Defective Machinery from China: Foreign Buyer Rights When Equipment Fails to Perform

Tribunal	CIETAC (China International Economic and Trade Arbitration Commission)
Date of Award	1990808
Docket No.	CISG/1996/36
Parties	Chinese Buyer (Claimant) v. Canada ( Seller (Respondent)
Goods/Sector	Diaper machine
Key Issues	Fundamental breach; Avoidance; Reduction of price, remedy of; Installment contracts; Damages; Mitigation of loss; Interest; Failure of performance, other party
CISG Articles	Art. 25, 50, 71, 73, 74, 77, 78, 80

Facts

China International Economic and Trade Arbitration Commission, Shanghai Commission [hereafter, the Arbitration Commission] accepted this arbitration application in accordance with: On 13 November 1995, after receipt of the Notice of Arbitration and [Seller]'s claims, [Buyer] submitted counterclaims to the Shanghai Commission. The Arbitration Commission accepted [Buyer]'s counterclaims and decided to hear them together with [Seller]'s claims.

Legal Issues

This case raised the following questions under the CISG:

• Did the breach constitute a "fundamental breach" under CISG Art. 25? The tribunal assessed whether the non-performance substantially deprived the injured party of its contractual expectations — the threshold for invoking avoidance remedies.

• Was the injured party entitled to avoid the contract? Under CISG Art. 49/64, avoidance requires both a fundamental breach and proper notice under Art. 26. The tribunal examined whether these preconditions were met.

• How should damages be calculated? The tribunal considered the concrete method (Art. 75, based on cover transactions) and the abstract method (Art. 76, based on current market price) to determine the appropriate measure of compensation.

• Did the injured party fulfill its duty to mitigate? Under CISG Art. 77, the injured party must take reasonable measures to reduce its losses. Failure to mitigate can reduce the damage award.

• Is the injured party entitled to interest on sums in arrears? Under CISG Art. 78, a party who fails to pay the price or any other sum in arrears is liable for interest, without prejudice to any claim for damages.

Practical Takeaways for International Businesses

1. Define breach thresholds in your contract. CIETAC applies the Art. 25 "fundamental breach" test strictly. Explicit remedies and termination triggers reduce ambiguity and protect both parties.

2. Avoidance requires proper notice. Under CISG Art. 26, a declaration of avoidance must be communicated to the other party. Failing to give timely notice can forfeit your right to terminate, even if the breach is fundamental.