Date: 05.06.1998
Country: Arbitral Award
Court: Arbitration Institute of the Stockholm Chamber of Commerce - Stockholm, Sweden
Parties: Beijing Light Automobile Co. Ltd v. Conell Limited Partnership
A US seller and a Chinese buyer concluded a contract for the sale of a press to be used by the buyer for the production of frame rails for light trucks. The parties agreed on a 18-month guarantee. The press was constructed and first assembled in the United States. The seller had replaced a part of the press with a substitutive part but it had neither informed the buyer thereof nor instructed the buyer's engineers as to how to install it. The press was then disassembled for delivery to the buyer's factory, where it was reassembled by the buyer's technicians and put in operation. For almost three years the buyer used the press continuously without incident. Finally the press failed resulting in serious damage to the press itself. Only after the failure of the press the buyer realized that a part of the press had been replaced with a device which deviated from the seller's drawings. The buyer commenced arbitration proceedings claiming damages for non conformity of the press to the contractual specifications. In particular the buyer alleged that the failure of the press was caused by the substitutive part, which was less reliable that the part normally used by the seller and indicated in the seller's instructions and drawings. The seller contended that the buyer's claim for damages was time-barred because of the expiration of the contractual guarantee period. It also alleged that the parties had derogated both from the CISG's provisions in Art. 35 and from Arts. 38 and 39 and that in so doing, the parties had also derogated from Art. 40 CISG. In any case, the buyer had not complied with the requirements of Arts. 38 and 39 CISG. The buyer responded that no limitation period should apply since the seller had promised that the press would last for at least thirty years.

As to the buyer's contention that no limitation period should apply, the Tribunal stated that it was not possible to infer, from the seller's statements as to the duration of the press, a contractual guarantee to the effect that the remedies under the contract or CISG would be available to the buyer throughout the lifetime of the press: such a guarantee would obviously differ from normal trade practices and would, therefore, be very exceptional.

As to the non-conformity issue, the Tribunal held that neither the failure of the press nor the replacement of the part were, in themselves, evidence of non-conformity. Since the buyer had not proved the inadequacy of the substitutive part irrespective of installation, the Tribunal found that the adequacy of such a part depended on proper installation, so that the true issue was to establish which of the parties was to bear the consequences of the substitution of the part and of its improper re-installation by the buyer.

The Tribunal found that the contract contained a generic guarantee that the press was made of the best materials with first class workmanship, brand new and unused. This clause was consistent with the seller's obligation under Art. 35(1) CISG to sell goods conforming to, among other things, the quality and description required by the contract and was to be supplemented by the general guarantee contained in Art. 35(2) CISG, under which, unless otherwise agreed by the parties, the goods sold shall be fit for the purposes for which goods of the same description would ordinarily be used and for any particular purpose expressly or impliedly made known to the seller, unless the buyer does not rely on the seller's skill and judgment. In the Tribunal's opinion, Art. 35(2) CISG, which expresses the principle of the buyer's reasonable expectancy with respect to the general and particular purpose of the goods and which also appears in many domestic laws, cannot be derogated from by contract warranties dealing in positive terms with general aspects of quality. As a consequence the parties had not derogated from Art. 35(2) CISG.

The Tribunal found that the contractual documents provided to the buyer did not contain any detailed description of how the substitutive part was to be installed and that the failure of the substitutive part could not be held due to the buyer's negligence during installation or maintenance. The substitutive part of the press was not fit for the long, continuous unfailing operation of the press that the buyer expected and that was the purpose of its investment. The press, therefore, falling short of what the buyer was entitled to expect under Art. 35(2) CISG, was non-conforming.

As to the time-bar issue, as it was undisputed that the buyer had given notice of the alleged non-conformity well beyond not only the 18-month contractual period but also the two-year limitation period indicated in Art. 39(2) CISG, the Tribunal deemed it necessary first to establish whether Art. 40 CISG was applicable and whether or not the parties had derogated from it. Under Art.40 CISG the seller is not entitled to rely on the examination and notice requirements of Arts. 38 and 39 CISG if the lack of conformity relates to facts of which it knew or could not have been unaware and which it did not disclose to the buyer. The Tribunal's conclusion was that the parties had not derogated from Art. 40 CISG and that the application of this provision prevented the seller from relying on the expiration of both the CISG and contractual terms.

According to the Tribunal, Art. 40 CISG is to be considered a "safety valve" for preserving the buyer's remedies for non-conformity in cases where the seller has forfeited its right to the protection against claims for such remedies granted by the provisions on the buyer's timely examination and notice. Provisions similar to Art. 40 CISG exist in the domestic laws of many countries and are triggered as a result of instances of fraud, bad faith and gross negligence by the seller. Thus, Art. 40 CISG is an expression of the principle of fair trading that also underlies many other of CISG's provisions and is, by its very nature, the codification of a general principle. In the Tribunal's view, not only had the parties not derogated from Art. 40, but, in any case, it would have been very questionable whether such derogation would have been valid or enforceable under various domestic laws or any general principle for international trade practices.

The Tribunal stated that Art. 40 CISG should only be applied in special circumstances because its application would mean that the seller loses the defenses based on the often relatively short-term limits for the buyer's examination and notice of non-conformity and can only rely on the general prescription rules under applicable domestic laws or possible international conventions, such as the 1974 United Nations Convention on the Limitation Period in the International Sale of Goods. As to the concept of the "seller's awareness" in Art. 40 CISG, the Tribunal stated that it covers not only conduct amounting to fraud, similar cases of bad faith or gross negligence but also cases when the seller consciously disregards facts that meet the eye and are of evident relevance to the non-conformity. With regard to the burden of proof under Art. 40 CISG, the Tribunal stated that the buyer's burden is alleviated because once the buyer has sufficiently established the basis for its claim, the seller must show that it had not reached the required state of awareness. Otherwise the buyer's burden would be often impossible, considering that, when Art. 40 CISG applies, considerable time may have passed since manufacture or delivery of the goods. The seller therefore must contradict the buyer's allegations with evidence on its own design and manufacturing process, that it is in a better position to secure than the buyer. The Tribunal also stated that the seller, in order to avoid liability under Art. 40, must disclose the non-conformity to the buyer and inform the buyer of the risk resulting from such non-conformity.

In the case at hand the Tribunal found that the seller could not have been unaware of the fact that the proper installation of the substitutive part was critical and that improper installation by the buyer could lead to serious failure of the press within a period of time other than that which the buyer was entitled to expect under the contract; since the seller had done nothing to eliminate the risk, it had consciously disregarded apparent facts which were of evident relevance to the non-conformity and which, in fact, had caused the failure of the press. Moreover the seller had not complied with its duty to disclose the non-conformity, because it had failed to provide instructions on, or supervise, the installation, which had caused the non-conformity. As a result of the above, the buyer was not time-barred from presenting the claim for damages and the seller was liable in damages for non-conformity of the press.