearing in Beijing. Representatives of [Buyer] and [Seller] participated and submitted evidence. During the hearing, the parties presented the facts and issues, answered questions of the Arbitral Tribunal, and examined the evidence.

After the hearing, on 22 August 2006, [Buyer] submitted its "Opinion on Conciliation" and "Opinion on the Examination of [Seller]'s Evidence". On 24 August 2006, [Seller] submitted to CIETAC original copies of Defense Exhibits 15 and 16. On the same day, [Seller] also submitted its "Opinion on the Examination of [Buyer]'s Evidence", a "Classified Index for [Seller]'s Main Evidence of Defense" and [Seller]'s "Supplementary Evidence of Defense."

The Secretariat of CIETAC transferred each party's materials to the opposing party and informed the parties that, according to the arrangement of the Tribunal during the hearing, the parties should submit their further statements and opinions, including written opinions on the examination of the opposing party's evidence, before 11 September 2006. In addition, [Buyer] should come to the Secretariat of CIETAC to examine the original copies of [Seller]'s Defense Evidence Exhibits 15 and 16 as soon as possible.

On 4 September 2006, the arbitration representative of [Buyer] came to CIETAC and examined the original copies of the Evidence Exhibits 15 and 16 submitted by [Seller] and made no objections to the authenticity of this evidence. The original copies were returned to [Seller] by the Secretariat of CIETAC. On 5 September 2006, the Secretariat forwarded to the [Buyer] the "Opinion on Conciliation and the Comments on [Buyer]'s Opinion on Conciliation" submitted by [Seller].

Later, [Seller] submitted "[Seller]'s Attorney's Statement", "[Seller]'s Rebuttal to [Buyer]'s Opinion on the Examination of [Seller]'s Evidence", an "Application for a Second Oral Hearing", and "[Seller]'s Opinion on Conciliation and Comments on [Buyer]'s Opinion on Conciliation;"; while [Buyer] submitted its "Statement of Claim" and "Opinion on the Examination of [Seller]'s Supplementary Defense Evidence." These documents were forwarded to the parties by the Secretariat of CIETAC.

C. Second Hearing

Considering the complexity of the case, after discussion with the Tribunal, the Secretariat of CIETAC decided on 17 October 2006 to schedule a second oral hearing on 25 October 2006.

On 25 October 2006, the second oral hearing was held in Beijing. Representatives of [Buyer] and [Seller] participated. The parties discussed the facts and issues, answered questions of the Arbitral Tribunal, and examined the evidence.

After the second oral hearing, [Buyer] submitted a "Summary of its Statement Opinions" on 31 October 2006 and [Seller] submitted its "Final Statement on the Case" on 1 November 2006. These documents were posted to the parties by the Secretariat of CIETAC.

Later, [Seller] sent a letter to CIETAC on 6 November 2006, and submitted the "Civil Judgment of the Tianjin Higher People's Court" as evidence. After discussion, the Tribunal held that it was too late for [Seller] to submit evidence and materials after the second oral hearing; the Tribunal thus did not accept these documents. On 9 November 2006, the Secretariat of CIETAC informed [Seller] of the above decision.

Since the present case was complicated, through the application of the Tribunal, the Chairman of the CIETAC agreed and decided to extend the time for rendering the final award to 30 June 2007.

This case has finished all of its proceedings. The Arbitral Tribunal, after discussing jointly, based upon the written documents and the facts identified in the oral hearings, handed down its arbitration award.

II. FACTS AND ISSUES

A. Facts

On 16 September 2002, [Buyer] and [Seller] signed their "Type R9001XL Color Concrete Block Production Line Order Contract" (hereinafter the "Contract"). The parties agreed that:

   -    [Seller] sold one Color Concrete Block Production Line, type R9001XL (hereinafter: "Second-Line Device") made by it to [Buyer];
 
   -    The price was set at €2,766,600 in total, FOB main European harbors.

The contract contains provisions addressing the discharge period, payment terms, installation and adjustment, as well as after-sales service.

After the conclusion of the contract, [Seller] performed its obligation of providing the goods, while [Buyer] paid 90% of the contract price according to the contract. However, later the parties had disputes on the installation and adjustment of the device, as well as the payment of the residual 10% of the contract price. They were unable to resolve their disputes through consultations, thus [Buyer] submitted this case for arbitration.

B. [Buyer]'s Statement of Claim

The [Buyer]'s arbitration requests are:

   -    [Seller] should continue performing the contract concluded on 16 September 2002;
 
   -    [Seller] should pay the loss of [Buyer], which is RMB 45,371,057.35 in total;
 
   -    [Seller] should bear all the arbitration costs of the present case.

[Buyer] submitted the following facts and reasons in its "Request for Arbitration" and "Supplementary Statement Opinions" as the basis for its requests:

1. The related agreements in this contract and its attachments

According to Article 9.2 of the contract, in the period of [Seller]'s shipment delivery, if necessary, [Buyer] has the right to request [Seller] to deliver the goods in advance or to delay the delivery as long as [Buyer] informs the [Seller] in a timely manner;

According to Article 12.1, [Seller] has the obligation to guarantee that the production line is of the highest technological level and quality, and due to the requirements of the Technological Process in Attachment 1 of the contract, to make sure to provide totally new high quality spare parts for the production line of the type generally used, so that they are safe, reliable and in accordance with the technological requirements;

According to Article 12.2, [Seller] should, pursuant to the contract attachments, provide the whole set of technical documents and materials that are correct and consistent with the requirements of the design, infrastructure, operation and maintenance of the contract device;

According to Article 12.3, if [Seller] violates Article 12.2 aforementioned and provides wrong technical drawings or materials, [Seller] is obliged to replace the drawings in a timely manner, and to "take the responsibility for free re-manufacture or immediate repayment and bear the risks and costs incurred;"

According to Article 15, if, because of [Seller], the contract cannot be executed, [Buyer] can ask [Seller] to compensate [Buyer] for direct costs (relevant costs incurred in the period of the establishment of [Buyer]'s factory) and indirect costs (the theoretical loss of [Buyer]'s one-year production in single-class according to the current market price);

Pursuant to Attachment 1 of the contract, "Scope of Supply, Technical Functions, Prices in Separate Classifications and Total Price," [Seller] has the obligation to provide "Chinese Operation Interface and Chinese Operation Manual for Forming Machines and its Spare Parts" (for the production line in the contract);

Pursuant to Attachment 2, "Technical Drawings and Documents," [Seller] should provide the agreed technical drawings and documents to [Buyer] four weeks before the contract comes into effect;

Pursuant to Attachment 3, "Installation, Adjustment and Training," [Seller] has the obligation to send experienced technical personnel to install and adjust the contract production line for [Buyer]; During the period of installation and adjustment, [Seller] should provide a work plan for the next week to [Buyer] every week; [Seller] should give technical training to the technical personnel of [Buyer] to make sure that they have mastered the specified techniques during the period of installation and adjustment; If [Seller] cannot finish this duty in a timely manner, [Seller]'s technical personnel should continue staying in the site of [Buyer] until [Seller] has completed this obligation;

Pursuant to Attachment 4, "Device Assessment, Check and Acceptance," [Seller] has the duty to guarantee that the producing ability of the production line in the Contract is in accordance with the output standard agreed in Attachment 4, and to guarantee that the contract production line is consistent with related technical standards in its producing process. Especially, "after the devices have been operated, in the warranty period, [Seller] shall guarantee that all the production devices fulfill the requirements stipulated in Attachment 1 of the contract." In case of any problem that [Buyer] cannot solve, [Seller] "should send its technical personnel to [Buyer]'s factory to solve the problem within two days, who should not leave until the problem has been completely solved;"

Pursuant to Attachment 6, "Payment Method," [Buyer] has the duty to pay the residual 10% of the contract price only under the condition that the following requirements are fulfilled: [Seller] has issued commercial invoices; the parties have signed the Check and Acceptance Certificate for the production line; [Seller] has provided the bank guarantee in amount of 10% of the contract device price (which is equal to the residual amount of the contract price); and [Seller] has issued bank bills of exchange.

2. The parties' performance

After having signed the contract, [Buyer] performed its contractual payment obligation.

However, [Seller] violated Article 12.2 of the contract and Attachment 2, by failing to provide to [Buyer] all the drawings and technical materials needed for the Second-Line Device. Some drawings and technical materials have never been provided by [Seller]. Moreover, the "conservation kiln" roof structure and "conservation kiln frame" design drawings provided by [Seller] were inconsistent with the contract. The acts of [Seller] directly caused the delay of [Buyer]'s civil work, which later led to the delay of installation and adjustment of the device. The acts of the [Seller] constituted a fundamental breach of contract.

Because of [Seller]'s breach of contract requirements to provide drawings and technical materials, [Buyer] could not finish the civil work of the Second-Line Device in the scheduled period. Pursuant to Article 9 of the contract, [Buyer] formally sent a letter to [Seller] to delay the delivery of the goods so that it could avoid the loss resulting from the fact that the goods could not enter into the workshop for installation and adjustment. Nevertheless, [Seller] ignoring the contract and [Buyer]'s reasonable request, still decided to deliver the goods. This act also breached the contract.

Besides, [Seller] neither finished the work of device installation and adjustment in the time specified in the contract and its attachments, nor did [Seller] perform the contract obligation stipulated in Attachment 3 of the contract. The Second-Line Device had a lot of defects in design, technique and quality. [Seller] promised to solve these problems before 31 December 2004, but even up to now it has not yet solved them, which directly caused the stoppage of installation and adjustment. [Seller] ignored the work of installation and adjustment, as well as the requirements of the contract, unilaterally cancelled the after-sales service, and refused to provide spare parts support without any reasonable reasons -- all of these acts constituted a fundamental breach of the contract.

[Seller]'s breach of contract aforementioned not only caused the stoppage of installation and adjustment for the Second-Line Device, but also obstructed the scheduled formal check and acceptance process of the device. [Seller]'s acts caused the failure of the [Buyer]'s Second-Line Device to formally enter into production even up to now, resulting in the [Buyer]'s failure to recoup the substantial investment spent on the Second-Line Device. Consequently, the [Buyer]'s foreseeable contract purposes and the normal business benefits that [Buyer] relied upon when entering into the present contract cannot be achieved any longer.

3. [Seller] should compensate the loss of [Buyer]

[Seller]'s violation of the contract, failing to provide all of the drawings agreed in the contract (and part of the drawings have not been provided even until now), has caused the [Buyer]'s civil work, particularly the workshop civil work, to be severely delayed. The [Seller] should be held responsible for this loss.

[Seller] did not perform the obligation of installing and adjusting the device under the contract, which caused the stoppage of the formal check and acceptance process of the device, and directly caused [Buyer] to fail to enter into normal production within the scheduled time. Therefore, the extra-processing cost paid by [Buyer] in order to perform the signed contract, as well as the loss resulting from [Buyer]'s compensation to its clients for failing to perform the contract, should be paid by [Seller].

[Seller] did not perform the obligation of repair and warranty, thus [Buyer] had to maintain the device itself, the costs resulting from which should be paid by [Seller].

Because of [Seller]'s breach of contract, the Second-Line Device cannot be checked and accepted, nor formally entered into production, thereby, [Buyer] had the loss of working time. Meanwhile, [Buyer] still paid the water, electricity and employees for the Second-Line Device during this period, and the fixed assets investment spent on the Second-Line Device by [Buyer] became idle funds, which led to the loss of occupying idle funds. These aforementioned losses should also be paid by [Seller].

Since the device provided by [Seller] had serious defects in technique, design and quality, the device could not achieve the production capacity standard stipulated in the contract. Therefore, compared to the normal production capacity that the device should have had, [Buyer] will undoubtedly suffer a loss of profits, which should be borne by the [Seller].

In addition, the attorneys' fee spent on this case by [Buyer] should be paid by [Seller]. The reduction of the contract price that has already been accepted by [Seller] should also be borne by [Seller].

C. [Seller]'s Statement of Defense and Supplementary Statement of Defense

[Seller]'s responses to [Buyer]'s arbitration requests in [Seller]'s Statement of Defense and Supplementary Statement of Defense are as follows:

1. [Seller] has already performed all of its obligations under the contract

After having signed the contract, [Seller] delivered a qualified Second-Line Device to [Buyer] as agreed, and completed the process of installation and adjustment, assessment, check and acceptance, training and after-sales service of the device. The production line has already commenced its regular production and its products are in extensive sales in the market. Thereby, there is no factual and legal basis for [Buyer] to ask [Seller] to continue performing the contract.

2. Because of [Buyer], the Second-Line Device failed to complete the process of installation and adjustment in the scheduled time; [Seller] should not be held responsible for this

After having delivered the Second-Line Device, [Seller] immediately took the initiative action to get to know the progress of the installation and preparation process, reminded [Buyer] of the scope of the installation and preparation work and provided some guidance accordingly, expressing that it would send its technical personnel to the installation place at any time. But until 22 May 2003, the installation and preparation process that [Buyer] was responsible for had not yet been completed.

Pursuant to Attachment 3 of the present contract, the installation and adjustment period of the Second-Line Device under normal condition should be four months. The installation work of the Second-Line Device was started on 16 June 2003. Because the [Buyer] did not complete the relevant preparation work in a timely manner and made many errors in this work, the installation and adjustment could not longer be finished within four months.

      1) The workshop plants and device civil work foundation could not be completed in a timely manner, which directly affected the process of installation and adjustment.

[Buyer]'s place to settle the Second-Line Device was a newly-built plant. Until the end of 2003, the ground and roof of the plant had not yet been finished. Before the commencement of installation and adjustment work, [Buyer] had only finished the concrete pouring for part of the ground of the workshop plants. This led to a cross-operating situation, which meant constructing the workshop plant while installing the device at the same time. The fact that the roof of the plant was not completed indicates that there was no place to hang the cables of the device, which made the electrical installation failed to commence, and the safety of the device became questionable. Especially, when encountering raining or snowy weather, the installation of the device entirely could not be normally carried out.

Until 28 October 2003, [Buyer] had not completed the conservation kiln roof; till 18 August 2003, the conveyor foundation for finished products had not been finished; till 27 August 2003, the foundation for the conservation kiln track had not yet been finished. Besides, the errors in workshop ground foundation and column foundation directly afftected the process of the installation of the device.

      2) Devices prepared by [Buyer] itself were not timely prepared and had numerous defects, which led to re-manufacture, adjustment, and a big delay of the work time, affecting the progress of installation and adjustment.

On 18 August 2003, [Seller] found the conservation kiln tracks provided by [Buyer] unqualified, but [Buyer] insisted on most of the tracks, which forced the [Seller] to spend a lot of extra working time in installing, adjusting, and fixing. On 8 August 2003, pallet storehouse tracks and brackets had not yet been finished, while the tracks were inconsistent with the standards provided by [Seller], and the aggregate warehouse platform was wrongly made. On 13 October 2003, the loading hopper of the forming machine had not yet been completed. On 10 November 2003 and 14 January 2004, [Buyer] still had not finished lots of work. Besides, the mistakes in transport trailers, gas and water pipelines, and loading tracks of the big mixer caused by [Buyer] itself, greatly affected the progress of the installation process of the device.

      3) [Buyer] did not timely prepare the infrastructures, such as water, electricity, gas and oil, affecting the installation and adjustment of the device.

On 28 October 2003, the main electricity power supply passing through the installation place that should be prepared by [Buyer] had not yet been solved, the compressed air system had not been installed, the urgently-needed hydraulic oil had not been well-prepared, and the cooling water had not been prepared, either. On 22 October 2003, [Seller] pointed out to [Buyer] that the installation place of the Second-Line Device lacked water and electricity supply, thus it was not qualified to install the device.

      4) [Buyer] did not prepare qualified staff who could cooperate with [Seller], which affected the communication and progress of the installation and adjustment process.

Article 7.14 of Attachment 3 of the contract stipulates that, [Buyer] should provide qualified interpreters to solve the language problem, meanwhile, it states clearly that the device operators should have good English or German writing and speaking skills with high technical proficiency. As a matter of fact, during installation progress, [Buyer] neither provided interpreters in a timely manner, nor prepared qualified technical personnel. In addition, the technical personnel changed frequently, which was one of the main reasons for the delay of installation and adjustment.

The above facts demonstrate clearly that it was [Buyer] that caused the delay of installation and adjustment, even after [Seller] having held installation meetings regularly and had sent several letters to [Buyer] to point out the problems, these problems still could not obtain a timely solution, which delayed the installation and adjustment period further. [Seller], according to Article 7 of Contract Attachment 3, kept on staying at the place of [Buyer] until having finished the Second-Line Device. The delay caused by [Buyer] made [Seller] expend a large amount of extra labor cost. Under this condition, it makes no sense for [Buyer] to ask for compensation from [Seller].

3. [Seller] did not delay the delivery of the drawings, and did not have any effects on [Buyer]'s civil work

[Buyer] has alleged that [Seller] delayed providing the drawings, but actually [Seller] delivered over 90% of the drawings to [Buyer] within the time request under the contract, including all of the drawings needed for civil work. The reason why part of the drawings could not be provided on time was that [Buyer] continually requested to change the design. For instance, on 2 November 2002, [Buyer] faxed to [Seller]: "Considering the waterproof issue, we are supposed to replace the roof layout faxed to you last time with the present one, please confirm to us whether it is feasible." On 25 December 2003, [Buyer] faxed to [Seller] concerning "The Issue on Device Removal": "since the civil work foundation clashed with the device foundation, we request to remove the devices marked in the figure (aggregate warehouse, mixing system and cement warehouse) 800mm west overall". On 30 December 2002, [Seller] replied to [Buyer] by fax; [Buyer] received all of the drawings on time, but because of [Buyer]'s changes, [Seller] sent new drawings of the conservation kiln trestle. By the way, on 25 December, [Seller] received [Buyer]'s fax concerning removing the loading devices and mixing devices 800mm west overall. It was not [Seller]'s fault that the infrastructures had not been completely prepared. The aforementioned facts indicate that [Seller] had already performed the obligation of delivering the drawings to [Buyer]. [Seller]'s acts did not constitute a fundamental breach of the contract.

4. The Second-Line Device does not have design, technique and quality defects

[Buyer] has alleged that "the Second-Line Device has defects in design, technique and quality." This is inconsistent with the facts, and until now, [Buyer] has not provided any legal and effective evidence to prove its allegation. The fact is: [Seller] has provided sufficient evidence to prove that the Second-Line Device has entered into production formally; the products made by it have been sold to and used by various clients. The evidence submitted by [Buyer] in order to prove its claim, only contains the so-called "twenty problems" sent by [Buyer] to [Seller]. [Seller] had already answered the "twenty problems" responsibly and clearly. The "twenty problems" are actually device operation problems having to do with its production, which is totally irrelevant to the design, technique and quality of the Second-Line Device. Article 12.6 of the contract states that [Buyer] should use the certificate issued by Tianjin Quality Supervision, Inspection and Quarantine Bureau as evidence for requests for compensation on quality defects. [Buyer] has never made any quality objections to [Seller] pursuant to the contract from the time it received the device delivered by [Seller], thus failed to provide the evidence to support its compensation claim.

5. The Second-Line Device has already passed the check and acceptance test made by the parties and entered into regular production

      1) [Buyer] and [Seller] had completed the check and acceptance process of the Second-Line Device according to Attachment 4 of the contract.

Under circumstances in which the parties had inspected and accepted the Second-Line Device, and the device had entered into production, in order to avoid its obligation to pay the residual price of the contract, [Buyer] continually raised problems, refusing to sign the check and acceptance report. On 6 August 2004, [Buyer] stated 20 problems with the Second-Line Device as the reason for refusing the check and acceptance progress.

Concerning the check and acceptance standards of the Second-Line Device, the parties only rule on them in Attachment 4 of the contract. According to this Attachment, after finishing the adjustment of the device, the tests of the single machine and the whole production line should commence. After completing the tests of all the functional materials on the whole production line, the tests of four kinds of products will begin. Attachment 4 also stipulates the output for each sort of product per hour and their technical parameters. In [Buyer]'s written documents sent to [Seller] after 28 April 2004, [Buyer] intentionally denied the fact that the four products it recognized had finished and passed the tests. [Buyer] ignored the check and acceptance work contents agreed in Attachment 4, insisted on finding peripheral technical problems that could not affect the production of the Second-Line Device so as to reject [Seller]'s request for signing the check and acceptance report and finally achieve its purpose of not paying the residual contract payment.

      2) The Second-Line Device had already passed the check and acceptance test in March 2004.

Based upon principles of overcoming difficulties and pursuing the utmost interests of clients, under the condition of constructing and installing at the same time, [Seller] provided comprehensive guidance to [Buyer]'s installation preparation, corrected and adjusted the errors of [Buyer]. The [Seller]'s technical personnel seized every moment to install the device, and finally finished the installation work in the middle of January 2004.

[Buyer] and [Seller] tested the functions of the four products agreed in the contract in March 2004. Later, [Buyer] confirmed that the test of hollow block had been successfully finished on 29 March 2004; the reason why the test of the road-edge block was not successful was that the molds provided by [Buyer] wore severely.

      3) [Buyer] temporarily changed the species of the products and the standards of check and acceptance; the responsibility of the later re-check should be taken by [Buyer].

[Buyer] modified Attachment 4 of the contract on 30 March 2004, making a new check and acceptance clause and changing the product categories as well as the technical standards. Considering the unpaid balance and in the spirit of mutual cooperation, [Seller] had to accept these changes, but it also stated that it could not guarantee the qualification of these products after these changes. Even under this condition, [Seller] still had finished the check and acceptance tests of the four products before 28 April 2004, the result of which was confirmed by the parties in the written form. According to the check and acceptance standards in the contract, once the four products have passed the tests, all the functions of the whole Second-Line Device can be deemed as having passed the check and acceptance test.

All of the above facts and evidence explicate that, the Second-Line Device provided by [Seller] had already completed the check and acceptance test on 28 April 2004. [Buyer] had confirmed this fact by its signature. Thus, there never exists the fact alleged by [Buyer] that the device could not pass the check and acceptance test.

6. Whether to continue with the installation and adjustment is not the issue of this case. The purpose that [Buyer] refused to sign the Check and Acceptance Certificate was to refuse the residual payment of the contract

      1) The Second-Line Device has already commenced its production, with its products sold to and used by the [Buyer]'s clients. From the industry, device and product feature perspectives, the materials used in the adjustment of the Second-Line Device and the products made by it are entirely the same with the materials used in formal production and the formal products, thus there is no difference between the trial products and the formal products. Actually, since May 2004, [Buyer] has produced qualified products by using the device in disputes. The evidence submitted by [Buyer] indicates that, until 31 December 2005, [Buyer] had produced over 840,000 square meters of concrete blocks by using the Second-Line Device. The evidence submitted by [Seller] when it filed this case with the Tianjin First Intermediate People's Court, can also explain that the device has entered into production. Besides, [Seller] has found that the products made by the Second-Line Device have entered into the market, and been actually used in the construction of certain places such as the Tianjin South Road, University of Science and Technology.

      2) The problems mentioned by [Buyer] on 6 August 2004 are possible to occur in the operation of the device, not those problems existing in the period of installation and adjustment. This kind of problems should be settled in various ways. [Buyer] has no right to refuse the payment and ask for compensation based upon these problems.

From the problems raised by [Buyer] and the reply given by [Seller], one can clearly see that the problems, which include errors, vibrations, noises, wears and tears, drips, etc., are something that would happen once the device operates regularly. Since the Second-Line Device has already passed the check and acceptance test and [Buyer] has used it for production, these problems mentioned by [Buyer] are not the problems that should be solved in the period of installation and adjustment, and these problems can never have fundamental impacts on the regular production. In addition, [Seller] took active steps to solve the various problems mentioned by [Buyer] in the operation of the device.

Pursuant to Attachment 5 of the contract, the quality guarantee period was due on 28 April 2005. The fact that [Buyer] unreasonably refused to sign the Check and Acceptance Certificate and pay the contract payment breached the contract seriously. Hence [Buyer] should be held liable to [Seller] for its breach of contract.

7. It is incompatible with the facts and has no legal basis for [Buyer] to allege that "[Seller] fundamentally breached the contract"

According to the CISG, or pursuant to the law of China, "a fundamental breach" refers to the situation that the obligor violates the main obligations of the contract so that the purposes of the contract cannot be achieved. Article 94 of the PRC's Contract Law stipulates the specific conditions under which the parties can avoid the contract. These conditions can be interpreted as follows: because of the breach of contract, the loss is serious; the purposes of the contract failed or became unexpected, which are actually fundamental breaches. However, the fact is that [Seller] delivered the goods to [Buyer] in accordance with the contract, [Buyer] never mentioned any quality defects to [Seller], [Buyer] has been using the Second-Line Device provided by [Seller] to produce products, and the products have been sold in the market and used by the [Buyer]'s clients.

Besides, Article 15.1 of the contract defines the "fundamental breach" as "unable to execute the contract". The contract clearly separates "fundamentally unable to perform the contract" (which is "unable to execute the contract" in the Chinese version of the contract) and "stay to execute the contract" respectively in Article 15.1 and Article 15.2, which reflects that the contract treats "unable to perform the contract" as a different act from "stay to execute the contract." In the present case, [Seller] had actually delivered the Second-Line Device agreed in the contract, and this device had finished its installation and entered into production. Thus, neither in sense of facts nor in sense of legal rulings or the contractual agreements, is there a basis to draw the conclusion that the [Seller] comitted a fundamental breach of the contract in the dispute arising from the contract performance by the parties.

8. There is no factual and legal basis for the huge amount of compensation requested by [Buyer]; the Tribunal should dismiss this request

In order to avoid paying the residual € 277,600, [Buyer] sued in Tianjin First Intermediate People's Court in August 2005, requesting [Seller] to compensate its alleged loss of RMB 7,850,000. Later, since there was an arbitration clause in the contract, [Buyer] submitted its claim for arbitration. Although the facts and reasons alleged in the Request for Arbitration were the same as those in the Complaints of Plaintiff [Buyer], the [Buyer] increased the compensation amount to RMB 45,370,000. The compensation [Buyer] asked for is only calculated unilaterally by [Buyer] itself, lacking both factual and legal bases.

In Attachment 4 of the contract, the parties only agree to recognize the output of the Second-Line Device per hour as the check and acceptance standard of the device. Apart from that, the contract neither stipulates the Second-Line Device's output of running eight hours continually, nor sets any other clauses concerning the output requirement. The yearly output or monthly output calculated by [Buyer] has no contractual basis.

The [Buyer] calculated the difference between the three-class output under the 85% productive condition with that is actually produced as the loss of profits for its compensation claim. However, such calculation lacks legal basis. Whether the Second-Line Device, which has passed the check and acceptance test, runs and reaches a certain output standard, is affected by various factors such as market demands. [Seller] does not have any legal obligation to be responsible for the output of the Second-Line Device used by [Buyer].

D. [Seller]'s Counterclaim

[Seller] submits the following counterclaim.

Requesting the Tribunal to make an award that:

   -    [Buyer] shall immediately pay to [Seller] the € 276,600 contract price of the Second-Line Device;
 
   -    [Buyer] shall pay the overdue interest until the date when the actual payment is made (it is € 44,256 to the date of the commencement of [Seller]'s counterclaim);
 
   -    [Buyer] shall undertake all of the arbitration fees for the counterclaim.

[Seller] submits the following facts and reasons in support of its counterclaim:

[Seller] and [Buyer] signed their contract on 16 September 2002, agreeing that [Buyer] purchased one Type R9001XL Color Concrete Block Production Line (namely the "Second-Line Device") from [Seller]; the contract price was €2,766,000 in total.

After having signed the Second-Line Device contract, [Seller] performed its obligations under the contract positively, and provided a number of extra supports to [Buyer] with the utmost good faith so as to make sure the Second-Line Device would operate well and efficiently. Nevertheless, after having paid 90% of the contract price, [Buyer] refused to sign the Check and Acceptance Certificate and refused to make the residual payment of the contract price by various excuses, which constitutes a breach of the contract.

According to the contract and relevant legal regulations, the importance of testing the Second-Line Device and signing the Check and Acceptance Certificate is the same as that of making the payment. It also constitutes the primary obligation under the contract. The check and acceptance process is clearly stipulated in Attachment 4. The "Memorandum of the Meeting between [Buyer] and [Seller]" confirmed by [Buyer] and other documents indicate that the Second-Line Device has already passed the check and acceptance test. In addition, [Buyer] has used the Second-Line Device in large-scale production and sold products widely in the market ever since May 2004.Therefore, the Second-Line Device is completely in good condition. [Seller] requested [Buyer] to pay the residual contract payment several times and promised to offer a certain discount if [Buyer] paid in a timely manner. However, [Buyer] still refuses to sign the Check and Acceptance Certificate and perform its obligation of payment till now. It is the [Seller]'s position that, the fact that the Second-Line Device has passed the check and acceptance test and being used in production in itself should be deemed as that [Buyer] has signed the Check and Acceptance Certificate.

Although Attachment 6 of the contract treats [Seller]'s submission of the bank guarantee letter as a prerequisite to making the residual contract payment, the purpose of issuing the bank guarantee letter is to make sure that after [Buyer] pays the residual payment, it can obtain the quality warranty service provided by [Seller] during the warranty period. According to Attachment 5 of the contract, "the warranty period of the production line is twelve months and starts from the time of check and acceptance." In May 2005, the warranty period of the Second-Line Device was due. [Seller] provided warranty service during the warranty period as stipulated by the contract even without the [Buyer]'s payment of residual balance. Therefore, there is no necessity to issue the bank guarantee letter.

To conclude, it is the [Seller]'s position that it has already comprehensively performed its contractual obligations, and fulfilled the requirements for asking [Buyer] to pay the residual payment stipulated in Attachment 6. [Buyer]'s refusal to pay the residual contract payment to [Seller] has already constituted a breach of contract and thus has brought a large economic loss to [Seller]. Therefore, [Seller] submits its counterclaim and requests the Tribunal to ascertain the facts, and order the [Buyer] to immediately pay the [Seller] € 276,600 as the residual balance and to pay overdue interest until the date when the payment is actually made. Only this can protect the legitimate interest of the [Seller].

E. [Buyer]'s Statement of Defense to [Seller]'s Counterclaim

[Buyer] submits the following statement of defense to [Seller]'s counterclaim:

1. [Seller] foundamentally breached the contract and lost the right to ask for the residual balance

In the proceedings of [Buyer]'s arbitration claim, [Buyer] has submitted sufficient evidence to prove that [Seller] fundamentally breached the contract and caused serious economic loss to [Buyer]. [Buyer] has requested the Arbitral Tribunal to require [Seller] to provide compensation; hence [Seller] should not ask [Buyer] to make the 10% residual contract payment.

2. The counterclaim submitted by [Seller] lacks factual basis and violates the contract

Regardless of the evidence submitted by [Buyer] and the issue of whether [Buyer] breached the contract and should be held liable -- only taking the contract into consideration, Article II, paragraph (B) of Attachment 6 of the contract, "Payment Methods", states clearly:

"[Buyer] should immediately pay the 10% contract price to [Seller], which is € 276,600,00 (the original context, the Tribunal notes), within 14 days once it receives the following documents provided by [Seller]:

-  1) Four original copies of commercial invoices;

-  2) One original copy of Check and Acceptance Certificate signed by the parties;

-  3) A bank guarantee in the amount of 10% of the contract price;

-  4) Two bills of exchange."

Up to the present, since the Second-Line Device has not been formally checked and accepted , and [Seller] has not provided the bank guarantee for the residual balance, [Seller]'s request to [Buyer] to pay the residual amount lacks factual basis and violates the contract.

3. [Seller] did not fulfill the requirements for requesting the residual payment of the contract

In any event, under the condition that [Seller] should fulfill its obligations first -- only when [Seller] finishes performing all of its contract obligations, can it have the right to ask [Buyer] to perform the last obligation of paying the residual amount. According to the evidence submitted by [Buyer], since [Seller] did not fulfill the obligations of timely and completely providing the drawings and technical materials, providing warranty service and installing and adjusting the device, it has lost the right to ask [Buyer] to make the residual contract payment.

F. [Buyer]'s Supplementary Opinion

After the first oral hearing, the Supplementary Opinions submitted by [Buyer] are as follows:

1. [Seller]'s obligations under the contract and its attachments

Pursuant to Article 11 of the contract, [Seller] has the obligation to submit to [Buyer] the Assessment Report of the Second-Line Device. Pursuant to Article 12.1 of the contract, [Seller] has the obligation to provide a quality warranty of the Second-Line Device. Pursuant to Article 12.2 and Article 12.3, [Seller] has the obligation to provide to [Buyer] complete and correct drawings and technical materials in a timely manner.

According to Attachment 3 of the contract, "Installation, Adjustment, and Training", and "The Total Price List of the Device" in Attachment 1, "Scope of Supply, Technical Functions, Prices in Separate Classifications and Total Price", [Seller] should finish the installation and adjustment of the Second-Line Device, and has the obligation of training the [Buyer]'s staff. According to Attachment 4, "Device Assessment, Check and Acceptance", [Seller] should guarantee that the Second-Line Device can pass the check and acceptance test. And according to Article 5 of Attachment 4, [Seller] should make sure that the Second-Line project can enter into production within four months after it is delivered to [Buyer] (after installation and adjustment.).

2. [Seller] severely breached the contract and should be held liable and undertake compensation

      1) [Seller] did not perform the obligation of submitting the Assessment Report to [Buyer].

      2) [Seller] provided drawings and technical materials that were incompatible with the contract.

First of all, [Seller] delayed in providing the drawings and technical materials.

[Seller] alleges that, until the end of October 2002, [Seller] had delivered 90% of the drawings. Concede this statement is true, it still proves the fact that [Seller] delayed delivering the drawings, not to mention that [Seller]'s statement on whether [Seller] delivered the alleged 90% drawings in a timely manner merely based upon its own explanation, without any supporting evidence (including the confirmation of [Buyer]). Actually, most of the evidence submitted by [Buyer], including Evidence Exhibit 3, is direct evidence, which shows that [Buyer] continually asked [Seller] to deliver the drawings and materials as soon as possible from the agreed day of delivery, yet the [Seller] never performed this obligation. Even up to the present, parts of the drawings and technical materials have not yet been delivered to [Buyer].

Second, the drawings and technical materials provided by the [Seller] contain errors.

The evidence submitted by [Buyer] and confirmed by [Seller] shows that, since the layout design of the drawings provided by [Seller] was inconsistent with the actual demand of the Second-Line Project, especially the errors in the foundation drawings and the data of load could not meet the standard of design and construction, thus causing the device foundation to offset with each other. Inevitably, [Buyer] was forced to horizontally shift the foundation of the Second-Line Device. In order to finish the final installation, [Seller] should modify part of the wrong drawings. To save time, the [Buyer] had to give up its right to require the [Seller] to load safety coefficients on the new design when requesting the [Seller] to re-design. It was the [Seller] that delayed the progress of the foundation project of the Second-Line Device and affected the whole project that shall be held responsible.

The "Summary of Talks with the [Seller]" dated 19 December 2002 submitted by [Buyer], and the "Existing Unsolved Problems of the Second-Line Device of [Buyer]'s Building Materials" provided by [Seller] as its Evidence Exhibit 50 both prove that the conservation kiln drawings provided by [Seller] in delay were incompatible with the contract, and that the conservation kiln trestle in the drawing could not connect and be fixed with the conservation kiln roof, which stopped the progress of the conservation kiln project. Since the conservation kiln was the most critical part of the Second-Line Project, the other constructions could not proceed unless the problems in the conservation kiln drawing were solved. The errors in the conservation kiln part would directly put the whole constructions of the workshop at a standstill. In order to save time on civil work, [Buyer] even asked [Seller] not to take the foundation safety coefficients into consideration when re-designing the drawings, and had to request the civil work builders to re-design the drawings during its progress. [Seller]'s acts directly caused a serious delay of the civil work, installation and adjustment work of the Second-Line Project.

Third, even until now, [Seller] failed to provide part of the drawings and technical materials, including "Maintenance Guidelines of the Great Mixers", "Maintenance Guidelines of Forming Machines" and the Chinese Operation Interface of the Second-Line Device. [Seller]'s acts not only caused the Second-Line Project to fail to complete its installation and adjustment process, but also fiercely affected [Buyer]'s normal operationof the Second-Line Device.

      3) [Seller] did not complete the obligation of installing and adjusting, and did not make the Second-Line Project pass the formal check and acceptance test.

      According to Evidence Exhibit 50 submitted by [Seller], the Second-Line Project at least has remained the "Route Horizontal Balers' Function Test", "Split Line Device Test", "Remote Problem Diagnosis System Test", "Buried-Chain Flat Trailer System Function Test" and "Three-Color Fabric System Full-body Tile Test in Article 24 of Attachment 1 of the Contract" unsolved. Besides, [Seller] ignored Attachment 3 of the contract, leaving the installation place unilaterally with the work unfinished, which caused the complete stoppage of the installation and adjustment process of the Second-Line Project until now.

Pursuant to Attachment 1, in the contract price [Buyer] paid to [Seller], 13.3% was allocated to the cost of installation and adjustment, which demonstrates that the relationship between [Buyer] and [Seller] cannot only be treated as a simple sales contractual relationship, the work of installing and adjusting is an important contractual obligation that [Seller] must fulfill.

Evidence Exhibit 51 in [Seller]'s Supplementary Statement of Defense shows that: "[Buyer] agrees to sign the Assessment Report within five working days after [Seller] solves the remaining problems." According to this content, [Seller]'s acceptance of final assessment in July 2005 took effect only after the [Buyer] completed the installation and adjustment, and solved all remaining problems. But until now, since [Seller] not only has not finished its obligation to complete the installation and adjustment, but also cannot solve the remaining problems and new problems incurring, hence the Second-Line Project fundamentally fails to fulfill the prerequisite of check and acceptance, and [Buyer] cannot commence its formal production.

      4) [Seller] did not fulfill the obligation of providing training under the contract.

      5) [Seller] breached the quality warranty obligation that delivered device with severe quality and technical defects.

      [Seller] also admits that the Second-Line Device still has a number of "remaining quality and technique problems." These quality and technical defects are one of the fundamental reasons why the Second-Line Project cannot reach the requirements of output, production capacity, quality and technical standards under the contract. It shall be emphasized that the failure to meet the output standard under the contract becomes a significant basis for [Buyer]'s belief that [Seller] has breached the quality warranty obligation and that the Second-Line Device has serious quality and technical defects, rather than the fact of whether the Second-Line Device can produce related products.

According to Attachment 4 of the contract, "Device Assessment, Check and Acceptance", the output of the color blocks made by the Second-Line Device should reach: 244.8 /hourΧ20 hours/day (double-class) Χ 25 days/month Χ 12 months/year Χ 85 1248480 /year. According to the output published on [Seller]'s website, the yearly output of the ordinary block of the First-Line Device, which should be lower than the output of the Second-Line Device, should reach 1200000 (double-class, 300 days/year, namely 25 days/month Χ 12 months/year). As a matter of fact, the actual output of the Second-Line Project from May 2004 to December 2004, eight months in total, double-class (which means 24 hours) produced, was only 345700. The actual output of 2005 in double-class was merely 501900 (cf. Auditing Report in Separate Classifications of [Buyer]'s Evidence Exhibit 4). Through the above comparison, it is not difficult to draw the conclusion that the actual output of the Second-Line Device is no more than a third of the output agreed in the contract and the output publicly promised by [Seller].

Based upon the above facts, it is reasonable for the [Buyer] to believe that the production capacity of the Second-Line Device provided by [Seller] is considerably lower than the output standard agreed in the contract. [Seller] did not fulfill the obligation of device quality warranty.

      6) [Seller] unilaterally terminated the technical service and stopped providing spare parts for the device. Although it was [Seller]'s obligation to provide the spare parts without any charge, [Buyer] once compromised to pay for them in order to solve the problems with the device, however, the [Seller] refused again, which left the device idle.

Based upon the above facts, [Buyer] submits that [Seller] seriously breached its contract obligations in providing drawings and technical materials, staff training, device installation and adjustment, technical service and quality warranty. [Seller] should be held liable for its breach of contract and undertake the compensation.

3. The Tribunal should support [Buyer]'s requests since [Buyer]'s reason and amount of the compensation are factually and legally justified.      

      1) The direct economic loss caused by [Seller]'s breach of contract

      Since [Seller] wrongly provided the drawings, which caused the delay of civil work of the conservation kiln of the Second-Line Project, [Buyer] paid RMB 250,000.00 to the builders of the civil work as compensation, which should be borne by [Seller].

Because [Seller] delayed providing the drawings and technical materials, and could not complete the work of installation and adjustment, the Second-Line Device could not commence its production. In order to fulfill the delivery obligation under contracts signed by [Buyer] with other parties, [Buyer] had to make an extra-processing, the delivery loss and profit loss resulting from which was RMB 3,424,294.98. This amount should be borne by [Seller].

For the same reason aforementioned, the Second-Line Device could not enter into production in a timely manner and [Buyer] could not perform the delivery obligations in the contracts it signed with other parties. [Buyer] had to compensate the other parties of RMB 255,000.00, which should be borne by the [Seller].

In the period of installation and adjustment, [Seller] did not perform the obligation of maintenance and repair. As a result, the [Buyer] had to spend RMB 547,516.60 for maintenance. In addition, since the Second-Line Device could not commence its production, the payments for labor cost of the delayed time period, water and electricity fees were RMB 779,244.13, and the loss of profits which equal to the occupied investment was RMB 2,416,205.29.

[Seller] should compensate the above direct economic loss, RMB 7,672,261.00 in total.

      2) The loss of delay and loss of profits resulted from [Seller]'s breach of contract

      According to Article 5 of Attachment 3 of the contract, [Seller] should complete the manufacture of the Second-Line Device within four months after the contract comes into effect (from 20 September 2002 to 19 January 2003), deliver the Second-Line Device within one month (from 20 January 2003 to 19 February 2003), and finish the installation and adjustment of the Second-Line Device within four months after the delivery (from 20 February 2003 to 19 June 2003).

Based upon the above agreements, the parties should finish the work of installation, and adjustment, check and acceptance before 19 June 2003, and starts the formal production of the Second-Line Project immediately. As a matter of fact, under the situation that the work of adjustment and production proceeded at the same time, the Second-Line Project has begun its trial production from June 2004 to present. Therefore, [Buyer] actually suffered losses as follows:

            a) The loss of delay with no yield

            From 20 June 2003 to 1 May 2004, since the Second-Line Device had just finished the installing, the adjustment work had not yet been completed, it could not enter into production within the scheduled time under the contract (19 June 2003), thus the loss of delay consists of:

      -    The loss of delay from 1 July 2003 (the time for completing the installation and adjustment work agreed in the contract is 19 June 2004) to 31 December 2003, which is RMB 18,641,600; and
 
      -    The loss of delay from 1 January 2004 to 30 April 2004 (calculated from [Seller]'s claims dated in May 2004), which is RMB 8,442,600.

            b) The loss of profits for not reaching the output standard

            From 1 May 2004, the day the Second-Line Device commenced its trial production, to the present, the Second-Line Device cannot reach the output standard agreed in the contract. The loss of profits includes:

      -    The loss of profits from 1 May 2004 to 31 December 2004, which is RMB 12,197,300; and
 
      -    The loss of profits from 1 January 2005 to 31 December 2005, which is RMB 16,685,500.

The [Seller] should bear the total amount of loss of profits, RMB 55,967,000.

Concerning the actual amount of the compensation, [Buyer] still insists on the amount it submitted in its Request for Arbitration.

      3) [Seller] should also pay the attorneys' fees that the [Buyer] spent on advocating its claims.

G. [Seller]'s Supplementary Opinion

After the first oral hearing, the written opinions submitted by [Seller] were as follows:

1. It was [Buyer] that caused the delay of the civil work, and it is irrelevant to attribute the delay of the project to [Seller]'s delay in providing certain drawings

      1) The fundamental reason for the delay of the civil work was that [Buyer] changed the drawings again after it had confirmed the Production Layout Drawing and after the deadline for providing the drawings.

      [Buyer] and [Seller] had frequent and close negotiations on the layout design of the production line before they signed the contract, and [Buyer] had confirmed and accepted the layout design with its signature in the contract. This fact sufficiently rebuts the statement that [Seller] made design errors and the drawings were inconsistent with designing principles, which were raised by the [Buyer] from time to time

After [Buyer] had confirmed the layout design drawings of the production line and after [Seller] had delivered all of the device foundation drawings, [Buyer] made numerous changes. For example, on 29 October 2002 and 2 November 2002, [Buyer] asked [Seller] to change the roof structure of the Second-Line workshops and plants. On 30 October 2002, [Buyer] requested at least eight changes to the layout design of the production line when it met with [Seller], while at that time, [Seller] had delivered all the device foundation drawings and had already begun manufacturing the device. On 25 December 2002, [Buyer] stated that since the civil work foundation and the device foundation clashed with each other, it suggested shifting the devices 800mm west overall.

It was because of [Buyer]'s own demand for the civil work design that [Buyer] negotiated with [Seller] on the changes of the design, rather than due to [Seller]'s design errors as alleged by [Buyer]. It is unarguable that [Buyer] had already accepted the device layout drawings. The fact that the civil work design was incompatible with building design principles is irrelevant with [Seller]'s layout design. In case of any inconsistency, it is the obligation of the [Buyer] as a local Chinese enterprise to inform the [Seller] of relevant rulings and principles.

When the [Seller]'s manufacture of the device was almost finished and [Seller] was about to arrange delivery, three months after the contract became valid, [Buyer] again made numerous changes. It was the fact that [Buyer] delayed arranging its own civil work that made the civil work design fail to complete. [Buyer] has no reason to attribute the failure to [Seller].

      2) According to the contract, it is [Buyer]'s obligation to finish all of the civil work while the [Seller] had no such obligation except for providing drawings of foundation of the device. The time for [Seller] to begin the installation was within twenty days after receiving the notice that [Buyer] has reached the installation requirements. Actually, [Buyer]'s civil work was delayed again and again. Until on 16 June 2003 when the device installation was started, the ground pouring of [Buyer]'s work shops had not yet been finished. [Seller] began installing based upon the principle of friendly cooperation. [Buyer] mentioned the issue of the conservation kiln several times in the arbitration, however, from the letter sent to [Seller] by [Buyer] on 21 May 2003, it can be seen that the foundation of the conservation kiln was completed first and the installation of the conservation kiln also began first.

      3) [Seller] delivered to the [Buyer] more than 90% of the drawings, including all of the device foundation drawings within the required time period with no objection.

      The contract came into effect on 20 September 2002, [Seller] made all drawings of foundation based on the Device Layout Design drawing confirmed by the parties when signing the contract, and sent them to [Buyer] on 18 October 2002 by Federal Express. From the time of signing the contract till now, [Buyer] never informed [Seller] of the lack of drawings of foundation, and the evidence submitted to the Tribunal by [Buyer] does not involve the late delivery of those drawings.       

      4) Some drawings delivered late were not drawings of the foundation, thus had no impact on the progress of civil work.

      [Buyer] sent a letter to [Seller] on 28 October 2002, asking [Seller] to provide five drawings and one technical requirement, which involved Pigment Pocket Size Drawing, Pigment Warehouse Manufacturing Drawing, the Technical Requirement for Flat Trailer, Scrap Hopper Drawing, Conservation Kiln Trestle Drawing, and Aggregate Warehouse Manufacturing Drawing. These drawings are pictures of certain components, or pictures of some little tiny devices, which are irrelevant to [Buyer]'s civil work foundation.

2. It was [Buyer] that caused the delay of device installation and adjustment

      1) Either in the contractual and factual aspects or from the perspective of general practices and principles, [Buyer] was obligated to undertake most of the related preparation work for installation and adjustment. The fact that [Buyer] had not completed this work was the direct cause of the delay of installation and adjustment.

      2) A large amount of evidence provided by [Seller] shows that the delay of installation and adjustment was caused by [Buyer], instead of [Seller].

      3) [Buyer] did not submit any evidence to prove that it was [Seller] that caused the delay of installation and adjustment; its failure to satisfy the burden of proof should make it bear the adverse results. The Arbitral Tribunal should dismiss [Buyer]'s requests.

[Buyer] signed and confirmed that the device had passed the tests of four products in April 2004, which indicates that the production line had finished its installation and adjustment, as well as its check and acceptance process. [Buyer] did not submit any evidence to show that from 16 June 2003 to April 2004, it was [Seller] that caused the delay of installation and adjustment. Examining the evidence submitted by [Buyer], there is no document showing that [Buyer] had made any requests on the contractual performance from 21 May 2003 to 27 July 2004. Therefore, [Buyer]'s compensation request requested lacks factual basis and supporting evidence, and cannot be supported by the Tribunal.

      4) [Buyer] misunderstood the discharge period and contract clauses; compensation based upon misunderstandings should not be supported.

      [Buyer], pursuant to Article 5 of Attachment 3 of the contract, simply added the discharge periods together, deeming that [Seller] should complete the device installation and adjustment on 1 July 2003, and asked for the compensation ever since. Whether the work of installation and adjustment commences as soon as the receipt of the device is pending on the [Buyer]; the [Seller] has nothing to do with the determination of the time period from the date of delivery to the date of installation. Therefore, [Buyer] wrongly misunderstood the discharge period. [Seller] delivered the goods to [Buyer] in accordance with the contract, and began the installation on 16 June after having received [Buyer]'s notice on 8 June that the installation could begin. This act did not breach the contract and was also accepted by [Buyer]. [Buyer] started calculating the loss of profits from 1 July 2003, which reflects that its intent to request for compensation arbitrarily and to avoid or refuse to pay the residual balance is extremely apparent.

3. The device provided by [Seller] passed the check and acceptance test in April 2004; [Buyer] accepted and used it; and the quality warranty period was due in April 2005

      1) [Buyer] signed and confirmed that the device had passed the test of producing four kinds of products in April 2004. The fact that the device passed the test of four products means that it passed the test of the whole production line, since [Buyer]'s purpose of purchasing this device was to produce these four kinds of products. The following facts demonstrate that the device had passed the check and acceptance test and that [Buyer]'s purpose of entering into the contract was realized.

      2) [Buyer] ignored the fact that the device had passed the check and acceptance test, refusing to sign the Check and Acceptance Certificate, which constituted a breach of contract. Its intent to extend the warranty period and to avoid paying the residual balance was fairly obvious.

4. The remaining problems raised by [Buyer] were totally not problems in technique, craft and quality, and could not have a fundamental effect on the regular operation of the device

      1) [Buyer] alleges that the device provided by [Seller] has problems in design, craft and technique but failed to provide any effective evidence. Furthermore, this allegation is inconsistent with the facts confirmed by the parties, thus cannot be supported.

      2) Carefully analyzing the "Twenty Remaining Problems of the Second-Line Device" presented by [Buyer] on 6 August 2004, it is obvious that these problems related to the device are actually problems normally occurring in the regular operation of the device with no passive impact on its operation.

5. The alleged huge economic loss submitted by [Buyer] does not have any factual and legal basis and should not be supported by the Tribunal

      1) [Buyer] did not provide effective evidence to prove that the loss submitted by it was caused by [Seller]'s fault, thus it should bear the adverse results for its failure of burden of proof and should not obtain the Tribunal's support.

      2) The huge damages claim submitted by [Buyer] lacks legal basis, and should not be supported.

According to Article 74 of the CISG:

"Damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract."

In the present case, the possible damage that ought to have been foreseen is 5% of the total contract price for the Second-Line Device. Even relying on the "Agreement on the Remaining Problems for [Buyer]'s Second-Line" drafted by [Buyer] on 15 July 2005, the compensation amount requested by [Buyer] was only € 76,000, far below the 5% of the total contract price (€138,300) that ought to have been foreseen.

      3) The damages asked by [Buyer] lacks contractual basis, and cannot be supported.

Article 15 of the contract, "Breach of Contract", stipulates the liability for [Seller]'s breach of contract, including the responsibility for completing the installation and adjustment work in delay.

Article 15.1 states that "if, because of [Seller], the contract cannot be executed, the following losses resulting from this should be borne by [Seller]:

a) [Buyer]'s direct costs: relevant costs incurred during the period of the establishment of [Buyer]'s factory;

b) [Buyer]'s indirect costs: the loss of profits on [Buyer]'s one-year production in single-class at the market price of that time."

Article 15.2, "Stay of the Contract", states that: If, because of a delay in the delivery of the contract device, or because of [Seller], the installation and adjustment is delayed, [Seller] should pay a specified penalty to [Buyer] pursuant to the stipulations of Article 14."

Article 14 states that: "The rate of the penalty is 0.5% / 7 days, accounted in 7 days if less than 7 days. The maximum of the penalty should be no more than 5% of the total price of the late-delivered goods. If [Seller] delivers the goods later than 10 weeks after the shipment period agreed in the contract, [Buyer] can avoid the contract, but [Seller] should still pay to [Buyer] the corresponding penalty calculated following the above formula."

The English version of Article 15 should prevail over the Chinese version that has mistakes and omissions. Due to the above facts, Article 15.1, "unable to execute the contract", cannot apply here, since [Buyer]'s contract purpose was already achieved in April 2004, the condition of being unable to execute the contract never existed. But according to the English version of Article 15.2, even if there is sufficient evidence to show that it was [Seller] that caused the delay of installation and adjustment, the compensation [Seller] shall be determined by the issue of whether [Seller] had faults and the severity of its faults, and should not exceed 5% of the total contract price. However, since the [Buyer] itself caused the delay of installation and adjustment, [Buyer] has no right to request [Seller] for compensation.

      4) The Auditing Report in Separate Classifications submitted by [Buyer] is unauthorized, and cannot be treated as evidence.

Pursuant to Regulations for the Implementation of the Law of PRC on Certified Public Accountants (CPA), a CPA has no right to issue auditing reports predicting things that did not happen. From the definition of "Auditing" stipulated in the Regulations, it can be known that "Auditing" is the review, examination and verification of existing and past financial revenues and expenditures, financial books, and vouchers, rather than a judgment predicted and estimated from things that did not happen. Thereby, the report provided by [Buyer] is unauthorized and cannot be the basis for identifying the facts. [Buyer] submitted three compensation amounts based upon the same facts, and declared that each amount was audited by professional institutions, however, these three amounts had great differences.

6. [Buyer]'s refusal to sign the Check and Acceptance Certificate and to make the residual payment is a severe breach of contract. [Buyer] should immediately pay the residual balance to [Seller] and undertake relevant responsibilities

[Buyer] refers to the bank guarantee letter. The purpose of issuing the bank guarantee letter is to make sure that after [Buyer] pays the residual balance it can obtain the quality service provided by [Seller] during the warranty period. But according to Attachment 5 of the Second-Line Device contract, "the warranty period of the production line is 12 months calculated from the date of check and acceptance". In May 2005, the warranty period of the Second-Line Device was due. [Seller] assumed the warranty obligation under the contract during this period, and [Buyer] enjoyed the warranty service even though it had not made the residual contract payment. Therefore, it is unnecessary to issue the bank guarantee letter. In addition, when the letter of credit was due, [Buyer] refused the [Seller]'s request of extension. Therefore, the negotiation progress under the L/C as agreed in the contract can no longer be used to pay the residual balance now. [Seller] submits that, [Seller] has comprehensively performed its obligations under the contract. [Buyer] has finished checking and has accepted and used the device for two years. The unreasonable arrears of the residual contract payment constitutes a severe breach of contract, and has caused a large economic loss to [Seller]. Therefore, [Buyer] should pay the residual balance of € 276,600 to [Seller] at once, and also undertake the overdue interest until the day when the actual payment is made.

7. Other Issues

      1) Concerning the issue that the English version of the contract in this dispute should prevail.

      The English version of the contract was drafted by [Seller], and the Chinese version was translated based upon the English version (The fact that the First-Line Device contract signed by the parties only had the English version, whose contents were totally consistent with the English version of the Second-Line Device contract, can prove this point). The Chinese version had a lot of mistakes and omissions, such as Article 9.2, Article 12.6 and Article 15. Under the condition that the parties agreed that both two versions had equal legal effects, [Seller] submits that the relevant articles in the English version, which state more correctly and completely in aspects of logic, semantics and the original meaning of the contract, should prevail.

      2) Concerning the issue that because of [Buyer], the installation and adjustment work was delayed for 6.5 months, resulting in a big loss to [Seller].

      [Buyer] delayed completing the installation preparatory work and was constructing the factory during the installation work. This extended the installation and adjustment to 10.5 months and extended the working time of [Seller]'s engineers to 6.5 months. The total service fee on installation and adjustment agreed in the contract is € 336,734.30. Calculated according to this standard, the service fee on extending working time for 6.5 months should be € 540,000.00, which is RMB 5,400,000. [Seller] reserves the right to ask for this compensation from [Buyer].

H. [Buyer]'s Summary Statement

After the second oral hearing, [Buyer] outlined its case in its "Summary Statement" as follows:

1. [Seller] did not fulfill its obligations in accordance with the contract, and should be held liable for the breach of contract

      1) [Seller] did not fulfill the obligation of delivering the Assessment Report to [Buyer].

      Until now, [Seller] has not delivered to [Buyer] the Assessment Report stipulated in Article 11 of the contract. The certification documents submitted in the arbitral proceedings and the quality certificate provided by [Seller] itself are not the Assessment Report agreed in the contract, which cannot explain that [Seller] has fulfilled the above obligation. [Seller] has breached the contract, and cannot prove that the Second-Line Device was consistent with the quality standard at the time of delivery.

      2) [Seller] violated the contract obligation to provide of drawings and technical materials. This caused the adjustment, check and acceptance progress to be unfinished and led to a failure to commence normal production, for all of which the [Seller] should be held liable.

      3) [Seller] did not comply with its obligation of quality warranty; the device delivered has severe technical and quality defects.

      It is necessary to emphasize that, it is a fact that the Second-Line Device cannot produce products according to the output standard agreed in the contract (namely the device cannot reach the output standard); that becomes a significant basis for [Buyer]'s belief that the Second-Line Device has serious quality and technical defects, rather than the fact of whether the Second-Line Device can produce related products.

2. The compensation and its amount submitted by [Buyer] are all compatible with the facts and law

According to Article 107 of the Contract Law of the PRC, if a party fails to perform its obligations under a contract, or its performance fails to satisfy the terms of the contract, it shall bear the liabilities for breach of contract including compensating for losses.

What the [Seller] did severely violated the terms of the contract and constituted a breach of contract. Because of [Seller]'s breach of contract, the installation and adjustment process was seriously delayed and the Second-Line Device cannot finish the check and acceptance work until the present; because of [Seller]'s breach of contract, the Second-Line Project cannot enter into production until now, which made [Buyer]'s foreseeable purpose of entering into the contract fail to be achieved; because of [Seller]'s violation of providing quality warranty, the Second-Line Device came up with big quality and technical defects, being unable to reach the output standard as agreed in the contract even in the trial production period. And these defects in quality and technique will undoubtedly bring losses to [Buyer] and keep on increasing. Based upon the above facts and law rulings, it is reasonable for [Buyer] to believe that the present losses of [Buyer] have a direct and legal casual link with [Seller]'s breach of contract. [Seller] should compensate the losses of [Buyer] resulting from [Seller]'s breach of contract.

I. [Seller]'s Final Statement

[Seller] concluded its case in its "Final Statement" submitted after the second oral hearing as follows:

1. [Seller] performed its obligations under the contract, and did not fundamentally breach the contract in delivery of drawings      

      1) The facts concerning [Seller]'s performance of its obligation to deliver drawings in accordance with the contract

      The contract signed by the parties came into effect on 20 September 2002. Pursuant to Attachment 2, the deadline for [Seller] to deliver the drawings is four weeks after the contract comes into effect, which should be before 19 October 2002. In fact, [Seller] fulfilled its contractual obligation to deliver drawings under the contract, and sent all of the drawings to [Buyer] on 18 October 2002 by Federal Express.

Drawings involved in this production line amounted to over seventy items. After [Buyer] received these drawings, it informed [Seller] of the lack of five items of drawings and one technical requirement. This part of pictures was drawings of individual small devices on the production line, and could not have any substantive impact on the contract performance, and did not constitute a fundamental breach as alleged by [Buyer]. The above five omitted drawings were all device manufacturing drawings prepared by [Buyer]; if there were still certain drawings not received by [Buyer] at present, the device could not have commenced its production. Actually, the evidence submitted by [Buyer] indicates that the Conservation Kiln Trestle Drawing which [Buyer] regarded as having the most serious problem, was delivered on 26 November 2002. By 30 December 2002, [Seller] had delivered all of the drawings, including the modified drawings requested by [Buyer] (see p. 42 of [Buyer]'s Evidence Exhibit), and from then on [Buyer] never sent any letter to [Seller] to request the drawings. Therefore, [Buyer] never provided effective evidence to prove that [Seller] breached the contract and should pay for the compensation.

      2) Rebuttals to issues raised by [Buyer]

            a) The conservation kiln issue

            As a relatively independent system, the conservation kiln is in strict conformity with the requirements of the contract, and does not have any design errors. The only problem is the omission of the drawing on the connection part between the top of the conservation kiln specially required by [Buyer] and the roof of the workshop, which has already been solved in a negotiation between the parties in January 2003.

            b) The issue of technical materials of the production line

            Pursuant to the contract, the Device Maintenance Manual and other technical materials were sent to the [Buyer] in company with the device. [Seller] delivered the goods in January 2003and sent technical materials at the same time. [Buyer] never mentioned any lack of technical materials after its receipt of goods in February 2003, thus lacking the factual basis to mention it now.

2. It was [Buyer] that caused the delay of the civil work; [Seller] had nothing to do with that

Alleging that [Seller] delayed providing drawings and caused the delay of civil work, [Buyer] asked [Seller] to compensate the loss. However, [Buyer] did not provide effective evidence to support its claim, thus it cannot be supported by the Tribunal.

      1) According to the contract (Attachments 1 and 3 of the contract), the civil work (including device foundation and plants constructions) should be completed by [Buyer], rather than undertaken by [Seller].

      2) Drawings related to the design of civil work were only drawings of the design of layout and [Seller] had performed this obligation when it signed the contract. Drawings relevant to the construction of civil work were merely drawings of foundation; [Seller] had also comprehensively fulfilled this obligation.

      3) [Buyer] based its allegation that [Seller] fundamentally breached the contract and caused the delay of civil work and shall make compensation only on the omission of five self-prepared device manufacturing drawings; such allegation is groundless. Considering the terms of the contract, the civil work design and its construction are entirely [Buyer]'s own duties, [Seller] has nothing to do with the progress arrangement of the work.

Considering the evidence, certain self-prepared device manufacturing drawings are not device foundation drawings, which have no necessary relations to the construction of civil work, not to mention the design of the civil work. Thus, this evidence is not relevant to the present case.

Considering the facts, it was [Buyer] that caused the delay of the civil work, rather than [Seller].

The main reason for the delay of the civil work preparation was that [Buyer] asked to modify the drawings from time to time. [Buyer] also delayed in the period of civil work construction, while according to the terms of the contract, [Seller] has no obligations in this period.

3. It was [Buyer] that caused the delay of installation and adjustment process; [Seller] had nothing to do with it

      1) Considering the parties' obligations during the period of installation and adjustment: according to Attachment 3 of the contract, which directly provides for the parties' obligations during the installation and adjustment period, it is obvious that [Buyer] should bear the main work and responsibilities.

      2) [Seller]'s obligation under the contract during the installation and adjustment period is actually technical service, which has already been performed completely.

      3) The fact that [Buyer] could not comprehensively fulfill related obligations under the contract during the period of installation and adjustment was the direct reason for the delay of installation and adjustment. Thus [Buyer] should bear this responsibility itself.

      4) [Buyer] ignored the contract clauses, making a biased statement from the beginning of installation and its duration, which was unreasonable and inconsistent with the facts.

4. The device in this dispute has already passed the check and acceptance test; [Buyer] should make the residual payment under the contract

It is an indisputable fact that the capacities of the four molds to produce four kinds of products, mold-replacement time and split line, are all testing items in check and acceptance process under Attachment 4 of the contract. Based upon the consensus of the parties, if the installation and adjustment had not been completed, it would be impossible for [Buyer] to have had the above tests as well as the check and acceptance work. But as a matter of fact, Evidence Exhibits 15 and 16 submitted by [Seller] prove that the four sets of molds have passed the check and acceptance test. Also, the parties have no arguments on the fact that the main items, such as the mold-replacement time and split line, have passed the check and acceptance test, and they confirmed this in written documents.

The reason the [Buyer]'s purchased the Second-Line Device was to produce these four kinds of products. Thus, once the device had passed the tests for these four products, it meant that the device has passed the test of the whole production line, and [Buyer]'s contract purpose has been realized.

5. The huge economic loss alleged by [Buyer] has no factual, contractual or legal basis

In conclusion, the arbitration requests submitted by [Buyer] have neither factual basis, nor legal foundations. Instead of being supported, [Buyer] should pay to [Seller] the residual balance and corresponding overdue interest.

III. OPINION OF THE ARBITRAL TRIBUNAL

A. The applicable law

The parties did not make an agreement on the applicable law governing the substantive part of this case. Since the places of business of [Buyer] and [Seller] are located separately in China and Germany, and both of these countries are parties to the "United Nations Convention on Contracts for the International Sales of Goods" (hereinafter: "CISG"), the Arbitral Tribunal holds that the CISG should be the applicable law of the current case. Meanwhile, as the arbitral institution selected by the parties, the domicile of [Buyer] and the installation place of the device are all located in China, according to the principle of the closest relation in conflict rules of Private International Law, matters not provided in the CISG, should be governed by the substantive law of the PRC.

B. The validity of the contract

The parties signed the present contract on 16 September 2002, agreeing on the discharge period, payment terms, installation and adjustment, after-sales service, quality warranty and compensation. Article 4 of the contract provides that: "this contract comes into effect as soon as [Seller] receives the down payment from [Buyer] (or remits the deposit to the joint account opened by [Buyer] and [Seller], cf. Attachment 6 of the contract), and [Buyer] confirms the contract device layout design drawings." After the examination of the Arbitral Tribunal, the Tribunal believes that nothing in this case affects the validity of the contract, and the parties never made any objection to the validity of the contract. It is the true intention of the parties that led them to sign the contract without any violation of the law. This contract is effective and binding on the parties.

C. The core issues and liabilities

After the contract signed by the parties came into effect, according to the contract, [Buyer] paid 90% of the contract price, and [Seller] delivered all the concrete block production line devices under the contract. Then the parties had disputes on issues of device installation and adjustment, check and acceptance, and the payment of the 10% residual contract price.

[Buyer] alleges that [Seller] breached the contract as follows:

1. [Seller] did not deliver all the drawings and technical materials required for the device;

2. The roof structure of the "conservation kiln" and the "conservation kiln" design drawings provided by [Seller] were incompatible with the terms of contract;

3. The installation and adjustment period was delayed by one year;

4. After the device started its trial production, it always broke down and could not be used normally, while [Seller] rejected solving the problems and even refused to provide after-sales service;

5. Because of these breaches of contract, [Seller] caused [Buyer] to suffer a huge economic loss. [Seller] should compensate [Buyer] and continue to perform the contract.

[Seller] submits that:

1. [Seller] has satisfied its obligations of delivery of the device, installation and adjustment, check and acceptance, training and after-sales service under the contract. The device has commenced its production and its products have been widely sold in the market. There is no basis for [Buyer] asking [Seller] to continue performing the contract.

2. [Seller] delivered more than 90% of the drawings, including all of the civil work drawings within the time requirement under the contract. The reason why part of the drawings could not be timely delivered was that [Buyer] continued to ask to modify the design.

3. The device installation was formally begun in June 2003; it was [Buyer] that caused the alleged delay:

      1) The workshop and plants, foundation of the civil work for the device were not completed in a timely manner;

      2) [Buyer] had not finished the conservation kiln roof until 28 October 2003;

      3) [Buyer] did not prepare the infrastructures for the device, such as the water, electricity, gas and oil, in a timely manner. On 10 November 2003 and 14 January 2004 a considerable amount of work remained unfinished, which affected the normal progress of the installation and adjustment;

      4) [Buyer] did not provide interpreters during the installation in a timely manner, and did not prepare coordinating staff in accordance with the contract, which was also one of the reasons that led to the delay of installation and adjustment.

4. The device did not have defects in design, technique and quality. The parties finished the check and acceptance test in April 2004. They tested the four products after having finished the tests of all the functional materials of the device. [Buyer]'s refusal to sign the Check and Acceptance Certificate was only to avoid the payment of the residual contract price.

5. Since May 2004, [Buyer] has produced qualified products by using the device, and until the end of December 2005, [Buyer] had produced over 840,000 square meters of concrete blocks, and sold them out into use. Thus, this Tribunal should dismiss [Buyer]'s requests.

The Arbitral Tribunal identified the following facts after the oral hearings:

1. After the contract came into effect, [Seller] delivered all of the concrete block production line devices under the contract, the total price of which was € 2,766,000; [Buyer] also paid 90% contract price in terms of the contract, which was € 2,489,400, and owed to [Seller] a 10% residual contract payment, which was € 276,600. Later, the parties had disputes on issues of installation and adjustment of the device, check and acceptance, and the payment of the residual contract price.

2. The delivery of technical drawings and materials

According to Article 12.2 of the contract, [Seller] should "according to Attachment 2 of the contract, provide the whole set of related technical materials that are correct, clear and consistent with the requirements of design, infrastructure, operation and maintenance of the contract device." The parties also agrees that [Seller] should deliver the technical drawings and documents to [Buyer], 27 pieces of which should be delivered within four weeks after the contract comes into effect, and 16 pieces of which should be delivered with the delivery of the device. The contract came into effect on 20 September 2002, and the delivery time within four weeks was 18 October. [Seller] acknowledged that only 90% of the device drawings were delivered in accordance with the contract time, the residual 10% had not been delivered even by 28 November.

3. The installation, adjustment and training

Attachment 3 of the contract provides that: "[Buyer] should undertake all of the preparation work for installation based upon the technical requirements provided by [Seller] and related clauses in the contract, such as making the concrete foundation of the machine. After finishing the above work, [Buyer] should immediately inform [Seller], and [Seller] should send four to six experienced technical engineers to [Buyer] to install and adjust the device within twenty days after receiving the notice of [Buyer]. The period for installation and adjustment is four months." It also stipulates that: "the technical engineers of [Seller] should provide training to [Buyer]'s technical personnel during the period of installation and adjustment to teach them to master the following skills", which are: "the skill of operating all the production line independently", "the skill of solving machine faults independently", "skills of mold replacement and common repair ", and ten specific operation and adjustment skills such as forming units, product arrangement system.

According to Article 15.2, if the device is delivered in delay or [Seller] does not finish the installation and adjustment in a timely manner, [Seller] should pay a specified penalty to [Buyer] pursuant to the stipulations of Article 14.

The parties began the installation and adjustment on 16 June 2003. In the middle of January 2004, the device installation was basically completed and entered into adjustment. At the end of April 2004, the device basically passed the test. On 28 April, the parties confirmed in the "Memorandum of Meeting between [Seller] and [Buyer]" that: "[Buyer] agreed that the device has finished the test of four molds and thus passed the test" "the date of acceptance: the parties agreed to accept the device on 20 May." Meanwhile, the parities also clearly stated the remaining problems in the test, such as the modification of adding pneumatic hammer to pigment warehouse, inaccurateness of weighing the hopper, further adjustments to the installing positions of finishing line and split line, appropriate modification to the anchor hook angle of the finished cars, further tests for color bricks, and the inconsistency with the contract on training of [Buyer]'s staff.

4. The check and acceptance work

Attachment 4 of the contract provides that: "after finishing the adjustment of the device, the tests of the single machine and the whole production line should commence. After completing the tests of all the functional materials on the whole production line, the following functional tests should commence." "There are tests for four kinds of products in total, the output and technical parameters for each kind of product should reach the following standards." Attachment 4 provides specifically on the test standards and parameters of the four kinds of products: concrete hollow block, color floor tile, curbstone and flowerpot block. Besides, it also provides that: "if, because of [Buyer] or [Seller], the device cannot reach the output and quality standard, the test should be extended for one week until the device passes the test."

On 30 March 2004, according to [Buyer]'s "Request for Modifying the Check and Acceptance Clause of the Contract", the parties made a "New Check and Acceptance Agreement": Except that the "hollow block" should finish its test on 29 March, the parties modified the "flowerpot block" to "tree hole block', the standard and parameters of which should be tested separately from the "road-edge stone" (which is the "curbstone" aforementioned and "color brick" (which is the "color floor tile" aforementioned), "the test time can be properly adjusted, but should not exceed the time stipulated in the contract (6 hours for test of each mold)."

The four products passed the test in April 2004. In May 2004, [Buyer] began to use the device, produce and sell the products in bulk. Later, [Buyer] refused to sign the Check and Acceptance Certificate in light of the unsolved device problems and staff training problems, while [Seller] insisted on asking for the residual contract payment. The dispute could not be solved by negotiation.

Pursuant to the above facts and the dispute between the parties, the Tribunal has the following understandings:

1. In terms of the contract, the [Seller] did not deliver the drawings in a timely manner. The number of delayed drawings was not large and such delay did not cause serious results, thus this did not constitute a serious breach of contract. However, it is a fact that [Seller] delayed in delivering some of the drawings and violated the terms of the contract.

2. In the process of installation and adjustment, [Seller] did not give sufficient training to [Buyer]'s staff and the device had many unsolved problems. [Seller] did not solve them in a timely manner, which caused the installation and adjustment period to be delayed for over half a year. Although there were lots of reasons for the delay, and the [Buyer] should also take certain responsibilities, the major liabilities should be undertaken by [Seller].

Based upon the reasons aforementioned, the Arbitral Tribunal holds that, [Seller] should be held liable for its breach of contract. The allegation of [Seller] that it performed the obligations under the contract and did not breach the contract lacks factual basis, and should not be supported by the Tribunal.

D. [Buyer]'s Arbitration Request

1. [Buyer]'s request to have [Seller] continue with its performance the contract

As noted above, the parties have not completely solved the problems of the device, staff training, check and acceptance certificate and payment of residual contract price. Relevant obligations in Attachments 4, 5 and 6 have not been performed, either. The Tribunal recognizes that the parties made an agreement in July 2005; [Buyer] drafted the "Agreement on the Remaining Problems with the [Buyer]'s Second-Line Device", which contains stipulations on the payment, reduction of the residual contract price, conditions, time of signing the Check and Acceptance Certificate, Remote Diagnosis System and Training of staff. Although this agreement has not been signed and has no legal effects, it indicates the possibility and necessity of solving the above problems. According to the specific conditions of the present case and relevant legal regulations, from the perspective of real performance and principle of protecting the parties' legal rights, the Tribunal believes that, [Buyer]'s request to have [Seller] continue to perform the contract should be supported.

2. The request to have [Seller] pay RMB 45,371,057.35 to [Buyer] as compensation

The Tribunal notes that:

      1) Article 15.1 of the contract provides that: "if, because of [Seller], the contract cannot be executed, the following loss resulting from this should be borne by [Seller]:

            a) [Buyer]'s direct costs: relevant costs incurred during the period of the establishment of [Buyer]' factory; and

            b) [Buyer]'s indirect costs: the loss of profits of [Buyer]'s one-year production in single-class according at the market price of that time."

      2) Article 15.2 of the contract provides: "Stay of the contract: if, because of a delivery delay of the contract device, or because of [Seller], there are installation and adjustment delays, [Seller] should pay specified penalty to [Buyer] pursuant to the stipulations of Article 14". If pursuant to the Chinese translation of the English version provided by [Seller], the stipulation of Article 15.2 should be that: "Delay of contract performance: if the device under the contract is delivered in delay, or [Seller] cannot finish the installation and adjustment in a timely manner, [Seller] should pay penalty to [Buyer] in terms of Article 14 of the contract."

Article 14 says: "…The rate of the penalty is 0.5% / 7 days, accounted in 7 days if less than 7 days. The maximum of the penalty should be no more than 5% of the total price of the late-delivered goods. If [Seller] delivers the goods later than 10 weeks beyond the shipment period agreed in the contract, [Buyer] can avoid the contract, but [Seller] should still pay to [Buyer] corresponding penalty following the above formula."

From the above articles, it can be seen that:

First, the situation of the present case is not that the contract could not be executed, and the first request of [Buyer] is to ask [Seller] to continue performing the contract. Thus Article 15.1 concerning the compensation for the failure of execution cannot apply here.

Second, Article 15.2, no matter whether in the Chinese version provided by [Buyer], or in the English version provided by [Seller], is a stipulation on penalty for breach of contract, which is also called the compensation, the maximum amount of which cannot exceed 5% of the total device price. But [Buyer] did not request the compensation in its arbitral requests; therefore, the Tribunal holds that the compensation request of [Buyer] cannot be supported.

3. The request that [Seller] should undertake all the arbitration fees of this case

Based upon that extent to which the Tribunal supports [Buyer]'s arbitral requests, each party should undertake 50% of the arbitration costs of the present case.

E. [Seller]'s counterclaim

1. Concerning the residual payment of the Second-Line Device, € 276,600, and the overdue interest (€ 44,256 from the day of [Seller]'s counterclaim)

The Tribunal notes that, as to the request for the 10% residual payment under the contract submitted by [Seller] in its counterclaim, Article (II), paragraph B of Attachment 6 of the contract provides that: "[Buyer] should immediately pay the 10% contract price to [Seller], which is € 276,600,00, within 14 days once it receives the following documents provided by [Seller]:

      1) Four original copies of commercial invoices;

      2) One original copy of Check and Acceptance Certificate signed by the parties;

      3) A bank guarantee in the amount of 10% of the contract device price (the sample of this bank guarantee is similar with the related bank guarantee in [Buyer]'s first production line contract); and

      4) Two bills of exchange."

As aforementioned, the Check and Acceptance Certificate has not been signed, and the above four requirements have not been satisfied, thus, the Tribunal holds that the request of [Seller] to have the [Buyer] pay the 10% residual contract payment and its overdue interests cannot be supported.

2. Concerning the request to have the [Buyer] pay the arbitration fees of the counterclaim

The Tribunal holds that, since [Seller]'s counterclaim has not been supported; all the arbitration fees of the counterclaim should be borne by [Seller] itself.

IV. AWARD

According to the above opinion, the award is as follows:

1)    The "Type R9001XL Color Concrete Block Production Line Order Contract" signed by [Buyer] and [Seller] on 16 September 2002 should continue to be performed.
 
2)    The amount of arbitration fees for this case is RMB 583,711.00. Each party should undertake 50% as RMB 291,855.50. Since the [Buyer] has prepaid the whole arbitration fees, the [Seller] should pay to [Buyer] RMB 291,855.50 after offset.
 
3)    The other arbitration requests by [Buyer] are dismissed.
 
4)    All the counterclaims by [Seller] are dismissed.
 
5)    The counterclaim cost of the present case is US $ 11,138.00, all of which shall be borne by [Seller], which is offset with the amount that the [Seller] prepaid to CIETAC.
 
6)    The [Seller] should complete its payment to the [Buyer] within 30 days from the date this award is rendered; the overdue interest is 8% per year.

This award is the final decision and shall take into effect upon adjudication.


FOOTNOTES

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

** Fan Yao, graduate student studying International Economic Law at School of Law, Tsinghua University, Beijing, China, has participated in the 6th Annual Willem C. Vis (East) International Commercial Arbitration Moot.

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

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Pace Law School Institute of International Commercial Law - Last updated October 21, 2009
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