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

China International Economic & Trade Arbitration Commission CIETAC (PRC) Arbitration Award Arbitration particulars Facts of the case Position of the parties - [Buyer]'s claims - [Seller]'s response Main issues Beech log case (23 September 2002) Translation [*] by Zheng Xie [**] I. Identification of the arbitration agency The proper text of the second contract Whether the goods had quantity and quality defects 1. The goods under the first contract 2. The goods under the second contract II. III. IV. The negotiations on the resolution of disputes under the two contracts and the notification procedure for claiming damages V. Itemization of the [Buyer]'s claims 1. The customs import added value tax 2. The storage fee 3. Loss incurred due to the reduced disposal price and the issue of the invoice 4. The charge for repairing the containers 5. The traveling expenses 6. Expenses incurred due to shortage of goods under first contract The resolution of the issues by the Arbitration Tribunal VI. VII. VIII. IX. The applicable law The arbitration agency The language of the arbitration The versions of the second contract X. The defects of the goods The [Buyer]'s claims - Claims under the first contract - Claims under the second contract XI. XII. The award The arbitration fee ARBITRATION PARTICULARS The China International Trade and Economic Arbitration Commission (hereafter, the "Arbitration Commission") accepted the case (Case number: G ) according to: - The arbitration clauses in two contracts for the sale of beech logs (Contracts No. 00GM37SFIM2301 and No. 00GM37SFIM2302) signed by Claimant [Buyer], Shandong Foreign Trade Co. Ltd (Group) of the People's Republic of China, and Respondent [Seller], of Germany, on 18 January 2000; and

- The written arbitration application submitted by the [Buyer] on 7 July 2001. The arbitration clauses in the contracts state "All disputes in connection with this Contract or the execution thereof shall be amicably settled through negotiation. In case no settlement can be reached between the two parties, the case under dispute shall be submitted to the Foreign Trade Arbitration Commission of the China Council for the Promotion of International Trade for arbitration. The arbitration shall take place in Beijing, China and shall be executed in accordance with the Provisional Rules of Procedure of the said Commission and the decision made by the Arbitration Commission shall be accepted as final and binding upon both parities. The fees for arbitration shall be borne by the losing Party unless otherwise awarded." The arbitration agency stipulated in the arbitration clauses is the "Foreign Trade Arbitration Commission of the China Council for the Promotion of International Trade", for which the Chinese name is "Zhong Guo Guo Ji Mao Yi Cu Jin Hui Dui Wai Mao Yi Zhong Cai Wei Yuan Hui." With the approval of the State Council of the People's Republic of China, the name of the "Foreign Trade Arbitration Commission of the China Council for the Promotion of International Trade" was changed to the "China International Economic and Trade Arbitration Commission" (the current name.) The Arbitration Commission therefore accepted this case based on the above arbitration clause. Because the [Buyer] submitted the arbitration application on 17 July 2001, according to Article 7 of the Arbitration Rules of the China International Economic and Trade Arbitration Commission [hereafter, the Arbitration Rules], the Arbitration Rules which took effect on 1 October 2000 apply to this case. And at the court session held on 18 January 2000, the parties' representatives expressly agreed to apply the Arbitration Rules which took effect on that date. On 28 November 2001, Presiding Arbitrator appointed by the Chairman of the Arbitration Commission, arbitrator appointed by the [Buyer], and the arbitrator appointed by the Chairman with the [Seller]'s authorization formed the Arbitration Tribunal to hear this case. After reviewing the written documents submitted by the parties, the Arbitration Tribunal held a court session in Beijing on 18 January 2002. Both parties' representatives attended the court session. The [Seller] submitted supplementary materials both at the court session and thereafter. At the [Seller] request, the Arbitration Tribunal held a second court session in Beijing on 4 June 2002, and both parties' representatives presented. At both court sessions, the parties made statements and arguments, cross-examined the evidence, and answered the Arbitration Tribunal's questions. After the court sessions, both parties submitted supplementary opinions and materials. The Secretariat of the Arbitration Commission exchanged the above documents between the parties. At the request of the Arbitration Tribunal, on 15 August 2002 the Chairman extended the hearing period of this case to 28 September 2002. This case is completed. Based on the court sessions and the written materials submitted by the parties, the Arbitration Tribunal handed down the award by consent. The following are the facts, the Arbitration Tribunal's opinion and the award.

FACTS On 18 January 2000, the [Buyer] and the [Seller] signed Contract 00GM37SFIM2301 for the sale of German beech logs. According to the Contract, the [Buyer] purchased from the [Seller] 300m 3 beech logs for the price of 221,700 Deutsche Mark [DM] CIF Qingdao. After signing the Contract, the [Buyer] issued an L/C with the [Seller] as the beneficiary in accordance with the Contract. On 14 March 2000, the goods arrived at the stipulated destination port, Qingdao. The [Buyer] negotiated for the documents by paying the [Seller] the contract price of 221,700 DM. After that, the [Buyer] conducted the commodities inspection. On 30 March 2000, the China Import and Export Commodities Inspection Bureau issued its inspection certificate indicating that the goods were in shortage and had defects. The [Buyer] raised objection to the quality of the goods, and the [Seller] responded by, at the beginning of April 2000, delivering 100 m 3 of German beech logs for free to the [Buyer]. The [Buyer] accepted this delivery. The [Buyer] then alleged that the quality of these 100 m 3 of beech logs was bad, but did not conduct a commodity inspection on these 100 m 3 logs. On 18 January 2000, the [Buyer] and the [Seller] signed the second Contract No. 00GM37SFIM2302 for the sale of German beech logs. During the performance of the second Contract, the [Seller] delivered to the [Buyer] 300 m 3 beech logs with the total value of 221,700 DM. After signing the Contract, the [Buyer] issued the second L/C for 221,700 DM with the [Seller] as the beneficiary, but because of non-conformities between the L/C and the documents, the paying bank refused to pay. On 29 April 2000, the [Buyer] paid the [Seller] 190,000 DM by T/T. The China Commodities Inspection Agency inspected the goods under the second Contract, and issued an inspection certificate on 12 May 2000, indicating that the goods were not up to A quality. The quality of the goods and damages under the above two Contracts were disputed. The parties were unable to resolve this dispute by negotiation. Then the [Buyer] filed this arbitration. POSITION OF THE PARTIES [Buyer]'s claims The [Buyer] alleged that because the goods delivered by the [Seller] did not comply with the Contracts, the [Buyer] suffered severe loss. The [Buyer] filed the following claims: 1. Because the goods described in the [Seller]'s documents did not comply with the goods which the [Buyer] actually received, the [Buyer] paid an additional RMB 93,000 to the Customs; 2. The [Buyer] paid a package repairing fee of RMB 6,179.00 for the [Seller]; 3. Because the quality of the goods was not up to the standard required, the [Buyer] incurred the loss of storage expenses, maintenance fee, interest on bank loan and reduced disposal price, totaling RMB 668,473.78; 4. The [Buyer] incurred the cost of traveling to Germany totaling RMB 42,342.00 in order to solve the disputes in this case. The total amount of above items is RMB 809,994.78.

[Seller]'s response Before the first court session, the [Seller] submitted its response. [Seller] alleged that: 1. The arbitration clauses in this case are invalid because the arbitration agency stipulated in this case is not the current one, and in addition, according to German law, an arbitration clause does not apply to a small size company like the [Seller]. 2. The [Buyer] did not fulfill its duty to notify the [Seller] of the defects of goods within 90 days, the period for claiming damages stipulated in the Contracts. 3. The [Buyer] failed to specify the Contract based on which it filed the claims. 4. The [Seller] did not sign the second Contract. In addition, the Appendix of the second Contract submitted by the [Buyer] is actually the Appendix of the first Contract, so the parties did not sign any contract to stipulate the quality of the goods under the second Contract as the [Buyer] alleged. 5. The goods had no defects. 6. Because the [Buyer] went to Germany for other transactions, the traveling expenses should not be compensated. 7. The [Buyer]'s allegations lacks any legal basis. MAIN ISSUES The Arbitration Tribunal finds that the main issues in this case are as follows: I. Identification of the arbitration agency The [Seller] alleges that the arbitration clauses in the two Contracts specified the arbitration agency was the Foreign Trade Arbitration Commission of the China Council for the Promotion of International Trade, not the current commission. In addition, [Seller] alleges that according to German law, an arbitration clause does not apply to a small size business like the [Seller]. II. The proper text of the second Contract The [Seller] alleged that it did not sign the second Contract submitted by the [Buyer], and in addition, the Appendix of the second Contract submitted by the [Buyer] is the Appendix of the first Contract, not the second Contract. In the response submitted by the [Seller] on 8 April 2002 after the first court session, the [Seller] alleged that the second Contract had three different versions, among which the one stipulating 300 m 3 beech logs for a total contract price of 221,700 DM was actually executed. The [Seller] submitted two versions of the second Contract, one referred to 1,700 m 3 beech logs for a total price of 1,275,000 DM, and the other provided for 300 m 3 beech logs for a total price of 221,700 DM; both of the two versions have both parties' signatures. III. Whether the goods had quantity and quality defects

1. The goods under the first Contract The [Buyer] alleges that the goods delivered by the [Seller] under the first Contract were not up to the A quality standard set forth in the Contract, and that there was a shortage in the quantity shipped. The [Buyer] provided the inspection certificate issued by China Import and Export Commodities Inspection Bureau and indicating that: - The goods had 11 pieces/25.51 in shortage; - The goods without obvious defects were 27 pieces of 50.54, which weas 18.4% of the goods delivered, - The goods with obvious defects were 134 pieces/223.95, which was 81.6%. The conclusion of this inspection certificate was that the quantity and quality of part of the goods did not comply with Contract No. 00GM37SFIM2301. The [Seller] alleged that it had never agreed on the above inspection certificate, and in addition, the [Buyer] had never requested return or exchange of the goods. 2. The goods under the second Contract The [Buyer] alleged that the goods delivered by the [Seller] should have been up to the A quality standard, but the inspection certificate issued by China Import and Export Commodities Inspection Bureau showed that the quality of the goods which the [Seller] delivered id not conform to that standard. The inspection certificate indicated that the beech logs had defects (knots, scars, knobs, etc.), and were not up to A quality. The conclusion of this inspection certificate was that "the quantity and quality of beech logs delivered did not conform to Contract No. 00GM37SFIM2302. The [Seller] alleged that because the appendix of this Contract submitted by the [Buyer] was not true, the [Buyer] had no evidence to prove that the goods under this Contract should be A quality. In addition, this inspection certificate wrongfully indicated the date when the goods arrived. The [Buyer] alleged that although the parties disputed on the versions of the Contract, the [Buyer] had definitely specified the quality standard in the L/C, and this standard was completely complying with that stipulated in the first Contract. More importantly, the [Seller] issued the invoice according to this quality standard and also described in the invoice the quality standard which was completely conforming to this one. Accordingly, the [Buyer] has reason to believe the goods under the second Contract should have been up to A quality. As to the date when the goods arrived, the [Buyer] explained that after the goods arrived at the destination port, due to the non-conformities of the L/C, the [Buyer] could not get all of the documents, so it could neither process the goods through customs clearance nor take delivery of the goods. The goods had been under the Customs control and supervision until the [Buyer] took delivery on 29 April. IV. The negotiations on the resolution of disputes under the two contracts and the notification procedure for claiming damages THE FIRST CONTRACT

The [Seller] alleged that the [Buyer] failed to inform the [Seller] of the defects of the goods within 90 days, the period for claiming damages stipulated in the Contract. The [Buyer] submitted the faxes which it sent to the [Seller] from April 2000 to June 2000 to prove that it had filed claims with the [Seller] for damages within 90 days after the goods arrived at the destination port. The [Seller] alleged that the parties had discussed the shortage and the defects of goods under the first Contract and that the [Buyer] did not definitely specify its claims for damages. However, as to the [Seller]'s proposal that it would deliver 100 m 3 (72,000 DM worth) of logs for free to the [Buyer] to solve the disputes, the [Buyer] did neither object nor reject, but immediately accepted all of the goods. The value of goods delivered for free is much more than the value of goods in shortage (18,622.30 DM worth.) In addition, the disputes under the first Contract had no effect on the transaction under the second Contract. The [Seller] holds that it has already timely and properly compensated the [Buyer], and in addition, the parties have agreed on the compensation proposal, i.e., the free delivery of 100 m 3 beech logs. The [Buyer] alleged that these 100m 3 beech logs were shipped to the [Buyer] by the [Seller] on 13 March 2000 originally for sales on a commission basis, and the value was not 72,000.00 DM as the [Seller] alleged, but only 43,000.00 DM recorded in the invoice issued by the [Seller]. In addition, the diameters of these logs were 40-49 cm, but not more than 50cm as least under the two transactions in this case; the quality of these goods was very low. At the end of March 2000, when the [Buyer] received the inspection certificate for the goods under the first Contract issued by the China Import and Export Commodities Inspection Bureau, it immediately filed claims with the [Seller] for damages. The [Seller] proposed giving the 100 m 3 beech log in transit to the [Buyer] for free, but the [Buyer] had never confirmed that the giving these 100 m 3 beech log for free was the way to finally and completely resolve the dispute. Furthermore, the value of these 100 m 3 beech logs was only 43,000 DM, not 72,000 DM as the [Seller] alleged. In fact, the market price of these 100 m 3 beech logs in China was less than 43,000 DM, because the diameters of these logs were very short and also the goods were saw lumber. Meanwhile, in order to avoid enlarging the loss and in the spirit of long time cooperation, the [Buyer] did not request return of the goods, because if the [Buyer] insisted on return of the goods, due to the nature of the logs, the goods would become rubbish if returned to Germany. Moreover, as to the freely granted 100 m 3 beech logs, the [Buyer] did not "immediately accept" them as the [Seller] alleged. According to the above facts, these 100 m 3 beech logs were shipped on 13 March from Germany to Qingdao. Before the [Seller] proposed to freely give them to the [Buyer], it had already been decided to ship these goods to Qingdao, so the alleged fact that the [Buyer] "immediately accepted all of the goods" is not true; it was only coincidence. THE SECOND CONTRACT The [Buyer] alleged that it was disappointed after receiving goods with very low quality under the first Contract and the above 100 m 3 breech logs, so the [Buyer] asked the [Seller] to cancel the B/L issued on 3 March 2000 under the second Contract, and to revise the payment method to cash on arrival. The [Seller] orally agreed, but failed to perform as request above, which caused the goods to be piled at the port for more than ten days after arrival. In addition, there were many non-conformities in the documents. After negotiation, the [Buyer] accepted the [Seller]'s request that the [Buyer] pay 190,000 DM first, and if the quality of the goods did not conform to the Contract or the documents, the [Buyer] had the right to claim damages.

However, the inspection certificate again showed that the goods delivered by the [Seller] were not up to A quality, which caused the [Buyer] severe loss. The [Seller] alleged that soon after the goods under the second Contract arrived in Qingdao on 11 April, 2000, the [Seller] requested the [Buyer]'s authorized bank, Bank, to pay the full contract price of 221,700 DM, but the Bank refused. On 14 and 19 April, the Bank informed the [Seller]'s authorized bank, Bank, that it refused to make payment due to the non-conformity of the documents and the B/L. In order to take delivery of the goods, on 27 April the [Buyer] went through the customs clearance and paid the local Customs for the value added tax. It was only after the goods were unloaded that the [Buyer] had sufficient time close to the goods. On 28 April, the local Customs issued its "Commodity Customs Declaration Form", and the [Buyer] could take the delivery. On 29 April, the [Buyer] paid the [Seller] 190,000 DM by T/T. The [Buyer] voluntarily and unilaterally changed the payment method from L/C to T/T, and the second L/C was actually cancelled. In addition, the amount did not conform to that stipulated in the L/C. The [Seller] confirmed this modification made by the [Buyer]. The [Seller] alleged that First, there were 18 days between 11 and 29 April, during which or on 29 April the [Buyer] had every chance to know the goods under the second Contract; Second, when the documents provided by the [Seller] did not conform to the Contract, the [Buyer] had sufficient reasons to refuse to pay the contract price; Third, however the [Buyer] voluntarily made the payment, but only paid 190,000 DM (31,000DM less than the contract price). This fact could show that the [Buyer] must have had actual and full knowledge of the quality of the goods. Otherwise, how could the [Buyer], a specialized international trade company, have made the payment and only paid 85% after experiencing the similar situation in the former transaction and having sufficient reasons to refuse to pay? From the legal perspective, the [Buyer]'s conduct of modifying the consideration and the payment method can be explained as it requested the [Seller] to reduce the contract price according to Article 17, and the [Seller]'s reply showed it confirmed the [Buyer]'s conduct. Thus, the parties had reached an agreement on the compensation for damages. The current situation is that the [Buyer] went back on its word, which was agreed on by the parties as the way to solve the disputes. Moreover, the [Buyer] failed to prove the enlarged loss. The [Buyer] alleged that, contrary to the [Seller]'s opinion, the disputes under the first Contract adversely affected the transaction under the second Contract. The goods arrived at Qingdao Port on 14 March 2000 and went through customs clearance on 27 April, 2000. However, the [Buyer] had issued the irrevocable L/C under the second Contract through China CITIC on 3 March 2000. It seems that the first transaction had no influence on the second one. However, if before issuing the L/C under the second transaction, the [Buyer] knew that the goods under the first Contract had severe defects and shortage, it might not have issued the L/C under the second Contract. Because of the disputes under the first Contract, after arriving at the Qingdao Port on 11 April, the goods under the second Contract had been piled at the port for half a month, and the [Buyer] did not take the delivery. The payment of 190,000 DM which the [Buyer] made to the [Seller] did not finally and completely settle the disputes on the quality of the goods. In order to understand the above situation well, it is necessary to know the reasons why the [Buyer] paid the [Seller] 190,000 DM.

After the goods under the second Contract arrived, because the disputes under the first Contract had not been solved and the [Buyer] worried about the quality of the goods under the second Contract and the [Buyer] requested the [Seller] to revoke the L/C under the second Contract. However, because the [Seller] had presented this L/C to the Deutsche Bank for packing credit of 190,000 DM, the parties finally agreed that the [Buyer] would pay for the packing credit of 190,000 DM which the [Seller] got from the bank in order to get the full set of documents. The [Seller]'s allegation that "the [Buyer] voluntarily and unilaterally changed the payment method from L/C to T/T," is not true, because according to international customs, once issued, an irrevocable L/C cannot be cancelled by the issuer unilaterally without the beneficiary's agreement. In addition, without the beneficiary's agreement, the issuer cannot change the payment method from L/C to T/T. In this case, because the [Seller] had already completed the procedure for the packing credit of 190,000 DM with Bank, the [Buyer] and the [Seller] agreed on the payment of 190,000 DM against the full set of documents. Furthermore, the [Buyer] does not agree with the [Seller]'s allegation that the [Buyer] had sufficient time and opportunities to know the quality of the goods within the 18 days, i.e., 11-29 April. In fact, if it did not agree to pay 190,000 DM, the [Buyer] could neither have gotten the full set of documents, nor gone through customs clearance and taken the delivery; let alone have the time and opportunities to know the quality of the goods. In addition, according to the Customs regulation, before customs release, the goods had been under customs supervision and control. After the [Buyer] paid the value added tax, the goods were released by Customs in the afternoon of 28 April. The [Buyer] took the delivery of the goods on 29 April, so it had no opportunity to know the quality of the goods until 29 April. Accordingly, the [Seller]'s allegation that the [Buyer] completely knew the quality of the goods and then made the decision to make the payment is not true. V. Itemization of the [Buyer]'s claims The claims the [Buyer] filed in the arbitration application mainly include: 1. The value added tax for the imported value; 2. The loss of storage fee; 3. The loss from disposing of the beech logs at a reduced price; 4. Packing and maintenance expenses; 5. Traveling expenses; 6. The loss of the shortage of goods under the first Contract. On 20 May 2002, the [Buyer] submitted its "Calculation and Explanation of the [Buyer]'s Loss" and changed its claims; the total amount which the [Buyer] requests the [Seller] compensate for is RMB 801,886.64. The following are the [Buyer]'s revised arbitration claims and the [Seller]'s arguments against the [Buyer]'s claims. 1. The customs import value added tax The [Buyer] alleged that the value added tax on the 300 m 3 beech logs (the actual quantity was 274,49 m 3 ) under the first Contract was RMB 118,253.98; the value added tax of the 100 m 3 beech logs delivered free was RMB 26,960.31. The value added tax on the 200 m 3 beech logs under the second Contract was RMB112,703.11.

2. The storage fee The [Buyer] alleged that because the quality of the beech logs delivered by the [Seller] did not comply with the Contracts, the [Buyer] could not immediately sell the goods and incurred a storage fee for the long time storage of the goods. The storage fee for the 274.49 m 3 beech logs under the first Contract was RMB 74,918.12; the storage fee for the 100 m 3 beech logs delivered for free was RMB 25,990.23; the storage fee for the 300 m 3 beech logs under the second Contract was RMB 75,440.65. The total amount of the above fees was RMB 176,349.00. 3. The loss incurred due to the reduced disposal price and the issue of the invoice The [Buyer] alleged that the method used to calculate the loss incurred under the first and the second Contracts was (sales expenses minus sales income) times 70% (the sales expenses include the added value tax and the storage fee.) The [Buyer] also submitted the invoice issued by Qingdao Trade Company to prove the sales income. In fact, the [Buyer] was authorized by the Trade Company to import the German beech logs. The loss should be calculated as follows: A. The loss incurred under the first Contract and in connection with the 100 m 3 beech logs delivered for free The [Buyer]'s expenses are in total RMB 1,164,129.01. This includes the following items: - The price under the first Contract, i.e., 221,700 DM (RMB 918,006.37 were paid for the foreign currency); - The import duty for the 300 m 3 beech logs under this Contract, i.e., RMB 118,253.98, and the import duty for the 100 beech logs, i.e., RMB 26,960.31; - The storage fee for the 300 m 3 beech logs, i.e., RMB 74,918.12, and the storage fee for the 100 beech logs, i.e., RMB 25,990.23. The [Buyer]'s income from reselling the beech logs was RMB 567,000.000, so the [Buyer] alleged that the loss was calculated as 70% of the difference of sales expenses (RMB 1,164,129.01) and sales income (RMB 567,000.00). Therefore, it was RMB 417,990.31. B. The loss incurred on the 300 m 3 beech logs under the second Contract The [Buyer]'s expenses under this Contract were RMB 959,107.76. They include - The price under the second Contract, i.e., RMB 190,000, (RMB 770,964.00 were paid for the foreign currency), - The import duty for the 300 beech logs under this Contract, i.e., RMB 112,703.11, - The storage fee for the 300 beech logs, i.e., RMB 75,440.65. The [Buyer]'s income from reselling the beech logs was RMB 480,000.00. Thus, the [Buyer] alleged that the loss was calculated as 70% of the difference of sales expenses (RMB

959,107.76) and sales income (RMB 480,000.00). Therefore, it amounted to RMB 335,375.43. In response to these claims by the [Buyer], the [Seller] alleged that if [Buyer] questioned the quality of the goods, according to Article 16(3) of the Contract, the [Buyer] should have applied to the local commodity inspection agency to thoroughly inspect the goods in order to determine the specific amount of loss, and the relevant expenses should be paid by the party who was at fault. However, the [Buyer] did not apply to the commodity inspection agency to inspect the goods in accordance with the Contract, so there was no judgment on the quality and value of the goods made by any authority. In addition, the [Buyer] did not provide any convincing evidence to prove its actual income from the resale. In sum, the current evidence does not show the [Buyer] suffered any severe loss. As to the invoice submitted by the [Buyer], the [Seller] alleged that this invoice submitted by the [Buyer] and issued by Qingdao Trade Company was illegally used because it was an expired value added tax invoice. Thus the [Buyer] provided false evidence, and its claims supported by the false evidence could not be established. The [Buyer] alleged that although the invoices were illegally issued, they could indicate the price and income from reselling the beech logs. Two companies provided the proof to indicate that they purchased the corresponding quantity of beech logs and admit that they have received the above invoices issued by Qingdao Trade Company. 4. The charge for repairing the containers The [Buyer] alleged that, during the transit, the containers of the goods under the first Contract were broken because they were not tightly packed. The [Seller] should have paid for the repair charges of RMB 6,179.00, but failed to do so. Thus, in order to immediately take the delivery, the [Buyer] paid the above charge. As to this charge, the [Seller] alleged that on 20 April 2000, the carrier,, listed the five lightly broken containers and exempted the shipper's liability. The above fact shows that the [Buyer] has been compensated for the loss incurred in China, and the [Seller] has paid off the bill. Thus, the [Buyer] would not incur any more loss. 5. The traveling expenses The [Buyer] alleged that in November of 2000, the [Buyer] sent Mr. and Mr. to Germany to negotiate with the [Seller], and that the airfare incurred was RMB 59,640.00. However, because of the discount granted for international airline tickets, the traveling expenses actually incurred were RMB 42,342.00. As to this loss, the [Seller] alleged that this traveling was for other purposes, and the [Buyer]'s representatives just stopped by the [Seller]'s office. Mr. and Mr. went to Germany for many possible purposes. More importantly, it was questionable whether it was necessary for the [Buyer] to meet the [Seller] before it was not decided whether the [Seller] should bear any additional liability. Accordingly, it is irrational for the [Buyer] to claim for these expenses from the [Seller]. 6. The expenses incurred due to the shortage of goods under the first Contract The [Buyer] alleged that the quantity of the goods stipulated in the first Contract was 300 m 3, but the [Seller] actually delivered 274.49 m 3, i.e., 25.51 m 3 less than the stipulated quantity; thus, the [Buyer] paid 18,622.30 more (calculated at the lowest price of 730.00D M/ m 3.).

However, in "The Calculation and Explanation of the [Buyer]'s Loss" the [Buyer] relinquished this claim. TOTAL: The [Buyer]'s final arbitration claims The [Buyer] requests the [Seller] to compensate for: - The loss under the first Contract, i.e., RMB 417,990.21; - The loss under the second Contract, i.e., RMB 335,375.43; - The charge for repairing the containers, i.e., RMB 6,179.00; - The expenses for travel to Germany, i.e., RMB 42,342.00. THE ARBITRATION TRIBUNAL'S OPINION I. The applicable law The parties did not stipulate the applicable law in the Contracts. However, both China and Germany are Contracting States of the United Nations Convention on Contracts for International Sales of Goods (1980) (CISG), and the parties did not exclude the application of the CISG. In these circumstances, where as here the Contracts do not stipulate or lack definite stipulation, the CISG applies to the case. In addition, the place of arbitration of this case is China, so the Arbitration Law of the PRC and the Civil Procedure Law of the PRC apply to the procedure of this case. Accordingly, the Arbitration Tribunal does not sustain the [Seller]'s allegation that according to German law the arbitration clauses in the Contracts do not apply to the [Seller]. II. The arbitration agency In the first response, the [Seller] alleged that Article 20 of Contract No. 00GM37SFIM2301 stated that the arbitration agency should be the "Foreign Trade Arbitration Commission of the China Council for the Promotion of International Trade". The [Seller] therefore objected to the acceptance of this case by the China International Economic and Trade Arbitration Commission. In fact, the "Foreign Trade Arbitration Commission of the China Council for the Promotion of International Trade" stipulated in the Contract is the same arbitration agency as the China International Economic and Trade Arbitration Commission. With the State Council's approval, the name of the "Foreign Trade Arbitration Commission of the China Council for the Promotion of International Trade" was changed to "Foreign Trade Arbitration Commission" and then changed to "the China International Economic and Trade Arbitration Commission," and the relationship of subordination remains the same. Thus, only the name of the arbitration agency was changed, and its nature, relationship of subordination, and function remain unchanged. Accordingly, the Arbitration Tribunal holds that it is not impropriate for the Arbitration Commission to accept and hear this case. Moreover, in the court session open on 18 January 2003, both parties' representatives expressly agreed that the Arbitration Commission can preside over this arbitration. III. The arbitration language The parties did not stipulate the arbitration language in the two Contracts. Article 85 of the Arbitration Rules states that "The Chinese language is the official language of the Arbitration Commission. If the parties agree otherwise, their agreement shall prevail." Accordingly, the

Chinese language shall be the arbitration language in this case. On 30 August 2001, the [Seller] requested that English be the arbitration language in this case, and on 6 September 2001, the [Buyer] accepted the [Seller]'s request. According to Article 85 of the Arbitration Rules, on 12 September 2001 the Arbitration Commission decided that the arbitration language in this case should be English language. However, in the court session held on 18 January 2002, the parties stipulated that the arbitration language in this case should be the Chinese language and signed a written agreement to this effect. Thus, the official language for the court session on 18 January 2002 and the following procedure was the Chinese language, and this award is written in Chinese. IV. The versions of the second Contract No. 00GM37SFIM2302 As to this Contract, the [Buyer] and the [Seller] submitted to Contract for the sale of 1,700 m³ beech logs with the unit price of 750 and the total price of 1,275,000 DM and the Contract was signed by the parties. It should be verified that the parties had reached agreement on this sale. However, both parties admitted when performing the contract that the [Seller] should deliver 300 m³ beech logs and the [Buyer] should only pay 221,700 DM. Based on this fact, the [Buyer issued the l/c for 221,700 DM on 3 March 2002. The Arbitration Tribunal holds that the quality and price which the parties the parties actually performed should be the basis for deciding the disputes in this case, and the other provisions and contents of the Contract should be decided in accordance with the context provided by the parties. V. The defects of the goods The [Buyer] alleged that the goods under both Contracts were not conforming; the inspection certificates issued by China Import and Export Commodities Inspection Bureau indicated that the goods under the first Contract had defects and were in shortage, and the goods under the second Contract had defects and were not up to A quality. In its two responses, the [Seller] alleged that the goods had no defects. As to the quality of the goods under the first Contract, according to Article 16(1) of the Contract, the [Buyer] had the right, after the goods arrived at the destination port, to apply to the China Import and Export Commodities Inspection Bureau to inspect the quality and quantity of the goods, and to claim for damages with the inspection certificate. In this case, after the goods arrived at the destination port, the [Buyer] applied to the China Entry-Exit Inspection and Quarantine Bureau (the former name is "China Import and Export Commodities Inspection Bureau") to inspect the quality of the goods, and on 14 March 2000 this Bureau issued an inspection certificate, which indicated that the goods had defects and were in shortage. The Arbitration Tribunal holds that the [Buyer] provided the inspection certificate issued by the relevant commodity inspection bureau in accordance with Article 16(1) of the Contract, and this inspection certificate is a valid evidentiary document to prove the goods delivered were in shortage and had defects. As to the quality of the goods under the second Contract, the [Seller] doubts the truthfulness of the Appendix of the second Contract provided by the [Buyer], and alleged that there was no evidence to prove that the beech logs under this Contract were not up to A quality. The Arbitration Tribunal reviewed the [Seller]'s response and evidence submitted on 8 April 2002. From Evidence 6 (the photocopy of the B/L under the second Contract) the Arbitration Tribunal finds that the B/L indicated that the goods should be A quality. From the documents submitted by the [Seller], the Arbitration Tribunal also finds further evidence that the goods

were to be up to A quality. Accordingly, the Tribunal holds that the goods under the second Contract should have been up to A quality. The [Buyer] provided the "Quality/Quantity Inspection Certificate" issued by China Entry-Exit Inspection and Quarantine Bureau; the Contract No. recorded in this inspection certificate was in accord with the second Contract No, and the Inspection Certificate showed that the goods were not up to A quality. The Arbitration Tribunal holds that the inspection certificate was valid, and the goods under the second Contract did not conform to the Contract according to this inspection certificate, VI. The [Buyer]'s claims - The claims under the first Contract The Arbitration Tribunal does not sustain the [Seller]'s allegation that the [Buyer] failed to claim for damages within 90 days stipulated in the Contract. The faxes, which were provided by the [Buyer] and sent by the [Seller] to the [Buyer] from April 2000 to June 2000, showed that the [Buyer] had claimed for damages within the stipulated period in the Contract. - The 100 m 3 beech logs that were delivered for free and their impact on the claims under the first Contract The Arbitration Tribunal does not sustain the [Buyer]'s claims related to the 100 m 3 beech logs that were delivered for free for the following reasons. After receiving the [Buyer]'s request for compensation, the [Seller] proposed to freely deliver 100 m 3 beech logs to the [Buyer] to solve the disputes. The [Seller] actually delivered 100 m 3 beech logs to the [Buyer], and the [Buyer] accepted them. The [Buyer] alleged that these 100 m 3 beech logs were delivered to the [Buyer] for sales on a commission basis, but it could not provide the commission sales contract or other evidence to prove the parties' agreement of commission sales; thus, the Arbitration Tribunal cannot sustain the [Buyer]'s allegation. Considering the faxes about the claims for damages sent between the parties and the parties' actual performance, the Arbitration Tribunal holds that any third person with normal sense and business experience would understand that the so-called freely delivered beech logs was an agreement between the parties to solve the disputes on damages after the defects of the goods were found. And the [Buyer]'s acceptance of the goods showed that it had accepted and performed this agreement, and accepted the goods as compensation from the [Seller]. Thus, the Arbitration Tribunal holds that the parties had reached their final agreement to solve the disputes on quality and quantity defects of the goods under the first Contract, and the parties have performed in accordance with this agreement. Based on the above analysis, the Arbitration Tribunal does not sustain the [Buyer]'s claims under the first Contract including the loss of RMB 417,990.21 and the charge of RMB 6,179 for repair of the containers. - The claims under the second Contract The [Seller] alleged that the parties had also reached an agreement to solve the disputes under the second Contract. The [Buyer] paid only 190,000 DM which was 31,000 DM less than that stipulated in the Contract. The [Seller] alleged that the parties agreed to reduce the contract price in this manner. However, the [Buyer] alleged that the purpose of the payment of 190,000 was not to reduce the contract price, but to immediately get the documents to enable the [Buyer] to take the delivery. In this case, before the [Buyer] paid the contract price, the documents were held by the bank. According to general trade practice, the [Buyer] could neither take the delivery nor inspect the goods or go through customs clearance, so generally it could not determine whether the goods had or did not have quality or quantity defect.

Without knowing the condition of the goods, it was unreasonable to think that the [Buyer] had reached any agreement with the [Seller] on how to reduce the price and how to compensate for the quality or quantity defects -- unless the [Seller] could provide contrary evidence, such as the express agreement signed by the parties or the parties' expression of agreement, etc. In this case, the [Seller] did not provide any convincing evidence to prove its allegation; and the [Buyer] expressly objected to the [Seller]'s allegation. The Arbitration Tribunal does not accept the [Seller]'s allegation. The Arbitration Tribunal holds that the fact that the price was reduced during the performance of the Contract did not cause the [Buyer] to lose the right to claim for damages from the [Seller]. The damages which the [Buyer] claimed include customs import value added tax, the price difference, the storage fee, etc. - As to the customs value added tax, the Arbitration Tribunal holds that it is an item involved in the importer's cost, but not actual loss, so this claim cannot be sustained. - As to the price difference, the [Buyer] alleged that it resold the goods at the price of RMB 1,600/ m 3 to Qingdao Timber Industry Company, and provided the Qingdao value added tax invoice issued by Qingdao Trade Company to prove that the income from reselling the 300 m 3 beech logs was RMB 480,000. The [Seller] alleged that this was an expired invoice and that it was illegally issued and that, in addition, the Administration of Taxation has no record of these invoices. The [Buyer] responded that it may be that an administrative penalty can be imposed on the Qingdao Trade Company by the Administration of Taxation for illegally using the invoices, but the sales income recorded in these invoices is true. After considering the parties' allegations and reviewing the relevant documents submitted by them, the Arbitration Tribunal holds that because the issuance of these invoices provided by the [Buyer] violated the current Chinese taxation law and regulations, they cannot be admitted as evidence to prove the income from reselling the beech logs. The [Buyer] did not provide any other evidence to prove the actual price at which the [Buyer] sold the beech logs to Qingdao Timber Industry Company, so the Arbitration Tribunal does not sustain the [Buyer]'s claim for the price difference. - As to the storage fee of RMB 75,440.65 and the expenses for traveling to Germany of RMB 42,342.00, the Arbitration Tribunal sustains this claim. VII. The arbitration fee The Arbitration Tribunal holds that the [Buyer] shall pay 30% of the arbitration fee and the [Seller] shall pay 70%. AWARD The Arbitration Tribunal handed down the following award: - The [Seller] shall pay the [Buyer] RMB 117,782.65; - The [Buyer]'s other claims are dismissed; - The arbitration fee is RMB 35,200, of which the [Buyer] shall pay 30%, i.e., RMB

10,560, and the [Seller] shall pay 70%, i.e., RMB 24,640. The [Buyer] has paid the arbitration fee of RMB 35,200 in advance, which is fully offset by this arbitration fee. Thus, the [Seller] shall pay the [Buyer] for the prepaid arbitration fee of RMB 24,640. According to above items, the [Seller] shall pay the [Buyer] RMB 142,422.65 within twenty days after this award is handed down; otherwise, interest shall be paid at 2/10000 daily interest rate. This is the final award. It shall take effect as of the date it is handed down. FOOTNOTES * All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of the People's Republic of China is referred to as [Buyer] and Respondent of Germany is referred to as [Seller]. Amounts in the former currency of Germany (Deutsche Mark) are indicated as [DM]; amounts in the currency of the People's Republic of China (renmimbi) are indicated as [RMB]. ** Zheng Xie, LL.M. Washington University in St. Louis, LL.M., BA in Economics, University of International Business and Economics, Beijing.