Go to Database Directory || Go to CISG Table of Contents || Go to Case Search Form || Go to Bibliography

CISG CASE PRESENTATION

China 30 March 1999 CIETAC Arbitration proceeding (Flanges case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/990330c2.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 19990330 (30 March 1999)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1999/16

CASE NAME: Unavailable

CASE HISTORY: See companion Flanges case of 29 March 1999

SELLER'S COUNTRY: People's Republic of China (respondent)

BUYER'S COUNTRY: United States (claimant)

GOODS INVOLVED: Flanges


Case abstract

PRC: Award of China International Arbitration Commission [CIETAC] 30 March 1999 (Flanges case)

Case law on UNCITRAL texts (CLOUT) abstract no. 770

Reproduced with permission of UNCITRAL

Abstract prepared by Damon Schwartz

The case deals with the conformity of goods, notice periods and article 40 "safety valve", avoidance for fundamental breach and the calculation of damages.

An American buyer entered into multiple contracts with a Chinese seller for the purchase and transportation of forging carbon steel flanges ("flanges"). Each contract contained different terms: on quantity, specification, price, and time of delivery. However, other terms such as quality, examination, claims, and arbitration were the same. Furthermore, the seller was to provide the so-called Mill Test Reports ("MTRs") describing the chemical and heat data of the flanges. The buyer had the option to inspect the goods prior to shipment and the right of examination was an inseparable part of the agreement. In the early stages of the contractual relationship, some minor quality issues were resolved by the parties without reference to the contractual periods for claims.

After a few years, some quality deficiencies were discovered in the goods by one of the buyer's third-party customers. Therefore, the customer returned all Chinese flanges to the buyer and claimed compensation. The buyer requested compensation from the seller, but the negotiations were unsuccessful as the seller denied liability on the contractual grounds that claims could only be placed within 90 days of the arrival of the goods.

Eventually, the buyer agreed on compensation with the seller and mitigated the losses by selling flanges at lower prices. Further, the buyer notified the seller it would not accept any undelivered flanges called for under the contract.

When the case was heard by the arbitral tribunal, both parties agreed that the CISG was applicable pursuant to the laws of the People's Republic of China and since the parties' countries were signatories to the CISG. Experts were appointed to determine the existence of deficiencies in the goods and the authenticity of the testing data.

The buyer claimed for damages under CISG article 74 pursuant to breach of CISG articles 36(1), 36(2), and 40. It argued that since it had the right to inspect goods prior to or after shipment, failure to inspect goods prior to shipment did not waive any rights to inspect the goods after shipment. Further, it claimed that the MTRs should be considered as a quality warranty. As some of the flanges were found to be inconsistent with the MTRs, the buyer claimed an extended period to submit indemnity claims. Its argument that the MTRs should be considered a quality warranty was partially accepted by the tribunal.

The seller based its arguments on CISG articles 38(1), 39(1), and 39(2). It submitted that the buyer had failed to perform inspections which would have discovered many of the possible defects. The seller also claimed that the buyer had waived the right to claim for quality defects as it had not inspected the goods prior to shipment nor raised the claim within three months after the goods' arrival at the destination port. The seller maintained that the flanges were not defective, as evidenced by the buyer's own testing, and that the buyer's self-testing procedures were incorrect and therefore inaccurate. In addition, the seller requested that the buyer should pay for the remaining undelivered flanges determined in the contracts and compensate the seller for losses due to storage, reprocessing, and lost profit.

The experts' report concluded that some of the flanges tested were defective under the standards specified in the contracts. The experts also found that the buyer's independent and self-testing methods were not completely consistent with acceptable testing procedures and could not be used to determine defect rates.

The tribunal decided that the failure to inspect the goods prior to shipment did not waive the right to all later inspections, as the contract provisions stated that the buyer's right to examination was inseparable from the agreement. The tribunal found that CISG article 36(1) was in accordance with the contract provisions, stating that the seller was liable for any lack of conformity which existed at the time when the risk passes to the buyer, even though the lack of conformity became apparent only later on. The tribunal considered the seller liable under CISG article 36(2), in that the defective flanges were a breach of a guarantee that the goods would remain fit for their ordinary purpose. However, the guarantee period was not indefinite and would not extend past the two-year period set forth in CISG article 39(2).

As to the defective and non-conforming goods, the tribunal found that the seller should not be held liable for the non-latent defects after the three-month period stipulated in the contracts, as these defects could have been discovered by simple examination of the goods. The buyer should therefore share some of the liability for the losses due to its failure to perform inspections of the flanges [CISG article 38(1)]. However, the seller was found to be liable for latent defects beyond the three-month period up to two years, as these defects could only be discovered with destructive tests or through actual use. Although the tribunal concluded that some of the deficiencies in this case were defects of which the seller "could not have been unaware", the tribunal held that CISG article 40 is secondary to CISG article 39(2). The tribunal ruled that the language of CISG article 39(2) bars an indemnity claim beyond the two-year period recited therein.

The tribunal stated that the seller would be liable for latent defects where the buyer had raised a claim within two years after the acceptance of the flanges. Non-latent defect claims were dismissed as the buyer should have performed inspections and notified the seller within the three-month period of the contracts. The tribunal also found that the buyer's claim for lost profits on the undelivered flanges was unsupported by evidence of serious defects. The buyer's claims for losses were granted by the tribunal as an acceptable method of mitigating damages. The tribunal determined that the seller should bear no liability for the buyer's settlement of its dispute with its third-party customer.

Go to Case Table of Contents

Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 4 ; 9 ; 29 ; 35 ; 36 ; 38 ; 39 ; 40 ; 49 ; 74 ; 77 [Also cited: Articles 60 ; 80 ]

Classification of issues using UNCITRAL classification code numbers:

4B [Scope of Convention (issues excluded): fraud];

9B [Implied agreement on international usage; standards];

29A [Parties by agreement may modify or terminate the contract];

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

36A ; 36B [Time for assessing conformity of goods (conformity determined as of time when risk passes to buyer): seller responsible when lack of conformity becomes apparent later; Lack of conformity occurring after passage of risk (caused by seller's breach of any of his obligations): guarantee of continued conformity];

38A [Buyer's obligation to examine goods: time for examining goods];

39A ; 39B [Requirement to notify seller of lack of conformity: buyer must notify seller within reasonable time; Cut-off period of two years];

40B [Seller's knowledge of non-conformity (sanction when seller fails to disclose known non-conformity): seller loses right to rely on articles 38 and 39];

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

74A ; 74A1 [General rules for measuring damages: loss suffered as consequence of breach; Includes loss of profit];

77A [Obligation to take reasonable measures to mitigate loss]

Descriptors: Scope of Convention ; Fraud ; Usages and practices ; Avoidance ; Conformity of goods ; Guarantees ; Examination of goods ; Lack of conformity notice, timeliness ; Lack of conformity known to seller ; Damages ; Profits, loss of ; Mitigation of loss

Go to Case Table of Contents

Editorial remarks

EDITOR: Camilla Baasch Andersen (14 March 2006)

Applying Article 40 to 39(2) as well as 39(1) -- Stockholm vs. Flanges

The question of whether Article 40 applies to 39(2) as well as 39(1) has been discussed in theory.[1]

Unlike Article 44, Article 40 is worded to apply to "Articles 38 and 39" and not to specific paragraphs, and although the cut-off period in Article 39(2) is considered an absolute cap by many,[2] it seems to be subject to Article 40 in some cases. This issue was considered in an arbitration award of the Stockholm Chamber of Commerce, concerning a press in China.[3] The Tribunal heard a case concerning a truck frame rails press, where the seller had replaced a part with a substitute part without informing the buyer of that, and without making the buyer aware of consequent necessary installation differences due to this substitute part. The buyer's notice of lack of conformity was not given to the seller until three years after delivery of the machine, when the machine failed and damaged itself. The buyer was not, however, barred from notifying of the non-conformity despite Article 39(2), as the Tribunal deemed that the seller knew of the replacement part, knew that it would be significant to the buyer, and did not inform the buyer of that. In this case, the Tribunal stated that:

"Article 40 is an expression of the principles of fair trading that underlie also many other provisions of CISG, and it is by its very nature a codification of a general principle."

Consequently, since the seller had consciously disregarded facts which were of relevance to the non-conformity, Article 40 could cut off the seller's reliance on Article 39(2).

A reported CIETAC Arbitration case from China, recently translated by the CISG W3,[4] apparently challenges this application of Article 40 to Article 39(2), by ranking the two-year cut-off period above the buyer's protection from a seller who knows of the defect. In this case, the Tribunal stated that:

"... some of the deficiencies of flanges supplied by the [Seller] in this case relate to facts of which the [Seller] "could not have been unaware."

This thus brings Article 40 into application. But, nevertheless, this Tribunal found that the cut-off rules should prevail, as:

"the longest time limit to notify of lack of conformity of the goods with the contract is 'within a period two years from the date on which the goods were actually handed over to the buyer.' This is so because the restricting words 'in any event' are used in Article 39(2)."

Upon closer inspection, the reasoning of the CIETAC Tribunal hinges on the fact that they consider the latent defects in question would have been discovered within the two-year time period if the buyer had not overstocked and thus used them before.[5] The Tribunal asserts that this is in the spirit of the Convention, and thus elevates this assumption that buyers do not commercially overstock to a general principle as well. If we contrast that with the elevation of the principle in Article 40 to that of a general principle in the Stockholm Arbitration case above, we have a serious discrepancy in the international application of the CISG. Moreover, it raises a difficult question: how is this issue to be "correctly" solved, in the light of two conflicting general principles?

The facts in the two cases differ significantly on one important point: in the CIETAC case, the goods are not used until the expiration of the cut-off because they are stock (deemed overstock by the Tribunal), whereas in the Stockholm case, the machine was taken into use and broke down as a result of a malfunction. We can support the CIETAC Tribunal's findings by reference to Articles 8/9, although the Tribunal does not do so itself. By using Article 8 and the interpretations of a reasonable person, and referring to trade practice in Article 9, it is not a far stretch to claim that there may be a general commercial assumption that goods are taken into use within a reasonable time after delivery; flexibly accommodating the different types of goods and trade sectors. In a situation where the buyer is overstocking, can the seller who is not actually fraudulent, but should have know that there is a problem with some flanges not expect to be free of any claims after the cut-off period? This question is, of course, directly linked to the question of whether the general principle of protection from a fraudulent buyer should overrule all, in the form of Article 40. Because if it does, then it makes no difference whether the goods were taken into use or lying around in a warehouse -- this does not change the seller's knowledge.

There is nothing in the travaux to indicate that Article 40 should not be applied identically to Article 39 in its entirety. Quite the contrary, a plain meaning reading of the words of Art 40 will show that unlike Art 44 it does NOT limit itself to the application of Art 39(1). What is worrying here is that this is perceived as something to which gap-filling measures like general principles can apply. But where is the gap? Surely, this is solely a question of interpreting according to plain meaning, or dynamically applying Art. 40 differently? There is an important distinction between gap-filling and interpretive guidelines, and we must be wary not to blur this line too much. The above two cases do that. And by using the very flexible and fuzzy concept of general principles to reach the decision which the Tribunal finds right, respectively, they are exercising a considerable freedom under the CISG -- one which was not intended to be there.

It might be argued that if Article 40 always applies to Article 39(2), then it is not, as deemed by many, an absolute cut-off rule. This, in itself, would support a view that applications of Article 40 be, if not hindered, then limited to cases of evident or flagrant breaches of good faith by the seller. This is one of those situations where the considerations of two provisions clash. On one hand, there is the idea behind 39(2); the need for resolving and finalizing business matters within a foreseeable future, the need for a party to be able to reach a point in time where he/she knows with certainty that all worries or considerations concerning a transaction can safely rest in peace, that business may move on. On the other hand, there is the consideration behind Article 40; the idea that under no circumstances should a fraudulent party be permitted to "get away with" anything. But, it can also be said that mandatory morality is not a part of the CISG, and should rather be relegated to domestic laws or other laws which an arbitral tribunal should wish to apply,

When comparing these two considerations, it is easy to see how a seller might get caught by Article 40 claims made, for example, five years after a transaction, long after he has considered himself safe from all claims and has discarded any documents or other evidence which may prove that there was no knowledge of any lack of conformity on his part. For this reason, it would certainly seem advisable to require an even more rigorously lifted burden of evidence [6] from the buyer, allowing for the fact that the seller was in his right to consider the case concluded, especially if we assert that there is a commercial assumption for not overstocking and using or applying goods within this period.

But, if the principle of protecting the buyer prevails, then none of the above considerations matters, as this principle proposes that under no circumstances may the seller be protected if he is fraudulent. And it is therefore suggested that the application of Article 39(2) to Article 40 is an indirect way for the Tribunal in the CIETAC case to affirm that the Seller is NOT fraudulent, but merely passed on some flanges produced elsewhere that he should have known were defective. It would have been preferable if the Tribunal in this case had applied these considerations to conclude that Article 40 thus does not apply, as they seem hesitant to apply it in legal terms. Because with the creation of a conflicting general principle to this issue, in contrast with the firm guideline laid down in the Stockholm case and quoted in the UNCITRAL Digest as the state of CISG law, a uniformity problem is created.

Consequently, despite the fact that these two cases are so different in fact, the conflict between two general principles is evident, and future case law must solve the problem of ranking their importance: which is more important under Articles 40 and 39(2): protecting the buyer from a fraudulent seller or allowing a seller to consider himself free of claims? It is this author's submission that the former principle must prevail over the latter, although it should not be seen as a mandatory one. In cases such as the CIETAC case where the Tribunal would find this to lead to unjust results, it is arguably because Article 40 should not have been applied in the first place as the standard of knowledge of the seller was too low to employ the rule. If the considerations of Art 40 are out of place in a case, then so is the provision itself. And if its consideration of protection against a fraudulent buyer is in place, then no amount of overstocking or other commercial rules should prevail.

However, this author's opinion will not generate a congruent application of this problem. If, however, a certain level of consensus among scholars in the scholarly jurisconsultorium is developed on this point, and emerging cases look to this and weigh both of these precedents and choose which one to follow in the creation of a practical jurisconsultorium, then the issue will presumably be on its way to a more similar solution if the same paths of reasoning are chosen.[7] And as long as the legal reasoning is sound and international, one path is hopefully going to be more preferred over the other.


FOOTNOTES

1. See, for example, Lookofsky in Understanding the CISG (3rd Worldwide ed. 2008), p. 91, and Schwenzer in: Schlechtriem & Schwenzer, Commentary on the UN Convention on the International Sale of Goods (CISG), 2d (English) ed., Oxford (2005), p. 480.

2. See, for example, John C. Reitz A History of Cut-off Rules as a Form of Caveat Emptor: Part I -- The 1980 U.N. Convention on the International Sale of Goods in 36 American Journal of Comparative Law (1988) 437-472 at p. 443, available at: <http://cisgw3.law.pace.edu/cisg/biblio/reitz1.html>

3. See the decision of the Arbitration Institute of the Stockholm Chamber of Commerce of 5 June 1998 in the case of "Beijing Light Automobile Co., Ltd v. Connell Limited Partnership" available at <http://cisgw3.law.pace.edu/cases/980605s5.html>.

4. China 30 March 1999 CIETAC Arbitration proceeding (Flanges case) available at: <http://cisgw3.law.pace.edu/cases/990330c2.html>.

5. "The limit of two years provided in Article 39(2) CISG is to be applied, because it would be inconsistent with the spirit of this Convention to require the seller to compensate for the losses caused by the buyer's commercial overstocking of goods for too long a period of time."

6. Comp. with the seller's burden of evidence in proving himself unaware following the buyers proof that awareness was likely in the Swedish arbitration case.

7. At the time of this publication, the CIETAC case has been published in translated form for only a few weeks, and there is thus only scholarly commentary to be found on the Stockholm arbitration case, and the UNCITRAL Digest only mentions this case. In time, other scholarly commentary on this case is bound to surface.

Go to Case Table of Contents

Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

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) 1999 vol., pp. 1703-1738

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at nn.74, 158, 174, 223, 225, Nordic Journal of Commercial Law (2/2005); Ramos, Rules on Communication of Defects in the CISG, nn. 473-484 and accompanying text

Go to Case Table of Contents
Case text (English translation)

Queen Mary Case Translation Programme

China International Economic & Trade Arbitration Commission
CIETAC Arbitration Award

Flanges case (30 March 1999)

Translation [*] by Mingde Cao & Shengli Wang [**]

Edited by Yuan Xiaotong [***]

  1. Details of the Case
    (I) Outline of the contracts
    (II) The [Buyer]'s reasoning and arbitration application
    1. The quality problem as it appeared, step by step
      (i)    Measures to compensate [Buyer]'s losses
      (ii)   Quality problems revealed by evidence on flanges tested
    (III) The [Seller]'s defense
    (IV) Differences between the positions taken by the parties: issues over:
      (i)    Whether the goods had serious quality deficiencies; and
      (ii)   The contract basis and other legal basis for [Buyer]'s claims
    (V)   Differences concerning the [Buyer]'s claims to compensate its economic losses
  2. The Reasoning of the Arbitral Tribunal
    (I)   Applicable law
    (II)   The quality issue
      (i)    The experts' investigation and evaluation report
      (ii)   Opinions of the parties on investigation and evaluation report
    (III)   Rulings on [Buyer]'s right to claim damages or other relief
      (i)    Concerning time bar for arbitration and time limit for claims
      (ii)   Concerning quality issues and contract provisions on claims
    (IV)   Rulings on amounts claimed for:
      (i)       ...   flanges in store unable to sell
      (ii)      ...   profit losses for flanges in store
      (iii)     ...   profit losses for flanges undelivered
      (iv)     ...   economic losses suffered from flanges sold by the method of "original goods without any change"
      (v)      ...   expense for settlement
      (vi)     ...   expenses for tests
      (vii)    ...   money for returns from other clients
      (viii)   ...   interest
      (ix)      ...   taxes
      (x)       ...   attorneys' fees
      (xi)      ...   the arbitration fee
      (xii)     ...   expenses for experts' investigation and evaluation
  3. The Award
    Appendix

China International Economic & Trade Arbitration Commission (previously CCPIT Foreign Trade Arbitration Commission, name later changed to CIETAC, hereafter referred to as the "Arbitration Commission") accepted this arbitration case in accordance with:

  -    The arbitration clause in the sales contracts for flanges signed on 24 January 1987, 25 July 1988 and 20 October 1989 between Claimant, US ×× Valve Company {hereinafter referred to as "[Buyer]") and Respondent (in the very beginning named China ×× Import & Export Company ×× Branch Company, hereinafter "[Seller]"); and
 
  -    The Arbitration Application filed by Claimant [Buyer].

The [Buyer] named Mr. A as arbitrator, the [Seller] named Mr. D as arbitrator, and the Chairperson of the Arbitration Commission named Mr. P as the Chief Arbitrator of the case according to the Arbitration Rules of the Arbitration Commission. Together they formed an Arbitral Tribunal to hear this case.

The hearing was not held until April 1996 as the parties offered many supporting materials (the applications and enclosures) prior to the hearing, and the case involved many issues calling for document translation, transmission, preparation and contact. The hearing was held for three days, i.e., 18, 19 and 20 April. The parties or their representatives appeared before the Tribunal, made full oral presentations and argued fully on the facts, their claims and the basis for their claims in law and under the contracts.

The hearing involved many issues over whether there were deficiencies or disguised deficiencies of the goods, and problems as to whether the testing data were true. After discussion, the Arbitral Tribunal decided that it was necessary to carry out an independent investigation on the goods still stored in [Buyer]'s warehouse, the goods which had been tested and returned, and the testing institution which committed the testing for Claimant [Buyer]. At the hearing, the Arbitral Tribunal proposed to send experts to carry out spot investigations according to the Arbitration Rules. [Buyer] agreed to this, while the [Seller] addressed that it was unnecessary to conduct spot investigations with the position that "whoever claims bears the burden of proof." The Arbitral Tribunal raised questions to both parties. In addition to their answers and explanations to these questions, the parties also submitted further supplemental written evidence or their representatives' statements.

After the April 1996 hearing, the Arbitral Tribunal contacted both parties via mail and telephone regarding the involvement of an expert in the investigation. [Seller] stated that the purpose of the investigation was not clear and it was unnecessary to carry out expert investigations, therefore, the [Seller] disagreed to the investigations. To the contrary, the Arbitral Tribunal considered it necessary to resolve some important issues (for example, the actual findings of the US lab and the [Buyer]'s self-test) and necessary for the Tribunal to carry out an expert investigation on some technical issues. In accordance with Articles 39, 40 and 41 of the Arbitration Rules, the Arbitral Tribunal decided to employ experts for investigation and consultation and sent the notice to carry out spot investigations in the U.S.. The expert investigation expenses were paid by the [Buyer] temporarily. Via the Secretariat of the Arbitration Commission, the Arbitral Tribunal authorized the China Association for International Understanding and its subsidiary, ×× Economic and Technology Consultation Company to recommend two experts. They were Jin ×× (Vice Chief Engineer, Research Fellow of the China Research Center on Boiler and Pressure Container Test) and Zhang ×× (Vice Chief Engineer of the China General Institute on Iron Research). Both are experienced experts on iron material research and had participated in many international test and evaluation projects for boilers and pressure containers. After accepting the task of investigating and evaluating the flange quality in this case, they temporarily left their working institutions and worked independently as qualified experts. During the period from 2 December 1996 to 12 December 1996, accompanied by Mr. P, the Chief Arbitrator of the Arbitral Tribunal, Ms. S, the Secretary handling the case in the Secretariat of the Arbitration Commission, and the two experts went to Houston, Texas where the goods were located to carry out spot investigations. The two parties to the dispute sent persons to attend the investigations (the [Seller] sent two representatives). In addition to examining the self-test equipment, experimental process and the testing approach of the [Buyer], the expert team, together with the parties, visited M. Lab in Houston which had examined these flanges previously. Later, the expert group selected eight samples for the second testing from the goods which had been considered by the [Buyer] to have defects or recessive defects and confirmed by the [Seller].

Under the supervision of the Chief Arbitrator of the Arbitral Tribunal and the two experts, the samples for examination were cut into two pieces and sealed with a mark. One part was mailed to China by air, another part was brought by the experts to New York. The New Jersey International Testing Lab (hereafter "International Testing Lab") and Central Iron & Steel Research Institute, Ministry on Metallurgical Industry (hereafter "Central Iron & Steel Research Institute") were then authorized to conduct separate and independent physical and experimental examinations on these two parts. Reports of the examinations from the two laboratories were sent to the experts for analysis, based on which an expert report on investigation and evaluation was written. The report was sent to both parties to the dispute and to the three arbitrators separately in March 1997. Sufficient time was given to the parties to offer their own comments. Both parties sent to the Arbitral Tribunal written comments on the expert report on investigation and evaluation.

Both parties to the dispute submitted basic arguments on the expert report on investigation and evaluation. Each offered its own understanding in which the explanations on some issues were different. According to the Arbitration Rules, the Arbitral Tribunal believed that it was necessary to hold another hearing to invite the experts to provide such explanations to the expert report on investigation and evaluation that were deemed necessary. The parties were notified to attend the hearing on 27 October 1997. Due to the fact that, abruptly, the two experts separately had to go abroad for other missions, the parties were notified that the hearing was rescheduled to 9 December 1997. Neither party had any objection to this. The rescheduled hearing was held in time with the attendance of the representatives of both parties.

The [Seller] asked the Arbitral Tribunal to rule on whether the Claimant [Buyer] had lost its capacity as an business entity based on a certificate issued by Secretary of State of Oregon on 29 September 1995, which referred to the [Buyer] as "×× Valve Company registered in Oregon 15 May 1986, and carrying out its operation in Texas" and declared that "the company named above had been terminated in its registration place (Oregon) since 4 April 1997." Therefore, the [Seller] held that ×× Valve Company did not have the capacity as Claimant [Buyer] in this case. Even though the original ×× Valve Company carried out activities of appeal and arbitration, [Seller] alleged that because its legal capacity had expired, the [Buyer] had no right to carry out these activities. The [Seller] applied to the Arbitral Tribunal to resolve this important procedural issue and to dismiss the claims of the [Buyer] and its agent, and to suspend the hearing.

The [Buyer] explained, stating that ×× Valve Company had simply changed its registration place from Oregon to Delaware for a change of stock ownership, but there was no change in its independent corporate personality and operation. [Buyer]'s original place of business in Texas still acted as a corporation registered in other states to carry out its operations within its original business fields in this state. Because ×× Valve Company was a US public company whose stocks had been listed, the change in its stock ownership and registration place would not affect its corporate personality, debts and credits, and its legal status in litigation and arbitration proceedings. ×× Valve Company did not experience bankruptcy, liquidation and winding up. The [Buyer] also pointed out that the [Seller] might be unfamiliar with the US laws on company registration and cast unnecessary suspicion on the part of the [Seller]. The [Buyer] would like to make this issue clear by providing written materials after this hearing.

After a temporary adjournment, the Arbitral Tribunal decided that this hearing was only for listening to the experts' explanations on their report and the certificate of Texas offered by the [Seller] would to be confirmed later. Therefore, it was proposed to continue the hearing and listen to the experts' interpretation. The Arbitral Tribunal required the [Buyer] to offer written materials to prove the existence of its corporate personality. Both parties accepted the above opinions of the Arbitral Tribunal.

At the second hearing, the experts explained their report on investigation and addressed necessary explanations on questions raised by the two parties.

On 19 January 1998, the [Buyer] offered considerable materials in evidence on the change of ×× Valve Company's stock ownership and its registration address, and materials to support [Buyer]'s position that there had been no change in its legal status. It also offered evidence materials showing that the constitution of ×× Valve Company registered in Delaware had made it clear that all credits, debts, obligations and rights of ×× Valve Company registered in Oregon were inherited by ×× Valve Company registered in Delaware. This material was transmitted to the [Seller] and the three arbitrators. According to the facts and opinions on the motion of the case, the Arbitration Commission determined that ×× Valve Company registered in Delaware was the successor of the [Buyer], ×× Valve Company registered in Oregon, and able to attend arbitration activities and to perform the rights and obligations of the arbitration award, i.e., the [Buyer], ×× Valve Company still had the requisite subject qualification.

The Arbitral Tribunal held that it was necessary to point out that the award was postponed because of complexities, which involved experts' investigation and evaluation, and the translation and transmission of many documents, and that each postponement was applied for by the Arbitral Tribunal and approved by the Arbitration Commission according to the Arbitration Rules. On 28 May 1997, the Arbitration Commission ruled that the date for issuance of the award was postponed to 1 December 1997. The Arbitral Tribunal decided to schedule another hearing on 28 October 1997 to invite the experts to provide interpretations on their report on investigation and evaluation. Then the date to hold a hearing was postponed to 9 December 1997 for the reason that the experts had to go abroad, and the two parties agreed with this postponement and appeared at the postponed hearing in time. Previously, the Arbitral Tribunal had applied to the Arbitration Commission to postpone the date for issuance of the award to 2 May 1998, which was approved by the Arbitration Commission. In view of the fact that both parties agreed to the second hearing and the time left for the [Buyer] to offer written evidence material on its valid subject qualification, the arbitration process of this case was not suspended. The Secretariat of the Arbitration Commission handling the case of this Arbitral Tribunal notified of the postponement after the [Buyer] provided this additional evidence material. The approval by the Arbitration Commission was not sent out until 14 January 1998 when it was considered that the notice of postponement should be sent to both parties. It was so mailed by the Secretariat of the Arbitration Commission. On 16 February 1998, the Arbitration Commission received from the [Seller] mail claiming its opposition to the extension of award dated 22 January 1997. The Secretariat of the Arbitration Commission replied in written form according to the actual conditions on 28 April 1998. The [Seller] then submitted its objection to the extension of the award on 18 May 1998. It was held that the [Seller] did not receive the notice to extend the award to 2 May 1998 before 1 December 1997, nor did [Seller] receive the arbitration award, which meant the expiration of the arbitral activities, therefore, the second hearing on 8 December 1997 and the activities of the Arbitral Tribunal were beyond the requirement of the Arbitration Rules, and were invalid. Therefore, in accordance with the Article 81 of the Arbitration Rules, the Arbitral Tribunal submitted to the Arbitration Commission to provide an interpretation of the extension of an award under Article 52 of the Arbitration Rules. The Arbitration Commission explained:

"The Arbitration Law of the PRC has no specific stipulations on the period of continued existence of the Arbitral Tribunal after it is formed according to legal procedure or the time limit for the Arbitral Tribunal to make an award. Article 52 of the Arbitration Rules of this Arbitration Commission is a stipulation requiring attention but will not void the legal effects of the Arbitral Tribunal's activities. Neither does this article stipulate whether and when the extension of time limit should be notified to the two parties in disputes, nor does it specify the effect of postponing an award. Therefore, once the time limit of nine months expired, even though postponement procedures had not be completed in accordance with this Article, such a failure is a problem of the Arbitral Tribunal or the Secretariat of the Arbitration Commission, which is to be handled by the Arbitration Commission based on the actual conditions. In another word, the Arbitral Tribunal does not lose the legal basis for its existence, so the Arbitral Tribunal is still lawful and the award made by the Arbitral Tribunal is legal and effective."

The Arbitral Tribunal held that the [Seller] had misunderstood the time limit stipulated in Article 52 as a time limit to terminate the Arbitral Tribunal and its activities. In fact, even after the Arbitral Tribunal hands down its award, it is not terminated immediately. It is revealed in Articles 56, 61 of the Arbitration Law and Articles 61, 62 of the Arbitration Rules, that the deadline to make the award is not the deadline of the Arbitral Tribunal to end its effective existence. In addition, the Arbitral Tribunal applied to the Arbitration Commission for an extension before 1 December 1997, which had been approved by the Arbitration Commission, and the corresponding decision had been made. As to the working problem that the mailing this notice of extension to the parties was delayed, the Arbitration Commission could find the facts and make corresponding arrangements which was in no connection with the legal existence of the Arbitral Tribunal and the effectiveness of its award. Furthermore, the two parties accepted the decision that the second hearing was postponed to 8 December 1997 and both appeared at this hearing. At this hearing, the [Seller] proposed a new issue of "applying to the Arbitral Tribunal to verify the subject qualification of the [Buyer]", and agreed to reserve time for the [Buyer] to offer written evidence material. The [Seller] did not advance any objection on the issue of time, which means that the [Seller] in fact had accepted the extension of this case and its award according to Article 45 of the Arbitration Rules.

The deadline approved by the Arbitration Commission for the last time to decide the case was 2 April 1999. The Arbitral Tribunal has now made its award.

The following are the details of the case, the opinions of the Arbitral Tribunal and the award.

I. DETAILS OF THE CASE

(I) Outline of the contracts

The [Buyer] and the [Seller] signed Contract Number 88YCSG/2-019 (later changed to 88YCSG/0023-2) on 25 July 1988, which stipulated that the [Buyer] agreed to purchase (and the [Seller] agreed to sell) forging carbon steel flanges. Contracts Number 89YCSG/10-533 and Number 91YCSG/10-523 which called for the same goods (forging carbon steel flanges) were respectively signed on 20 December 1989 and in the early part of 1991. Each contract had different terms on quantity, specification, price and time of delivery, but their other terms such as quality examination, claims, and arbitration were the same. The following are the dates signed and amounts involved.

Contract Number Date signed Sum (US $)
88YCSG/2-019 25 July 1988 US $2,345,834
89YCSG/10-533 20 October 1989            466,443
91YCSG/10-523 In early 1991            272,273
Total   US $3,084,570

Each contract was accompanied by a specific order for goods. Each order contained detailed specifications (including pressure and diameter), quantity, unit price, total sum (C&F Houston), and the deadline for delivery (the period of shipment, partial shipment). Payment was to be made by Letter of Credit [L/C].

The technical specifications in the contracts include the requirement that:

All flanges should satisfy the US steel flange Standard ANSI-B16.5 and the US material experiment Standard ASTM-A105N. In addition, several requirements surpassing the A105 Standard were added. That is:

(i)    Carbon content should be 0.27% (maximum) [The Arbitration Tribunal's note: 0.35 (maximum) required in the A105 Standard.];
 
(ii) All flanges should go through normalizing heat treatment [The Arbitration Tribunal's note: the flanges under the pipe pressure beyond 300Psi should go through "normalizing" heat treatment as required in the A105 standard.]

The A105 Standard specified the process of normalizing heat treatment as follows:

The forgings after being forged or heat-rolled are to be cooled by a temperature below 1,000° F (638° C) instantly, then are to be heated to a temperature between 1,550° F (843° C) and 1,700° F (927° C); exposure to the air to cool the forgings is permitted.

The contract also stipulated that:

Mill Test Reports ("MTRs") are to be provided by the factory to specify the heat treatment data, the chemical ingredients analysis and the mechanical performance. The numbers of heaters and the label of "A105N" should be printed on each piece of flange to indicate that this flange has passed the "normalizing" heat treatment. Each piece of flange should also be printed with the size, pressure level, applicable standard (ANSIB16.5) of flanges and standard (A105) for materials, heat treatment method (normalizing, "N"), material heat number, agreed enterprise identification mark (DSI in the contract) and the country of origin. The flanges welded for another time should be printed a mark of "W" on them.

The mechanical performance of flanges requires a minimum tensile strength of 70,000 Pai (or 485 MPa), a minimum subdue strength of 36,000 Psi (or 250 MPa), a minimum rate of extension of 22% (has some connection with the thick wall of flanges), 30% shrinkage rate and a maximum of Brinell hardness 187 HB.

The contract signed in 1988 has two provisions on examination and compensation.

Article 10 provides:

"Examination of goods. The buyer will examine the first batch of goods before they are packed; if the goods are qualified hereafter the goods may or may not be examined, but the right of examination is an inseparable part of this agreement."

Article 15 states:

"Claims. After the arrival of goods at the destination port, if the buyer finds any discrepancy in quality and/or quantity/weight with the contract, except for the liability of the insurance company and/or the carrier, the buyer has the right to propose objections to the seller based on the test certificate issued by the testing authority agreed by the two parties. Quantity/weight objections must be made within 15 days after the arrival of goods at the port. The seller should reply within 30 days after receiving the goods."

The contracts signed in 1989 and 1991 were standard contracts, which were printed before negotiation. Furthermore, Article 10 above was omitted, while the period for quality objections provided in Article 15 was changed from "within 90 days after the arrival of goods at the destination port" to "within 30 days after the arrival of goods at the destination port." There were no further changes in other provisions.

(II) The [Buyer]'s reasoning and arbitration application

The [Buyer] alleged in his arbitration application and presentation at the hearing:

Among the above three contracts, the third, Contract (Number 91YCSG/10-533), signed in early 1991, was not performed. By early 1991, the [Seller] had shipped 107,841 flanges in total with a contract price of US $3,096,623.41, and 33,407 flanges were not delivered with a price of US $329,410.49 (including 32,030 flanges undelivered in the third contract with a contract price of US $272,273).

The [Buyer] once sent an employee to occasionally visit the [Seller] and his manufacturing factory who checked some flanges, examined their size and sometimes pointed out issues on how to guarantee compliance with the technical standards. This manufacturing factory has its own lab and they promised the [Buyer] that the flanges were produced strictly in accordance with the contract and standard regulations. In particular, the [Seller] presented Mill Test Reports to the [Buyer] for each forging part. The [Buyer], relying on the [Seller]'s MTRs, did not examine the goods in the lab in China, and did not examine the goods after they arrived at the port. The [Buyer] alleged that this practice followed the international trade practices, because each flange had printed on it the mark of the quality standard (B165 and A105N) and had enclosed with it the MTR which recorded the chemical ingredients, mechanical and physical performance and the temperature of normalizing heat treatment tested in the process of production with the signature of the testing personnel and the seal of the producers. This acts as a quality certificate provided by the suppliers and producers for the users. In accordance with trade practices, the dealers always rely on the seller's MTR when they resell the goods in the market.

      i. The quality problem gradually appeared

In June 1991, a major international contractor, EBASCO, found that flanges purchased from the [Buyer]'s client, TEAM Industrial Company, had quality problems and asked to return the goods which had been used for a pipe for Exxon, the largest oil producer in the U.S..

TEAM Industrial Company carried out an investigation on 4,000 flanges purchased from the [Buyer], some of which were purchased by the [Buyer] from the [Seller]. TEAM Industrial Company authorized Houston ×× Lab to examine these flanges, and found that:

   -    Some flanges which had not passed normalizing heat treatment were indicated as having been treated by normalizing heat treatment with the mark "N"(normalizing) printed on these flanges; and
 
   -    The chemical ingredients of some flanges were not consistent with the contract and the Mill Test Report.

Therefore, EBASCO returned all Chinese flanges and claimed for US $825,000 suffered from this alleged breach. The [Buyer] had to arrange a settlement out of court to reduce compensation liability and counsel fees. The [Buyer] paid US $605,000 as a settlement. TEAM Industrial Company returned 2,754 flanges, most of which were supplied by another Chinese company (Shanxi Machinery Equipment Import & Export Company, hereafter referred as "Shanxi Company"). Only fifty-three of these flanges were supplied by the [Seller] in this case.

After finding that the flanges offered by the [Seller] had serious deficiencies, the [Buyer] notified the [Seller] and Shanxi Company, requiring the [Seller] to send representatives to Houston to discuss the issue of claims. However, it was not until December 1991 that the two parties began their negotiation. The [Seller]'s representatives did not deny that the [Seller] was liable for the damages that [Buyer] suffered from quality deficiencies of the products supplied by the [Seller], but they only agreed to bring the [Buyer]'s claims to China and consider it further. Thereafter, the [Seller] denied its liability after a long time of contacting and pressing. The [Seller] repeatedly emphasized that:

   -    Quality objections and claims could only be proposed within 90 days after the arrival of goods at the port;
 
   -    There was no agreement between the [Seller] and the [Buyer]'s clients, TEAM Industrial Company and EBASCO Company;
 
   -    Therefore, the claims of EBASCO had no relationship with the [Seller].

The [Buyer] pointed out that the quality problems of flanges could not be found by testing. Certain potential deficiencies (e.g., not having gone through normalizing heat treatment) could only be found after installation, operation or test of consumption. The [Buyer] also mentioned that the two parties never thought that the contract clause requiring examination within 90 days had hard-binding force; the two parties never cited the "90 days time limit for claims" in treating quality problems. This meant that the parties, by their behavior, actually modified the terms of the contracts.

Nevertheless, the [Seller] took an attitude of refusal from the beginning to the end. This led to a situation in which the [Buyer]'s claims could not be reasonably resolved, despite the lapse of a long period of time. In September 1992, the US National Testing Commission on Boilers and Pressure Containers issued a Special Report on the Investigation of Chinese Flanges (hereinafter "Special Report").

The subject of this report was:

An investigation of Chinese Flanges:
An investigation of quality deficiencies of Chinese flanges throughout the US;
An investigation that caused great shocks in the US community on engineering technology.

The report adduced evidence of serious deficiencies of flanges imported from China and sent out alarms stating that "these flanges are not consistent with the requirement of ANSI standard or ASTM norm A105; meanwhile, extreme risks to human body and property may be caused by using these high pressure products."

In the Special Report, it was mentioned that the flanges sold by the [Seller] to the [Buyer] had quality deficiencies and in particular there was filling material in the welding part of the flanges produced by "Shougang Company", which was considered forging. This report was enclosed with the Mill Test Report issued with the name of Shougang and its seal as a proof. The report made it impossible for the [Buyer], as the major merchant importing flanges from China, to sell his flanges in stock by normal trading.

      ii. Measures to compensate [Buyer]'s losses

The [Buyer] alleged that after finding serious quality problems with the flanges, the [Buyer] negotiated with the [Seller] for compensation. Meanwhile, the [Buyer] also took other remedial measures including notifying the [Seller] that the [Buyer] had reasons to refuse any flanges undelivered by the [Seller] to avoid further losses.

In addition, the [Buyer] had to carry out non-destructive, simple and plausible examinations on a large part of the flanges in storage. Because the expense to engage an independent lab is fairly high, the [Buyer] purchased Arc Met 900 portable emission spectrum analyzers and Swiss EQUOTP portable Sclero-meters to carry out self-tests. As of October 1994, the [Buyer] tested 5,609 flanges supplied by the [Seller], of which, 15.3% of the flanges (859 flanges) were found to have quality deficiencies. If a destructive testing method had been used, a much higher percentage of quality deficiencies would have been found. The results of the self-test were shocking and unacceptable. To reduce the loss of both parties, the [Buyer] had to sell the flanges as "original goods without any change and no quality guarantee (normally not providing the Mill Test Report)" at a lower price (The Arbitration Tribunal's notes: Some buyers may use such flanges to connect normal low-pressure pipes). Therefore, the [Buyer] alleged that the [Seller] should compensate the losses suffered from reselling the flanges at low prices.

      iii. Quality problems revealed by evidence on flanges tested

The test report of the independent laboratory on flanges provided by the [Buyer]'s clients revealed that the [Seller]'s flanges had the following problems.

a.    The contract provided that all flanges should go through normalizing heat treatment. However, the mark "N" was printed on some flanges that had not passed the normalizing heat treatment. For example, reports from 57187-1 to 57187-4 issued by ×× Lab mentioned that among four tested flanges, three had not passed the normalizing heat treatment and the tensile strength of the other one flange was below the standard of 70,000 Psi.
 
b. The chemical ingredients were not qualified. The carbon content of some flanges reached 0.29%; this was beyond the 0.27% which was provided in the contract and the silicon content reached 0.42%, which was beyond the 0.35% provided in the contract.
 
c. In particular, some flanges were printed with the same heat number, but were provided two or three Mill Test Reports which presented different chemical ingredients and data with much difference. This meant that some Mill Test Reports were fabricated.

Among the 5,609 flanges tested by the [Buyer], 859 flanges did not qualify, accounting for 15.3%, including two with size errors, 484 with various deficiencies by visual measurement (such as cracks, etc.), 183 flanges with unqualified hardness and 190 flanges with unqualified chemical ingredients.

The above tests revealed that the quality problems with the flanges were so serious that no buyer would accept them. In particular, after the report on Chinese flanges issued by the US National Testing Commission of Boilers and Pressure Containers publicized the quality problems of the flanges produced by Shougang, the [Buyer]'s clients became aware of problems with the [Buyer]'s flanges and the [Buyer] also found so many problems in the self-test. No responsible dealer would wish to bear the high risk of getting involved in legal disputes and compensation claims and the [Buyer]'s clients would not use the flanges with such serious quality problems.

The [Buyer] also listed a statistic on the sharp decrease of sales of Chinese flanges to the US market, including sales volume of the [Seller]'s products to US market customers since 1993. The [Buyer], as the company that imported the most Chinese flanges in the US, suffered serious losses from this.

      iv. Contracts and legal basis for the [Buyer]'s claims (to be discussed in another section)

      v. The [Buyer]'s arbitration claims

The [Buyer] alleged that the quality of the flanges supplied by the [Seller] was not consistent with the requirements of the contract and its technical standards, and that the latent defects of the goods were exposed in the course of their actual use by the users, which caused the users to return the goods. This was made publicly known and impeded the sale of the goods in the US. After a partial test of the goods in store, it was found that a large percentage of goods had quality deficiencies and were seriously not consistent with the Mill Test Report provided by the [Seller]. These facts revealed that the [Seller] had already known or could not have been unaware of the bad quality of the goods, but the [Seller] did not inform the [Buyer]. The [Buyer] consequently suffered serious reputation damage and economic losses for goods returned or goods not being sold anymore. The [Buyer] therefore has the right to claim compensation against the [Seller]. The [Buyer] asked the Arbitral Tribunal to rule that the [Seller] should compensate the [Buyer] for all his economic losses (listed below in accordance with the additional materials of 20 June 1996).

The [Buyer]'s claims

[Buyer] claims:

(1) Losses for flanges unsold in store. US $929,368.80 for flanges unsold in store calculated with the CIF price (including all import duties and freight to store goods);

(2) Profit losses for flanges in store. The profit losses are US $573,912, determined by calculating the market value of US $1,503,281.20 for flanges in store in accordance with the actual conditions of 1991 to 1992, with the cost of US $929,369 subtracted therefrom.

(3) Profit losses of the flanges undelivered. The CIF cost of US $355,763 was calculated after putting the order price of flanges undelivered together with 8% duties, port fees, freight, the fees to putting goods in store, and the agency fees. The sales value was reached by dividing this sum by 0.65%. The gross profit should be US $3,929,475 ÷ 0.65% × 0.35% = US $191,565.

(4) Losses suffered from selling flanges in the manner of "original goods without any change and quality promise"

Of which:

1.  The sales value of the flanges definitely determined to be offered by the [Seller] was US $19,974.15, the CIF value was US $53,861.79, and the gap between the two values was the losses actually suffered, i.e., US $33,887.64. Calculating the place of CIF value by the real market value of US $93,000.00, the profit losses are US $93,000.00 - US $19,974.15 = US $73,026.45;

2.  Flanges sold without identifying the source of goods should be calculated by the percentage of the flanges sold. If the losses of expected profit are calculated by reducing the real sale price from the market value of US $79,132, this amounts to US $79,132 - US $39,175 = US $139,957.

(5) The settlement fee paid to TEAM Industrial Company. The total compensation to TEAM Industrial Company was US $605,000, of which, goods supplied by the [Seller] accounted for 2%; therefore, the [Seller] should pay US $12,160 for its part in the total damage.

(6) Testing fees. The fees altogether paid to carry out the test were US $883,348 for the purpose of reducing the losses, of which the goods supplied by the [Seller] accounted for 24.8%; therefore, the [Seller] should pay US $216,420. These fees included rent paid for special testing field and the amortization charge of depreciation for equipment bought, to which the testing charge of US $9,320 paid by Maxim Technologies in May 1996 should be added. The total sum should be US $225,740.

(7) Flanges returned by other clients. In addition to TEAM Industrial Company, losses suffered from flanges returned by other clients supplied by the [Seller] were US $5,666.

(8) Interest. The interest on fees paid for testing and storing flanges for four years was US $268,086, calculated at 7% per annum.

(9) Taxes. The [Seller]'s contribution of property tax imposed by local government for flanges in store unable to be sold was US $45,896.

(10) Attorneys' fees. US $122,187 had been paid to the counsel for this case.

(11) Arbitration fee. The arbitration fee was US $43,816.

The above expenses add up to US $2,461,201 [or US $2,558,038] [The sum in the brackets was calculated in accordance with the gap between the market value of flanges and their actual sale price.]

(III) The [Seller]'s defense

The [Seller] alleged:

He carried out the contract smoothly after signing two contracts with the [Buyer] in 1988 and 1989. The [Seller] is a trade company of a large Chinese iron and steel factory, whose raw materials were provided by the steel falconry of the Shougang Group and produced into flanges by his own factory. The [Seller] always pursued quality goods and maintained a good reputation. The [Buyer] had sent representatives to the [Seller]'s factory many times to review [Seller]'s production equipment and the quality of his products.

By May 1991, the [Seller] delivered all flanges in accordance with these two contracts. After the goods arrived at the US port, the [Buyer] accepted all of the goods and, before the time limit for demanding compensation, the [Buyer] submitted no objections to the quality of the flanges. There was no hindrance to block the [Buyer] from selling the flanges provided by the [Seller]. It can be found in the [Buyer]'s arbitration application that flanges now in store and unable to be sold were only a small portion of the flanges ordered and that the flanges supplied by the [Seller] were commonly accepted in the US market.

For these reasons, in early 1991, the two parties signed Contract Number 91YCSG/10-523. However, when the [Seller] shipped 15 containers of flanges to the US port in July 1991, the [Buyer] refused to accept these goods and to pay for them, which caused the [Seller] to suffer economic losses from reselling goods to other clients.

Although the [Buyer] claimed for the reason of so-called quality problems of products after many years; the actual reasons were that the market for flanges had reached its saturation point and became a bear market after 1990 because many companies were importing too many flanges. On the other hand, the sources of flanges were varied because of too many exports, of which some flanges with poor quality were supplied by some suppliers. This situation affected the reputation of the [Seller], a large enterprise which cares about quality and international reputation constantly. The [Buyer] searched for many excuses alleging that Shougang Group was a large enterprise with much capital at home and abroad, which was a good object to afford the commercial risk and so-called "losses" of the [Buyer].

The [Seller] further alleged:

(i) The [Buyer]'s statement on the deficiencies of the flanges

The [Buyer]'s statement on the deficiencies of the flanges was not consistent with the facts. After analyzing the evidence provided by the [Buyer], the [Seller] alleged that it was not objective, or bore no probative force, or was questionable, and could not be regarded as evidence.

      (1) The [Buyer]'s client, TEAM Industrial Company, resold the flanges imported by the [Buyer] to EBASCO Company, and EBASCO Company used these flanges and authorized ×× Lab to examine these flanges, finding that these flanges had an amazing rate of unacceptable quality deficiencies, which led to many returns. However, it can be found in the testing report of ×× Lab authorized by EBASCO Company that:

a) In Report Number 910844 submitted on 29 July 1991, eighteen flanges were tested, among which only one flange with the sample number of "Q" was supplied by the [Seller] and the test conclusion on it was "qualified";

b) In Report Number 910783 submitted on 17 July 1991, eight flanges were tested, among which only one flange with the sample number of "H" was supplied by the [Seller] and it was concluded as qualified in the chemical ingredients, mechanical performance, hardness and heat treatment;

c) In Report Number 910783 submitted on 28 June 1991, five flanges were tested, among which only one flange with the sample number of "D" was supplied by the [Seller], and it was concluded as qualified in the chemical ingredients, mechanical performance, hardness and heat treatment. Another flange with the number of "E" was not supplied by the [Seller] in accordance with the Mill Test Report and heat number (284) which revealed that it was purchased by the [Buyer] from Oriental Science Equipment Import and Export Company subject to Contract Number (90) OE 1409MR.

      (2) The [Buyer] authorized ×× Lab to test flanges, including:

a) On 21 October 1991, it was concluded in the test report (No. 57189-4) of ×× Lab that only the tensile strength of the two flanges being tested with the same heat number was not qualified (the standard was 70,000 Psi, and the actual testing result was 68,800 Psi; the results of the two flanges had a gap of 1.7%). In the test reports (No. 57189-2 & No. 57189-3), all of the technical indicators were concluded as qualified. These two reports alleged that the flanges had not gone through normalizing, but they did not attach the metallograph and further basis for such conclusion;

b) On 15 June 1992, as recorded in the test report (No. 920672) by ×× Lab, six flanges were tested, among which two flanges with the sample numbers of 5 and 6 were supplied by the [Seller]. Only the flange (No. 5) had a carbon content of 0.29% which was slightly higher than the 0.27% required in the contract, but it satisfied the standard of 0.35% required by A105 standard. The lab concluded that it qualified.

The test reports as authorized by the [Buyer] himself were very simple, even with no metallograph.

      (3) Self-test report provided by the [Buyer]:

The [Buyer] alleged that 5,609 flanges in store provided by the [Seller] were tested, among which 859 flanges were inconsistent with the quality requirements including 484 flanges (accounting for 56% of all the flanges with deficiencies) with defects which can be found by visual measurement.

However, since these deficiencies were clear by visual measurement and no equipment test was needed, why were they not examined until October 1994, several years later than the delivery?

On the other hand, since there were such a large part of the flanges in store found to have defects by visual measurement and unable to be sold, why was [Buyer] able to sell most of the 100,000 flanges which should contain a large number of flanges with the same defects?

Furthermore, the self-test reports contained discretionary changes and illegible records; moreover, many records were repeated and even with many negative numbers. These reports do not even contain the signature of the persons who filled out the forms, nor do they have the company seal. How can they be used as evidence for claims?

The [Seller] believed that it was revealed by some flanges supplied by the [Seller] after being tested by ×× Lab with the authorization of the [Buyer]'s client and the [Buyer] himself that these flanges were by and large qualified. And with respect to the self-test report of 1994 on flanges, it was not a formal test report and should be given no weight of evidence.

(ii) The Special Report issued by the US National Testing Commission on Boilers and Pressure Containers

The [Buyer] cited the Special Report in his arbitration application and many other evidence materials to support his claims that the [Seller] intentionally provided adulterated flanges (inferior materials were allegedly filled in the welding hole of the neck of flanges) and that the Special Report especially mentioned "Shougang", which made the flanges in store produced by Shougang impossible to be sold in the US market.

The [Seller] pointed out that the flange with the heat number 1-406 mentioned in the Special Report was definitely not produced by the [Seller], nor was it provided by the [Seller] to the [Buyer]. The Special Report listed the Mill Test Report of this flange which clearly showed that this flange was under Contract [No. (90) OE1409MR)] and Order (No. 109636) and its actual producing factory (Shandong). The [Buyer] himself clearly knew the source of this flange, but the [Buyer] did not inform the actual facts to the US National Testing Commission on Boilers and Pressure Containers while submitted this to the Arbitral Tribunal as evidence. The [Buyer] claimed that he suffered losses from the Special Report which listed the serious quality problems of flanges produced by Shougang. However, it was the [Buyer] himself who caused the mistake in the Report. The [Buyer] ordered the flange from the Oriental Equipment Co. and the flange was produced in Shandong, but he informed the US National Testing Commission on Boilers and Pressure Containers that the flanges were produced by Shougang. Moreover, after the Special Report was issued, the [Buyer], as the party who purchased this flange and an insider, did not write to ask for correction immediately, which made this wrong report wide-spread and caused a very bad influence on the reputation of Shougang. The [Buyer]'s behavior infringed on the reputation of Shougang. It is the [Buyer] who should be liable to pay compensation.

(iii) The allegations that "the flanges provided by the [Seller] were unable to be sold" and that "the [Buyer] suffered serious losses" are not true

It is not a fact as the [Buyer] claimed that the flanges supplied by the [Seller] could not be sold. The [Seller] provided the [Buyer] flanges with a total value of about US $3 million (US $3,090,000 in accordance with the [Buyer]'s arbitral application). In October 1992, the [Buyer] claimed that there were flanges in store with a value of US $1.25 million. That implied that, in more than three years from 1989 to 1992, the yearly average sale of flanges reached about US $460,000 [US $3 million - 1,250,00/3.8]. However, the [Buyer] stated in the arbitral application of April 1995 that there were about US [$720,000] worth of flanges in store. That meant that, in this period (two and a half years), the yearly sale of flanges provided by the [Seller] reached US $212,000 [1,250,000 - 720,000/2.5]. Therefore, even under such an "unfavorable" environment after the issuance of the Special Report, the [Buyer] still sold flanges with a value of US $212,000 each year, which revealed that flanges supplied by the [Seller] could be sold. As the "largest" company in the business of importing, storing and selling flanges, the [Buyer] imported Chinese flanges with a value of US $31 million by 1992. When it came to April 1995, only flanges with a value of over US $70,000 supplied by the [Seller] were stored as inventory which only accounted for a very small portion. In addition, the inventory flanges did not mean losses. Sales went slowly for two reasons: first, the [Buyer] imported too many Chinese flanges for their low prices; second, the market was saturated and the supplies surpassed the demand. It is improper that the [Buyer] attempted to transfer this commercial market risk to the [Seller]. The [Seller] would especially call the Arbitration Tribunal's attention to the fact that the [Buyer] purchased flanges from many exporters, and attributed the quality problem caused by importing low quality flanges supplied by some small enterprises to flanges supplied by the [Seller], but the test evidence provided was not sufficient to prove that the flanges provided by the [Seller] have bad quality. At the least, such allegation was unfair.

The [Seller] stated that the economic losses claimed by the [Buyer] were also not true. Calculated based on the sales price provided in [Buyer]'s evidence (the market price), the sales income from the flanges that the [Buyer] sold was much more than US $30 million that the [Buyer] paid for the flanges purchased from the [Seller]; this meant that the [Buyer] had gained much profits. However, the [Buyer] claimed US $2.36 million for the unsold flanges with a value of US $700,000, which equaled 3.2 times of the flanges in store. The claims were so high, but the [Buyer] did not provide any convincing evidence on the bad quality of flanges, which clearly reveals the absurdity of these claims

The [Buyer]'s claims contravened the contracts and did not have legal basis of laws and regulations. The [Seller] requests the Arbitral Tribunal to overrule all of the [Buyer]'s arbitral claims.

As to [Seller]'s specific claims against the [Buyer], the arguments will be presented in a separate section.

(IV) Different positions taken by the parties; and the legal and contract basis for differences

In their statements at the hearing and in the supplementary materials supplied by each party, each party submitted his own opinions on the legal and contractual basis for their claims and addressed intensive arguments.

(i) Whether the goods supplied by the [Seller] contained serious quality deficiencies

(1) The [Buyer] alleged that his statement had illustrated the process that revealed the quality problems and their seriousness.

The [Buyer]'s claim

      1) The fact that [Buyer]'s goods had been sold in large quantity did not mean that they did not contain any quality deficiencies; this was because they were accompanied by Mill Test Reports and printed with the mark of "ASTM-A105N", which could be regarded as a guarantee for quality. Moreover, the fact that serious problems did not occur on the flanges in use may have been because the pipe pressure sustained by the pipes was far less than the specified pressure and strength stipulated in the standard. Unanticipated problems (for example, the welding neck flanges were mixed with the flanges made of foreign materials) that occurred in use later caused suspicion, test and checking, which exposed even more problems which led to returns, claims and so on.

      2) As revealed by the test of the independent lab, the flanges supplied by the [Seller] were not qualified, which caused the [Buyer]'s US clients to refuse to use this kind of flanges. The test report issued by the independent lab illustrated that some flanges delivered by the [Seller] as having being tested had not gone through normalizing. This was not consistent with the technical requirements of the contracts. In addition, flanges that had not gone through normalizing were stamped with the mark of "N" for being normalized and the temperature of normalizing heat treatment was recorded in the Mill Test Reports. The producer should clearly know whether a flange has gone through normalizing heat treatment. Flanges that had not gone through normalizing were recorded in the Mill Test Reports as having passed normalizing including the temperature of heat treatment and the mark "N" stamped on them, so it meant a behavior of fraud by hiding the real facts.

For the deficiencies of chemical ingredients and other aspects, the report issued by the independent lab revealed that though most flanges met Standard A105 (carbon content 0.35%), this did not satisfy the requirement of the contracts (carbon content 0.27%). Among the Mill Test Reports submitted by the [Seller], it was found that there were two, or even three Mill Test Reports with totally different chemical ingredients for flanges of the same heat number. This could only illustrate that these Mill Test Reports were filled out arbitrarily and could not reflect the real characteristics of the flanges in the process of production. How can such quality gain the trust of users?

      3) The quality deficiencies of the flanges provided by the [Seller] caused serious consequences. The Special Report issued by the US National Testing Commission on Boilers and Pressure Containers indicated that the use of unqualified flanges may cause damage to human health and great losses of property and warned US users of flanges to be very cautious when using Chinese flanges. In addition, the [Seller]'s name (Shougang) was listed in the report. The [Buyer] alleged that the warning in the Special Report was not alarmist talk and it was not unusual to encounter serious accidents of pipe split caused by flanges with bad quality in some countries and areas. Due to this reason, the volume of flanges imported from China to the US decreased sharply from US $25 million in 1991 to only US $2.45 million in 1993.

As a US valve company importing Chinese flanges, the [Seller] suffered great losses since the unsold Chinese flanges had to be stored in a warehouse. These losses were totally connected with the serious breach of the [Seller] and his improper acts. The [Seller] should compensate the [Buyer]'s losses.

The [Seller]'s defense

      1) The [Buyer] did not identify the quality problems for the flanges which were supplied through different sources. The [Buyer] was very clear that many flanges containing quality problems were not provided by the [Seller]. For example, the Special Report mentioned the welding neck flanges with foreign materials were supplied by Shougang, the name of the supplier; these flanges were not produced and supplied by the [Seller]. In addition, the inlaid flanges, which were found by EBASCO and caused serious returns, were supplied by a Shanxi Company. Among the 31 flanges tested by ×× Lab authorized by EBASCO and TEAM Industrial Company, only three flanges were supplied by the [Seller] and the test conclusion on those three flanges was " all qualified". Another flange considered by the [Buyer] to be supplied by the [Seller] was unqualified with Si content of 0.4% , but this flange was actually purchased by the [Buyer] from Beijing Oriental Equipment Company. As to the 10 tested flanges authorized by the [Buyer] himself in October 1991 and June 1992, it was concluded that the one flange supplied by the [Seller] with a carbon content of 0.29% was consistent with the Standard A105.

In a word, the [Buyer] alleged that the unqualified rate of the flanges supplied by the [Seller] was very high, even to 15.3%, completely based on the [Buyer]'s self-test. The self-testing records were drafts which should not be regarded as evidence materials.

      2) The [Buyer] stressed the seriousness of the normalizing heat treatment problem and alleged that this was a "latent defect".

As recorded in the first test report of ×× Lab provided by the [Buyer], only three flanges supplied by the [Seller] were tested and concluded as having gone through normalizing. The other test report, Number SWL-57189, claimed that the flanges with two heats (Heat number 8113769 and Heat number 8314118) had not gone through normalizing, but this report did not provide any metallograph, nor did it indicate the testing method.

The [Seller] pointed out that the flanges in this case should endure pressure under 300 Psi, so they were not required to go through normalizing in accordance with Standard A105. The [Seller] consulted the [Buyer]"whether 700 tons of material that had not gone through normalizing could be used", and the [Buyer] replied that it was acceptable. In fact, in accordance with the contracts, flanges stamped with the mark of "N" should go through normalizing; therefore, the [Seller] still normalized the flanges, which did not need to go through normalizing in accordance with the standard. This was proved by the report of ×× Lab. The [Buyer] strongly alleged that flanges supplied by the [Seller] that had not gone through normalizing were stamped with the mark of "N" and referred to this as a kind of fraud, but even when the Arbitral Tribunal held a hearing, the [Buyer] could not provide any effective evidence that the flanges supplied by Shougang had not gone through normalizing.

The [Seller] also pointed out that normalizing was carried out in batches and each batch may contain 50, 150, or 400 flanges. For different positions in the heat, the temperature may be slightly different, therefore, though going through normalizing in the same heat, the metallograph may show some difference in the test after going through normalizing. Therefore, the fact that some tests showed flanges not having gone through normalizing could not be regarded as purposefully filling the Mill Test Report with false information. The [Seller] stated that [Buyer]'s opinion which concluded that the inconsistency between the goods and the contracts and the MTRs as evidence of "arbitrariness and fraud" was unacceptable, wrong and legally unjustifiable.

      3) As to the issue of the same heat number with so many Mill Test Reports and different data.

The [Seller] described the production process of flanges and the filing of material test reports in its "Supplementary Opinions" dated 14 June 1996.

The chemical ingredients in the test reports on materials were obtained directly through the following process: the molten steel was taken directly as a sample in the process of making steel; its chemical ingredients were tested; the steel was not formally discharged from the heat until its chemical ingredients were confirmed as qualified; the chemical ingredients at this time were filed as data in test reports on materials.

Because there were other procedures such as ingot casting, blank cutting, forging, processing and normalizing after steel making, all these procedures had some influence on the scattered distribution of chemical ingredients, the data on chemical ingredients obtained from product analysis was slightly different from that of the molten steel. In addition, since flanges of the same heat number may be produced out of materials in different positions of ingot casting, forging blank, for the phenomenon of irregular separating out in the process of solidification and irregular reallocation of molten steel in the process of crystallization, it was common to encounter differences in their chemical ingredients, which was an objective existence. The difference between the product test report and the Mill Test Report could not be regarded as evidence of arbitrary conduct.

(ii) The issues concerning the contract terms and the legal basis for claims

Both the [Buyer] and the [Seller] cited the terms and conditions of the contracts in this case, the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest, General Principles of the Civil Law ( "GPCL"), the United Nations Convention on Contracts for the International Sale of Goods (the "CISG"), and related international practices or trade customs as the contractual and legal basis for the [Buyer] claiming rights for argument, and each party proposed its own opinions and explanations.

The [Buyer]'s position

      1) Articles 18, 19 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest and Articles 111, 112 of the General Principles of Civil Law provide that if a party fails to fulfill its contractual obligations (i.e., breaching the contract), the other party shall have the right to claim compensation and that the party that breaches a contract shall be liable for compensation equal to the losses consequently suffered by the other party.

The People's Republic of China and the United States governments are both Contracting States of the CISG and have ratified this Convention. In accordance with Articles 5, 6 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest, the CISG and international practice were applied to this case. In accordance with Article 74 of the CISG, the damages should include the loss of expected profits suffered. Furthermore, Article 36 of the CISG provides:

"The seller is liable ... for any lack of conformity which exists at the time when the risk passes to the buyer, even though the lack of conformity becomes apparent only after that time" ... [if this] lack of conformity ... is due to a breach of any of his obligations, including a breach of any guarantee that for a period of time the goods will remain fit for their ordinary purpose or for some particular purpose, or will retain specified qualities or characteristics."

The [Buyer] believed that the flanges subject to these contracts were steel-made products whose chemical ingredients and physical nature would not deteriorate in quality over a long time of storage and in the process of use. When delivering the goods, the [Seller] was not only to provide goods, but also to provide correct test reports made according to actual and real test results in accordance with the contracts. The mark which represented the conformity to the agreed standard was to be stamped on these products, which was the guarantee of qualified products and compliance with the special quality and nature required.

In fact, the goods provided by the [Seller] were not consistent with the terms of the contracts, not consistent with the chemical ingredients and/or with the physical performance written in the Mill Test Report submitted by the [Seller], and not consistent with the standard stamped on the goods. These discrepancies, i.e., the goods had serious deficiencies which not only involved too many flanges, but might also be a risk to property and life; and led the [Buyer]'s clients to return large quantities of goods. These discrepancies also attracted serious attention from the US National Testing Commission on Boilers and Pressure Containers and supervision and criticism by news media, which caused the [Buyer] to suffer serious economic losses and losses of reputation and profit due to the failure to sell the large quantity of inventory goods. The [Buyer] believed that his claims were totally consistent with contract terms and applicable laws and regulations.

      2) In the long period of negotiation between the [Buyer] and the [Seller], the [Seller] raised unreasonable defenses to shirk responsibility under contracts and legal principles.

The [Seller] replied on the indemnity clauses to allege that the [Buyer]'s claim was not filed within the deadline for compensation claim as stipulated "within 90 days after the goods reached the port", and therefore the [Buyer] lost his right to claim compensation. At the same time, the [Seller] also cited Article 10 of the contract enclosure providing that "the [Buyer] may carry out examination before the first batch of goods is shipped and if the goods are qualified, hereafter each batch of goods may be examined or not, but the examining right is an inseparable part of this agreement". The [Seller] stated that the fact that the [Buyer] himself did not carry out examination meant that he had given up the rights he was entitled to by the contracts.

The [Buyer] believed that the [Seller]'s position on these terms was not tenable. The [Buyer]'s position is:

            a) The contracts stipulated that the [Buyer] was allowed to carry out examination before the goods were shipped, while in fact the two parties had no conditions to arrange for the [Buyer] to carry out lab tests. The [Buyer] could only carry out sampling test on their size, while the producing factory and the [Seller] once again showed that they had an integrated laboratory, each batch of goods going through strict examination, and the Mill Test Report providing the data tested in the laboratory. The [Buyer] had the right not to examine the goods and this right not to examine goods definitely included reliance on the [Seller]'s fulfillment of contract obligations. The [Buyer] correctly performed his right, but the [Seller] violated his contract obligations, which made the [Buyer] suffer damages caused by the [Seller]'s fault.

            b) The same principle should also apply to the right of examination within 90 days after the arrival of goods at the port. The [Buyer] could trust that the goods supplied by the [Seller] were consistent with the Mill Test Reports provided. And in fact, in the process afterwards (quality problems were sometimes found beyond 90 days after the arrival of goods at the port), the [Seller] never refused to deal with the quality problems relying on the 90-days time limit for indemnity claim. These facts actually reflected that though the terms of time limit for indemnity claims were written in the contracts, yet the two parties never proposed to examine goods within 90 days after the arrival. In other words, by their acts, the two parties altered the contract and removed the restrictions. In fact, under the contracts in this case, there were thousands of flanges to be tested within 90 / 30 days, which was not enough time to carry out transportation, storage and testing.

            c) The time limit for indemnity claims in the contracts should not apply to the goods in this case based on Article 36(2) of the CISG. The flanges are goods that could remain fit for their ordinary purpose of use for a long time after delivery and the quality should not go bad with the passage of time. At the same time, the flanges had been provided Mill Test Reports attesting their specified qualities or characteristics and stamped with quality standard marks. Moreover, for many functions (metallographical tissue and mechanical performance), the flanges could not be tested without damage; if there were deficiencies in these aspects, they were latent defects. Latent defects could only be found by destructive test or in the process of use.

Therefore, the "trade custom" acknowledged throughout the world was that goods could only be sold after the seller provided the Mill Test Report in the process of production. The users could rely on the Mill Test Report or mark consistent with the standard printed on the goods to purchase the flanges. Article 36(2) of the CISG stipulated that sellers should be still liable for the goods not consistent with the contract after the risk had transferred to the buyer. Article 15(3) of the Regulations of the People's Republic of China on Purchase-and-Sale Contract of Industrial-and-Mineral Products also stipulated that, for goods whose deficiencies could only be found after installation and operation, quality objections could be claimed within six months after its operation. There are similar laws on product liability in many jurisdictions. In this case, all such deficiencies and claims were raised within six months in operation after the exposure of deficiencies, which was consistent with Article 36 of the CISG and the stipulations in the Regulations of the PRC on Contract for Sale of Industrial-and-Mineral Products.

            d) The claims in this case involved not only the issue of products with poor quality, but also the issue that the [Buyer] considered the [Seller] replaced the results with different product test reports in his performance. For example, products not having gone through normalizing were not only printed with the mark of "N" (normalizing), but had also filled in so-called data on heat treatment temperature in Mill Test Reports. This act of the producers - not regarding the consequences of purposeful acts - in fact, behaved as commercial fraud. For the deficiencies of some goods that could only be found in the use and notified to the seller, Article 39 of the CISG stipulated the time limit to give notice to the seller for the inconsistency of the goods was within two years after receiving the goods. The notice for the inconsistency of the goods in this case were all sent within twenty-four months, for example, in August 1991, EBASCO and TEAM Industrial Company returned goods in large batches and claimed compensation within twenty-four months after the arrival of the goods at the port. Most flanges tested in July 1991 by ×× Lab were delivered to the [Buyer] twenty four months before 1991.

The [Buyer] specially pointed out that, in accordance with Article 40 of the CISG, the [Seller] had no right to rely on the time limit for notification of the lack of conformity with the contract as stipulated in Articles 38, 39. Article 40 should be applied because the suppliers (including the [Seller] in this case and other producers) had known or had been unable not to know of some goods being inconsistent with the contract (for example, flanges not having gone through normalizing that were marked as having gone through normalizing, and non-forging parts that were used to make forging flanges provided in the contract.)

Based on the arguments above, the [Buyer] alleged that the claims in this case were consistent with the PRC laws and the CISG, and that the [Seller] could not disclaim [Buyer]'s claims relying on the quality objections and indemnity article in the contracts.

The [Seller]'s opinions

      1) The [Seller] agreed that the Law of the PRC on Economic Contracts Concerning Foreign Interests and the CISG should apply to the dispute in this case.

The [Seller] alleged that if the goods delivered by the [Seller] were inconsistent with the contract, the [Buyer] could certainly submit evidence for his compensation claims. There was a specific article concerning the quality objections and claims in the contracts, which was consistent with the PRC laws and the CISG. It was agreed in the first contract (Number 88YCSG/2-019) that the [Buyer] had the right to examine the products two times.

   -    First, examination was to be carried out before the first batch of goods was shipped, if the goods were qualified, later shipments of goods could or could not be examined, and the right to examine was an inseparable part of this contract. The [Buyer] claimed that the test was not carried out before shipment of goods for the reason that he had no means (equipment, lab, etc.) to carry out spot examination, which, it should be pointed out, is a totally unreasonable argument. The [Buyer] sent his employees to the [Seller]'s factory, which was equipped with full lab appliances, and there were labs that could serve the [Buyer] where the factory was located. On the contrary, the [Buyer] never asked the [Seller] to help arrange for examination. It was the [Buyer] who decided not to carry out the examinations and that meant the [Buyer] automatically gave up his rights entitled by the contract.
 
   -    Second, as stipulated in the contract, the [Buyer] could still carry out examination after the arrival of goods at the port. Of course, whether to examine or not depended on the [Buyer]'s option. But the article provided clearly that if the [Buyer] raised claims, the quality objection must be based on the test certification issued by a testing authority. The [Buyer] attributed the failure of examination after the goods arrived at the port to his trust in the [Seller] and the guarantee in the Mill Test Reports. It was incorrect. Even though the [Seller] provided a quality guarantee, the [Buyer] must examine the goods. A quality warranty could not exempt the [Buyer]'s obligation to examine goods.

The CISG also clearly stipulates that "the buyer must examine the goods, or cause them to be examined within as short a period as is practicable in the circumstances."

The [Buyer] also emphasized that the examining period of 90/30 days stipulated in the contract was not enough to carry out transportation, storage and testing of goods, which was incorrect. Bulk goods are never examined one by one. The [Buyer] carried out the trade of import and export for a long period of time and fully knew that quality problems could be found by sample testing at random, which could be finished completely within 90/30 days. The [Buyer]'s excuse for not examining is not tenable.

      2) The [Buyer] alleged that the acts of the parties had altered or removed the contract provisions on examination and claims after the arrival of goods. The [Seller] did not acknowledge this and stated that this was inconsistent with the facts, the contracts and the laws. In addition, Article 18(5) of the contract (Number 88YCSG/2-019) provided that "any alteration, supplemental of the contract or abandoning of any contract terms has to be subject to written confirmation, otherwise it is void." This illustrates that the two parties could not alter their contract by acts. The contracts signed in accordance with the laws had their own binding force, even though the time for filing claims was not cited or declared to deal with some specific quality problems, this did not mean abandonment. The two parties did not refer to many articles of the contract when performing the contract, which could not illustrate that these articles were void. In fact, the [Seller] sent a letter to the [Buyer] on 16 November 1992, declaring that terms concerning quality inspection and time limit for objections should be observed.

      3) The issue concerning so-called "latent defects"

The [Seller] points out, the laws do not define "latent defects" and the [Buyer] did not make clear his own definition. The [Seller] alleged if there were "latent defects" in the flanges, then they should at least possess the feature that the defects could not be tested within 90/30 days after the goods arrived at the port. In fact, the so-called inconsistency of the flanges supplied by the [Seller] with the contracts and standard proposed by the [Buyer] now were discovered by ×× Lab and through self-test. If the [Buyer] had carried out this kind of test in accordance with the agreements after the arrival of goods at the port, could not the defects have been found? How could these be called "latent defects"? The [Seller] also cited the explanation on "latent defects" provided by experts and professors in the Chinese steel industry that indexes evaluations of flange quality including basic attributes such as chemical ingredients, mechanical function to judge whether the specific degree of standards requirement could be met; the deficiencies referred to the defects which would affect the use or cause damage of a work piece, such as surface and inner crackles and bubbles. Concerning the basic attributes: hardness and chemical ingredients could be tested first, which was easy and by which data could be obtained in a shorter time without breaking flanges. If chemical ingredients and hardness tests were passed, and found to be consistent with the contracts, normally there would be no mechanical function problems; if there were problems on chemical ingredients and hardness, flanges could be considered as unqualified though there might be no mechanical function problem, no more testing was necessary. If mechanical functions were needed to be known, samples could be selected to carry out a destructive test. Even though destructive test was to be carried out, it was also a normal test method and was unnecessary and impossible to require every work piece or lots of work pieces to pass the destructive test. The [Buyer] did not carry out any test at all within the agreed test period, which was not only inconsistent with the agreements, but also inconsistent with the provisions of the CISG, therefore, the [Buyer] should be liable for violating the contracts and laws, i.e., losing his right for claims.

      4) The [Seller] also pointed out that the Mill Test Report was only a record of data of test on whether materials used were consistent with the standard and a material test report was not a guarantee. In this case, there was a warranty article in the contract that "the products are to be consistent with the specifications provided in Article 1 of this contract", and this article made it clear that "except for these, any representations, warranties and conditions of any kind are to be disclaimed". This kind of warranty term was different in nature from a quality guarantee period, so it could not be regarded as a permanent quality guarantee. The [Seller] also stated that, while the indemnity claim article could not restrict the warranty term, it confined the period and conditions to assume liabilities when violating the warranty. There was no time concept related to warranty terms, but there was a time concept related to assuming liabilities when violating warranty terms, which was subject to the indemnity claim article, i.e., the [Buyer] should submit claims within the agreed time limitation in the contracts when alleging that the [Seller] did not provide flanges according to the specifications in Article 1 of the contract.

Based on the above, the [Seller] stated that there were no latent defects in the flanges in this case and there was no so-called fraud; therefore, the [Buyer] had no right to rely on the provision of Article 40 of the CISG..

As to the Chinese Rules of Contract for Purchase-and-Sale of Industrial-and-Mineral Products cited by the [Buyer], the [Seller] alleged that the regulation applied to domestic disputes arising out of economic contracts and should not be applied to this case. As to the stipulation that the longest period to notify the inconsistency between goods and contract provisions stipulated in Article 39(2) of the CISG referred by the [Buyer], the [Seller] stated that the contracts in this case clearly provided the deadline for indemnity claims, so the contract provisions should precede the stipulation of Article 39(2) of the CISG.

As to the stipulation of Article 39 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest on time limit referred by the [Buyer], the [Seller] argued that this article applied to the issue of the right of action, on whether the [Buyer] had the right to commence an arbitration, and since this case had been accepted, the issue on time limit had been solved. But the right of quality claims was a substantive issue to be dealt with in accordance with the agreed contracts and substantive laws.

(V) Different positions taken by the parties concerning [Buyer]'s claims to compensate its economic losses

The [Buyer] alleged that it was reasonable to require the [Seller] to compensate all his economic losses including expected profits based on the quality deficiencies of the goods and the law and contract basis for his claims. The [Seller], in turn, analyzed and refuted the [Buyer]'s specific claims respectively.

(i) The flanges in store that [Buyer] was unable to sell

The [Buyer]'s position:

The [Buyer] alleged that, based on the reasons above, the flanges provided by the [Seller] were unable to be sold in the US because of the inconsistency with the contracts and in the Mill Test Reports, the percentage of unqualified goods was over 15%, there were returns and claims from many purchasing companies, and because of the warning of the US National Testing Commission on Boilers and Pressure Containers. Except for a small part of the goods sold at a lower price in the manner of "original goods without any change" (not providing the Mill Test Report), the rest of the goods could not be sold. These goods in store were calculated at US $929,368.87 by CFR, which could only be returned, therefore, the [Buyer] requested the [Seller] to repay for these goods by CFR.

The [Seller]'s position:

There were two arguments for the [Buyer]'s claims for the flanges in store.

First, the percentage of the flanges provided by the [Seller] inconsistent with the contracts reached over 15%, but this conclusion was made based on the tests conducted by the [Buyer] himself. The [Seller] had refuted the reliability and effectiveness of these evidence provided by the [Buyer] and the [Buyer] could not provide any further convincing and reliable evidence.

Second, the "Shougang" flanges (Heat Number 1-406 and Number 2-284) that were mentioned in the Special Report were not supplied by Shougang at all, but were the goods produced in Shandong Province and imported from Oriental Science Equipment Import and Export Company by the [Buyer]. It was misleading to mention "Shougang" in the preface of the Special Report. The [Buyer] clearly knew these facts but took no reasonable measures to clarify. If it was the Special Report that made Shougang flanges unable to be sold, the [Buyer] himself should be liable for this.

The [Seller] also alleged that the [Buyer] had altered his statistics many times. It was clear from the statistics provided by the [Buyer] that the yearly average sale of "Shougang" flanges stored by the [Buyer] reached US $212,000 between October 1992 and April 1995. This contradicted the [Buyer]'s statement that "Shougang flanges was unable to be sold", a statement that could not be supported by evidence. In addition, "goods in store" did not equal to losses. Therefore, [Seller] believes that the [Buyer] should assume the so-called inventory losses.

(ii) The profit loss of flanges in store

The [Buyer] alleged that, in accordance with the CISG, compensation should include loss of profit. Based on the US price index of 1991 and the invoices for goods actually sold, the [Buyer] estimated that the market value of these flanges reached US $1,503,218.2, and the gross profit loss would be US $573,912 (US $1,503,281.2 - US $929,369 = US $573,912).

The [Seller] does not acknowledge that the [Buyer] suffered inventory loss. The [Seller]'s position is that the [Buyer] suffered no profit loss from the flanges in store. Moreover, the calculation method and basis of the [Buyer] was not verified with evidence. Therefore, it also should be overruled for that reason.

(iii) Loss of profit from flanges undelivered

The [Buyer] alleged that there were flanges undelivered in three contracts altogether with a value of US $329,410 (contract price). The [Buyer] should get an expected profit of US $191,565 in accordance with the above storage and calculated by the same CFR cost and gross profit loss. The [Buyer] alleged that it had the right to require the [Seller] to compensate the losses in accordance with the CISG.

The [Seller] stated that the third contract (Contract Number 91YCSG/10-523) was signed in 1991. When some of the flanges subject to this contract were shipped to the US pursuant to that contract, the [Buyer] refused to accept them without any reason. The rest of the flanges which had been produced could not be shipped and had to be detained in China. The [Buyer] refused to accept the goods and breached the contract, which caused the [Seller] to suffer losses. Therefore, it was the [Buyer] who should compensate the [Seller] for losses. On the contrary, the [Buyer]'s claim for expected profits was ridiculous.

(iv) As to profit loss suffered from flanges sold in the manner of "original goods without any change and without any quality guarantee"

The [Buyer] stated that because the Mill Test Reports provided by the [Seller] were inconsistent with the goods supplied, the flanges could not be sold and became overstocked. The [Buyer] had to sell some stored flanges at a lower price in the manner of "original goods without any change and quality guarantee" (i.e., providing no accompanied Mill Test Report and stating that heat treatment and mechanical function test were not carried out), which was a measure to reduce losses. The profit loss suffered from this should be compensated by the [Seller] who breached the contract.

The [Seller] stated that if the [Buyer] did suffer loss from such sales, the [Buyer] should provide normal sales contracts, invoices (originals or notarized duplicates), sales contracts of "original goods without any change and quality guarantee," and have their invoices prove their specifications, quantity and price gap. Otherwise, [Buyer]'s allegations could not be proved. Meanwhile, the market price of products was related to supply and demand, which was a commercial risk assumed by the [Buyer].

(v) The cost for the settlement with Team Industrial Company

The [Buyer] alleged that because the flanges purchased by Team Industrial Company supplied by the [Seller] and another Chinese company (Shanxi Company) exposed serious quality problems, this led to a great amount of returns, great replacement of flanges which had been used in pipes, and caused a serious dispute over claims between the end user and the [Buyer]. Therefore, the [Buyer] compensated US $605,000 to Team Industrial Company for the settlement to resolve the dispute. The [Buyer] provided timely notification of this to the [Seller] and asked the [Seller] to contribute to this settlement. As examined among the returns from this client, the flanges supplied by the [Seller] accounted for 2%, therefore, the [Seller] should assume 2% of the above settlement fee, i.e., US $12,100.

The [Seller] stated that Team Industrial Company requested returns and claimed its losses based on the test result of over thirty flanges by ×× Lab authorized by EBASCO. Later the [Buyer] reached a settlement agreement with this end user and paid a settlement fee. It could be found from the test reports of ×× Lab that only three of the tested flanges were supplied by the [Seller] and the test results on them qualified as "no quality problems." Why should the [Seller] be expected to contribute compensation liability for the flanges with deficiencies supplied by others?

(vi) The testing fee

The [Buyer]'s position:

The [Buyer] had to stop selling the flanges supplied by the [Seller] due to serious quality problems, so the [Buyer] had to find a place to stack them. To reduce losses, the [Buyer] also had to sort the flanges and carry out partial tests (excluding destructive tests on mechanical strength and metallograph). The total amount reached US $883,348 including storage, sorting, purchasing spectrum equipment and manpower cost, of which, the [Seller] should assume 24.5%, i.e., US $216,420, which corresponded to the percentage of the flanges supplied by the [Seller] in store, and should be assumed by the [Seller].

The [Seller]'s position:

The storage, transportation, test and depreciation of equipment purchased were all reasonable, normal expenses of the [Buyer] as importer and wholesaler. They should be assumed by the [Seller].

(vii) Losses suffered from returns of other clients

The [Buyer]'s position:

There were flanges with a sum of US $5,665.79 returned for quality problems by the clients of the [Seller] other than Team Industrial Company. These returned goods were proved to be the [Seller]'s goods which were accompanied with their heat number, Mill Test Reports, and evidence on payment of returns for check. This loss should be assumed by the [Seller].

The [Seller]'s position:

The report of returns listed superficial deficiencies of flanges, such as surface crackles, size, and bad welding. If these deficiencies did actually exist, they could have completely been found by test within 90/30 days after the arrival of the goods at the port. As the [Buyer] did not notify of quality objections within the time limit provided in the contract, the [Buyer] had lost his right for claims. The [Buyer] himself should be liable for this.

In the three-page list of flanges submitted by the [Buyer], some flanges (Order No. I09636, Contract No. (90) OE1409R) were not ordered through the contracts and orders between the [Buyer] and the [Seller]. Why should the [Seller] be liable for such compensation?

(viii) Interest loss and taxes

The [Buyer] alleged that the interest losses of storage and testing costs and the property tax on goods in store were actual costs and losses of the [Buyer] and that the [Seller] should contribute on the part which was supplied by the [Seller].

The [Seller] stated that, since the [Buyer] himself should assume the costs of storage and testing for the flanges, the [Buyer] should certainly assume the interest on these costs. As to taxes, based on Article 13 of the contracts, the [Buyer] should assume all the taxes in the importing country. Based on the above facts and reasons, the [Buyer] himself should assume this liability.

II. THE ARBITRAL TRIBUNAL'S OPINION

(I) The applicable law

The contracts in this case did not provide what laws the contracts would be governed by and construed in accordance with for any disputes. In accordance with the principle that laws of the country with which the contract has the closest relationship are to be applied, since the place of business of the [Seller], the contracting place and the place of arbitration of this case are all in China, the laws of the PRC should apply to this case.

In accordance with Article 6 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest, the countries of the two contracting parties are the U.S. and China which are signing and ratifying states of the CISG, therefore, the CISG will be applied to settle the disputes in connection with the contracts except the reservation articles declared by the two countries.

In accordance with Article 5 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest, international customs can be applied where there is no stipulation in the PRC laws.

(II) The quality issue

The focus of the dispute in this case has to do with the quality of the goods. To make a correct and reasonable evaluation of the quality problem, the following issues need to be investigated or clarified:

   -    What provisions in the contracts set forth the requirements and standards for the quality of the goods?
 
   -    What quality problems arose and how serious they were (the scope and degree of harm)?
 
   -    The nature of quality problems and possible remedial measures.

The opinions of both parties and the matters concerning tests have been presented in the above Details of the Case.

The Arbitral Tribunal decided to employ experts to carrying out an investigation and evaluation in accordance with the Arbitration Rules. The test results provided by the two parties to the dispute, sample tests and the evaluation of experts could be taken as a reference for the Arbitral Tribunal to analyze the quality problems associated with the goods in this case. Matters concerning the views of both parties on past tests are outlined above in the "Details of the Case" section of this award. The key points pertaining to the experts' investigation and evaluation directed by the Arbitral Tribunal are:

(i) The nature of the experts' investigation and evaluation report

(1) The experts' investigation and evaluation does not belong to the merchandise test provided in the contracts or laws. Neither can it replace the [Seller]'s merchandise test for exports, nor can it replace the [Buyer]'s test on imported goods for claims. The experts are employed to report on special topics in this case for reference of the Arbitral Tribunal in holding its hearings in accordance with the Arbitration Rules. The Arbitral Tribunal is to decide whether the experts' opinions are to be accepted. The Arbitral Tribunal has ruled that:

   -    It is not suitable to select lots of flanges for test at random from all flanges in store;
 
   -    It is only required to properly select some samples from flanges which were still in the [Buyer]'s warehouses and determined unqualified by the [Buyer].
 
   -    Each sample is to be divided into two parts, China and US independent and fair test institutes were separately authorized to carry out the tests on chemical, physical, metallographical and mechanical functions.

The experts analyzed and compared their results, made independent judgment on the quality problems of flanges in accordance with their knowledge and experience and prepared written evaluation opinions.

(2) The selection of samples and authorization for test

The samples were selected from flanges in store, which had been determined "unqualified" by the [Buyer]. The [Buyer] had divided "unqualified" flanges in store into three types: "unqualified" by self-test of the [Buyer], "unqualified" by test of ×× Lab, and the returns from users. The two parties to the dispute were present when selecting samples. The printing marks on flanges and their corresponding Mill Test Reports were checked and altogether eight flanges were selected, which were determined to be goods supplied by the [Seller], and marked by paint from No. SG-1 to No. SG-8. The processing factory of Houston MAXIM Laboratory was authorized to cut each flange into two and pack them with the same package separately under the co-supervision of the Chief Arbitrator of the Arbitral Tribunal, the Secretary of the Arbitration Commission and the experts. One part was airmailed directly to Beijing and another part was carried by the experts to New York.

The China and US testing labs are independent labs selected by the Arbitral Tribunal and experts after co-investigation.

   -    The US International Testing Laboratories selected is a lab established in 1934 with a long history and comprehensive instruments, whose historical records revealed that it has provided testing services on all kinds of materials for tens of international renowned producing factories, and gained acknowledgement from numerous US professional associations and institutes;
 
   -    The China Iron & Steel Research Institute selected is a testing center nominated by the state for testing all kinds of metal materials with the most advanced and comprehensive metal materials testing instruments in China and numerous high-level researchers. The institute was often authorized by agencies at home and abroad and the CCIB to carry out testing on metal materials.

The selection of the above two US and China labs satisfied the principles of independence and fairness.

The authorized Chinese Association for International Economic Cooperation signed agreements on testing the eight samples separately with the above laboratories and made unified arrangement on testing items, standards and testing methods after sending experts to discuss the matters with the two labs.

To guarantee the accuracy of the analysis of chemical ingredients, it was determined that the China Central Iron & Steel Research Institute lab was to check data by wet analysis test as the final result (wet analysis test is the most accurate, but it involves considerable labor, long time and considerable costs. In dealing with conflicts, wet analysis testing is always recommended.) For two welding flanges, the Central Iron & Steel Research Institute was required to carry out two metallographical checks on the whole flanges and the welding seams.

(3) The testing results and the conclusions of the experts

The testing results by the China and the US independent labs revealed that most figures were very close. The Arbitral Tribunal concluded that the testing results by the two labs were reliable. (See the enclosed "Comparison between the Mill Test Report and the Testing Figures of the China and US labs.")

The experts analyzed the testing results of the two laboratories and submitted the following opinions:

      1) Chemical ingredients

The chemical ingredients of all selected flanges with eight heat numbers meet the requirements of Standard ASTM A105 and are qualified products.

   -    Several testing reports from ×× Lab submitted by the [Buyer] in this case revealed that the chemical ingredients of some flanges tested by the lab also met Standard A105 and contract provisions. Flanges of SG3, SG4 were considered unqualified in the [Buyer]'s self-test, but they were concluded as qualified in the tests of the China and US labs.
 
   -    The experts held that there were errors for the analyzing results obtained from the Mrc Met 900 Portable Optical Emission Spectrometer applied by the [Buyer], which led to different figures obtained by the China and US labs and, in addition, which deviated greatly from the repeated analyzing results of Houston Metallurgy Lab.
 
   -    The experts considered that the [Buyer]'s self-test data on chemical ingredients was an inappropriate basis for determining whether the chemical ingredients of flanges were qualified.

      2) Mechanical performance and hardness

Concerning hardness, the two labs' conclusion that all eight flanges were qualified corrected the misjudgment of the [Buyer] that SG-2 was unqualified by self-test.

   -    Concerning mechanical performance, all eight flanges were qualified, among which the strength performance of the flange (SG-6) was slightly lower (by about 2%) than Standard A105, but it was considered at the edge of the standard and acceptable by comprehensively analyzing other indexes.
 
   -    In addition, the testing results of the two labs corrected the conclusion that the percentage elongation of flange SG-7 tested by ×× Lab was unqualified.

      3) Normalizing heat treatment

The testing results of eight flanges held that four flanges (SG-3, SG-4, SG-5, SG-7) had gone through normalizing heat treatment and that four flanges (SG-1, SG-2, SG-6, SG-8) had not gone through normalizing or had not gone through normalizing correctly.

   -    The experts held that it was provided by Standard A 105 that flanges with a pressure level of above 300 Psi should go through normalizing heat treatment, while, for flanges with a pressure level of under 300 Psi, normalizing was an additional requirement. Normally, steel 0.025% seldom goes through normalizing heat treatment, for normalizing heat treatment does not create remarkable influence in its functions. The pressure level of flanges in this case was 150 Psi, which made it unnecessary to go through normalizing heat treatment in accordance with Standard A105.
 
   -    If the contract required normalizing and flanges were printed with the mark of "N", but they were not normalized or not correctly normalized, this was inconsistent with the requirement of the contract.

      4) Welding rents

There were many reasons for flanges being rent in the process of welding. In addition to the quality of the flange itself, there were other problems such as whether the welding rod selected, welding technology and parameters were reasonable and whether the way of operation was proper in the process of welding.

   -    Among the [Seller]'s flanges tested this time, one flange (SG-5, heat number 015751) was returned for welding rent. It was tested by the China and US independent labs and was held that the chemical ingredients, mechanical performance, hardness and normalizing heat treatment all met Standard A105. The welding rents of these flanges may have been a problem of welding operation.
 
   -    For flanges that qualified by meeting all technical indicators, it was improper to regard them as unqualified for the reason of welding rents.

(4) The experts' other opinions on quality and testing issues

In accordance with the requirements of the Arbitral Tribunal, the two experts submitted their own opinions concerning quality and testing issues - for reference of the Arbitral Tribunal.

      1) Many flanges were tested and determined "unqualified" by the [Buyer]'s self-test. After investigating the instruments used for testing and the testing procedure applied by the [Buyer], the experts concluded that:

   -    These testing results could not be properly regarded as the basis to determine whether the chemical ingredients of flanges were qualified or not. The main reason was that the sampling was in the middle part between the inner surface and the exterior surface, which did not fulfill the provisions of Standard A105, and was only a surface test - which had a comparatively large deviation. The test of hardness was carried out by converting Dietmar Leeb hardness into Brinell hardness, which may be greatly affected by human factors, so the testing result was unstable.
 
   -    Therefore, this was an improper basis for determining that flanges were unqualified.

      2) As for the nine flanges determined to be unqualified among the fourteen flanges supplied by the [Seller] and tested by MAXIM Lab (formerly named as ×× Lab) from 1991 to around 1996, after investigation and discussion with its major technical person in charge, the experts concluded that:

   -    (1) The analyzing standard of chemical ingredients cited in its test reports was incorrect;
 
   -    (2) It was improper to disregard the allowed deviation provided by Standard A105;
 
   -    (3) It was improper for this lab to take CE 45% as the standard to decide whether flanges were qualified;
 
   -    (4) It was partial to determine the flanges not passing normalizing heat treatment only by regarding the growth of crystals and the character of Dendritic Structure or the ferrite in the edge of crystals.

      3) Concerning surface deficiencies. The experts checked the spot flanges that were with surface deficiencies found by the [Buyer] after self-test and accounted for a certain percentage. The experts found that most surface deficiencies were hollows and forging foldings which were all exposed on the surface. These deficiencies were visible and easy to be found if the purchaser had examined in time. (Some deficiencies could not affect the function and use of the flanges after simple and easy polish.)

      4) The investigation found that some flanges were repaired by welding. Standard A105 provides that repair by welding is allowed, but a technology assessment must be carried out before welding, normalizing heat treatment must be carried out after repair by welding, and the mark of "w" should be printed on flanges repaired by welding. The investigation determined that all flanges repaired by welding were not printed with the mark of "w", inconsistent with the provisions of Standard A105.

      5) Concerning crackles created by welding of users, the experts held that crackles created by welding should be regarded differently depending on different conditions. Some flanges may have quality problems, for example, unqualified chemical ingredients could lead to bad welding, and the welding operation may cause crackles for reasons of improper technical parameters or improper technical operation. The flange (SG-5) in this case was returned for the reason of crackles caused by the users' welding, whose chemical ingredients, mechanical performance and hardness were all qualified by the tests of the China and independent labs. The two labs found that this flange went through normalizing heat treatment which completely met Standard A105N. The reasons for the welding crackles should be searched from the craft of welding operations. The crackles are not a core product quality problem.

      6) Concerning problems with the Mill Test Report. After comparing these testing results with the testing data listed on the Mill Test Report, the experts concluded that the data on the Mill Test Report had a comparatively large deviation. More than one MTR was attached to some products (e.g., SG-1, SG-2) and the chemical ingredients recorded in the MTRs differed considerably. This was incredible and unacceptable. The experts concluded that, as a minimum, this reflected great problems in the factory's production administration.

(ii) The opinions of the parties on the experts' investigation and evaluation report

The Arbitral Tribunal noted that the [Buyer] and the [Seller] agreed with most of the experts' report. They acknowledged that many of the technical ideas and opinions expressed by the two experts in their report were acceptable to both of them.

At the same time, when applying the ideas and opinions in the experts' report, each party placed emphasis on the selected data and opinions for his side, while other opinions were not cited and mentioned, or regarded as doubtful.

The [Buyer]'s position:

The [Buyer] stated that the experts' report fully supported the [Buyer]'s allegation on product quality with the arguments:

(1) The Mill Test Reports provided to the [Buyer] were not accurate and indicated serious problems in production management. The experts noted that three Mill Test Reports for SG-1 (Heat number 8314118) and two Mill Test Reports for SG-2 (Heat number 8113802) differed greatly. The experts pointed out that, while a certain deviation was allowed in melting ingredients and product analysis, the deviation in Mill Test Reports of the same heat was too large to believe, which caused people to doubt the reliability of the Mill Test Reports.

The [Buyer] alleged that the experts' opinions indirectly but strongly revealed that there were serious problems in the Mill Test Reports, which were caused by purposeful acts.

(2) Many flanges had not gone through normalizing heat treatment in accordance with the contract.

It was mentioned in the experts' report that Test Report Number 60904 made by MAXIM Laboratory (×× Lab) on ten flanges in May 1996 concluded that flanges (No. 1, 3, 6 and 7) had not gone through normalizing heat treatment. The experts concluded, after analyzing its metallograph, that the purpose of improving tissues by normalizing heat treatment was not fulfilled. Among eight flanges selected by the experts, the metallograph testing by the authorized China and US laboratories revealed that half of these flanges, i.e., four flanges, had not gone through normalizing heat treatment, which was contrary to the contract requirement. The experts also pointed out that the Mill Test Report stated that flanges had gone through normalizing heat treatment and the mark of "N" was printed on the flanges, while these flanges had not actually gone through normalizing heat treatment, so it should be regarded as not fulfilling the contract requirement.

(3) Flanges repaired by welding were not printed with the mark of "w", which did not fulfill the standard. It was pointed out in the experts' reports that flanges repaired by welding should go through normalizing heat treatment. It was held in the experts report that some flanges repaired by welding did not have the mark of "w" printed on them, which did not meet the requirement of Standard A105.

(4) For flanges which the Mill Text Reports indicated had gone through normalizing heat treatment with the mark "N" printed on them, it was only by the destructive test that the experts could make a real judgment that these flanges had not gone through normalizing heat treatment. This situation supported the allegation by the [Buyer] that "the defects involved in this case were definitely 'latent' defects as provided by the Vienna Convention." The exposure of deficiencies and serious problems in welding also illustrated that these problems could only be found in the process of production and use.

(5) The [Buyer] raised suspicion or different opinions as to the other aspects of the experts' report.

      1) The [Buyer] had some suspicions on Mr. Zhang Yongquan, the expert, who worked for the institute within the same administrative system (Metallurgical Industry) with the [Seller], though he did not find any evidence showing that Mr. Zhang was partial when experts visited Houston.

      2) The experts' conclusion that the [Buyer]'s self-test of chemical ingredients "could not guarantee accuracy" did not consider the difference between a merchant trading flanges and a science laboratory. In contrast, the experts still held that the instrument, standard steel and test procedure applied by the [Buyer] in self-test could satisfy the requirements to carry out non-destructive test on chemical ingredients and sorting on flanges. The [Buyer] claimed that this was a conclusion drawn by the experts without carrying out careful enough tests on a sufficient number of flanges to support their ideas on the reliability of [Buyer]'s self-tests.

      3) Although the experts' report did not purport to advance conclusions on the seriousness of the quality problem with the flanges, the experts' discussion on key deficiencies (the Mill Test Reports are not reliable, flanges did not go through normalizing heat treatment and many other deficiencies concerning repaired welding) revealed that the problems were quite serious, which proved that many flanges delivered by the [Seller] did not reach the quality required by the parties' contracts.

      4) The experts' report mentioned that some Chinese persons were consulted, but did not make it clear who they were or did not illustrate what influence these unknown persons could bring to bear on the experts' methods or the conclusion they drew.

The [Seller]'s Position:

The experts' investigation and evaluation was not carried out on the basis of sampling at random; the samples were selected from "unqualified" flanges returned after sale and prepared by the [Buyer] in advance. Among the eight "unqualified" flanges selected that way, it was found that their hardness and chemical ingredients all met the requirement of ASTM Standard A105. The China and US agencies tested mechanical functions (mechanical performance, physical performance). Their tests revealed that the mechanical function of the [Seller]'s flanges met the requirement of the standard. Among the eight flanges, only half of them, i.e., four flanges, had not gone through correct normalizing heat treatment and did not reach the normal treatment effects. And even for flanges determined by the [Buyer] to be "unqualified", the actual conditions were not as [Buyer] judged. That means the [Buyer]'s judgment and test contained serious mistakes.

(1) It is stated in the test report that for flanges under level of 300 Psi, normalizing heat treatment was only an additional requirement, because normalizing treatment places no remarkable influence on performance. The experts held that even if this type of flanges did not go through normalizing heat treatment or did not go through correct normalizing heat treatment, it could not cause a comparatively large influence on the use or performance of the flanges.

It was also stated in the test report that it is very difficult to determine whether flanges had gone through normalizing heat treatment only by micro-organization; "flanges determined as not having not gone through normalizing heat treatment may have actually gone through an excessively high-temperature normalizing heat treatment." The [Seller] alleged that the experts' report assessed that these flanges could have gone through correct normalizing heat treatment, but with a bad effect. Therefore, the [Seller] should not been alleged as not carrying out normalizing intentionally.

(2) It was held in the experts' report that the [Buyer]'s self-tests were "hard to determine the accuracy of the analyzing data because, for some of this data, there is too large a deviation for chemical ingredients."

Concerning the hardness test in the [Buyer]'s self-test, the experts held, it was improper to determine whether flanges were qualified by the instruments and method applied by the [Buyer].

(3) The experts' report presented clear comments on the test reports issued by MAXIM (the former ×× Lab). The experts concluded that the reports issued by MAXIM quoted the wrong analysis standard of chemical ingredients. Therefore, the conclusion that certain flanges did not pass the normalizing heat treatment was incomprehensive.

The experts concluded that the flange (SG-7) was a qualified product and "the conclusion made by ×× Lab that the strain rate of this flange was not qualified was a wrong conclusion." The [Seller] stated that the experts' report had held that the self-tests executed by the [Buyer] and the standards, equipment and methods applied by the [Buyer] contained mistakes. Therefore, the test conclusions must contain serious mistakes and the test reports provided by the [Buyer] could not be accepted as evidence to support the [Buyer]'s claims.

(iii) The opinions of the Arbitral Tribunal on flange quality problems

The Arbitral Tribunal carefully examined the opinions of both parties, the evidence they presented on the quality problems and the experts' report on the investigation and evaluation. Before drawing its conclusions, the Arbitral Tribunal held that it was necessary to examine basic opinions on the manner in which the experts' report on investigation and evaluation was applied, and proposed opinions on several key issues concerning quality.

(1) The Arbitral Tribunal's assessment on the experts' report

The Tribunal noted that, even though the parties had different views on some aspects of the experts' report on investigation and evaluation, both parties held that the experts' investigation and evaluation was "beneficial to solve the disputes in the case." The Arbitral Tribunal also understood that:

   -    After accepting the authorization in this case, the two experts left the administration of their original working units, acted as independent, employed and qualified experts completely, and provided consultation services for the Arbitral Tribunal in this case, based on their own knowledge and experience.
 
   -    They completely abided by the employment, strictly carrying out the provision of "not carrying on independent contact with any party in the dispute", and acted in accordance with the principle of "respecting the facts, being scientific and cautious in their analysis, analyzing reasonably, and fair treatment."
 
   -    With the permission of the Arbitral Tribunal, the two experts invited several experts on steel material testing and carried out discussions on special academic issues such as determining the heat treatment of metallographical organizations via metallographs. These experts were scholars and researchers on metallurgy and materials in related colleges, universities and institutions. The discussions did not involve the specific dispute in this case, nor were the names of the two parties in dispute mentioned. Therefore, it was beyond any doubt on the experts' activities, cautiousness and their attitude.

The Arbitral Tribunal therefore held that the experts report on investigation and evaluation could be regarded as important evidentiary material in hearing the case and the experts' evaluation and opinions are to be applied as important references.

(2) What quality defects were there in flanges supplied by the [Seller]? And how to evaluate the seriousness?

The Arbitral Tribunal has noted that there are comparatively large differences on this issue between the [Buyer] and the [Seller]. The experts' investigation and analysis evaluation led to the conclusion that in some parts, the flanges supplied by the [Seller] were inconsistent with contract requirements, including:

(1) Not all flanges had gone through normalizing heat treatment;

(2) Some flanges repaired by welding did not have printed on them the mark "w", and some flanges with welded neck or that were repaired by welding had not gone through normalizing heat treatment after welding in accordance with the standard;

(3) The Mill Test Reports were inconsistent with the real nature of the flanges. Several Mill Test Reports were provided for the flanges with the same heat number with different data.

As for the seriousness of the defects in the flanges supplied by [Seller], the Tribunal once expected the experts to provide analysis and comments. However, in this investigation, tests were only carried out among selected "unqualified" products determined by the [Buyer] or returned from the users and only eight flanges were selected. The full evaluation was therefore limited. The Arbitral Tribunal held that the seriousness of deficiencies was mainly evaluated from the following two aspects:

(1) The percentage of products with quality problems; and

(2) The nature of the quality deficiencies and the harm they caused.

As to the percentage of products with quality problems, quality problems alleged by the [Buyer] appeared in the 30 flanges tested by the US ×× Lab, and [Buyer]'s self-tests for deficiencies of chemical ingredients, hardness and range estimation illustrated that flanges with quality deficiencies accounted for a large percentage of these flanges. However, the ×× Lab did not test the goods in batches and at random, and the accuracy of the [Buyer]'s self-tests may be limited by the factors such as testing instruments, methods and testing conditions. As a result, it is difficult to regard [Buyer]'s percentage figures as a scientific and lawful basis to determine the real percentage of quality deficiencies.

The flanges provided in this case are the connecting parts used in pipes. It was known from the specific orders of flanges supplied that the size of flanges supplied in this case differed from 1 inch to 24 inches, whose pressure levels ranged from 150 Psi to 300 Psi (equaling to 10, 20 atmospheric pressure). If there were problems in the connecting parts of pipes and cracks were caused, no matter whether the media transported by this kind of pipe was poisonous or not, the consequences could be highly serious due to the state of high pressure. Therefore, it was extremely necessary to require that the connecting parts (flanges) produced and supplied should fulfill Standard A105 and the additional conditions requested by the clients in the contract.

For example, as for the requirement of normalizing heat treatment, in the process of forging, materials for flanges may appear to have bad-distribution of crystal organizations or to have remaining stress. Normalizing heat treatment could not only polish the crystal structure to improve the tensile strength, but also improve the welding and processing performance of flanges. Since most flanges are to be welded or processed for the use of connecting pipes, if the [Buyer] required normalizing heat treatment, it was to be observed. The Arbitral Tribunal noted, however, that the experts mentioned that for flanges at the level of 300 Psi, esp. for steel with a carbon content 0.25%, even though normalizing heat treatment was not carried out, the use performance of flanges was not affected greatly. At the same time, the experts also pointed out that if the contract required normalizing but the flanges supplied had not gone through normalizing heat treatment or pass the correct normalizing heat treatment, it apparently did not follow the contract provisions."

The experts' report disclosed large deviations for chemical ingredients in Mill Test Reports. The flanges repaired by welding were not imprinted with the mark of "W" and the flanges that had not gone through normalizing heat treatment were imprinted with the mark of "N". In addition, there were many Mill Test Reports with different data for flanges of the same heat number. All of these would cause purchasers and users to seriously doubt the truth and reliability of the Mill Test Reports and the marks printed on the flanges.

However, the number of flanges tested was very limited, compared with the quantity of more than ten thousand of flanges, therefore it was hard to determine scientifically and accurately what percentage of flanges had the above deficiencies. At least from the present evidence, it was determined that the above deficiencies were not very rare.

The Arbitral Tribunal notes that, in view of the special nature of flanges for high pressure pipes, the provisions of Standard A105 are very strict.

   -    The rejection and return provisions of the Standard (A105-84 or A 105-87a) provides that "each forging part with harmful deficiencies found should be rejected in the time of processing and application";
 
   -    The supplementary requirements of this standard provide in the article of "product analysis" that "any forging part is to be selected at random on behalf of forging parts ordered of each size and shape; if it is unqualified after analysis, each forging part is to be checked or the whole batch is to be rejected."
 
   -    The article of "product marks" of Standard A105-87a specifically requires the producer to print the test and verifying marks. The Standard especially suggests that organization be taken into consideration "to prove that pipe fittings are produced, sampled and tested in accordance with this standard and the result is determined in accordance with the Standard." Therefore, it is highly emphasized in the Standard that the marks must present the facts and comply with the Standard.

Based on the above, the Arbitral Tribunal held that some Mill Test Reports and marks on the flanges supplied by the [Seller] were not consistent with the real quality conditions of the flanges. The inconsistency casts doubt on the creditability of the record in the Mill Test Report and the marks on the flanges. The Arbitral Tribunal regards this as a serious violation of the contract.

The [Seller] claimed that, among more than 10,000 flanges supplied by the [Seller], the [Buyer] had sold about 80%. If the rate of unqualified flanges was as high as the [Buyer] stated, why were problems not encountered?

The Arbitral Tribunal held that, whether the flange deficiencies could immediately trigger quality accidents had some connection with the actual environmental conditions and the conditions requiring strength for the flange in use. At the same time, the quality indicators required by the standard generally set forth a comparatively large safety range. The fact that the flanges in use did not cause accidents does not prove that the flange quality was consistent with the contract and the standard. The contract required that the quality of the flanges must be consistent with the standard in order to prevent accidents, because if accidents occurred on high pressure pipes, the consequence could be worse than anything imaginable. The Arbitral Tribunal does not support the opinion that the absence of accidents illustrates the good quality of the flanges.

The Arbitral Tribunal also noted that the [Buyer] based many of its allegations of deficiencies on the results of a simple self-test method and concluded that more than 15 % of all flanges were unacceptable "unqualified" products, which was also applied to illustrate that the flanges quality deficiency had reached a very serious degree. However, the experts stated in their evaluation report that while the [Buyer]'s self-test method, instruments and degrees could meet the requirement to sort flanges commercially, [Buyer]'s chemical ingredients test had a comparatively large deviation. In addition, the Dietmar Leeb hardness was not listed in the ASTM standard, so it was improper to use this kind of test as the basis to determine whether flanges were qualified. Accordingly, the Arbitral Tribunal will not support the [Buyer]'s allegation that "more than 15% of the flanges are unacceptable unqualified products."

The Arbitral Tribunal also held that it was necessary to point out that neither the contracts signed by both parties nor the current laws and regulations provided what threshold of unqualified products with deficiencies should be reached for claims. Therefore, the Arbitral Tribunal does not support the above rate of unqualified products alleged by the [Buyer], but the Arbitral Tribunal decides that this does not preclude the [Buyer] from submitting reasonable claims for compensation based on other reasons.

(III) [Buyer]'s right to claim damages

As to the [Buyer]'s right to claims, the parties' arguments involved many problems on laws and the contracts. The Arbitral Tribunal presents the following separate analysis of each.

(i) The time limit for arbitration and the time limit for claims

Article 39 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest provides that "the time limit for commencing an action or arbitration is four years concerning contract disputes on buying and selling goods, which starts from the day the party knows or should know that his rights were infringed."

This case involves a contract dispute on the same type of goods delivered continuously and in many batches. When the quality problems were found and the clients returned the goods in June 1996, the parties negotiated on the issues of quality and compensation, but no agreement was reached. In October 1992, the [Buyer] notified the [Seller] for the second time that if the [Seller] did not compensate the losses, the [Buyer] would file a legal proceeding against the [Seller]. In April 1995, the [Buyer] filed an arbitral application to the Arbitral Commission. After the review, the Arbitral Commission decided that the case was still within the time limit for filing a proceeding or arbitration and consequently accepted the application. The Tribunal believes that not only had the Arbitral Commission confirmed that the application satisfied the time limit set forth by laws, but the [Seller] gave his implied consent to the [Buyer]ís compliance with the procedural time limit, as the [Seller] responded to the arbitration.

The specific right to file claims is a substantive issue to be addressed at the hearing. It should be determined on the basis of the agreements of the parties and the relevant laws and regulations. The right to claim has a connection with the time limit for proceedings and arbitration but it is a substantive right rather than a procedural right. The Arbitral Tribunal has noted that this understanding is consistent with that which the [Seller] understood for the time limits for arbitration and damage claims.

(ii) Quality discrepancy and time limit of claims provided in the contracts

The Arbitral Tribunal noted that there is a "claim for compensation" article in each of the three contracts signed by the parties. As it provided, if the [Buyer] claims for compensation in terms of quality discrepancies, it must be submitted within 90 or 30 days (90 days provided in the first contract and 30 days provided in the second and the third contracts) after the arrival of goods at the destination port. It also provided that if the [Buyer] claims for compensation in terms of quantity discrepancies, the claim must be submitted within 15 days after the arrival of goods at the destination port. In Section (IV)(ii) of the above "Details of the Case", the Arbitral Tribunal illustrated the two parties' opinions on the time limit for claims. That information will not be repeated here. Here, the Arbitral Tribunal presents its conclusions on the following issues.

(1) The effectiveness of the indemnity article in the contracts

      1) The Arbitral Tribunal holds that the claim for compensation article cited above is an important article providing the two parties' rights and obligations. It had been confirmed by the parties' signatures and should be an effective term binding the parties' performance of contract and entrusting rights. The parties should abide by them unless such a provision is contrary to related laws and regulations.

      2) The Arbitral Tribunal examined the evidence such as the parties' correspondence and did not find any notice or mail and telegraph sent to modify the articles regarding the claim for compensation or examination time for the goods. Therefore, the Arbitral Tribunal held, the above contract articles on quality objections and claim for compensation are the only effective written terms on claims in this case.

      3) The [Buyer] alleged that the two parties did not plan on having the products examined in the U.S. within 90 days after the arrival of the goods at the port. The reason was that the specifications in the contract clearly provided that the buyer should examine the goods before shipment, i.e., examination was to be carried out in China. (Note: This was only provided in Contract Number 88YCSG/2-019.) However, another article provided that quality objections should be proposed within 90 days after the arrival of goods at the port. The [Seller] alleged that the provision concerning proposing quality objections made the test in specifications and other tests meaningless. Therefore, it was an illogical explanation and should be denied. The [Buyer] also illustrated with examples that the two parties did not propose or cite the 90-day restriction for quality objections in dealing with the quality problems of flanges in performing the contract. The [Buyer] alleged that this meant that the parties had altered this quality objections and claims article by their behavior, i.e., that any time limitation for filing claims was abolished.

The Arbitral Tribunal decides that the examination carried out by the buyer before the shipment of goods was not contradictory to the examinations after the arrival of goods at the port for the purpose of claims for compensation. The examination before shipment may help to find deficiencies of goods at an early time and reduce as much losses as possible caused by deficiencies when the goods were transferred to the buyer. No matter whether the buyer examined goods before shipment or after the goods were delivered to the buyer, the buyer should have the right to carry out examinations of the goods, which was also required by the CISG.

Concerning whether the parties altered the contract terms by their acts in performing the contract, the Arbitral Tribunal did not find any document overriding the above article for claims, nor any instance of proposing a claim and having settled the claim in the evidence materials provided by the two parties. Therefore, the Arbitral Tribunal could not determine that the article for claims in the contract had been altered by the parties' agreement or had been denied or abolished by the acts of the parties.

      4) The Arbitral Tribunal noted that the article on claims in the contracts specifically provides for claims by the buyer. For any claims to be proposed, evidence was to be provided to prove that the quality objections were correct and reasonable, which could only be attained by necessary examinations of the goods. Therefore, it was provided in the CISG that time and opportunity should be given to the buyer to carry out examinations of goods and the buyer is required to "examine goods or cause them to be examined, within as short a period as in the circumstances" (Article 38). If the goods are not in conformity with the contract, the seller must be notified "within a reasonable period of time after he has discovered [the lack of conformity] or ought to have discovered it (Article 39). These provisions illustrate that the buyer had the obligation to carry out examination after receiving goods and to notify the seller in a reasonable period of time. Article 39(1) of the CISG further 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 he has discovered it or ought to have discovered it." The Arbitral Tribunal decides that the article of claims in the contract is consistent with the CISG and should be observed.

At the same time, the Arbitral Tribunal also noted that the [Buyer] mentioned "trade custom" to state that the usual practice of the trade in the U.S. and other places in the world was that if imported flanges had been tested as satisfactory in accordance with certain established industrial standard, examinations were often quit. The [Buyer] alleged that it was customary in the trade to rely on the seller to satisfy the requirement of specifications and for the seller to provide documents (Mill Test Reports), which allow the buyer's clients and governmental agencies to assess the steel of the original steel factory and the producing factory and its nature. The Arbitral Tribunal holds that the two parties' specific terms in the contract do not deny the trade customs. However, if it was clearly provided in the contract and confirmed by the two parties' signature, the contract terms should be observed. This is a common international principle. Therefore, the Arbitral Tribunal decides that the two parties should abide by the above contract and legal provisions on examination within a reasonable time and on notifying the seller. As to whether "90 days" or "30 days" is the most reasonable time, it is not provided in the CISG. The reason is that goods can vary in thousands of ways and the "reasonable time" should be determined by the parties' negotiation in accordance with the nature of the goods and the circumstances of each case. It was provided in the three contracts signed by the parties that the time limit for proposing objections was "90/30" days, which should be observed in accordance with the contracts. As to the matters that may not be subject to this time limit, it will be discussed below.

(2) The latent defects and the time limit for indemnity claims

Although there is no reference to "latent defects" in either the contracts in this case or in the PRC laws applied to this case, this is an inevitable issue in international trade practice. There are many famous cases and authorities making statements on this subject in the world. Latent defects normally refer to defects that cannot be found by reasonable observation or test and those deficiencies which could only be exposed or found in real use. As to latent defects, once found, the time limit for the aggrieved party to identify problems and ask for remedies such as claims is not subject to the time limit for quality objections agreed by the two parties. The provisions of Articles 36(2) and 39(2) of the CISG in fact can be applied to deal with the disputes on the latent defects.

The defects in the goods in this case can be divided into two categories: latent and non-latent.

Non-latent defects. The deficiencies that were visible on the surface and deficiencies which could be known to be inconsistent with the standard and contract by normal fast test of chemical ingredients obviously do not belong to the category of latent defects. The Arbitral Tribunal holds that this kind of non-latent defect is not difficult to find by carrying out non-destructive spot tests within 90/30 days after the arrival of the goods at the port in accordance with the article for claims in the contract.

Latent defects. As to the normalizing heat treatment and mechanical functions of the flanges, they could only be determined by destroying the products and making samples for tests of metallograph, tensile strength and extension. Though these tests could be processed by selecting samples, it will need a large amount of products to be destroyed for the test since the tests can be representative only if the testing samples are selected separately from each batch of normalizing heat treatment. The Arbitral Tribunal considers that it should be reasonable to regard the deficiencies on normalizing heat treatment and mechanical performance of the products as latent defects for this kind of product. As to this kind of latent defect, the [Buyer] could only rely on the [Seller]'s warranties of goods quality in compliance with the contracts and industrial standards. The findings and claims out of these defects should not be subject to the time limit of 90/30 days provided in the article for claims of the contract in this case. The time limit of two years provided in Article 39(2) of the CISG is to be applied, because it would be inconsistent with the spirit of the CISG to require the seller to compensate for the losses caused by the buyer's commercial overstocking of goods for too long a period of time.

(3) The nature of the Mill Test Report and indemnity claims

The [Buyer] alleged that, based on trade customs, a Mill Test Report is a deed of security of the producing factory on the ingredients and character of the products and the procedure used for production of flanges. The [Buyer] further pointed out that the nature of the flanges was fixed without any change during the whole period of the contract relationship. The [Buyer] alleged that, in essence, the Mill Test Report was a "permanent" contract promise on the mechanical nature and chemical ingredients of flanges, and that in accordance with Article 36(2) of the CISG, the seller's responsibility for his goods inconsistent with the Mill Test Report was not subject to time limit for claims.

The [Seller] stated that the Mill Test Report was issued by the producing factory after sampling inspection in order to record the testing data on whether materials used by a certain amount of products in the process of production was consistent with the standard. The MTR had never contained the wordings like "warranties" or "the scope and limit of guarantee", so it was not a permanent quality warranty bond. In addition, there was no quality warranty terms in the contracts which required that the [Seller] should be liable for the flanges sold within a time limit after put in use.

The Arbitral Tribunal noted that:

   -    The three contracts set ASTM-A105-84c (A105-87a) as the quality standard;
 
   -    The enclosures to the contracts in this case all stated that a Mill Test Report was to be provided; and
 
   -    The ASTM standard lists these test reports as certifications, which illustrates that this is a kind of quality certification proving that the products are produced in accordance with Standard ASTM A105.

The Arbitral Tribunal holds that the Mill Test Report, as a "qualification certification", certainly should have the meaning of warranty for the products as consistent with the standard. However, if it is to act as a kind of time-limit warranty related to claims, the term "quality assurance period" (for example, food, medicine and so on) was commonly required to be clarified. Since the term "quality assurance period" was not clarified in these contracts:

   -    The Mill Test Report should not be regarded as a permanent warranty as alleged by the [Buyer] under any conditions (including storing conditions and use conditions and so on) without any time limit, which can provide the basis for claims at any time.
 
   -    The MTR is not only a common data record. As a "qualification certification" filled with on-the-spot testing data of the same heat number on chemical ingredients, mechanical performance, state of heat treatment and so on, if the MTR is found inconsistent with the reality later, the [Seller] should be liable for this.

The Arbitral Tribunal holds that Article 36 of the CISG refers to the basic principle on time limit for the seller being responsible for goods inconsistent with contract and Articles 38 and 39 provide that if the buyer is to claim, he should test the goods and notify the seller of his goods being inconsistent with the contract within a certain period of time. Article 38 calls for the goods to be tested within as short a period as is practicable in the circumstances, while Article 39 requires that the seller be notified within a reasonable period of time. As far as this case is concerned:

   -    Under normal conditions, the [Buyer] should test the goods at the port. Since the latent defects could not be found by ordinary testing, based on Article 39(2), the [Seller] should be notified within two years in any event, otherwise the buyer should lose his right to claim the discrepancy of goods.
 
   -    As to the Mill Test Report, it should be regarded as a quality certificate. If the period for warranty of quality was not clarified (for example, some products are clarified as "valid for three years"), the [Buyer]'s right for claims is subject to the above "90/30" days and should extend to "two years".

(4) The purposeful act of concealing facts and the time limit for indemnity claims

The [Buyer] alleges that many deficiencies of the flanges supplied by the [Seller] in this case were deficiencies that "the seller had known or could not have been unknown while he did not notify the [Buyer]." The [Buyer] listed certain facts.

   -    Flanges that had not gone through normalizing heat treatment were recorded in the Mill Test Reports as having gone through normalizing and filled in with the temperature of the normalizing and the mark of "N"(normalizing) was listed as belonging to the same heat number;
 
   -    Most of the flanges which were re-welded did not bear the "W" mark; and
 
   -    Many Mill Test Reports were provided for the flanges under the same heat number with great differences in data, which meant that the Mill Test Report could not reflect the real nature of the flanges.

The [Buyer] alleged that as the producer and supplier of flanges, the [Seller] should be aware of whether flanges had gone through normalizing heat treatment, whether flanges were repaired by welding; and that the [Seller] should also be aware that materials for flanges belonged to different heat numbers. Why were the real facts not reflected in the Mill Test Report?

The [Buyer] alleged that it was an act of fraud used by the [Seller] to conceal the real nature of flanges with deficiencies. The [Buyer] stated, with reference to Article 40 of the CISG, that under such conditions, the buyer's right for claims was not subject to the time limitation under the contract terms or under Articles 38, 39 of the CISG.

The [Seller] stated that the Mill Test Reports were issued by the producer based on the sampling test method and that it was internationally accepted that the results from this sampling test method could be used to represent the qualification rate for batch products. However, with such a method, the inconsistency with the contracts (for example, different positions in the normalizing heat treatment, and bad-distributed temperature affected that some flanges were not going through good normalizing) of some flanges might be inevitable and was normally accepted by the buyers in the commercial trade. It was not logical to presume that it was the [Seller]'s purposeful act of fraud based on the appearance of this kind of exceptional or few (compared with thousands of flanges) defects.

The [Seller] also stated that the [Buyer] knew that the flanges supplied by the [Seller] were produced by a large-size state-owned enterprise with solid technical forces. Furthermore, the [Buyer] visited [Seller]'s plant to examine the quality and the procedures of production and testing. It was impossible for the [Seller] to have purposely committed fraud. The [Seller]'s Mill Test Reports were filled out by this factory, so it was even more impossible for the [Seller] to have carried out purposeful concealing acts. In addition, the basis for overruling the Mill Test Reports was not executed through an independent, reliable and fair test. The sources of flanges for testing were very complicated (flanges ordered by the [Buyer] came from many companies), and the samples could not be completely concluded as the goods of the [Seller] (for example, Number 2-284 and Number 1-406 mentioned in the Special Report).

Therefore, the [Seller] declared that the allegation of fraud was completely unacceptable.

The Arbitral Tribunal studied the evidentiary materials provided by the two parties carefully, especially the testing result of the eight selected flanges supplied by the parties, which illustrated that there did exist deficiencies of flanges pointed out by the [Buyer]. The experts had pointed out that these quality deficiencies were inconsistent with the provisions of the contracts and the standard. The experts determined that this reflected the existence of comparatively large problems of the factories in the administration of production.

The Arbitral Tribunal noted that Article 40 and all other articles of the CISG do not deal with acts of commercial fraud. The act of fraud should be determined and dealt with in accordance with the applicable domestic laws of the contract. In commercial trade, it is very common that the "buyer" is not the end user and the "seller" is not the actual producer, therefore it is hard to draw an objective conclusion consistent with the fact on determining some facts belonging to this kind of purposeful fraud of the buyer or seller. Based on the evidence, the Arbitral Tribunal cannot conclude that in this case the [Seller] carried out a purposeful fraud. However, in this case, the marks on the Mill Test Reports and the flanges did present discrepancies with the actual products, the name of the [Seller] was written on the Mill Test Report and the producing factory filled in was also the name of the [Seller]'s factory. Therefore, the [Seller] in this case should be liable for this kind of discrepancy, while the liabilities between the [Seller] and his producing factory could be determined in accordance with the legal relationship of contract or agreement between them.

(iii) The Arbitration Tribunal's opinions on the [Buyer]'s right of indemnity claims and the timely quality objection notice

Based on the analysis above, the Arbitral Tribunal's opinions on the [Buyer]'s right and obligation of indemnity claims are:

(1) The issue of time limitation for the [Buyer] commencing an action had been considered by the Arbitration Commission at the time of accepting this case and was determined to be within the scope of the statutory limitation period. The [Seller] presented substantive defenses in the arbitration, which could illustrate that the [Seller] agreed that this case had not surpassed the statutory limitation period for arbitration.

(2) It is provided in the Article of Indemnities in the three contracts in this case that the time to propose objections against the quality of goods should be "within 90/30 days after the arrival of goods at the destination port." This Article was confirmed by the two parties' signatures and used repeatedly in another two contracts signed later. In performing these contracts, there was no written alteration of this Article. Modification of this Article relating to quality objections, claims and settlement of claims by the parties never happened. Therefore, this was an effective contract term.

(3) The [Buyer] was entitled to the right to inspect the goods in the contracts, and the contracts also provided for the [Buyer]'s obligation of testing and notifying of objections within a "reasonable" period of time after receiving goods (within 90/30 days after the arrival at the port). These provisions were consistent with the provisions of the applicable laws. The Arbitral Tribunal holds that, for deficiencies which could be found after regular commercial test (for example, superficial deficiencies, spot test for chemical ingredients, repair by welding and its deficiencies, etc.), if the [Buyer] decided not to open packages for examination or carry out sampling tests and could not notify this kind of quality objections to the [Seller] within the above time limit provided, i.e., the [Buyer] could not perform his obligation to notify of the lack of conformity of goods with the contract within the time provided, the [Buyer] therefore lost the right to rely on this kind of quality objections and claims.

(4) For deficiencies of the goods, which could only be found by destructive sampling test, (e.g., metallograph of heat treatment and mechanical performance) on flanges of different heat number and different batches of heat treatment separately, these deficiencies could be regarded as latent defects. In accordance with the CISG, the time limit to propose quality objections against this kind of deficiencies should be extended. But in accordance with the provision of Article 39(2) of the CISG, if there was no specific time limit for warranty in the contract, the longest time limit to notify of lack of conformity of the goods with the contract is "within two years from the date on which the goods were actually handed over to the buyer" [the restricting words of "in any event" are used in Article 39(2)].

(5) As to the Mill Test Reports provided to the [Buyer] with the goods, the Arbitral Tribunal neither supported the [Buyer]'s statement to regard them as a "permanent warranty", nor supported the [Seller]'s statement to regard them as common records in production testing. The Mill Test Reports are qualification certificates to prove that the materials under each heat number are made into flanges in accordance with the standard. However, the objections against the inconsistency between the goods sold and these qualification certificates should also be notified within 90/30 days after receiving the goods or a maximum of two years.

(6) In accordance with the present evidentiary materials and the continuous performance of the contracts between the parties for many years, the Arbitral Tribunal does not decide as proposed by the [Buyer] that the [Seller] had carried out purposeful fraud. However, some of the deficiencies of flanges supplied by the [Seller] in this case should be the defects which the [Seller] "could not have been unaware." No matter how the [Seller] administered and supervised the quality of flanges manufactured by the production factory, as far as the legal contractual relationship is concerned in this case, the [Seller] should be liable for breach of contract for this kind of deficiencies of flanges. For these deficiencies, the [Buyer] is not restricted by the quality/quantity objections terms provided in the contracts or the time limitation recited in Article 39 of the CISG.

(7) The Arbitral Tribunal determines that it is necessary to point out that, though the Tribunal makes the above analysis of different time limits for the [Buyer] to propose quality objections for claims, this is consistent with the contracts and related provisions of the applicable laws in terms of the different natures of the deficiencies of the flanges supplied, for the reason that the flanges stored at present were not gone through common sampling rest at random in accordance with the rules for testing of commodities, it still is hard to make correct evaluations on the percentage of deficiencies of different natures in different batches and the whole quantity to divide the liabilities of the two parties. The Arbitral Tribunal holds that, under such conditions, the Tribunal can only determine the specific rulings on this case in its discretion by reasonable analysis and judgment.

(8) The issues of performing the third contract (91YCSG/10-523).

The Arbitral Tribunal noted that there was a comparatively large gap between the two parties on the termination and right for claims of Contract Number 91YCSG/10-523.

The [Buyer] alleged that because there were numerous and serious deficiencies in the flanges delivered for the first and second contracts, the [Buyer] had the right to refuse to accept further goods. The [Seller], however, alleged that, in accordance with Article 60 of the CISG, receiving goods was one of the fundamental obligations of the [Buyer] and that it was against the stipulations of the CISG for the [Buyer] to refuse to receive goods. The [Seller] alleged that, after the [Buyer] refused to receive goods, it yet claimed that the [Seller] did not deliver goods subject to the contract. This did not reflect the facts and contravene the definite provisions of Article 80 of the CISG.

The Arbitral Tribunal checked the evidentiary materials provided by the two parties with great care, knowing that from December 1990, the two parties began to negotiate on the third contract. On 12 December 1990, Order Number 110421 was agreed with an amount of US $272,273. Later the contract was signed in early 1991 (the date was not written in the contract, but both parties confirmed that this contract was signed in 1991). From 8 May to 16 June 1991, the [Buyer] issued the buyer's authorizations to ship in sequence for the goods subject to this order. On 12 July and 25 July 1991, the [Seller] notified that he would deliver two batches of goods to shipment subject to the Order I10421 with total values of US $116,361 and US $78,398.72, respectively (in 164 wooden boxes and 92 wooden boxes, respectively) and required the [Buyer] to cover the insurance for the goods. On 7 August 1991, the [Buyer] notified the [Seller] of the case of EBASCO Company returning goods and claiming for indemnities, which involved the quality of flanges. On 28 September 1991, the [Buyer] notified the customs authority with a letter that the flanges were to be refused. On 27 September, the [Buyer] notified the [Seller] that the goods had been refused, but the [Buyer] could help to keep them temporarily for 90 days without any storage fee, and the [Seller] was required to remove the mark of the [Buyer] on the flanges and sell them to others or transshipped them to other places.

The Arbitral Tribunal noted that the evidence for returns and claims relied by EBASCO and TEAM Industrial Companies was the three test reports provided by ×× Lab from June 1991 to July 1991. But among the thirty-one flanges tested mentioned in the test reports, only three flanges were supplied by the [Seller] and the testing conclusions for these three flanges were qualified. Among the flanges returned by TEAM Industrial Company then, only fifty-three flanges were supplied by the [Seller]. it was very obvious that this company returned all Chinese flanges purchased from the [Buyer] without identifying the specific producing factories. The [Buyer] therefore refused to accept all flanges delivered continuously from Chinese companies without identifying specific producers.

The Arbitral Tribunal holds that the [Buyer] did not have justifiable reasons for this kind of means to treat goods. The [Buyer] signed independent contracts with different Chinese companies with legal person capacity to purchase the flanges separately. The [Buyer] could not improperly refuse to accept goods provided by other Chinese companies based on a finding that there were quality problems for products provided by one of the Chinese companies, unless he could provide definite evidence of serious quality deficiencies for products provided by the company whose goods were refused.

For example, there was an accident involving a plane produced by the US Boeing Company purchased by one company and the reason of the crash was found to be a serious quality problem. Under such circumstances, the purchaser had no right to cancel at his discretion all contracts concerning planes purchased from the US Douglas Company.

The Arbitral Tribunal decides that the opinions and reasons that the [Buyer] alleged for refusing the goods shipped under Contract Number 91 YCSG/10-523 by the [Seller] do not conform with the contracts and the applicable laws. The Arbitral Tribunal does not support this position of the [Buyer].

(9) Concerning the issue of "flanges with mixture of foreign materials" in the Special Report.

Although it was made clear that the one "flange with mixtures of foreign materials" mentioned in the "Special Report" (September 1992) issued by the US National Testing Commission on Boilers and Pressure Containers was neither a product provided by the [Seller] in this case, nor the goods under the contracts in this case, the [Buyer] yet alleged that the Special Report specially pointed out that there were unbearable serious quality problems with flanges produced by Shougang, and publicized the Mill Test Reports on these flanges, alleging that therefore flanges provided by the [Seller] could not continue to be sold in the US market. This was said to be one of the reasons why flanges in store could not be sold thus causing great losses.

The [Seller], on the contrary, alleged that the [Buyer] was aware that this was not an item supplied by Shougang, but connived at the spread of the false report and comment in Special Report rather than correcting it in accordance with the facts. [Seller] stated that the [Buyer] should be liable for the reputation and economic losses [Seller] suffered from this.

In the first hearing on this case, the Arbitral Tribunal required that the [Buyer] present the original Mill Test Report with Heat number 1-406 in the Special Report. After examination, this flange was definitely a contract product produced by the Shougang Company and supplied by another company, ×× Industrial Company, which signed a contract with the [Buyer]. However, the Mill Test Report was printed by the [Seller], whose red seal was recognized at spot as "Number 6 Seal Specially for test" of this company by the [Seller], and "the person for testing" was printed by typewriter as a "MR. BA ZHAO ZHONG" without the signature of Mr. Ba. At that time, the person of the [Seller] attending the hearing admitted, he once recommended that the [Buyer] purchase flanges from Beijing Oriental Instrument Company, but did not know that this company had pilfered blank "Mill Test Reports" sealed with Shougang "Number 6 Seal Specially for Test" and printed his own name as the "person for test."

The Arbitral Tribunal holds that the [Buyer] in this case should have known that this flange mixed with foreign materials was not the [Seller]'s product, but did not announce this fact in time. At the same time, [Buyer] only had the right to claim against the real supplier who pilfered the Mill Test Report of "Shougang." The [Seller] in this case should not be held liable for this claim. As to the reputation and economic losses of the [Seller] suffered from this, the [Seller] should also be liable for this, because:

(1) At the least, it was due to the [Seller]'s poor administration that the [Seller] neither was aware of nor found the truth till now why so many blank Mill Test Reports sealed with "Number 6 Seal Specially for Test" were pilfered;

(2) The [Seller] considered itself as the sufferer from an "untrue report", but did not announce any revision.

The Arbitral Tribunal also holds that this Tribunal will not hear the contract dispute rising out of another legal relationship. The losses or influence suffered by the [Buyer] and the [Seller] caused by the act of another company should be settled by the two parties separately.

(10) Based on the analysis above, the Arbitral Tribunal holds that it is necessary to point out here that since the two parties both signed in the contracts to determine that the time limitation for proposing quality objections or indemnities claims should be within 90/30 days after the arrival of goods at the port, and then the two parties should observe the contract agreement.

   -    If the [Buyer] had carried out suitable inspections or tests within the time agreed in the contracts and did not find substantial quality deficiencies, but substantial quality deficiencies were found later, had the [Buyer] lost the right to file claims? The answer is No. For example, if substantial latent defects were found, the [Buyer] could still claim indemnities.
 
   -    To put it in another way, if the [Buyer] received a large amount of goods, did not make any test at all, and took no regard for the claims provisions of the agreements he signed, then if a quality deficiency was found later, could [Buyer] file claims at any time, for whatever nature? The answer is No. For superficial deficiencies and deficiencies which could be found by normal test, the [Buyer] had no right to claim indemnities again.

The [Buyer] did not notify the [Seller] of quality deficiencies or discrepancies with the contracts and the standard for more than 15% flanges until one or two years after the time limit for examinations and indemnities agreed in the contract. The [Buyer] was negligent in this respect.

The Arbitral Tribunal holds that, in accordance with Article 36 of the CISG, where goods are inconsistent with contract and standard, the seller of the goods should bear significant liabilities. However, the [Buyer] only emphasized the "reliance" and "trade customs" after the arrival of goods at the port, but did not undertake his legal obligations definitely agreed in the contract. The [Buyer]'s omission to examine the goods caused a failure to reveal the problems and the increase of the quantity of flanges ordered and delivered, which aggravated the damages. The Arbitral Tribunal holds that the [Buyer] should be liable correspondingly for the additional losses caused by his own negligence. These are the basic facts and fair and reasonable principles which must be taken into account by the Arbitral Tribunal when it hears this and decides the award.

(IV) The amounts claimed by the [Buyer]

The [Buyer] listed the specific amounts for his claims and submitted his evidence for calculating the basis for each of claim. The Arbitral Tribunal concludes:

(i) The flanges in store that [Buyer] was unable to resell

[Buyer]'s position

The [Buyer] calculated that the cost of the unsold flanges in store (including importing duties and fees for manual work) purchased from the [Seller] was US $929,368.87. The [Buyer] requested that the claims for this amount should be dealt with as returns. The Arbitral Tribunal noted that the reasons alleged by the [Buyer] for returns were that though all flanges were not tested, it was known from 5,609 flanges tested that the rate of unqualified goods reached as high as 15.3%. The deficiencies tested only included unqualified chemical ingredients, unqualified hardness, visible deficiencies, and unqualified size. If tests on all aspects of flanges (for example, destructive test on metallograph and mechanical performance, etc.) were counted, the [Buyer] alleged that the rate of unqualified goods would be much higher.

Ruling by the Arbitral Tribunal

The Arbitral Tribunal pointed out in (III)(iii)(3) of the section of "The Opinion of the Arbitral Tribunal," that visible deficiencies and deficiencies in chemical ingredients could be easily found by opening the packaging for tests and by regular testing. The [Seller] should be notified "within 90/30 days after the arrival of goods at the destination port" in accordance with the contracts. These flanges were not sold and tested when in September 1992, the US National Testing Commission on Boilers and Pressure Containers issued its Special Report of Investigation on Chinese Flanges. Although [Buyer] attributed the overstock of goods and the inability to sell them to inferior quality of flanges, which inhibited the sale of flanges in the US market, the Arbitral Tribunal yet holds that there were many reasons for the [Buyer]'s failure to sell the flanges in store that had been supplied by the [Seller] at a value of US $929,368.67, including the accuracy of market forecast in the primary stage and the later influence by the Special Report and media reports on the quality problems of flanges produced in China. Of these flanges:

   -    Some contained deficiencies of chemical ingredients and visible deficiencies and had not been inspected through regular testing by the [Buyer] within 90/30 days after delivery of goods. The [Buyer] therefore has lost the right to propose objections and claim indemnities;
 
   -    Some may have involved latent defects which cannot be found, so the time limit of quality objections are allowed to be extended to a longer period; and
 
   -    Some flanges were completely consistent with the requirements of the contracts and the standard.

The Arbitral Tribunal decides not to support the [Buyer]'s claim of returning all these flanges in store, and decides that:

   -    The pressure level of all the flanges in this case was below 300 Psi and for most of them was 150 Psi. In accordance with Standard ASTM A105 87c or A105 89a, such flanges need not go through normalizing heat treatment. However, as the [Seller] printed the mark of "N" on the flanges in accordance with the contracts, these flanges can be sold after this mark is removed.
 
   -    The Arbitral Tribunal notes that there are testing reports (including the testing reports issued by ×× Lab and the testing report on the eight flanges tested by the experts) illustrating that the flanges supplied by the [Seller] were all basically consistent with the requirement of Standard A105 on their chemical ingredients, hardness and mechanical performance. However, there may be some flanges whose Mill Test Reports might be inconsistent with the actual test (the discrepancy found not a discrepancy surpassing Standard A105). Therefore, the method of sale without providing Mill Test Report, i.e., "original goods without any change and quality guarantee", can be applied to these flanges. Therefore, the Tribunal rules that the [Seller] should bear the part of the charge for reforming the marks of flanges and, for the losses caused by the price falling, the [Buyer] should bear part of the losses suffered from his own fault.
 
   -    In accordance with the evidence provided by the [Buyer], on 20 June 1996 the losses of all flanges sold in the method of original goods without any change and quality guarantee consisted of 44.24% of the cost of goods delivered, of which it was reasonable for the [Seller] to compensate half of the losses, i.e., US $929,368.67 × 44.24% ÷ 2 = US $205,576 (numbers after rounding).

(ii) The profit losses for flanges in store

[Buyer]'s position

Based on the [Buyer]'s method of evaluating the profit, the arriving cost of flanges unsold in store was US $929,369 with the gross profit on these flanges calculated at US $573,912, which equals 61.75% of the arriving cost for these flanges.

Ruling by the Arbitral Tribunal

The Arbitral Tribunal will not comment whether this level of profit is reasonable, but addresses the following points:

(1) Flanges ordered by the [Buyer] were not to be sold all at one time, while they were stored according to the different batch-by-batch specifications to be sold to different clients. The profit fluctuation for this method of storage and sale has a close relationship with the market demand and the price fluctuation, i.e., the importer and wholesaler may earn much profit, while he may also bear high risk meanwhile. The Arbitral Tribunal holds that there are many uncertain factors associated with the method of calculating profit proposed by the [Buyer]. It is an incorrect and unreasonable practice to require the seller of goods to compensate profit losses based on a calculation method containing uncertain factors.

(2) As has been pointed out in the previous part, the [Buyer] alleged the inconsistency of chemical ingredients and the visible deficiencies constituted a very high percentage of these. Moreover, it was not difficult to detect such deficiencies within 90/30 days after the arrival of the goods at the destination port. The [Buyer] neither carried out regular tests (including authorizing others to carry out tests) by opening packaging to check and by carrying out sampling tests for conformity with the contracts, nor did the [Buyer] notify the [Seller] of the discrepancies between the goods and the contracts within the contractually agreed time for taking remedial measures. Therefore, the [Buyer] should bear a corresponding liability.

The Arbitral Tribunal holds that it is unreasonable for the [Buyer] to claim profit losses in accordance with a method with uncertain factors when the [Buyer] himself did not observe the agreement. The Arbitral Tribunal will not support this claim.

(iii) The profit losses for the flanges undelivered

[Buyer]'s position

The [Buyer] alleged that there were 33,407 flanges undelivered with a contract value of US $329,410.49, including 32,030 flanges ordered through the third contract with a contract value of US $272,273.

Ruling by the Arbitral Tribunal

The Arbitral Tribunal has pointed out in Section (III)(iii)(8) of the Opinion of the Arbitral Tribunal, that:

   -    The Tribunal does not support the [Buyer]'s refusal to receive goods, for which the shipment notice had been issued in September 1991, without sufficient evidence to prove that there were serious deficiencies in the flanges supplied by the [Seller]; and
 
   -    The Tribunal does not support the [Buyer]'s claim for compensation for goods rejected by him without sufficient reasons.

In accordance with the data provided by the [Buyer] (appendix IV of the arbitral application), there were 1,377 (33,407 - 32,030 = 1,377) flanges with a contract value of US $57,137.49 (US $329,410.49 - US $272,273 = US $57,137.49). The quantity of the undelivered flanges amount to 1.28% of the total amount of goods received (107,841 flanges) and the value equaled 1.8% of the total value of the received goods. In accordance with international trade practices, due to various reasons, a certain amount of more or less shipment is allowed for bulk commodities (the common amount of more or less shipment is 5% more or less). The Arbitral Tribunal holds that the [Seller]'s short supplies for the previous two contracts are within the common limits of the more or less amount. The [Buyer]'s claim on "profit loss for the flanges undelivered" should be dismissed.

(iv) Concerning the economic losses suffered from flanges sold by the method of "original goods without any change"

[Buyer]'s position

The [Buyer] alleged that if goods whose Mill Test Reports and marks on the flanges were inconsistent with the real flanges were sold, he would assume unbearable legal liabilities and suffer serious economic and reputation losses. Accordingly, the method of "original goods without any change" was to be applied to deal with the flanges in store to reduce losses. This method for sale was applied by informing the purchaser that flanges did not go through the destructive testing on metallograph and mechanical intensity and most flanges could only sustain pressure of 150-300 Psi. Therefore, the purchasers could use these flanges to connect low pressure pipes of ordinary media in accordance with the purchasers' own need.

Ruling by the Arbitral Tribunal

The Arbitral Tribunal holds that the sales method is a practical remedial measure. The [Buyer] submitted detailed materials for this, illustrating that the arrival cost of the flanges supplied by the [Seller] sold by this method was US $105,298 (US $53,862 + US $51,436 = US $105,298), while the actual selling price was US $59,149 (US $19,974 + US $39,175 = US $59,149), and the loss was US $46,149. The Arbitral Tribunal decides to support this claim.

(v) The expense for settlement with Team Industrial Company

The Arbitral Tribunal went through all existing materials concerning the matter of Team Industrial Company's claim, which was caused by an inlaid flange supplied by another Chinese company. The user found serious quality problems for some flanges in welding the flanges and exercised selective examinations on the Chinese flanges supplied by the [Seller]. Houston ×× Lab tested thirty flanges and found more problems which led to returns and claims. As pointed out before by the Arbitral Tribunal, among the thirty flanges tested by ×× Lab, only three flanges were supplied by the [Seller] and all were concluded as qualified products. Among all the flanges returned by Team Industrial Company, only fifty-three flanges were supplied by the [Buyer]. The [Buyer] did not identify the quality difference of the goods provided through different origins and required that the [Seller] in this case contribute to the expenses for the settlement with Team Industrial Company in accordance with percentage of the goods supplied by the [Seller] in all returns. This is unreasonable and is not supported by the Arbitral Tribunal.

(vi) Testing expenses

[Buyer]'s position

The [Buyer] claimed that it cost altogether US $883,348 for renting field, buying equipment (only depreciation was considered) and labor services for the [Buyer] to carry out intensive checks, selections and tests on the flanges in store. Except the payment of other suppliers, the [Seller] should pay US $216,420. And the [Buyer] required that the [Seller] in this case should cover the expenses.

Ruling by the Arbitral Tribunal

The Arbitral Tribunal holds that it is the buyer's contractual obligation to inspect the goods. If the [Buyer] had carried out sampling tests or authorized others to carry out selective examinations in accordance with the terms agreed in the contracts after the arrival of goods, he could not only have saved a lot of testing expenses, but could also have found problems and proposed quality objections in time, and gained corresponding compensation for losses.

The Arbitral Tribunal does not support this claim where the [Buyer] did not carry out tests previously in accordance with the contracts and the applicable law but asked for compensation for additional expenses on tests afterward.

(vii) The refunds to other clients due to the returns of the goods

The [Buyer] claimed that the [Seller] cover the refunds to other clients of US $5,663.79 for returns of the goods. The Arbitral Tribunal noted that it was revealed by evidence provided by the [Buyer] that these flanges were returned casually by some small clients of the [Buyer] from 1991 to 1993 and most of the reasons for returns were superficial and visible deficiencies such as surface cracks, forging deficiencies, cracks repaired by welding or deficiencies of holes for bolts. The Arbitral Tribunal holds that it is necessary to point out that the [Buyer] is not the agent of the [Seller] and the transactions between the [Buyer] and the [Seller] are one-off trade. The right of indemnity claims can be available only if the quality discrepancies are claimed for the above deficiencies within 90/30 days after the arrival of goods at the destination port. The Arbitral Tribunal does not support this claim of the [Buyer].

(viii) Interest

The [Buyer] claimed US $268,086 for interest loss of the total compensation, including the interest for the cost of flanges in store, the interest on the testing expenses and expenses of storage. Since the compensation claims of these two expenses are not fully supported by the Arbitral Tribunal, the Arbitral Tribunal will not support the interest on these expenses either.

(ix) Taxes

The [Buyer] claimed that the [Seller] should pay the property tax of US $45,896 for property reserved imposed by the local county government and the school zone where the flanges were stored.

The Arbitral Tribunal holds that the [Buyer] is an importing wholesaler who stores many flanges for later sales in batches. Separately looking for warehousing to store flanges is an act determined by the [Buyer]. This kind of property tax imposed by the local government is out of the [Seller]'s expectation when signing the contracts. Also, it is provided in Article 13 of the contracts that all taxes imposed by non-seller's countries are to be paid by the [Buyer]. In addition, the failure to sell some of the flanges in time was not completely due to the [Seller]'s act. The Arbitral Tribunal will not support this claim of the [Buyer].

(x) Attorneys' fees

The [Buyer] claimed that the [Seller] should pay the attorneys' fees of US $122,187 paid by the [Buyer].

The Arbitral Tribunal holds that, though the Tribunal does not support all of the compensation claims of the [Buyer], yet the facts and legal basis for some of the [Buyer]'s claims have been supported by the Tribunal. In accordance with the Arbitration Rules, the Arbitral Tribunal decides that the [Seller] should compensate the [Buyer] for attorneys' fees of US $10,000.

(xi) The arbitration fees

The Arbitral Tribunal decides it is reasonable that 60% of the arbitration fees should be paid by the [Seller] and 40% of the arbitration fees by the [Buyer].

(xii) Expenses for experts' investigation and evaluation

The Arbitral Tribunal, in accordance with the Arbitration Rules, authorized experts to carry out investigations and evaluations. In addition, the Tribunal authorized special labs in China and US to sample unqualified flanges determined by the [Buyer] and carry out testing. The evaluations provided an important reference to the Tribunal to make an award. The two parties in this case should jointly bear the sum of US $24,500 that was paid by the [Buyer] temporarily. The Arbitral Tribunal holds that it is reasonable for the two parties to contribute 50% each. Therefore, the [Seller] should pay the [Buyer] half of this fees, which was paid by the [Buyer] previously on behalf of the [Seller].

In addition to the above, the Arbitral Tribunal points out that there are a large number of evidentiary materials supplemented by the parties in this case many times and representation materials for argument. If certain materials are not referred in "Details of the Case" and "Opinion of the Tribunal" sections of the arbitration award, it does not mean they were omitted or disregarded by the Tribunal. The Arbitral Tribunal believes that the above analysis in this award is sufficient for it to make the award.

III. THE AWARD

The Arbitral Tribunal hereby decides on the [Buyer]'s arbitration claims:

(I) The [Seller] should pay US $205,576 to compensate for the reformation and resale at a lower price for the flanges in store.

(II) The [Buyer]'s claim on deciding the [Seller] compensating profit loss for the flanges unsold is dismissed.

(III) The [Buyer]'s claim on deciding the [Seller] compensating profit loss for the flanges undelivered is dismissed.

(IV) The [Seller] should pay the loss of US $46,149 that the [Buyer] suffered from selling flanges in the method of "original goods without any change".

(V) The [Buyer]'s claim to have [Seller] reimburse part of the settlement fees paid to Team Industrial Company is dismissed.

(VI) The [Buyer]'s claim to have [Seller]'s pay the expenses of test fields and storage for the flanges in store is dismissed.

(VII) The [Buyer]'s claim to have [Seller] pay the losses of the goods returned by the small clients is dismissed.

(VIII) The [Buyer]'s claim on to have [Seller] pay interest losses is dismissed.

(IX) The [Buyer]'s claim to have [Seller] pay local property taxes is dismissed.

(X) The [Seller] should pay US $10,000 toward the [Buyer]'s attorneys' fees.

(XI) The [Seller] should pay 60% of the arbitration fees and [Buyer] should pay 40%.

(XII) The expense for the experts' investigation in this case is US $24,500. Each of the two parties to the dispute should assume 50%. As the [Buyer] had paid the full amount of US $24,500 for the experts' investigation, the [Seller] should reimburse the [Buyer] US $12,250.

(XIII) In 45 days of the effective date of this award, the [Seller] shall pay to the [Buyer] the above compensation and payment. If the payment is in arrears, interest will be paid at 10% per annum.

(XIV) All the other arbitral claims not addressed in the above award in this case are dismissed.

The award is final.


Appendix

The Comparison between Mill Test Report (MTR) and Data on Testing by two China and US Labs

Sample

Number

(Heat Number)

Testing units Chemical Ingredients wt% Mechanical performance Heat treatment

HB
Comprehensive

result

C S Si Mn P Cr Ni Mo V Nb Cu Tensile strength Psi(MPa) Subduing strength Psi(MPa) Extension rate% Shrinking rate %
Contract/Standard [†]
0.27

[†]
0.35

[†]
0.05
[†]
0.35
[†]
0.6

[†]
0.6-
1.05

[†]
0.4

[†]
0.3
[†]
0.4
[†]
0.12
[†]
0.03
[†]
0.02
[†]
0.4
[††]
70000

([††]
458)

[††]
36,000

([††]
250)

[††]
22
[††]
30
Normalized [†††]
187
SG-1

(831

4118)

MTR 0.27 0.030 0.27 0.90 0.037 83392 60913 30 60 Normalized 170 qualified
ITL 0.237 0.026 0.30 0.78 0.013 70400 49600 29 51.2 Not normalized 143 Not normalized or not correctly normalized
CMRI 0.24 0.026 0.29 0.76 0.016 (505) (250) 33 57 Not normalized 146
SG-2 (8313902) MTR 0.25 0.021 0.26 0.86 0.016 (485) (279) 24 50 Normalized 168 qualified
ITL 0.26 0.026 0.31 0.82 0.013 78400 53400 29 56 Not normalized 156 Not normalized or not correctly normalized
CMRI 0.26 0.028 0.29 0.86 0.018 (550) (299) 29 54 Not normalized 158
SG-3 (911276) MTR 0.24 0.031 0.24 0.80 0.013 72979 47111 34 65.2 Normalized 149 Qualified
ITL 0.22 0.035 0.30 0.87 0.013 75400 52400 29 57 Not normalized 149 Should be regarded as being normalized
CMRI 0.23 0.034 0.24 0.86 0.029 (525) (300) 33 58 Normalized 158
SG-4 (758) MTR 0.26 0.04 0.32 0.90 0.03 70716 40117 35.4 57 Normalized 140 Qualified
ITL 0.247 0.013 0.32 0.63 0.013 72600 54700 33.5 63 Normalized 143 Qualified
CMRI 0.26 0.006 0.34 0.62 0.024 (500) (269) 35 61 Normalized 144
SG-5 (015751) MTR 0.24 0.022 0.24 0.82 0.026 0.02 0.02 0.01 0.02 0.01 (510) (347) 30 64 Normalized 141 Qualified
ITL 0.242 0.015 0.30 0.77 0.013 0.052 0.055 0.021 0.003 0.007 0.22 78300 59100 25 55 Normalized 156 Qualified
CMRI 0.25 0.016 0.34 0.8 0.014 0.096 0.055 0.018 0.005 0.007 0.18 (535) (264) 30 52 Normalized 160
SG-6 (911292) MTR 0.23 0.035 0.28 0.8 0.028 74690 55837 34 64 Normalized 150 Qualified
ITL 0.210 0.026 0.29 0.77 0.013 69700 45600 31.5 57.3 Not normalized 104 Not normalized or correctly normalized, the strength is at the edge of being qualified.
CMRI 0.22 0.025 0.26 0.76 0.013 (487) (245) 36 58 Not normalized 140
SG-7 (233) MTR 0.22 0.024 0.22 0.73 0.04 (487) (337) 34 65 Normalized 128 Qualified
ITL 0.219 0.036 0.28 0.85 0.013 72800 (498) (505) 32.5 61 Normalized 140 Qualified
CMRI 0.23 0.037 0.28 0.84 0.015 45800 (297) (317) 33 26 59 59 Normalized 147
SG-8 (911291) MTR 0.23 0.041 0.27 0.84 0.02 73965 48585 28.4 58..3 Normalized 150 Qualified
ITL 0.214 0.033 0.29 0.78 0.012 70400 44000 28 45.3 Not normalized 140 Not normalized or not correctly normalized
CMRI 0.24 0.035 0.28 0.83 0.012 (496) (249) 90 49 Not normalized 144

N.B For flanges with more than one Mill Test Report, only data of one Mill Test Report was listed in this form for comparison. For Mill Test Report without data on remaining elements, no test on remaining elements was carried out.

Less than or equal.
†† Greater than or equal.
††† Greater than.


FOOTNOTES

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

** Mingde Cao, is a law Professor of Southwest University of Political Science and Law, Chongqing, P.R. China, associate editor-in-chief of Modern Law Science. He was awarded one of the ten most distinguished Jurists nomination award in China in 2004 for his achievements in jurisprudence, and a prominent teacher in Chongqing in 2003 in law education. He was vice mayor of Nanchuan city in Chongqing municipality from July 1997 to July 1998. He also is an experienced lawyer, now a visiting scholar of Pace Law School from June 2005.

Shengli Wang, is a doctorate candidate of Southwest University of Political Science and Law, Chongqing, P.R. China. He earned his J.D. from SWUPL, and his B.A. from Nanjing Agriculture University where he studied in the English Language College for four years.

*** Yuan Xiaotong, LL.M., McGill University; LL.B. Renmin University of China.

Go to Case Table of Contents
Pace Law School Institute of International Commercial Law - Last updated August 25, 2008
Comments/Contributions
Go to Database Directory || Go to CISG Table of Contents || Go to Case Search Form || Go to Bibliography