A European cement manufacturer and its two Asian affiliates (the buyers, referred to collectively as Claimant) entered into an agreement to purchase shares in an Asian cement-manufacturing business wholly owned by Respondent 1. Respondent 2 was the president and majority shareholder of Respondent 1. The parties agreed that the law of the Asian State X was to govern the merits of their dispute. Claimant accused Respondents of breaching express and implied warranties in the sale and purchase agreement (SPA). The express warranties related to the production capacity of a cement-manufacturing plant operated by the target business, full disclosure of all material facts concerning the plant and completion of an additional production line. The implied warranties concerned the absence of hidden or latent defects and the plant's fitness for its purpose.

Un fabricant européen de ciment et ses deux filiales asiatiques (les acheteurs, collectivement désignés comme le demandeur) avaient conclu un accord en vue d'acquérir une participation dans une entreprise asiatique de fabrication de ciment détenue à 100 % par le défendeur 1. Le défendeur 2 était le président et actionnaire majoritaire du défendeur 1. Les parties étaient convenues que la loi de l'État asiatique X régirait le fond de leur différend. Le demandeur accusait les défendeurs de violation des garanties expresses et tacites de la convention d'achat-vente (« SPA »). Les garanties expresses portaient sur la capacité de production d'une cimenterie exploitée par l'entreprise cible, l'exposé complet de tous les faits importants concernant l'usine et la mise en place d'une chaîne de production supplémentaire. Les garanties tacites portaient sur l'absence de vices cachés et l'adéquation de l'usine à son objet.

Un fabricante europeo de cemento y sus dos filiales asiáticas (los compradores, denominados colectivamente «demandante») celebraron un contrato encaminado a comprar acciones en una empresa asiática fabricante de cemento controlada íntegramente por el demandado 1. El demandado 2 era presidente y accionista mayoritario del demandado 1. Las partes acordaron que la ley del Estado asiático X regiría el fondo de su controversia. El demandante acusó a los demandados de incumplir las garantías, tanto expresas como implícitas, del contrato de compraventa («SPA»). Las garantías expresas estaban relacionadas con la capacidad de producción de una planta de fabricación de cemento explotada por la empresa objetivo, la divulgación total de todos los hechos materiales relativos a la planta y la realización de una línea de producción adicional. Las garantías implícitas se referían a la ausencia de defectos ocultos o latentes y a la conveniencia de la planta para su propósito.

'A. Applicable rules of [State X] law and trade usages

251. Many of the relevant provisions of the [State X Civil Code] are based on the United States' Uniform Sales Act1 and, thus, United States' case law interpreting these principles is persuasive, although not binding, on [State X] courts interpreting the principles in the [State X Civil Code].2

252. The ICC Rules also apply and Article 17(2) provides that "[i]n all cases the Arbitral Tribunal shall take account of the provisions of the contract and the relevant trade usages".

253. The Tribunal accepts that it is a trade usage within the cement industry to negotiate a price for an operating cement plant based on the rated capacity of that plant and an appropriate price per tonne of production capacity. The evidence showed that the relevant price per tonne negotiated in this case included limestone supply and strategic considerations such as the location of the Plant and the local circumstances . . .

254. The Tribunal also notes that it is a trade usage within the cement industry to identify an acquisition target, make general inquiries and investigations regarding the state of the assets and then negotiate an agreement that contains warranties designed to protect the buyer's interests ...This is necessary because in order to perform a full inspection of the internal workings of an operating cement plant, it would be necessary to stop production, which is not a standard practice.

....... . .

256. The following sections of the [State X Civil Code] provide guidance on the issue of express warranties:

[Art. 1] Where the obligation of either party to a contract of sale is subject to any condition which is not performed, such party may refuse to proceed with the contract or he may waive performance of the condition. If the other party has promised that the condition should happen or be performed, such first mentioned party may also treat the non-performance of the condition as a breach of warranty.

[Art. 2] Any affirmation of fact or any promise by the seller relating to the thing is an express warranty if the natural tendency of such affirmation or promise is to induce the buyer to purchase the same, and if the buyer purchases the thing relying thereon. No affirmation of the value of the thing, nor any statement purporting to be a statement of the seller's opinion only, shall be construed as a warranty unless the seller made such affirmation or statement as an expert and it was relied upon by the buyer.

257. With respect to implied warranties, the following sections of the [State X Civil Code] are relevant:

[Art. 3] In a contract of sale, unless a contrary intention appears, there is:

(1) An implied warranty on the part of the seller that he has a right to sell the thing at the time when the ownership is to pass, and that the buyer shall from that time have and enjoy the legal and peaceful possession of the thing;

(2) An implied warranty that the thing shall be free from any hidden faults or defects, or any charge or encumbrance not declared or known to the buyer.…

[Art. 4] The vendor shall be responsible for warranty against the hidden defects which the thing sold may have, should they render it unfit for the use for which it is intended, or should they diminish its fitness for such use to such an extent that, had the vendee been aware thereof, he would not have acquired it, or would have given a lower price for it; but said vendor shall not be answerable for patent defects or those which may be visible, or for those which are not visible if the vendee is an expert who, by reason of his trade or profession, should have known them.

[Art. 5] In a sale of goods, there is an implied warranty or condition as to the quality or fitness of the goods, as follows:

(1) Where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are acquired, and it appears that the buyer relies on the seller's skill or judgment (whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be reasonably fit for such purpose;

(2) Where the goods are bought by description from a seller who deals in goods of that description (whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be of merchantable quality.

[Art. 6] The vendor is responsible to the vendee for any hidden faults or defects in the thing sold, even though he was not aware thereof.

This provision shall not apply if the contrary has been stipulated, and the vendor was not aware of the hidden faults or defects in the thing sold.

[Art. 7] In the cases of Articles [4(6 above], the vendee may elect between withdrawing from the contract and demanding a proportionate reduction of the price, with damages in either case.

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(i) Contractual interpretation

(1) Warranties: Line 2

260. As finally submitted in their post-hearing brief on liability, the Claimants claim against the Respondents for three distinct failures in respect of Line 2: (i) a failure to deliver Line 2 free of hidden defects, (ii) a failure to deliver Line 2 fit for its intended purpose and (iii) a failure to disclose all material facts relating to widespread problems encountered in Line 2 prior to its acquisition by the Claimants . . .

261. In support of these claims, the Claimants rely upon express and implied warranties. The express warranties are advanced under Clauses 4.2(f) and 4.2(g) of the SPA ...The implied warranties are advanced under [the State X Civil Code], which are set out in the Code's Section 3 (Conditions and Warranties), Subsection 2 (Warranty Against Hidden Defects of or Encumbrances Upon The Thing Sold) ...In summary, subject to qualifying conditions, [the State X Civil Code] renders the vendor responsible for a warranty against hidden defects rendering the goods unfit for their intended use; and ...implies a warranty as to the reasonable fitness of the goods for their intended purpose. It is convenient to address here the express warranties first.

....... . .

(3) Clause 4.2(f)

265. Clause 4.2(f), after incorporating the SPA's defined terms, reads as follows, broken down into numbered sub-paragraphs for ease of reference later:

[1] Seller [the First and Second Respondents] [2] represents, warrants, and covenants to Purchaser [the First Claimant] as of the date of [the SPA: 21st October 1998: the SPA was in fact signed on 28th October but back-dated to 21st October 1998] and the Closing Date [28 October 1998] that:

.... [3] (f) the Cement and Mining Assets [Both are defined terms in the SPA] listed in Annex C [4] represent all of the assets required to operate a cement factory with a clinker capacity [5] of 2.46 million tonnes per year [6] in the ordinary course of business; ...

266. [1] The Seller, as defined, is both [Respondent 1] and [Respondent 2]. As elsewhere decided in this Award, [Respondent 2] is also a principal party to the SPA,3 including any warranties contained in Clause 4.2.

267. [2] The heading to Clause 4 of the SPA is "Representations and Warranties"; and the introductory words to both Clauses 4.1 and 4.2 begin with the phrase "Seller represents, warrants and covenants to Purchaser". Given the parties' own contractual language, it is not again possible to limit sub-clause (f) to mere representations only and to exclude any possible element of a contractual warranty. The verbs "covenant" and "warrant" are the language of contractual promise and not mere representation; and although there may be no distinction or no significant distinction between "warrants" and "covenants" in the English language, there is no cause here to treat both as mere surplusage, neither as a matter of English usage nor under the laws of [State X]. Moreover, such a distinction could not be squared with the effect, rightly acknowledged by the Respondents, of the warranty contained in Clause 4.2(g). Moreover, while it may be an answer to a claim based on misrepresentation that the representee did not rely on the representation, such lack of reliance can be no answer to a claim for breach of a warranty in the form of a contractual promise: under the laws of [State X] (as elsewhere), a promise is a promise. The Respondents' invocation of [the State X Civil Code] is likewise irrelevant to a contractual warranty: the Claimants are not here seeking to convert a mere affirmation or statement into a warranty; here the warranty is an express contractual promise.

268. [3] Annex C, entitled "List of Cement and Mining Assets", does not expressly include Line 3, which was still unbuilt as at [the date of the SPA]. This was however a non-exhaustive definition: see Annex C "among others" ...and it is not possible to make commercial sense of the later figure of "2.46 million tonnes" without taking into account the future Line 3 (see point [5], at paragraph 270, below).

269. [4] Capacity: This is the first crucial issue of interpretation separating the parties; it overlaps with the Respondents' case on a separate agreement allegedly converting the transaction to terms "as is, where is"; and the Tribunal addresses these related points separately below.

270. [5] 2.46m: This figure of 2.46 million tonnes applies to Lines 1, 2 and 3, but not to Lines 1 and 2 without Line 3; and it excludes Line 4.

271. [6] Ordinary Course of Business: This is the second crucial issue of interpretation separating the parties. It assumes, for example, electrical supply, as indicated in regard to Line 3 by Schedule 1 of Annex D to the SPA; but the Respondents also contend that it must mean [Respondent 1]'s ordinary course of business because at the relevant dates . . ., [Claimants] had not yet operated the plant as [their] own business. There is an echo here of the Respondents' case on "capacity"; but even if this point were decided in the Respondents' favour and limited to design capacity, the Claimants contend that the Respondents, on the evidence, did not meet even this lesser standard. In the Tribunal's view, the phrase means nothing more than "normally"; but the Tribunal returns to these broader points below.

(4) Clause 4.2(g)

272. Clause 4.2(g), after likewise incorporating the SPA's defined terms, reads as follows, broken down into numbered sub-paragraphs for ease of reference later:

[1] Seller [the First and Second Respondents] [2] represents, warrants, and covenants to Purchaser [the First Claimant] as of the date of [the SPA: 21st October 1998: as already indicated, the SPA was in fact signed on 28th October but back-dated to 21st October 1998] and the Closing Date [28 October 1998] that:4 ...

[3] (g) all material facts relating to the [4] Cement and the Mining Assets [5] have been disclosed to Purchaser [the First Claimant] in writing;

273. [3] The test of materiality imports the "de minimis" rule; it also, in the Tribunal's view, limits facts to those which, if disclosed, would have influenced the judgment of the purchaser on its decision to agree to the purchase, including price or particular terms; but otherwise the word "all" self-evidently applies a broad test.

274. [4] The Cement and Mining Assets are defined terms in the SPA; and as regards Line 2, no controversy exists as to their scope.

275. [5] Much of what was learned by the Claimants was not in fact disclosed by the Respondents but by third persons or by themselves on site visits to the plant, by permission of the Respondents. The Claimants make no distinction as to the form of disclosure, save that it must be in writing as at [date of the SPA].

276. The crucial point of interpretation arising from the parties' respective cases on Clause 4.2(g) turns on the argument advanced by the Respondents based on Clause 1.1 of Annex D to the SPA, to the effect that the Claimants had inspected the plants (Line 2 as built and Line 3 still unbuilt); and in recording that both were "acceptable", the Claimants thereby limited or extinguished the effect of the warranty in Clause 4.2(g). However, subject to that argument and the effect of the "as is, where is" submission, which the Tribunal considers separately below, Clause 4.2(g) raises no further difficulty of contractual interpretation for the Claimants' case.

(5) The implied warranties

277. The Respondents contend generally that no statutory implied terms can be applied to Line 2 because it was "second-hand goods". The Tribunal rejects this submission for two reasons. First, Line 2 was newly built as of [date of the SPA]: ...it had operated for just over 15 months; and for an industrial plant, [Respondent 1's chief engineer] was, in our view, right to reject its description as "second-hand". Second, the Tribunal considers that even the categorisation of Line 2 as "second-hand goods" would not automatically preclude the application of the statutory terms; and in particular, the decision of the Supreme Court in [another case] suggests that such implication would depend on the circumstances of the particular case. In the circumstances of this particular case, given the recent commissioning of Line 2, the Tribunal considers it appropriate to apply [the State X Civil Code].

278. As regards [the State X Civil Code], the Claimants must meet several qualifying conditions. The condition of "hidden defects" raises factual disputes but no issue of statutory interpretation. The exclusion of known patent or visible defects is irrelevant, because the Claimants advance no claim for such defects; but the Respondents contend that the Claimants as "experts" should have known of defects which were not patent or visible. This point likewise raises factual issues which are considered by the Tribunal separately below. Subject to these factual points, the Tribunal decides that the Claimants can invoke this implied warranty, to the effect that the Respondents are responsible for a warranty against hidden defects in Line 2, rendering Line 2 unfit for its intended use as a cement plant or so diminishing its fitness for such use that, had the Claimants been aware of such defects, the Claimants would not have acquired Line 2 or would have given a lower price for it.

....... . .

(6) Intermediate summary

280. It is convenient to summarise so far the effect of the Tribunal's decisions on the express contractual and statutory implied warranties upon which the Claimants base their claim in regard of Line 2. In the Tribunal's view, the Claimant establishes warranties in the terms of Clause 4.2(f), Clause 4.2(g) and [the State X Civil Code], subject to the further issues addressed below. The effect of Clause 4.2(f) turns on the meaning of "capacity" ...and the "as is, where is" issue ...The effect of Clause 4.2(g) turns on the issue arising from Clause 1.1 of Annex D to the SPA ...together with the "as is, where is" issue. The effect of [the State X Civil Code] turns on the issue relating to the Claimants' expertise, which is a factual issue to be determined in the context of each of the Claimants' claims for implied warranty ...Lastly, the Tribunal has here addressed only the issues of contractual and statutory interpretation. Other questions, including time-bars, breach, quantum and all factual issues are considered separately ...

(7) Warranties: Line 3

281. With respect to Line 3, [Respondents] claim mainly on the basis of Clause 4.2(m) of the SPA (the "Line 3 Warranty"), which provides the following express warranty: "Seller will complete Line 3 in accordance with Annex D". The provisions of Annex D provide specific direction on the requirements for completion of Line 3 and what will be considered successful commissioning of that line ...Further, Clause 5.1 of Annex D contains a further warranty for equipment and construction:

Seller will generally perform the Works following good standards and practices applicable in [State X] and all the equipment and materials will be new and of good quality. In particular, the Civil Works will be free from material defect, and the one year guarantee of the contractor ...will be passed on to either [the target company] or Purchaser....

In addition to these express warranties covering equipment and materials and the civil works, Clause 4.2(g) also applies to Line 3.5

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B. Contractual interpretation

....... . .

(ii) Scope of the express warranties

298. [Claimant] relies first on the express warranty contained in Clause 4.2(f) of the SPA which provides that "the Cement and Mining Assets listed in Annex C represent all of the assets required to operate a cement factory with a clinker capacity of 2.46 million tonnes per year, in the ordinary course of business". As already discussed, the components of this warranty at issue between the parties are "capacity"; "2.46 million tonnes per year"; and "in the ordinary course of business".6 The Claimants say that this "Assets Warranty" required the Respondents to transfer all of the assets required and that those assets, when operated in the ordinary course of business, be capable of producing 2.46 million tonnes of clinker per year.

299. What did the parties intend by the use of the word "capacity" in Clause 4.2(f) of the SPA? At the time the SPA was signed, the Claimants were aware that the Plant was incapable of actually producing 2.46 million tonnes of clinker per year. Nonetheless, the Claimants argue that the use of the word capacity was intended to insure that the Plant that was the subject of the sale, when operating normally, was actually able to produce the specified amount of clinker. The Respondents readily admit that Line 2 never achieved the rated capacity. However, the Respondents contend that the word capacity relates to the designed capacity and not actual capacity. The Tribunal agrees that capacity refers to designed capacity, or what the parties also referred to as rated capacity. The industry practice was to refer to production lines in terms of their rated capacity.

300. The Respondents state, however, that they believed that its rated capacity was 1 million tonnes of clinker per year because they had hired an expert ...to design Line 2 with this capacity. In these circumstances, the Respondents assert that they did not breach the warranty because they honestly believed that the rated capacity was as warranted. The Tribunal notes that this argument would be relevant to a claim for misrepresentation, but that it has no place in a claim for breach of warranty. Whether the Respondents believed the warranted capacity to be correct or not is irrelevant to the breach of warranty claim. It may, however, be relevant for the Claimants' claims in fraud, which will be discussed further below. On the evidence, it is clear that Line 2, as designed, was not capable of producing 1 million tonnes of clinker per year. The Tribunal notes that the interpretation of "capacity" as referring to "design capacity" is the only one that makes sense when considered in the broader phrase "capacity of 2.46 million tonnes of clinker per year". The Tribunal will now turn to the meaning to be attributed to the figure contained in this express warranty.

301. 2.46 million tonnes represents the estimated rated capacity of all three production lines, if all three were fully operational. At the time of purchase, Line 1 (considered to make up 460,000 tonnes per year of this capacity) was mothballed. Works were required to restart Line 1, which involved additional costs ...While Line 1 is not at issue in this arbitration, it is relevant to determining the intent of the parties in drafting the express warranty contained in Clause 4.2(f).

302. Line 2 had commenced commercial operation within the previous 15 months, but was suffering from performance and reliability problems and had yet to operate at its rated capacity of 1 million tonnes of clinker per year. Line 2 also had some fundamental design problems. For example, the Claimants were aware that components of the Line 2 machinery were undersized and would have to be replaced in order to be able to achieve the rated capacity. Preaquisition, the Claimants estimated that they would have to invest approximately US$20 million in Line 2 in order to continue operating the line and work through the various performance problems ...The Claimants do not claim for any of these budgeted expenses in this arbitration, i.e. there is no claim for any of the costs arising from performance or reliability problems of which the Claimants were aware prior to the acquisition, through the [due diligence report] or otherwise. [Claimant] does claim for what it characterizes as hidden defects in Line 2. [Claimant] claims that it commenced the discovery of these problems after the line suffered a forced shutdown [two months after the date of the SPA] and continued to discover problems for the following two years ...

303. At the time of acquisition, Line 3 was under construction; the majority of the civil works had been completed and some of the machinery and equipment required for the line was in storage on site. Line 3 was expected to produce 1 million tonnes of clinker per year once it had been commissioned. The Claimants negotiated the ability to provide technical advice to the Respondents who were obligated to complete Line 3 under the terms of the SPA. The intention of this provision was to ensure that the observed issues with Line 2 were not repeated in the yet to be completed Line 3. What is important at this stage is to note that Line 3 was expected to eventually be capable of producing 1 million tonnes of clinker per year but that, at the time of acquisition (and for a period of at least 20 months following acquisition), it was not expected to produce any clinker at all.

304. In summary, at the time the SPA was negotiated, the Claimants were aware that the Plant was actually operating at approximately 606,000 tonnes of clinker per year.7 It was anticipated that with some gradual investment in Line 2 and the completion of Line 3, the Plant would be capable of operating at 2.46 million tonnes per year. Therefore, the phrase "capacity of 2.46 million tonnes of clinker per year" referred to the rated capacity of the Plant after certain known issues with Line 2 were addressed and after Line 3 had been successfully completed.

305. The parties also disagree on the meaning to be attributed to the words "in the ordinary course of business". The Respondents argue that this phrase must mean [Respondent 1]'s ordinary course of business because at the Closing Date, [Claimant] had not yet operated the plant as its own business. This point is similar to the argument that the Respondents have made with respect to capacity and is another attempt to persuade the Tribunal that the parties knew and agreed that the Plant that was the subject of the SPA was incapable of performing at its rated capacity. The Tribunal is unconvinced by this argument. In the context of the entire phrase in the express warranty at issue, the Tribunal finds that the words "in the ordinary course of business" meant nothing more than normally.

306. In essence, the phrase "with a capacity of 2.46 million tonnes of clinker per year in the ordinary course of business" more fully describes the Plant, which was the subject of the SPA, according to the industry practice of referring to operations by their rated capacity; the Plant and assets that were being transferred would normally, once the anticipated investment and modifications were made by the Claimants, produce 2.46 million tonnes of clinker per year.

307. The Claimants, in effect, argue that the Assets Warranty contains both qualitative and quantitative aspects. As to the qualitative aspect, the Claimants submit that this express warranty obligated the Respondents to provide assets that were qualitatively capable of producing 2.46 million tonnes per year in the ordinary course of business. In essence, the Claimants argue that the Assets Warranty is a capacity warranty. The Claimants say that this aspect of the express warranty is relevant for the allegedly defective Lines 2 and 3 assets that were delivered by the Respondents. This aspect is also relevant for [Claimant]'s claim that the Mining Assets, contrary to Respondents' representation, were not sufficient to operate a cement plant with a capacity of 2.46 million tonnes of clinker per year for 50 years.8

308. As to the quantitative aspect, the Claimants submit that the express warranty requires that all of the assets required to operate the cement factory were to be transferred by the Respondents. [Claimant] relies on the quantitative aspect of the express warranty for its claims for assets that it says were not transferred by Respondents at the Closing Date, i.e. the books and records relating to the assets; certain equipment and machinery; the warehouse and barracks; the land for coal storage; land for the proposed conveyor belt; and the road leading from the national highway to the Plant. Annex C to the SPA is incorporated into the Assets Warranty to specify which assets were to be transferred. This annex provides, in relevant part:

The Cement and Mining Assets to be transferred by Seller to [target company] and [Claimant 2], respectively, at the Closing Date shall include, among others, (a) the assets set forth in the [appraisers' report] ...and (b) the assets set forth in the inventory to be delivered by Seller to Purchaser on the Closing Date

[Emphasis added].

309. Annex E to the SPA defines "Cement Assets" as follows:

...all the [assets], which are required or reasonably necessary for the operation of a cement plant located at . . ., with (1) an annual clinker capacity of 2.46 million tonnes ...including, without limitation, the assets relating to Production Lines 1, 2, and 3, which are listed in Annex C.

310. It was not argued that the assets claimed by [Claimant ] under this aspect of the express warranty were listed in either the [appraisers' report] or the inventory mentioned in Annex C. [Claimant] submits that the words "assets ...shall include, among others" indicate that the lists provided were not exhaustive and that Clause 4.2(f), Annex C and Annex E read together required the Respondents to transfer all of the assets reasonably necessary to operate a cement plant with a capacity of 2.46 million tonnes of clinker per year.

311. As already discussed, [Claimant] was clearly aware at the time Clause 4.2(f) was drafted that the Plant did not have an actual clinker production capacity of 2.46 million tonnes per year. This descriptor only becomes meaningful in a situation where Line 1 is repaired and operated; Line 2 is upgraded and fully operational; and Line 3 is completed and operational. At the time the Assets Warranty was drafted, the Respondents were also aware that the Plant did not have an actual clinker capacity of 2.46 million tonnes per year but, like the Claimants, the Respondents thought that the Plant with all three production lines completed and operational would have that capacity. Given the state of the parties' knowledge of the capacity limitations of the Plant, the parties could not have intended that the Assets Warranty be a capacity warranty. The Tribunal considers that the words "with a clinker capacity of 2.46 million tonnes per year, in the ordinary course of business" were meant to more clearly describe the Plant that was the subject of the sale transaction between the parties. The Respondents were, therefore, required to convey all of the assets reasonably necessary to operate the Plant. Both parties were aware that additional works were required for the Plant to reach its rated capacity, hence the addition of the words "in the ordinary course of business". In the circumstances, the Tribunal does not consider that the express warranty in Clause 4.2(f) was a capacity warranty. [Claimant] did rely on the express warranty in Clause 4.2(f) with respect to the quantitative aspects of the warranty, which relate to not only the assets that [Claimant] claims were not transferred by the Respondents at the Closing Date, but also to the sufficiency of the Mining Assets.

312. [Claimant] also claims on the basis of the Material Disclosure Warranty,9 the express warranty provided by the Respondents that "all material facts relating to the Cement and Mining Assets have been disclosed to Purchaser in writing". As noted above, the parties did not define "material" in the SPA. However, it is important to note that Line 2 was commissioned approximately 15 months before the Plant was acquired by [Claimant] ...The Respondents advised [Claimant] that Line 2 was having "teething" problems, but that it was anticipated that those problems would be fully addressed before any sale of the Plant. In the context of the typical life of a cement plant, Line 2 was a new line and it was not expected that the equipment and materials used to construct the line would suffer from undue wear or break down in the short term. The Tribunal has already determined that the representations contained in Clause 4.2 of the SPA were express warranties. [The State X Civil Code] defines an express warranty, in part, as an affirmation or promise that has the natural tendency to induce the buyer to purchase the same. In that context, a material fact relating to the Cement or Mining Assets is one that would cause [Claimant] to reconsider the purchase, including the amount paid for the Plant or the particular terms. In addition, the Material Disclosure Warranty also applies to Line 3 and, more generally, to the other Cement and Mining Assets.

313. With respect to Line 3, [Claimant]'s claim is based primarily on Clause 4.2(m) of the SPA. The Tribunal finds that the express warranty contained in Clause 4.2(m) of the SPA is clear in its scope. The Respondents were required to complete Line 3 in accordance with Annex D and to ensure that the equipment and materials were of new and good quality and that the civil works for the line were free from material defect.

314. In summary, the Tribunal finds that the SPA contained express warranties. Specifically, the Assets Warranty required the Respondents to transfer all of the assets reasonably necessary to operate the Plant; the Material Disclosure Warranty required the Respondents to advise the Claimants, in writing, of any facts (including facts related to Line 3) that would impact the Claimants' decision to purchase the Plant or the amount paid or terms agreed for the purchase of the Plant; and the Line 3 Warranty required the Respondents to complete the construction of Line 3 in accordance with Annex D of the SPA.

....... . .

D. Quasi-delict

484. The parties agree that the existence of a contractual relationship between the parties does not preclude a finding of quasi-delict. The parties also agree that [State X] law provides that where both breach of contract and quasi-delict are claimed and proven, the successful party cannot be compensated twice for the same wrong ...The parties disagree on which acts can constitute a quasi-delict. The Claimants say that liabilities from different sources of obligations may overlap, e.g. contractual relations do not preclude quasi-delictual responsibility and vice-versa ...The Respondents argue that the same act that gives rise to a breach of contract cannot also give rise to a quasi-delict but an act that arises outside the contractual obligations between the parties can give rise to a quasi-delict . . .

485. The Tribunal accepts that the Claimants accurately set out the elements that make up a quasi-delict and human relations action at [State X] law:

Recovery under [State X law] requires a showing of the following elements: (i) damage suffered by the plaintiff; (ii) the fault or negligence of the defendant, or of some other person for whose acts the defendant must respond; and (iii) the connection of cause and effect between the defendant's fault or negligence and the damages incurred by the plaintiff. The concurrence of these elements obliges the defendant to pay damages to the plaintiff . . .

. . .

The specific elements of an abuse of right under [State X law] are: (i) a legal right or duty; (ii) which is exercised in bad faith; (iii) and with the sole intent of prejudicing or injuring another. Upon satisfactory proof of these elements, relief may be had under Article …, which furnishes the general sanction for all provisions of law that do not specifically provide for their own sanction. Given that [the former] makes abuses of rights contrary to law and [the latter] provides for redress of wilful or negligent injurious actions that are "contrary to law", every abuse of right under [the former] entitles the injured party to damages ...

The Court has also held that the principle of redress for an abuse of rights set forth in Article ...and redress for acts against good customs set forth in Article ...complement each other, and certain cases may fall within the purview of both provisions. [The latter] deals with acts contra bonus mores-literally "against good customs"-and has the following elements: (i) there is an act which is legal; (ii) but is contrary to morals, good customs, public order or public policy; and (iii) the act is done with intent to injure. An act is wilful if it is done with knowledge of its injurious effect. It is not necessary that the act be done purposely or solely to produce the injury ...

486. The Claimants did not make good their submissions on abuse of rights. In particular, the Claimants made no submissions as to the good customs that the Respondents allegedly breached, nor on the wilful nature of the alleged acts (or, for that matter, which acts were alleged to be the legal acts that formed the basis of this claim). In the circumstances, the Tribunal considers that the Claimants have not made out any claim on the basis of violations of Articles ...or ...of the [State X Civil Code].

487. In their Statement of Case ...the Claimants submit that the following acts of the Respondents constitute both breaches of contract and tortious conduct:

Line 2. [Respondent 1] failed to alert [Claimant] to the widespread problems it must have encountered in seeking to operate this Line. [Respondent 1]'s reasons for failing to operate Line 2 at its rated capacity thus focussed on the bottlenecks resulting from the defective conveyor which was due to transfer the raw materials to the Pre-heater Tower. This party did not, however, draw attention to the other problems in the mechanical and electrical components-such as those encountered in the Kiln and Cooler-which must have come to its attention during the 18 months it had operated this Line since its commissioning in January 1997 ...

Rather than disclosing these problems to [Claimant], [Respondent 1] deliberately sought to conceal some of the more apparent problems such as those encountered with the Kiln which repeatedly had to be shut down due to brick failures. The resulting repairs to the Kiln shell were thus concealed by bitumen being applied over the weld patches and the overall Kiln Shell being painted over prior to [Claimant]'s inspections of the same ...

[An expert]'s review of this Line's civil works also uncovered numerous examples of grossly negligent and/or fraudulent design and construction. By way of example, [the expert] discovered that certain tendons were missing from the beams of the Raw Meal Silo despite appearing in this structure's "As-built" drawings ...

Line 3. [The expert] also observed numerous examples of both inferior construction materials having being used on this Line's civil works and such materials having been assembled in a manner contrary to [Respondent 1]'s express representations and warranties ...By way of example, the Line 3 civil works were finally suspended by [Respondent 1] ...at the recommendation of [the civil engineer appointed by Respondent 1] after [Respondent 1]'s personnel had been observed "using a poor quality sand containing important parts of clay and earth for the preparation in-situ of concrete (obviously with an excess of water) for the [Cooler] building columns"....

[Respondent 1]'s failure to complete this Line in compliance with the construction standards set out in the Sale and Purchase Agreement has already been addressed in some detail in this submission as has that party's wholly unjustified refusal to correct its numerous breaches in this respect.

[Respondent 1]'s misconduct was further evidenced by that party's failure to deal with [Claimant] in good faith in the post-acquisition period despite [Claimant]'s best efforts to provide technical assistance to achieve the successful completion of this Line.

Limestone reserves. [Respondent 1]'s gross misrepresentations in respect of both the quantity and quality of the limestone reserves represents a further example of gross negligence or even fraudulent behaviour by that party.

Removal of documentation. [Respondent 1]'s obstructive behaviour was further demonstrated by its removal from the Plant of most of the documentation relating to the Cement and Mining Assets in breach of Article 5 of the Sale and Purchase Agreement. Although some (but by no means all) of this documentation was subsequently handed over to [Claimant], [Respondent 1] had no valid justification for removing these documents. Such an act was intended to disrupt the smooth transition of the Plant and/or to conceal evidence of defects in the Plant which [Respondent 1] had failed to draw to [Claimant]'s attention.

[Emphasis in original]

488. The Tribunal notes that the parties are in agreement that where both breach of contract and quasi-delict are claimed and proven, the successful party cannot be compensated twice for the same wrong. Leaving aside the issue of exemplary damages,10 the Claimants suggest that if a particular claim is made out in both contract and tort, there may be a difference as to the quantum of actual damages that can be awarded because the damages for quasi-delict include unforeseen damages ...However, the Claimants have not argued that any of the actual damages they seek were not reasonably foreseeable by the Respondents, nor have they distinguished, more generally, between the measure of damages they seek on the basis of contract and quasi-delict. In these circumstances, to the extent that the Tribunal has found that the Claimants have proved their breach of contract claims with respect to the acts alleged to also be quasi-delicts, no further actual damages can or should be awarded. Further, the Claimants submit that the same acts that form the basis for their breach of contract claim also form the basis for their quasi-delict claim. The Tribunal has determined that all of the Respondents' impugned acts, where proven, were breaches of contract. It is accordingly unnecessary to determine whether there is also liability in tort for these acts.

489. With respect to [Claimant]'s claims on Line 2, the Tribunal has already found that the impugned acts of the Respondents constituted breach of warranty and, thus, to the extent that the claims have been proven, actual damages have been awarded. It is unnecessary to determine whether the acts complained of also constitute quasi-delicts. The same is true with respect to [Claimant]'s claims related to Line 3.

490. With respect to the sufficiency of the limestone reserves, the Tribunal's conclusion is essentially the same. The Tribunal has found that the Respondents breached the Material Disclosure Warranty by failing to advise the Claimants of the insufficiency of the limestone reserves ...

491. With respect to the books and records removed from the Plant prior to Closing, the Tribunal orders that these items be returned to [Claimant] within thirty days of the date of this Award ...and the Claimants have not proven any other actual damages that relate to this breach of warranty.'

1
Claimants' Statement of Case at pp. 62-63 citing Moles v. Intermediate Appellate Court, G.R. No. 73913, 169 SCRA 777, January 31, 1989 as to PCC Article 1562.

2
Philippine First Insurance v. Hartigan, G.R. No. L-26370, July 31, 1970; Dale Sanders & A.S. Moreau, Jr. v. Hon. Regino T. Veridiano II et al., G.R. No. L-46930, June 10, 1988.

3
See § 3, above. [Editor's note: § 3 reads '[Claimant] and [Respondent 1] entered into a Letter of Intent . . ., an Escrow Agreement ...and the SPA. [Respondent 2] executed the Letter of Intent and Escrow Agreement as the representative of [Respondent 1]. [Respondent 2] is the President of [Respondent 1]. The SPA identifies [Respondent 1] and [Respondent 2] as parties and refers to them collectively throughout the agreement as the "Seller" ... [Respondent 2] executed the SPA in his personal capacity as majority shareholder of [Respondent 1] . . .']

4
See paragraphs §§ 266-267, above for the analysis of the common introductory Clause.

5
See §§ 272-276, above for the analysis of the warranty contained in Clause 4.2(g).

6
See §§265-271, above.

7
Line 2 was operating at approximately 2000 tpd. If one assumes 303 days of annual operation (1 million tpa/3300 tpd), then annual production would be 2000 tpd x 303 days = 606,000 tpy.

8
The Claimants later revised this figure to 30 years.

9
Clause 4.2(g) of the SPA.

10
The issue of exemplary damages will be dealt with separately later in this Award....