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CISG CASE PRESENTATION

China 6 April 1994 CIETAC Arbitration proceeding (Printing machine case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/940406c1.html]

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

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Case identification

DATE OF DECISION: 19940406 (6 April 1994)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1994/05

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: United States (respondent)

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

GOODS INVOLVED: Printing machine


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 25 ; 46 ; 48 ; 84

Classification of issues using UNCITRAL classification code numbers:

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

46C [Buyer's right to require repair of non-conforming goods];

48A [Cure by seller after date for delivery: seller's right to remedy any failure to perform];

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

Descriptors: Fundamental breach ; Repair ; Cure ; 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) 1994 vol., pp. 756-760

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at n.91, 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

Printing machine case (6 April 1994)

Translation [*] by Zheng Xie [**]

Translation edited by Meihua Xu [***]

China's International Trade and Economic Arbitration Commission [hereafter, the Arbitration Commission] accepted this case on 29 April 1993 according to:

   -    The arbitration clause in Contract No. 910AOB-20006 signed by Claimant [Buyer], China ___ Company, and Respondent [Seller], U.S. ___ Corporation, on 16 September 1991; and
 
   -    The written arbitration application submitted by [Buyer] to the Arbitration Commission on 6 April 1993.

On 5 June 1993, the Chairman of the Arbitration Commission appointed Mr. P as the presiding arbitrator according to the Arbitration Rules. Mr. P, Mr. A appointed by the Chairman of the Arbritration Commission on behalf of [Buyer], and Mr. D appointed by [Seller] formed the Arbitration Tribunal and heard the case.

On 27 July 1993, the Arbitration Tribunal held a court session in Beijing. Both parties attended the session. They made oral statements and arguments, and answered the Arbitration Tribunal's questions.

Because of the considerable discrepancy in the views of the parties on the quality of the machine delivered pursuant to the contract, the Arbitral Tribunal, upon [Seller]'s request and with [Buyer]'s approval, sought to organize some experts to adjust the machine. On 13 November 1993, the Arbitration Tribunal issued its interlocutory award to this effect. However, on 25 December 1993, [Seller] wrote to the Arbitration Tribunal stating that because the manufacturer, Taiwan __ Company and the supplier, Hong Kong __ Company, do not agree to having the machine so adjusted, the adjustment cannot be made, and asked the Arbitration Tribunal to issue its award based on the facts and the evidence. On 24 January 1994, [Buyer] also sent a letter stating that if the adjustment could not be made, the Arbiration Tribunal may hand down its award based on law.

Considering the parties' opinions, the written materials and the court session, the Arbitration Tribunal has concluded the case and handed down its award by consent.

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

I. FACTS

On 16 September 1991, [Buyer] and [Seller] signed a contract for the sale of an eight-color printing machine for the total contract price of US $371,200. Meanwhile, [Buyer] signed a technology contract appendix with its client end-user, Wuxi Qian Zhou Huang Shi __ Printing Factory, and with the manufacturer, Taiwan __ Company, and [Seller]'s supplier, Hong Kong __ Company.

On 22 January 1992, the machine arrived at Shanghai Port; in February, it arrived at the Wuxi factory; on March 13, it was inspected. The inspection certificate shows that the machine lacks eight stick components. At the end of March, the supplier and the manufacturer's technician went to the factory to adjust the machine. The technician, who was not a printing machine technician, said that the machine was not adjusted well, so it could not run for printing. The manufacturer agreed to send some technicians with the supplier to the Wuxi factory to adjust the machine at the end of April, but the technicians did not adjust the machine to the specification stipulated.

In May, September and December 1992, [Buyer] claimed damages from [Seller] and negotiated with the supplier and the manufacturer, but no agreement was reached. On 28 June 1993, [Buyer] filed the arbitration application with the Arbitration Commission.

II. POSITION OF THE PARTIES

A. [Buyer]'s claims

[Buyer] claims the following damages:

     1. [Seller] shall indemnify the entire price of the machine, US $371,200.

     2. [Seller] shall indemnify the price for purchasing components, including stick components, which were bought for the machine, but the machine did not run, renminbi [RMB] 1,260,000.

     3. [Seller] shall pay the arbitration fee and [Buyer]'s attorneys' fee.

B. [Seller]'s defense

To [Buyer]'s claims, [Seller] defends:

     1. The reasons for and evidence for [Buyer]'s assertion that the machine has defects are not sufficient.

          a. The first adjustment at the end of March 1992 did not make the machine match the requirements because the technician was not a printing machine technician. That effort to adjust the machine is the basis for [Buyer]'s assertion that the quality was not conforming. This assertion does not have sufficient evidence to support it.

          b. When the second adjustment was made, because of an electric problem, the manual drive was used instead of the electric drive, and the power did not fulfill the technical requirements. In such circumstances, the test results could not prove the quality of the goods.

          c. The inspection certificate issued by the commodity inspection bureau does not show a clear result. The inspection was made when the adjustment was not finished. The inspection shows the machine has severe defects, which does not mean the quality is not conforming or that the machine cannot run well; this does not mean the machine does not work normally when the adjustment is made. Accordingly, this inspection is not sufficient to support the conclusion that the machine has quality defects. [Seller] has requested the Arbitration Tribunal to arrange an inspection by experts, if it is necessary.

     2. [Seller] does not know the machine's current situation. If [Buyer] uses or stores it improperly, [Seller] is not liable.

     3. [Buyer] has not provided sufficient evidence to support its claim for expenses of buying components.

C. [Buyer]'s response

To [Seller]'s assertions, [Buyer] responds:

     1. According to the contract, [Seller] is responsible for adjusting the machine. [Buyer] maintains that the machine has quality defects on the basis of the adjustment result, regardless of whether the person to do the adjusting was a printing machine technician or not, and [Seller] should be liable for failure of the first adjustment.

     2. Due to electric problems, the manual drive was used; however, this did not affect the adjustment result. No one made any objection to this during the second adjustment.

     3. The inspection certificate issued by the commodity inspection bureau is clear; it shows that the machine has six quality defects.

     4. [Seller] did not inspect on the spot, so it cannot draw arbitrary conclusions. [Seller] asserts it does not know the machine's current situation; [Seller] also alleges that [Buyer] is using the machine improperly. Such assertions conflict with one another.

     5. [Buyer] is amenable to having the machine adjusted again. However, if the adjustment fails, [Seller] should indemnify [Buyer]'s direct loss, end user's expected profits and other losses, RMB 1,260,000.

After the first court session, the parties submitted supplementary materials regarding the technical problems of adjustments and other facts.

D. [Seller]'s main points

[Seller]'s main points are:

     1. The parties involved in this case, [Buyer], [Seller], the end-user, the manufacturer and the supplier, did not jointly sign any agreement. The three agreements signed by the end-user and the manufacturer are not binding on [Seller]; [Seller] is only responsible for its contract with [Buyer].

     2. [Seller] and [Buyer] reached an agreement that [Seller] would send to [Buyer] eight stick components for free. Thus, the parties have performed the obligations according to United Nations Convention on Contracts for the International Sale of Goods (1980). However, when the components arrived at Shanghai, the end-user refused to accept them and Shanghai customs forfeited them, for which [Seller] is not liable.

     3. [Seller] did not attend the two adjustments, so it is not liable for the adjustment result. [Buyer] did not attend the second adjustment, so it is not liable for the second adjustment. The problems arising in the adjustments are not fundamental defects of the design and specification of the machine, but are caused by the quality of the ink and paper used. It is wrong to conclude that the machine has severe defects, and that it cannot run well.

     4. The contract and the technical appendix to the contract signed by the end user and the manufacturer do not stipulate specifications or samples. The end-user accepted the machine and sample which it now claims are non-conforming, and now requests to return the machine and claims damages. The claims are not supported.

     5. The manufacturer, according to the contract, offered to make a further adjustment and suggested to take measures to mitigate damages, but the end-user refused, which breached the contract and the technical appendix.

     6. The end-user asserts, "if the adjustment calls for additional components, [Seller] admits the machine does not conform to the contract". This assertion shows that the end-user does not want the manufacturer to take reasonable measures to mitigate damages in accordance with the instruction of the Arbitration Tribunal.

     7. [Buyer] and its agent breached the CISG and the Provisional Regulation on Foreign Trade Agency implemented by China Ministry of Foreign Trade and Economic Cooperation. [Buyer]'s claims shall not be supported, because:

          a. Article 49(2) of CISG stipulates that "... in cases where the seller has delivered the goods, the buyer loses the right to the declare the contract avoided ..." [Translator's note: This is an inaccurate statement by the Seller that was not commented on by the Tribunal in its opinion. Article 49(2) states in its entirety that "... in cases where the seller has delivered the goods, the buyer loses the right to declare the contract avoided, unless he does so [in a timely manner]" (emphasis added)].

[Seller further alleged that] CISG [Article 46(3)] states that "[i]f the goods do not conform with the contract, the buyer may require the seller to remedy the lack of conformity by repair ...", but [Buyer] instead claims for the entire contract price, which means it declares the contract avoided and requests to return the goods, and which breaches the CISG.

          b. [Buyer] and its end user neither kept the machine in the original condition, nor did it take reasonable measures to protect the machine, so it has no right to request to return the machine and claim for the entire contract price.

     8. [Buyer]'s claim for the expenses of buying the components for RMB 1,260,000 is not supported because the supply of many of the components is not [Seller]'s obligation. Moreover, some of the components were bought even before the goods were shipped. Therefore, [Seller] is not liable for [Buyer]'s claim for the cost of the components.

     9. The relationship between the end-user and [Buyer] is the legal relation of principal and agent. [Buyer] breached the contract and requested [Seller] to indemnify the entire contract price. This is contrary to the Provisional Regulation on Foreign Trade Agency. The end-user confirmed the supplier's quotation, and signed the technical appendix to the contract with the manufacturer, and accepted the non-conforming sample provided by the manufacturer, so it should not claim damages against [Buyer]; accordingly, [Buyer] has no right to request [Seller] to indemnify it.

E. Award requested by [Seller]

In conclusion, [Seller] requests the Arbitration Tribunal to make the following award:

     1. [Buyer]'s claim for the entire contract price, US $371,200.00, and the expenses for the components, US $1,260,000 should be rejected

     2. [Buyer] should accept the manufacturer's measures to repair according to the contract signed by [Buyer] and the end-user, and the technical appendix signed by the end-user and the manufacturer.

     3. [Buyer] should pay [Seller]'s attorneys' fee and other expenses for this arbitration.

     4. [Buyer] should pay the arbitration fee.

F. [Buyer]'s objections

To [Seller]'s above assertion, [Buyer] makes the following objections:

     1. The contract and appendix decide the relationship of the five parties.

    -   First, the contract was signed by [Buyer] and [Seller]. Clause 2 and Clause 20 respectively stipulate that the manufacturer is Taiwan __ Company; the appendix is part of the contract and has the same validity.
 
    -   Second, Appendix I introduces the machine; Appendix II is on the machine's standard components; Appendix III is the agreement on printing paper for the machine, all of which are part of the contract.
 
    -   Third, although [Seller] did not participate the negotiation, it signed when the ___ company faxed the appendices to it. The contact and the appendices are related and have the same validity. The relationship among the five parties exists. [Seller] is liable for the contract and the appendices.

     2. [Seller] asserts that the inspection certificate only shows that the machine lacks eight components, but does not show any other defects, such as the design, quality, and specification, etc. The inspection certificate of 6 April 1992 states that the PMB-18D printing machine was tested under the circumstances described in the instruction, and the Bureau inspected the machine's operation and found the following problems:

          (1) The items printed by the machine have errors (see samples 1, 2, 3, 4, 5, 6).

          (2) When the machine runs again after stopping, the color cannot be printed at the right position.

          (3) When one set of color is adjusted, the other sets of color move to the wrong position.

          (4) When the item is printed, some paper is loose and some is tight.

          (5) The items printed have defects.

          (6) The paper printed has different and improper size of margins.

The inspection certificate shows the machine cannot be used due to its defects. This is a fundamental breach as defined in Article 25 of the CISG. Thus, [Seller] shall be liable for the damages according to Article 46(2) [Translator's note: Presumably, this is a typographic error, with the intended reference to Article 45(2).].

          (7) [Seller] is responsible for the adjustment of the machine according to the contract and custom. It is unreasonable for [Seller] to assert relief from liability because it did not attend the adjustment and to allege that the failure of the adjustment was caused by the quality of the ink and paper.

          (8) The quality of the machine is not conforming; this is not only proved by the inspection, but the manufacturer, the end-user and the supplier admitted this during the negotiation in Guangzhou; in addition, the manufacturer agreed that [Buyer] returns the machine. The contract and the appendices stipulate the quality of the machine, which shall be eight-color standard printing. The paper provided by [Buyer] in the first court session is not sample paper, but the packing paper that came with the machine, and when the machine was inspected, no one said it was sample paper.

          (9) It is not true that the end-user refused to take measures to repair. When the adjustment failed, the end-user asked to send persons for further adjusting. The dispute cannot be resolved, because [Seller], the manufacturer and the supplier did not take active measures for negotiation.

III. OPINION OF THE ARBITRAL TRIBUNAL

The Arbitration Tribunal holds the following opinion:

     1. The applicable law

The parties did not stipulate the applicable law in the contract. [Buyer]'s application and [Seller]'s defense materials cite the United Nations Convention on Contracts for the International Sale of Goods (1980) (CISG). The contract is for the sale of goods and the parties apply the CISG to this case. Accordingly, the Arbitration Tribunal holds that the CISG applies to this case.

     2. The contract and the appendices

The Arbitration Tribunal notes that although the three appendices were signed by the end-user and the manufacturer, the content is related to the technology of the machine and adjustment, and [Buyer] and supplier attended the negotiation of the appendices; [Seller] signed the contract when it receiving the contract and the appendices sent by the Hong Kong supplier. Clause 20 of the contract stipulates that the appendices are parts of the contract and have the same validity as the contract. Accordingly, the Arbitration Tribunal does not support [Seller]'s assertion that it is not liable for the agreements (the appendices) signed by the manufacturer, the end-user, [Buyer] and Hong Kong __ Company in Shenzhen.

Contract No. 910AOB and the three appendices are binding on both [Buyer] and [Seller].

     3. The quality and adjustment of the machine

According to the court session and the materials submitted by the parties, [Buyer] is not liable for the failure of the two adjustments. Although, the adjustments were made by the Taiwan manufacturer, Contract No. 910AOB signed by [Buyer] and [Seller] requires [Seller] to provide the best materials and technology to manufacture a new and good quality printing machine. However, the two adjustments failed. [Seller] did not provide any evidence to prove that the machine are conforming to the contract. In addition, [Seller] suggested that the Arbitration Tribunal arrange an adjustment of the machine by experts at the first court session. However, when the Arbitration Tribunal issued an interlocutory for such an adjustment, [Seller] stated that the manufacturer did not agree to cooperate, and suggested not to make the adjustment.

Thus, the Arbitration Tribunal holds that, according to Article 25 of CISG, [Seller] deprived [Buyer] of its right to receive a new and usable machine, which constitutes fundamental breach. [Buyer] is therefore entitled to return the goods and to get back the price of the machine.

     4. The expenses for buying the components

[Buyer] did not provide sufficient evidence to support its claim for the cost of the components. Therefore, the Arbitration Tribunal does not grant this claim.

IV. THE AWARD

     1. Within 45 days of the date of this award, [Buyer] shall return the printing machine, [Seller] shall pay the expenses, and [Seller] shall return the entire contract price, US $371,200. In addition, [Seller] shall pay interest at the annual rate of 5% from the date when [Buyer] made the payment to the date when [Seller] returns the price to [Buyer].

     2. [Buyer]'s claim for expenses of buying the components, RMB 1,260,000, is dismissed.

     3. Each party shall pay its own attorneys' fee.

     4. [Seller] shall pay the arbitration fee, RMB ___. [Buyer] has paid the arbitration fee in advance, so [Seller] shall pay RMB ___ to [Buyer] within 45 days of the date of this award .

This is the final award.


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 the United States 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].

** Zheng Xie, LL.M. Washington University in St. Louis, LL.M., BA in Economics, University of International Business and Economics, Beijing.

*** 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.

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