Continental Automotive GmbH v. Acushnet Rubber Company, Inc, Final Award, 12 Jan 2012

CAS	CONTINENTAL AUTOMOTIVE SYSTEMS US, INC.
CDS	CONTINENTAL DIESEL SYSTEMS LLC
CISG	United Nations Convention on Contracts for the International Sale of Goods
Cri-Tech	Cri-Tech, Inc.
Ford	FORD MOTOR COMPANY, Kentucky Truck Plant
Global Settlement	Confidential Global Settlement Agreement and Release of 31 October 2009
GQA	General Quality Agreement for Automotive Suppliers of 23 March 2004
MoH	Minutes of Hearing
MSA	Master Supply Agreement Terms and Conditions
Navistar	NAVI STAR, INC.
PHB	Post Hearing Brief
PPAP	Production Part Approval Process
PSW	Part Submission Warrant
RARoA	Respondent’s Answer to the Request for Arbitration
Rejoinder	Respondent’s Rejoinder of 12 August 2011
RoA	Request for Arbitration
Rules	ICC-Rules of Arbitration (1998 version)
SA	Sourcing Agreement for Mechanical Components of 5 September 2006
SoC	Statement of Claim
SoD	Statement of Defence
SoR	Statement of Reply
SSC	Strategic Supplier Contract
ToR	Terms of Reference
TR	Transcript
VDO	SIEMENS VDO AUTOMOTIVE AG
ws	witness statement

1.

CONTINENTAL AUTOMOTIVE GMBH, Siemensstrasse 12, 93055 Regensburg, Germany, a company with limited liability (Gesellschaft mit beschränkter Haftung) organized and existing under the laws of Germany and registered in the commercial register of the Amtsgericht Hannover under registration no. HRB 59424 (Exhibit C 1).

2.

Claimant is the legal successor of SIEMENS VDO AUTOMOTIVE AG, the party to the Strategic Supplier Contract ("SSC") (Exhibit C 3) which forms the basis of the dispute.

3.

Claimant is legally represented by Dr. Klaus Sachs, Dr. Armin Dürrschmidt, Dr. Nicolas Wiegand, Ms. Petra Festner, CMS Hasche Sigle, Nymphenburger Strasse 12, 80335 Munich, Germany and

4.

Mr. Kurt Linguist, Ms. Megan Hanley Baer, Womble Carlyle Sandridge & Rice, LLP, One Wells Fargo Center, Suite 3500, 301 South College Street, 28202-6037 Charlotte NC, USA

5.

ACUSHNET RUBBER COMPANY, INC. D/B/A PRECIX, 744 Belleville Avenue, New Bedford, MA 02742-6916, USA, a company organized and existing under the laws of the State of Delaware, USA.

6.

Respondent is an elastomeric designer and manufacturer of engineered sealing solutions; it is doing business under the name of PRECIX.

7.

Respondent is legally represented by Dr. Axel Bosch, Ms. Anneke Brandt, Taylor- Wessing, Am Sandtorkai 41, 20457 Hamburg, Germany and

8.

Mr. George Royle V, DrummondWoodsum, 84 Marginal Way, Ste. 600, Portland, Maine 04101, USA

9.

The Arbitral Tribunal ("Tribunal") is constituted as follows:

(1) Prof. Dr. Siegfried H. Elsing, Orrick Hölters & Elsing, Heinrich-Heine-Allee 12, 40213 Düsseldorf, Germany

- Arbitrator, nominated by Claimant -

(2) Mr. Jens Bredow, Deutsche Institution fur Schiedsgerichtsbarkeit e.V., Beethovenstrasse 5-13, 50674 Cologne, Germany

- Arbitrator, nominated by Respondent -

(3) Prof. Dr. Roderich C. Thümmel, Thümmel, Schütze & Partner, Urbanstrasse 7, 70182 Stuttgart, Germany

- Chairman, jointly nominated by the Arbitrators (1) and (2) in accordance with the respective agreement of the parties -

10.

Place of Arbitration is Frankfurt/Main, Germany, as per the Arbitration Agreement.

11.

The Arbitration Agreement relied upon by Claimant is contained in the Strategic Supplier Contract ("SSC") (Exhibit C 3) under Sec. 13.8 and reads as follows:

"Any disputes arising out of or in connection with the STRATEGIC SUPPLIER CONTRACT, shall be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce, Paris, by three arbitrators appointed in accordance with said Rules. The seat of arbitration shall be Frankfurt, Germany. The procedural law of this place shall apply where the Rules are silent. The language to be used in the arbitration proceedings shall be English."

12.

According to the parties’ agreement Frankfurt/Main, Germany was meant to be the place of arbitration. The arbitration procedure is governed by the ICC Rules of Arbitration (the "Rules") (1998 version), the additional rules as laid down under Sec. 12 of the Terms of Reference ("ToR") and by §§ 1025 et seq. of the ZPO (German Rules of Civil Procedure).

13.

Sec. 13.9 of the SSC (Exhibit C 3) contains the parties’ agreement on the governing law and reads as follows:

"Contractual relations shall be governed by German law with the exclusion of the United Nations Convention on Contracts for the International Sale of Goods of April 11th, 1980."

14.

Accordingly, the substantive law applicable to the claim in dispute is German law with the exclusion of the United Nations Convention on Contracts for the International Sale of Goods (CISG) of 11 April 1980.

15.

Claimant is claiming damages in an amount of USD 25 m from Respondent. The amount claimed corresponds to an alleged liability of Claimant to its affiliate CONTINENTAL AUTOMOTIVE SYSTEMS US, INC. ("CAS"). CAS, allegedly, had in turn to indemnify its customer NAVISTAR, INC. ("Navistar") for this amount thereby compensating the costs of a recall campaign conducted by Navistar and Na-vistar’s customer FORD MOTOR COMPANY, Kentucky Truck Plant ("Ford") with regard to fuel injectors delivered by CAS and used in Navistar and Ford truck diesel engines. Such fuel injectors were, according to Claimant, to be recalled as they were leaking due to defective o-rings supplied by Respondent and used as a component of the injectors.

16.

Claimant’s predecessor in right, namely SIEMENS VDO AUTOMOTIVE AG ("VDO") and Respondent had entered into a business relationship according to which Respondent was to supply VDO and later Claimant with the o-rings used for the sealing of above mentioned fuel injectors applied to diesel engines. Such fuel injectors are composed of an actuator and the injector housing. The o-rings at issue are assembled to the actuators in the Limbach-Oberfrohna plant of Claimant. Actuators and injector housings are put together at CAS’ Blythewood plant. O-rings serve the purpose of sealing the clearance between actuator and injector housing thereby avoiding that fuel is flowing out of the injector.

17.

O-rings were delivered by Respondent to Claimant and VDO on the basis of different contractual agreements, namely the SSC, entered into by VDO and Respondent on 29 October 2004 (Exhibit C 3) and a General Quality Agreement for Automotive Suppli- ers entered into between Respondent and VDO on 23 March 2004 ("GQA") (Exhibit C 9). VDO and Respondent also entered into a Sourcing Agreement for Mechanical Components as an addendum to the SSC on 5 September 2006 (only signed by Respondent) ("SA") (Exhibit C 8).

18.

The SSC formed the framework agreement on the basis of which the SA has been made. The GQA laid down the general quality specifications required by VDO for the deliveries of Respondent. Together, the SSC and the GQA provided the general terms and conditions on the basis of which Respondent would produce, test and ultimately deliver o-rings to VDO.

19.

The subject to this dispute are o-rings from one lot, namely lot 610101 ("Lot 610101") which, according to Claimant, were defective, produced by Respondent in violation of contractual agreements, assembled to the actuators and built into the fuel injectors by Claimant and CAS which were later delivered by CAS to Navistar for use in their own diesel engines and the diesel engines delivered to Ford. In use, Lot 610101 o-rings allegedly degraded ("nibbling effect"), were consequently not able to perform their sealing task in a proper way, allowed fuel to leak into the crankcase which finally led to the destruction of diesel engines.

20.

In light of an increasing number of vehicle returns observed, Navistar and Ford decided to conduct recall campaigns with regard to the injectors potentially affected instead of fixing failed engines piece by piece. The forecasted costs of the recall campaigns allegedly amounted to USD 31 m for both, Navistar and Ford. In a Confiden-tial Global Settlement Agreement and General Release ("Global Settlement") (Exhibit C 73) settling various issues disputed between CAS and Navistar, agreement was reached that CAS compensate Navistar at an amount of USD 25 m for "PCR all Q issues (past and current)" a determination which allegedly relates to the "o-ring issue". This amount has been claimed by CAS from Claimant and Claimant seeks indemnification from Respondent with regard to its corresponding liability to CAS.

21.

Lot 610101 o-rings were moulded by Respondent in eight different batches on 8 June 2006 (two batches), 12 June 2006, 1 March 2007, 17 October 2007, 6 November 2007, 1 February 2008 and 26 February 2008. The compound used by Respondent in connection with the moulding of Lot 610101 o-rings ("Compound F 38") had been mixed by a subcontractor of Respondent, namely Cri-Tech, Inc. ("Cri-Tech") on a mixing device known as "3D Banbury Mixer" on 8 April 2006. The Compound F 38 had been developed by Respondent during the years 2004 and 2005. According to Cri-Tech’s certificate of compliance (Exhibit R 37) a shelf life of six months was assigned to the material which, accordingly, expired on 8 October 2006.

22.

As customary in the automotive industry and as provided in Sec. 12 of the GQA a Production Part Approval Process ("PPAP") had been conducted by Respondent with regard to the manufacturing process for o-rings. The PPAP process consists of a PPAP submission to the customer and the customer’s approval of the chemical recipe and the manufacturing procedure for the compound, the mixing of test batches, the manufacturing of test lots and the testing of the o-rings to determine whether they satisfy the performance characteristics agreed. A first PPAP submission with regard to Respondent’s o-rings occurred in May 2005 which had to be repeated due to necessary changes in the recipe. The second PPAP submission forming the basis for Respondent’s deliveries including the delivery of o-rings from Lot 610101, occurred on 13 September 2006 ("PPAP 2"). The PPAP 2 submission did not refer to a special mixing procedure with regard to the compound. It is disputed between the parties whether PPAP 2 was based on Lot 610101 o-rings or o-rings from lot 533301. The respective part submission warrant ("PSW") was executed by Respondent on 4 December 2006 (Exhibit C 25) referring to a drawing and a specification under the file name "A2C20001881 ABC D". It is disputed between the parties which specification this exactly refers to.

23.

Engine failures due to leaking injectors had first been discovered and communicated to Navistar in September 2008. First injector returns from Navistar to CAS occurred in October 2008. Various analysis undertaken led CAS and Claimant to conclude that affected injectors had been shipped to Navistar between 30 April and 14 October 2008 and that the actuators used for such injectors were assembled by Claimant during the time period from 9 April to 7 May 2008 ("Relevant Time Period"). During the Relevant Time Period mainly Lot 610101 o-rings but also o-rings from another lot and another supplier had been used in the assembly of the actuators.

24.

Respondent delivered 395,000 o-rings from Lot 610101 to VDO during the time period from 27 March 2007 to April 2008. Approximately 335,000 of those went into the actuator assembly at Claimant. Injectors finally manufactured from actuators equipped with Lot 610101 o-rings were for the major part installed in European diesel engines; only a minor portion (approx. 92,000 according to Claimant and 62,000 according to Respondent) went into the Navistar and Ford diesel engines. No customer complaints were observed with regard to European diesel engines.

25.

All o-rings delivered by Respondent to Claimant including those of Lot 610101 were of a blue colour, In several analysis undertaken by the parties themselves and by third parties including Laboratory Richter o-rings from Lot 610101 showed inferior values with regard to certain physical properties, especially tensile strength and modulus, as compared to other lots delivered by Respondent. With regard to tensile strength median values of Lot 610101 o-rings surrounded 10 N/mm² as compared to 11,8 to 16,3 N/mm² in other lots (compare Exhibit C 20), modulus median values of Lot 610101 o-rings surrounded 5 N/mm² as compared to higher values (only measured in psi) in other lots (compare Exhibit 20).

26.

Modulus is not a physical property addressed in any relevant specification whereas tensile strength is. It is disputed between the parties whether the required value for tensile strength is ">" (greater or equal) 10 N/mm² or ">" (greater) 10 N/mm² (depending on the applicable specification) and whether it is sufficient that the median value of a representative sample matches the specification or whether it is necessary that each and every o-ring is compliant with the requirements of the specification.

27.

With regard to warranty and liability the SSC provides i.a. as follows:

"2. Support of Projects

2.5 Clarification by the SUPPLIER of CONTRACT PRODUCTS

If the SUPPLIER has doubts regarding the specifications of the CONTRACT PRODUCT desired by SIEMENS VDO AUTOMOTIVE, it shall inform SIEMENS VDO AUTOMOTIVE immediately in writing of the reservations.

3. Logistics

3.2 STRATEGIC SUPPLIER CONTRACT as Basis for Orders and Releases

Orders and releases by SIEMENS VDO AUTOMOTIVE shall be issued exclusively on the basis of this STRATEGIC SUPPLIER CONTRACT. Other conflicting conditions shall not apply, even if SIEMENS VDO AUTOMOTIVE does not expressly object to them. The PARTIES shall enter into additional INDIVIDUAL AGREEMENTS on a case by case basis for "CONTRACT PRODUCTS".

3.10 Receiving inspection by SIEMENS VDO AUTOMOTIVE

After arrival at SIEMENS VDO AUTOMOTIVE works the CONTRACT PRODUCTS are to be inspected only with regard to their type and quantity and for externally visible damage caused by transportation. SIEMENS VDO AUTOMOTIVE is not obliged to carry out a more detailed examination on arrival. If defects are noticed during the previously mentioned examination on arrival, the SUPPLIER is to be informed of them immediately in writing. In case SIEMENS VDO AUTOMOTIVE complies with the afore-stated condition the SUPPLIER hereby waives his right to reject delayed notification of deficiency.

7. Quality Assurance

7.1 Quality Assurance System

The SUPPLIER shall maintain a quality management system in line with the recent standards of the automotive industry in accordance with the General Quality Agreement for Automotive Suppliers of SIEMENS VDO AUTOMOTIVE.

7.3 Dispatch

The SUPPLIER shall supply CONTRACT PRODUCTS of perfect quality which conform to the valid technical and specification documents relevant to the delivery.

8. Warranty/Liability

8.1 Warranty

SUPPLIER expressly warrants that all CONTRACT PRODUCTS and work shall conform to and satisfy the drawings, specifications and samples or other descriptions furnished, specified or approved by SIEMENS VDO AUTOMOTIVE as well as applicable safety and environmental rules or regulations from time to time in force in the countries were CONTRACT PRODUCTS or vehicles equipped with CONTRACT PRODUCTS are to be sold or used ("Relevant countries"), including those of EU/EFTA/NAFTA, and shall be of merchantable quality of good material and workmanship, free from defects and in accordance with the provisions of separate QUALITY AGREEMENTS. If CONTRACT PRODUCTS are designed by or on behalf of SUPPLIER, or are in accordance with SUPPLIER specification, which may internally utilize third party’s designs SUPPLIER expressly warrants that the total design content shall be free from defects and that all CONTRACT PRODUCTS made in accordance with such design shall be fit and sufficient for the purpose(s) intended by SIEMENS VDO AUTOMOTIVE even if such design is approved by SIEMENS VDO AUTOMOTIVE.

8.6 Return of defective CONTRACT PRODUCTS

SUPPLIER acknowledges that SIEMENS VDO AUTOMOTIVE may not be able to recover all defective CONTRACT PRODUCTS which are subject to SUPPLIER’S warranty and liability under this STRATEGIC SUPPLIER CONTRACT. In such case, SIEMENS VDO AUTOMOTIVE shall provide the SUPPLIER with a representative sample of such CONTRACT PRODUCTS for the analysis of the root cause of the defect and the failure rate of CONTRACT PRODUCTS. For the analysis of the failure rate of CONTRACT PRODUCTS SIEMENS VDO AUTOMOTIVE shall apply statistical methods customary in the automotive industry and/or SIEMENS VDO AUTOMOTIVE agreed upon with its respective customer.

8.7 Delivery of defective CONTRACT PRODUCTS

Any damages incurred by SIEMENS VDO AUTOMOTIVE in causal connection with the delivery of defective CONTRACT PRODUCTS shall be borne by the SUPPLIER.

8.8 Exchange of Information

The PARTIES undertake to exchange immediately any information concerning possible damage risks and any cases of damage that have already occurred. They undertake to work together cooperatively in measures taken to avert risks to ensure that these measures are carried out smoothly."

28.

Claimant bases its claim for damages on Sec. 8.7 of the SSC and breach of contract.

29.

Claimant alleges that o-rings from Lot 610101 were defective and in violation of the SSC in that (i) they were not produced in accordance with the agreed production process, (ii) they failed to meet the applicable specifications, (iii) they turned out to be incapable of fulfilling their intended purpose and (iv) they were produced from a compound the assigned shelf life of which had been (partly) exceeded. In detail:

30.

The o-rings from Lot 610101 had not been produced as per the production process which was subject to PPAP 2 (Sec. 8.1 sentence 1 of the SSC and Sec. 12 of the GQA). PPAP 2 as submitted by Respondent in September 2006 referred to o-rings of a lot numbered 533301. This PPAP related to components mixed with a so-called mill mix device. In contrast to that Lot 610101 o-rings although composed of the same components had been mixed with a so-called 3D Banbury device which materially differs from the mill mix device. This was a change in the production process which would have required another PPAP which had not taken place. Accordingly, Lot 610101 o-rings were produced without the approval and release of the production process employed for this lot. As a consequence of the use of the different mixing device, the material properties of Lot 610101 o-rings were different from the material properties of any other lot, especially the compound was less homogeneous and included accumulations of barium sulfat, quartz and iron, i.e. elements which were not present in other lots.

31.

The delivered Lot 610101 o-rings were not in conformity with the applicable specifications (Sec. 8.1 sentence 1 of the SSC) which were incorporated in a document with the file name "A2C20001881ABC SPE 000 D" designed on 25 April 2006 and released on 15 May 2006. This document replaced the preceding version with the file name "A2C20001881ABC_c.doc" designed and released in March 2002. Such change of the applicable specifications had been agreed upon with Respondent by email exchange in June and July 2006 and is further underlined by Sec. 2 of the SA pointing to a specification "A2C20001881 ABC D" (Exhibit C 8) and by an internal email communication of Mr. Slutz, CEO of Respondent, of 7 November 2006 addressing a specification named "A2C20001881ABC D" (Exhibit C 52). The o-rings of Lot 610101 did not meet the specifications in that the tensile strength which needed to be greater than 10 N/mm² was not reached. Already the median of all tested o-rings was at 10 N/mm², a significant number of o-rings from Lot 610101 dramatically undercut the required 10 N/mm².

32.

The delivered o-rings from Lot 610101 were not fit for the relevant purpose (Sec. 8.1 sentence 2 of the SSC) as they were not suitable for the production of actuators and injectors which could be installed in diesel engines, including U.S. applications, a purpose which was communicated to Respondent during the supplier component review of 10 February 2005.

33.

The delivered o-rings from Lot 610101 were manufactured from a compound the assigned shelf life of which had been exceeded (Sec. 8.1 sentence 1 of the SSC). Lot 610101 o-rings were produced in eight batches five of which were moulded after a shelf life of six months assigned by the third party contractor Cri-Tech to the com- pound had elapsed. The outdated compound was possibly exposed to humidity which could have led to an inferior homogeneity of the compound and, accordingly, to inferior properties of the o-rings moulded from such compound.

34.

Claimant further alleges that the o-rings from Lot 610101 had been used during the time period from 9 April to 7 May 2008 by Claimant in the assembly of actuators. Such actuators were delivered by Claimant to CAS which in turn with the assistance of one of its subsidiaries CONTINENTAL DIESEL SYSTEMS LLC ("CDS") used the actuators in the assembly of injectors. Such injectors were delivered to Navistar which in turn build a small part of the injectors into engines for its own vehicles, the larger part of the injectors into engines which were eventually sold to Ford.

35.

Lot 610101 o-rings which were defective and produced in breach of contractual agreements, failed in their application in that they deteriorated and tore ("nibbling effect") and, this way, did not any more properly seal the injector body and the actuator. This led to a leakage of fuel into the crankcase of the engine thereby increasing the oil level. The oil-fuel mixture finally reached the ventilation and air intake system and, this way, entered the cylinders causing an overheating within the cylinders and in the end the failure of the engine. Numerous engines of Navistar and Ford vehicles broke down or were destroyed. The break down of engines compelled Navistar and Ford to recall the potentially affected vehicles in order to avoid larger loss. CAS, as the supplier of the defective injectors, was forced to pay to Navistar the total amount of USD 25 m in compensation of the costs of these recalls.

36.

Such payment of USD 25 m was effected in connection with the Global Settlement (Exhibit C 73) dealing with various business issues disputed between CAS and Navistar. The USD 25 m was a clearly defined element of this Global Settlement and a separate entry in the calculation of the final balance of various mutual claims. Claimant was able to agree with Navistar on the USD 25 m figure which was a reasonable figure as it considerably undercut the costs expected for the replacement of destroyed engines ("fix on fail") and even the projected recall costs of Navistar and Ford which amounted to USD 31 m. It was CAS’ reasonable assumption that Navistar reimbursed Ford for its portion of the recall costs

37.

Claimant as supplier of the actuators — which were defective as they were equipped with defective Lot 610101 o-rings - is liable to CAS for the amounts expended there on the basis of Art. 35, 45 and 74-77 CISG. The amount expended by CAS on Navis-tar’s claims were the foreseeable result from the delivery of defective o-rings.

38.

Claimant requests that the Tribunal order Respondent as follows:

39.

(a) Respondent is ordered to indemnify and hold harmless Claimant from its liability towards CONTINENTAL AUTOMOTIVE SYSTEMS US INC. by paying to CONTINENTAL AUTOMOTIVE SYSTEMS US INC. the sum of USD 25 m for and on behalf of Claimant plus applicable interest in the amount of 8 % above the base rate published by the European Central Bank as of 31 July 2010.

40.

(b) Respondent is ordered to pay all costs and fees relating to this arbitration, including the costs of the Tribunal, Claimant’s legal counsel and other external advisors’ fees and expenses, and all legal and other costs.

(See Sec. 3 (e) of MoH, page 85 SoR)

41.

Respondent originally alleged that Claimant had no standing to sue. Especially Respondent disputed the allegation that SIEMENS VDO AUTOMOTIVE AG was merged into Claimant in mid 2008 and, accordingly, became the legal successor of SIEMENS VDO AUTOMOTIVE AG (see Sec. 9.1.1 ToR). During the hearing of 21 September 2011 Respondent confirmed that Respondent does no longer dispute Claimant’s standing to sue and that it had dropped this argument (Sec. 3 (d) MoH).

42.

Respondent alleges that the o-rings delivered by Respondent under Lot 610101 were without any defects and that there were no breaches of contract in connection with the manufacture and delivery of Lot 610101 o-rings by Respondent. In detail:

43.

The o-rings were in conformity with Claimant’s specifications. The applicable specification is the document labelled "A2C20001881ABC_c" (Exhibit C 11) which was the only specification Respondent had checked, agreed to and signed at the time of the component release in December 2006 (Exhibit R 10) and which is the specification referred to in the drawing identified in the PSW signed by VDO in December 2006. The specification labelled "A2C20001881ABC SPE 000 D" (Exhibit C 10) was only a draft until a new drawing referring to it was issued in August 2008 (Exhibit R 11). That was after Respondent had delivered all o-rings from Lot 610101 to Claimant. Accordingly, this specification does not apply to the delivery. Neither Claimant nor VDO have conducted a PPAP for the new drawing and draft specification to which it refers, nor has either of them ever "released" o-rings for production by Respondent in reference to the new drawing and the draft specification to which it refers. Respondent never agreed to the changes contained in the draft specification.

44.

The o-rings delivered under Lot 610101 complied with the applicable specification (Exhibit C 11) because every measure of their median tensile strength was greater than or equal to 10 N/mm² as confirmed by multiple tests. Even if the draft specification (Exhibit C 10) was applicable, such specification with regard to tensile strength would have also been met. Claimant relied on flawed testing methods for o-rings’ tensile strength that have never been agreed upon by the parties. Claimant had received sample o-rings from Lot 610101 in Respondent’s PPAP submission and, upon information and belief, tested those o-rings extensively before approving the PPAP submission and issuing a PSW in December 2006.

45.

The median value of tensile strength is the benchmark for measuring an o-ring lot’s compliance with the applicable specification. It is impossible to test all o-rings in a given lot to determine whether each o-ring in the lot complies with a specification for tensile strength. Tensile strength testing involves breaking the o-rings being tested. Therefore, it is necessary to have a statistical method for evaluating a limited number of o-rings from a given lot in a manner that conclusively establishes whether that lot, as a whole, complies with a specification for tensile strength. This is underlined by the standard DIN 53504 (Exhibit R 28) which is referred to in the applicable specification ("a statistical method similar to the standard DIN 53504"). Further, also Claimant has historically viewed the median value as the benchmark for measuring a lot’s compliance with specified tensile strength values.

46.

By mixing the compound for Lot 610101 on an apparatus known as "3D Banbury mixer" Respondent fully complied with the approved manufacturing process. The manufacturing process for o-rings is described in a control plan and a flow chart (Exhibits R 7 and R 8) which do not specify any apparatus for mixing elastomer compounds. Therefore, Respondent was free to use either mixing device. Furthermore, there is no material difference in how "mill mix" and "3D Banbury" devices mix elastomer compounds. The use of a "mill mix" instead of a "3D Banbury" device was never agreed between the parties. Respondent would have never agreed to that as the mill mix apparatus has a smaller capacity compared to a 3D Banbury apparatus. There was no need for Respondent to start a new PPAP submission due to the change of the mixing device as there is no functional difference between the 3D Banbury mixer and mill mix or tilt mix devices. Further, there was also no obligation on Respondent’s side to give notice of a change involving the mixing device. Finally, Claimant is alleging only a process defect (arising from the missing PPAP procedure) which would only be relevant if that would have caused a physical defect of the product which is not the case. Especially, there is no proof of lack of dispersion in Lot 610101 o-rings and/or no proof that such lack of dispersion caused any physical deficiencies.

47.

Respondent alleges that there was also no obligation on Respondent’s side to manufacture o-rings from a compound that is no more than six months old which was the shelf life assigned to the compound used for the production of Lot 610101 o-rings by Cri-Tech, Respondent’s contractor. The assignment of a shelf life to material by Cri-Tech is merely a commercial construct based on inventory management and legal considerations. It has nothing to do with the quality of a compound. Respondent itself would not have assigned a shelf life to a compound it had mixed in-house. Respondent followed the industry standard practice for confirming that raw material has not degraded by conducting a "rheology test" on the material before use. Where rheology curves for the material remain consistent overtime, the industry standard and accepted conclusion is that the material has not changed. That was the case with the compound used for production of Lot 610101. Finally, there is no evidence that the use of a compound more than six months old led to any physical deficiency in the o-rings moulded.

48.

Respondent alleges that it had no design responsibility for the o-rings at issue. Accordingly, Respondent did never warrant that its products were fit and sufficient for an intended purpose. Sec. 8.1 of the SSC (Exhibit C 3) relied upon by Claimant does only apply to products designed by or on behalf of supplier. That was not the case as the design of the o-rings came from and rested entirely with VDO. Further, Claimant or VDO did never communicate any special purpose such as heavy duty diesel truck applications to Respondent. Such heavy duty diesel truck applications may subject the o-rings to extremely high pressure levels and may require engine owners to supplement their diesel fuel with after market fuel additives that may contain ingredients harmful to elastomer compounds such as the material from which Lot 610101 o-rings are made.

49.

According to Respondent, final proof that the o-rings under Lot 610101 were not defective is the fact that those were tested and accepted by Claimant and were used in different applications without any problems. From the entire Lot 610101 (395,000 o-rings) only approx. 62,000 had been used for the actuators and injectors employed in Navistar and Ford trucks. The rest went to European applications and were used there without any complaints.

50.

Respondent disputes that Lot 610101 o-rings and their quality were the cause for the leakages that occurred at the sealing between the actuators and the injector housing observed in Navistar and Ford truck engines. There is no conclusive proof that only injectors equipped with Lot 610101 o-rings failed. On the contrary, the fact that no defects were reported with regard to the significant number of Lot 610101 o-rings used in European applications underlines that the quality of Lot 610101 o-rings was not the root cause for the failures in heavy duty diesel trucks. During the time period of the production of the actuators identified by Claimant (9 April to 7 May 2008) other o-ring lots manufactured by Respondent had been used as well as lots from other manufacturers. Accordingly, it cannot be concluded that only Lot 610101 o-rings caused the leakages. Other possible causes could be deficiencies in the assembly and manufacturing process at Claimant or CAS (leading to a different failure mode, namely "rolling"), design defects with regard to the actuator, especially over-sized glands, or special requirements of heavy diesel engines with regard to pressure and heat stability of the sealing system. Such requirements have never been communicated to Respondent and were not reflected in the applicable specification.

51.

Claimant did not offer direct evidence for its allegations with regard to causation. Claimant’s witnesses lacked first hand knowledge, the so-called "Scott-Gallo-List" (Exhibit C 17, C 64) and the corresponding manufacturing records (Exhibit C 69 and C 70) contain inconsistencies and no physical specimen of failed or degraded o-rings were presented during the arbitration. Accordingly, colour and condition of such allegedly defective o-rings remain open and unproven.

52.

Respondent further disputes that fuel injectors with failed o-rings were traceable only to a certain production lot of o-rings given the production method used by Claimant (which encompasses the so-called "bowl-feeder-effect"), that failures of o-rings stopped when Claimant stopped using Lot 610101 o-rings, and that the alleged tensile strength deficiencies of Lot 610101 o-rings led to the o-ring failures. Especially, Respondent claims that the same failures would have occurred even if Lot 610101 o-rings clearly complied with the tensile strength requirements as the specification was inappropriate in case of heavy diesel truck engines. At least such has not been dis-proven by Claimant.

53.

Respondent further disputes that Claimant has suffered any damages or damages in the alleged amount. Claimant is not liable to CAS and CAS was not liable to Navistar for the amount at issue. Respondent further disputes the causal link between the alleged defect and such damages. Especially, Respondent points to the fact that it was not necessary for CAS to agree on a settlement for USD 25 m with regard to the o-ring issue, further that USD 25 m have never been paid by CAS to Navistar but rather wrapped into a general settlement agreement (randomly) allocating USD 29 m of value to the settlement of several warranty claims one of which is said to be the o-ring issue. Such agreement does not reflect a true delivery of USD 25 m in value from CAS to Navistar but is rather of notional value. Further, there is no proof that Navistar had any liability or effected any payment to Ford. Respondent complains that it has not been involved in the settlement discussions between Claimant, CAS and Navistar. Therefore, the conclusion of such settlement had intervened with the causal chain of events potentially leading to damages in an unusual and inappropriate manner and had created a further cause which ultimately led to the damage. Finally, Respondent disputes that Claimant took the necessary steps to mitigate any damages it purportedly suffered (Sec. 8.8 SSC).

54.

Respondent requests the Tribunal as follows:

55.

(a) Deny Claimant’s claims in their entirety, and

56.

(b) order Claimant to pay all costs and fees relating to this arbitration, including without limitation the costs of the arbitration and Respondent’s attorneys’ fees and expenses (including the fees and costs of any expert or other professionals).

(See Sec. 3 (f) MoH, page 64 Rejoinder).

57.

The Request for Arbitration of 29 July 2010, together with 12 exhibits, has been filed by Claimant with the Secretariat of the International Court of Arbitration of the ICC ("the Secretariat") on 30 July 2010 (date of receipt by the Secretariat). Respondent filed its answer of 15 October 2010 to the Request of Arbitration together with 12 exhibits, with the Secretariat on 15 October 2010 (date of receipt by the Secretariat).

58.

On 23 September 2010, the Secretary General of the ICC International Court of Arbitration confirmed Prof. Dr. Siegfried H. Elsing and Mr. Jens Bredow as co-arbitrators in this arbitration. Prof. Dr. Siegfried H. Elsing had been nominated by Claimant in its Request for Arbitration, Mr. Jens Bredow had been nominated by Respondent by letter of 10 September 2010 to the Secretariat.

59.

On 22 October 2010, the Secretary General of the ICC International Court of Arbitration confirmed Prof. Dr. Roderich C. Thümmel as chairman of the Tribunal. Prof. Dr. Roderich C. Thümmel had been jointly nominated by the co-arbitrators pursuant to a special agreement of the parties (see page 5 RoA and counsel of Respondent’s letter of 20 September 2010).

60.

The Secretariat forwarded the file of the case to the arbitrators in accordance with Art. 13 of the Rules by letter of 22 October 2010. The file was received by the arbitrators on 25 October 2010.

61.

The ToR were prepared by the Tribunal and agreed by the parties and the Tribunal on 2/9/14/15 December 2010. The Tribunal established a provisional timetable on 2 December 2010.

62.

On the basis of the ToR and the Rules the Tribunal issued six Procedural Orders asking the parties for the substantiation and clarification of their submissions, extending deadlines, clarifying procedural issues and inviting the parties to a hearing.

63.

Procedural Order no. 2 ordered Respondent to produce certain documents on Claimant’s production request.

64.

The parties agreed on a confidentiality undertaking with regard to confidential documents and confidential information submitted which was supported by a Protective Order issued by the Tribunal (Procedural Order no. 4).

65.

Claimant’s submissions encompassed i.a. its Request for Arbitration of 29 July 2010 ("RoA"), its Statement of Claim of 26 January 2011 ("SoC"), its Request for Production of 4 May 2011, its Submission of 20 May 2011, its Statement of Reply of 15 July 2011 ("SoR") and its Post-Hearing Brief of 31 October 2011 ("PHB"), further Exhibits C 1-C 84. Respondent’s submissions i.a. encompassed Respondent’s Answer to the Request for Arbitration of 15 October 2010 ("RARoA"), Respondent’s Statement of Defence of 20 April 2011 ("SoD"), Respondent’s Production of Documents and Statement to Claimant’s Request for Production of Documents of 18 May 2011, Respondent’s Submission of 17 June 2011, Respondent’s Rejoinder of 12 August 2011 ("Rejoinder") and Respondent’s PHB of 31 October 2011, further Exhibits R 1 -R 75.

66.

An oral hearing before the Tribunal took place in Frankfurt/Main from 21 to 23 September 2011. The parties presented witness statements in preparation of such hearing, namely the Claimant (expert) witness statements of Mr. Jurgen Wiesenberger, Mr. Henry Rübner, Mr. Keith Shaw, Mr. Todd Detweiler, Mr. Barry Marten and Mr. Joachim Götz Kiefaber and Respondent (expert) witness statements of Mr. William Clark, Mr. Matthew Azevedo, Mr. Olaf Timm, Mr. R J Del Vecchio and Mr. Joerg Tinney. All of the witnesses and expert witnesses presented by the parties were heard during the hearing.

67.

Minutes of the hearing were taken by the chairman of the Tribunal (MoH of 21, 22 and 23 September 2011) and submitted to the parties on 4 October 2011. Further, a verbatim transcript has been prepared of the entire hearing by Ms. Kimberly Turnage, court reporter. Such verbatim transcript was made available to the parties on 12 October 2011 (provisional version) and 17 October 2011 (final version).

68.

On 8 November 2011 the Tribunal directed the parties to simultaneously submit their respective notes of fees and disbursements in connection with this arbitration until 20 November 2011. Both parties complied with this directive.

69.

The Tribunal declared the proceedings closed according to Art. 22 para. 1 of the Rules on 23 September 2011 with the proviso that the parties retained the right to submit Post Hearing Briefs until 31 October 2011.

70.

The time limit set by the Secretariat for establishing the ToR had been extended until 28 February 2011. The ToR were established until 14 December 2010. The time limit set for rendering the final Award was extended by the Court twice, the first time at its session of 1 June 2011 until 30 September 2011 and thereafter at its session of 1 September 2011 until 31 January 2012.

71.

The jurisdiction of the Tribunal has not been challenged by the Parties (see Sec. 3 (c) MoH). The Tribunal holds that it has jurisdiction to hear and decide the case on the basis of Sec. 13.8 SSC.

72.

Claimant’s standing to sue is no longer disputed by Respondent (see Sec. 3 (d) MoH). The Tribunal holds that Claimant is the legal successor of VDO and, accordingly, entitled to claim under the SSC.

73.

Claimant bases its claim for damages on the allegedly defective delivery of o-rings, namely o-rings from Lot 610101 and further breaches of contract in connection with the manufacture and delivery of such o-rings. The legal basis for such claim as invoked by Claimant is Sec. 8.7 of the SSC (Exhibit C 3); in addition, general notions of breach of contract under German law (§ 280 para. (1) BGB) - which is the applicable substantive law as per parties’ agreement - are to be considered.

74.

It is undisputed between the parties that Sec. 8.7 SSC requires a defect in contract products, damages incurred by Claimant and a causal link between the delivery of defective contract products and such damages. If these three requirements are met, Respondent is to bear such damages. § 280 para. (1) BGB requires a violation of contract duties for which Respondent is responsible and, again, damages which are caused by such breaches. The burden of proof with regard to these requirements is - following the general rule accepted under German law - on Claimant as the party invoking the benefits and legal consequences of Sec. 8.7 SSC and § 280 para. (1) BGB) (see e.g. BGH, NJW 1991, 1052, 1053; Wieczorek/Schütze/Ahrens, ZPO, 3rd ed., A vor § 286 para. 30 and subs.). The applicable standard of proof as established by the German Supreme Court is that the burden of proof is met if a certain set of facts is established to the conviction of the Tribunal in a way that "directs doubts to be silent without excluding such doubts entirely" (see e.g. BGHZ 53, 245, 256; BGH, VersR 1977, 721; BGH, NJW 1989, 2948, 2949; BGH, NJW 2003, 1116, 1117; BGH, NJW 2006, 3416, 3419; BGH, NJW 2008, 1381, 1382; Wieczorek/Schütze/Ahrens, ZPO, 3rd ed., § 286 para. 35).

75.

Upon thorough analysis of the parties’ submissions, the (expert) witness statements submitted, the outcome of the witness hearing and parties’ arguments brought forward before and during the hearing and in their post hearing briefs the Tribunal concludes that Claimant has met its burden of proof with regard to defect of a large portion of Lot 610101 o-rings, causation of leakage and engine failure by such defective o-rings and damages. Therefore, Respondent is liable to Claimant under Sec. 8.7 SSC for the damages incurred. The use of the 3D Banbury mixing device without an additional PPAP procedure and the use of an out of shelf life compound for the production of Lot 610101 o-rings do not constitute additional breaches of contract and even if that would be the case, Claimant would have failed to prove that the leakages are the consequence of such breaches. In detail;

76.

With regard to defect Claimant relies on Sec. 8.1 SSC and alleges that Lot 610101 o-rings failed to meet the applicable specification, were not of a merchantable quality of good material and workmanship and were not fit for the intended purpose. The Tribunal holds that a significant number of Lot 610101 o-rings did not meet the applicable specification and were, accordingly, not of a merchantable quality of good material and workmanship, free from defects and in accordance with the provisions of the agreements concluded between the parties as such o-rings did not fulfil the requirement specified for tensile strength.

77.

The applicable specification against which the physical properties of Lot 610101 o-rings have to be checked is the so-called new specification, namely the specification with the file name A2C20001881 ABC SPE 000 D ("Specification D") (Exhibit C 10). Though it is true that the parties, namely Claimant’s legal predecessor VDO and Respondent, did not always seem to have a very focussed approach to determining applicable specifications and other standards in the context of their business dealings, the evidence submitted clearly points to Specification D as the specification which the parties felt should set the relevant standards.

78.

It is undisputed from the evidence that Respondent had originally been supplied by VDO with the old specification version C (Exhibit C 11) which was the specification used by the o-ring supplier Dowty existing at that time (testimony Mr. Timm, TR day 2, page 149, line 15 and subs.). It was obvious from the beginning that the old specification was not the specification which could be used in the future as it did not match VDO’s requirements, especially the requirement that the o-rings should have a different colour, namely blue, and a different coating, namely Velix II (testimony Mr. Timm, TR day 2, page 160, line 7 to TR day 2, page 161, line 13). So, it was clear to all parties involved that the old specification was not the one to survive. It was also clear that Respondent needed a bilingual specification (testimony Mr. Timm, TR day 2, page 149, line 21 and subs.).

79.

The contractual agreements between the parties did not provide for any special form which needed to be followed in order to amend or change a specification. In light of the fact that the old specification (Exhibit C 11) was not the one which could be used and in light of the fact that the parties informally had agreed on a different colour and coating it is manifest from the evidence that the development of the new specification was a process over time ending with the submission of the complete Specification D (see e-mail from Ms. Helbig of 26 June 2006, Exhibit R 20) and that Respondent saw this Specification D as the relevant one when it submitted PPAP 2. This is highlighted by the email exchange between Mr. Timm and Mr. Nitzsche of 7 July 2006 (Exhibit C-12, see also Exhibit R 20) which expressly dealt with Specification D and contains an acceptance by Mr. Timm for Respondent.

80.

Mr. Timm when accepting Specification D acted as representative of Respondent. Mr. Timm regularly held himself out as Respondent’s representative in the communication with VDO and not as an independent third party service provider, a behaviour which was not stopped by Respondent. This is evidenced by Mr. Timm’s designation as "Precix-European Operation, Manager - European Sales" in his e-mails (e.g. Exhibit C 12) and on his business card (Exhibit 72). So, it is the Tribunal’s conclusion that Mr. Timm was in a position and authorized by Respondent — at least in the sense of an apparent authority ("Duldungsvollmacht") - to discuss matters for Respondent and to bind Respondent. That is also shown by Mr. Timm’s signature under the addendum to the SA (Exhibit C 51).

81.

More importantly, the SA refers to a specification with the file name "A2C20001881 ABC D". Although the SA was only signed by Respondent it is to be assumed that it was also agreed to by Claimant as the SA formed the basis for the individual deliveries (see Sec. 3.2 SSC). The designation used in SA does not entirely match the one of Specification D (which is A2C20001881 ABC SPE 000 D). Still it is the Tribunal’s conclusion that this meant to be the new specification. Such conclusion is supported by the fact that the SA was signed by Respondent after the email exchange between Mr. Timm and Mr. Nitzsche (Exhibit C 12) had occurred. Further, Mr. Slutz, CEO of Respondent, himself made it clear in an internal email that the applicable specification is the one with the file name A2C20001881 ABC D and that this specification "is written around the F 38 material which was developed just for this application" (Exhibit C 52). It is obvious that not the old specification but only Specification D was written around the F 38 material.

82.

The parties’ common understanding that Specification D was the applicable specification at the time the PPAP 2 submission was made (and, accordingly, at the time Lot 610101 o-rings were delivered) is not set aside by the fact that the parties, and especially Respondent, may not have discussed or observed each and every single change of the new Specification D as compared to the old specification. Specification D has been prepared by Claimant’s predecessor VDO and undisputedly provided to Respondent as an entire and complete document. It was, therefore, Respondent’s task to check whether Respondent was able to comply with each and every single requirement made in the new specification (see also Respondent’s obligations under Sec. 2.5 SSC). That was the very reason for Mr. Nitzsche’s inquiry (Exhibit C 12). If Respondent should not have discovered the change with regard to the tensile strength requirement (change from > 10 N/mm² to > 10 N/mm²) Respondent is still bound by this requirement as it accepted the entire document. Respondent’s argument that only certain items (like colour and coating) have been separately agreed upon is not supported by the facts presented. Respondent could have thought about rescinding its declaration (§ 119 BGB) after having discovered that it had agreed to something which it did not want to agree to. Such did not happen. In this context, it is further to be noted that it would have been Respondent’s task to clarify any doubts it might have had with regard to the specification (Sec. 2.5 SSC).

83.

Mr. Timm’s and Mr. Tinney’s personal views, expressed in their witness statements and testimony, that the old specification was applicable cannot change the Tribunal’s view. Which specification is to be considered the applicable one is a matter of legal conclusion from facts presented to the Tribunal and supported by evidence. Such facts, as set out above, make it clear that Specification D is the one applicable to the Lot 610101 o-ring delivery.

84.

It is undisputed that Specification D calls for a tensile strength of o-rings greater than 10 N/mm² (Exhibit C 10, page 6 under 4.7). It is disputed between the parties whether each and every single o-ring delivered must surmount the threshold of 10 N/mm² in tensile strength or whether that is only required for the median of a sample. The Tribunal holds that the tensile strength requirement of Specification D refers to each single piece of product.

85.

The issue is one of interpretation of Sec. 4.7 of Specification D (Exhibit C 10). The provision reads in its entirety:

"4. Requirements

4.7 Tensile strength and ultimate elongation

This test has to be done similar to the standard DIN 53504. If this test follows after storage in a test fluid, the part has to be dried previously according to chapter 4.13.

O-rings with an inner diameter less than 45 mm will be tested using a pulling mandrel (see attachment) instead of using the sheave according to the standard.

Diameter of the mandrel: ømandrel =(d0/2)-0,5 mm

Drawing of pulling mandrel of type 1 see attachment.

Pulling mandrels acc. to type 2 (see attachment) can be used in case, the diameter of type 1 has to be < 5 mm.

Values for new condition

Ultimate elongation > 120 %

Tensile strength > 10 N/mm²

Additional tests see table in chapter 4.14."

86.

The simple reading of Sec. 4.7 suggests that there are two issues addressed in the wording: The first five paragraphs (from "this test" to "has to be < 5 mm") seems to deal with testing procedures. It directs that tests be done "similar to the standard DIN 53504" and elaborates on that. DIN 53504 describes a test method as emphasized in Sec. 1 of the document itself (Exhibit C 48):

"The test method specified in this standard..."

87.

The first five parameters of Sec. 4.7 do not contain a specification in itself as confirmed by the testimony of Mr. Tinney (TR day 2, page 186, lines 2-11). As a test method the wording (together with DIN 53504) refers to a statistical analysis which should be applied. The purpose of such method is to find out whether a certain batch or lot of o-rings is likely to comply with the requirements set by the specification. It is obvious that not all o-rings (or even a major portion) can be tested as the test requires the destruction of the product. So, it is necessary to rely on a statistical method making it more or less likely that the entire batch or lot meets the required standards.

88.

The second part of Sec. 4.7 is the specification itself. This part sets the standard which has to be complied with. The language is easy to understand; It says that tensile strength for new o-rings has to be greater than 10 N/mm². It does not say that only a sample or a statistical value has to comply with the standard. It is also not to be as-sumed that such should be the intended interpretation as it does not seem to comply with parties’ reasonable expectations. If certain requirements are put together in a specification for a product, it is the reasonable expectation of the purchaser (recog-nized by the seller) that each and every piece of product is compliant with the specifi-cation. Otherwise the purchaser would accept that a certain number of pieces fall outside the specification. The purchaser cannot tolerate this outcome if products out of specification could potentially be harmful to the end product or the user. If they are not harmful the purchaser would not have needed to set any specific value in the specification from the beginning.

89.

So, if the value for tensile strength of the o-rings is of importance - and that is suggested by the fact that it is part of the specification - then a reasonable purchaser’s expectation demands that each single product is within the specification. This would be different if the parties had agreed on certain tolerance levels. One would expect an agreement on tolerance levels to be addressed in the specification by e.g. adding to the tensile strength parameter "+/- x". Another way of allowing a tolerance would be to specifically agree that a median value of a sample shall be the decisive value if such median is accompanied by a defined range. The range makes it clear to what extent lowest and highest values may deviate from each other this way determining the allowed tolerance. The testimony of the expert witnesses Mr. Del Vecchio, Mr. Tinney and Mr. Kiefaber makes it clear that the requirement of a median value without at the same time defining a range is not very useful (testimony Joerg Tinney, TR day 2, page 209, lines 23-26, testimony Mr. Kiefaber, TR day 1, page 25, lines 18-25, testimony Mr. Del Vecchio, TR day 2, page 249, lines 24-27, page 250, lines 1-9).

90.

The wording of Sec. 4.7 does not give a hint as to tolerances agreed by the parties and/or accepted by Claimant. There is no "+/-"addition to the tensile strength value although tolerance descriptions are by no means unknown to Specification D. One must only look to Sec. 4.6 (constant elongation: 25 % +/- 1 %) or 4.5 (constant deformation: 25 % +/- 1 %) or 4.14. At the same time, there is no indication of any range allowed in connection with the tensile strength value. Such range does not follow from DIN 53504. It would have needed to be part of the specification (or otherwise agreed by the parties).

91.

In consequence, the objective interpretation of Sec. 4.7 suggests that the tensile strength requirement has to be met by each and every piece of o-ring delivered. That is also underlined by the wording of Sec. 7.3 and 8.1 SSC referring to "all contract products". Claimant can rely on this objective interpretation. A different common understanding of the parties as argued by Respondent is certainly possible. It would, though, need to be proven by Respondent who relies upon a deviation from the objective interpretation of Sec. 4.7. The Tribunal cannot see that Respondent met its burden of proof in this regard. Although it is true that Claimant repeatedly referred to the median as the benchmark for testing tensile strength in earlier correspondence (letter of Claimant of 18 December 2009, Exhibit C 6; letter of Claimant’s counsel of 26 May 2010, Exhibit C 7) and although Claimant itself seems to accept test values for tensile strength that fall below a specified minimum but within a tolerance (defined by range) in its generic material specification (Exhibit R 69, page 9) the Tribunal is not convinced that this proves the parties’ common understanding to deviate from the objective interpretation of Sec. 4.7 of Specification D.

92.

The parties’ earlier communication referred to above suggests that the parties themselves differentiated between testing methods on the one side (which are necessarily statistical methods) and specification requirements. This is underlined by Mr. Witte’s (of VDO) e-mail of 16 January 2006 to Mr. Timm (Exhibit R 23, last paragraph). Also Mr. Azevedo in his testimony mentioned that one would need more tests (on slab) if the median requirement was met but single values were out of spec (testimony of Mr. Azevedo, TR day 2, page 131, lines 1-22). One can certainly agree on a statistical test in order to determine the likelihood of compliance of a product with certain parameters and at the same time require that each and every product does not fall below a certain threshold. By way of example: A statistical outcome of 14 N/mm² as median value looks rather safe if the minimum requirement is > 10 N/mm². Accompanied by the single values tested it gives the purchaser comfort that none or nearly none of the products delivered is likely to fail. It does, on the other hand, not automatically involve the acceptance by the purchaser that a certain number of o-rings is out of specification with the danger of failing in the field. So, it is the conviction of the Tribunal that the earlier communication between the parties addressing the median value was not aiming at weakening the standard as set in Sec. 4.7 of specification D but rather to discuss statistical test results and their consequences.

93.

All reports on test samples from Lot 610101 o-rings submitted by the parties show that a significant number of o-rings from each sample had not reached tensile strength values >10 N/mm² as required by Sec. 4.7 of Specification D.

94.

For example, the sample testing conducted by Laboratory Richter on 12 December 2008 (Exhibit R 30) revealed that from 10 pieces tested 5 pieces - that is 50 % - did not show tensile strength values >10 N/mm² (test results: 10,9; 10,0*; 10,2; 10,0*; 8,4*; 11,1; 10,8; 10,7; 9,5*; 9,6*). The sample testing of Laboratory Richter of 12 December 2008 (Exhibit C 19) shows that from a sample of 30 pieces 16 pieces did not provide tensile strength value of >10 N/mm² (if the tensile strength values are rounded to one decimal) - that is 53,3 % (test results: 10,87; 10,03*; 10,21; 10,04*, 8,43*; 11,08; 10,81; 10,65; 9,51*; 9,58*; 9,96*; 9,31*; 9,80*; 10,30; 10,48; 9,46*; 10,28; 10,39; 9,97*; 10,13; 10,50; 10,53; 10,57; 9,09*; 9,97*; 1.0,40; 9,48*; 9,60*; 8,26*; 10,03*). The latest test report from Laboratory Richter of 17 May 2011 (Exhibit C 49) shows that 29 out of 50 samples were tested no greater than 10 N/mm² (again rounded to one decimal) - that is 58 % (test results: 9,53*, 10,50, 9,45*, 8,66*, 10,07, 10,15, 10,65, 10,18, 10,90, 9,92*, 10,37, 10,75, 9,11*, 10,01*, 9,95*, 10,31, 9,52*, 9,77*, 10,04*, 9,34*, 9,70*, 9,50*, 9,69*, 9,66*, 10,51, 10,62, 9,74*, 9,69*, 10,98, 9,29*, 11,06, 8,83*, 9,67*, 10,21, 10,02*, 9,91*, 10,53, 9,98*, 9,70*, 10,70, 10,62, 9,54*, 10,50, 10,15, 7,73*, 9,89*, 9,96*, 9,88*, 10,13, 10,44). The test results and the test methods have not been disputed by Respondent in their substance.

95.

Another test report of 29 July 2011 submitted by Respondent and prepared by ARDL (Exhibit R 68) allegedly concerning Lot 610101 o-rings reveals that 9 out of 30 o-rings tested not greater than 10 N/mm² with regard to tensile strength - that is 30 % (test results: 10,4, 9,8*, 10,0*, 10,01, 9,6*, 10,8, 10,7, 10,8, 11,4, 11,0, 10,0*, 9,3*, 10,4, 9,7*, 10,7, 9,2*, 10,5, 10,02, 10,7, 11,0, 10,0*, 10,2, 9,9*, 10,3, 11,2, 10,6, 10,6, 10,1, 10,5).

96.

The sample testing thereby evidences with all necessary clarity that a very significant number of tested pieces (50 % to 58 % in the Laboratory Richter tests and 30 % in the ARDL test) failed to meet the specification. As the different sample tests have been undertaken at different times and from different parts of the (remaining) Lot 610101 o-rings they allow the conclusion that with regard to all Lot 610101 o-rings delivered a major portion did not meet the agreed specification with regard to tensile strength. It is not disputed by Respondent that the sample testing as submitted has been undertaken in a proper way which is representative for the entire Lot 610101.

97.

The failure of a significant portion of the Lot 610101 o-rings to meet the tensile strength specification makes these o-rings defective within the meaning of Sec. 7.3, 8.1 sentence 1 and 8.7 SSC. The defect, further, leads to the consequence that the o-rings concerned are not of a merchantable quality of good material and workmanship as required by Sec. 8.1 SSC. Whether the fact that a significant portion of Lot 610101 o-rings is defective (as evidenced by the test results set out above) renders the entire lot defective as suggested by Claimant can rest and remain undecided. Sec. 8.7 SSC requires that "contract products" are defective. That is supported by Sec. 7.3 and 8.1 which also refer to "contract products". The SSC provisions do not require that an entire lot is defective. For the purpose of Sec. 8.7 SSC it is sufficient that there are defective products which cause damages. Therefore, the defectiveness of the entire lot would not add anything in this context.

98.

Apart from that it is doubtful whether a claim for damages can be based upon an "assumed defect" of a whole lot. Claimant’s reference to Sec. 8.3.1 of ISO/TS 16949 (Exhibit C 46) is relevant for the issue whether a certain lot of product needs to be taken out of the chain of commerce in order to avoid (as a matter of caution) the risk of future damages if it is "suspect" (see Sec. 8.3 ISO/TS 16949, compare also Sec. 8.6 SSC). It does not allow the conclusion that the use of a "suspect" lot triggers claims for damages. Such claims are based upon concrete defects not upon assumed defects. The concrete defect in the case at hand is the fact that a large percentage rate of Lot 610101 o-rings is indeed defective as it does not meet the tensile strength specification.

99.

Claimant also relies on Sec. 8.1 sentence 2 SSC and makes the argument that the o-rings of Lot 610101 as delivered were not fit for the purpose intended by VDO and Claimant, i.e. for US diesel truck engines. The Tribunal holds that the requirements of Sec. 8.1 sentence 2 SSC are not met as it was not Respondent but VDO who designed the o-ring and that Respondent could not have been aware of the details of the application of the o-rings; accordingly, the warranty of fitness for an intended purpose does not apply and is not breached by Respondent.

100.

The o-rings have been designed by VDO. Claimant does not dispute this with regard to physical dimensions of the o-rings (para. 144 SoR). The drawing and specifications were prepared by VDO. Respondent’s task was to devise an appropriate elastomer compound which would meet the specifications designed by VDO. Respondent was never aware of the concrete application of the o-rings. Respondent certainly knew that it was used for sealing purposes and in diesel engines. It also knew that the o-rings were used in US applications. But the concrete design of the actuator, the injector or the engine as a whole, the pressure and temperature requirements and other parameters of the application were unknown to Respondent and it was not to be expected from Respondent to make itself aware of those parameters. The fact alone that the o-rings were used in US diesel truck applications would not give Respondent — who is not an automotive company - an idea of concrete requirements apart from those set out in the drawing and specification. Accordingly, Respondent could not and did not warrant the fitness of the o-rings for a special purpose - certain defined US diesel truck engines - intended by VDO or Claimant.

101.

Claimant relies on two other breaches of contract allegedly committed by Respondent, namely the production of compound for Lot 610101 o-rings on a 3D Branbury mixer (instead of a mill mix device) without additional PPAP approval and the use of a compound for part of the Lot 610101 o-rings the assigned shelf life of which had elapsed. The Tribunal holds that the use of the 3D Banbury mixing device was not in breach of contractual agreements between the parties, that such use did not have to be notified to Claimant and that it did not require an additional PPAP approval process. Further, the Tribunal holds that the use of a compound with an exceeded shelf life was as well not in breach of contractual obligations of Respondent given the fact that such compound was submitted to rheology testing before use. In detail:

102.

Respondent argues that PPAP approval has. been given by Claimant with regard to Lot 610101 o-rings as mixed on the 3D Banbury mixer rendering Claimant’s breach of contract allegation moot from the beginning. So, the first issue to be decided is which o-ring lot formed the basis of the PPAP 2 process as conducted by Respondent and submitted to VDO on 13 September 2006 (Exhibit C 25). Respondent takes the position that it was a sample from Lot 610101 o-rings which accompanied the documents. Claimant is of the opinion that it was a sample from lot 533301. The Tribunal holds that PPAP 2 related to o-rings from lot 533301.

103.

There is convincing evidence that Lot 610101 o-rings were not the ones used by Laboratory Richter for its tests submitted together with the PPAP 2 documents. Such tests by Laboratory Richter took place on 17 November 2005 (Exhibit C 23) whereas the first batches of Lot 610101 o-rings was moulded only on 8 April 2006. Further, the attachment "APCO" to the PPAP 2 documentation (Exhibit C 25) refers to lot 533301. The same is true for the PSW time line (Exhibit C 26) and the compound test results for 13801 (F 38) (Exhibit C 27). Although it remains unclear which sample o-rings had been accompanying the PPAP 2 documentation which was sent to VDO in September 2006 this does not change the picture. Even if samples from Lot 610101 o-rings had been sent together with the PPAP 2 documentation the relevant tests with the o-rings had been made with lot 533301 o-rings. Respondent could not expect VDO or Claimant to give its approval on the basis of a physical sample of o-rings which was not identical to the o-ring lot covered by the accompanying test reports.

104.

In this connection Respondent makes the further argument that the samples delivered were extensively tested and accepted by Claimant. Even if Lot 610101 o-rings were the sample delivered there are still no facts submitted supporting Respondent’s conclusion that those were tested by Claimant and accepted. Respondent bears the burden of proof in this regard which it did not meet.

105.

Lot 533301 o-rings had undisputedly been moulded from a compound mixed in a mill mix device whereas Lot 610101 o-rings had, also undisputedly, been moulded from a compound mixed in a 3D Banbury mixer. The issue to be addressed in this context is whether the change of the mixing device from a mill mixer to a 3D Banbury mixer was contrary to contractual agreements or would have made a notification to Claimant or a new PPAP approval process necessary. The Tribunal holds that all of this is not the case:

106.

The contractual documentation submitted by the parties does at no point require the use of a certain mixing device for the compound F 38. Also, the control plan (process flow diagram) submitted by Respondent in connection with the PPAP 2 approval process (Exhibit C 25, page 3) does not mention the mixing method. Additional agreements by the parties in this context have not been invoked by Claimant. So, nothing on file suggests that the use of the 3D Banbury mixing device was against contractual agreements.

107.

Further, there is no conclusive evidence that the use of the 3D Banbury mixer required a new PPAP if the PSW is based upon product mixed on a mill mix device. As Claimant’s expert witness Mr. Kiefaber pointed out the aim of a PPAP notification is to inform the customer about possible changes in the production procedure so that he knows about the risks that might be involved (testimony Mr. Kiefaber, TR day 2, page 8, lines 9-10). As drawings and specifications cannot pin down each and every single aspect of product quality and as product quality is influenced by various parameters of the production process, e.g. temperature, handling of machinery by employees, maintenance of machinery, etc. the purpose of the PPAP is to "freeze" the process in order to avoid quality impairments due to changes of process parameters (testimony Mr. Kiefaber, TR day 2, page 12, lines 25-31). This is also set out in the PPAP manual 4th ed. (Exhibit C 22) - which is the applicable edition (see PSW, Exhibit 25, under the heading "Declaration").

108.

It is, though, as well obvious that not each and every process change can result in the necessity of an information to the customer and/or a new PPAP submission. So, the task is to separate relevant from irrelevant changes. In this regard the control plan for the manufacturing process which accompanied the PPAP submissions of Respondent (Exhibit C 25) gives an important hint: As it makes no mention of the mixing process for the o-ring raw material at all, it can be concluded that from the parties’ perspective the details of the mixing process were not considered critical to the quality of the compound but rather a standard procedure. That is underlined by Mr. Del Vecchio’s expert testimony who confirms that the compound would typically be of the same quality irrespective of the mixing device (TR day 2, page 226, lines 10-14). Mr. Clark and Mr. Del Vecchio both testified that in the elastomer manufacturing industry the change from one type of a mixer to another one is not viewed as something that might affect the quality of the elastomer compound; rather it is a function of volume processed (TR day 2, page 83, line 23 to page 84, line 31, page 229, lines 23-31). This is supported by the further explanation of Mr. Clark and Mr. Del Vecchio that the mixers all do the same function and that the mixing result, namely the compound, would be typically of the same quality irrespective of whether a mill mix or a tilt mix had been used. Also the additional explanations of Mr. Del Vecchio, an expert in the elas-tomer industry, stress the lacking process relevance of the mixing device: Typically, mill mix devices are used for smaller volumes (e.g. for sampling purposes) of compound whereas 3D Banbury mixers or tilt mixers are used for larger volumes (e.g. for series production). Mr. Del Vecchio also indicated that mill mix devices are heavily dependent on proper handling by the operating employees whereas 3D Banbury mixers are typically less dependent upon the skill of the people operating the machine. So, in any event, the Tribunal is not sufficiently convinced that product quality is endangered once a 3D Banbury mixer is used instead of a mill mixer.

109.

Finally, the wording of Sec. 3 of the PPAP manual 4th ed. (Exhibit C 22) itself does not seem to call for a notification of the customer or a new PPAP submission in case of the change of a mixing device. None of the examples mentioned in Table 3.1 is close enough to the facts in the case at hand. The crucial test according to the PPAP manual is whether the change can "be expected to influence the integrity of the final product" (see Sec. 2 in Table 3.1). This is to the conviction of the Tribunal not the case when a 3D Banbury mixer is used.

110.

Apart from the above arguments it is to be noted that even if a new PPAP process would have been necessary and the non-performance of such PPAP would amount to a breach of contract, this "process defect" (as addressed by Respondent) could only be relevant for a damage claim if it turned into a product defect finally causing the o-ring failure. Claimant - bearing the burden of proof in this respect - did not submit evidence in this regard. Nothing on file suggests that the physical properties of Lot 610101 o-rings would have been different if a new PPAP (with the 3D Banbury mixer) was conducted. On the contrary, the fact that e.g. lot 806401 o-rings (a product with regard to which no quality issues are heard of) had also been moulded on the basis of a compound mixed in a 3D Banbury mixing device (Exhibit C 20) supports the Tribunal’s finding that the use of a 3D Banbury mixer was not relevant for the quality of the product.

111.

It follows from the certificate of compliance for Lot 610101 raw material (Exhibit R-37) that Cri-Tech, the contractor of Respondent, had mixed the compound for Lot 610101 o-rings on 8 April 2006 and that it had assigned a shelf life of six months after the production date to the compound. The shelf life, therefore, expired on 8 October 2006. It is further established by Respondent’s production data (Exhibit R 56, page 2) that Lot 610101 o-rings were moulded in eight batches three of which were produced within the shelf life of the compound (batch 1 and batch 2 moulded on 8 June 2006, batch 3 moulded on 12 June 2006) whereas five batches were moulded after the shelf life had elapsed (batch 4 moulded on 1 March 2007, batch 5 on 17 October 2007, batch 6 on 6 November 2007, batch 7 on 1 February 2008 and batch 8 on 26 February 2008). This raises the issue whether the use of a compound with an exceeded shelf life amounts to a breach of contract committed by Respondent. The Tribunal holds that, although the use of a product with an exceeded shelf life might generally be a problem, it did not amount to a breach of contract in the concrete situation of the present case:

112.

It is unknown why Cri-Tech put a shelf life of six months to the compound mix. Respondent’s position supported by Mr. Del Vecchio and Mr. Clark’s testimony that the assignment of a shelf life to material by Cri-Tech "tends to be a commercial construct, based on inventory management and legal consideration"(Respondent’s PHB, para. 180) does not remove the potential relevance of such assignment. Mr. Del Vecchio and Mr. Clark both speculated that a shelf life might have to do with a limitation of liability of the supplier (testimony Mr. Del Vecchio, TR day 2, page 232, lines 6-11 and testimony Mr. William Clark, TR day 2, page 94, lines 16-23). If a supplier is not willing to guarantee the quality and usability of a product for a longer period of time than six months this tends to show that there is the risk of a quality deterioration of the compound over time. This, in turn, makes it necessary for the user of the product to carefully check whether the raw material still has the required qualities before going into the production process.

113.

It is supported by evidence (WS Mr. Clark, para. 22; WS Mr. Del Vecchio, para. 35, 36) and basically undisputed that Respondent as a general rule undertakes rheology testing of all compound used before going into the moulding process. The testing is repeated each time the compound is used again. Such testing reveals changes in the material, especially whether the material had already cured to a certain extent. Mr. Del Vecchio and Mr. Clark testified that it is the industry standard to conduct rheology testing with a view to confirming that raw material has not degraded. With regard to the compound used for Lot 610101 the rheology curves remained, as evidenced by Exhibit R 56, consistent over the period from June 2006 to February 2008. According to Mr. Del Vecchio and Mr. Clark the industry standard and accepted conclusion is that the material has not changed and can confidently be used to manufacture o-rings (testimony Mr. Clark, TR day 2, page 98, line 2 to page 99, line 10; testimony Mr. Del Vecchio, TR day 2, page 233, line 30 to page 235 line 25, page 280, lines 4-15). As the rheology curves (Exhibit 56) for the compound used for the moulding of Lot 610101 o-rings do not signal a change in product quality the Tribunal concludes that Respondent did not violate its contractual duties when using a compound with an exceeded shelf life.

114.

Even if that would be seen differently and a breach of contract is assumed, this would only be relevant for a damage claim if it could be shown that such led to a defective product. There are no facts beyond speculations on file which support Claimant’s argument that the exceeded shelf life was the cause for a defect of Lot 610101 o-rings, especially for inferior physical properties. It is entirely open whether there were any adverse conditions like increased humidity or temperature at Cri-Tech’s or Respondent’s storage facilities which might have had an impact on the product over time. The burden of proof lies with Claimant and such proof has not been submitted.

115.

According to Sec. 8.7 SSC Claimants alleged claim for damages requires a causal connection between the delivery of defective Lot 610101 o-rings and damages incurred by Claimant. The first sub-issue in this context is whether there was a causal link between defective Lot 610101 o-rings and the engine failures complained of. The second sub-issue is whether engine failures led to monetary damages at Claimant in an amount of USD 25 m (see para. 134 and subs.).

116.

According to the general rule outlined above (para. 74) the burden of proof for the causation requirement lies with Claimant. The Tribunal cannot see why the burden of proof should have shifted to Respondent as suggested by Claimant. Case law and authorities cited by Claimant in this regard (Claimant PHB Sec. 172 and subs.) relate to the special situation that contractual duties to disclose are violated. In these cases it is discussed whether the burden of proof for the causal link between the violation of the duty to disclose and the damage claimed should shift to the violator who would then need to disprove the assumption that the other party would have acted in a prudent way in accordance with the information withheld ("Vermutung aufklärungsgerechten Verhaltens"). This is, though, not the case at hand. As the Tribunal held (see para. 97) Respondent’s breach of contract is the delivery of defective o-rings not meeting the agreed specification. There is no legal authority supporting the view that in case of a defective delivery it is the customer’s burden to disprove causation with regard to damages. Other charges which might involve issues of lacking disclosure (in connection with the use of a 3D Banbury mixer and the use of compound with an exceeded shelf life) have been rejected by the Tribunal (see para. 105 and subs., 111 and subs.). Therefore, the violation of a duty to disclose is not at stake and, accordingly, the case law and authorities cited by Claimant cannot support its case.

117.

Respondent does not dispute that engine failures occurred with regard to Navistar and Ford truck engines, especially the series F 250 to F 550. Claimant explained that such engine failures turned out to be the result of leaking fuel injectors as delivered by CAS to Navistar. According to this explanation - corroborated by videos on test lines submitted (Exhibit C 57 and C 58) - fuel leaked from the injector into the crankcase of the engine. This led to a rise of the oil level in the crankcase. The oil-fuel mixture arrived at the ventilation system and, as a consequence, finally got into the cylinder heads of the engine. This in turn led to uncontrolled combustion processes and an overheating of the cylinder heads which made the engine fail. The leakages occurred at the clearance between the actuator and the injector housing which was to be sealed by the o-ring. So, the leakage was caused by the fact that the sealing did not work properly. This is a plausible explanation of the causation chain which is not disputed by Respondent and, thus, can be taken by the Tribunal as given.

118.

Respondent vigorously disputes that the above described leakages were caused by defective Lot 610101 o-rings. Respondent rather points to an inadequate assembly or manufacture of the actuators and/or injectors at Claimant or CAS, an inadequate manufacture or design of the o-ring gland at the actuator or an inadequate specification not reflecting the special requirements of heavy diesel trucks like the F 250 to F 550 Navistar and Ford trucks as alternative causes for the leakages and the engine failures. The Tribunal holds that Claimant met its burden of proof and showed to the conviction of the Tribunal that the defective Lot 610101 o-rings deteriorated in use ("nibbling effect"), degraded and finally failed to serve its purpose thereby allowing the leakage. In detail:

119.

As indicated earlier (para. 74), the proof of a fact or a line of events does from the perspective of German procedural law not require proof in a scientific sense. Further, there does not need to be an absolute certainty and, also, no likelihood which is close to certainty ("an Sicherheit grenzender Wahrscheinlichkeit"). Rather it is necessary that the Tribunal gains a degree of certainty which is acceptable for practical purposes and which "directs doubts to be silent without excluding such doubts entirely" (BGHZ 53, 245, 256; BGH, VersR 1977, 721; BGH, NJW 1989, 2948, 2949; BGH, NJW 2003, 1116, 1117; BGH, NJW 2006, 3416, 3419; BGH, NJW 2008, 1381, 1382). The Tribunal gained this degree of certainty with regard to the causation of leakages by defective Lot 610101 o-rings from, and bases its conviction on, the written submissions of the parties, their oral submissions during the hearing, the evidence submitted and especially the testimony of the (expert) witnesses heard.

120.

First and foremost, it is undisputed that the physical properties of Lot 610101 o-rings are inferior to those of all other lots of o-rings addressed by the parties during the arbitration. This is especially true for tensile strength and modulus (whereas only the tensile strength of a large portion of Lot 610101 o-rings renders this portion defective, see above para. 93 and subs.). From the samples taken it occurs that tensile strength of Lot 610101 o-rings surrounded a median value of 10 N/mm² and modulus a median value of 5 N/mm² (see Exhibit C 20) whereas the corresponding median values of lot 533301 were at 14,7 N/mm² and 8,4 N/mm² (Exhibit R 21), of an unknown lot 14,8 N/mm² and 9,0 N/mm² (Exhibit R 31) and again an unknown lot 13,7 N/mm² and 6,9 N/mm² (Exhibit R 38), accordingly values which exceed those of Lot 610101 o-rings by far. The other lots mentioned in Exhibit C 20 range from 11,8 to 16,3 N/mm² with regard to tensile strength.

121.

Claimant’s expert witness Mr. Martin plausibly testified that tensile strength is an important physical property and an indicator for the quality of the cross-link density in the o-ring. Low tensile strength indicates low cross-link density which makes the o-ring less stiff and more susceptible to extrusion/nibbling. Further, low tensile strength usually goes along with a low modulus (testimony Mr.Martin, TR day 2, page 131, lines 21-24, page 134, line 31 to page 135, line 2, page 135, lines 8-17). None of the witnesses testified that lower tensile strength (and modulus) values have no correlation with the stiffness and resisting power of the o-ring and Respondent himself did not offer a theory in this regard. So, it is a well-founded and plausible conclusion that the low tensile strength (and modulus) values (as compared to other lots) formed the direct cause for the degradation of o-rings as observed by Claimant during the analysis of the returned injectors.

122.

There are no facts or circumstances submitted to the Tribunal which indicate that o-rings from any other lot than Lot 610101 failed in the field. Lot 610101 o-rings were used for production only in the time period between 9 April and 7 May 2008 ("Relevant Time Period"). This is a result of Claimant’s analysis which is supported by the testimony of Mr. Wiesenberger and Mr. Rübner. A limited uncertainty results from the so-called "bowl-feeder-effect". In Claimant’s production process, there is no clear cut change from one lot of o-rings to the next. O-rings are filled into a vibrating bowl which moves o-rings one by one into a slot for further processing. If the bowl is refilled with a new lot, Claimant’s manufacturing data point to this new lot although there is still a certain number of o-rings from the foregoing lot in the bowl (Claimant PHB, para. 228). The Tribunal considers this effect to be negligible, particularly as it relates only to a small number of o-rings (up to 2000, see testimony Mr. Rübner, TR day 1, page 208, lines 4-9) as compared to the entire number of o-rings used during the Relevant Time Period (WS Wiesenberger, para. 38; WS Rübner, para. 31).

123.

There are no complaints about failing injectors reported covering the time period before Lot 610101 o-rings had been used in the field. There are no complaints of failures reported after the recall campaign had been conducted by Navistar and Ford. No witness and even not Respondent itself left the Tribunal with any doubt that the o-ring issue at hand was - in terms of time - a singular event which did not have a predecessor nor a successor.

124.

During the Relevant Time Period nearly the entire Lot 610101 o-rings (a rest of 40,000 remained on stock, testimony Mr. Wiesenberger, TR day 1, page 66, lines 1-4) and o-rings from another Precix lot and another supplier had been used by Claimant for actuators which went to CAS. It is undisputed that Respondent’s o-rings were blue whereas the other supplier’s o-rings (Trelleborg) were black. There is no indication that any one of the o-rings listed in the Scott-Gallo-List, Claimant’s compilation of returned o-rings traced to certain actuators and their production dates (Exhibit C 17, C 64), were black. None of Claimant’s witnesses, namely Mr. Wiesenberger, Mr. Martin and Mr. Shaw testified that they have ever heard of or seen any degraded or failed black o-ring. They only heard of or have personally seen blue o-rings which were degraded (testimony Mr. Wiesenberger, TR day 1, page 59, lines 2-5; testimony Mr. Shaw, TR day 1, page 218, line 21; testimony Mr. Martin, TR day 1, page 126, lines 29-30 and page 127, lines 2-6). Respondent’s repeated suggestion that the o-rings analysed might not have been examined properly is not supported by evidence. So it is a plausible and convincing conclusion that only blue o-rings, i.e. o-rings from Respondent failed.

125.

Again, there is no indication that o-rings from other lots of Claimant failed. One other lot, namely lot 806401 has also been used during the Relevant Time Period (see Exhibit R 64) but it was only Lot 610101 which was exclusively assembled during such time period. As only actuators assembled during the Relevant Time Period were reported to have failed it is a plausible conclusion that the problem was with Lot 610101 and not with lot 806401.

126.

There is no indication that there were any assembling or manufacturing problems which caused o-rings to fail. Mr. Wiesenberger in his witness statement (WS Wiesenberger, para. 21) explained carefully the Ishikawa analysis (see Exhibit C 63) as undertaken by Claimant in order to find out the root cause for the failure. All steps of the production process have, according to Mr. Wiesenberger, been looked at. Neither at Claimant’s site in Limbach-Oberfrohna nor at CAS’ site at Blythewood could any production problems been identified. There are no facts on file which suggest that assembly or production problems existed at the time of the manufacture of the injectors which failed. The Tribunal has no reason to doubt Mr. Wiesenberger’s testimony.

127.

Especially, there is no indication supporting Respondent’s arguments that the o-ring failure was due to a wrong design of the o-ring gland in the actuator. Respondent makes the point that the gland was too wide thereby allowing the o-ring to roll and, as a consequence of that, to be destroyed by mechanical exposure. Respondent made this argument on the basis of a photograph of the actuator gland. Mr. Del Vecchio, Respondent’s expert witness, testified that he would see extrusion/nibbling and not rolling as failure mode (TR day 2, page 269, line 28 to page 270, line 16). Mr. Clark’s gland analysis (Exhibit R 70) was made on the basis of the photograph which showed a degraded o-ring with a reduced width. Mr. Clark’s and Mr. Del Vecchio’s explanations why they found the gland width to be too wide did not convince the Tribunal. First, neither Mr. Clark nor Mr. Del Vecchio had ever a real actuator in their hands before making their analysis. Second, Mr. Clark based his opinion on the width of a degraded o-ring. Third, Mr. Del Vecchio based his analysis on a "finger nail test". Fourth, Mr. Del Vecchio himself admitted that a gland size which allowed a fill of the o-ring between 60 % and 85 % is regarded as acceptable (TR day 2, page 273, lines 22-27). In addition, Mr. Rübner testified that Claimant never changed the dimensions of the gland (TR day 1, page 198, lines 2-11).

128.

Respondent argues that the application of the o-rings in injectors used for F 250, F 350, F 450 and F 550 diesel truck engines (especially the latter two which are to be considered heavy diesel trucks and which showed high failure rates) required properties of the o-rings which were not reflected in Specification D. Such diesel trucks, so Respondent, require a higher resistance against temperature and pressure as diesel engines used in passenger cars. This was the reason why the o-rings only failed in this application. This corresponds to the testimony of Mr. Shaw and Mr. Del Vecchio who indicated that indeed the Navistar application might expose the injector and, accordingly, the o-rings to a higher temperature.

129.

From the legal perspective, Respondent, by advancing this argument, relies on a legal concept known as "permissible alternative behaviour" ("rechtmäßiiges Alternativver-halten"): If Respondent would have delivered only o-rings with tensile strength values surmounting the threshold of 10 N/mm², i.e. defect free o-rings, that would have, so Respondent, not changed the failure mode. Still, the engine failures would have occurred because Claimant wrote the wrong threshold value for tensile strength into the specification, a value which might have been appropriate for passenger car diesel engines but not for heavy duty truck engines.

130.

Under German law it is well established that "permissible alternative behaviour" is a relevant defence (see Staudinger/Schiemann, BGB, Neubearb. 2005, Vorbem. zu §§ 249 and subs., para. 102 and subs.; Münchener Kommentar/Oetker, BGB, 5th ed., § 249 para. 211 and subs.) and further that the party relying on this defence bears the burden of proof for the facts supporting such defence (see BGH, NJW 1967, 551, 552; BGHZ 78, 209, 214; BGH, NJW 1986, 2838; BGH, NJW 1993, 520, 521; BGH, NJW 2002, 888, 890; BGH, NJW-RR 2004, 79, 81; BGH, NJW 2005, 1718, 1719; Staudinger/Schiemann, op. cit., para. 93; Münchener Kommentar/Oetker, op. cit., para. 218 and subs.). So, it would be Respondent’s burden to show that, indeed, the use of o-rings with tensile strength values surmounting 10 N/mm² would as well have led to the leakages and engine failures. The Tribunal holds that the Respondent did not meet this burden. Respondent did not present facts which warrant the conclusion that the same failures would have occurred with o-rings within specification.

131.

Mr. Del Vecchio’s testimony that a median tensile strength of 10,0 N/mm² and 10,1 N/mm² will not make a material difference (TR day 2, page 264, lines 2-17) does not assist Respondent in this regard. The defect lies, as explained above, in the fact that a significant number of Lot 610101 o-rings showed tensile strength values not exceeding 10 N/mm². The median value is, as the Tribunal held, not relevant in this regard.

132.

Higher failure rates with heavy diesel trucks do as well not prove Respondent’s case. It is a plausible assumption that heavy duty diesel engines are a more difficult challenge for the material used (including o-rings) due to higher temperature and possibly higher pressure conditions. So, it can easily be explained that o-rings fail first in heavier engines causing relatively greater numbers of those engines to fail after a certain operation time. It is, though, no proof for the proposition that o-rings within specification are failing.

133.

Mr. Wiesenberger’s testimony (WS Wiesenberger, para. 41-44; TR day 1, page 116, lines 3-7) to the effect that certain test line results (two tests) showed 15 failing o-rings out of 16 is a statistical indication that also o-rings with tensile strength value of more than 10 N/mm² might have failed but no conclusive proof. It is true that from 16 o-rings with a median tensile strength value of approx. 10 N/mm² one could expect, as a matter of statistics, that roughly half of those should be above 10 N/mm² and, accordingly, within specification. On the other hand, it is unclear whether the test situation in the two tests matched the real life requirements and whether there have been other influences which impaired also those o-rings which, statistically, were to be expected of the required quality. Mr. Wiesenberger mentioned other tests which were inconclusive. So, it may be difficult to put together a test line in all aspects comparable to the engines used in the field. In any event, the Tribunal is unable to base a finding that o-rings within specification show the same failure mode in the field on two tests reported the exact circumstances of which are unknown.

134.

It is Claimant’s further burden to show that the injector failures caused by defective o-rings from Lot 610101 finally led to damages on Claimant’s side in the amount claimed, i.e. at USD 25 m. Claimant does not rely on out of pocket payments effected in the amount claimed but rather points to a USD 25 m warranty liability it is allegedly burdened with in favour of CAS due to the defective delivery of Lot 610101 o-rings. In turn, CAS’ loss allegedly arose from a settlement found with CAS’ customer Navistar on recall costs expended by Navistar and its customer Ford regarding injectors equipped with defective o-rings from Lot 610101. The Tribunal holds that Claimant indeed owes an amount of USD 25 m to CAS and that such liability constitutes damages under Sec. 8.7 SSC. In detail:

135.

CAS entered into a Confidential Global Settlement Agreement and General Release with its customer Navistar on 31 October 2009 ("Global Settlement") (Exhibit C 73). The Global Settlement according to its Sec. III.1. provides for a cash payment from Navistar to CAS in the amount of approx. USD 18,5 reflecting the result of a netting of various items as set out in Exhibit A to the Global Settlement ("True Up"). The True Up reveals, as the Global Settlement in its entirety does, that various issues pending between CAS and Navistar were intended to be settled by the Global Settlement. The disputes between CAS and Navistar i.a. encompassed claims by CAS for a shortfall in ordering product ("volume shortfall claim"), the purchase by Navistar of CAS operations in South Carolina, the repayment of a vendor loan and certain warranty issues. One of the items addressed in the True Up is Sub-Sec. 4 with the following wording (excerpt):

Continental to Navistar updated

4. Warranty Payment to Navistar

PCR all Q issues (past and current) 25,000,000

Injector Driver Module (IDM) 4,000,000

136.

Claimant argues that the figure of USD 25 m contained in the True Up (as one of the entries influencing the final cash payment balance) is the amount agreed to be paid by CAS to Navistar in order to compensate Navistar’s recall costs incurred in connection with injectors which had failed due to defective Lot 610101 o-rings. This view is supported by Sec. III.2. a. of the Global Settlement indicating that the amount of USD 25 m plus USD 4 m (together USD 29 m) are payments in connection with warranty obligations, further by Sec. IV.2. making it clear that the "warranty claims arising out of the ‘O-Ring’ degradation issues of the failure mode identified in calendar year 2008 in product(s) manufactured by Precix" are covered by the release, further by Sec. 6 of the Understanding of Business Settlement (Exhibit C 74) indicating that CAS will pay to Navistar "$ 25 M for past and current warranty related items pertaining to the MY 2007 PCR system and components". In this connection, Mr. Wiesenberger confirmed in his testimony that the USD 25 m figure in the Global Settlement and the Understanding of Business Settlement referred to the settlement of the o-ring issue (TR day 1, page 75, lines 28 and 29, day 2, page 47, lines 12-14). On this basis, the Tribunal is convinced that the USD 25 m entry into the True Up was the amount agreed upon between CAS and Navistar as compensation for Navistar’s (and Ford’s) recall costs expended due to defective Lot 610101 o-rings. Further, the Tribunal is convinced that the amount of USD 25 m constituted a loss for CAS as if such amount would not have been entered into the True Up CAS would have been entitled to a payment by Navistar which surmounts the payment actually effected by USD 25 m.

137.

Respondent argues that the entry of USD 25 m into the True Up might have aimed at other purposes not disclosed by CAS or Claimant. So, the entry could have been made to provide CAS with a claim basis (against Claimant, and finally Respondent) and could have been compensated by an inadequate valuation of any of the other items addressed by the Global Settlement (i.e. the volume short-fall claim). The entry might as well have been used to cover other (not disclosed) warranty issues not connected with the o-ring issue. The Tribunal cannot find a factual basis for such allegations in the file or in the testimony of the witnesses. The reference to one other warranty item in the True Up, namely the IDM issue, underlines that the parties to the Global Settlement did look at warranty issues individually and not with a global view. That is also shown by mentioning the "Ambient Debris Warranty Claims" in Sec. IV.2. of the Global Settlement which has not been assigned a value though. The otherwise broad language of the release in Sec. IV.2. of the Global Settlement can be considered customary practice as parties typically wish to draw a final line under all possible disputes. It does not support the idea that there have been actual claims brought forward which were finally covered by the USD 25 m entry. Such was confirmed by Mr. Wiesenberger in his testimony and the Tribunal has no reason to doubt that.

138.

Also, the Tribunal is unable to discern any fact which would support the idea of a "faked" entry in the True Up. It is undisputed that Navistar and Ford conducted a recall campaign (called "Customer Satisfaction Program" or "Authorized Field Change") (see Exhibit C 32, C 78, C 79, C 80). The forecast for the campaign costs for Navistar and Ford together amounted to USD 31 m (Exhibit C 33, WS Wiesenberger para. 60). Accordingly, a compromise amount of USD 25 m does not seem to be unreasonable especially in light of the fact that the actual field costs expended by Navistar and Ford until February/June 2011 were already approaching the amount of USD 25 m. As of June 2011, the total costs for the field action incurred by Ford amounted to approx. USD 18,5 m (Exhibit C 71 a and 71 b) and by Navistar to approx USD 5,5 m (Exhibit C 75) as of February 2011 which already adds up to approx. USD 24 m. So, there is no indication that the entry of USD 25 m in the True Up had any other purpose than just reflecting such compromise.

139.

The further fact that Claimant and CAS are not aware of the terms of settlement found between Navistar and its customer Ford on the o-ring issue and the recall costs does not warrant a different view. The forecast for the costs of the field action covered Na-vistar’s as well as Ford’s projected costs. Navistar was under a warranty obligation to Ford according to Sec. 22 of the Next Generation Diesel Engine Supply Agreement (Exhibit C 83). So it was reasonable for CAS to assume that indeed Navistar indemnified Ford for costs expended there on the o-ring issue (see Exhibit C 77). It was also reasonable for CAS to base its decision with regard to the Global Settlement on this assumption even if it did not know the exact terms of the Navistar/Ford settlement. Sec. 22 E of the Next General Diesel Engine Supply Agreement (Exhibit C 83) does not change this line of thought. In case of a recall campaign caused by a defective delivery it is obvious that the actual causation (delivery of defective engines) will most likely be the "agreed causation" as indicated by Sec. 22 E.

140.

With regard to Claimant’s liability to CAS Claimant does not rely on a contract wording (as only purchase orders transmitted via Claimant’s SAP system exist, Exhibit C 13) but rather on Art. 35, 45, 74 to 77 CISG. Indeed, absent any agreement to the contrary, the CISG is applicable as to purchase and sale agreements concluded between a German entity (Claimant) and a US entity (CAS) (see Art. 1 para. 1 lit. (a) CISG). Art. 45 para. 1 lit. (b) CISG requires a breach of contract on Claimant’s side which is evidenced by the delivery of actuators with defective Lot 610101 o-rings (Art. 35 CISG). It further requires loss as a result of such breach of contract. Such loss can consist of a liability to third parties ("Haftungsschaden") (see e.g. OLG Dusseldorf, Exhibit C 43). This is the case here: Navistar as the third party concerned has, as outlined above (para. 135 and subs.), a claim against CAS resulting from the Global Settlement which has already been fulfilled by setting off the amount of USD 25 m against other items entered into the True Up. This constitutes loss on CAS’ side. The Tribunal holds that this loss is caused by the delivery of actuators with defective Lot 610101 o-rings of Respondent (see para. 117 and subs.) and that, accordingly, the requirements for the claim under Art. 45, 74 CISG are met.

141.

The limit for recoverable damages under Art. 74 CISG is that the "damages must not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in light of the fact and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract". This limitation does not, though, foreclose or limit Claimant’s claim. At the time the contractual relationship between Claimant and CAS with regard to the delivery of actuators was entered into it was obvious to Claimant that it had to deliver a defect-free product and that Claimant might be responsible for damages resulting from a defective delivery. Further, the risk of recall and product liability is inherent to deliveries in the automotive industry. Accordingly, it was foreseeable for Claimant that recall costs could be a factor in the calculation of damages owed.

142.

Respondent takes the view that if, in principle, there was a causal link between the delivery of defective Lot 610101 o-rings and recall costs at Navistar and Ford, such causal link has been extinguished by the conclusion of a settlement between CAS and Navistar. By entering into the Global Settlement CAS, so Respondent, voluntarily accepted a liability and this way interrupted the chain of causal events this way removing the causal link for a damage claim.

143.

The Tribunal holds that no such interruption of the chain of causal events occurred. Such interruption needs to be considered with regard to two different claims, namely CAS’ claim against Claimant (see para. 144 and subs.) and Claimant’s claim against Respondent (see para. 150). In detail:

144.

As issues of causation are not addressed by the CISG it is necessary to first determine which legal order applies in ascertaining the applicable causation rules.

145.

The Tribunal holds that German law governs the legal relationship between Claimant and CAS according to Art. 4 para. 1 lit. (a) Rome I Convention (Verordnung (EG) No. 593/2008) as Germany is the place of business of the seller which is Claimant. Therefore, German law also governs the issue whether and under what circumstances the conclusion of a settlement agreement interrupts the chain of causal events.

146.

According to German law the chain of causal events is not interrupted if the settlement has been made on the basis of a reasonable assessment of the factual and legal situation. Interruption would only occur if the damaged party had "intervened with the chain of events potentially leading to damages in an unusual and inappropriate manner and would have created a further cause which ultimately led to the damage" (BGH, NJW-RR 1992, 1196; see also OLG Hamm NZA-RR 1998, 485). In applying this legal standard the Tribunal holds that the conclusion of the settlement with Navistar has not been an unusual and inappropriate intervening action committed by CAS as the terms of the settlement were reasonable under the circumstances of the case:

147.

CAS was liable to Navistar to compensate Navistar’s damages caused by the defective o-rings under a Master Supply Agreement Terms and Conditions ("MSA", Exhibit C 30) and a Contract Term Sheet ("CTS", Exhibit C 31). According to Sec. 22. MSA CAS was under a warranty obligation to Navistar and owed Navistar damages arising from a defective delivery (see in detail the legal analysis submitted by Claimant’s co-counsel Womble Carlyle Sandridge & Rice of 15 July 2011, page 5 and subs which remained undisputed by Respondent with regard to the legal rules cited). The injectors delivered with the failing Lot 610101 o-rings were defective and, accordingly, CAS had to compensate Navistar for its damages (including Navistar’s liability to third party Ford). Such liability could have been very significant in numbers if Navistar and/or Ford would have decided to conduct a "fix on fail" approach with regard to the injectors. In light of the Weibull analysis undertaken by Navistar and the resulting forecasted fix on fail costs (Exhibit 33), the decision of Navistar and Ford to conduct a field action at considerably lower costs is to be considered a reasonable one. As such costs were projected to be around USD 31 m (Exhibit C 33) CAS’ liability would have extended to this amount. Accordingly, it was reasonable for CAS to find a settlement at a lower figure, namely USD 25 m. This seems to be especially true if one looks at the matter with hindsight: As of February/June 2011 already around USD 24 m had actually been expended by Navistar and Ford on the field action with further costs to be expected.

148.

Nothing in the negotiation and finalization of the Global Settlement supports the argument that it was a case of uncommon or unreasonable intervention with the causal chain of events. CAS’ negotiation strategy including its outcome is to be considered reasonable and not beyond customary standards. This is also true for the fact - heavily complained about by Respondent - that CAS did not involve Respondent in the settlement negotiations. The decision not to involve Respondent must be accepted by Respondent. There is no legal authority supporting a claim of Respondent to be present at settlement negotiations between CAS and Navistar or to be able to control such negotiations. Sec. 8.8 SSC does not provide otherwise as the information and cooperation obligations of both parties are not aiming at preventing one party from settling unilaterally. It was CAS’ liability which was at stake vis-à-vis Navistar and, therefore, it is well understandable that CAS wanted to deal with that separately and without intervention of Respondent.

149.

The same analysis applies if one would examine the issue of an interruption of the causal chain of events by settlement under US law. Again, the reasonableness of a settlement in light of the circumstances and facts given is the decisive benchmark. Claimant’s co-counsel Womble Carlyle Sandridge & Rice in their legal analysis of 15 July 2011 - undisputed by Respondent with regard to the legal rules cited - come to the conclusion that also under US law standards the entering by CAS into the settlement with Navistar was reasonable and did not interrupt the causal chain of events (see para. 21 and subs. of Womble Carlyle Sandridge & Rice’s analysis). The Tribunal concurs with this analysis.

150.

With regard to the legal relationship between Claimant and Respondent the issue of a potential interruption of the chain of causal events is governed by German law (Sec. 13.9 SSC). Accordingly, the same analysis as undertaken above (para. 146 and subs.) applies with the consequence that also from the perspective of Claimant’s claim under Sec. 8.7 SSC no legally relevant interruption of causation occurred when CAS entered into the Global Settlement with Navistar.

151.

Claimant did not (yet) suffer loss from the delivery of actuators with defective o-rings in the sense of a drain of funds. Rather Claimant’s claim rests on a liability vis-à-vis CAS. According to the standard set by § 249 BGB the determination of damages requires a comparison of Claimant’s assets before and after the damaging event, i.e. before and after the delivery and use of defective Lot 610101 o-rings. Such comparison reveals that after the damaging event Claimant is burdened with a liability in the amount of USD 25 m. This liability is to be entered in Claimant’s balance sheet and leads to a reduction of Claimant’s net equity in the same amount. Accordingly, Claimant’s liability reflects damages on Claimant’s side in the nominal amount of the liability.

152.

§ 249 BGB further makes it clear that a claim for damages is not necessarily a claim for payment (money damages). The concept of § 249 BGB is based upon the idea of "restitution in kind" ("Naturalrestitution"). This means that the damaged party is to be effectively put into the situation which would exist without the damaging event. On this basis, Claimant can require the indemnification from its liability to CAS. As long as Claimant has not effected payment on its liability to CAS indemnification means that Respondent frees Claimant from its liability by paying CAS directly the amount owed, i.e. the amount of USD 25 m.

153.

The Tribunal finally examined the issue of contributory negligence on Claimant’s side. It came to the conclusion that no such contributory negligence exists and therefore Claimant’s claim for damages is not to be reduced on this basis.

154.

In this context one could first consider the fact that Claimant although knowing the o-rings to be critical components of injectors failed to conduct a random check of o-ring lots received from Respondent with regard to tensile strength or other parameters which could have made the parties aware of the problems with Lot 610101 at an early stage. The Tribunal, though, is convinced that this cannot serve as a basis for charging Claimant with contributory negligence. It was Respondent’s duty to check the product delivered and Claimant was expressly relieved from a duty to test incoming products (see Sec. 3.10 SSC) which is a customary procedure in the automotive industry.

155.

Further, the Tribunal considered Respondent’s argument that the parameters set in Specification D were not in line with the actual requirements of US heavy diesel truck engines. Had VDO, so Respondent’s argument, set the right standard (higher tensile strength requirements), Lot 610101 o-rings had not been put into commerce by Respondent. This, though, is rather an issue to be examined under the legal concept of "permissible alternative behaviour" than of contributory negligence. If it could be shown that o-rings with tensile strength values within specification were nevertheless inappropriate for US diesel truck applications, such could be a valid defence against the claim in question. The pertinent analysis was undertaken by the Tribunal (see para. 128 and subs.). The Tribunal held that it was Respondent’s burden of proof to show that the use of within spec o-rings would have caused the same leakages and that Respondent failed to meet its respective burden. There is no room for an additional examination of the same issue under a contributory negligence concept and, even if one would see this differently, it would be again Respondent’s burden to show the relevant facts which has not been done.

156.

Finally, the Tribunal considered Respondent’s argument that Claimant inflated damages due to providing Navistar with data overstating the number of fuel injectors at issue (Sec. 310 and subs. Respondent’s PHB). The Tribunal, though, comes to the conclusion that Claimant cannot be charged with having inflated damages. The list provided by Claimant to Navistar and Ford addressing approx. 96,000 actuator/fuel injector pairs manufactured between 9 April and 7 May 2008 (Exhibit C 15) was Claimant’s best possible limitation of fuel injectors to be replaced. Originally, approx. 108,000 actuators manufactured during the Relevant Time Period had been sent to CAS. Claimant was able to reduce the potentially affected actuator/fuel injector pairs to 96,000 because it could be established that certain defined fuel injectors had been delivered with already replaced o-rings (not being products from Respondent). Although Exhibit C 15 might list too many actuator/fuel injector pairs as they were partly not equipped with Lot 610101 o-rings and, certainly, parts of Lot 610101 o-rings were not defective, the Tribunal cannot devise a way for Claimant to further limit the number of injectors to be recalled and Respondent does not offer such. Respondent mentions the possibility of cleaning out feeder bowls and/or using only one lot at a time. The Tribunal cannot see a legal basis for such a far reaching intrusion into Claimant’s production process. Especially, it cannot be Claimant’s task to foresee and provide for all situations of potentially defective deliveries by suppliers.

157.

Claimant claims interest in the amount of 8 % above the base rate published by the European Central Bank as of 23 July 2010. The Tribunal holds that Claimant is entitled to interest on its claim for damages, i.e. on the amount of USD 25 m at a rate of 8 % above base rate published by the European Central Bank under § 288 para. 2 BGB and that Claimant is entitled to such interest from the date when the Secretariat has received the request for arbitration (which was already the case on 30 July 2010) (§§ 291 BGB, 1044 ZPO modified by Art. 4 para. 2 of the Rules). As interest is applied for from 31 July 2010 only, the Tribunal awards interest from this date.

158.

The Tribunal holds that Respondent shall bear the costs of arbitration and the reasonable party costs incurred on Claimant’s side as Claimant is successful with its claim for damages in its entirety. This holding is based on Art. 31 para. 3 of the Rules and on § 1057 para. (1) ZPO. The Tribunal finds that the "loser pays"-rule established under German procedural law is appropriate in the instant case.

159.

In application of this holding, the Tribunal awards Claimant the following reimbursement claim for costs against Respondent:

160.

The costs of arbitration have been fixed by the ICC Court of Arbitration at an amount of USD 540,000 (see letter of 21 December 2011). The parties have advanced an amount of USD 270,000 each. Accordingly, Claimant is entitled to a reimbursement of its advance in the amount of USD 270,000.

161.

Further, Claimant is entitled to the following costs incurred by it in connection with the conduct of the arbitration:

(a)	Fees of Representation
	CMS Hasche Sigle
	Fees	EUR	955,493,84
	Expenses	EUR	61,904,02
		EUR	1,017,397,86
	Womble Carlyle Sandridge & Rice
	Fees	USD	677,580,00
	Expenses	USD	43,967,25
		USD	721,547,25
(b)	Travel Costs	EUR	22,796,20
	(Claimant’s Representatives and Claimant’s witnesses)	USD	38,611,96
(c)	Other
	Costs of expert J. Kiefaber	EUR	25,760,57
	Laboratory Richter costs	EUR	1,190,00
	Court Reporter	EUR	6,021,00
	Translator	EUR	2,856,00
		EUR	35,827,57

162.

Claimant has submitted the above figures on 20 and 21 November 2011. Travel and other expenses are reasonable in amount and match with the course of this arbitration proceeding. The costs of Claimant’s legal representation is as well reasonable. Both parties used German and US counsel in this arbitration which is due to the fact that the major portion of the relevant facts occurred in the United States and US law was, although not the legal order governing the contractual relationship between the parties, of significance in various respects. This justifies to extend the reimbursement to the fees and expenses of both, German and US legal counsel. Claimant’s fees for legal representation amount to EUR 955,493,84 (German counsel) and USD 677,580 (US counsel) whereas Respondent’s fees for legal representation amount to USD 515,419,17 (German counsel) and USD 196,983,07 and USD 44,180,51 (US counsel). As it was Claimant who carried the burden of proof and had to establish all relevant facts of its claim, it is a reasonable assumption that Claimant’s legal counsel had to

expend significantly more time on the case than Respondent’s legal counsel. On this background the Tribunal considers the costs claimed by Claimant, although higher than those of Respondent, still to be reasonable in amount. Finally, the costs expended for the mediation (included in the costs submitted by the parties) is considered by the Tribunal to be reimbursable as it was reasonable under the circumstances to try and find a resolution of the matter by mediation.

163.

Based on the foregoing considerations the Arbitral Tribunal issues the following

AWARD:

(1) Respondent is ordered to indemnify and hold harmless Claimant from its liability towards CONTINENTAL AUTOMOTIVE SYSTEM US, INC. by paying to CONTINENTAL AUTOMOTIVE SYSTEM US, INC. the sum of USD 25,000,000 (in words: twenty-five million US Dollars) for and on behalf of Claimant plus applicable interest in the amount of 8 % above base rate published by the European Central Bank as of 31 July 2010.

(2) Respondent is ordered to pay to Claimant the following amounts:

(a) in reimbursement of Claimant’s advance on the costs of arbitration an amount of USD 270,000; and

(b) in reimbursement of Claimant’s costs for legal representation amounts of EUR 1,017,397,86 and USD 721,547,25; and

(c) in reimbursement of Claimant’s other expenses amounts of EUR 58,623,77 and USD 38,611,96.

Siegfried H. Elsing	Appointed by the claimant
Jens Bredow	Appointed by the respondent
Roderich C. Thümmel	President

Continental Automotive GmbH v. Acushnet Rubber Company, Inc

Documents of the case

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

Final Award

Abbreviations:

I. Parties to the Arbitration

(1) Claimant

(2) Respondent

II. Arbitral Tribunal and Place of Arbitration

III. Arbitration Agreement and Governing Law

IV. Factual Background of Dispute

V. Claimant’s Position and Request for Relief

(1) Claimant’s Main Arguments

(2) Relief Sought by Claimant

VI. Respondent’s Position and Request for Relief

(1) Respondent’s Main Arguments

(2) Relief Sought by Respondent

VII. Course of Proceedings

(1) Initiation of Proceedings

(2) Constitution of the Tribunal

(3) Further Course of Proceedings

VIII. Findings of the Tribunal

(1) Jurisdiction and Standing to Sue

(2) Requirements of Claim for Damages as Invoked by Claimant and Burden of Proof

(3) Defect of Lot 610101 O-Rings

(a) Applicable Specification

(b) Interpretation of Sec, 4.7 of Specification D

(c) Failure of Lot 610101 O-Rings to Meet Tensile Strength Requirement of Specification D

(3) Fitness for Intended Purpose

(4) Other Breaches of Contract

(a) 3D Banbury Mixer

(aa) O-Ring Lot Covered by PPAP

(bb) Change of Mixing Device

(cc) Process Defect

(b) Exceeded Shelf Life

(5) Causation of Engine Failures

(a) Relevant Issue and Burden of Proof

(b) Engine Failures were Caused by Leaking Injectors

(c) Defective Lot 610101 O-Rings as Cause for the Leakages

(d) Specification for O-Rings not reflecting Special Application Requirements?

(6) Causation of Loss of USD 25 m at Claimant

(a) Loss on the Side of CAS

(b) Claimant’s Liability to CAS

(c) No Interruption of the Chain of Causation

(aa) CAS’ Claim against Claimant

(bb) Claimant’s Claim against Respondent

(d) Liability as Damage

(e) No Contributory Negligence

VIII. Interest

IV. Costs

X. Award

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