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CISG CASE PRESENTATION

China 27 October 1997 CIETAC Arbitration proceeding (Hot-rolled coils case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/971027c1.html]

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

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Case identification

DATE OF DECISION: 19971027 (27 October 1997)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1997/31

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Germany (respondent)

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

GOODS INVOLVED: Hot-rolled coils


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 35 ; 38 [Also cited: Article 30 ]

Classification of issues using UNCITRAL classification code numbers:

35A [Conformity of goods to contract: quality, quantity and description required by contract];

38A [Buyer's obligation to examine goods]

Descriptors: Conformity of goods ; Examination of goods

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Editorial remarks

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): 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) 1997 vol., pp. 2658-2669

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

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

Hot rolled coils case (27 October 1997)

Translation [*] by Meihua Xu [**]

Edited by John W. Zhu [***]

The China International Trade and Economic Arbitration Commission (formerly known as the Foreign Economic and Trade Arbitration Committee of China Council for the Promotion of International Trade, hereafter, the "Arbitration Commission") accepted the case according to:

   -    The arbitration clause in Contract No. S32478 for the sale of hot rolled coils signed by Claimant [Buyer], China __ Group Company (former name was China __ Industrial Company), and Respondent [Seller], Germany __ Company on 19 March 1996; and
 
   -    The written arbitration application submitted by [Buyer] on 26 November 1996.

The [Buyer] first appointed Mr. S as its arbitrator; however, Mr. S died. The [Buyer] then appointed Mr. A as its arbitrator on 11 March 1997. Mr. A, Mr. D, the arbitrator appointed by the [Seller], and Mr. P, the Presiding Arbitrator appointed by the Director of the Arbitration Commission according to the Arbitration Rules, formed the Arbitration Tribunal to hear this case. Later, pursuant to the Arbitration Rules, the Director of the Arbitration Commission appointed Mr. G as the Presiding Arbitrator because Mr. P was too busy. Mr. G, Mr. A, and Mr. D continued processing this case. The parties had no objection to the change of arbitrators and the formation of the Arbitration Tribunal.

The Arbitration Tribunal examined the arbitration application, the arbitration defense and the attachments submitted by the [Buyer] and the [Seller], and held a court session in Beijing on 18 July 1997. The [Buyer] and the [Seller] sent their agents to the court session. They made oral statements, presented arguments on legal issues, and answered the Arbitration Tribunal's questions. After the court session, both parties submitted written supplementary opinions and evidence.

This case has been concluded. The Arbitration Tribunal has handed down this award by consent on the basis of the court session and the written materials submitted by the two parties.

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

I. FACTS

On 19 March 1996, the [Buyer] and the [Seller] signed Contract No. S32478, by which the [Buyer] was to purchase 5,000 tons of hot rolled coils from the [Seller] on the following terms:

   -    Product: hot rolled coils made in Ukraine, 08KP under GOST 1050-88 standard (hereafter, "GOST standard");
   -    Price: US $290/ton, CFR FO CQD Shanghai;
   -    Specifications: The contract contains requirements on chemical components, function, specification and manufacturer of the goods, shipping period, and payment terms;
   -    Inspection: Article 17, the inspection clause of the contract, states that "the [Buyer] has the right to appoint CCIB to re-inspect the products at the discharge port at the [Buyer]'s expense. In the event of discrepancies between the actual goods and the contract or the transport documents certified by the CCIB report at the discharge port, the [Buyer] reserves the right to claim against the [Seller] within 45 days after completion of discharge."

After signing the contract, the [Buyer] issued a L/C on 28 March 1996, and received 5,018.708 tons of goods delivered by the [Seller] on 7 June 1996 in Shanghai.

The Shanghai Import & Export Commodity Inspection Bureau of the People's Republic of China (hereafter, "Shanghai CIB") inspected the 5,018.708 tons of goods (638 rolls in all) under the contract, and issued Inspection Certificate No. 3102/2366104 on 3 July 1996 (hereafter, "the Inspection Certificate"). The Inspection Certificate states:

   -    Appearance: Forty-one rolls (68.3%) of the sixty rolls randomly chosen from the goods had defects on the surfaces, which did not conform to the contract;
 
   -    Size: The thickness of eight rolls (25%) of the thirty-two rolls randomly chosen from the goods did not conform to the contract;
 
   -    Chemical components: Chemical analysis was performed on samples in different heat numbers, and the sulphur content of Heat No. 360308 did not conform to the contract.

The [Buyer] and the [Seller] had a dispute over the quality of the goods and failed to reach an agreement after negotiations. Therefore, the [Buyer] filed this arbitration application to the Arbitration Commission on 26 November 1996.

The [Buyer]'s arbitration claims are:

1. Because the [Seller] failed to perform the contract in accordance with the contract requirement, the [Buyer] could not perform its obligation to deliver the goods to a third party, with the result that the [Buyer] has paid the third party renminbi [RMB] 1,000,000 and a litigation fee of RMB 20,010, which the [Seller] should compensate to the [Buyer];

2. [Seller] should pay the difference between the price actually sold and the contract price for the 5,018.708 tons of goods, which is RMB 4,485,791.71;

3. [Seller] should pay the [Buyer]'s loss of interest, i.e., RMB 507,592.80, calculated from the day the goods should have been sold to the present;

4. [Seller] should pay the [Buyer]'s loss of profit, i.e., RMB 1,508,331.27, which should have been received but was not received by the [Buyer], and RMB 522,400, the price estimation fee paid to the Jiangsu Price Firm;

5. [Seller] should pay [Buyer]'s loss of storage fee caused by [Seller]'s breach of contract, which is RMB 119,858.89; and

6. [Seller] should bear the arbitration fee and attorneys' fee of RMB 150,000.

[POSITION OF THE PARTIES]

[Buyer]'s position

The [Buyer] alleges that:

After signing the contract, the [Buyer] issued the L/C as required by the contract. However, after being inspected by Shanghai CIB, the goods delivered by the [Seller] were found non-conforming on internal quality, appearance, specification, and size. On 8 July 1996, after being informed the inspection result, the [Buyer] asked its attorney to sent a letter to the [Seller], asking for return of the goods, and postponement of the L/C for 2-4 weeks to negotiate the compensation issue. Later, the [Seller] sent staff to China to check the condition of the goods, asserting that they would discuss and solve the problems as soon as possible once they went back. However, the [Seller] did not make any response.

The two parties negotiated the problem several times, and the [Seller] sent letters to the [Buyer], suggesting to have the goods re-inspected by Guangzhou SGS and CCIC. On 2 November 1996, the [Seller] sent a letter to the [Buyer], denying that there were defects on the goods, asserting that "the goods conform to the contract, and that there was no issue of compensation."

Xishan __ Industry Development Company (formerly known as Xishan __ Resource Company, hereafter "Xishan Company") entrusted the [Buyer] to import the 5,018.708 tons of goods, which were to be sold to Wuxi Special Pipes Company (hereafter, Wuxi Company"). Since the goods delivered by the [Seller] were found non-conforming after inspection, Xishan Company could not deliver the goods to Wuxi Company as required by its contract, with the result that Wuxi Company brought a lawsuit before the Wuxi Intermediate People's Court. According to (1996) Xijingchuzi No. __ Decision, Xishan Company was obligated to pay the economic loss related to this case of RMB 1,000,000 and the litigation fee of RMB 20,010.

Since the goods delivered by the [Seller] were termed non-conforming goods after being inspected by the inspection agency agreed upon by both parties, the [Seller] has violated the contract and should be responsible for the following payments:

1. According to the (1996) Xijingchuzi No. __ Civil Decision, Xishan Company lost its lawsuit and was obligated to pay RMB 1,000,000 to Wuxi __ Company, which was caused by the [Seller]'s violation of the contract. The [Seller] should pay the aforesaid sum plus the related litigation fee of RMB 20,010;

2. In order to mitigate the loss, and considering the fact that it would cause loss to the [Seller] if the goods were returned, the [Buyer] accepted the [Seller]'s request not to return the goods on condition that the [Buyer] could accept the goods, but the price for the goods should be the price determined by an authorized agency -- not the price in the original contract -- and that the [Seller] should bear the cost for entrusting such an agency and for the price difference.

The price difference (including tax) is: [US $290/ton RMB 8.32 / US $ (exchange rate on the day of payment) 5,018.708 tons + RMB 2,187,561.87 (increased VAT) + RMB 728,377.98 (the Customs charge)] - RMB 2,100/ton 5,018.708 tons = RMB 4,485,791.71.

The price estimation fee is RMB 522,400.

3. The goods imported by the [Buyer] should have been sold on 20 June 1996; however, due to the quality problem, the [Buyer]'s client refused to accept the non-conforming goods. Therefore, the [Seller] should bear the [Buyer]'s loss of interest on the L/C payment calculated from 20 June to present (temporarily calculated to 20 November).

The loss of interest is: US $1,450,000 (L/C payment) RMB8.32 / US $ (exchange rate on the day of payment, 3 September 1996) 8.415 (monthly interest) 5 (20 June 1996 - 20 November) = RMB 507,592.8.

4. [Seller] should also bear the [Buyer]'s and its domestic client, Xishan Company's loss of profit which should have been received if the [Seller] had performed the contract, but was not received by the two parties.

The loss of profit is 5,018.708 (the total weight) [RMB 3,380/ton (the price actually sold) - US $290/ton (the contract price) RMB 8.32 / US $ (exchange rate on the day of payment)] = RMB 4,854,094.38, deducting

-    Increased VAT: RMB 2,187,561.87
-    The Customs charge: RMB 728,377.98
-    Transportation and miscellaneous fee: RMB 371,384.26
-    Insurance fee: RMB 33,220
-    Inspection fee: RMB 25,219

The [Seller] should pay the [Buyer] RMB 1,508,331.27.

5. Xishan Company could not deliver the goods to its client because of the [Seller]'s contract violation. Therefore, the [Seller] should bear the storage fees from the day on which the goods should have been sold to present, including:

      (1) Shanghai Neilian Shipping Department: 1,278 tons RMB 0.40/day/ton 90 days (20 June 1996 - 18 September) = RMB 46,008;

      (2) Suzhou Great Wall Steel Mold Plates Factory: 498.96 tons RMB 0.10/day/ton 94 days (20 June - 22 September) = RMB 4,690.22; Unloading fee: 498.96tons RMB 20/ton = RMB 9,979.20;

      (3) Xishan __ Nanxizhang International Trade Warehouse: 3,241.06 tons RMB 0.10/day/ton 150 days (20 September - 20 November) = RMB 48,615.90; 1,278.60 tons RMB 0.10/day/ton 60 days (20 September - 20 November) = RMB 7,671.60; 498.96 tons RMB 0.10/day/ton 58 days (22 September - 20 November) = RMB 2,893.97;

The loss of storage fee from 20 June 1996, when the goods should have been sold, to 20 November 1996 is RMB 119,858.89.

      (6) The [Seller] should bear the costs for arbitration including the arbitration fee, attorneys' fee and traveling fee.

[Seller]'s defense

The [Seller] counter argues:

1. The CCIB Inspection Certificate

      (1) The [Seller] does not agree that the Inspection Certificate issued by Shanghai CIB should be the final basis for compensation. Article 17 of the contract stipulates that the [Buyer] has the right to entrust CCIB to re-inspect the good, and that if the inspection result does not conform to the contract requirement, the [Buyer] reserves the right to ask for compensation within 45 days after unloading the goods;

      (2) The Inspection Certificate issued by Shanghai CIB did not describe the condition of the goods correctly. There were the following problems:

            a. The GOST standard applies to goods with edges cut or uncut. The goods under the contract were uncut goods, and the goods actually delivered conformed to the standard for uncut goods; however, Shanghai CIB ignored this fact.

            b. The inspection report on thickness of the goods did not indicate whether the goods were measured based on the proper standard for measuring the thickness of this kind of goods stipulated in the contract, which provides that the standard used for measuring the goods was that the samples should be taken at a distance of not less than 40mm from the edges and not less than 2 meters from the end of the rolled length. On the other hand, the GOST 1050-88 standard stipulates that the samples should be taken at a distance not less than 1.5 meters from the end of the rolled length. Shanghai CIB did not perform the inspection based on this standard.

            c. Sulphur content of the goods. The sulphur content in the Inspection Certificate issued by Shanghai CIB was incorrect. There are samples from Heat No. 360308 kept at the factory in Ukraine, which indicate that the sulphur content is 0.03%. The Inspection Certificate issued by Shanghai CIB did not show that the inspection on chemical components was performed on the basis of GOST-88 standard as stipulated in the contract. Therefore, this Inspection Certificate is unreliable and the [Buyer] cannot claim damages based on this.

2. The [Seller] actually wanted to inspect the goods with the [Buyer] or allow the [Buyer] to re-inspect the goods alone. The [Seller] reserves the right to request re-inspection on the goods; however, the [Buyer] repeatedly rejected the [Seller]'s request without any reason, with the result, there is no independent inspection report, and the [Buyer] has not provide sufficient evidence to support its compensation claim.

3. [Buyer]'s compensation claim

      (1) The [Buyer] alleges that the goods imported were to be sold to Xishan Company, and that they would eventually be resold to Wuxi Company, but denied that Xishan Company could not deliver the goods to its client because of the inspection result given by Shanghai CIB. The [Seller] noticed that in the decision made by the Wuxi Intermediate People's Court, however, the Xishan Company did not make defense or raise any counterclaim, which indicated that it did not mitigate the loss. In any event, the [Seller] should not bear the damages suffered by Xishan Company.

      (2) The Jiangsu Price Firm determined that the market price for the contract goods was RMB 1,100/ton, which the [Seller] cannot accept. The price estimation was based on the incorrect inspection result given by Shanghai CIB, which could not reflect the real condition of the goods, and this loss was an indirect loss.

      (3) The Inspection Certificate indicated that the goods were deteriorating because of the environment and weather. And because the [Buyer] failed to resell the goods at a proper price to mitigate the loss after its client refused to take delivery of the goods, the [Seller] is not liable for this damage.

      (4) The [Seller] is not liable for the losses of profit, interest, and storage fees. These losses were caused by the [Buyer]'s client's refusing to take delivery of the goods; the [Buyer]'s client should bear the costs itself.

      (5) The [Buyer] should bear the cost incurred for arbitration.

4. Based on the above, the [Seller] has fulfilled its contract obligation in accordance with Articles 30 and 35 of the United Nations Convention on Contracts for the International Sale of Goods (hereafter, the "CISG") and Article 31 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest. The goods delivered by the [Seller] conformed to the contract on specification, quantity, quality, and chemical components, and the [Seller] never admitted that the goods were non-conforming goods. The Inspection Certificate issued by Shanghai CIB is unsound, and there is no reasonable inspection report issued by an independent third party. In addition, the [Buyer] failed to take reasonable measures to mitigate the loss. Therefore, the [Buyer]'s arbitration claim should not be accepted.

At the court session, the [Seller]'s witness, Andrei Koval, made oral and written statements on the Inspection Certificate issued by Shanghai CIB.

[Buyer]'s response

The [Buyer] submitted the following supplementary opinions after the court session.

1. Shanghai CIB is the inspection agency agreed upon by the two parties. It is a legally authorized inspection agency and the Inspection Certificate issued by it can be a legal and effective basis for compensation claim.

Moreover, Article 17 of the contract, which was accepted by the [Seller], stipulates that the inspection performed by Shanghai CIB and its Inspection Certificate can be an effective basis for the [Buyer]'s compensation claim. If the [Seller] does not agree that Shanghai CIB's inspection result is effective and has binding effect and that it can be the basis for compensation claim, then the [Seller] should not have agreed to have Shanghai CIB to do the inspection in the contract.

2. Shanghai CIB's Inspection Certificate is scientific and reasonable.

      (1) This inspection was performed strictly on the basis of the standard stipulated in the contract. The [Seller] received the Inspection Certificate in July 1996, and it did not raise objection or ask for a second inspection by Shanghai CIB from the beginning to the time when the arbitration process started.

      (2) [Seller]'s assertion that Shanghai CIB took samples improperly cannot be established. The letter from Shanghai CIB Chemical Mineral Metal Material Inspection Center to China Commodity Inspection Bureau Science Department submitted by the [Seller] described clearly that the samples were taken at a distance more than 2 meters from the end and more than 50mm from the edge of the rolls' length.

      (3) The [Seller]'s conclusion that the inspection result on sulphur content was erroneous based on the statement that the samples from the same oven kept by the manufacturer in Ukraine were conforming is not acceptable.

            a. The [Seller] alleged that the samples kept by the manufacturer in Ukraine conformed to the contract; however, it has not provided sufficient written evidence to support its assertion;

            b. The inspection result given by the inspection organization authorized by Chinese government and agreed by both parties, i.e., Shanghai CIB, should be the basis.

            c. When the inspection results given by the manufacturer and by Shanghai CIB conflict, the manufacturer's conclusion that its products are conforming goods is not effective.

      (4) The opinion of [Seller]'s witness, Andrei Koval, on the Inspection Certificate is not scientific.

            a. Andrei Koval does not know the whole inspection process, method of taking samples, and data in detail (he admitted the aforesaid facts at the court session). To say that the Shanghai CIB's Inspection Certificate should not be admitted by the Arbitration Tribunal without knowing the situation objectively is not scientific.

            b. Andrei Koval works at Guangzhou SGS, to which the [Seller] had asked for re-inspection. He has a close connection with Ukraine (where the manufacturer is located); therefore, the justice of his testimony is doubtful.

            c. Andrei Koval quoted the wrong GOST standard in his testimony, which was evidenced by the "opinion" issued by the Shanghai Steel Research Bureau Inspection Center and the letter from the Shanghai CIB Chemical Mineral Metal Material Inspection Center to the China Commodity Inspection Bureau Science Department.

3. The [Seller] failed to deliver conforming goods in accordance with the contract, and it should bear the responsibility for contract violation and compensation.

      (1) The Inspection Certificate issued by Shanghai CIB indicated that the [Seller] did not deliver the goods as required by the contract.

      (2) In the letter sent to the [Buyer] on 5 August 1996, the [Seller] admitted that there were rolls of coils which did not conform to the thickness and quality requirements in the contract in the goods delivered to the [Buyer], and that it would like to discuss the compensation issue.

      (3) In the letter the [Seller] sent to the [Buyer]'s client, the [Seller] also admitted that three rolls of coiled sheets were wrongfully delivered by mixing with other orders.

      (4) That the samples spot-checked did not conform to the contract does not mean that the remaining goods are all conforming goods. It is common sense that the [Buyer] and Shanghai CIB were not obliged to and could not inspect the 5,000 tons of goods by opening each roll, not even to mention to taking samples from each roll to do the physical and chemical inspections.

4. The [Buyer]'s compensation claim is reasonable and has legal basis.

      (1) The [Buyer] had received the deposit from its domestic client even before receiving the goods from the [Seller]. As long as the goods delivered by the [Seller] conformed to the contract, the goods could have been sold, which has nothing to do with the market risk.

      (2) Since the [Seller] failed to deliver the goods in accordance with the contract, after failing to reach an agreement by negotiation and having informed the [Seller], the measures which have been taken by the [Buyer] to mitigate the loss were appropriate.

      (3) The [Buyer] did nothing wrong during the performance of the contract; therefore, the [Seller] should compensate the [Buyer] for the sum the [Buyer] has paid to the third party pursuant to court order and for the losses of extra storage fees, transportation and miscellaneous fee, interest, and profit which should have been received if the [Seller] had delivered the goods according to the contract, but was not received by the [Buyer].

[Seller]'s response

The [Seller] further alleged in its supplementary defense submitted after the court session and in the second supplementary defense that:

1. The contract did not stipulate whether the edges of the goods should be cut or uncut; therefore, according to trade usages, the [Seller] could deliver uncut goods. Furthermore, the representative of the [Seller] had known that the goods were to be used to make pipes on the day of the conclusion of the contract. Therefore, if the purpose of the goods is for making pipes, the uncut goods delivered by the [Seller] surely conform with Article 35(2)(a), and 35(2)(b) of CISG.

2. The accusation of the [Buyer]'s attorney on the [Seller]'s professionals' comments on the Inspection Certificate of CCIB is not reasonable.

3. The [Buyer] failed to provide evidence to show that it had suffered losses.

4. The Jiangsu Price Firm should have estimated the price of the goods on the basis of the market price on the day of the conclusion of the contract, instead of on the day of price estimation, 31 October 1996. The [Seller] should not be liable for the loss caused by decreasing market price.

5. If the [Buyer] in fact had suffered losses, they were caused by the decreasing market price, not the [Seller]'s contract violation. The [Seller] should not bear the responsibility for compensation.

II. OPINION OF THE ARBITRATION TRIBUNAL

1. Application of the CISG

Considering that the places of business of the [Buyer] and the [Seller], China and Germany, are Contracting States of the CISG, the CISG should be applied.

2. Whether Article 3.3(2) and Article 4.4 of the GOST 1050-88 standard apply to the contract goods in this case

The Arbitration Tribunal notes that the "Opinion" issued by Shanghai Steel Research Bureau Inspection Center submitted by the [Buyer] as important evidence, takes the position that:

"... Article 3.3(2) [GOST 1050-88] states that it is 'for checking the surface quality and dimensions, all bars, strips and coils'... it is improper to apply this article to hot rolled coils. Article 4.4 of GOST 1050-88 standard stipulates that 'for all types of testing, samples shall be taken at a distance of not less than 1.5 turns from the end of the rolled length'. Article 4.4 clearly aims at coils, but the inspection method used by CCIB was commonly used in China and internationally, and the inspection result is reasonable and effective."

The Arbitration Tribunal examined the texts of the GOST 1050-88 standard and the contract carefully.

      (1) Article 3.3(2) of GOST 1050-88 standard

      The Arbitration Tribunal notes that GOST standard is a national standard used in Soviet Union, which was originally written in Russian. The text of this standard submitted by the [Seller] has been translated into English. The [Buyer] and the "opinion" issued by Shanghai Steel Research Bureau Inspection Center raised no objection to the English translation; therefore, it should be deemed that the English translation related to the contract in this case is reliable.

The Arbitration Tribunal also notes that the English version of the contract is the authentic text; therefore, it should become clear whether Article 3.3(2) of GOST 1050-88 standard is applicable to the contract goods in this case by comparing the English versions of the GOST 1050-88 standard and the contract.

"For checking the surface quality and dimensions," Article 3.3(2) refers to "all bars, strips and coils." The type of the goods, which is indicated in the "material" column of the contract is "hot rolled coils" and the specification, which is indicated in the quality column of the contract was written as "08kP according to GOST 1050-88". Coils are mentioned in both Article 3.3(2) of the GOST 1050-88 standard and in the contract. It is obvious that this article applies to the contract goods in this case.

Therefore, the Arbitration Tribunal deems that Article 3.3(2) of GOST 1050-88 standard applies to the contract goods in this case.

      (2) Article 4.4 of GOST 1050-88 standard

      Article 4.4 of GOST 1050-88 standard stipulates that "for all types of testing, samples shall be taken at a distance of not less than 1.5 turns from the end of the rolled length."

The Arbitration Tribunal cannot find the words or indications in Article 4.4 of GOST standard or in the provisions of the "4 methods of testing" that Article 4.4 of GOST standard "aims at coils, and does not apply to this case" as asserted by Shanghai Steel Research Bureau Inspection Center. This assertion by Shanghai Steel Research Bureau Inspection Center is unfounded. The Arbitration Tribunal concludes that Article 4.4 of GOST 1050-88 standard applies to this case.

3. The Inspection Certificate issued by Shanghai CIB

On 3 July 1996, Shanghai CIB issued Inspection Certificate 3102/2366104 and concluded that:

   -    The hot-rolled coils with 68.3% defective surfaces did not conform to the contract;
   -    The hot-rolled coils with 25% thickness defect did not conform to the contract;
   -    The sulphur content of coils in Heat No. 360308 did not conform to the contract.

In addition, it was mentioned in the remarks that the steel number on one roll and the thickness marks on two rolls did not conform to the contract stipulations.

Regarding Shanghai CIB's inspection result, the [Seller] quoted Article 17 of the contract, stating that the [Seller] never agreed that CCIB's inspection result was final and had binding effect. The [Seller] asked the manager of SGS-CSTC China Steel Department, Andrei Mikhailovich Koval, to testify that Shanghai CIB did not perform the inspection on the basis of GOST 1050-88 standard. However, the [Buyer] argues that according to Article 17 of the contract, the inspection performed by CCIB and its Inspection Certificate are effective bases for its compensation claims, and that they have binding effect.

The [Buyer] further argues that the Inspection Certificate issued by CCIB is scientific, and that the inspection was performed strictly in accordance with the contract stipulations. Providing the "opinion" issued by Shanghai Steel Research Bureau Inspection Center, the [Buyer] asserts that the [Seller]'s allegation that the CCIB took samples improperly cannot be established.

The Arbitration Tribunal examined Article 17 of the contract, which states:

"The [Buyer] has the right to appoint CCIB to reinspect the material at the discharge port at the [Buyer]'s expense. In the event of discrepancies certified by the CCIB report at the discharge port, the [Buyer] reserves the right to claim against the [Seller] within 45 days after completion of discharge."

The Arbitration Tribunal deems that [Buyer]'s right to reinspect the goods as stipulated in Article 17 of the contract is in accordance with Article 38 CISG. If the goods are found in non-conformity with the contract after CCIB's inspection, the [Buyer] is entitled to ask for compensation from the [Seller]. However, the inspection by CCIB must be performed based on the stipulations of China Import & Export Commodity Inspection Law, Article 6 of which stipulates that "if the parties have agreed on an inspection standard, the inspection organization should perform the inspection based on that standard."

The real issue in the instant case is whether the Shanghai CIB conducted the inspection strictly in accordance with the GOST 1050-88 standard stipulated in the contract.

Inspection Certificate 3102/2366104 issued by Shanghai CIB did not state that the inspection was performed on the basis of GOST 1050-88 standard, and except for a reference in the "Goods Name" column, the GOST 1050-88 standard was not mentioned in the entire report.

Shanghai Steel Research Bureau Inspection Center's opinion that Articles 3.3(2) and 4.4 of GOST 1050-88 standard do not apply to this case has been found inaccurate by the Arbitration Tribunal in section (2) above.

      (1) Defects on the surface of the goods

      The Arbitration Tribunal notes that the two parties have disputed whether the edges of the goods should be cut or uncut, and whether the goods are to be used to make pipes. The Arbitration Tribunal holds that GOST 1050-88 standard does not mention the difference between cut and uncut, and that the contract does not stipulate whether the goods should be cut or uncut, nor does it stipulate that the goods are to be use to make pipes. Therefore, the aforesaid disputes have nothing to do with this case.

What the Arbitration Tribunal needs to judge and what relates to this case is whether Shanghai CIB's inspection result that the surface of the goods had defects can be established on the basis of GOST 1050-88 standard.

Article 3.3(1) of GOST 1050-88 standard requires inspecting the entire goods; however, Shanghai CIB only chose 60 rolls from a total of 638 rolls, which was only 9.4% of the entire goods. This violated Article 3.3(2) of GOST 1050-88 standard.

The Inspection Certificate issued by Shanghai CIB indicated that the so-called defects were cracks and cracked edges, which were evidenced by photos without any statistics. The Arbitration Tribunal notes that according to Article 2.1 and 6.2 of GOST 1050-88 standard, isolated defects on surfaces, which are less than half of the size error, are allowed.

Since there are no statistics, the Arbitration Tribunal is not able to determine whether the defects of the cracks and cracked edges exceed half of the size error, or whether they are harmful or to what extend they are harmful. In other words, Shanghai CIB did not prove that the cracks and cracked edges were harmful.

However, from the pictures submitted to the Arbitration Tribunal, the defects are clearly not isolated.

Although the defects are not isolated and have exceeded the extent allowed by Article 2.1.6.2 of GOST 1050-88 standard, Shanghai CIB failed to prove that the defects were harmful. In addition, Shanghai CIB did not inspect the entire goods as required by GOST 1050-88 standard, but only inspected sixty rolls of the entire goods. Since GOST 1050-88 standard requires inspection of the entire goods, the inspection result on sixty rolls has no meaning on the remaining 578 rolls, therefore, the Arbitration Tribunal has to hold that forty-one rolls have isolated surface defects which have not been proved harmful based on the inspection result given by Shanghai CIB.

      (2) Error on thickness of the goods

      Article 3.3(2) of GOST 1050-88 standard requires inspection of the entire goods; however, Shanghai CIB only chose thirty-two rolls from the total amount of 638 rolls, which was 5% and did not conform to 3.3(2) of GOST 1050-88 standard.

Article 4.4 of GOST 1050-88 standard requires taking samples at a distance of not less than 1.5 turns from the end of the rolled length; however, Shanghai CIB took samples at a distance not less than 2 meters from the end of the rolled length. Koval estimated that 1.5 turns should be about 6 meters. Therefore, the Arbitration Tribunal holds that 6 meters is appropriate based on the thickness, width and the average weight of the rolls. It can be concluded that 2 meters from the end of the rolled length is less than 1.5 turns. In other words, Shanghai CIB took samples from the end of the rolls, the thickness of which is not accurate; therefore, it did not conform to Article 4.4 of GOST 1050-88 standard, and the Arbitration Tribunal cannot accept the inspection result.

      (3) For the three rolls with different marks from the contract. Shanghai CIB did not draw any conclusion from this, but only mentioned them in remarks. The Arbitration Tribunal deems that they should be considered as wrongfully delivered goods. However, Shanghai CIB did not mention that there were defects on the appearance or quality of the three rolls, and the [Buyer] has accepted and resold them. Therefore, the Arbitration Tribunal holds that the [Buyer] has accepted these three rolls of wrongfully delivered goods.

      (4) The Arbitration Tribunal notes that the [Buyer] stated in its "legal opinion" submitted on 12 August 1997, that "the [Buyer] and CCIB cannot do the inspection on the 5,000 tons of goods by opening each roll, not even to mention taking samples from each roll to do physical and chemical inspections, and that there is no such requirement."

Article 3.3(2) of GOST 1050-88 standard only requires inspections on surface quality and dimensions of each piece, and there are different stipulations on inspections on chemical components and function, which need not inspect each piece. Therefore, the [Buyer]'s "legal opinion" was written without reading the text of GOST 1050-88 standard carefully.

Certainly, if the two parties deem that it would have been difficult or unnecessary to inspect the surface quality and dimensions of each piece, they could have made a modification to their contract. However, the two parties in this case did not make any modification on one or some stipulations of the inspection standard. It therefore should be considered that the two parties agreed to follow the inspection standard.

Article 6 of the China Import & Export Commodity Inspection Law stipulates that

"... in the absence of such stipulations (compulsory standards or other inspection standards which must be complied with as provided for by laws or administrative rules and regulations), import and export commodities shall be inspected in accordance with the inspection standards agreed upon in the foreign trade contracts."

The two parties in this case agreed to use GOST 1050-88 standard; therefore, Shanghai CIB should inspect the goods in accordance with that standard.

      (5) Sulphur content

      The [Seller]'s objection to the conclusion that sulphur content of goods produced in one oven was too high was mainly to prove that the inspection on the goods of the same oven made by the manufacturer showed that the goods were conforming. The [Seller] did not mention any problem on the [Buyer]'s method of inspection. The Arbitration Tribunal deems that the inspection made by the manufacturer is meaningful; however, it was stipulated in the contract that the [Buyer] had the right to reinspect the goods, and according to the CISG, the [Buyer] has the right to inspect the goods. Therefore, if there are discrepancies between the reinspection result and the manufacturer's inspection result, the reinspection result should be the basis, except where there are errors in methods of inspection or taking samples, or there is evidence to otherwise prove the existence of such errors.

The Arbitration Tribunal also notes that the chemical components mentioned in GOST 1050-88 standard are the result of a ladle test. However, Shanghai CIB did the inspection on products. Error should be allowed between the two results. Article 1.2 of GOST 1050-88 standard does not have a stipulation on allowed error on sulphur content. This should be interpreted to mean that error on sulphur content is not allowed.

The Arbitration Tribunal therefore holds that the conclusion made by Shanghai CIB that the sulphur content of Heat No. 360308, i.e., 0.057%, has exceeded 0.04%, the maximum content stipulated in the contract, is acceptable.

      (6) Based on the above investigation and analysis, the Arbitration Tribunal concludes that:

            a. Shanghai CIB did not perform the inspection according to Article 6 of the China Import & Export Commodity Inspection Law, nor did it inspect the goods in accordance with GOST 1050-88 standard. Therefore, except for the conclusion that forty-one rolls had cracks and cracked edges, which were not isolated, its conclusion that the surface and thickness of the goods did not conform to the contract cannot be the basis to determine the quality of the goods in this case;

            b. The inspection result on sulphur content of the goods is accepted. The sulphur content of the goods of Heat No. 360308 did not conform to the contract;

            c. The [Buyer] has accepted the three rolls of goods with different marks from the contract.

4. The [Buyer]'s arbitration claims

      (1) The first claim of the [Buyer] is that the [Seller] should pay renminbi [RMB] 1,000,000, which the [Buyer] paid to a third party, and the litigation fee of RMB 20,010.

The [Buyer] alleges that the reason for raising this claim is that "the [Seller] failed to deliver the goods as required by the contract, with the result that the [Buyer] could not perform its obligation to deliver the goods to the third party."

The client of the [Buyer], Xishan Company, and the so-called third party, Wuxi Company, signed a mineral products sales contract, Article 2 of which stipulated that the quality and technical standard shall be in accordance with "CCIB standard". The [Buyer] could not deliver the goods to the third party because the goods did not conform to "CCIB standard". However, according to the [Buyer]'s contract with the [Seller], the goods in this case should be based on the GOST 1050-88standard instead of the CCIB standard. The Arbitration Tribunal has concluded that because Shanghai CIB did not perform the inspection based on the GOST 1050-88 standard, therefore, except for its conclusion that forty-one rolls had cracks and cracked edges which were not isolated (although the defects have not been proved harmful), and that the sulphur content of the products from one oven was too high, the other conclusions of the inspection are not acceptable. Thus, Xishan Company's inability to deliver the goods to a third party has nothing to do with this case. The Arbitration Tribunal does not accept this claim of the [Buyer].

      (2) The [Buyer] asks the [Seller] to pay the price difference of RMB 4,485,791.71 on the basis of an "expertise report on the price of imported hot-rolled coil" issued by Jiangsu Price Firm and the price estimation fee of RMB 522,400.

The Arbitration Tribunal examined the "expertise report on the price of imported hot-rolled coil" issued by Jiangsu Price Firm, and according to the "evaluation procedure and method" part of this report, the price was decided by conforming the Inspection Certificate issued by Shanghai CIB and considering the domestic sales market and the floating price.

As stated above, except for the inspection results that forty-one rolls have surface defects which are not isolated but have not been proved harmful, and that the sulphur content of the products from one oven exceeded contract requirement, the Arbitration Tribunal does not accept the Inspection Certificate issued by Shanghai CIB. The [Buyer] should bear the risks from the domestic sales market and the floating price, which have nothing to do with the [Seller]. Therefore, the Arbitration Tribunal does not accept the "expertise report on the price of imported hot-rolled coil" issued by Jiangsu Price Firm. This claim of the [Buyer] is not acceptable.

The Arbitration Tribunal does accept that forty-one rolls have surface defects which are not isolated but have not been proved harmful, and that sulphur content of the products from one oven exceeded contract requirement.

Forty-one rolls should weigh 322.51 tons if calculated on the basis of the average weight per roll. The [Seller] alleges that the goods of Heat No. 360308 were 32.54 tons, to which the [Buyer] did not raise objection. The aforesaid two items total 355.06 tons. Therefore, the Arbitration Tribunal deems that the [Seller] shall compensate the [Buyer] US $3,089.02, i.e., 355.06 290 0.03 = 3,089.02, which is 3% of the contract price.

      (3) In the [Buyer]'s claims 3, 4, and 5, the [Buyer] asks the [Seller] to pay for (including the compensation to its client):

      -    Loss of interest on the L/C price of RMB 507,592.80;
      -    Loss of Xishan Company's anticipated profit of RMB 1,508,331.27;
      -    Loss of Xishan Company's storage fee of RMB 119,858.89.

The [Buyer]'s aforesaid claims were raised based on Shanghai CIB's Inspection Certificate; however, the Arbitration Tribunal does not accept the entire result of this Inspection Certificate. It has only ruled that the [Seller] shall only compensate the [Buyer] on the defects on forty-one rolls and for the defect of sulphur content. Therefore, the Arbitration Tribunal does not accept these claims of the [Buyer].

5. Arbitration fee

The [Buyer] shall bear 90% of the arbitration fee and the [Seller] shall bear 10%.

III. THE AWARD

The Arbitration Tribunal rules that:

      (1) [Seller] shall pay US $3,089.02 to the [Buyer];

      (2) [Buyer]'s other arbitration claims are dismissed;

      (3) [Buyer] shall bear 90% of the arbitration fee and [Seller] shall bear 10%. [Buyer] has paid RMB __ in advance, which offsets the arbitration fee, therefore, [Seller] shall pay back RMB __, i.e., US $__ , to [Buyer].

The [Seller] shall pay the aforesaid US $5,905.39 within 45 days 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 Peoples' Republic of China is referred to as [Buyer] and Respondent of Germany 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].

** 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 a 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.

*** John W. Zhu, LL.M. China University of Political Science and Law (National Graduate Scholarship); Bachelor of Law, Southwest University of Political Science and Law; Double Degree, English Literature, Sichuan International Studies University, Chongqing, China. Focus: International Economic Law.

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Pace Law School Institute of International Commercial Law - Last updated October 11, 2006
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