China 24 December 1998 CIETAC Arbitration Proceeding (Diesel generator case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/981224c1.html]
DATE OF DECISION:
DATABASE ASSIGNED DOCKET NUMBER: CISG/1998/05
CASE HISTORY: Prior arbitration award dated 5 May 1998
SELLER'S COUNTRY: Singapore (respondent)
BUYER'S COUNTRY: People's Republic of China (claimant)
GOODS INVOLVED: Diesel generators and spare parts
APPLICATION OF CISG: Yes
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
39A [Requirement to notify seller of lack of conformity: buyer must notify seller within reasonable time]
39A [Requirement to notify seller of lack of conformity: buyer must notify seller within reasonable time]
CITATIONS TO ABSTRACTS OF DECISION
(a) UNCITRAL abstract: Unavailable
(b) Other abstracts
CITATIONS TO TEXT OF DECISION
Original language (Chinese): Zhongguo Guoji Jingji Maoyi Zhongcai Caijueshu Caijueshu Xuanbian [Selected Compilation of Awards of CIETAC]: 1995-2002, Law Press, pages 216-227
Translation (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
UnavailableGo to Case Table of Contents
|Case text (English translation)|
Diesel generator case (24 December 1998)
Translation [*] by Meihua Xu [**]
Edited by Yan Tianhuai [***]
I. Facts and Issues
- The prior arbitration proceeding
- The current arbitration proceeding
- Positions of the parties
II. Opinions of the Arbitration Tribunal
III. The Award
The Shenzhen Sub-Commission of China International Trade and Economic Arbitration Commission (CIETAC) (hereafter, "Shenzhen Sub-Commission") accepted this case according to:
|-||The arbitration clause in the Diesel Generator Sales Contract No. XXX(hereinafter,
the "Contract") signed by and between the [Buyer], a Singapore company, and the
[Seller], a Chinese company; and|
|-||The written arbitration application submitted by the [Buyer] on 13 May 1998.|
The arbitration of this case shall be conducted in accordance with the Arbitration Rules of CIETAC (hereinafter, "Arbitration Rules"), which became effective on 10 May 1998. The [Buyer] and the [Seller] each appointed its own arbitrator but failed to jointly appoint the presiding arbitrator, who therefore was appointed by the Chairman of the CIETAC according to the Arbitration Rules. The three arbitrators formed the Arbitration Tribunal on 7 July 1998.
The Secretariat of Shenzhen Sub-Commission has delivered to both parties all of the related documents, notices, and materials.
On 21 August 1998, the Arbitration Tribunal held a court session, at which both parties' representatives were present. During the court session, the Arbitration Tribunal heard each party's statements and arguments, examined the evidence, and asked questions on the facts of the case. At the end of the court session, each party made its closing statement.
After the court session, both parties submitted supplementary documents to the Arbitration Tribunal.
On 24 December 1998, the Arbitration Tribunal handed down this award. The following are the facts, issues, and the Arbitration Tribunal's opinions and award.
I. FACTS AND ISSUES
The [Buyer] and the [Seller] signed the Contract on 9 November 1995. The following are the contract clauses related to the dispute in this case.
(1) Contract goods: Four Peitebo TB400A diesel generators together with necessary auxiliaries, and one automatic shield made in Singapore.
(3) Country of origin and manufacturer: The diesel generators shall be made by Singapore Peitebo Yuandong Company, the diesel engines shall be KTA19G4 made by British Cummins Company, and the generators shall be HC534D made by British Stamford Company.
(9) Payment: The payment term stipulates the documents to be provided by the [Seller], including ... (4) a quality certificate issued by the manufacturer of the diesel engines; (5) a quality certificate issued by the manufacturer of the generators; (6) a certificate of origin issued by the Chamber of Commerce in Singapore; (8) a quality certificate issued by the manufacturer of the diesel generators.
(10) [Seller]'s responsibilities: (1) The [Seller] shall ensure that the diesel generators are newly produced with quality raw materials and that they satisfy every technical criterion; (2) in case of any shortage of or damage to the goods caused by inferior quality, the [Seller] shall be responsible for repair or replacement; (3) the quality warranty period shall be twelve months or 1,000 operational hours (whichever is earlier) calculated from the end of the first three months after the diesel generators were installed and commissioned, and during the warranty period any damages to the diesel generators shall be repaired or replaced by the [Seller]; (4) the [Seller] shall be responsible for providing the technical data of the building and equipment in connection with the diesel generators and shall also be responsible for commissioning the diesel generators free of charge; and (5) the [Seller] shall be responsible for the installation of the diesel generators free of charge.
(14) Liabilities for breach of the contract: If any party fails to fulfill its responsibilities, the other party shall be entitled to compensation.
(15) Dispute settlement: All disputes related to or arising from the performance of the Contract shall be settled through negotiation. If the dispute cannot be settled through negotiation, it should be submitted to the Shenzhen Sub-Commission for arbitration which shall be conducted in accordance with the Arbitration Rules. The Arbitration shall be conducted in Shenzhen, China and the arbitral award is final and binding upon both parties. Neither the [Buyer] nor the [Seller] has the right to appeal the case to any court or governmental organization.
(16) Inspection: The goods shall be inspected twice: the first inspection shall be conducted by two persons in Hong Kong three days before shipment, and the second inspection shall be done at the [Buyer]'s factory in Shenzhen, China and shall be final.
(17) Applicable law: The contract shall be governed by Chinese law.
Article (1) and (2) of the annex to the Contract provides the same description of the countries of origin and the manufacturers of the goods as provided in Article (3) of the Contract with the only exception that two English words were added following the transliteration of Cummins and Stamford.
Article 10.2 of the annex to the Contract provides a description of the generator's combining function as follows:
The generators shall be started by hand. The generator that is started first shall be connected with the master line first, then the combining system will collect and compare the output of the generator with the master line, and adjust the speed of the generator simultaneously. When the speed matches the frequency of the master line, the combining system will compare the phases, and when the phases become the same, the output switch of the second generator will be turned on and the second generator will be connected with the master line. Upon the completion of the combination of four generators, the system will monitor every generator's output load and distribute the load among the generators according to the load distributor (the customer may fix it between 20% and 100%).
PRIOR ARBITRATION PROCEEDING (the award of 5 May 1998)
A dispute arose between the parties during the performance of the Contract. On 23 January 1997, the [Seller] filed an application for arbitration (hereinafter, "Prior Arbitration"). On 25 February 1997, the Shenzhen Sub-Commission accepted the arbitration application (the case number of the prior arbitration is  Shen Guo Zhong Zi No. XXX, hereinafter, "Prior Arbitration Case").
The [Seller] claimed that:
The [Buyer] defended that:
On 25 June 1997, the court session for the Prior Arbitration Case was held. During the court session, the [Buyer] asked the Arbitration Tribunal (hereinafter, "Prior Arbitration Tribunal") to entrust a third party to inspect the goods, to which the [Seller] gave its consent. The Arbitration Tribunal accepted the [Buyer]'s request.
On 13 March 1998, the Internal Combustion Engine Inspection Institute of Guangdong Province issued the (Guangdong) Province Zhi Jian Ren Zi No. 052 inspection certificate, which states that any objection to the inspection result shall be raised within fifteen days after receipt of the certificate; any late objections will be dismissed.
The Secretariat of the Shenzhen Sub-Commission forwarded the inspection certificate to both parties, and the two parties raised no written objection.
According to Article 18 of the Arbitration Rules (1995 version), a counterclaim should be filed within 60 days after receipt of the arbitration notice. The [Buyer] raised its counterclaims in the documents submitted to the Prior Arbitration Tribunal on 24 February and 27 March 1998. On 6 April 1998, the Prior Arbitration Tribunal informed the [Buyer] with a letter stating that the [Buyer]'s counterclaims were filed beyond the time limit prescribed in the Arbitration Rules, therefore could not be accepted.
Upon approval by the Shenzhen Sub-Commission, the award date of the Prior Arbitration Case was postponed. On 5 May 1998, the Prior Arbitration Tribunal handed down the  Shen Guo Zhong Jie Zi No.XXX award (hereinafter, "Prior Arbitral Award"), which ordered the [Buyer] to pay the [Seller] the price in arrears.
Thereafter, the [Buyer] filed an new arbitration application with Shenzhen Sub-Commission as stated at the outset of this text.
CURRENT ARBITRATION PROCEEDING
On 13 May 1998, Shenzhen Sub-Commission accepted the [Buyer]'s application for arbitration, in which the [Buyer] claimed that:
The [Buyer] also requested a complete inspection of the four generators.
On 1 August 1998, the [Buyer] amended its claims and in the final statement submitted to the Arbitration Tribunal on 8 August 1998 the [Buyer] fixed the total amount of its claims at RMB 948,100 based on the following reasons:
The [Seller] submitted to the Arbitration Tribunal a written defense together with related evidence. During the court session, both parties made their statements of the case, exchanged arguments, presented closing statements, and submitted written statements and supplementary opinions.
Issues and positions of the parties
The key issues of the case are:
As to the first issue, the [Buyer] asserted that:
However, the [Seller] pointed out that the [Buyer] had lost its right to claim for compensation. As the Respondent in the Prior Arbitration Case, the [Buyer]'s defense that the quality of the goods was not in conformity with the Contract and its counterclaims that its rights under the Contract were infringed by the [Seller] had been addressed by the Prior Arbitration Tribunal in the Prior Arbitral Award. In the Prior Arbitral Award, the Prior Arbitration Tribunal held that:
"The generators delivered by the [Seller] completely satisfy the requirement provided in Article 10.2 of the annex to the Contract. Even though some problems occurred during the commissioning process, the [Seller] has made repair or replacement in accordance with the Contract, therefore, the [Buyer] should not refuse to make payment by claiming that some defects existed in the four generators and the [Seller]'s non-delivery of one combining cabinet caused the failure of the combining function required in Article 10.2 of the annex to the Contract."
The quality defects the [Buyer] raised in this case, such as the broken fan blades, the leaking tank, and the broken cable, had been repeatedly raised in the Prior Arbitration Case and had been rebutted by the [Seller]. Such issues had also been addressed by the Prior Arbitration Tribunal in the Prior Arbitral Award as stated above. The most important evidence relied on by the Prior Arbitration Tribunal in reaching its conclusion in the Prior Arbitral Award was a definitive inspection result issued by the inspection institution entrusted by the Prior Arbitration Tribunal in regard to the working condition of the four generators delivered by the [Seller]. Therefore, the [Seller] argued that although the [Buyer] had the right to file a pro forma claim with the Shenzhen Sub-Commission and that the Shenzhen Sub-Commission could accept it. However, according to the Arbitration Rules, the [Buyer]'s claim should be dismissed and the [Buyer] should be ordered to bear the arbitration fee, because the facts relied on by the [Buyer] in the current case had been ruled by the Prior Arbitration Tribunal in the Prior Arbitral Award,
The [Seller] also defended that there were brand marks on the diesel engines and generators except the control boxes only, the [Seller] had provided the [Buyer] with the full set of documents required by the Contract, and the [Buyer] had accepted and used the contract goods beyond a reasonable time.
As to the second issue, except the aforesaid basis for claiming for compensation, the [Buyer] also asserted that: (1) the [Seller] violated Article 1(1) of the Contract by not providing the combining cabinet in time, without which the balanced working load and combined operation of the generators could not be guaranteed; as a consequence, the [Buyer] incurred additional cost; and (2) the [Seller] violated Article 10(3) of the Contract by not providing repair services within twenty-four hours after a notice of quality problem was given during the warranty period, for example, the [Seller] was notified the quality problems before September 1996 but did not provide the repair service until October or December 1996 or even February 1997, and such quality problems occurred more than fourteen times during the warranty period; as a consequence, the [Buyer[ suffered substantial economic losses.
The [Seller] contended that the quality issues had been settled by the parties in accordance with the Contract and the settlement of such quality issues had been confirmed in the Prior Arbitral Award. As to the quality problems that existed on fan blades, water tanks, cables, circulated soft tubes, and energy storage switches, the [Seller] pointed out that the Arbitration Tribunal had confirmed the following facts after the court session: (1) the defective fan blades, water tanks, and cables had been replaced in time by the [Seller] in accordance with the Contract, free of charge upon receipt of the [Buyer]'s request; (2) the aforesaid quality problems had no negative effect on the major functions of the generators; and (3) the damages to the energy storage switches were caused by ordinary wear and tear after the expiry of warranty period, and there was written evidence showing that the [Buyer] replaced only one of the energy storages switches with a new one bought by itself but left others intact; therefore the function failures of such energy storage switches (as stated in a inspection certificate issued by an inspection institution engaged by the [Buyer]) were caused by the [Buyer]'s failure to replace them in time with new ones rather than quality problems for which the [Seller] should be responsible.
The [Seller] further argued that the [Buyer] presented no evidence to prove any substantial defects existed in manufacturing or operation of the generators except undue exaggeration of some abnormalities in connection with their ancillary functions.
As to the law applicable to this case, the [Buyer] alleged that Chapter 4 of the Product Quality Law of the People's Republic of China (which is about the damage caused by defective goods), Article 112 of the General Principles of the Civil Law of the People's Republic of China (which is about the seller's liabilities when defective product cause damage to an individual's body or property), Article 12 and Article 17 of the Economic Contract Law of the People's Republic of China (which are about the mandatory quality terms in a contract for sale of goods), and Article 18 of the Foreign Economic Contract Law of the People's Republic of China (which is about liabilities for breach of contract) should be applied. The [Buyer] also agreed that reference to chapter III of the United Nations Convention on Contracts for the International Sales of Goods (hereinafter, "CISG") (which is about buyer's obligations) and Chapter 3 of the Products Quality Law of the People's Republic of China (which is about the quality responsibilities of producer and vendor) should be made.
The [Seller] argued that the [Buyer]'s claims were not in conformity with applicable Chinese Law under which any claims based on external quality problems should be raised within three months and any claims based on internal quality problem should be raised within one year, or in line with international practices and customs under which inspection of goods and claim for compensation based on quality problem should be made within reasonable time. The [Seller]'s opinion was that this case should be governed by Article 39 of CISG, which provides that "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 has discovered it or ought to have discovered it," rather than Article 12 and 17 of the Economic Contract Law of People's Republic of China and Article 35 of the Product Quality Law of the People's Republic of China as asserted by the [Buyer].
II. OPINION OF THE ARBITRATION TRIBUNAL
1. In Article 17 of the Contract, both parties agreed that the Contract should be governed by Chinese law. The parties also expressed their intention to have the CISG applied to their dispute. The Arbitration Tribunal respects the parties' choice.
2. The Arbitration Tribunal noted that the Prior Arbitration Tribunal had found that after conclusion of the Contract, the [Seller] delivered four diesel generators to the [Buyer]'s factory in Shenzhen, China on 30 March 1996, and the [Buyer] accepted them by using its seal on the delivery note. This fact indicated that the [Buyer] received the goods in good condition.
3. As to the issues such as whether the four generators delivered by the [Seller] were in conformity with the Contract, whether the [Seller] delivered the quality certificates and certificates of origin and whether the generators carried with brand marks, the Arbitration Tribunal holds that the [Buyer] should have raised these issues at the time [Buyer] received the goods, and if there had been any lack of conformity the [Buyer] could have refused to take the delivery of the goods. The goods were delivered to the [Buyer] on 30 March 1996 and the [Buyer] should have inspected the goods including the certificates and brand marks promptly according to Article 16 of the Contract, however, the [Buyer] did not act until 22 April 1996 when it sent a letter to the Chamber of Commerce in Singapore asking when the [Seller] applied for the certificate of origin and what number of the certificate of origin was. Another written evidence provided by the [Buyer] indicated that it did not send a letter to the [Seller] until 4 October 1996 stating that the Shenzhen Technology Supervision Bureau did not approve the four generators because the [Seller] failed to provide the name of the manufacturer and quality certificate of the four control boxes. The [Buyer] should not have waited so long to raise such issues until it received, installed, and operated the generators. This violated Article 39(1) of the CISG as well as international trade practices and customs. Therefore, even though the [Buyer]'s statement regarding the certificates and brand marks is true, it has lost the right to rely on a lack of conformity of the goods.
4. The evidence shows that after [Seller]'s engineers completed commissioning of the generators, they filled out four commissioning reports which were confirmed by the [Buyer]'s representative by signing his name on them. The commissioning report states that the [Seller] has completed commissioning the generators and had promised to the [Buyer] a warranty period of one year or one thousand operation hours (whichever is earlier) calculated from 29 September 1996. The commissioning report also states that the [Seller] has repaired or replaced all parts that need to be repaired or replaced, such as the broken fan blades and cables. The Arbitration Tribunal noted that some problems occurred during the operation of the generators, such as breaks in cables, tanks, tubes and so on. However, the evidence shows that the [Seller] made timely repairs or replacements of the broken parts within the warranty period.
The Arbitration Tribunal also found seven job orders with Serial No. 01356, 01357 and so on among the evidence presented by the [Buyer]. The job orders were issued between 17 October 1996 and 12 February 1998, which indicated that the [Seller] had been performing its obligation to repair and maintain the generators. The [Buyer]'s representative also signed on the job orders saying "work completed to my satisfaction."
The Arbitration Tribunal further noted that the primary reason asserted by the [Buyer] for its claim for compensation was that the [Seller]'s non-delivery of one combining cabinet caused the other four separate control boxes' failure to perform the combining function as well as general control function and also made them impossible to connect with low power distributors. In its statement presented to the Arbitration Tribunal, the [Buyer] also primarily replied on the forgoing reason to calculate the damage suffered by it. With respect to this issue, the Arbitration Tribunal considered it is necessary to review the inspection report issued by Internal Combustion Engine Inspection Institute of Guangdong Province, China. The following is a summary of the inspection report:
Issue: The [Buyer] alleged that the [Seller] failed to deliver one combining cabinet, as a result, the generators could not perform the combining function as required by the Contract; while the [Seller] stated in writing that the combining system for the four generators were installed in the four control boxes and could perform the required combining function. The parties failed to reach an agreement on this issue.
Investigation and inspection
An inspector from the Internal Combustion Engine Inspection Institute of Guangdong Province, China and an arbitrator from Shenzhen Sub-Commission, after jointly hearing both parties' statements about the conditions of the generators at the [Buyer]'s working site and considering the major dispute between the parties and the request of Shenzhen Sub-Commission, decided that the purpose of the inspection is to clarify the combining systems and combining function of the four control boxes.
Results of the inspection
After examination of the data collected at the operating site and inspection of the control shields under static and dynamic condition, the following conclusions are reached:
Above all, it can be concluded that the four Peibote TB400A diesel generators as well as the auxiliary equipment have the combining function as prescribed in Article 10(2) of the Contract.
The inspection report was issued at the [Seller]'s request and with the [Buyer]'s consent, and both parties' representatives were at the inspection site and signed on the inspection minutes. The inspector did the inspection following the principle of impartiality and independence and in a scientific manner. The two parties did not raise objections to the inspection report after receiving it, nor did they ask the inspector to explain the inspection report at the court session.
The Prior Arbitration Tribunal adopted the aforesaid inspection report, and this Arbitration Tribunal did not find any basis or reason to overrule this inspection report and the Prior Arbitration Award. Moreover, this Arbitration Tribunal has no right to overrule the Prior Arbitration Award.
Based on the aforesaid facts and analysis, the Arbitration Tribunal concludes that the goods delivered by the [Seller] were in conformity with the Contract as well as the annex to the Contract. Although there were some problems with the generators during the commissioning process as well as normal operation process, the [Seller] nevertheless did timely repairs or replacements of the broken parts within the warranty period, which was confirmed by the [Buyer]'s representative with signature. In addition, the [Buyer] mistakenly claimed that the [Seller] failed to deliver a combining cabinet without knowing that four control boxes could perform the combining function. This fact reflected the [Buyer]'s lack of professional expertise. Therefore, the [Buyer] itself should be responsible for the improper operation of the generators and the losses incurred.
The damages and losses were not caused by the quality of the generators, therefore, the [Buyer] should not claim for compensation of RMB 948,100 and ask the [Seller] to overhaul the generators.
The Arbitration Tribunal holds that the [Buyer]'s claims shall be dismissed, and the [Buyer] shall bear the arbitration fee as well as the [Seller]'s attorneys' fee HK $ XXX; the latter is evidenced by the arbitration service agreement signed by the [Seller] and its lawyers.
III. THE AWARD
The Arbitration Tribunal rules that:
(1) The [Buyer]'s claims are dismissed;
(2) The [Buyer] shall compensate the [Seller] for its attorneys' fee HK $ XXX within 30 days of the date of this award. For any late payment, 8% annual interest shall be added; and
(3) The [Buyer] shall bear all the arbitration fee of RMB XXX of which the [Seller] has prepaid RMB XXX and the [Buyer] has prepaid RMB XXX. The [Buyer] shall pay back RMB XXX to the [Seller] within 30 days of the date of this award .
This award is final.
* 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 Singapore is referred to as [Seller]. Amounts in the currency of the People's Republic of China (renminbi) are indicated as [RMB]; amounts in the currency of Hong Kong (dollars) are indicated as [HK $].
** 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.
*** Yan Tianhuai, LL.M. Golden Gate University Law School; LL.M. Nanjing University Law School; Becon, Nanjing University Business School, Attorney at Law, admitted in P.R. China and California, USA. Partner, G & D Law Firm, Nanjing, China.Go to Case Table of Contents