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Lawyers, other representatives, expert(s), tribunal’s secretary

Arbitral Award

[1].
China International Economic and Trade Arbitration Commission, Southwest Branch (hereinafter called "Southwest Branch" accepted the arbitral case of disputes about the purchase and sale contract of motorcycles in accordance with the arbitral terms and conditions of the thirty-five "Purchase and Sale Contracts" (hereinafter called 35 "contracts") signed between Chongqing Hengshen Xintai Trade Co., Ltd. (hereinafter called "Applicant") and the respondent Baja Inc. (first name BAHA MOTORSPORTS LLC, hereinafter called "respondent") from Sep 5, 2008 to Jan 22, 2009, i.e. 0349/CQHS/2008, 0488/CQHS/2008, 0485/CQHSl2008, 0489/CQHSl2008, 0519/CQHS/2008, 0520/CQHS/2008, 0522/CQHS/2008, 0505/CQHS/2008, 0506/CQHS/2008, 0507/CQHS/2008, 0540/CQHS/2008, 0543/CQHS/2008, 0547/CQHS/2008, 0557/CQHS/2008, 0573/CQHS/2008, 0591/CQHS/2008,. 0598/CQHS/2008, 0599/CQHS/2008, 0575/CQHS/2008, 0576/CQHS/2008, 0579/CQHS/2008, 0580/CQHS/2008, 0581/CQHS/2008, 0611/CQHS/2008, 0009/CQHS/2009, 0010/CQHS/2009, 0011/CQHS/2009, 0012/CQHS/2009, 0014/CQHS/2009, 0016/CQHS/2009, 0017/CQHS/2009, 0019/CQHS/2009, 0020/CQHS/2009, 0022/CQHS/2009 and 0024/CQHS/2009 as well as the arbitral application submitted by the applicant to Southwest Branch on Jan 5, 2010. This case No. is SWM2010001.
[2].
The arbitral procedure for this case shall be governed by the Arbitration Rules of the China International Economic and Trade Arbitration Commission (hereinafter called "Arbitration Rules") executed by the China International Economic and Trade Arbitration Commission (hereinafter called "Arbitration Commission") from May 1, 2005.
[3].
The Southwest Branch's Secretariat sent the arbitration notification of this case, "Arbitration Rules" and "Name list of the arbitrators" to the applicant and the respondent by express mail service (EMS) on Jan 21, 2010, and enclosed and sent the arbitration application and its attachments provided by the applicant to the respondent.
[4].
On Feb 5, 2010, the applicant claimed to postpone the time to appoint the arbitrator to Feb 20, 2010 by the reason that he hoped to have sufficient time to appoint the arbitrator and prepare for arbitral defense and counterclaim because the amount involved in this case is tremendous, and postponed to submit the defense and counterclaim to March 21, 2010. The applicant agreed to the above application.
[5].
The applicant appointed Mr. Tang Qingyang as the arbitrator, while the respondent appointed Mr. Yang Liangyi as arbitrator. Because the both parties did not appoint or authorize jointly director of the arbitration commission to appoint the chief arbitrator within the specified period, director of the arbitration commission appointed Mr. Liu Yuwu as the chief arbitrator according to article 24 of the "Arbitration Rules". The above three arbitrators established the arbitral court for this case on March 11, 2010. At the same day, the Southwest Branch's Secretariat served the notification of establishing the court to the both parties by EMS.
[6].
On March 15, 2010, the respondent put forward the application to claim to postpone the period to submit the defense/counterclaim to Apr 20, 2010, and claim to use English as the arbitral language for this case. The applicant refused the claim. On March 19, 2010, the arbitral court agreed to postpone the period to Apr 10, 2010 through panel hearing, and concluded that the party concerned did not agree to use English as the arbitration language, therefore Chinese should be used as arbitration language for this case according to article 67 of the "Arbitration Rules".
[7].
On Apr 8, 2010, the respondent put forward the application to postpone the period again and claim to postpone the period of defense/counterclaim to Apr 26, 2010, and the applicant expressed his opinion on it. On Apr 9, 2010, the arbitral court agreed to postpone the period to Apr 20, 2010 through panel hearing.
[8].
The arbitral court decided to open court for hearing of this case in Chongqing on May 14, 2010 through negotiation with the Southwest Branch's Secretariat. On Apr 12, 2010, the Southwest Branch's Secretariat served the notification to open the court to the both parties and the arbitral court.
[9].
On Apr 16, 2010, the respondent submitted the "Jurisdiction objection" by Fax. The Southwest Branch's Secretariat transferred this document to the applicant, and then the applicant expressed his opinion on it. On May 10, 2010, the arbitration commission made the decision on jurisdiction (2010) China MZJZ No.007458 including the following contents: the arbitration commission has the right of jurisdiction on this case and the arbitration procedure for this case should be executed in the Southwest Branch continuously.
[10].
On May 14, 2010, the arbitral court carried out open hearing of this case in Chongqing. The applicant and respondent appointed their arbitral attorneys to attend the hearing and stated the facts to the arbitral court to explain their respective point of view to confront and answered questions by the arbitral court.
[11].
At the date of the first hearing, the respondent submitted "counterclaim and defense about the right of jurisdiction" and "arbitral counterclaim". The applicant stated that the period that the respondent submitted the counterclaim exceeded the period decided by the arbitral court, which should not accept it. Through panel hearing, the arbitral court decided to accept the counterclaim put forward by the respondent by exceeding the period. However, the arbitral court asked the respondent to submit the evidence material of the counterclaim and obtain the relevant formalities. The respondent agreed to submit the evidence material of counterclaim within 30 days after hearing before the first court hearing is finished.
[12].
After opening the court for the first time, the applicant submitted the "supplementary application of arbitration claim" on May 19, 2010, and submitted the "objection and claim on and for accepting counterclaim as well as claim to explain whether the arbitral court should accept the counterclaim by exceeding the period" on May 21, 2010. The respondent submitted the confrontation on the applicant's evidence on May 27, 2010, and submitted the rebutting opinion on the applicant's "objection and claim on and for accepting counterclaim as well as claim to explain whether the arbitral court should accept the counterclaim by exceeding the period" on June 2, 2010.
[13].
According to the "objection and claim on and for accepting counterclaim as well as claim to explain whether the arbitral court should accept the counterclaim by exceeding the period" submitted by the applicant on May 21, 2010 and the rebutting opinion submitted by the applicant on June 2, 2010, the arbitral court answered the both parties on July 6, 2010. Article 13, item 1 of the "Arbitration Rules" specified that the period that the respondent submits the counterclaim may be postponed properly in case the arbitral court considered there is any right reason. Therefore, the arbitral court shall have the right to decide whether it shall accept the counterclaim submitted by the respondent by exceeding the period according to the specific situation of the case. The arbitral court believed that it is unnecessary to withdraw the decision to accept the respondent's counterclaim made before during the first open hearing.
[14].
On June 12, 2010, the Southwest Branch received the arbitration fee for counterclaim prepaid by the respondent.
[15].
On June 29, 2010, the respondent submitted supplementary evidence material of the counterclaim and changed the first specific number for the counterclaim on July 26, 2010.
[16].
On July 30, 2010, the applicant claimed to postpone the period that he should submit the defense and evidence material for the counterclaim to Nov 6, 2010. The respondent expressed agreed on it. On August 24, 2010, the arbitral court decided to postpone the period that the applicant claimed to submit the defense and evidence material against the respondent’s counterclaim to Nov 6, 2010. On Nov 2, 2010, the applicant submitted the defense and its evidence material against the counterclaim.
[17].
Considering that the evidence that the applicant put forward the arbitration claim for this case is the arbitration articles in the 35 "contracts" signed between the applicant and respondent from Sep 5, 2008 and Jan 22, 2009, while the counterclaim evidence submitted by respondent on June 29, 2010 included the 130 contracts signed between the applicant and respondent. However, the applicant did not specify which part of the counterclaim amount is used for the arbitration put forward by the applicant on the 35 contracts and which part is used for the arbitration on more than 100 contracts signed between the both parties. Therefore, the arbitral court sent the letter to the applicant and respondent on Nov 10, 2010 to ask the respondent specify the counterclaim and amount for the arbitration put forward by the applicant on the 35 contracts within 10 days after receiving the letter. At the same time, for the more than 100 contracts mentioned in the counterclaim by the respondent, the arbitral court asked the applicant to express the opinion on joint hearing of this case within 10 days after receiving this letter.
[18].
On Nov 17, 2010, the applicant lettered to the Southwest Branch and the arbitral court to believe that the respondent’s counterclaim based on the more than 100 contracts exceeding the scope of disputes has not any necessary connection with the applicant’s claim based on the 35 contracts in the fact legally. Therefore, the applicant did not agree on the respondent’s counterclaim that the more than 100 contracts should be heard together in this case.
[19].
On Nov 26, 2010, the respondent submitted the letter about the counterclaim. The respondent believed that the arbitral court has made the decision on the respondent’s counterclaim about jurisdiction on the basis of notifying the both parties and sufficient discussion. The decision should not be withdrawn or cancelled. The claim in the notification given by the arbitral court on Nov 10, 2010 is not in line with the prior written decision.
[20].
On Dec 14 and 15, 2010, the arbitral court carried out the second open hearing in Chongqing. The applicant and respondent appointed their respective attorneys to attend the hearing and expressed their opinions on the scope of hearing. At the same time, the both parties stated the facts to the arbitral court and expressed their points of view, and confronted it and answered questions by the arbitral court and enquired the witness.
[21].
After the second open hearing, the applicant and respondent submitted their supplementary materials and confrontation opinions. The Southwest Branch’s Secretariat exchanged them between the applicant and respondent.
[22].
For the scope of hearing decided by the arbitral court, the arbitral court made the following decision on March 23, 2011: (I) The scope of hearing in this arbitral court for this case is only limited to the 35 "contracts" on which the applicant put forward the arbitration; (II) the respondent shall specify his counterclaim and the amount within the scope of hearing in the arbitral court for this case within 7 days after receiving the decision, or otherwise, the arbitral court shall have the right to make the decision. The Southwest Branch’s Secretariat served the above decision to the applicant and respondent respectively.
[23].
Apr 1, 2011, the Southwest Branch’s Secretariat received the "explanation of the counterclaim and amount put forward by the respondent according to the scope of hearing decided by the arbitral court", "the respondent’s letter to claim for cancel of this arbitration procedure" as well as the "respondent’s explanation about legal cost incurred after the second hearing", and served the above document to the applicant.
[24].
Apr 6, 2011, the applicant submitted the "reply about the respondent’s claims for cancel of this arbitration procedure" and the "reply about the explanation of the respondent’s counterclaim and amount". The Southwest Branch's Secretariat transferred them to the respondent.
[25].
Apr 8, 2011, the Southwest Branch's Secretariat notified the applicant and respondent by letter. The respondent's claim for cancel of the arbitration procedure has not sufficient reason, so the arbitral court did not agree on the respondent's claim for cancel of the procedure. At the same time, the both parties shall submit them in written form within 5 days from the date this letter is received if there is any supplementary material to be submitted, or otherwise, the arbitral court will not accept any material and work out the award directly.
[26].
Apr 18, 2011, the respondent submitted the "applicant's explanation about the Respondent's counterclaim and amount>".
[27].
According to the arbitral court's claim, director of the arbitration commission postponed the period of arbitral award for many times so as to finally postpone it to August 31, 2011.
[28].
During hearing of this case, all the arbitration documents related to this case served to the both parties by the Southwest Branch's Secretariat in accordance with the relevant rules of the "Arbitration Rules".
[29].
The hearing of this case has been finished. The arbitral award based on the most of opinions formed in the form of panel hearing in the arbitral court has been finished on the facts and legal basis.
[30].
The details of this case, most of opinions in the arbitral court and the contents of arbitral award are as follows respectively:

I. Details of this case

[31].
The applicant and respondent signed the following contracts from Sep 5, 2008 to Jan 22, 2009: 0349/CQHS/2008, 0488/CQHS/2008, 0485/CQHSl2008, 0489/CQHSl2008, 0519/CQHS/2008, 0520/CQHS/2008, 0522/CQHS/2008, 0505/CQHS/2008, 0506/CQHS/2008, 0507/CQHS/2008, 0540/CQHS/2008, 0543/CQHS/2008, 0547/CQHS/2008, 0557/CQHS/2008, 0573/CQHS/2008, 0591/CQHS/2008,. 0598/CQHS/2008, 0599/CQHS/2008, 0575/CQHS/2008, 0576/CQHS/2008, 0579/CQHS/2008, 0580/CQHS/2008, 0581/CQHS/2008, 0611/CQHS/2008, 0009/CQHS/2009, 0010/CQHS/2009, 0011/CQHS/2009, 0012/CQHS/2009, 0014/CQHS/2009, 0016/CQHS/2009, 0017/CQHS/2009, 0019/CQHS/2009, 0020/CQHS/2009, 0022/CQHS/2009 and 0024/CQHS/2009 total 35 "contracts".
[32].
According to the stipulations in the above 35 "contracts", the applicant as the seller and the respondent as the buyer agreed to purchase and sell different types of motorcycles, and the shipping location shall be Chongqing, China or Shanghai, and the destination shall be the USA at FOB price according to the "INCOTERMS 2000".
[33].
The quality shall be in line with the "Chinese Export Standard" and the mode of payment shall be D/P at sight. The inspection shall be in line with the "standard of the sample. The seller shall inspect quality and quantity of the goods after receipt of the goods, and shall have the right to lodge a claim to the seller within 30 days after receipt of the goods in the event of any shortage and quality defect, and shall have certificate of the relevant agency".
[34].
If any disputes during the performance of the 35 "contracts" can not be settled by the both parties, the applicant shall have the right to claim for arbitration to the Southwest Branch in accordance with the relevant arbitration articles of the 35 "contracts".

(I) Applicant's claim and arbitration application

[35].
The applicant stated in his arbitration application that:

1. The applicant is a famous motorcycles (including all-terrain motorcycle) manufacturer in Chongqing, and sells all types of motorcycles to the respondent for a long time, and has many years of cooperative relation with the respondent. From Sep 5, 2008 to Jan 22, 2009, the respondent signed 35 contracts of purchasing and selling motorcycles (including all-terrain motorcycles) at FOB with mode of payment "D/P at sight" with the applicant.

2. After the contract was signed, the applicant organized the production in accordance with the contract. The products were inspected by Chongqing Import and Export Commodities Inspection Bureau and granted with customs procedures for export, and performed the obligations of delivering goods according to the respondent’s requirement in accordance with INCOTERMS 2000. The total price of goods for the 35 "contracts" performed by the applicant is USD 2,392,030.04. The goods with USD 2,392,030.04 delivered by the applicant were confirmed by the respondent through the E-mail PDF text "Not-paid list" sent by the respondent to the applicant. The respondent did not put forward any objection against quality of the goods within the period specified in the contracts after receipt of the goods and the certificate issued by the relevant agency about quality defects of the goods within the period specified in the contracts. The respondent did not perform any payment obligations to the applicant in accordance with the contracts to now.

3. The applicant recovered the price of goods by telephone for many times but the respondent did not perform the payment obligation in accordance with the contract, which has constituted serious breach of contract. During the period, the applicant authorized China Export &Credit Insurance Corporation to contact with the respondent for payment of price of goods. However, the respondent owed the price of goods by the reason that the applicant could not accept it so that the price of goods could not be paid due to the respondent’s unfaithfulness.

[36].
Therefore, the applicant put forward the following arbitral claims:

1. The respondent shall pay price of goods USD 2,392,030.04 to the applicant;

2. The respondent shall pay interest occurred due to deferred payment, which shall be calculated from March 1, 2009 until the respondent paid off the price of goods, and calculated at RMB interest rate on the same period 5.31% published by the People’s Bank of China (the applicant changed the arbitration claim on May 19, 2010 as follows: the respondent paid total USD 2,392,030.04 owed according to the 35 "contracts" and the interest due to deferred payment shall be RMB 992,933.49 Yuan by May 14, 2010. The respondent shall pay interest RMB2,411.18 Yuan/day to the applicant from May 15, 2010 until all the owed price of goods is paid off by the respondent).

3. The respondent shall pay RMB 110,000.00 Yuan or equivalent USD to compensate lawyer’s fee to the applicant;

4. The respondent shall pay travel expense for this case to the applicant;

5. The respondent shall bear the arbitration fee for this case.

(II) The respondent’s defense and counterclaim

[37].
The respondent’s defense is as follows according to the applicant’s arbitration claim:

1. The facts about this case

As one of main customers of the applicant, the respondent has kept nearly 5 years of transaction relation (hereinafter called "transaction") with the applicant. The respondent purchased cross-country motorcycles and all-terrain motorcycles from the applicant and then sold them to American customers. When the applicant started negotiation of potential contract of purchase and sale with the respondent, the applicant understood the products provided to the respondent would be sold to its customers in the USA finally, and understood the products supplied by it must be in line with the USA EPA standard.

During the above transaction, the applicant signed a large number of "Contracts of Purchase and Sale" for cross-country motorcycles and all-terrain motorcycles, including the above 35 "contracts" and more than 100 other "contracts of purchase and sale" (hereinafter called "contracts") signed by the applicant with the respondent separately from 2006 to 2010. All the "contracts" texts were prepared and provided by the applicant. In addition, the applicant transported the motorcycles under the above "contracts" to the USA (freight was borne by the respondent) and appointed the respondent’s customers in the USA as consignee, including Pep Boys - Manny, Moe & Jack (hereinafter called "Pep Boys").

The both parties specified in the contracts that the mode of payment should be "D/P at sight", but the payment procedures were changed during actual performance due to the transaction between the both parties was very large or the respondent was required to pay price of goods under a number of orders within a period only one time or the respondent’s customers should directly pay price of goods to the applicant, which constituted material change of the mode of payment specified in the contracts.

The applicant and respondent signed the 35 "contracts" as being a part of long-term transaction between the both parties from Sep 1, 2008 to Jan 22, 2009. Therefore, the applicant would supply a large number of cross-country motorcycles and all-terrain motorcycles (hereinafter called "motorcycles involved in the case" to the respondent, who could resell them to its customers in the USA (including Pep Boys).

Besides the 35 "contracts", the applicant and respondent signed separate more than 100 "contracts" from 2006 to 2010 as a part of transaction between them. The applicant would supply a large number of cross-country motorcycles and all-terrain motorcycles (hereinafter called "other motorcycles" to the respondent, who could resell them to its customers in the USA (including Pep Boys).

However, the motorcycles provided by the applicant under the 35 "contracts" and other "contracts" could not reach the quality standards specified in the contracts, while the respondent fund it until American custom detained the goods transported to Pep Boys in 2008.

When the motorcycles involved in the case and other motorcycles were transported to the USA, American EPA found some of samples transported to Pep Boys breached materially American EPA rules and standards, including (1) The inspection results of some of sample for inspection were not in line with the specifications in the qualified certification application delivered to American EPA; (2) Some of samples for inspection could meet the requirement of labeling and/or warranty of emission specified by American EPA.

American EPA denied it immediately. All the motorcycles imported by Pep Boys were mounted with the above unacceptable series engines (including the motorcycles involved in the case under the 35 "contracts" and other motorcycles under other "contracts") so that they are not in line with the EPA standard. Therefore, many of the motorcycles involved in the case under the 35 "contracts" and other motorcycles under other "contracts" were certified not in line with the EPA standard, so Pep Boys and respondent were litigated by American EPA due to breach of EPA standard.

Since Dec 2008, the respondent and Pep Boys has negotiated with American EPA and hoped to avoid this litigation and minimize the loss resulted from it, and asked American EPA to allow some of the motorcycles detained by American custom to be sold on American market after certain procedures and improvements. For this matter, American EPA, Pep Boys and the respondent reached a compromise finally and agreed to submit the "Compromise Judgment" to American court. According to the "Compromise Judgment" and the "compromise agreement" signed between the respondent and Pep Boys on Jan 26, 2010, the respondent suffered a loss about USD 2,500,000.00 resulted from the applicant’s breach of EPA.

2. Laws applicable for this case

The respondent claimed that the arbitral court shall refer to the American laws, regulations and low practices when dealing with EPA problem considering the American EPA standard specified in the contracts by the both parties besides the "United Nations Convention on Contracts for the International Sale of Goods (hereinafter CISG) and the "Contract Law of People's Republic of China" (hereinafter called "Contract Law") applicable for this case.

3. The applicant shall have the obligations to guarantee the motorcycles are in line with the EPA standard.

Firstly, article 1 of the 35 "contracts" and other "contracts" specified the specifications of the motorcycles to be delivered, in which specially specified that the motorcycles should be mounted with the engines in line with one of the following specifications or similar specifications: "Engines and 4-stroke engines by EPA and CARB with 2008EPA approvals", "red or black engines approved by the EPA", "black engines approved by "2008EPA and CARB", "engines approved by the EPA and CARB" and "4-stroke engines with 2007EPA and CARB approvals". Therefore, the applicant should have the contract obligations to provide the motorcycles in line with the EPA standard.

In this case, the applicant fully knew and understood the motorcycles provided to the respondent according to the 35 "contracts" and other "contracts" would be resold by the respondent to its customers in the USA. Therefore, according to article 2 of the "CISG", the applicant should have the obligations to guarantee the motorcycles are in line with the EPA standard and safety standard for customers, and are in line with the purpose of being imported to the USA and sold in the USA. Or otherwise, the goods shall be considered not in line with the 35 "contracts" and other "contracts".

Moreover, in order to certify the motorcycles under the 35 "contracts" could meet the EPA requirements, the applicant submitted the certificate of conformance issued by American EPA as evidence. The issuance of the certificate of conformance could not certify that the motorcycles are really in line with the EPA standard, on the contrary, the applicant acknowledged that in the arbitration that the motorcycles must meet the American EPA standard.

Therefore, the applicant should have the contract obligations to the respondent according to the 35 "contracts" and other "contracts, i.e. the motorcycles provided should be guaranteed to be in line with all the American applicable safety and quality standards, including the EPA standard and safety standards for customers.

4. Motorcycles involved in the case and other motorcycles not in line with the EPA standard

The respondent believed that the certificate of conformance issued by American EPA submitted by the applicant could not certify that the motorcycles are really in line with the EPA standard. Each engine imported to the USA in accordance with the certificate of conformance must be in materially line with the engine testing and design specifications submitted when the certificate of conformity was delivered. The EPA would inspect the motorcycles involved in the case and other motorcycles in different periods, including sampling and testing, which is part of American EPA inspection and compliance rules.

American EPA found out that a large number of samples from the motorcycles resold to Pep Boys seriously breached American EPS standard and relevant rules and regulations. American EPA concluded that all the motorcycles involved in the case and other motorcycles, including one imported by Pep Boys and one mounted with unacceptable sample engines, were not in line with American EPA, which showed that the motorcycles involved in the case and other motorcycles are not in line with the EPA standard.

5. The respondent could not find out any potential detects of the motorcycles involved in the case and other motorcycles before American custom detained the goods.

Although article 6 of the 35 "contracts" specified that the respondent or consignee should lodge a claim for quality of the goods within 30 days after receipt of the goods, but the both parties never executed the inspection procedures under article 6 during the actual transaction.

In addition, the defects of the motorcycles provided to the respondent under the 35 "contracts" and other "contracts" caused breach of the EPA standard fall within "potential defects", i.e. defects that could not be found out during reasonable inspection.

There are not any the rules directly involved in "potential defects" in the "CISG" and Chinese laws. However, the respondent could not found out any potential defects of the motorcycles provided by the applicant (including the defects of quality not in line with American EPA standard). The respondent relied on the applicant’s statement in the certificate of conformity and/or the applicant’s application in the certificate of the conformance. Therefore, the respondent claimed to the applicant that the right of product quality should not be limited by the period of 30 days specified in the 35 "contracts" and article 6 of the other "contracts".

6. The applicant breached the 35 "contracts" and other "contracts, and should compensate the respondent for loss resulted from it.

[38].
Because it is not in line with the EPA standard, American EPA concluded that the motorcycles imported by Pep Boys, including the motorcycles mounted with unacceptable sample engines (including the motorcycles under the 35 "contracts" and other "contracts"), are not in line with American EPA standard. According to the "Compromise Judgment" signed by the applicant and EPA, and the "compromise agreement" signed between the respondent and Pep Boys on Jan 26, 2010, the respondent suffered a loss and interest total about USD 2,500,000.00: including:

(1) The respondent should pay USD 1,480,250.00 to Pep Boys according to the "compromise agreement" signed between them;

(2) The civil penalty imposed by American EPA on the respondent shall be USD 25,000.00;

(3) Export expense should be paid in accordance with American EPA "Compromise Judgment" ;

(4) The emission expense should be paid in accordance with American EPA "Compromise Judgment" ;

(5) The expenses due to delay of the warranty period should be paid in accordance with American EPA "Compromise Judgment" ;

(6) The expenses for inspection and testing should be paid in accordance with American EPA "Compromise Judgment" ;

(7) The expenses for compromise negotiation between American EPA and Pep Boys should be paid (including lawyer’s fee).

[39].
Considering the loss suffered due to the applicant’s breach of the 35 "contracts" and more than 100 other "contracts signed between the both parties, the respondent put forward the following counterclaim:

1. The applicant shall pay about USD 2,500,000.00 and interest to the respondent to compensate the respondent for loss suffered due to the applicant’s breach of the 35 "contracts" and other "contracts to provide the products not in line with the EPA standard (the respondent stated on July 23, 2010 that with further obviousness of American EPA procedures and relevant loss, the respondent recalculated all the losses and confirmed them as USD 3,228,771.00, not including any interest loss suffered by the respondent);

2. The applicant shall bear the arbitration fee for the counterclaim put forward by the respondent and legal cost incurred due to this case, including layer's fee.

[40].
The scope of hearing decided finally by the arbitral court is limited to the 35 "contracts" on which the applicant claimed for arbitration (there are only 10 contracts on which the respondent put forward the counterclaim to be coincided with the contracts on which the applicant put forward the claim), therefore, the respondent confirmed the counterclaim finally as follows:

1. The applicant shall pay loss total USD 353,587.62 due to the respondent's breach of American EPA standard to provide motorcycles to Pep Boys;

2. The applicant shall pay loss total USD 13,953.17 resulted from defects of the respondent's products;

3. The applicant shall pay all expenses total USD 796,555.3 expended by the respondent for arbitration of this case;

(III) The applicant's supplementary opinions

[41].
During hearing of this case, the supplementary opinions submitted by the applicant mainly include the followings:

1. Applicable laws for this case

The "CISG" and the "INCOTERMS" 2000 (hereinafter called "INCOTERMS" 2000) are applicable for this case. Any matters not detailed in the "CISG" and the "INCOTERMS" 2000 shall be explained in accordance with the laws, regulations and judicial procedures of the PRC.

American EPA laws, regulations and legal practices shall not be referred for this case due to the following reasons:

(1) "Engines with 2008 EPA and CARB", "4-stroke engines with 2008 EPA approval" and "Engines with EPA approval" etc letters specified in the 35 "contracts" involved in this case refer to the specific stipulations about the emission standard of the motorcycles purchased and sold by the both parties, which only stated that the emission index (or standard) of the motorcycles provided by the seller shall be in line with the emission standard issued by American EPA.

(2) The 35 "contracts" involved in the case only specified that the goods provided by the applicant shall be in line with the EPA standard instead of applicable American EPA laws, regulations or legal practices. Provided that the goods provided by the applicant are not in line with American EPA emission standard, the extent of quality liabilities and penalty due to it shall be determined on the ""INCOTERMS 2000" and "CISG" or Chinese laws.

2. The respondent did not perform the obligations of quality inspection for the goods delivered by the applicant and did not perform the obligations on notification so as to lose the claim right for quality of the goods.

After accepting the goods delivered by the applicant, the respondent did not inspect quality of the goods in accordance with the contracts and did not raise any objection or claim notification for the goods under the 35 "contracts" to the applicant within 30 days after accepting the goods in the form specified in the contracts, and did not also provide any certificate for quality claim issued by the relevant agency.

Therefore, the applicant did not perform the inspection obligation on quality of the goods delivered by the applicant and obligation of notification so as to directly cause loss of the claim right for quality of the goods. The respondent lodged counterclaim for quality compensation and asked to set off the applicant’s obligatory right of price of the goods, which has not any basis legally.

3. The series contract texts signed by the applicant and respondent during the long-term cooperation between the both parties are the English versions formed gradually and the Chinese/English contract samples formed by continuous adjustment and negotiation. The terms and conditions of the contract really reflected the both parties’ declaration of intension related to the matters. Therefore, the respondent defended that the contract text is the format contract provided by the applicant and is not in line with the fact.

4. After the respondent breached the contract and owed payment of the goods, the applicant contact with the respondent by telephone and E-mail and authorized China Export & Credit Corporation to contact with the respondent for payment of the goods, and performed the obligations to prevent from expanding the economic loss. The respondent shall bear the interest incurred due to deferred payment and other expenses incurred due to the applicant’s claim for arbitration, including but not limited to the arbitration fee, travel fee for the witness and the attorney’s fee etc.

5. The respondent’s defense that the motorcycles provided by the applicant are not in line with the EPA standard is false.

Firstly, according to the respondent’s defense statement, the respondent never inspects the motorcycles provided by the applicant during the several years of transaction between the both parties. The loss suffered by the respondent due to the EPA’s punishment is just the direct and expanded consequence resulted from that the respondent did not perform inspection obligations and other obligations of purchase and sale for a long time. These inspection obligations shall be obligatory obligations for the buyer but not the seller’s obligations in accordance with the "CISG".

According to article 6 of the "contracts" signed by the both parties "Inspection according to the sample standard", "the buyer shall inspect the quality and quantity of the goods after receipt of the goods, and shall lodge the claim to the seller within 30 days after receipt of the goods in case any shortage or defects of the goods, and shall have the certificate issued by the relevant agency.

The article 38 (1) of the "CISG" specified that "the seller must inspect the goods or the goods must be inspected by others within the period as short as possible". The article 39 (1) stated that "in case the goods are not in line with the contract, the buyer must find or notify the seller of any case not in line with the contract within a reasonable period and state that any nature not in line with the contract, or otherwise, would lose the right to state that the goods are not in the contract".

Therefore, as for this case, even if the goods provided by the applicant have any quality defects, the quality has been deemed acceptable because the buyer deliberately breached the obligations of inspection and notification. According to the above "CISG", the respondent has lost the right to claim for quality to the applicant and lost the claim right for quality compensation.

Secondly, the applicant has provided and showed the certificate that the motorcycles involved in the case are in line with the EPA emission standard, i.e. the EPA certificate related to the all types has preliminarily certified that the motorcycles involved in the case have passed certification of the EPA and are in line with the quality specified in the emission standard.

Moreover, the respondent did not provide the specific testing and inspection report that certified that the actual emission of the motorcycles delivered by the applicant exceeded the maximum value specified in the EPA standard to certify the fact that the motorcycles delivered by the applicant exceeded the emission standard specified in the EPA indeed.

6. The respondent’s claim about "potential defects" in the motorcycles involved in the case has not any reason. Just as acknowledged by the respondent, "potential defects" refer to the defects found out by reasonable inspection. In this case, the respondent never inspects the quality. How can say them "potential defects"? In addition, the quality defects disputed in this case are whether the emission of the motorcycles is in line with the EPA emission standard and the respondent can find out whether the quality is in line with the contracts nor not by testing and inspection.

The specific problem stated in the bill of defense by the respondent is that the adjusting screws on the carburetors of the motorcycles provided really are not in line with the certificate request of the EPA. Therefore there is not any right reason that was confirmed as the reason of unconformity by American EPA, which has not any reasonable evidence because the quality defects stated can be found out by visual inspection. If there are such defects indeed, they can be found out and treated fully at the beginning so long as the respondent seriously performed the inspection obligation but were not be punished by American EPA so as to cause the huge loss after the cooperation between the both parties has kept for several years.

The letter 16 of the counterclaim evidence catalogue provided by the respondent shows preliminarily that the respondent had known the above defects by Jan 16, 2008 at the latest, but the respondent still continued more transaction with the applicant, including transaction under the 35 "contracts" involved in this case, and the respondent did not submit any written notice and requirement of improvement. The fact shows that the applicant shall not bear any liability for the quality defects stated by the respondent (the applicant shall not bear any compensation liability at least for the quality of the goods disputes in this case to the respondent under the 35 "contracts").

7. The respondent’s application that asked to use quality compensation loss to set off its defense against the payable price of the goods and the requirement shall be jointly judged after the hearing of the counterclaim is finished has not sufficient legal support.

The respondent did not provide any legal articles and basis to support its defense. There are not any articles in the ""INCOTERMS 2000", "CISG" and the "Contract Law" to support that the payment of goods may not be paid due to defects of the goods provided by the seller.

According to analysis of the legal relationship, this request is the claim of payment formed according to the purchase and sale relationship of the goods but the counterclaim is the claim for compensation resulted from quality of the goods. The basic legal relationship of the two claims is relatively independent, without any negative or positive contradiction relationship between them. In short, the confirmation of payment of the goods to the applicant shall not affect establishment and hearing of the claim for the respondent’s compensation confirmation. Therefore, the respondent’s defense reason aims to postpone payment of the goods to the applicant, which is not just and is short of facts and legal basis.

8. The transaction involved in this case is related to multiple subjects. It is necessary to distinguish the specific legal liabilities each subject shall bear in this case.

The applicant, Chongqing Hengshen Group Co., Ltd (manufacturer of the motorcycles involved in this case, hereinafter called "Hengshen Group", American Hengshen Corporation (holder of the EPA of the motorcycles involved in this case, hereinafter called "American Hengshen") have independent qualification of legal person, and shall enjoy independent right legally and shall bear corresponding obligations, and shall be calculated independently during operation of the corporations, without any confusion.

The applicant performed independent accounting and full financial responsibility, and shall be independent legally, so shall not bear any legal liability for Hengshen Group or American Hengshen. Even if there is the relation between Mother Company and sub-company, the sub-company shall not also bear any legal liability for the mother company. If the respondent considered Hengshen Group has any breach of contract or breach caused economic loss to it, the respondent shall look for legal rescue in accordance with the contracts or relevant laws and shall not be confused with American Hengshen and Hengshen Group so that the applicant bears the legal liability that shall belong to another subject.

9. According to the facts and the contracts, the applicant shall not be the bearer of loss liability for the counterclaims.

According to the counterclaim, the respondent shall have the right to claim the applicant for compensation for the loss resulted from EPA penalty due to inconformity of certificate, tag and warranty of the products sold in America. The applicant believed that the respondent, as an American enterprise, should understand and abide by the relative rules of the American laws, and shall work out obvious stipulations for the products in the contract in advance, and shall carry out severe inspection after and before import to ensure the products are fully in line with American relevant laws. The applicant provided relevant products in accordance with the contracts. The loss due to EPA penalty was caused by the respondent’s default of the above obligations so the loss shall not be compensated by the applicant.

(1) EPA certificate

The relevant stipulations in the contract between the applicant and respondent show that the products the respondent only asked the applicant to prove can be approved by the EPA or shall be attached with the EPA certificate. The applicant had provided the sample before providing products to the respondent and the EPA certificate applied by American Hengshen was provided to the respondent, who signed the contract to purchase the relevant products with the applicant after it is approved by the applicant. That is to say that the respondent had understood the products under the contract were provided with the EPA certificates applied and obtained by American Hengshen for sale in America when the contract was signed. The applicant is not the applicant or holder of the EPA certificate of the product involved in the case. According to B1 of "INCOTERMS 2000" FOB "the buyer must bear the risk and expense personally to obtain any import license or other official permits, and shall conduct import of the goods in case the custom formalities are needed and any custom formalities to cross other countries if necessary". In this case, the respondent shall have the obligations of the official permit EPA. Therefore, if the respondent met with any problem when using the EPA certificate obtained by American Hengshen for sale and the products provided by the applicant have not any material inconformity of the EPA emission standard, the applicant has not any fault for it so the liability shall not be borne by the applicant.

At the same time, the products provided by the applicant are in line with the EPA emission quality and can obtain the EPA approval. According to EPA 2006 ~ 2009, the screws on carburetors of the motorcycles are both adjustable screws and unadjustable screws. American EPA started to change the original adjustable screws on the carburetors or unadjustable screws with unadjustable screws from 2010. The applicant provided adjustable screws for the motorcycles involved in the case, which was in line with the EPA requirement at that time so it shall not constitute breach of the rules. The respondent authorized Motorscience Corporation to inspect the adjustable screws for 8CGQX.049DBI engine series. The results of testing and inspection at the thickest and thinnest show that the emission at the worst condition (thickest) is also in line with the EPA emission requirement and obtained the EPA certificate materially. This evidence shows that the motorcycles mounted with adjustable screws provided by the applicant are in line with the EPA emission requirement. In addition, there is not any statement in the EPA indictment and judgment to certify that the products involved in the case have any testing report and other statement to show that the actual emission exceeds the standard, which can also certify that the products involved in the case provided by the applicant have not any material emission exceeding the standard.

Moreover, the respondent’s products sold in the USA was confirmed by the EPA as the products without the EPA certificate because the respondent did not obviously specify it in the contract or transaction and did not perform the inspection obligations. The applicant, as Chinese Corporation, did not understand the EPA legal rules. The understanding of the EPA relevant rules relies on the respondent. In the contract, there is not any stipulation that the motorcycles sold by the applicant in the USA shall be in line the specific requirements and conditions about American EPA certificate, and the respondent did not both further specify and notify the applicant separately during the consequent performance and ask the applicant to provide the EPA application.

The applicant is not the applicant for the EPA certificate. From 2007 to 2009, the commitment on the EPA application was not worked out by the applicant. The applicant never did the commitment that the gasoline throttle mounted on the motorcycle is unadjustable one, and did not understand the applicant’s detailed statement in the certificate application. Moreover, the samples delivered for inspection before and after the contract signed between the applicant and respondent are in line with the actual goods delivered actually to perform the contract involved in the case, and the samples were approved by the respondent. Therefore, the applicant has not any intention and fault to breach the contract.

This contract for this case also specified the sample inspection and acceptance inspection, and specified the period of objection against the inspection. However, the respondent did not carry out any inspection. Because the products involved in the case have exceeded the period of objection against inspection, the respondent did not put forward any objection against inspection within the valid period, and did not provide any written objection against the inspection and valid certificate issued by the relevant agency within the valid period. According to article 39 of the "CISG and article 158 of the "Contract Law", the respondent did not perform the obligations specified in the contract on the goods under the contract involved in the case so the respondent has lost the claim right for quality defects to the applicant.

Just as what the respondent said, the EPA certificate was not obtained only because the application shows "adjustable parameter: No". If the respondent obviously specified it or performed the inspection obligation in the contract or during the transaction, this problem would be found and corrected timely to meet the relevant requirements to prevent the respondent from breaching the EPA regulations and suffering EPA penalty. Because the respondent did not perform inspection and check obligations so as to cause the "so called" quality defects which could not be found timely within a period of several years, the loss liability shall not be borne by the applicant.

The respondent should have understood the strict requirements of American EPA law for application and use of the EPA certificate. Firstly, the applicant of the EPA certificate must be an American manufacturer or importer. In view of this, the applicant in this case or Hengshen Group has not the qualification to apply for it. The respondent should have understood it. Secondly, if American importer uses the EPA certificate for same motorcycle type obtained by other subjects, it must perfect the relevant legal agreement with the holder of the certificate and obtain a complete set of certificate applications for record to facilitate check of American custom and EPA agency during the sale. During performance of the contract involved in the case, the respondent did not sign the use agreement of the relevant certificates with American Hengshen in accordance with American relevant laws to obtain a complete set of applications for record and examination to ensure the products are provided with the EPA certificates, and did not ask the applicant to associate with obtaining the above materials so as not to timely find problem during use of the EPA certificate, which is the important reason that the EPA certificate could not be obtained so that the chance to take measures to minimize loss was lost. The respondent has unshirkable liability for the loss and expansion of the loss. Therefore, the loss was confirmed the reason that the respondent did not obtain the EPA in the products involved in the case sold in the USA, which was caused by its deliberation and fault to breach American laws. The applicant has not any deliberation and fault during performance of the contract so the applicant shall not bear the liability for the loss.

(2) Tag

According to the contract between the both parties, it only specified pasting tag but did not specify use extent of the tag. Therefore, the stipulation that the tag can not be torn down shall not have any binding force on the applicant. Even if the tag was torn down, the applicant shall not be considered breached the contract.

In fact, the products provided by the applicant are provided with tags by using 3M material so that the tags can not be torn down completely, which was certified in the mail provided by the respondent.

According to the respondent’s explanation in the mail, Hengshen Group carried out relevant tests and answered the respondent’s questions put forward in the mail. From then on, the respondent did not put forward any objection further, which shows that the applicant performed the obligation to answer the respondent’s question but the respondent did not perform the relevant obligation on disclosure again so that the applicant did not known the reason why the tag is not acceptable.

The tag quality can be checked visually. However, the respondent never inspects it, which shows that it waived the right to raise objection against quality so as to waive the claim right.

(3) Breach of emission quality rules

Whether the emission warranty is put into each packing box or not, which can be checked visually. However, the respondent never inspects the main reason of penalty.

The emission warranty is provided by the respondent. The applicant prints according to the specification on it to certify that the applicant execute the specifications on the EPA certificate.

The respondent’s commitment on the emission warrant shall have legal binding force so it shall bear obligation for the commitment.

According to the abovementioned, the applicant believed that the respondent breached American EPA law and shall bear the warranty liability, while the applicant shall not bear any legal liability and contract obligation.

10. According to the facts stated in the indictment and judgment in the USA, the liability in the counterclaim shall not be borne by the applicant. Even if the arbitral court judged that the applicant shall bear a part of the liability, the loss and expansion of the loss caused by the respondent’s fault of notification and part of loss foreseen by the applicant in the contract shall be deducted from the loss compensation claimed by the respondent.

(1) The cooperation between the applicant and respondent was started from June 8, 2006, but illegal behaviors of the respondent and Pep Boys in the indictment and judgment is involved in 2004 and 2004. Therefore, the civil penalty shall include illegal behaviors in the above years.

(2) On June 21, 2007, EPA sent the notice of breaching the rules to the respondent, but most of contract transactions of the applicant and respondent occurred after the EPA notification to the respondent. Therefore, it can be reasonably considered that the respondent's EPA breach is not caused by the applicant’s so called "emission quality breach" but the respondent’s long-term subjective and deliberate breach of American EPA law. Therefore, the applicant shall not bear the loss or charge caused by it.

(3) In the indictment and judgment, there is not any testing report or other evidence document to certify that the products provided by the applicant to the respondent materially exceeded relevant EPA emission standards.

(4) In the EPA indictment and judgment, there is not any statement about carburetor screws, which can not certify that the huge loss caused by the EPA litigation stated by the respondent. For the consultant and lawyer's fee, according to American EPA regulations, the respondent, as "manufacturer" in the scope of definition 42 U.S.C §7550(1), is the subject bound by the EPA regulation. The expense for the consultant or lawyer engaged by it is necessary expense to perform relevant EPA obligations and these expenses are paid by the respondent, which has been notified to the applicant, but the applicant did not agree on it. So the applicant shall not bear it.

(5) The penalty suffered by the respondent is only USD 25000. The agreement between the applicant and Pep Boys is not involved in the applicant. The applicant did not know and agree it so shall not be bound by the agreement. The expenses claimed by the respondent according to the agreements shall not be the basis and reason of the applicant's compensation. If the loss must be borne, it shall be included in the actual penalty USD 25000.00 suffered by the respondent and apportioned in the part of share for the goods provided by the applicant.

(6) For the motorcycle types involved in the EPA certificates for the two types withdrawn by American Hengshen, the applicant has not any transaction with the respondent, which has not any correlation with the matters disputed in this case.

From the abovementioned, the applicant believed that the respondent's counterclaim has not any fact and legal basis. The applicant claimed the arbitral court to deny the respondent's counterclaim.

(IV) The respondent's supplementary opinions

[42].
The respondent submitted its supplementary opinion in this case. The main contents include the followings:

1. The applicant shall not have the right to claim the respondent to pay price of the goods under the 35 "contracts".

During 5 - 6 years of transaction started from 2006, the cross-country and all-terrain motorcycles purchased by the respondent from the applicant were resold to the respondent's main retailer in the USA. The applicant knew the fact. However, the motorcycles sold by the applicant to the respondent have not any complete and material quality standard in line with the contracts and the motorcycles not in line with the quality standard caused huge loss to the respondent. Specifically, during recent 6years of transaction, the respondent resold part of the motorcycles purchased from the applicant to its retailer Pep Boys in the USA. These motorcycles can not reach the quality standard agreed in the contract between the applicant and respondent. There are 130 contracts involved in it. So far, the loss has reached USD 4,423,915.35, which is caused by the applicant's default. Therefore, the applicant shall bear the compensation liability.

The above amount that shall be compensated by the applicant has exceeded the price of the goods under the 35 "contracts" claimed by the applicant to the respondent. Therefore, the applicant shall not pay any amount to the applicant, while the applicant shall pay balance of the above amount to the respondent.

2. According to the 130 contracts, the applicant shall have the obligation to provide motorcycles in line with the EPA standard.

(1) The 130 contracts obviously specified that the applicant shall have the obligation to provide the engines in line with the EPA standard.

The 130 contracts specified the quality requirements for the engines i.e. the engines shall be in line with the EPA standard materially, including two meanings. The first layer of meaning is that the applicant shall have the obligation to understand and know contents of the EPA standard, and the second layer of meaning is that the applicant shall have the obligation to ensure the engines provide by it shall be in line with the EPA materially. The applicant claims that it does not understand the EPA standard and shall not have the obligation to understand and ensure the EPA standard but ensure that emission of the engines is in line with the EPA standard, which shall be equivalent to have performed the obligations in the contract. This claim shall not be reasonable.

Even if there is any dispute against the quality standard of engines in the contract, according to the contract explanation in article 125 of the "Contract Law", it shall be concluded that the applicant shall have the obligation to materially provide the engines in line with the EPA to the respondent.

(2) The liability for application and obtaining of the EPA certificates for the motorcycle engines under the 130 contracts have been borne by the applicant. The respondent never takes part in it.

The liability for application and obtaining of the EPA certificates for the motorcycle engines under the 130 contracts have been borne by the applicant. The applicant of the EPA certificate is the associated company American Hengshen in the USA. The applicant stated that these EPA certificates are applied by American Hengshen authorized by the respondent, and such claim is not in line with the objective facts. The applicant attempts to use the applicant of the EPA certificate American Hengshen as another entity and the manufacturer of the relevant motorcycles is its mother company Hengshen Group, and denied understanding relevant EPA rules and put off its obligations to ensure the engines are in line with the standard, which is certified by the transaction process between the both parties and the work contents of the respondent’s relevant witness.

(3) The FOB term specified in the contract can not change the applicant’s obligation to ensure that the products are in line with the EPA standard.

It is pointed in section 3 and 4 of the preface of the "INCOTERMS 2000" that "it shall be noted that the scope covered by the INCOTERMS is only limited to the matters not related to the delivery of sold goods in the rights and obligations of the parties concerned in the sale contract. As for the INCOTERMS, there are two very ordinary special misunderstandings. Firstly, INCOTERMS is generally considered suitable for transport contract but not for sale contract. Secondly, the persons often consider mistakenly that it specifies that the parties concerned may wish all liabilities included in the sale contract." Therefore, the FOB term specified in the contract is only limited to risk and ownership transfer of the goods during transportation and delivery of the goods, and is not the basis to judge the obligation under the contract to ensure that the goods are in line with the EPA standard. On the contrary to the applicant’s claim, it is obviously specified in the INCOTERMS that the seller shall have the obligation to "provide the goods in line with the contract" at FOB.

3. The applicant denied the respondent’s claim by the reason that the respondent did not raise any objection within the reasonable period, which is not reasonable.

(1) Not all of the 130 contracts specified the period of inspection and claim. Under the condition that there are not obvious stipulations about the period of inspection and claim, the applicant shall not have the right to deny the respondent’s claim by the reason that the respondent did not raise any objection within the reasonable period.

(2) Even if there are stipulations about the period of inspection and claim in the contracts, the applicant shall not have the right to deny the respondent’s claim by the reason that the reasonable period of notification has expired. Although article 39 of the "CISG" asks the buyer to notify the seller within a reasonable period that the goods are not in line with the contracts, but it is specified in article 40 of it that "if the goods are not in line with the specifications in the contract, and it means the facts that the seller has known or could not know but did not notify the buyer, then the seller shall not have the right to quote article 38 and 39". In this case, EPA found that the motorcycle engines under the 130 contracts mainly have three breach matters including uncertified, labeling and warranty etc. Therefore, the applicant, as seller of the goods, understood it obviously. Notwithstanding, the applicant did not notify the respondent. According to article 40 of the "CISG", the applicant shall have the right to deny the respondent’s claim by the reason that it was not notified within the reasonable period.

(3) The EPA breach matters of the motorcycle engines under the 130 contracts fall within "hidden defects". The respondent could not find them even if the routine inspection was carried out.

Even if the respondent carried out inspection after receipt of the goods, the above EPA breach matters are hidden defects which could not be found by non-destructive routine inspection.

Therefore, for the defects that could be found by the respondent only through destructive inspection beyond the respondent’s routine inspection, the respondent did not sent the claim notification within the reasonable period, which is also reasonable. It is specified in article 44 that notwithstanding the stipulation that the seller shall notify the seller within the reasonable period, "if the seller did not send the necessary notification without reasonable reason, the price can be still reduced according to article 50 or the seller shall have the right to claim loss compensation other than profit loss", which shows that for the hidden defects, the CISG does not use the matter that the buyer must notify within the reasonable period as the condition of loss compensation claim.

4. The respondent has taken effective measures to avoid expansion of the loss.

The respondent knew in January 2008 that EPA had started the relevant investigation but its investigation conclusion was worked out by the end of 2008. The EPA did not work out any conclusion prior to it. Therefore, Pep Boys and the respondent did not understand the EPA investigation conclusion at all by the end of 2008.

According to the 130 contracts, the applicant shall have the obligation to ensure the products provided by it are in line with the EPA standard, but the respondent has done its best to remind to assist it with providing the products in line with the EPA standard in accordance with the contracts during 5 - 6 years of transaction. In fact, the respondent reminded the applicant to pay attention to the tag and warranty early in 2007.

According to the EPA, each unacceptable motorcycle was imposed a fine USD32,500.00 maximum from March 16, 2004 to Jan 12, 2009 and each motorcycle was imposed a fine USD 37,000.00 after Jan 13, 2009. Therefore, EPA shall have the right to impose the maximum fine USD 2.36 billion on the 72, 810 motorcycles provided by the applicant. In order to minimize the loss, the respondent engaged the experts and lawyers familiar with the EPA standard to assist with it, and reached the compromise with Pep Boys and EPA finally so that the fine and loss compensation that shall be paid by the respondent is much lower than the penalty prior to the compromise.

It is specified in article 74 of the CISG that "the loss compensation that shall be paid by either of the parties due to breach of the contract shall be equivalent to the loss suffered by the other party due to the breach. The loss compensation shall not be more than the possible loss that is foreseen or shall be foreseen due to breach of the contract according to the facts or conditions that it had known or should know at that time when signed the contract with either of the parties". According to the 130 contracts, the applicant, as a party to bear the obligation to ensue that the products is in line with the EPA regulations, shall foresee the maximum EPA penalty suffered possibly when signing the contract. Now, the compensation amount claimed by the respondent is much lower than the amount. Moreover, the loss compensation claimed by the respondent is caused by breach of the EPA.

5. The respondent’s point of view in this case is also supported by the previous judgment of the China International Economic and Trade Arbitration Commission.

The respondent believed that the background of the case involved in the "Arbitral award of the arbitral case about disputes of flange quality" on March 29, 1999 is similar to this case. The conclusion of the relevant matters by the arbitral court for this case can support the respondent’s claim in this case:

(1) For the obligation that shall be borne to ensure the products are in line the relevant standard, the arbitral court concluded that "because the condition that the buyer is not the final user and the seller is not the actual manufacturer during the business transaction is very popular..... According to the legal relation of the trade contract, the seller in this case shall bear the liability for the inconformity........ The liabilities of the seller and actual manufacturer shall be determined in accordance with the contract or agreement signed between them". It shows that so long as it is specified in the contract that the goods shall be in line with the standards, the seller shall have the obligation to ensure the products are in line with the standards. Upon unacceptable condition appeared, the seller shall bear the liability.

(2) For the problem whether the claim shall be lodged within a reasonable period, the arbitral court concluded that "the defects of the flanges in this case "is sure to be known" during manufacture of the flanges. No matter how the respondent as the seller organizes the good resource, manages and supervises the manufacturer’s quality, in view of the legal relationship in this contract, the respondent as the seller shall bear the liability of breach of the contract for the flange defects to the applicant as the buyer, i.e. shall not be bound by the period in article 39 of the CISG". It shows that in the contract relation between the buyer and seller, the seller shall have the right to claim that the product defects are not known by the reason that it is not the manufacturer of the goods. If the seller is impossible not to know it and did not notify the buyer, the buyer’s claim period shall not be limited by article 39 of the CISG (i.e. so called reasonable period or 2 years of time limit).

According to the abovementioned, the respondent concluded that according to the 130 contracts, the applicant shall have the obligation to provide the products in line with the EPA standard to the respondent, but the EPA investigation conclusion shows that the applicant did not perform such obligations, which caused huge loss to the respondent (including loss to the relation between the respondent and its key customers as well as good credit of the respondent). The applicant shall bear all liabilities for compensation. The breach matters found by the EPA through investigation are the conditions that the applicant knows or shall know but did not notify the respondent, and it is reasonable that the respondent did not notify the applicant within the reasonable period. The applicant shall not have the right to deny the respondent’s claim for compensation by the reason. Considering the goods provided by the applicant to the respondent are not in line with EPA standard, the loss amount caused to the respondent has exceeded the price claimed by the applicant. Therefore, for the basic claim of the applicant, the respondent claimed to set off the corresponding part by using counterclaim. The respondent shall not pay any amount to the applicant. On the contrary, the applicant shall pay the balance exceeding the counterclaim to the respondent.

6. The specific amount and calculation method of the counterclaim lodged by the respondent finally.

Considering that the arbitral court concluded that the hearing scope of this case shall be limited to the 35 "contracts" for the applicant’s claim, in other words, there are only 10 contracts fall within the hearing scope of this case among the 130 contracts on which the respondent lodged the counterclaim. Therefore, the respondent explained the counterclaim matters and amount on March 30, 2011 according to the hearing scope determined by the arbitral court. The applicant expressed its opinions on it on Apr 6, 2011. The respondent replied it on Apr 15, 2011.

According to the respondent’s explanation on March 30, 2011 and reply on Apr 15, 2011, the respondent stated that the total motorcycles provided by the applicant to the respondent under the 10 contracts are 11,255 sets and the motorcycles transacted actually are 11,267 sets. Calculated at the data provided in the attachment of EPA "Civil Complaint", the motorcycles with defects are 170,387 sets. Therefore, the applicant’s motorcycles under the 10 contracts (11,255 sets) account for 6.61% of the motorcycles suffered penalty (170,387 sets) with breach of the EPA.

[43].
Therefore, the respondent stated that its loss shall include:

1. The loss caused by the motorcycles provided by the respondent to the applicant of Pep Boys breaching American EPA regulation is USD 353,587.62, including:

(1) According to the "Compromise Judgment", Pep Boys shall pay USD 5 million of penalties to American EPA. According to the "sale agreement" signed between the respondent and Pep Boys and the latter "compromise agreement" signed consequently, the respondent shall bear USD 2,960,500 of the penalties suffered by Pep Boys. For the 10 contracts for this case, the applicant shall bear 6.61% i.e. USD 195,689.05 of it.

(2) According to the "Compromise Judgment", the respondent shall pay USD 25,000 of penalty to American EPA. For the 10 contracts for this case, the applicant shall bear 6.61% i.e. USD 1,652.50 of it.

(3) According to part VIII of the "Compromise Judgment" and the attachment E, the respondent shall pay USD 138,308 for the "Emission setoff plan" (the testing fee to be paid is estimated USD68308, and the expense for "Emission setoff plan" is estimated USD70000). For the 10 contracts for this case, the applicant shall bear 6.61% i.e. USD 9,142.16 of it.

(4) According to part VIII of the "Compromise Judgment" and the attachment D, the respondent shall pay USD 288,741 for "Expansion plan of warranty" (it is estimated USD250, 728 for expansion plan of warranty, and USD 38013 for commitment for unacceptable warranty). For the 10 contracts for this case, the applicant shall bear 6.61% i.e. USD 19,085.78 of it.

(5) According to part VI of the "Compromise Judgment" and the attachment C, the applicant shall pay USD1,003,450 temporarily for the "conformity plan". For the 10 contracts for this case, the applicant shall bear 6.61% i.e. USD 66,328.05 of it.

(6) The applicant shall pay layer’s fee and consultation fee etc total USD 933,284.16 for the "Compromise Judgment". For the 10 contracts for this case, the applicant shall bear 6.61% i.e. USD 61,690.08 of it.

2. The respondent suffered interest loss because the applicant’s motorcycles breached the rules. According to the above (1), (2) and (6), the loss suffered by the respondent is totally USD 259,031.63. Calculated on this basis at the existing equal loan interest rate of the People’s Bank of China from May 14, 2010, the interest loss shall be temporarily USD 13,953.17 by March 30, 2011.

3. The respondent paid USD 796,555.3 for the arbitration procedure, including:

(1) The respondent paid RMB 336,014 Yuan for the counterclaim arbitration fee due to the arbitration procedure (about USD 51,010.29);

(2) The respondent paid lawyer’s fee HKD 2,476,535.59 to Norton Rose Hong Kong (about USD 317,987.17);

(3) The respondent paid USD 357,777.46 of lawyer’s fee to Shanghai Fangda Partners, Beijing Branch;

(4) The respondent paid HKD 333,180.58 (about USD 42,780.38) to engage Mr. Jim M. Lyons for expert opinions;

(5) The respondent paid USD 27,000 of arbitration fee to arbitrator Yang Liangyi.

Therefore, the respondent asked the applicant to bear the loss caused by the motorcycles provided by the respondent to applicant of Pep Boys breaching American EPA regulation totally USD 353,587.62, interest loss total USD 13,593.17 caused by the applicant’s motorcycles breaching the regulations and all expenses total USD 796,553.3 paid by the respondent for the arbitration procedure for this case.

II. Most of opinions in the arbitral court

(I) Applicable laws for disputes in this case

[44].
The arbitral court found out that there is not any applicable law in the 35 "contracts" signed between the applicant and respondent.
[45].
Because the both parties’ business locations i.e. China and America are the signatory nations of the "CISG" and the applicant and respondent did not eliminate availability of the "CISG" obviously, the arbitral court believed that the "CISG" shall be the applicable law for settlement of disputes in this case.
[46].
At the same time, the seller’s (applicant) business location is in China, according to the closest collection principle, for the matter not specified in the "CISG", the arbitral court believed that it shall be governed by the local laws at the seller’s location, i.e. Chinese laws.
[47].
The arbitral court found out that the price specified in article 1.2 of the 35 "contracts shall be FOB "INCOTERMS 2000". Therefore the arbitral court believed that the "INCOTERMS 2000" of the International Chamber of Commerce shall be applicable for the 35 "contracts" in this case.
[48].
The respondent claimed in this case that considering the parties concerned specified American EPA standard in the contracts, the arbitral court shall quote American laws, regulations and legal practices when dealing with the matters related to EPA. The arbitral court believed that as for the laws for the contracts in this case, they shall not be governed by American laws. As for whether the goods delivered by the applicant are in line with the "obtained EPA approval", it is a material fact, the arbitration shall confirm it according to the relevant evidences provided by the both parties.

(II) The applicant’s arbitration claim

[49].
The applicant stated that the applicant organized production and obtain the custom export formalities, and performed the obligation to deliver the goods according to the respondent’s requirement and "INCOTERMS 2000" after the 35 "contracts" were signed. However, the respondent did not perform the obligation to pay the price of the goods according to the contracts. Therefore, the applicant lodged the arbitration claim and asked the respondent to pay the owed price of the goods USD 2,392,030.04 to the applicant, and interest due to deferred payment, the applicant’s lawyer’s fee and travel expense and arbitration fee paid by the applicant for this case.
[50].
The respondent acknowledged the fact that the applicant delivered the goods and reality of the fact on which the applicant lodged the arbitration claim in this case. However, the respondent believed that the motorcycles delivered by the applicant are not in line with American EPA standard and breached the 35 "contracts" so as to cause loss to the respondent. The respondent believed that according to article 99 of the "Contract Law", the debts that shall be paid by the both parties mutually may be set off. The respondent shall have the right to set off price of the goods that shall be paid to the applicant according to the loss suffered.
[51].
For the applicant’s arbitration claim, the arbitral court believed that:

1. Principal of price of the goods delivered by the applicant

It is specified in article 53 of the "CISG" that "the seller must pay the price of the goods and collect the goods n accordance with the contracts and the "CISG"". It is specified in article that "the buyer must pay price of the goods according to the date specified in the contracts and CISG or from the date that may be determined according to the contracts and CISG". It is specified in article 5 of the 35 "contracts" that "it shall be paid at D/P at sight".

Considering the respondent did not lodge the arbitration claim to return the goods and reduce the price in this case, according to article 5 of the 35 "contracts", the respondent shall bear the obligation on payment when the applicant delivered the goods and the respondent received the documents under the contracts. Therefore, this arbitral court supports the arbitration claim lodged by the applicant to ask the respondent to pay principal of the price of goods USD 2,392,030.04.

2. Interest on the price of goods delivered by the applicant

It is specified in article 78 of the "CISG" that "if either of the parties did not pay the price of goods or other owed amount, the other party shall have the right to collect interest on it, but the loss compensation that may be obtained according to article 74 shall not be affected".

The arbitral court believed that the matters put forward by the respondent, including whether the motorcycles delivered by the applicant are in line with American EPA standard and whether the respondent suffered loss due to it and whether the applicant shall compensate it etc, shall be determined only after the arbitral court finished the hearting. Before the arbitral court works out the judgment, the respondent shall not be exempted from the obligation on payment to the applicant according to the contracts due to it.

Therefore, the arbitral court believed that if the respondent did not pay the price of goods at the time specified in the 35 "contracts", and has not any defense reason to refuse or delay payment, the respondent shall bear corresponding liability for breach of the contracts on deferred payment. That is to say that the respondent shall pay corresponding interest to the applicant in accordance with article 78 of the "CISG".

For calculation of the interest, the applicant submitted the calculation manual to the arbitral court on May 19, 2010. The arbitral court has reviewed it and found out that the applicant’s calculation of interest is as follows:

(1) The applicant shall pay USD 1,486,634.84 for the goods delivered before January 2009 at the ratio USD 1: RMB 6.8379 Yuan, and then the interest shall be calculated at 5.31% from March 1, 2009 to May 14, 2010, i.e. total RMB 658,238.97 Yuan.

(2) The applicant shall pay USD 576,035.80 for the goods delivered in February 2009 at the ratio USD 1: RMB 6.8250, and then the interest shall be calculated at 5.31% from May 1, 2009 to May 14, 2010, i.e. total RMB 219,197.68 Yuan.

(3) The applicant shall pay USD 329,359.40 for the goods delivered in March 2009 at the ratio USD 1: RMB 6.8317, and then the interest shall be calculated at 5.31% from June 1, 2009 to May 14, 2010, i.e. total RMB 115,496.84Yuan.

(4) The above three sums of amount shall be converted into RMB 16,346,989.32 Yuan from May 15, 2010. Calculated at 5.31% of annual interest rate, the daily interest shall be RMB 2,411.18 Yuan.

Considering that the respondent did not deny the applicant’s interest calculation, but the arbitral court believed that the applicant’s interest calculation has not any obvious unreasonable matter, so the arbitration supported the applicant’s arbitration claim for interest. The respondent shall pay the interest on the owed amount due to deferred payment by May 14, 2010 under the 35 "contracts" totally RMB 992,933.49 Yuan to the applicant. The respondent shall pay interest at RMB 2,411.18 Yuan/day to the applicant until the respondent pays off the owed payment fully.

3. Lawyer's fee paid by the applicant for this case

For the claim lodged by the applicant for RMB 110,000.00 Yuan or equivalent USD that shall be paid by the respondent to compensate the lawyer's fee paid by the applicant, according to the extent that the applicant's arbitration claim for the price of goods and its interest shall be supported, the arbitral court believed that the lawyer's fee claimed by the applicant is reasonable so the arbitral court shall support the arbitration claim.

4. Travel expense paid by the applicant for this case

For the arbitration claim lodged by the applicant for that the respondent shall pay the travel expense paid by the applicant for the case, the applicant provided neither any specific amount nor any relevant evidence. Therefore, the arbitral court can not support the arbitration claim.

5. Arbitration fee claimed for the arbitration claim in this case

For the arbitration fee claimed for the arbitration claim in this case, considering the applicant's main arbitration claim is supported by the arbitral court, the arbitral court believed that the arbitration fee shall be borne by the respondent.

(III) The respondent's counterclaim

[52].
The respondent stated in this case that the both parties reached more than 100 "contracts" to provide a large number of cross-country and all-terrain motorcycles to the respondent to resell to its customers in the USA (including Pep Boys) from 2006 to 2010 besides the 35 "contracts" signed between the applicant and respondent from Sep 1, 2008 to Jan 22, 2009. However, the motorcycles provided by the applicant under the 35 "contracts" and other "contracts" are not fully in line with American EPA standard specified in the contracts so that the respondent suffered loss. Therefore, the respondent lodged the counterclaim for the loss.
[53].
During the second hearing of this case, the arbitral court found out through investigation that among the contracts on which the respondent lodged the counterclaim, there are only 10 contracts fall within the 35 "contracts" on which the applicant applied for arbitration. The 10 contracts are as follows:

0349/CQHS/2008, 0488/CQHS/2008, 0520/CQHS/2008, 0522/CQHS/2008, 0505/CQHS/2008, 0506/CQHS/2008, 0507/CQHS/2008, 0547/CQHS/2008, 0591/CQHS/2008 and 0016/CQHS/2009 (hereinafter called "10 contracts".

[54].
The arbitral court believed that the applicant claimed for arbitration on the 35 "contracts" signed between the applicant and respondent, and the respondent can only lodge counterclaim according to the contract relation and legal relation involved in the 35 "contracts". If the respondent's counterclaim exceeded the contract or legal relation involved in the 35 "contracts" on which the applicant claimed for arbitration, it shall not in the hearing scope of the arbitral court. Therefore, this arbitral court shall not support it. Therefore, the arbitral court decided on March 23, 2011 that the hearing scope of this case is only limited to the 35 "contracts" on which the applicant claimed for arbitration, and claimed the respondent to specify the counterclaim matters and amount according to the hearing scope of the arbitral court.
[55].
Latter on, the respondent specified the counterclaim matters and amount according to the hearing scope of the arbitral court on March 30, 2011 and the applicant expressed its opinions on it on Apr 6, 2011. The respondent replied it on Apr 15, 2011. According to the respondent's statement on March 30, 2011 and reply on Apr 15, 2011, the respondent claimed the applicant to compensate the following loss: (1) The motorcycles provided by the respondent to Pep Boys breached American EPA regulation so as to cause loss USD 353,587.62; (2) The respondent suffered interest loss USD 13,953.17 because the applicant’s motorcycles breached the regulations; (3) The respondent paid USD 796,555.3 for the arbitration procedure.
[56].
According to the respondent’s counterclaim, the applicant believed that the goods supplied by it have not any defects. According to the contract, the respondent only asked to provide the EPA approval for the goods or the EPA certificates. The products provided by the applicant are in line with the EPA emission quality requirements and can obtain the EPA approval. At the same time, the products sold by the respondent in the USA were confirmed by the EPA that the respondent did not specify obviously and did not perform the inspection obligation so that the goods have not the EPA certificates. As an enterprise in the USA, the respondent should abide by American laws so should bear liability for breach of the local laws.
[57].
For the respondent’s counterclaim and the applicant’s defense, the arbitral court expressed the following opinions:

1. The motorcycles provided by the applicant were approved by American EPA?

The arbitral court found out that it is specified in article 1 of the 10 contracts involved in this case:

(1) It is specified in No. 0349/CQHS/2008 that the product model sold by the applicant is WD90, with quantity 2640 sets. It is specified in the article 1 that it shall be provided with "90cc engine and electric starter, with 2008 EPA and CARB" (English "90cc, single cylinder, electric start, 2008 EPA & CARB approval engine").

(2) It is specified in 0488/CQHS/2008 contract that the product model sold by the applicant is DR150, with quantity 1152 sets. It is specified in the article 1 that "it shall be provided with 150cc, single cylinder, 4-stroke, with 2008 EPA engine" (English "150cc single cylinder, 4-stroke engine with 2008 EPA approval").

(3) It is specified in No. 0520/CQHS/2008 contract that the product model sold by the applicant is BA90, with quantity 186 sets. It is specified in the article 1 that "it shall be provided with 90cc engine, electric starter, with 2008 EPA and CARB" (English "90cc, single cylinder, electric start, 2008 EPA & CARB approval engine").

(4) It is specified in No. 0522/CQHS/2008 contract that the product model sold by the applicant is PX250, with quantity 216 sets. It is specified in the article 1 that "it shall be provided with 250cc engine with double cylinders, electric starter, with 2008 EPA and CARB" (English "250cc, double cylinder, electric start, 2008 EPA & CARB approval engine").

(5) It is specified in No. 0505/CQHS/2008 contract that the product model sold by the applicant is MB165, with quantity 315 sets. It is specified in the article 1 that "it shall be provided with 6.5 horse power, single cylinder, manual starter, with 2008 EPA power" (English "6.5 HP, single cylinder, recoil start, 2008 EPA approval").

(6) It is specified in No. 0506/CQHS/2008 contract that the product model sold by the applicant is DB30, with quantity 4968 sets. It is specified in the article 1 that "it shall be provided with 2.5 horse power, single cylinder, 4-stroke, with 2008 EPA engine" (English "2.5HP, single cylinder, 4-strokes, 2008 EPA approved engine").

(7) It is specified in No. 0507/CQHS/2008 contract that the product model sold by the applicant is MB165, with quantity 1575 sets. It is specified in the article 1 that "it shall be provided with 6.5 horse power, single cylinder, manual starter, with 2008 EPA power" (English "6.5HP, single cylinder, recoil start, 2008 EPA approval").

(8) It is specified in No. 0547/CQHS/2008 contract that the product model sold by the applicant is BA90, with quantity 62 sets. It is specified in the article 1 that "it shall be provided with 90cc engine, electric start, with 2008 EPA and CARB" (English "90cc, single cylinder, electric start, 2008 EPA and CARB approval engine").

(9) It is specified in No. 0591/CQHS/2008 contract that the product model sold by the applicant is PX250, with quantity 72 sets. It is specified in the article 1 that "it shall be provided with 250cc double cylinder, electric start, with 2008 EPA and CARB" (English "205cc double cylinder, electric start, 2008 EPA & CARB approval engine").

(10) It is specified in No. 0016/CQHS/2009 contract that the product model sold by the applicant is MB165, with quantity 105 sets. It is specified in the article 1 that "it shall be provided with 6.5 horse power, single cylinder, manual starter, with 2008 EPA power" (English "6.5HP, single cylinder, recoil start, 2008 EPA approval").

According to the above contracts, it is specified in the 10 contracts involved in this case that the engines of the motorcycles sold by the applicant shall be granted with "EPA2008 approval".

2. What the specific meanings of "Engine with EPA approval" in the 10 contracts involved in this case?

The arbitral court found out that EPA is the abbreviation of ENVIRONMENTAL PROTECTION AGENCY. In other words, EPA is a regulatory agency to supervise whether the new motor vehicles or engines sold in American markets are in line with American "Clean Air Law 1990".

According to the part IV of the evidence 10 provided by the applicant (i.e. part IV of the "indictment" submitted to Federal Court of Colombia District, USA by the EPA", American EPA requirements for the new motor vehicles are as follows:

(1) Unless the new motor vehicles or new motor vehicle engines are provided with the "certificate of conformity" issued by the EPA in accordance with American applicable regulations for the engine and vehicle emission standard, the manufacturer of new motor vehicles shall be forbidden to sell and distribute any new motor vehicles or new motor vehicle engines, or introduce them in any commercial transaction, or deliver them into any commercial transaction (or promoting the above behavior);

(2) After the regulations for the vehicles or engines come into effect, unless the new motor vehicles or engines are provided with the "certificate of conformity" issued by EPA, any new motor vehicles or motor vehicle engines shall be forbidden to import to America.

(3) The manufacturer must permanently paste tag or label on the vehicles or engines to abide by the emission standard to state that the vehicle or engine is covered by a certificate of conformity to ensure they are in line with the emission standard. The tag or label shall include other information related to the motor vehicle emission specified and controlled by the EPA.

(4) Unless the vehicles or engines are provided with tags or labels, the manufacturer of any new motor vehicles or new motor vehicle engines limited by the emission standard shall be forbidden to sell or import the vehicles or engines.

Therefore, according to the EPS regulatory requirements, the respondent must be approved by American EPA to purchase or sell the applicant’s motorcycle engines, and the motorcycle engines must be provided with the certificate of conformity issued by the EPA and shall be in line with the EPA’s labeling requirements. Or otherwise, EPA would not approve or agree with the respondent to import or sell the motorcycles under the 10 contracts involved in this case to America.

3. In the above 10 contracts, should the applicant or the respondent bear the obligation to ensure that the vehicle engines involved in the case are in line with American EPA regulatory requirements?

The respondent believed that the applicant shall have the obligation to ensure the vehicles are in line with the EPA standard contract. However, the applicant claimed in this case that it is only specified in the contracts that the products provided by the applicant shall be approved by the EPA or shall be provided with EPA certificate. The respondent knew when signing the contracts that the products under the contracts are provided with EPA certificates obtained by American Hengshen to sell in the USA, while the applicant is not the applicant or holder of EPA certificate of the motorcycles involved in the case. According to FOB term in the "INCOTERMS 2000", the respondent shall have the obligation to obtain the official permit EPA certificate.

The applicant or the respondent shall obtain American EPA 2008 approval for the vehicle engines involved in this case? It is obviously specified in the contracts. Therefore, the arbitral court concluded as follows:

(1) The arbitral court found out that the subject, which American EPA is applicable for based on American "Clean Air Law 1990" and other relevant regulations, is the manufacturer and distributor in the UAS. The regulations are not directly applicable for the manufacturers and distributors outside the USA. In other words, these regulations shall have direct binding force on the applicant in this case and distributors outside the USA, but not on the applicant involved in this case in China.

(2) For FOB in the "INCOTERMS 2000" applicable for this case, "the seller must bear the risk and charge to obtain any import permit or other official permit, and conduct import formalities for the goods when the custom formality is required, and obtain any custom formalities to cross other counties if necessary". Unless otherwise specified in the contracts or contrary transaction practice between the both parties, generally, the certificate required by American EPA agency shall be applied and obtained by the importer in the USA. The overseas exporter has only the association obligation.

(3) In this case, the arbitration found out that the respondent’s distributor name Pep Boys is clearly stated in the article 1 of the 10 contracts, and it specified that the motorcycle engines shall be provided with "EPA 2008 approval". Therefore, the applicant and respondent understood that the motorcycles sold by the applicant to the respondent under the 10 contracts will be sold by Pep Boys to the end-users in the USA. At the same time, the motorcycle engines shall be provided with "EPA approval". As the abovementioned, according to the EPA’s regulatory requirements, the motorcycle engine to be granted with the EPA approval means that they shall be provided with the certificate of conformity issued by the EPA and shall be in line with the EPA’s requirement for labeling. Or otherwise, the EPA would not permit the respondent to import and sell the motorcycles under the 10 contracts to America. At the same time, it is stated in the 10 contracts that the year of "EPA approval" shall be 2008. Therefore, the arbitral court believed that there is the requirement in the 10 contracts that the motorcycle engines shall be granted with the EPA approval.

(4) The arbitral court found out that the motorcycles under the 10 contracts are manufactured by the applicant’s mother company Hengshen Group. According to the evidence 9 etc provided by the respondent, Hengshen Group signed the contract with its associated company American Hengshen to specify that American Hengshen shall act as an agent and exclusive distributor of Hengshen Group in the USA and perform its right and obligation, including American shall obtain EPA and CARB certificates of conformity etc., while Hengshen Group promised that all the motorcycles delivered by it shall be in line with the applicable EPA and CARB emission regulations and applicable relevant safety regulations in American federal laws, and all important matters shall be similar to the certificates issued, and shall not carry out any change of the products without any disclosure to the importer’s disclosure or its approval. Especially, according to the contracts signed between Hengshen Group and American Hengshen, American Hengshen applied the EPA certificates for the motorcycles with different types manufactured by Hengshen Group, of which, the relevant certificates show that the certificates covered the motorcycle types distributed by the respondent, which sufficiently shows that the joint understanding of the applicant and respondent is that American EPA certificate shall be applied by the applicant’s associated company and the respondent may not obtain the new EPA certificate by itself.

(5) The arbitral court found out that the applicant acknowledged in this case that the applicant provided the EPA certificates applied by American Hengshen to the respondent before providing the goods to the respondent. The applicant provided the EPA certificate obtained by its associated company American Hengshen in E of the forth group of evidences attached to its arbitration application "American EPA certificate obtained by Hengshen Xintai Trade Co., Ltd. (referring to applicant, hereinafter inclusive), and certified the fact that "the products manufactured by Hengshen Xintai Trade Co., Ltd. have been granted with American EPA certificates and reached American Environmental Protection Standard for export". In addition, the motorcycles delivered by the applicant to the respondent had pasted the tags required by American EPA before delivered, which shows that the applicant had believed that the applicant had obtained the EPA certificates involved in this case on and before the applicant put forward the arbitration, and provided them to the respondent. The applicant did not believe that the respondent needs to obtain separate American EPA certificate or separately paste the tag required by American EPA.

Based on the above facts, the arbitral court believed that according to the 10 contracts involved in this case and the both parties’ actual actions, the applicant has performed the obligation to obtain the EPA certificates and abided by the requirement of EPA for labeling. Notwithstanding, the arbitral court believed that the respondent, as a direct subject supervised by American EPA and buyer at FOB term, shall take necessary reasonable measures to ensure that the motorcycles delivered by the applicant were granted with the "EPA approval" and are in line with the regulatory requirements of American EPA.

4. The motorcycle engines delivered by the applicant under the 10 contracts were granted with American "EPA approval"?

According to the evidence 10 provided by the respondent ("indictment submitted by American EPA to Federal District Court of Columbia District, USA), the motorcycles imported by the respondent and Pep Boys have the illegal behaviors without the certificates and tags.

The above attachment A of the "indictment" listed invoice date, type, engine series, product model, quantity and illegal kinds of the illegal motorcycles, of which, the illegal motorcycles in 2008 and 2009 include the motorcycle type, engine series and product model of the motorcycles under the 10 contracts. The illegal kinds include the motorcycles without certificates of conformity (uncertified) and tags.

Through reviewing, all the counterclaim evidence provided by the respondent, especially evidence 10, 11, 13, 14, 25, 26 and 27, and through open hearing, considering that American EPA had concluded that the motorcycles under the 10 contracts were not granted with certificates of conformity (uncertified) and the pasted tags have not in line with the requirements, the main reason is that the motorcycles manufactured by the applicant are not in line with the parameters on the EPA applied by it completely. Therefore, the arbitral court believed that the motorcycles manufactured by the applicant were not granted with "EPA approval" because they were not provided with the certificates of conformity.

5. The respondent lost the claim right due to the inspection articles of the 10 contracts involved in this case?

The arbitral court found out that it is specified in the inspection article 6 of the 10 contracts that "the buyer shall inspection the quality and quantity after receipt of the goods, and shall ledge a claim within 30 days after receipt of the goods in case there is any shortage or quality detect, and provide the certificate issued by relevant agency".

According to the above article, under the condition that the respondent did not state that the products provided by the applicant are not in line with the samples and the EPS standard without inspection or within reasonable period, the motorcycles provided by the applicant shall be deemed in line with the relevant requirements in the contracts. Even if the transacted goods are not in line with the contracts materially, the respondent has lost the right to state the goods not in line with the contracts. That is to say that the applicant has lost the right to lodge a clam for compensation to the applicant due to quality defects of the motorcycles involved in the case.

The arbitral court found out that article 6 of the above contract only specified that the respondent has the inspection right after receipt of the goods, and has the right to lodge a claim for shortage or quality defect of the goods within 30 days after receipt of the goods. However, the article did not obviously specified that the respondent would lost the claim right if the respondent did not carry out inspection and lodge a claim within 30 days after receipt of the goods. At the same time, the disputes between the applicant and respondent about the goods under the 10 contracts are not caused by quality defects of the goods but the motorcycle engines delivered by the applicant were not granted with the certificates of conformity (uncertified) by American EPA.

Considering that the EPA certificates for the motorcycle engines under the 10 contracts were applied by the applicant’s associated company not by the respondent, the applicant acknowledged that it had provided the EPA certificate applied by American Hengshen to the respondent before the goods involved in this case were provided to the respondent. The applicant believed when claiming for arbitration that "the products manufactured by Hengshen Xintai Trade Co., Ltd. had been granted with American EPA certificate". However,

American EPA believed that these motorcycles were not granted with the certificates (uncertified) and brought a lawsuit against the respondent. The arbitral court believed that the applicant should have provided EPA certificate before the applicant delivered the goods. Based on general trust, the respondent did not doubt that the motorcycles delivered by the applicant have the illegal behavior stated in American EPA "indictment" (it was not certified illegal or the tag illegal). At the same time, under the condition that the applicant provided the EPA certificate, the EPA certificate provided by the applicant is suitable or not, which does not fall within the contents of quality and quantity of the motorcycles received by the respondent. Therefore, the respondent shall not lose the claim right to the applicant due to the inspection article 6 of the 10 contracts involved in this case.

6. The applicant shall compensate the loss suffered by the respondent due to the motorcycles delivered by the applicant under the 10 contracts not in line with American EPA requirements?

According to the 10 contracts on which the respondent lodged the counterclaim, the applicant shall deliver 11,255 motorcycles to the respondent under the 10 contracts. The applicant claimed that the actual transacted motorcycles under the 10 contracts are 3,124 sets. However, the respondent claimed that the actual delivered quantity is 11,267 sets. Considering that the shipping documents claimed in the applicant’s arbitration application are only the part not paid by the respondent, the respondent provided complete product model, order No., contract No., container No. and quantity etc of the motorcycles transacted materially under the 10 contracts. Through comprehensive consideration of all the evidences provided by the applicant and respondent, the arbitral court concluded that 11,255 motorcycles have been delivered by the applicant under the 10 contracts.

[58].
For the respondent’s claim that the motorcycles provided to applicant of Pep Boys breached American EPA so as to cause USD 353,587.62, the arbitral court concluded as followings:

(1) According to the "Compromise Judgment", Pep Boys shall pay USD 5 million of penalties to American EPA. At the same time, the respondent shall bear USD 2,960,500 of the penalties of Pep Boys according to the "Sale Agreement" signed between the respondent and Pep Boys as well as the "Compromise Agreement" agreed by the both parties later on. Therefore, the loss suffered by the respondent under the 10 contracts shall be 6.61%, i.e. USD 195,689.05, which has concluded by the arbitral court.

(2) According to the "Compromise Judgment", the respondent shall pay USD 25,000 of penalties to American EPA. Therefore, the loss suffered by the respondent under the 10 contracts shall be 6.61%, i.e. USD 1,652.50, which has concluded by the arbitral court.

(3) According to part VIII of the "Compromise Judgment" and the attachment E, the respondent shall pay USD 138,308 temporarily for "Low Emission Setoff Plan" (about USD 68308 for testing fee and USD 70000 for "Low Emission Setoff Plan"). The 10 contracts involved in this case account for 6.61% of it, i.e. USD 9,142.16. The respondent did not provide sufficient evidence for the loss, so the arbitral court can not conclude it.

(4) According to part VII of the "Compromise Judgment" and the attachment D, the respondent shall pay USD 288,741 for "Expansion plan of warranty" (about USD250, 728 for expansion plan of warranty, and about USD 38013 for commitment for unacceptable warranty). The 10 contracts involved in this case account for 6.61% i.e. USD 19,085.78 of it. The respondent did not provide sufficient evidence for the loss, so the arbitral court can not conclude it.

(5) According to part VI of the "Compromise Judgment" and the attachment C, the applicant shall pay USD 1,003,450 temporarily for the "conformity plan". The 10 contracts involved in this case account for 6.61% i.e. USD 66,328.05 of it. The respondent did not provide sufficient evidence for the loss, so the arbitral court can not conclude it.

(6) The applicant shall pay layer's fee and consultation fee etc total USD 933,284.16 for the "Compromise Judgment". The 10 contracts involved in this case account for 6.61% i.e. USD 61,690.08 of it. The respondent provided the sufficient evidence for the loss, so the arbitral court concluded it.

[59].
The above arbitral court concluded that the loss suffered by the respondent due to shortage of EPA certificate (uncertified) etc under the 10 contracts involved in this case shall be total USD 259,031.63.
[60].
Considering that the 10 contracts involved in this case specified that the motorcycle engines sold by the applicant should be granted with "EPA 2008 approval". The applicant's associated company applied EPA certificate for it, and had provided the EPA certificates applied by American Hengshen before the goods were provided to the respondent. However, American EPA concluded that these motorcycles are short of the certificates (uncertified) and brought the lawsuit against the respondent. Therefore, the arbitral court believed that the motorcycles manufactured actually by the applicant were not granted with the "EPA approval" and the goods delivered by the applicant are not in line with the regulations. Therefore, the applicant shall be responsible for the loss suffered by the respondent because the motorcycles delivered by the applicant are short of the EPA certificate (uncertified) etc. On the other hand, as the abovementioned, the arbitral court believed that the respondent is the direct subject supervised by American EPA and the seller at FOB term, the respondent shall take necessary reasonable measures after the respondent received the goods delivered by the applicant to ensure that the motorcycles delivered by the applicant are granted with the "EPA approval" and are in line with the regulatory requirements of American EPA. Specifically, the arbitral court believed that the respondent shall verify whether the motorcycles manufactured by the applicant are materially granted with the EPA certificate and whether they are in line with the EPA certificate within the reasonable period. However, in this case, the respondent did not verify the motorcycles delivered by the applicant whether the motorcycles are materially granted with the EPA certificate and whether they are in line with the EPA certificate provided by the applicant within the reasonable period. Therefore, the arbitral court believed that the respondent shall bear part of the liabilities for the loss.
[61].
Considering the respective liabilities of the applicant and respondent comprehensively, the arbitral court believed that the loss suffered by the respondent due to shortage of the certificates of conformity issued by the EPA under the 10 contracts shall be USD 259,031.63. The applicant shall bear 50% of it, i.e. the applicant shall pay USD 129,515,815 of the respondent’s loss.
[62].
The interest loss claimed by the respondent due to the applicant’s default shall be USD 13,953.17. Considering that the loss that shall be compensated by the applicant to the respondent because the motorcycles delivered by the applicant are not granted with EPA approval was determined when this arbitral award was concluded, the arbitral court does not support the counterclaim claimed by the respondent for the interest from May 14, 2010.
[63].
For the lawyer’s fee paid by the respondent for the arbitration procedure of this case, considering that the respondent is defeated in the claim lodged by the applicant and the respondent’s primary counterclaim is based on the 130 contracts, the arbitral court concluded that it has the jurisdiction on the 10 contracts only in the hearing scope. At the same time, considering that the respondent’s amount counterclaimed is supported finally, the arbitral court believed that the respondent shall bear the lawyer’s fee paid by itself for the arbitration procedure of this case.
[64].
For the arbitration fee for the counterclaim lodged by the respondent, the arbitral court believed that the applicant shall bear 50% of it while the respondent shall bear 50% of it.
[65].
For the arbitration fee for that the respondent selected the arbitrator Yang Liangyi, the amount predeposited by the respondent at the arbitrator Yang Liangyi, as fee for the arbitrator, is USD 27,000. Through final accounting, although the actual fee is slightly higher than the pre-deposited fee, the arbitrator Yang agreed to use the pre-deposited amount as his final changing and does not recover the exceeded part. Considering that the arbitral court has heard the applicant’s claim and the respondent’s counterclaim, and the respondent is defeated in the applicant’s claim and the respondent’s primary counterclaim is based on the 130 contracts, the arbitral court concluded that it has the jurisdiction on the 10 contracts only in the hearing scope. At the same time, considering that the respondent’s amount counterclaimed is supported finally, the arbitral court believed that the applicant shall bear 30% of fees for selection of the arbitrator while the respondent shall bear 70% of it.

III. Arbitral award

[66].
According to most of the opinions in the arbitral court, the arbitral award of this case is as follows:

1. The respondent shall pay price of the goods USD 2,392,030.04 to the applicant;

2. The respondent shall pay RMB 992,933.49 Yuan of interest due to deferred payment of the above owed price of the goods by May 14, 2010 to the applicant;

3. From May 15, 2010, the respondent shall pay RMB 2,411.18 Yuan/day of interest to the applicant until the respondent pays off all the owed price of the goods;

4. The respondent shall pay RMB 110,000.00 Yuan of lawyer’s fee to the applicant;

5. The applicant shall compensate USD 129,515,815 of loss incurred due to that the motorcycles delivered by the applicant are not in line with American EPA regulation to the respondent;

6. The arbitration fee for this case is RMB 300,265 Yuan, which shall be borne by the respondent completely. The abovementioned arbitration fee has been set off by using the equivalent RMB prepaid by the applicant to the arbitration commission. Therefore, the respondent shall pay RMB 300,265 Yuan to the applicant to compensate the arbitration prepaid by the applicant on behalf of the respondent;

7. The arbitration fee for the counterclaim of this case is RMB 174,355 Yuan. The applicant shall bear 50% of it i.e. RMB 87,177.5 Yuan, while the respondent shall bear 50% of it, i.e. RMB 87,177.5 Yuan. The abovementioned arbitration fee has been set off by using the equivalent RMB prepaid by the respondent to the arbitration commission. Therefore, the applicant shall pay RMB 87,177.5 Yuan to the respondent to compensate the arbitration prepaid by the applicant on behalf of the respondent;

8. The arbitrator fee for the respondent’s selection of arbitrator Mr. Yang Liangyi is USD 27,000. The applicant shall bear 30%, i.e. USD 8,100, while the respondent shall bear 70% of it, i.e. USD 18,900. The abovementioned arbitration fee has been set off by using the equivalent amount prepaid by the respondent. Therefore, the applicant shall pay USD 8,100 to the respondent to compensate the arbitrator fee prepaid by the applicant;

9. The arbitral court denied the applicant’s other arbitration claims;

10. The arbitral court denied the respondent’s other arbitration claims;

[67].
The abovementioned amount and fees that shall be paid by the respondent to the applicant as well as the amount and fees that shall be paid by the applicant to the respondent shall be paid off within 30 days from the date this arbitral award is worked. Upon exceeding the period, the item 4, 5, 6, 7 and 8 shall be calculated interest at annual rate 5.31%.
[68].
This arbitral award shall be final judgment and shall come into effect upon being concluded.
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