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CISG CASE PRESENTATION

China 24 July 2007 CIETAC Arbitration proceeding (Flexo label printing machine case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/070724c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20070724 (24 July 2007)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2007/07

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Denmark (respondent)

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

GOODS INVOLVED: Flexo label printing machine case


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 8 ; 25 ; 45 ; 46 ; 49 ; 74 [Also cited: Article 39 ]

Classification of issues using UNCITRAL classification code numbers:

8C [Interpretation of party's statements or other conduct: interpretation in light of surrounding circumstances];

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

46B ; 46C [Buyer's right to compel performance: requiring delivery of substitute goods; Right to require repair of non-conforming goods];

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

74A [General rules for measuring damages: loss suffered as consequence of breach]

Descriptors: Intent ; Burden of proof ; Fundamental breach ; Avoidance ; Repair ; Substitute goods ; Damages

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Editorial remarks

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

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

Flexo label printing machine case [24 July 2007]

Translation [*] by Xiangyu Huang [**]

Edited by Fan Yao [***]

  1. Procedure
  2. Facts and Issues
  3. Arbitral Tribunal's Opinion
  4. Award

I. PROCEDURE

The China International Economic and Trade Arbitration Commission South China Sub-Commission (formerly known as the China International Economic and Trade Arbitration Commission Shenzhen Sub-Commission, later renamed on 18 June 2004 as the China International Economic and Trade Arbitration Commission South China Sub-Commission, hereinafter referred to as "SCCIETAC", or the "Arbitration Commission") accepted the case (Case No. SHEN M2006127X) according to:

-    The arbitration clause in Contract No. 040816 (hereinafter referred to as the "Contract"), signed by the Claimant, Shandong H Ltd. [of the People's Republic of China] (hereinafter referred to as the "[Buyer]") and the Respondent, N Corp. [of the Kingdom of Denmark] (hereinafter referred to as the "[Seller]"); and
 
-    The Request for Arbitration submitted by the [Buyer] on 28 August 2006.

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

On 21 September 2006, the Secretariat of SCCIETAC (hereinafter referred to as the "Secretariat") sent the Notice of Arbitration, the Arbitration Rules, and the Panel of Arbitrators to both parties via express mail service. Meanwhile, the Secretariat of CIETAC sent the Request for Arbitration submitted by the [Buyer] and its annexes submitted by the [Buyer] to the [Seller].

In accordance with the Arbitration Rules, the [Buyer] appointed Mr. W as arbitrator in this dispute. The [Seller] nominated Mr. C to the tribunal. Since the parties did not appoint the presiding arbitrator jointly, or entrust the Chairman of SCCIETAC to make this appointment within a specified time, the Chairman of SCCIETAC, pursuant to the Arbitration Rules, appointed Ms. L to be the presiding arbitrator. On 24 November 2006, the presiding arbitrator together with the arbitrators appointed by the parties formed the Arbitral Tribunal to hear the case. On the same day, the Secretariat sent the Notice of Composition of the Arbitral Tribunal to the parties.

The Secretariat arranged for an oral hearing to be held on the morning of 9 January 2007. On 5 December 2006, the Secretariat sent the Notice of the Oral Hearing to the parties. The [Seller] requested a postponement of the oral hearing for the reason that the original oral hearing date was in the Christmas season in the United States and Denmark, during which the [Seller] could not sent representatives to participate in the oral hearing. The Secretariat forwarded these documents to the [Buyer].

After discussion, the Tribunal postponed the oral hearing from 9 a.m. on 9 January 2007 to 9 a.m. 25 January 2007 with no alteration to other proceedings.

After examining the Request for Arbitration submitted by the [Buyer], the [Seller]'s Dissent to the T City Entry-Exit Inspection and Quarantine Bureau's Inspection Certificate of the People's Republic of China that was submitted by the [Buyer] and the related evidentiary materials of the case, the Tribunal held the first oral hearing on 9 a.m. 25 January 2007 in the Shenzhen Special Economic Zone. Representatives of the [Buyer] and the [Seller] participated. At the hearing, the parties made presentations and debates, examined the evidence, and answered questions of the Tribunal. The Tribunal investigated and verified the facts of the case. Finding that the parties had the desire for conciliation, the Tribunal sought to conciliate the case at the hearing and set a time limit for the parties to arrange a settlement.

On 7 February 2007, the [Buyer] submitted a Clarification, amending its original Claims. In response to that Clarification, the Secretariat sent a Notice of Extra Arbitration Fee to the [Buyer]. Later, the representatives of the parties called the Secretariat saying the case was under conciliation, and requested to defer the payment of the extra arbitration fee.

On 28 March 2007, the Tribunal held a second oral hearing. At this hearing, the parties arrived at a tentative settlement and drafted a written Settlement Agreement. The representative of the [Buyer] signed the Settlement Agreement while the representative of the [Seller] needed to confirm with his client. The Tribunal then withheld further hearings pending the parties reaching their final Settlement Agreement. However, the [Seller] elected not to sign the Settlement Agreement and the conciliation between the parties failed. On 15 May 2007, the [Buyer] paid the above-mentioned Arbitration Fee for the amended arbitral claim.

As requested by the [Seller], on the basis of the Statement of Defense submitted by the [Seller] on 28 May 2007, the Tribunal decided to hold another oral hearing to hear the amended arbitral claims put forward by the [Buyer]. Because of the corresponding time given to the [Seller] in view of the amended arbitral claim, the Tribunal could not render an award within the time limit provided in the Arbitration Rules. Pursuant to Article 42 of the Arbitration Rules, the Tribunal requested the Chairman of SCCIETAC to extend the time period for rendering the final award to 24 July 2007.

In accordance with Article 42(2) of the Arbitration Rules, considering the request as truly necessary and the reasons for the extension truly justified, the Chairman of SCCIETAC extended the time period to 24 July 2007.

On 9 a.m. 4 July 2007, the Tribunal conducted the third oral hearing on the [Buyer]'s amended arbitral claims. At the hearing, the [Buyer] presented facts and issues for the amended arbitral claims and the [Seller] made its response. The parties also debated with each other. On the basis of the "Acceptance Report" and its annexes, the "Meeting Minutes" and other important evidentiary materials sealed by the parties, the Tribunal made inquiries to the parties. At the end of the hearing, the parties submitted their final opinions. The Tribunal specified a time period of three days after the hearing for the parties to submit any further written material to the Secretariat. Any material submitted beyond that specified time period would be refused. On the day the hearing ended, the [Seller] submitted its Counsel's Opinion and supplementary evidence. After the hearing, the [Buyer] submitted two Counsel's Opinion documents with evidence on 6 July 2007. The Secretariat forwarded the said materials to each party promptly. On 12 July 2007, the [Seller] submitted its Reply to the Counsel's Opinion and annexes of the [Buyer].

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

II. FACTS AND ISSUES

A. Facts

On 27 August 2004, the [Buyer] and the [Seller] concluded the disputed Contract in China, stipulating that the [Buyer] purchased a nine color Flexo label printer (the "Machine") from the [Seller] for US $954,932. The price was paid in full by the [Buyer]. After the printing Machine arrived at the destination, was installed and the acceptance test had been carried out, a dispute arose relating to the quality of the Machine. The parties could not reach a resolution of this dispute by negotiation, thus, the [Buyer] submitted the dispute to SCCIETAC according to the arbitration clause of the Contract.

B. Position of the parties

      i. The [Buyer]'s position

      On 1 March 2005 the Machine was loaded on a ship and left the port in the United States. In the last third part of March, the Machine arrived at H port in Shandong, China. The customs was cleared and the price was paid in full. The Guarantee Period of the Machine was from 1 March 2005 to 1 September 2006. The parties carried out the preliminary check and acceptance on 15 June 2005. The Acceptance Report provided that "all the functions of the Machine were checked and accepted, other related issues see the annex notes." The annex explained that "insofar there are some unsettled problems of the Flexo label printing machine as the follows:

      First, the overprint precision of the print unit and mould-cutting unit has not been checked;

      Second, the irregular wine label underlying die mould-cutting, emission and collecting labels still need to be solved in the next stage of performance by the [Seller] with comprehensive technology support.

[Seller] replied the mould-cutting unit problem can be tested again when the accessory blade roller arrived. However, after this the [Buyer] found the Machine had serious defects and could not be put into normal use.

      First, the axial overprint of the printing unit is inaccurate (beer label overprint error was 0.3-0.5mm), article 6 of the Annex II of the Contract regulating the printing acceptance check criteria provides that the printing Machine overprint precision should be 0.1mm;

      Second, the printing and mould-cutting precision is inaccurate (the errors are 0.5mm), article 6 of the Annex II of the Contract regulating the printing acceptance check criteria provides that the printing machine overprint mould-cutting precision should be 0.15mm;

      Third, when the print speed was over 90 m/min, there would be a paper jam, article 6 of the Annex II of the Contract regulating the printing acceptance check criteria provides that the print speed should be 175 m/min;

      Last, there existed some problem with the designation of the oven structure causing the plate to be overly dry and the hot air drying of the unit is inefficient.

Centering on the defects of the Machine, the parties carried out several negotiations and made a full record of the process of acceptance and adjustment in the form of "Meeting Minutes", which the [Seller]'s staff affirmed by signature. In the middle ten days of July 2006, the [Seller] sent its Chief Technology Officer in the Asian-Pacific Area (OEM foreign nationality engineer) to repair and adjust the Machine. However, the defects of the Machine were not solved in the end. On 25 July 2006, the [Buyer] applied to the T City Entry-Exit Inspection and Quarantine Bureau of the People's Republic of China (hereinafter referred to as "T City Entry-Exit Inspection and Quarantine Bureau") for technological performance authentication of the printing Machine. On 27 July 2006, the T City Entry-Exit Inspection and Quarantine Bureau issued an "Identification Report" [Tribunal's note: It should be "Certificate of Inspection".]

According to the Contract concluded by the parties, if during the Guarantee Period, the goods were damaged due to design or manufacturing defects, or the quality and function did not conform with the contract provisions, the Buyer would entrust the China Commodity Inspection Bureau for inspection, and claim damages from the Seller (including replacement of goods) based on China Commodity Inspection Bureau's inspection certificate. All the costs would be assumed by the Seller.

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

            1. The [Seller] should replace the unqualified Flexo label printing machine with a qualified Flexo label printing machine, and provide a Guarantee Period of 12 months after the new Flexo label printing machine arrives.

            2. The [Seller] should pay the damages. The damages should be calculated on the base number of US $954,932, the Contract price of the Flexo label printing Machine, and at the US Dollar Liquidity Loan Rate offered by the Bank of China over the same period from the original delivery date of the Contract to the arrival date of the new machine.

            3. The [Seller] should be responsible for the Arbitration Fees.

Amendment of the [Buyer]'s claims

After the first hearing, the [Buyer] amended the original arbitral claims and requested the following relief:

            1. The [Seller] should replace the unqualified Flexo label printing machine with a qualified Flexo label printing machine within sixty days after the arbitral award is rendered. The Guarantee Period should be of 12 months after the new Flexo label printing machine was accepted.

If the [Seller] could not deliver the new qualified machine or the delivered machine could not pass the acceptance check, the Contract should be cancelled. The [Buyer] should return the delivered machines to the [Seller] and the [Seller] should return the price paid by the [Buyer] after the cancellation of the Contract.

            2. The [Seller] should pay the damages. The damages should be calculated on the base number of US $954,932, the Contract price of the Flexo label printing machine, and at the rate of 5%.

            3. The [Seller] should be responsible for the Arbitration Fees.

To support these arbitral requests, the [Buyer] submitted to the Tribunal the following evidence:

                  a. The Contract and the Annexes I and II;

                  b. The Machine Acceptance Report and its annexes;

                  c. The Meeting Minutes of the four meetings the parties had;

                  d. The Inspection Certificate provided by the T City Entry-Exit Inspection and Quarantine Bureau;

                  e. The Catalog of Entry-Exit Commodities Inspected and Quarantined by the Competent Entry-Exit Inspection and Quarantine Authority issued by the General Administration of Customs and State Administration for Entry-Exit Inspection and Quarantine of the People's Republic of China.

      ii. The [Seller]'s position

      On 18 December 2006, the [Seller] submitted to SCCIETAC a Dissent against the T City Entry-Exit Inspection and Quarantine Bureau's Inspection Certificate of the People's Republic of China (hereinafter referred to as the "Dissent"). On 4 July 2007, before the third oral hearing, in response to the amended arbitral claims by the [Buyer], the [Seller] submitted a written Statement of Defense and Counsel's Opinion. The [Seller] provided the invoices, the bills of lading, the list of the goods, the Reply to the Problems Concerning the Flexo Label Printing Machine (hereinafter referred to as the "Reply to the Problems"), the No. 122 Announcement of the General Administration of Quality Supervision of the People's Republic of China of 2003 and other evidentiary materials to support its requests.

The [Seller] requested the Tribunal to find that:

            1. There were no quality problems with the disputed Machine for the following reasons:

                  a. The printing Machine was a qualified product. The disputed Machine belongs to the schedule of must-be-inspected commodities of the China Commodity Inspection Bureau. Necessary inspections had been carried out when the Machine entered into China and was delivered to the [Buyer].

                  b. The printing Machine had been checked and accepted by the parties and was accepted as a qualified product. According to the Acceptance Report provided by the [Buyer], the Machine was accepted on 25 June 2005. The [Buyer] affirmed that the Machine was installed and adjusted and functioned well. Therefore, the [Buyer] affixed its seal on the Acceptance Report.

                  c. From the evidence provided by the [Buyer], the Machine had been used all the time. In the course of use, damages caused by improper operation cannot be excluded. At the same time, whether the [Buyer] properly operated the Machine, whether the appropriate materials were used or whether the printed products met the requirements of the [Buyer]'s client, all need to be verified by further evidence provided by the [Buyer]. The [Seller] maintained that there were improper operations and inappropriate materials were used in the course of using the Machine by the [Buyer].

                  d. There were contradictions between the inspection time of the T City Entry-Exit Inspection and Quarantine Bureau's Inspection Certificate and the Acceptance Report signed by the [Buyer]. According to the Acceptance Report, all the functions of the Machine were accepted. However, the T City Entry-Exit Inspection and Quarantine Bureau's Inspection Certificate directly deemed the Machine to be badly designed or badly manufactured only because of the print precision and speed, two causes which were not existent. The contradicted identification was not in compliance with the facts.

                  e. The T City Entry-Exit Inspection and Quarantine Bureau is not a legal authority to authenticate whether there were defects of the Machine. The authentication by the T City Entry-Exit Inspection and Quarantine Bureau is of no legal effect.

                  First, whether the T City Entry-Exit Inspection and Quarantine Bureau had the authority to authenticate the disputed Machine needs to be verified by the General Administration of Quality Supervision of the People's Republic of China. Only under the supervision and administration of the Inspection and Quarantine Organization can the authentication be carried out.

                  Second, the authentication of the disputed Machine can only be carried out by the General Administration of Quality Supervision of the People's Republic of China.

            2. All of the [Buyer]'s arbitral claims including the amended ones should be dismissed.

                  a. The original arbitral claims put forward by the [Buyer] were not complete. The requests for relief were not clear and concrete. At the hearing, the [Buyer] made the claim of damages its main argument; however, it did not make any specific compensation request. Therefore, the arbitral claims were not concrete and complete.

                  b. The amended arbitral claims were still not exercisable and could not be the basis for the award.

                        (1) The [Buyer] requested to replace the Machine after the arbitral award came into effect before there was not any direct evidence testifying to what kind of machines would be an unqualified Flexo label printing machine or a qualified Flexo label machine. This request was not exercisable.

                        (2) The [Buyer] set the time to be after the arbitral award came into effect. However, not only had the Tribunal not yet held any hearings when the [Buyer] made its request, also no arbitral award had been rendered.

                        (3) The [Buyer] requested a new qualified Flexo label printing machine. Now that the Machine had been qualified, is an acceptance check necessary anymore? Is the Guarantee Period of twelve months after the acceptance check necessary too? All the reasons provided by the [Buyer] do not comply with the legal regulations. The Machine cannot be deemed to have serious quality problems before authentication is carried out by a legal inspection organization.

                        (4) The amendment of the [Buyer]'s claims was based completely on the perspective of the [Buyer] getting an arbitral award in its favor. The amendment just set forth the rights and obligations of the parties after the arbitral award became effective. What is more, there is a dichotomy in the [Buyer]'s claims, i.e., either the first or the second claim would be justified. The [Buyer]'s "either-or" claims are neither concrete nor clear.

                        (5) The [Buyer] requested that the damages to be borne by the [Seller] should be calculated on the Contract price as the base number and that the rate of interest should be 5%. To the contrary, the [Seller] held the request was without legal basis.

The [Buyer]'s Reply to the [Seller]'s Defense

The amendment of the arbitral claims put forward by the [Buyer] was based on the fact that the [Buyer] did not fulfill its contractual obligations [Tribunal's note: It should be based on the fact that the [Seller] did not fulfill its contractual obligations.] In accordance with the legal regulations and the Contract and in line with the principle of "re-performance", the [Buyer] further specified the original first arbitral claims in its exercise. The amendment of the arbitral claims requested the Tribunal to find that the [Seller] did not fulfill its contractual obligations and to justify a clear and concrete way for the [Seller] to re-perform the contractual obligations instead of based on the perspective of the [Buyer] getting an arbitral award in its favor.

The T City Entry-Exit Inspection and Quarantine Bureau was the legal entry-exit commodity inspection authority at the place of the Machine. The Certificate of Inspection provided by the T City Entry-Exit Inspection and Quarantine Bureau was legally authentic and of full evidential effect.

Article 2 of the Law of the People's Republic of China on Import and Export Commodity Inspection (hereinafter referred to as the "Commodity Inspection Law") stipulates that:

"The State Council shall establish an administration for import and export commodity inspection (hereinafter referred to as the General Administration of Quality Supervision, in short), which shall be in charge of the inspection of import and export commodities throughout the country. The local import and export commodity inspection authorities set up by the General Administration of Quality Supervision (hereinafter referred to as the "Commodity Inspection Authorities," in short) shall be responsible for the inspection of import and export commodities within the regions under their jurisdiction."

Article 20(3) of the Regulations for the Implementation of the Law of the People's Republic of China on Import and Export Commodity Inspection (hereinafter referred to as the "Regulation") further stipulates that:

"If the consignees of the import commodities that are not subject to statutory inspection discover that the quality of the import commodities are not up to the standard or are damaged or short, and apply for issuing a certificate, the entry-exit inspection and quarantine organs or other inspection organs shall issue the certificate in a timely manner after inspection."

Pursuant to these regulation articles, the entry-exit inspection and quarantine bureau and its affiliations (e.g., T City Entry-Exit Inspection and Quarantine Bureau) have the authority to inspect the import commodities, and the obligation not to issue a certificate for unqualified import commodities.

The Regulation adopted on 31 August 2005 by the State Council of the People's Republic of China belongs to the administrative statutes. The No. 122 Announcement of the General Administration of Quality Supervision of the People's Republic of China submitted by the [Seller] is just a department rule adopted on 29 December 2003, and its issuance time is earlier than the Regulation. In line with the rule of the conflict of laws that "Higher-level Law is preferred over Lower-level Law" and "New Law is preferred over Old Law", the Regulation is preferred over the Measures for the Administration of Import and Export Commodity Inspection Institutions mentioned in the Announcement. [Translator's note: It should be "the Measures for the Administration of Import and Export Commodity Inspection and Authentication Institutions mentioned in the Announcement" according to the official document issued by the General Administration of Quality Supervision of the People's Republic of China.]

The Machine was not included in the compulsory import and export commodity inspection (according to the Catalog of Entry-Exit Commodities Inspected and Quarantined by the Competent Entry-Exit Inspection and Quarantine Authority issued by the General Administration of Customs and State Administration for Entry-exit Inspection and Quarantine of the People's Republic of China in Annex I). Therefore, when entering into China, a function authentication of the Machine was not necessary. In fact, normal quarantine instead of any function authentication was carried out. The contention of the [Seller] that the Machine was a must-be-inspected commodity of the China Commodity Inspection Bureau is not supported by the law and the facts. In reality, there was no repeated inspection and no conflicts of the inspection results.

According to the Commodity Inspection Law and the Regulation, there was no organ called the China Commodity Inspection Bureau. Actually, the General Administration of Quality Supervision was the highest organ in charge of commodity inspections. The "China Commodity Inspection Bureau" referred to in the Contract should be the organ set up in China in charge of import commodity inspections.

The [Buyer] had the right to apply to the T City Entry-Exit Inspection and Quarantine Bureau for Inspection Certificate on the unqualified Machine according to the law and the Contract. The inspection need not get the approval of the [Seller] in advance. The Certificate of Inspection is entitled to full evidential effect.

The contention of the [Seller] that the Machine had been inspected and accepted at an earlier time cannot stand.

                  a. The Annex of the Certificate of Acceptance fully proved that the Acceptance Check was an incomplete acceptance check.

                  b. The authentic Certificate of Inspection issued by the T City Entry-Exit Inspection and Quarantine Bureau clearly revealed that the Machine delivered by the [Seller] had design or manufacturing defects.

                  c. In the Guarantee Period, the [Seller] was responsible for the quality of the Machine. The Contract stipulated that in the Guarantee Period, if the goods were damaged due to design or manufacturing defects, or the quality and function did not conform to the contract provisions, the Buyer would entrust the China Commodity Inspection Bureau for inspection, and claim damages from the Seller (including replacement of goods) based on the China Commodity Inspection Bureau's inspection certificate. All the costs would be assumed by the Seller.

                  d. The Meeting Minutes of the several negotiations carried out by the parties about the Machine adjustment strongly proved that the Machine had serious quality defects. The supplementary evidence submitted by the [Seller] further confirmed the quality defects of the Machine. The contention that the paper and other raw materials used were unqualified was just an imagination of the [Seller]. The assertion that the malfunction was caused by unqualified raw materials was erroneous.

In the Reply to the Problems and in the supplementary evidence submitted by the [Seller], the [Seller] admitted that there were malfunctions of the Machine. This confirmed that the Machine had quality defects. Meanwhile, in the Reply to the Problems, the [Seller] said that the malfunction of the Machine could have resulted from the raw materials, the print setting, or from design or manufacturing defects of the Machine itself. The possibility that the malfunction was caused by design or manufacturing defefts of the Machine itself cannot be fully excluded.

In fact, the serious quality defects were found immediately after delivery. In terms of the defects, the [Seller] sent its staff to adjust and repair several times, for which the [Buyer] gave bona fide cooperation. As to the causes of the defects of the Machine, the [Seller] had sufficient time (more than two years) and conditions to test and solve. However, even the [Seller]'s highest technology officer, e.g., the Chief Technology Officer in Asian-Pacific Area could not solve the problems. Without any evidence, taking an imagination that the paper materials "may" be unqualified as the excuse can not be regarded as good faith. What is more, the [Seller] has to bear the adverse consequences of lack of evidence.

In accordance with the law and the Contract, the [Seller] should be responsible for the damages the [Buyer] suffered as a result of the breach of the Contract by the [Seller]. The [Buyer] paid US $954,932 for the Machine, which fell short of the acceptance standards. The adjustment and repair of the Machine took as long as two years, during which the Machine could not be normally used and the financial resources were devilishly occupied. The loss of interest was over 10% (the current annual interest rate for US dollar deposits offered by the Bank of China was 3.25%, the annual interest rate for loans was over 6%). The long-lasting adjustment of the Machine cost a lot of raw materials, water, electricity and labor. To solve the dispute between the parties, besides the arbitration fees, the [Buyer] spent RMB 200,000 for arbitration agency, RMB 10,518 for Machine inspection (see the Certificate of Inspection) and so on. The [Buyer] was very generous to claim the damages to be 5% of US $954,932, the Contract price.

In conclusion, the claims made by the [Buyer] were fully supported by the Contract and the law. What is more, they did not conflict with the current Arbitration Rules. The [Buyer] requested the Tribunal to support its claims.

III. OPINION OF THE ARBITRAL TRIBUNAL

A. The applicable law

The Contract has no choice of law clause. However, the arbitration institution and the Arbitration Rules chosen, as well as the citation of the Chinese laws in the written arbitration documents submitted by the parties demonstrate that the parties had impliedly chosen Chinese laws as the applicable law in this case. The Tribunal respects the will of the parties and their expression of intent. At the hearing, the Tribunal confirmed with the parties that Chinese laws and regulations applied to this case at hand. Meanwhile, since the places of business (China and Denmark) of the parties are in two different Contracting States of the United Nations Convention on Contracts for the International Sale of Goods (hereinafter referred to as the "CISG"), and the parties do not expressly opt out the CISG regime, the Tribunal finds that the CISG applies to the present dispute. This is confirmed by the parties. Therefore, the Tribunal finds that the parties have expressly chosen the Chinese law and CISG as the applicable laws of the present case.

B. Regarding the Contract and its Annexes

The Contract is an international sales contract concluded by the [Buyer] and the [Seller] on 27 August 2007. The whole Contract consists of two parts, i.e., the Contract and Annexes I & II. The original Contract has two copies concluded in Chinese and English; both versions are equally authentic. The Contract provides that the [Seller] hereby sells to the [Buyer] an FBZ4200 nine color Flexo label printing Machine of [Seller[ for a total price of US $954,932.00 CIF Qingdao, China. The origin and manufacturer should be [Seller] in the United States. The shipment is to be four and a half months after the advance payment is received. The Contract also gives clear and concrete provision on the terms of payment, bills of payment, loading, quality guarantee, inspection and claim, force majeure, installation and adjustment, late delivery penalty, etc.

Article 19 of the Contract is the arbitration clause, which provides that, any dispute, controversy or claim arising out of, relating to or in connection with this contract and its performance, shall be settled through friendly negotiation. If no settlement can be reached, the dispute shall be submitted to the China International Economic and Trade Arbitration Commission Shenzhen Sub-Commission (SCCIETAC) for arbitration in accordance with the current effective arbitration rules. The arbitral award is final, and binding on both of the parties. The arbitration and execution fees should be borne by the losing party.

Article 20 of the Contract (Supplement condition) provides that: "If there were any supplement conditions of the Contract, the supplement conditions should be automatically preferred in the performance. If there are any conflicts between the contract provisions and the supplement conditions, the supplement conditions prevail. The contract has two annexes. Annex I sets out the specification list of the Machine. Annex II prescribes the acceptance check standards of the Machine on the quality and delivery time."

The two Annexes are supplement conditions of the Contract. The acceptance check standards set out in Annex II requires that when used with stable raw material, printing ink and favorable print environment, the overprint precision should be "print to print 0.1mm", "print to mould-cutting 0.15mm", "print speed 175m/min". The following analysis will show that the above-mentioned is the most important contractual base for solving the disputed quality problems.

To conclude, the Tribunal finds that the disputed Contract consists of two parts, the Contract and the two annexes. The provisions included in the annexes are supplemental conditions. Both the Contract and the annexes reveal the true intent of the parties. The content of the two parts are legal and valid with complete formal elements. The Contract binds the parties since signature. The supplemental conditions prevail over the Contract provisions.

C. Regarding the Acceptance Report and its Annex

On June 2005 the parties sign an Acceptance Report for the Machine (hereinafter, referred to as the "Acceptance Report"). It states:

"FBZ4200 Flexo label printing machine of the 040816 Contract, Machine No. 09122004, arrived safely at the H Ltd. in Shandong. After installation and adjustment, the Machine functions well. All the functions of the Machine were checked and accepted, other related issues see the annex notes."

The "annex notes" referred to in the Certificate of Acceptance, are formally named Annex of the Acceptance Report for the Machine (hereinafter referred to as the "Annex"). The Annex said that "After installation and adjustment, the Machine works orderly", and that "the Guarantee Period is 18 months from 1 March 2005 to 1 September 2006". Several quality problems were unsettled at the time of acceptance and the reply and promises of the [Seller] are recorded thereto. The main problems are:

-    The problem with the ninth color ink stick;
-    The stability of the auto-overprint system to be observed;
-    The overprint precision of the print unit and mould-cutting unit has not been checked;
-    The irregular wine label underlying die mould-cutting, emission and collecting labels is unsolved;
-    The cold-hot unit film-mulching function is unsettled; and
-    The problem of the locker of the flexo roller of the first print suit.

For the last problem, the [Seller] admitted it to be a damage of two flexo rollers resulting from a defect in the design of the first color suit [Translator's note: The "first color suit" means the "first print suit" judging from the context]. The [Seller] also promises to provide long-term technology support for all the existing problems. The Annex has the parties' signatures and seals on it.

The Report and its Annex were submitted by the [Buyer] to prove that the Machine has quality defects. The Tribunal observes that the [Seller] argues that "this is direct effective evidence that the disputed Machine was ratified by the parties and involves no dispute." [See the Dissent against the T City Entry-Exit Inspection and Quarantine Bureau's Inspection Certificate of the People's Republic of China.] However, as a matter of fact, the parties hold totally contrary assertions as to the provable purpose of this evidence. Citing a series of records of the quality defects in the Annex of this evidence, the [Buyer] contends that the acceptance check carried out on 25 June 2005 was an incomplete or preliminary acceptance check. The [Buyer] submitted that the contention of the [Seller] that the Machine had been inspected and accepted at an earlier time could not stand. [See the Counsel's Opinion submitted by the [Buyer] on 20 June 2007.]

On the other hand, the [Seller] cites the following sentences as its defense that "[a]fter installation and adjustment, the Machine functions well. All the functions of the Machine were checked and accepted." The [Seller] contended that these words from the Inspection Report demonstrate that the Machine is qualified. But the [Seller] neglects the problems recorded in the Annex which are confirmed by the signatures and seals of the parties. In terms of the discrepancy of the quality assessments of the same machine, while the Inspection Report says the Machine functions well, the Annex says the Machine basically works orderly. It should be noted that the Annex also provides that there are still many quality defects of the Machine unsettled and that some functions fall short of the most important acceptance criteria. In light of these facts, the Machine does not conform to the Annex II provisions, which prevail over the Contract provisions.

The Tribunal finds that there are conflicts between the Inspection Report and its Annexes. The problems listed in the Annex II, e.g., "the overprint precision of the print unit and mould-cutting unit has not been checked", are concerned with the most important content of the Contract relating to the quality requirements made by the parties. The specific problems listed in the Annex II have actually overturned the non-objective conclusion in the Report that the Machine functions well. Hence, the Tribunal finds that the Inspection Report on which the [Seller] based its defense cannot prove that the Machine is up to standard. The Tribunal further notes that, before the signing date of the Inspection Report and its Annexes, the parties had several meetings about the defects of the Machine found in the installation and adjustment. The [Seller] also promised to fix some of these problems. All of this was supported by the Meeting Minutes signed by the parties. However, some of the core problems such as the precision of the print to mould-cutting and the print speed have been unsettled for over nine months after the [Seller] promised to fix them at the acceptance. For that reason, the Meeting Minutes of 1 April 2006, confirmed by the parties, note that "the error of the overprint unit is 0.3-0.5mm, the production yield is 60-70%"; and "when the print speed was over 80m/min, the stability of the Machine declines."

The [Buyer] said that its company could not carry out production for two months and wanted to negotiate with the [Seller] about the assumption of the damages. Till July 2006, the [Seller] sent its Chief Technology Officer of Asian-Pacific Area and other members of [Seller]'s staff to repair and adjust the Machine. But the problems remained unsettled. All these facts do not support the [Seller]'s contention that the Machine had been inspected and accepted and is up to standard. The Tribunal holds that the problems listed in the Annex confirmed by the parties can fully prove the fact that the Machine has quality defects.

D. The [Seller]'s Dissent is dismissed

After examining the relative laws and regulations, the Tribunal finds that the Dissent of the [Seller] has no legal basis and should be dismissed. The reasons are as follows:

      1. In the Dissent submitted to SCCIETAC, the [Seller] cited the first article of the No. 122 Announcement of General Administration of Quality Supervision of 2003 and contended that "the authentication of the Machine should be carried out by the General Administration of Quality Supervision of the People's Republic of China", and that "The T City Entry-Exit Inspection and Quarantine Bureau is not a legal authority to authenticate whether there were defects of the Machine. The authentication the T City Entry-Exit Inspection and Quarantine Bureau is of no legal effect."

The Tribunal ascertains that the No. 122 Announcement of the General Administration of Quality Supervision of 2003 (hereinafter referred to as the "Announcement") is the current department rule of the Measures for the Administration of Import and Export Commodity Inspection and Authentication Institutions effective from 1 January 2004 which is jointly issued by the General Administration of Quality Supervision, the Ministry of Commerce, the State Administration of Industry and Commerce (hereinafter referred to as the "Measures"), i.e., the No. 58 Order 2003. The Announcement was forwarded to the bureaus and branches vertically administrated by the General Administration of Quality Supervision on 29 December 2003. Article 1 of the Announcement provides that:

"The inspection and authentication institution on import and export commodities which is entrusted by participators in foreign trade, domestic or overseas inspection institutions or other relevant units, to inspection and authenticate the export and import commodities should first get approval from the General Administration of Quality Supervision, Inspection and Quarantine of the People's Republic of China and operates under the supervision and administration of the Inspection and Quarantine."

The definition of "the inspection and authentication institution" referred to in this article can be found in the No. 58 Order 2003, i.e., the Measures for the Administration of Import and Export Commodity Inspection and Authentication Institutions.

"Article 3: The inspection and authentication institution on commodities referred in this law is the inspection and authentication institution on import and export commodities of Chinese capital and those of Chinese-Foreign Joint Equity Venture, Chinese-Foreign Joint Cooperative Venture and of solely foreign capital and the branches thereof (hereinafter referred to as inspection and authentication institution on import and export commodities involving foreign investment), which, subject to the provisions of relevant state laws and regulations and the Measure, after being approved by the General Administration of Quality Supervision, Inspection and Quarantine of the People's Republic of China (hereinafter referred as the AQSIQ), is entrusted by participators in foreign trade, domestic or overseas inspection institutions or other relevant units, to inspection and authenticate the export and import commodities."

In view of these provisions, the "import and export commodity inspection and authentication institution" or the "inspection and authentication institution" referred to in the Announcement is an enterprise approved by AQSIQ or its affiliated inspection and quarantine bureaus which has industrial and commercial registration and the operation qualification. Its nature and function are different from the Entry-Exit Inspection and Quarantine organs set by AQSIQ at every province, autonomous region, municipalities and the ports and distributing centers. The latter is not a private enterprise but a public institution which is in charge of the entry-exit commodity inspection of the region under its governance. The T City Entry-Exit Inspection and Quarantine Bureau is not the Inspection and Authentication Institution referred to in the Announcement cited by the [Seller], but the organ which has the authority to supervise and administrate the Inspection and Authentication institutions within its governance. The establishment and approval proceedings provided in the Announcement and Measures do not apply to the T City Entry-Exit Inspection and Quarantine Bureau.

      2. The Certificate of Inspection issued by the T City Entry-Exit Inspection and Quarantine Bureau on 27 July 2006 after the [Buyer]'s application is legal and effective and the Tribunal accepts it as evidence.

Article 2(1) of the Implementation Regulation prescribes that:

"The General Administration of Quality Supervision, Inspection and Quarantine of the People's Republic of China (hereinafter referred to as the GAQSIQ) shall take charge of the work for import and export commodity inspection countrywide. The entry-exit inspection and quarantine bureaus and their branches established by the GAQSIQ at the provinces, autonomous regions, and municipalities directly under the Central Government, as well as at the ports, and the distribution centers of import and export commodities (hereinafter referred to as the entry-exit inspection and quarantine organs) shall administer the work for import and export commodity inspection at the place under their jurisdictions." [Translator's note: It should be the Article 2 of the Implementation Regulation according to the original text of the Implementation Regulation of the Law of the People's Republic of China on Import and Export Commodity Inspection issued by State Council of the People's Republic of China, No. 447 Order 2005.]

In order to perform the inspection and quarantine function, the AQSIQ has established 35 vertically administrated entry-exit inspection and quarantine bureaus throughout the 31 provinces, autonomous regions, and municipalities, as well as nearly 300 and over 200 administrative offices branches at sea, land and air ports. The AQSIQ vertically administrates all these entry-exit inspection and quarantine organs.

The [Seller] asserts that the disputed Machine belongs to the schedule of must-be-inspected commodities of the China Commodity Inspection Bureau. Necessary inspections have been carried out when the Machine entered into China and was delivered to the [Buyer]. The Tribunal holds that this assertion is just an inference by the [Seller] that is without legal basis and evidence support. The "must-be-inspected commodities of the China Commodity Inspection Bureau" should be compulsory inspection commodities according to the law or compulsory inspection commodities for short. The Catalog of Entry-Exit Commodities Inspected and Quarantined by The Competent Entry-Exit Inspection and Quarantine Authority (Mechanical and Electrical Products Part) issued by the General Administration of Customs and State Administration for Entry-Exit Inspection and Quarantine of the People's Republic of China submitted by the [Buyer] is the catalog of compulsory inspection commodities which the Tribunal accepts as evidence. The catalog demonstrates that the disputed Machine is not included in the schedule of compulsory inspection commodities. Article 20(3) of the Implementation Regulation also provides that:

"If the consignees of import commodities that are not subject to statutory inspection discover that the quality of the import commodities are not up to the standard or are damaged or short, and apply for an issuing certificate, the entry-exit inspection and quarantine organs or other inspection organs shall issue the certificate in a timely manner after inspection."

In line with the above-mentioned regulations, the Tribunal finds that the T City Entry-Exit Inspection and Quarantine Bureau is the entry-exit inspection and quarantine vertically administrated by the AQSIQ and has the legal authority to inspect and authenticate the technological performance of the disputed Machine. It also has the legal duty to issue relevant certificates. The legal effect of the Certificate of Inspection issued on 27 July 2006 is unassailable. Pursuant to the ruling "Some Provisions of the Supreme People's Court on Evidence in Civil Procedures" (hereinafter referred to as the "Evidence Provision"), the Certificate of Inspection has higher probative force than other evidence in the present case.

      3. The [Buyer]'s application to the T City Entry-Exit Inspection and Quarantine Bureau for quality authentication of the disputed Machine is in conformance with the Contract. In the present case, Article 14 of the Contract regarding Quality Guarantee provides that:

"The Seller promises that the goods are to be brand-new, and that the quality, specification and function should be in compliance with the Contract. The Seller is responsible for the installation and adjustment within 30 days after the arrival of the Machine. The Guarantee Period is 12 months after the Acceptance check of the Machine or 18 months after the shipment of the Machine, whichever comes first."

Since the shipment of the Machine comes first, pursuant to Article 14 of the Contract, the Guarantee Period should be calculated from the date of the shipment. As for the date of the shipment, it is provided in Article 6 of the Contract that the shipment is to be four and a half months after the advance payment is received.

On 21 September 2004, the [Buyer] paid the advance payment to the [Seller]. On 1 March 2005, the disputed Machine provided by the [Seller] was loaded and set off. Accordingly, the Guarantee Period should be 18 months calculated from 1 March 2005 to 1 September 2006 as contracted. The parties confirmed the starting time and finishing time of the Guarantee Period in the Annex with their signatures and seals. Article 15(2) of the Contract stipulates that:

"During the Guarantee Period, if the goods were damaged due to design or manufacturing defects, or the quality and function did not conform to the contract provisions, the Buyer would entrust China Commodity Inspection Bureau for inspection, and claim damages to the Seller (including replacement of goods) based on the China Commodity Inspection Bureau's inspection certificate. All the costs would be assumed by the Seller."

The "China Commodity Inspection Bureau" herein should be the General Administration of Quality Supervision, Inspection and Quarantine of the People's Republic of China (hereinafter referred to as the "AQSIQ") at the concluding time of the Contract. The Tribunal holds that the parties in an international trade are not always sure about the changes of the titles of the Chinese state organs. Therefore, the fact that parties of the present case used the former title of the state organ does not derogate the effect of the Article 15(2) of the Contract. However, it should be noted that, as is known in the practice of the international trade, the agreement of the parties refers to the entry-exit inspection and quarantine organs at relevant regions or ports, i.e., the entry-exit inspection and quarantine organs provided in current effective Chinese law, not the AQSIQ itself.

Besides, the [Seller] contends in the Dissent that the malfunction of the Machine resulted from mal-operation or unqualified raw materials for which the [Buyer] should submit corresponding evidences. The Tribunal holds that, according to the Evidence Provision, the burden of proof is on the party claiming. Since it is the [Seller] who objects to the facts submitted by the [Buyer], the burden of proof should be assumed by the [Seller] on the objection. In view of the fact that the [Seller] has submitted no evidence to support that objection, the [Seller] should bear the adverse consequences of lack of such evidence.

For all the reasons above, the Tribunal dismisses the [Seller]'s Dissent.

E. Regarding the liability for breach of the Contract

After the signing the Contract, the [Buyer] paid the contract price as provided and fulfilled its contractual obligations. The Machine supplied by the [Seller] does not conform to the Contract. This is supported by the Meeting Minutes signed by the parties, the Annexes and the Certificate of Inspection issued by the T City Entry-Exit Inspection and Quarantine Bureau.

The conclusion of the Certificate of Inspection is that:

"1. Under stable materials, printing ink and favorable environment, the print to print precision is over 0.1mm (See Photos 1 & 2);
"2. The print speed is slower than 175m/min.
In summary, based on the above-mentioned facts, we determine that the said problems result from design and/or manufacturing defects."

The above conclusion demonstrates that the [Seller] failed to fulfill its quality guarantee obligation under Article 14 of the Contract; the nine color Flexo label printing machine it sold to the [Buyer] does not conform to the Contract.

Article 25 of the CISG provides that:

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

Article 39 of the CISG provides that:

"(1) The buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it.

"(2) In any event, the buyer loses the right to rely on a lack of conformity of the goods if he does not give the seller notice thereof at the latest within a period of two years from the date on which the goods were actually handed over to the buyer, unless this time-limit is inconsistent with a contractual period of guarantee."

The facts of the present case are:

      In the 18 months Guarantee Period from 1 March 2005 to 1 September 2006, the [Buyer] informed the [Seller] several times about the non-conformity of the Machine and required the [Seller] to take make-up measures. The [Seller] also promised to solve the problems many times and sent technology staffs to adjust and repair the Machine with which the [Buyer] actively cooperated. However, the quality defects cannot be eliminated in the end which reflects that the quality defects of the Machine cannot be made up for within a reasonable time with reasonable efforts.

      Hence, the [Buyer] cannot realize its purpose of the Contract, i.e., the contractual expectations of the [Buyer] is deprived of. This result could be fairly foreseen by the [Seller] because the parties have made express requirements of the core characteristics such as the overprint precision and the speed. And the [Seller] cannot claim it can not foresee such a detriment to the buyer.

All of the above the facts are supported by the Meeting Minutes of 21 April 2005, 28 April 2005 and 26 May 2005 signed by the parties, the Annexes of the Inspection Report of 25 June 2005, and the Meeting Minutes of 1 April 2006.

According to the CISG and the facts, the Tribunal determines that the [Seller] breached the Contract by providing a non-conforming Machine. The non-conformity of the Machine substantially deprived the [Buyer] of what it expected under the Contract. Hence, the breach is a fundamental breach. The [Seller] is responsible for the liability for the breach in accordance with the CISG and Chinese law and the Contract.

F. Regarding the [Buyer]'s claims

      1. The claim that the [Seller] should replace the original Machine or the Contract should be avoided.

Before the end of the third oral hearing, in the final opinion, the [Buyer] filed an Amendment to the Arbitral Claims. According to the Amendment of the Arbitral Claims, the [Buyer] requests the Tribunal to find that:

"The [Seller] should replace the unqualified Flexo label printing machine with a qualified Flexo label printing machine within sixty days after the arbitral award is rendered. The Guarantee Period should be of 12 months after the new Flexo label printing machine was accepted. If the [Seller] could not deliver the new qualified machine or the delivered machine could not pass the acceptance check, the Contract should be cancelled. The [Buyer] should return the delivered machines to the [Seller] and the [Seller] should return the price paid by the [Buyer] after the cancellation of the Contract."

The Tribunal finds in favor of this claim for the following reasons:

First, Article 46 (2) & (3) of the CISG stipulate that:

"(2) If the goods do not conform with the contract, the buyer may require delivery of substitute goods only if the lack of conformity constitutes a fundamental breach of contract and a request for substitute goods is made either in conjunction with notice given under article 39 or within a reasonable time thereinafter.

"(3) If the goods do not conform to the contract, the buyer may require the seller to remedy the lack of conformity by repair, unless this is unreasonable having regard to all the circumstances. A request for repair must be made either in conjunction with notice given under article 39 or within a reasonable time thereinafter."

After the [Seller] breached the Contract, the [Buyer] gave notice within the period provided in Article 39 of CISG and Articles 15 and 17 of the Contract. Therefore, the [Buyer] is entitled to require replacement of the Machine, i.e., the [Buyer] is entitled to require the [Seller] to replace the non-conforming Flexo label printing machine (hereinafter referred to as the "Original Machine") with a conforming Flexo label printing machine (hereinafter referred to as the "New Machine").

Second, the delivery date of the New Machine should be ascertained. The [Buyer] requests the [Seller] make replacement within sixty days after the arbitral award is rendered. The Tribunal notes that the Original Machine set off on 1 March 2005 and arrived at the destination Qingdao on 30 March 2005. The course took 22 working days. Correspondingly, it is reasonable for the [Buyer] to request the New Machine to be delivered within 60 days. In terms of the facts ascertained by the Tribunal, as the party relies on the breach, the [Buyer] has sufficient evidence to prove that the [Seller] breached the Contract. Based on the expectation and the confidence that it would win the arbitration, it is reasonable for the [Buyer] to request that the New Machine be delivered within 60 days after the arbitral award is rendered.

Third, a reasonable Guarantee Period is necessary for the New Machine. A starting date also needs to be determined. Compared with the original Guarantee Period of 18 months calculating from the shipment, the Tribunal takes the 12 months Guarantee Period after the New Machine is accepted as reasonable.

Fourth, there are legal and contractual bases for the [Buyer] to cancel the Contract.

Article 94(4) of the Contract Law of the People's Republic of China (hereinafter referred to as the "Contract Law") stipulates that:

"The parties to a contract may terminate the contract under any of the following circumstances:

[…]

(4) The other party delays performance of its obligations, or breaches the contract in some other manner, rendering it impossible to achieve the purpose of the contract …"

Article 49 of the CISG also provides that:

"The buyer may declare the contract avoided if the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract."

Article 17 of the Contract prescribes that:

"If the Machine fails to meet the acceptance requirements due to the design or manufacturing defects of the Machine itself, the [Buyer] may request replacement of the Machine or cancel the Contract and ask for damages."

The claim by the [Buyer] that if the [Seller] could not deliver the new qualified machine or the delivered machine could not pass the acceptance check, the Contract should be cancelled should be deemed as setting reasonable conditions for the [Buyer] to avoid the Contract. By setting the conditions, the [Buyer] gives the [Seller] some bona fide grace which enables the [Seller] to choose between making a replacement and delivering a New Machine that complies with the Contract within the period or returning the contract price and getting back the Original Machine.

Based on the facts of the present case and the reasons the Tribunal gives to dismiss the [Seller]'s Dissent, the Tribunal finds the said content of the first arbitral claim is concrete and clear. The Tribunal would not accept the corresponding response made by the [Seller] which is of no legal basis.

      2. The claim that the [Seller] is responsible for the damages which should be 5% of the contract price.

The second arbitral claim made by the [Buyer] is that:

"The [Seller] should pay the damages. The damages should be calculated on the base amount of US $954,932, the Contract price of the Flexo label printing machine, and at the rate of 5%."

The facts of the present case demonstrate that the Original Machine which was being adjusted or repaired all the time fails the meet the requirements of acceptance. This not only deprived the [Buyer] of what it is entitled to expect under the Contract but also cost a lot of labor and material loss during the two years of repeated adjustment. As for the [Buyer]'s right to damages when the Machine fails to meet the requirements of acceptance, Article 17 of the Contract expressly stipulates that:

"The Seller should solve the problems within four weeks, if the Machine cannot work in an orderly manner and the production cannot be carried out after the installation and adjustment. After four weeks, if the Machine still cannot work in an orderly manner, penalties should be paid by the Seller to the Buyer. The penalty should be 0.5% of the total contract price for every seven working days with a maximum limit of 5% of the total contract price.

"The [Buyer] is entitled to request replacement of a new machine or avoid the Contract and get an indemnity of 5% of the total contract price, if after eight weeks of the installation and adjustment, the Machine fails to meet the requirements of acceptance due to design and/or manufacturing defects of the Machine itself."

On basis of the facts and the Contract, the Tribunal determines that the [Buyer]'s second arbitral claim is justified.

      3. The claim that the [Seller] should be responsible for the arbitration fees

      The Tribunal determines that the dispute is caused by the fundamental breach of the [Seller] deemed by the Tribunal to be the losing party. It is expressly provided in the Arbitration Clause, i.e., Article 19 of the Contract that "The arbitration and execution fees should be borne by the losing party."

The Tribunal accepts this claim.

IV. AWARD

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

1)    The [Seller] should replace the unqualified Flexo label printing Machine with a qualified Flexo label printing machine within sixty days after the arbitral award is rendered. The Guarantee Period should be of 12 months after the new Flexo label printing machine was accepted. If the [Seller] could not deliver the new qualified machine or the delivered machine could not pass the acceptance check, the Contract should be cancelled. The [Seller] should return the price paid by the [Buyer] and withdraw the machine delivered;
 
2)    The [Seller] should pay the damages of US $47,746.60, i.e., 5% of the total price of the Contract in the amount of US $954,932;
 
3)    The [Seller] is responsible for the Arbitration Fees. The Arbitration Fee for this arbitration is RMB 184,027. Since the [Buyer] has paid the entire sum in advance, the [Seller] should make payment of RMB 184,027 to the [Buyer].

The [Buyer] should pay for the travel expenses for the out-of-town arbitrator in the amount of RMB 12,076. Since the [Buyer] has paid RMB 14,000 in advance, the [Buyer] should be refunded for RMB 1,924 by the SCCIETAC.

The above payments should be made within twenty days from the date this award is handed down.

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


FOOTNOTES

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

** Xiangyu Huang, Undergraduate, Wuhan University School of Law, China; participant in the Seventeenth Annual Willem C. Vis International Commercial Arbitration Moot (2010).

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

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Pace Law School Institute of International Commercial Law - Last updated May 14, 2010
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