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CISG CASE PRESENTATION

China 20 July 1993 CIETAC Arbitration proceeding (Shaping machine case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/930720c1.html]

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

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Case identification

DATE OF DECISION: 19930720 (20 July 1993)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1993/10

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Japan (respondent)

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

GOODS INVOLVED: Shaping machines


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 25 ; 49 ; 74 ; 81 ; 84

Classification of issues using UNCITRAL classification code numbers:

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

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];

81C [Effect of avoidance on obligations: return of defective goods];

84A [Restitution of benefits received: seller bound to refund price must pay interest]

Descriptors: Fundamental breach ; Avoidance ; Damages ; Restitution ; Interest

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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): Zhong Guo Guo Ji Jing Ji Mao Yi Zhong Cai Wei Yuan Hui Cai Jue Shu Hui Bian [Compilation of CIETAC Arbitration Awards] (May 2004) 1993 vol., pp. 399-404

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at n.90, Nordic Journal of Commercial Law (2/2005)

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Case text (English translation)

Queen Mary Case Translation Programme

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

Shaping machine case (20 July 1993)

Translation [*] by Meihua Xu [**]

Edited by Yan Tianhuai [***]

China International Trade and Economic Arbitration Commission (hereinafter, the "Arbitration Commission") accepted this case according to

   -    The arbitration clause in the Sales Contract No. CL 84139 [hereinafter, the "Contract"] signed by Claimant [Buyer], China ___ Leasing Company and Respondent [Seller], Japan ___ Company on 24 November 1984; and
 
   -    The written arbitration application submitted by the [Buyer] on 6 July 1991.

Following the Arbitration Rules, the Chairman of the Arbitration Commission appointed Mr. P as the Presiding Arbitrator. Mr. P, Mr. A, the arbitrator appointed by the [Buyer], and Mr. D, the arbitrator appointed by the [Seller], formed the Arbitration Tribunal to hear this case.

After examined the [Buyer]'s arbitration application and evidence as well as the [Seller]'s defense and evidence, the Arbitration Tribunal held court sessions in Beijing on 7 December 1991 and 20 April 1992. Both parties sent representatives to the court sessions. They made oral statements of the facts, exchanged arguments, and answered the Arbitration Tribunal's questions.

This case has been concluded. The Arbitration Tribunal made its ruling based on the materials submitted by both parties and the facts ascertained during the court sessions.

The following are the facts, the Arbitration Tribunal's opinion and award.

I.   FACTS

On 24 November 1984, the [Buyer] and the [Seller] concluded the Contract in Beijing. According to the Contract, the [Buyer] purchased from the [Seller] one JB102 shaping machine and one JB105 shaping machine together with relevant auxiliary machines and parts at a total price of Japanese Yen [JPY] 40,050,000.00.

Article 14 , the quality warranty clause, of the Contract, provides:

"The [Seller] shall guarantee that the goods are brand new and are manufactured with the best material and through the best technology. The quality and specification of the goods shall conform to the Contract. The quality warranty period shall be twelve months after the goods arrive at the destination port. Within the quality warranty period, the [Buyer] shall operate the machines under normal conditions following the operating instructions. The [Seller] shall be liable for any loss resulting from design or manufacturing defect ."

Article 15.3 of the Contract provides:

"If the quality or quantity of the goods does not conform to the Contract, or if any defect including intrinsic defect or defect in material is found within the warranty period as stipulated in Article 14, the [Buyer] shall have the goods inspected by a inspection agency, and may claim damages based on the inspection report."

Article 21 of the Contract further provides:

"(1) The [Seller] acknowledges that the goods bought by the [Buyer] are to be leased to Jiangxi Province ___ Plastic Company; (2) The [Seller] promises the [Buyer] and the lessee that the specification, model, quality, and function of the goods shall satisfy the lessee's needs; and (3) The [Seller] shall be directly responsible to the lessee for the quality warranty and other services and obligations undertaken by it under this contract."

On 13 February 1985, the [Buyer], Jiangxi Province ___ Plastic Company [hereinafter, the "[Buyer]'s customer"], the [Seller], and Japan Steel Manufacturer (the manufacturer of the goods) jointly signed an attachment to the Contract and an agreement, in which all parties reached an agreement on delivery and inspection of the goods as well as related technical issues. Japan Steel Manufacturer provided the manufacturing standard of the goods.

On 20 June 1985, the [Buyer], the [Seller], and Japan Leasing Company concluded an assignment agreement, which provides:

The [Buyer] shall transfer all its rights and duties under the Contract to Japan Leasing Company. After Japan Leasing Company obtains the title to the goods, it shall lease the goods as lessor to the [Buyer], and shall entrust the [Buyer] to exercise the rights against and to perform the duties toward the [Seller] under the Contract except for the duty to pay the price. The [Seller] shall perform its duties toward and exercise its rights against the [Buyer] under the Contract except the right to claim the price. All disputes, claims, penalties, and arbitrations arising from or in connection with the performance of the Contract or this agreement shall be settled or conducted according to the Contract.

On 20 June 1985, the [Buyer] and Japan Leasing Company signed a lease agreement, according to which the [Buyer] paid the total rent on 15 August.

On 23 August 1985, the goods arrived at Shanghai port. On 11 November 1985, 13 December 1985, and 22 July 1986, respectively, the [Seller] dispatched its representatives to the [Buyer]'s customer's factory to install and commission the machines. Because the parties could not reach an agreement on the problems arising from installing and commissioning the machines, the [Buyer] filed this arbitration application on 6 July 1991.

II.  POSITION OF THE PARTIES

A. [Buyer]'s position

The [Buyer] alleges that:

1. The goods arrived at Shanghai port on 23 August 1985, which was seventy days later than the delivery date prescribed in the Contract.

2. During the first operation test conducted on 11 November 1985, it was found that severe quality defects existed in the machines, especially in some important parts, such as the thickness auto control system (JSW) of the JB105 machine was not functional and the time relay (H3Y- 230SEC) of the freezer was damaged. As a consequence, the products manufactured by the machines were defective. During the second test conducted on 13 December 1985, even though the JSW was replaced, the problems that occurred in the first test were still unresolved, and there were some new problems, such as the belt of the squeezing machine was broken, the flowing speed of the material was uneven, the funnel and high pressure oil pipe were broken, and the relay was destroyed.

On 14 January 1986, Jiangxi Import & Export Commodity Inspection Bureau inspected the goods and issued Inspection Certificate No. (86) J11-006, stating that "the defects in the shaping machine were formed during the manufacturing process." The [Buyer] immediately sent the aforesaid inspection certificate to the [Seller], however, the [Seller] delayed its response. It was not until 22 July 1986 that the [Seller] dispatched its representatives to the [Buyer]'s customer's factory to do the third operation test. Due to the malfunction of both JB102 and JB105 machines' JSW thickness auto control systems, the third test also failed.

On 29 July 1986, both parties signed a memorandum, confirming that the [Seller] would send a representative to repair the JSW and provide needed parts and technical documents in early August 1986. After being repeatedly urged by the [Buyer], on 3 March 1989, the [Seller] finally notified the [Buyer] by fax that the parts were going to arrive at Shanghai port on 4 March 1989, but the JSW thickness auto control system could not be delivered until an approval was obtained the Japanese government because of what [Seller] termed a "CoCom Problem" (Coordinating Committee for Multi-Lateral Export Controls).

On 15 April 1989, after taking delivery of the parts, the [Buyer]'s customer found that, besides the JSW thickness auto control system, some other important parts needed for operating the machines, such as the rubber bag inside the high pressure oxygen bottle, the engine shaft of the squeezing machine, transmission belt, and heating relay, also were not delivered.

Considering that the [Seller] had refused to perform its obligation for three years, on 9 October 1989, the [Buyer] asked its lawyer to write a letter urging the [Seller] to cure its breach of the Contract immediately. However, the [Seller] continued its breach. Late on, the [Seller] suggested that it provide other parts equivalent in price to the JSW system as a replacement. This suggestion was rejected by the [Buyer] as unreasonable.

The [Seller] has violated Article 14 and Article 21 of the Contract as well as Article 2 of the attachment to the Contract by delivering severely defective goods. In addition, the [Seller]'s failure to cure its breach of the Contract for as long as five years after both parties' confirmation of the severe defects in the goods on 23 November 1985 constituted a fundamental breach of the Contract. Therefore, the [Buyer] claims that:

     (1) The [Seller] should take back the machines and pay back the [Buyer] the price JPY 40,050,000.00;

     (2) The [Seller] should pay the [Buyer] the interest on the price calculated to 31 March 1991, totaling JPY 32,908,224.24;

     (3) The [Seller] should compensate the [Buyer] for other losses, including

     (4) The [Seller] shall bear the arbitration fee and the [Buyer]'s attorneys' fee.

B. The [Seller]'s Position

The [Seller] argues that:

1. The [Seller] does not accept the [Buyer]'s (1), (2), (3), and (4) claims.

2. The [Seller]'s seventy-day delay in delivery of the goods was caused by the [Buyer]'s customer's late supply of the sample product quality confirmation data to Japan Steel Company (the manufacturer of the goods).

3. The first operation test was conducted with the attendance of the [Seller]'s technicians. The [Seller] admitted that the control system and the time relay of the freezer were damaged. However, it was unclear whether the goods were damaged during the transportation after they were handed over to the [Buyer] in Yokohama, or during the [Buyer]'s unloading, installing and commissioning the machine. There was no problem when the goods were inspected before delivery from the manufacturer. Also, the Contract was formed under the term C&F; it was the [Buyer] who should bear all risks of loss of or damages to the goods. There is a strong possibility that the goods were damaged after they were handed over to the [Buyer], which means the damages should be borne by the insurance company or by the [Buyer] itself.

After the first test operation, the [Buyer] set forth its claims in the memorandum. However, because the pressing machine was not covered by the Contract and there was a strong possibility that the damages to the control system and the time relay of the freezer were caused by the [Buyer], the [Seller] did not accept the [Buyer]'s claims. In addition, the technicians dispatched by the [Seller] for the first test operation were only skilled workers of the manufacturer of the goods in charge of installation of the machines, the [Seller] was unlikely to delegate to them the duty to resolve all the disputes between the parties. On 3 December 1985, the manufacturer of the goods gave written technical suggestions to the [Buyer]'s customer and agreed to send technicians again doing the test operation of the control system and to provide for the parts of the time relay of the freezer and other parts.

On 13 December 1985, when the [Seller]'s technicians did the second operation test, they found that the seven problems claimed by the [Buyer] were caused by the [Buyer]'s errors in operating the machines, supplying water, and using non-conforming material. After repair, the JB102 machine continually run 144 hours and the JB105 machine continually run 94 hours, which satisfied the requirement for acceptance by the [Buyer]. However, the [Buyer] asked for RMB 300, 000 as a delay penalty to issue the acceptance certificate. The [Seller] rejected the [Buyer]'s request for delay penalty as groundless. Therefore, the [Seller] did not got the acceptance certificate from the [Buyer] even though the machines were acceptable.

4. The [Seller] objects to the manufacturing defects certificate issued by the Commodity Inspection Bureau on 14 January 1986 because no description of the thickness or the diameter of the product to be produced by the machines was provided in the Contract nor did the [Buyer] provide the [Seller] with the manufacturing drawings of such product. The certificate also has problems in terms of inspection date, inspection place, inspection purpose, inspection method, and inspection result.

5. During the third test operation conducted on 22 July 1986, the machines produced the products (duck) that satisfied the [Buyer]'s customer. This fact showed that the machines were good for PVC shaping, except for the control system's malfunction, which was caused by the [Buyer]'s customer's improper operating the machines.

6. The [Seller] denies the fact that it signed the memorandum dated 29 July 1986, in which the [Buyer]'s customer noted the defects in the goods and asked the [Seller] to resolve those problems. The [Seller] was unlikely to give the power of attorney of signing the memorandum to the technicians who were only in charge of technical issues.

7. On March 1989, the [Seller] shipped to the [Buyer] those parts listed in the [Buyer]'s memorandum dated 29 July 1986. However, the parts the [Buyer] is claiming were not listed in the memorandum, so they were not included in the Contracts and the [Seller] should not be responsible for them. In fact, some parts were provided by the [Seller] as an extra service at its discretion, not obligation under the Contract.

8. The machines' malfunction was caused by the [Buyer]'s customer's improper operation, poor quality material, and inadequate water supply volume, which were resolved by the technicians dispatched by the [Seller] on 13 December 1985. Therefore, the [Seller] bears no liability to the [Buyer] or the [Buyer]'s customer.

III. OPINION OF THE ARBITRATION TRIBUNAL

The Arbitration Tribunal noted that after the JB102 and JB105 machines arrived at the [Buyer]'s customer's factory, the [Seller] dispatched technicians three times to do test operations. Except for the second test operation, the other two test operations were recorded in the memorandums signed by the [Buyer]'s customer and the technicians.

The first operation test memorandum, signed on 23 November 1985, provides:

"... did installation and test operation. During the test operation, under the instruction by Mr. ___, the machines were able to operate, but still in an abnormal condition. The problems are that the thickness auto control system (JSW) of the JB105 machine was damaged and unable to function, and the time relay (H3Y-230SEC) of the freezer was broken after being used for only 48 hours."

The third operation test memorandum, signed on 29 July 1986, states:

"The JSW thickness auto control system is the essential part of the JB series shaping machines, however, the JB102 and JB 105 machines have been under an uncontrollable condition for a long time, and the thickness of the products cannot be adjusted as per the orders."

Since the parties failed to provide enough evidence about the second test operation, the Arbitration Tribunal is not going to consider it. According to the facts recorded in the first operation test memorandum and the third operation test memorandum as well as the two inspection certificates issued by Jiangxi Import & Export Commodity Inspection Bureau respectively on 14 January 1986 and 17 November 1986, the Arbitration Tribunal holds that there did exist quality problems in the JB102 and JB105 machines, the biggest one being malfunction of the JSW thickness auto control system.

The Arbitration Tribunal found that the JSW thickness auto control system was the essential part of the shaping machine to produce quality products, but for as long as eight years after the first test operation, the [Seller] failed to resolve the problem with the control system, with the result the machines could not be put into operation.

According to Article 25 of the United Nations Convention on Contracts for the International Sales of Goods (hereinafter, the "CISG"), which provides that "a breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract":

   -    The Arbitration Tribunal holds that the [Seller] has fundamentally breached the Contract, and that the [Buyer]'s claims for the [Seller]'s taking back the goods and paying back the [Buyer] the price of the goods plus interest at a 7% annual rate should be accepted.
 
   -    The Arbitration Tribunal also holds that the [Seller] shall compensate the [Buyer] for other losses including ocean transportation insurance fee of US $1,204.89, property insurance fee of US $889.39, customs duty of RMB 85,000, inland transportation fee and handling fee of RMB 4,265, inspection fee of RMB 1,733, photo fee and document translation fee of RMB 341.80, material cost of RMB 17,605.20, rent of JPY 356 455.49, and commission to transportation agent of RMB 407.66, totaling US $2,094.28, JPY 356,455.49, and RMB 109,352.66.

The [Buyer]'s other claims are dismissed by the Arbitration Tribunal for lack of sufficient evidence.

IV. THE AWARD

The Arbitration Tribunal rules that:

1. The [Buyer] shall return to the [Seller] the goods under the Contract, and the [Seller] shall pay back the [Buyer] the price of the goods, which is JPY 40,050,000, plus interest calculated at a 7% annual rate from 15 August 1988 to the day the payment is made.

2. The [Seller] shall compensate the [Buyer] for other losses, totaling US $2,094.28, JPY 356,455.49, and RMB 109,352.66.

3. The [Buyer]'s other claims are dismissed.

4. The [Seller] shall bear all arbitration fees.

The [Seller] shall made the payments mentioned in above 1, 2, 4 to the [Buyer] before 10 September 1993.

This award is final.


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] and Respondent of Japan 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]; amounts in the currency of Japan (Japanese Yen) are indicated as [JPY].

** Meihua Xu, LL.M. University of Pittsburgh School of Law on an Alcoa Scholarship. She received her Bachelor of Law degree, with the receipt of Scholarship granted by the Ministry of Education, Japan, from Waseda University, Tokyo, Japan. Her focus is on International Business Law and International Business related case study.

*** Tianhuai Yan, LL.M., Golden Gate University Law School; LL.M. Nanjing University Law School, BEcon, Nanjing Univesity Business School, Attorney at Law, admitted in P.R. China and California, USA; Partner, G & D Law Firm, Nanjing, China.

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