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CISG CASE PRESENTATION

China 5 April 1999 CIETAC Arbitration proceeding (Air conditioner equipment case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/990405c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 19990405 (5 April 1999)

JURISDICTION: Arbitration ; China

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

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1999/19

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Hong Kong (claimant)

BUYER'S COUNTRY: Mainland China (respondent)

GOODS INVOLVED: Air conditioner equipment


UNCITRAL case abstract

PEOPLE'S REPUBLIC OF CHINA: China International Economic & Trade
Arbitration Commission (CIETAC) 5 April 1999 (Air conditioner equipment case)

Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/99],
CLOUT abstract no. 989

Reproduced with permission of UNCITRAL

Abstract prepared by Xiaotong Yuan

This case deals primarily with timely examination of the goods and the notice of lack of conformity.

The parties entered into a contract for the sale of air conditioner equipment and materials. The contract provided that the price of the goods must be paid in three [installments]: a deposit after contract conclusion, the second [installment] after confirming conformity of the goods, and the remainder after the test run was completed. Under the contract the buyer had to examine the goods upon receiving them and issue a written receipt to the seller within three days after the goods were transported to the construction site. The buyer delayed the payment of the deposit and the price, arguing that the seller delayed the delivery of part of the goods and the goods had quality defects. The seller commenced arbitration to recover the payment. The buyer provided examination certificates indicating quality defects in different [installments] and requested the arbitral tribunal to find that it was entitled to return the goods under article 73(1) CISG. The buyer further claimed compensation under article 81(1) CISG.

The tribunal noted that since the buyer failed to pay the deposit and the seller failed to perform test runs and train the buyer's personnel, both parties failed to perform their obligations under the contract, and they should bear the responsibility on their own.

The arbitral tribunal held that all the examination certificates provided by the buyer were issued by an inspection authority after the seller filed for arbitration. Under the contract, the buyer had to examine the goods once they arrived at the construction site and issue a written receipt to the seller. The goods were delivered over the course of one year, but the buyer did not provide any written evidence to the seller indicating any quality problems. The tribunal held that the examination certificates were not issued within a reasonable time under the contract and article 38(1) CISG. Consequently, the tribunal held that under article 39 CISG, the buyer lost the right to rely on a lack of conformity of the goods because it did not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after it had discovered it. Therefore, the tribunal denied the buyer's counterclaim for compensation for the loss caused by the quality problems, and the buyer's request to return the goods.

Regarding the [installment] payable upon confirming conformity of the goods, the arbitral tribunal held that such confirmation should have taken place once the buyer opened the packages, examined the goods upon delivery to the construction site and issued a written receipt, as required by the contract. Since the buyer failed to raise an objection against the quality within that time limit, the tribunal held that the buyer was obliged to pay within three days after the goods arrived at the construction site.

The arbitral tribunal further held that the seller did not provide testing, training and maintenance services as required by the contract, which had caused damages to the buyer. Therefore, the tribunal denied the seller's claim for interest on the delinquent payment.

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Classification of issues present

APPLICATION OF CISG: The tribunal applied the domestic law of the PRC and the CISG

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 35 ; 38 ; 39 ; 73 ; 78 ; 80 ; 81

Classification of issues using UNCITRAL classification code numbers:

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

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

39A2 [Requirement to notify seller of lack of conformity: buyer must notify seller within reasonable time];

73A1 [Avoidance in installment contracts (fundamental breach with respect to installment): declaration with respect to defective installment];

78B [Rate of interest];

80A [Failure of performance caused by other party (party causing non-performance): loss of rights];

81A [Effect of avoidance on obligations: obligations of both parties under Convention]

Descriptors: Conformity of goods ; Examination of goods ; Lack of conformity notice, timeliness ; Installment contracts ; Fundamental breach ; Avoidance ; Interest ; Failure of performance, other party

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Editorial remarks

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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., p. 1766-1776

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at n.75, Nordic Journal of Commercial Law (2/2005)

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Case text (English translation)

Queen Mary Case Translation Programme

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

Air conditioner equipment case (5 April 1999)

Translation [*] by Meihua Xu [**]

Edited by John W. Zhu [***]

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

   -    The arbitration clause in Contract No. SYF-95008 signed by Claimant [Seller], Hong Kong __ Trade Company, and Respondent [Buyer], China Shenzhen __ (Group) Company on 6 July 1995; and
 
   -    The written arbitration application submitted by [Seller] on 23 March 1998.

On 6 April 1998, the Secretariat of the Arbitration Commission sent the arbitration notice and the attachment to the [Seller] by registered mail and to the [Buyer] by express mail. The attachment sent to the [Buyer] included the [Seller]'s arbitration application and the attachment, the Arbitration Rules of the Arbitration Commission (hereafter, the "Arbitration Rules") and the name list of arbitrators.

On 6 July 1998, Mr. P, the Presiding Arbitrator appointed by the Director of the Arbitration Commission, Mr. A, the arbitrator appointed by the [Seller], and Mr. D, the arbitrator appointed by the [Buyer], formed the Arbitration Tribunal to hear this case. On 8 July 1998, the Secretariat of the Arbitration Commission sent the Arbitration Tribunal formation notice to the [Buyer] and the [Seller] by registered mail.

The Arbitration Tribunal examined the [Seller]'s arbitration application, and the arbitration defense, the arbitration counterclaim, and the attachments submitted by the [Buyer] and [Seller], and held a court session in Beijing on 4 September 1998. The [Buyer] and the [Seller] sent arbitration agents to the court session. They made oral statements, answered the Arbitration Tribunal's questions and presented arguments.

After the court session, both parties submitted representation statements to the Arbitration Tribunal. On 6 October 1998, the Secretariat of the Arbitration Commission sent the aforesaid statements to the two parties by express mail, asking them to submit five copies of written application to the Arbitration Commission before 25 October 1998 if they had opinions or objections; otherwise, the Arbitration Tribunal would continue the arbitration process.

On 22 October 1998, the Secretariat of the Arbitration Commission received "supplementary representation opinions (1)" submitted by the [Seller]. On 23 October 1998, the Secretariat of the Arbitration Commission sent the aforesaid material to the [Buyer] by express mail, requesting the [Buyer] to submit five copies of its written application to the Arbitration Commission before 10 November 1998 if it had further opinions or objections; otherwise, the Arbitration Tribunal would continue the arbitration process. The [Buyer] did not submit any further written opinions within the stipulated time limit.

This case has been concluded. The Arbitration Tribunal handed down its award by consent on the basis of the facts and law. The following are the facts, the Tribunal's opinion and award.

I. FACTS

On 6 July 1995, the parties signed Contract SYF-95008 in Shenzhen, by which the [Buyer] was to purchase air conditioner equipment and materials from the [Seller] on the following terms:

   -    Total price: US $1,550,000 CIF Shenzhen construction site;
 
   -    Goods (1) Five TRANE cold water machine sets worth US $839,000;
(2) Two TRANE main engine remote control monitors worth US $22,000;
(3) Fourteen eccentric pure water pumps (PACO) and the spare parts worth US $219,282;
(4) Three TRANE separation machines worth US $3,980;
(5) 1,320 JOHNSON auto control systems, including 1,195 fin plate control valves and auto temperature controllers (US $82,455) and 125 electric valves (US $82,821);
(6) Imported materials for air conditioner construction worth US $300,462;
 
   -    Shipping period: From the date of the [Seller]'s receipt of the deposit, the TRANE equipment should be delivered within six months; the water pumps should be delivered within four and a half months; the JOHNSON equipment should be delivered within four and a half month; and the imported materials should be delivered within four months;
 
   -    Payment terms: The [Buyer] shall pay 30% of the contract price to the [Seller], i.e., US $465,000, within ten days after the conclusion of the contract, pay 67% of the contract price to the [Seller], i.e., US $1,038,500, after confirming the quality of the goods upon inspection, and pay the remaining US $46,500 within five days after completing the test run.

Article 5 of the contract stipulates the [Seller]'s obligations, including:

   (1)    Provide brand new goods as required by the contract attachment; guarantee that every part of the equipment works properly to reach the technical standard;
 
   (2)    Provide detailed technical documents, including theory, size and appearance, installment and maintenance documents;
 
   (3)    Transport the goods to the construction site, and inform the [Buyer] one week prior to loading;
 
   (4)    Test run the main engine; train operators during test running;
 
   (5)    Provide a free quality guarantee period which confirms the quality of the goods for twelve months after the test run or for eighteen months after delivery from manufacturer, depending on which comes first. During the guarantee period, the [Seller] shall pay the repair fee, except for damages for which the [Buyer] is liable;
 
   (6)    The [Seller] shall remedy losses and damages incurred due to packaging or during transportation;
 
   (7)    After the guarantee period expires, the [Seller] shall sell to the [Buyer] the parts needed by the [Buyer] at a price not higher than the price at the Hong Kong market.

Article 6 of the contract stipulates the [Buyer]'s obligations, which include:

   (1)    The [Buyer] shall complete import procedures, take responsibility for all tax matters, and make arrangement for inspection;
 
   (2)    The [Seller] may execute the rights as stipulated in articles 10, 14, and 15 of the contract if the goods cannot pass Customs due to import procedure, tax matters or inspection;
 
   (3)    The [Buyer] shall take responsibility for unloading, opening boxes, and inspection after the goods arrive at the construction site;
 
   (4)    The [Buyer] shall issue a written receipt to the [Seller] within three days after the goods arrive at the construction site.

Article 10 of the contract stipulates that the [Buyer] shall pay the entire cost for delay in taking delivery of the goods if the goods are delivered on time as required by the contract;

Article 11 of the contract states that if the [Seller] fails to deliver the goods on time, it shall pay a penalty of 1‰ of the price of the delayed goods/per day, which shall not exceed 5% of the total price of the delayed goods.

Article 12 of the contract stipulates that the [Buyer] shall inspect the goods immediately after their arrival, and if there is any damage to the goods, the [Buyer] shall claim damages from the [Seller] by written document within three days after the arrival of the goods by providing the inspection certificate issued by a notarized agency; however, the [Buyer] shall claim damages from the insurance company if the damages were not caused by the [Seller] or the manufacturer, and the [Seller] does not accept any claim for direct or indirect economic loss caused by breakdown of the machine.

Article 14 provides that the [Seller] reserves the right to ask for interest on the payment in arrears at a 2% monthly interest rate if the [Buyer] fails to make payment within the time limit stipulated in the contract.

Article 15 of the contract stipulates that the [Seller] reserves the right to take back the goods delivered to the [Buyer] until the contract price is paid off by the [Buyer].

Because the [Buyer] and the [Seller] could not reach an agreement on a dispute over delivery and payment for the goods, the [Seller] filed this arbitration application to the Arbitration Commission on 23 March 1998.

[POSITION OF THE PARTIES]

[Seller]'s position

The [Seller] alleges that:

     After signing the contract, the [Buyer] failed to pay the deposit of US $465,000 based on 30% of the contract price for each delivery before 16 July 1995, but paid US $432,500 in two payments, including US $232,500 paid on 24 August 1995, and US $200,000 paid on 1 November 1995.

After receiving the deposit, the [Seller] delivered TRANE cold water machine sets worth US $861,000 to the [Buyer] on 20 December 1995 and water pumps worth US $219,282 on 10 January 1996. On 15 January 1996, the [Buyer] paid US $465,000 and paid renminbi [RMB] 1,000,000 (US $117,647 at 8.5:1 exchange rate) on 24 January 1996; therefore, the [Buyer] had at that time a delayed payment of US $173,550.40.

On 10 March 1996, valves worth US $300,462 were delivered by the [Seller], and on 10 April 1997, the [Buyer] paid Hong Kong dollars [HK $] 1,280,889 (i.e., US $165,276). On 14 April, JOHNSON temperature controller and electric valves worth US $165,276 delivered by the [Seller] arrived. Because the [Buyer] cancelled the purchase of the TRANE separation machine, the total price of the goods delivered by the [Seller] was US $1,546,020, plus RMB180,000 (i.e., US $21,176 at 8.5:1 exchange rate) an extra payment the [Buyer] made to Guangzhou Keli Air Conditioner Construction Company (hereafter, "Keli Company") on 20 December 1996; the [Buyer] has thus paid a total of US $1,201,599. The total price for the goods delivered by the [Seller] is US $1,546,020, minus the payment made by the [Buyer], US $1,201,599, minus the 3% quality guarantee payment of US $46,500, the [Buyer]'s total payment in arrears is US $297,921.

Applying the 2% monthly interest rate on late payment stipulated in the contract for the period 1 January 1996 to 1 March 1998, the total interest on the late payment by the [Buyer] is US $163,499, including:

1. Interest on cold water machine sets

   (1)    Cold water machine sets worth US $861,000 were delivered on 20 December 1995, but the payment of US $465,000 was made on 15 January 1996, which was fourteen days late. The interest on that fourteen day delay is: (the price of the goods US $861,000 - deposit on cold water machine sets of US $258,300 - quality guarantee payment of US $25,830) 14 days 2% monthly interest rate = US $5,379;
 
   (2)    US $465,000 was paid on 15 January 1996, and the further interest from then to 1 March 1998 is: (the price of the goods US $861,000 - deposit on cold water machine sets of US $258,300 - paid amount US $465,000 - quality guarantee payment of US $25,830 - deposit on JOHNSON electric valves of US $18,276.80) 25 months and 14 days 2% monthly interest rate = US $47,670.

2. Interest on delayed pumps payment

Interest from 20 January 1996 to 1 March 1998: (price for the goods of US $219,282 - deposit on pumps of US $65,784.60 - payment which has been made of US $117,647 - quality guarantee payment of US $6,578) 25 months and 10 days 2% monthly interest rate = US $18,120;

3. Interest on delayed valves payment

Interest from 20 March 1996 to 1 March 1998: (price for the goods of US $296,916 - deposit on valves of US $90,138.6 - quality guarantee payment of US $8,907) 23 months and 10 days 2% monthly interest rate = US $92,330.

According to the [Seller]'s arbitration application and the "list of payment and interest Yifeng Company owes to Kehua Company" submitted by the [Seller] on 4 September 1998, the [Seller] claims that:

   (1)    The [Buyer] should pay the price of the goods and the interest, totaling US $461,420, i.e., RMB 3,829,785 at 8.3: 1 exchange rate;
 
   (2)    The [Buyer] should bear the arbitration fee.

[Buyer]'s position

The [Buyer] presents the following defense against the [Seller]'s arbitration claims:

1. The [Seller] failed to perform the contract on time

In July 1995, the [Buyer] and Keli Company reached a supply agreement for the "Yifeng Square" project, by which Keli Company entrusted the [Seller] to sign Contract SYF-95008 for the purchase of air conditioner equipment with the [Buyer]. After the conclusion of the contract, the [Seller] delivered TRANE cold water machine sets in two deliveries in December 1995 and January 1996, totaling US $839,000.

After inspection by the [Buyer], it was found that each set of the machine lacked a spring vibration damping system, which was an indispensable part for the cold water machine set to function normally. The agent of the [Seller] did not ask the [Buyer] to purchase substitute vibration damping system made by other manufacturers until December 1996, which cost RMB 71,820; therefore, the actual time of the [Seller]'s delivery of TRANE cold water machine sets should be December 1996, and, according to the contract provision, the [Seller] shall be liable for the delay in delivery.

2. The [Seller] failed to fully perform the contract

In April 1996, JOHNSON temperature controllers and electric valves arrived, which were worth US $165,276; in May 1996, the main engine remote control monitor was delivered, which was worth US $22,000. During the inspection of the goods, it was found that the [Seller] did not perform its obligation to "provide detailed technical documents" in accordance with the contract, with the result, the [Buyer] could not inspect or install the goods. The [Seller] did not provide those documents afterwards even after being urged by the [Buyer] repeatedly. Non-delivery of the documents is no different from non-delivery of goods; therefore, the [Buyer] had the right to refuse paying 67% of the contract price, which is US $125,474.92.

In addition, 145 pieces of auto air exhaust valves and two one-side expansion machines have not yet been delivered, which are worth US $7,171. Purchase of three separate air conditioners has been cancelled, worth US $3,980.

3. The quality of the goods was not in conformity with the contract

In January 1996, pumps worth US $219,282 arrived; in March 1996, imported valves were delivered. After inspection, the pumps and American AQUA butterfly valves, worth US $172,527, had severe defects and could not satisfy the [Buyer]'s purpose for purchasing the goods. The [Buyer] has asked for return of the goods, which was admitted by the [Seller] impliedly. The total price of this delivery was US $391,809, which should be deducted from the total contract price, and the [Seller] should bear the cost for [Buyer]'s installing and removing pumps and valves, i.e., RMB 390,000.

4. The clause on liability for breach of contract that is stipulated in the contract is unfair

The contract stipulates that the [Seller]'s responsibility for delayed delivery is limited to paying 5% of the total price of the delayed goods; however, there is no limit on the [Buyer]'s responsibility for delay in payment. The [Seller] has delayed delivery of the goods for two years, which has caused huge losses to the [Buyer]; however, the [Buyer] almost could not receive any compensation, which was unfair to the [Buyer].

Based on the above, during the performance of the contract, the [Seller] has materially violated the contract by delaying delivery, and delivering non-conforming goods with some missing goods or parts, which caused severe economic loss to the [Buyer]. Though under these circumstances, the [Buyer] did not delay payment; instead [Buyer] has paid more than it should have paid. The price the [Buyer] should pay is US $977,310 (total price US $1,550,000 - cancelled order of US $3,980 - goods returned US $391,809 - penalty of US $130,501 - quality guarantee payment of US $46,500). The [Buyer] has paid US $897,500, HK $1,280,889, and RMB 1,251,820. The [Seller] should return the extra payment to the [Buyer] and compensate RMB 390,000 as [Buyer]'s economic loss.

The [Buyer] counterclaims that:

   (1)    [Seller] should compensate the cost for [Buyer]'s installing and removing pumps and AQUA butterfly valves, i.e., RMB 390,000;
 
   (2)    [Seller] should pay a penalty for late delivery of US $71,262.8;
 
   (3)    [Seller] should pay the loss caused by lacking parts of TRANE cold water machine sets. The cold water machine sets delivered by the [Seller] lacked a spring vibration damping system, and the [Seller] asked the [Buyer] to purchase the substitute goods at the domestic market, which cost RMB 71,820. This payment should be regarded as money that the [Buyer] has already paid to the [Seller];
 
   (4)    The Tribunal should rescind the maximum amount for compensation on delayed delivery, and set a time limit for the [Seller] to provide the entire technical documents. The time the [Seller] completes providing the entire technical documents should be considered the delivery time, based on which the [Seller] shall take the responsibility for delayed delivery;
 
   (5)    [Seller] should bear the entire arbitration fee.

[Seller]'s response

After the court session, the [Seller] supplemented that:

1. The conditions for the [Buyer]'s making payment had been fulfilled, and the [Buyer] cannot refuse to make the payment it should have made by asserting that the goods have not been test run, or the goods were found non-conforming two years later.

The payment term in the contract stipulates that:

"The [Buyer] shall pay 30% of the total contract price, i.e., US $465,000, within ten days after the conclusion of the contract, pay 67% of the contract price, i.e., US $1,038,500, after inspection and confirming the quality of the goods, and pay the remaining US $46,500 within five days after completing the test run."

It can be concluded that the completion of the test run only relates to the quality guarantee payment of US $46,500, and has nothing to do with the payment of 67% of the contract price and 30% of the deposit. Article 12 of the contract clearly addresses the issue with respect to the "inspection and confirming the quality of the goods", stating that:

"The [Buyer] shall inspect the goods immediately upon the arrival of the goods, and if there is any defect, within three days after the arrival of the goods, the [Buyer] shall provide [...] The [Seller] will not accept any compensation claim for direct or indirect economic loss caused by equipment failure."

In fact, the [Buyer] inspected the goods immediately, and installed the goods without finding any problems. In the "Air Conditioner Equipment Arrival List for __ Square" submitted by the [Buyer], it admitted that the main engine and pumps were completely delivered and "passed the inspection." Therefore, the goods were inspected and the quality of the goods was confirmed; however, the [Buyer] refused to make payment. During the arbitration process, the [Buyer] attempted to switch "quality confirmed by inspection" to "quality confirmed by test running" which violates the principle of good faith.

2. The [Buyer] cannot refuse payment on the basis of quality problems

First, the goods have passed the inspection.

Second, a re-inspection was conducted after starting the arbitration process, which was two years after delivery of the goods and the goods had been installed. Small problems such as water leakage could possibly occur due to two-year improper storage or installation. It is obviously unfair to refuse to make a US $30,000 payment asserting small problems caused by the [Buyer] itself.

Third, the compensation period stipulated in the contract has expired; therefore, the [Seller] cannot accept [Buyer]'s claim even if there were quality problems, because the [Buyer] is out of time to ask for compensation.

3. There was no issue of delay in delivering the main engines

   (1)    The entire main engines were delivered on 20 December 1995, including the vibration damping system- shock absorbing spacer as stipulated on page one of the contract attachment. It would have been mentioned in the inspection certificate if there was no such device. Inspection Certificate No. 9601046 issued by Shenzhen Commodity Inspection Bureau (hereafter "Shenzhen CIB") on 26 January 1996 stated that "after examining the contract, packing list ... and related documents, and after inspecting and checking the goods carefully by opening the boxes, the goods satisfied the requirements for installation and test run," which indicated that the inspection bureau inspected the goods after opening the boxes according to the contract and packing list, and they did it carefully; therefore, it cannot be concluded that there was no shock absorbing device.
 
   (2)    The contract only required a vibration damping system, but not a spring shock absorber.

A vibration damping system includes hydraulic type, spacer type, and spring type, etc. If the main engine is set on the ground, it is okay not to use the vibration damping system, or to use only the shock absorbing spacer. If the main engine is set on the fifth floor, shock should be absorbed as much as possible in order not to disturb people downstairs in their work or study. After the arrival of the goods, the [Buyer] asked to change the shock absorbing spacer to spring type, which was a contract modification. The shock absorbing spacer delivered by the [Seller] conformed to the contract; therefore, its delivery date was the end of December 1995, which should not be the date the [Buyer] purchased the spring shock absorber.
 

   (3)    Guangzhou __ Company issued an entrustment letter to the [Buyer] without [Seller]'s authorization; therefore, the [Seller] should not bear the US $7,000 for purchasing the spring shock absorber. Even though a business connection was established because Guangzhou __ Company supplied necessary air conditioner device-fin engine pipe to the [Buyer], however, the [Seller] never promised to pay for the spring shock absorber, for which the [Buyer] and Guangzhou __ Company should be liable.
 
   (4)    Non-conforming goods. Only after the arbitration process started did the [Buyer] alleged that one-side inflating machines and auto air exhaust valves were not conforming. Before this, the [Buyer] had never raised objection over the substitute goods provided by the [Seller], and the goods have now been installed. The total price of the two items is only US $7,000. For issues involving this type of goods, if no objection was raised after receiving and installing the goods, it should be considered that the [Buyer] has accepted the goods impliedly.
 
   (5)    The [Buyer]'s basis for counterclaim cannot be established
   (1)    JOHNSON temperature control valves have been delivered; however, the [Buyer] insisted on withholding 67% of the contract price, which disobeyed the facts. Since the [Buyer] delayed payment for the main engines and pumps, the [Seller] asked the [Buyer] to make payment to the supplier in advance after the JOHNSON temperature control valves arrived at the [Seller]'s place. The [Buyer] paid HK $1,280,889 on 10 April 1997, and received JOHNSON temperature control valves four days later. HK $1,280,889 is worth US $165,276 at the 1: 7.75 exchange rate.
 
   (2)    Pumps have been accepted and installed. It is unreasonable to return the goods. Not accepting the goods is a prerequisite for returning goods.
 
   (3)    On the quality of the valves. On 10 March 1996, valves worth US $300,462 were delivered. The [Buyer] failed to raise objection within the time limit stipulated in the contract and left the goods for two years. The [Buyer] had the goods installed by an unqualified installation team; therefore, the [Seller] cannot accept the [Buyer]'s counterclaim on the basis of a water leakage problem.
 
   (4)    Regarding technical documents. The [Seller] provided basic technical documents to the [Buyer] at the conclusion of the contract, and the entire documents were provided to the [Buyer] upon delivery of the goods. The two parties have different opinions on this issue due to the trade usage between them that no receipt is issued when receiving technical documents. However, the goods arrival list made by the [Buyer] indicated that the entire technical documents for main engines and pumps have been received.

Moreover, delivering technical documents is different from delivering goods; they are two different obligations. Delivering the goods is connected with making payment. And each party to the contract has the right to reject the demand by the other party for the performance prior to the performance by the other party. However, delivering technical documents has no connection with making payment, and these matters cannot counterplea each other. The condition for making payment determined in the contract is delivering the goods, not delivering technical documents or others items. Delivering goods is a primary obligation and delivering technical documents is an accompanying obligation. There is a lack of legal basis for refusing payment without differentiating primary and accompanying obligations.

Based on the above, the [Seller] asserts that the [Buyer] has violated the principle of good faith by delaying payment for more than two years, which has caused severe economic loss to the [Seller]. The [Seller]'s request to the [Buyer] to perform the contract, make payment, and pay the penalty is legal and reasonable.

[Buyer]'s supplementary statements

After the court session, the [Buyer] made the following supplementary statements:

1. The applicable law

The contract did not stipulate the applicable law. Article 5 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest states that "if it is not stipulated in the contract, the contract shall be governed by the law of the country with the closest connection thereto "; article 6 of the same law states that: "international treaty which has connection with the contract should be applied if China is a Contracting State of such treaty and it has different stipulations from those in Chinese law, however, stipulations to which China has made reservation should be excluded." China signed the CISG on 30 September 1981 and deposited its instrument of ratification on 11 December 1986.

Since the place of signing the contract is Shenzhen, the [Seller]'s business was registered in Shenzhen, the goods purchased were to be used on the building to be built in Shenzhen, the price term in the contract was CIF Shenzhen construction site, and it was stipulated in the contract that the [Seller] should take responsibility to deliver the goods to the construction site; therefore, China has the closest connection with the contract, and the Law of the People's Republic of China on Economic Contracts Involving Foreign Interest and the United Nations Convention on Contracts for the International Sales of Goods (hereafter, the "CISG") should be applied.

2. According to the contract and the law, the [Buyer] has no obligation to pay 67% of the contract price

The contract stipulates that "after inspection and confirming the quality of the goods, the [Buyer] shall pay 67% of the contract price, i.e., US $1,038,500.00, to the [Seller], which clarified that the time for making payment should be "after inspection and confirming the quality of the goods." There was no stipulation in the contract regarding who should inspect and issue the inspection certificate. Article 12 of the contract only authorizes the [Buyer] to inspect the damage of the goods without requiring the [Buyer] to inspect the internal quality of the goods, and the [Buyer] has no authorization to do so.

According to Chinese law, imported goods must be inspected by the Import and Export Commodity Inspection Bureau in China. Article 5(2) of the Law of the People's Republic of China on Import and Export Commodity Inspection provides that: "no imported commodity can be sold or used without inspection." Article 6 of the contract also stipulates that the goods must be inspected, and the [Buyer] should arrange for inspection. The [Buyer] applied for inspection to Shenzhen CIB in time based on the contract and the aforesaid law. Shenzhen CIB agreed to install the goods after the first inspection, and to inspect the functioning of the goods after installation; however, the [Buyer] has not yet received the certificate confirming the quality of the goods. The [Seller]'s failure to perform obligations determined in Article 5(2), (4) of the contract was the main reason for the delay in inspection; therefore, the condition for making payment has not yet been satisfied, and the [Buyer] has no obligation to pay 67% of the contract price to the [Seller].

3. The [Buyer] has the right to declare the contract avoided with respect to one installment of the goods

On 21 April 1998, Shenzhen CIB made a formal conclusion that the imported pumps (US $219,281) were defective goods. On 29 May 1998, twelve valves chosen from 420 valves were spot-checked for the sealing function with the participation of Shenzhen CIB, with the result, 75% were found leaking. In other words, the [Seller] did not perform its obligation in Article 5(1) of the contract.

Article 73(1) of the CISG states that:

"In the case of a contract for delivery of goods by instalments, if the failure of one party to perform any of his obligations in respect of any instalment constitutes a fundamental breach of contract with respect to that instalment, the other party may declare the contract avoided with respect to that instalment".

Article 27 of the Law of the PRC on Economic Contracts Involving Foreign Interest also provides that "one party may avoid the contract if the failure by the other party to perform any of his obligations has substantially deprived him of what he is entitled to expect." According to the aforesaid stipulations, the [Buyer]'s asking for return of the goods after receiving inspection result was to protect its legal right, which was proper under the laws.

4. [Buyer]'s compensation claims have sufficient legal basis

Article 18 of the Law of the PRC on Economic Contracts Involving Foreign Interest stipulates that:

"If one party does not perform or performs the contract not in accordance with the contract, the other party may claim damages or require him to take reasonable measures to mitigate the loss."

Article 81(1) CISG also provides that:

"Avoidance of the contract releases both parties from their obligations under it ... Avoidance does not affect any provision of the contract for the settlement of disputes ..."

As stated above, the pumps and valves delivered by the [Seller] did not conform to the contract after inspection, and the [Buyer] has requested to avoid the contract and return the goods, and asked the [Seller] to pay RMB 390,000 for the cost of installing and disassembling the goods, which was in accordance with the Law of the PRC on Economic Contracts Involving Foreign Interest and the CISG. The [Buyer] did not ask for other compensation for the delay in construction that occurred on account of this.

5. Other contract violations of the [Seller]

Based on the inspection certificate issued by Shenzhen CIB on 28 April 1998, the [Seller]'s contract violations also include:

   (1)    For the main engines of the cold water machine sets worth US $839,000. Two of them were delivered on 14 December 1995, and three of them were delivered on 9 January 1996; however, due to the damages on the spring shock absorber, the [Seller] asked the [Buyer] to purchase substitute goods on 22 November 1996. Therefore, the delivery time for cold water machine sets was 22 November 1996, which was seven months delayed;
 
   (2)    For cold water machine sets remote control monitor worth US $22,000. Since the [Seller] refused to provide technical documents, the [Buyer] was not able to perform inspection. Technical documents are an indivisible part of the imported machines -- not providing them is equal to non-delivery of goods. Therefore, the delay in delivering this equipment was more than two years;
 
   (3)    The technical document for AQUA electric butterfly valves (on page 1~4 of imported material list for air conditioner construction) worth US $60,789 has not yet been provided;
 
   (4)    145 pieces of Honeywell DN25 auto air exhaust valves (on page 5 of the imported material list for air conditioner construction) worth US $3,625 have not yet been delivered;
 
   (5)    Two pieces of DN350 one-side expansion machines (on page 21 of the imported material list for air conditioner construction) worth US $3,546 have not yet been delivered;

The total price for the above delayed deliveries is US $929,060.

The [Seller] doubted the unloading date, 14 April 1997, in the inspection certificate. Indeed, in Kehua's delivery list submitted by the [Buyer] to the Arbitration Tribunal on the date of the court session, the delivery date for JOHNSON temperature controller and electric valves was 14 April 1997. If the [Seller] questions the inspection result, it can certainly apply for another inspection.

6. The following allegations of the [Seller]'s arbitration agent have no legal and factual basis

The [Seller] cannot provide evidence showing that the [Buyer] has received technical documents. The [Seller] asserts that "purchasing spring shock absorbing device is a modification of the contract" without giving evidence, and asserts that "valves with different specifications and types can substitute for each other" without providing a scientific basis for this.

Above all, the deposit the [Buyer] shall pay is: (total contract price - cancelled purchase- returned goods) 30% = (1,550,000- 3,980- 391,809) 30% = US $346,263.30; 67% of the contract price shall be paid after confirming the quality of the goods. The [Buyer] has paid US $1,201,599 (see Kehua's delivery list) plus RMB 71,820 for purchasing substitute shock absorbers. The [Seller] should pay interest on the extra payment made by the [Buyer]. The [Seller] should also pay the loss of the [Buyer] of RMB 390,000 and a penalty for delaying delivery of US $46,453 (US $929,060 5%).

[Seller]'s rebuttal

The [Seller] made the following rebuttal with regard to the [Buyer]'s supplementary statements:

1. Inspecting goods immediately is the [Buyer]'s obligation, but not the China Commodity Inspection Bureau (hereafter "CCIB")'s.

      (1) It was stipulated in the contract that the [Buyer] shall inspect the goods.

Article 6(3) of the contract stipulates that the [Buyer] "shall take the responsibility to unload, inspect the goods after the boxes were opened, and accept the goods after the goods arrive at the construction site", therefore, it cannot be concluded that the contract did not stipulate who should perform the inspection.

      (2) The contract stipulates that the goods should be inspected within three days after arrival.

Article 12, the inspection clause of the contract, provides that "the [Buyer] shall inspect the goods immediately, if there is any damage of the goods, within three days the [Buyer] shall ..." and Article 6(4) of the contract stipulates that "the [Buyer] shall issue a written receipt within three days after the arrival of the goods."

      (3) Inspecting the goods immediately is a legal obligation of the [Buyer]

The [Buyer] has chosen to apply the CISG, and the [Seller] agrees with that. Article 38(1) of the CISG 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." "Cause them to be examined" means the [Buyer] authorizes an organization to inspect the goods. The [Buyer]'s entrusting CCIB to inspect the goods is a method to perform its contract obligation; therefore, it cannot be concluded that the [Buyer] did not inspect and accept the goods.

2. The [Buyer] has lost its right to rely on the lack of conformity of the goods

Article 39 of the CISG states 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" and "[i]n any event, the [Buyer] loses the right to rely on a lack of conformity of the goods if he does not give the [Seller] notice thereof at the latest within a period of two years from the date on which the goods were actually handed over to the [Buyer], unless this time-limit is inconsistent with a contractual period of guarantee."

The parties in this case have agreed on the guarantee period. Article 5(5) of the contract provides that "the free guarantee period is within twelve months after the equipment is confirmed as qualified in the test running or eighteen months after shipment from the manufacturer, depending on which one comes first. Within the guarantee period, the [Seller] shall pay the cost for any necessary repair for damages, unless such damages were caused by the [Buyer]."

If the delivery date is considered to be the shipment date from the manufacturer, except JOHNSON temperature controller and electric valves, other goods were delivered before 10 March 1996, which was more than eighteen months if calculated to 10 September 1997, and more than two years if calculated to 10 March 1998. The [Buyer]'s raising objection on the quality of the goods was in April 1998 after receiving the arbitration notice, when the two year time limit had expired. JOHNSON temperature control electric valves were delivered on 14 April 1997, but this delivery was made after receiving payment; therefore, there is no issue of delay in payment, nor is there dispute between the [Buyer] and the [Seller].

3. The relationship between this case and CCIB

      (1) There is no causality between the inspection result and paying 67% of the contract price.

The contract did not stipulate that the inspection shall be conducted by CCIB, nor did it mention that 67% of the contract price shall be paid after confirming the quality of the goods through commodity inspection. Arranging inspection mentioned in Article 6(1) of the contract means the [Buyer] shall complete the entire importing procedures before the goods are imported, including inspection. Article 6(2) of the contract stipulates that "the [Seller] shall perform articles 10, 14, and 15 of the contract, if the goods cannot pass Customs after arrival at the destination port due to problems on import procedure, tax, or inspection." These articles indicate that the inspection is a procedural preparation before the Custom entry, which is also stipulated in Article 13 of the Regulations for the Implementation of the Law of the People's Republic of China on Import and Export Commodity Inspection that "register at the inspection organization at destination port; the inspection organization seals "registration accepted" on the Customs entry application, based on which the Customs releases the goods."

The [Buyer] has completed this procedure; otherwise, Customs would not have released the goods. Therefore, it is incorrect to mix inspection registration for Customs purpose with the inspection conducted by an inspection organization. It was stipulated in the contract that the [Buyer] shall inspect the goods within three days after receiving the goods, and that if there is any non-conformity, the [Buyer] shall raise objection immediately; otherwise, it should pay 67% of the contract price. It depends on the [Buyer] whether to have the goods inspected by itself, by another entrusted organization, or by the CCIB. No matter who inspects the goods, it should be completed within three days; otherwise, the [Seller] would not accept a compensation claim.

      (2) Article 5(2) of the Law of the People's Republic of China on Import and Export Commodity Inspection is not applicable to the [Buyer].

Article 5(2) of the Law of the People's Republic of China on Import and Export Commodity Inspection provides that imported goods need statutory inspection; no such goods should be sold or used without inspection." This article applies to importers, but not exporters. This is an obligation of the [Buyer]. Laws of the PRC on equipment installation and environment protection might stipulate other obligations to the [Buyer]; however, the [Buyer] should not shift off his responsibilities to the [Seller], or let the [Seller] bear the risk of performing these obligations. The [Seller] could only perform the stipulations in the contract which it knew of at the conclusion of the contract. The contract would be unpredictable and international trade could not be continued if exporters were required to follow Chinese administrative law.

      (3) The [Buyer] and Shenzhen CIB did not perform in accordance with the law.

Article 16 of the Regulations for the Implementation of the Law of the People's Republic of China on Import and Export Commodity Inspection states that:

"The inspection organization shall complete inspection on the imported goods within the time limit for filing a compensation claim. Notice of inspection result shall be issued for conforming goods, and inspection certificate shall be issued for non-conforming goods or goods require inspection result issued by inspection organization as required by foreign trade contract,"

The compensation claim period stipulated in the contract was only three days, and the guarantee period was eighteen months (calculated from manufacturer shipment date), however, the inspection report was not issued until two years later. It is unknown whether "installation permission notice" is one kind of legal inspection report.

The [Seller] reasserts that if the [Buyer] does not make payment in accordance with the contract, the [Seller] still retains the ownership of the goods. The [Seller] asks the Arbitration Tribunal to confirm the effectiveness of this assertion.

II. OPINION OF THE ARBITRATION TRIBUNAL

1. The applicable law

For the applicable law in this case, the [Buyer] alleged in its representation statement sent to the Secretariat of the Arbitration Commission on 5 October 1998, that the Law of the PRC on Economic Contracts Involving Foreign Interest and the CISG shall be applied. The [Seller] agreed to apply the CISG in its supplementary representation opinion (1) submitted to the Secretariat of the Arbitration commission on 22 October 1998.

According to the aforesaid opinions of the two parties, the Arbitration Tribunal deems that the contract was formed in Shenzhen, and the place of business of the [Buyer] and the place of arbitration are in China; therefore, pursuant to the proximate connection principle, the laws of China shall be applied. If there is no applicable stipulation in Chinese law, the CISG shall be applied.

2. Contract violation and the [Seller]'s arbitration claim

The Arbitration Tribunal notes that, during the performance of the contract, both parties have violated the contract. The [Seller] failed to perform its obligation to test run the main engines and to train operators as stipulated in Article 5(4) of the contract; therefore, it should bear the responsibility accordingly. On the other hand, the [Seller] has delivered goods worth US $1,546,020, but the [Buyer] has paid only US $1,201,599 with US $344,421 in arrears. The [Seller] has no right to ask the [Buyer] to pay 3% of the remaining payment, i.e., US $46,500, and in fact, the [Seller] did not claim for this amount, but asks the [Buyer] to pay US $297,921 which should have been paid but has not been paid by the [Buyer]. The Arbitration Tribunal accepts this claim of the [Seller].

3. The [Buyer]'s counterclaim

The Arbitration Tribunal notes that:

   -    the compensation claim notice regarding non-conforming pumps and return request sent by the [Buyer];
 
   -    Inspection Certificate No. 4403/WJ197006113 regarding quality problems on main engine remote control monitor, expansion machines and valves issued by Shenzhen CIB on 28 April 1998; and
 
   -    Inspection Certificate No. 4403/WJ19600911 regarding problems on pumps issued on 21 April 1998

were all submitted after the [Seller] submitted its arbitration claim, requesting the [Buyer] to pay the price in arrears.

According to the contract, the goods should be inspected immediately after they arrive at the construction site, and the [Buyer] shall issue a written receipt to the [Seller]. The issuing dates of the inspection certificates in this case exceeded a reasonable time as stipulated in the contract and in Article 38(1) CISG. The Arbitration Tribunal deems that the [Buyer]'s raising quality objection on the aforesaid goods has exceeded the reasonable time as stipulated in the contract and the CISG.

The [Seller] delivered the main engines at the end of 1995, delivered pumps and valves at the beginning of 1996, and JOHNSON temperature controller and electric valves worth US $165,276 were delivered in April 1997. The [Buyer] did not provide any written evidence to the [Seller] to prove that there were problems on the delivered goods, including non-matching goods, or lack of technical documents within at least one year.

Pursuant to Article 39 of the CISG, the [Buyer] "loses the right to rely on a lack of conformity 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". Since the [Buyer] failed to submit written documentation regarding the non-conformity of the goods within a reasonable time, in accordance with the contract and the CISG, [Buyer]'s request to return the goods cannot be accepted. The [Seller] in fact did not accept this request of the [Buyer] impliedly; therefore, the Arbitration Tribunal rejects the [Buyer]'s counterclaims for RMB 390,000 for installing and disassembling pumps and valves and for refund of US $391,809 for returned pumps and valves, as stated in its defense and arbitration counterclaim application.

For the [Buyer]'s counterclaim regarding main engine remote control monitor and technical document for AQUA butterfly valves, since the [Buyer] failed to raise this objection within a reasonable time, the Arbitration Tribunal does not accept this counterclaim of the [Buyer].

4. Delayed delivery and delayed payment during the performance of the contract

At the hearing, the Arbitration Tribunal notes that the [Buyer] failed to pay the deposit within the time limit stipulated in the contract, and the [Seller] delayed in delivery. There were defects in both parties' performance, which cancelled out each other. The Arbitration Tribunal does not look into the responsibilities for delayed delivery or delayed payment, which means the two parties shall each bear the responsibility on their own for contract violations that occurred before 14 April 1997, when the [Seller] delivered the last batch of the goods.

5. "Confirming after inspection" and paying 67% of the contract price

According to Article 9 of the contract, "the [Buyer] shall pay 67% of the contract price after inspecting and confirming the quality of the goods". The two parties obviously have a dispute over "confirming after inspection". The Arbitration Tribunal deems that based on the context of the contract, "confirming after inspection" means the [Buyer] opens the boxes and inspects the goods after the goods arrive at the construction site, and issues a written receipt within three days after the arrival of the goods." Since the [Buyer] failed to raise any objection and claim compensation within the stipulated time limit, the [Buyer] should have paid US $1,038,500 on 18 April 1997, which was within three days after the goods arrived at the construction site.

6. The quality problems with the goods

The Arbitration Tribunal notes that based on Article 5(5) of the contract, the [Seller] shall take responsibility for maintenance of the goods for an additional period of time after test running the goods. "Guarantee period was within twelve months after test running and confirming quality of the goods or within eighteen months after the shipment from the manufacturer, depending on which comes first. During the guarantee period, the [Seller] shall be responsible for all the costs for repairing damages except those damages caused by the [Buyer]." Due to the failure of the [Seller] to perform its obligations to test run and train operators, the machines could not run properly, not even mentioning the twelve months guarantee period and free maintenance within this period. Because the [Seller] did not perform this obligation, which caused certain damages to the [Buyer], the [Seller] shall be responsible. Therefore, the Arbitration Tribunal does not accept [Seller]'s claim to have the [Buyer] pay interest on the price in arrears.

7. Arbitration fee

The [Seller] shall bear 10% of the arbitration fee and the [Buyer] shall bear 90%. The [Buyer] shall bear the entire arbitration fee for the counterclaim. The [Buyer] shall bear the entire cost for choosing a non-local arbitrator.

III. THE AWARD

The Arbitration Tribunal rules that:

   (1)    [Buyer] shall pay US $297,921 for the price of the goods;
 
   (2)    [Seller]'s other arbitration claims are dismissed;
 
   (3)    All of [Buyer]'s arbitration counterclaims are dismissed;
 
   (4)    [Seller] shall bear 10% of the arbitration fee and [Buyer] shall bear 90%.The [Buyer] shall bear the entire arbitration fee for counterclaims, which has been paid by the [Buyer] in advance. The [Buyer]'s choosing a non-local arbitrator cost RMB 5,000, which should be borne by the [Buyer] entirely. The [Buyer] has paid RMB 8,000 in advance; therefore, the Arbitration Tribunal shall return the extra RMB 3,000 to the [Buyer].
 
   (5)    [Buyer] shall pay the aforesaid sum within 45 days of the date of this award; otherwise, an 8% annual interest shall be added.

This is the final award


FOOTNOTES

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

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

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

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Pace Law School Institute of International Commercial Law - Last updated October 22, 2010
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