- (2002) Ningminshangzhongzi No. 36
- Higher People's Court, Ningxia Hui Autonomous Region
PASSING OF RISK (ART. 67 CISG) - SALE INVOLVING CARRIAGE OF GOODS -
A Japanese buyer and a Chinese seller entered into a contract for the sale of white corundum. A dispute arose between the parties concerning the payment of the price. As a result, the buyer delayed many times the loading of the goods, and this caused a long storage at the port. To solve the question the parties entered into a second contract which modified the loading period, during which period the goods suffered damage.
The first instance Court, making reference to the FOB clause contained in Incoterms 2000 and referred to in the contracts, held that the risk had already passed to the buyer, and according to Arts. 25, 73(1) and 74 CISG the buyer was liable for fundamental breach of contract. The buyer appealed, arguing that the seller had caused the quality of the goods to deteriorate by negligently packaging and transporting it.
The Court of Appeal reversed the first instance decision. According to the Court the parties had validly modified the first contract as to the time of loading before the goods were loaded through the second agreement. As neither party could provide evidence to prove when the lack of conformity arose, according to CISG (Art. 67) and Incoterms 2000 the risks would have passed to the buyer had they crossed the ship’s rail because FOB was the price term used in the contract. The Court in conclusion held that the risk had not yet passed to the buyer and rejected the seller's claim.
Japanese Xinsheng Trade Company v. Ningxia Hui Autonomous Region Nihong Metallurgic Product Company
Case No. (2002) Ningminshangzhongzi No. 36
Higher People's Court, Ningxia Hui Autonomous Region
27 November 2002
[Translation by Wu Dong, provided by Pace University, to be found at http://www.cisg.law.pace.edu]
FIRST INSTANCE. Shizuishan Intermediate People's Court 2 December 2001; (2000) Shijingchuzi No.11. PARTIES AND COUNSEL. Plaintiff (Appellant): Japanese Xinsheng Trade Company, Place of Business: Tokyo Dugang District Park 2-3-4 Japan; (...) Defendant (Appellee): Ningxia Hui Autonomous Region Shougang Nihong Metallurgic Products Company (Joint Venture), Place of Business: Ningxia Shizuishan Dawukou District Yongkang Road 2 (...)
After accepting the appellate plea, the Court held open hearing on 6 June and 20 November 2002. Counsel for [Seller] and [Buyer] attended the hearing. Trial on this case is now completed.
On November 11 1998, [Buyer] and [Seller] entered into Contract (No. 98NSN-1101) and its memorandum. The contract stipulated:
[Seller] sold 720 tons of white corundum to [Buyer];
Delivery term was FOB;
US $518 per ton and the total price was US $372,960;
The loading port was Yingkou China or Bayuquan harbor;
The loading period was January to June 1999, and installments were acceptable.
In the memorandum, the quantity for each month during the period of loading was stipulated.
During performance, [Seller] delivered 240 tons of goods to the Bayuquan harbor on 23 December 1998, 1 February 1999 and 11 February 1999. However, [Buyer] altered the time of loading many times so that 120 tons of goods were loaded on 3 March 1999 which should have been loaded in January and the other 120 tons that should have been loaded in February were not loaded at all. In respect of the remaining 120 tons, [Seller] sent five letters to [Buyer] to request it to fulfill its obligation. However, [Buyer] responded to ask for reduction of price, but no problem of quality was mentioned.
Later after negotiation, on 11 November 1999 the parties signed another contract (No. 99NSN-11-1) in respect of the goods not loaded under Contract No. 98NSN-1101. The new contract stipulated:
[Seller] sold 120 tons of white corundum to [Buyer];
The delivery term was FOB;
US $563 per ton and the total price was US $67,560;
The loading port was Bayuquan harbor;
The loading period was November to December 1999;
Identification of quantity and quality should be issued by the CCIB of Bayuquan harbor.
The memorandum thereof stipulated: This memorandum could not be separated from Contract 98NSN-1101 and Contract 99NSN-11-1. After Contract 99NSN-11-1 was performed, the former Contract 98NSN-1101 would be cancelled automatically. If new packages were needed, [Buyer] should be responsible for this. All the packing fee, loss of goods and manual work should be borne by [Buyer]. Even (if) no new packages were changed, the loss of broken bags should be borne by [Buyer] as well. Before loading, [Buyer] should notify [Seller] in time so that the latter could send persons to watch the changing of bags and loading.
On 23 November 1999, Yingkou Shipping Agency Company as [Seller]’s agent applied for inspection of 120 tons of white corundum to Bayuquan Entry-Exit Inspection and Quarantine Bureau. On 3 August 2000, upon the request of the Court of First Instance, the Bayuquan Entry-Exit Inspection and Quarantine Bureau issued a certification of the inspection of the exported white corundum involved in the present case (Inspection Number: 70673). It stated:
"We accepted Yingkou Shipping Agency Company’s application for inspection of 120 tons/bags of white corundum on 23 November 1999. On the same day, we sent inspectors to take samples and make preparation according to the GB/T4676-84 Standard. After inspection, we found that the result conformed to the requirements of the No. 99NSN-11-1 Contract. However, as the goods had not been loaded and exported yet, we did not issue a certification of quality."
On 26 November 1999, the two parties came to the port to change the bags and found 60 tons of goods had 1-3 mm thickness of breeze on their bags. Therefore, they opened some of the bags and found part of the goods polluted by breeze to different extents. The other 60 tons of goods, stored in the Shengxing Storage out of the port, were found wet partly. LI Ming, employee of [Buyer], and WANG Baojian, employee of [Seller] so reported to their corresponding companies in writing. [Buyer] therefore raised objection on quality to [Seller], which later led to litigation.
The Court of First Instance also found: [Buyer] applied for custody of evidence on 7 September 2000 and [Seller] applied for custody of samples and requested to deliver the goods to other clients. On 25 September 2000, [Buyer] applied again for overall sampling of the goods and claimed that if [Seller] did not remove the goods and withdrew its application, [Buyer] would withdraw its application for custody as well. When the Court of First Instance notified the two parties to submit custody fee, [Buyer] remitted renminbi [RMB] 7,000 on 16 October. Later, [Seller] withdrew its application for custody and promised not to remove the goods. Therefore, the Court of the First Instance notified the two parties that no measures of custody would be taken temporarily. On 8 January 2001, [Buyer] again applied for overall sampling of the goods. Two days later, the Court of First Instance made a ruling ((2000) Shijingchuzi No.12-1 Civil Rule) and approved it. On 15 January 2001, the Court of First Instance sent judges to the port and requested the two parties to arrive there as well. The two parties agreed that the Bayuquan Entry-Exit Inspection and Quarantine Bureau would be the inspector. [Buyer] still requested to spread all the bags and take samples from each bag. [Seller] agreed, but requested [Buyer] to offer a guarantee of RMB 900,000 before taking this measure of custody. After field survey and query for opinion of commodities inspection agency, it was confirmed that all the bags had to be spread to take samples from each bag. Meanwhile, to spread all the bags, the upper packages had to be removed first as the goods were piled up in three layers and for a long time, and this would cause the goods to be scattered and suffer great loss. Therefore, the Court of First Instance directed [Buyer] to provide a deposit of RMB 900,000 before the custody was taken. However, [Buyer] refused to provide the deposit, and said if the deposit was required [Buyer] would give up the application for custody. So at last no measure of custody was employed. On 21 January 2001, [Seller] submitted an application for disposal of the goods to mitigate the loss. [Buyer]’s letter arrived on 29 January 2001, in which [Buyer] requested the Court of First Instance to take measures of custody to preserve the evidence. The Court of First Instance on 12 February notified [Buyer] to provide a deposit of RMB 900,000 in seven days; otherwise [Seller] would be able to dispose the goods at its will. But [Buyer] still did not provide the deposit as it regarded that the amount exceeded the real value of the goods. Upon this, the Court of the First Instance did not take measures of custody and notified the two parties. On 17 May 2001, [Seller] resold the goods to the Shougang No.1 Refractory Materials Company. [Buyer] on 10 August 2001 submitted a demur to the Court of First Instance in respect to the disposal the goods.
In respect of the quality problem of the 120 tons of corundum caused by the breeze and water, the parties stuck each to its own position and neither offered any persuasive proof as to where the pollution came from.
The Court of First Instance held that the contract between the parties showed their true minds and therefore should be observed. However, [Buyer] was in delay of receiving the goods, which caused the 120 tons of corundum to be stored at the port for such a long time and thus breached contract (No. 98NSN-1101). Though the two parties signed the No. 99NSN-11-1 contract later, disputes arose when implementing this contract and it was not implemented at all. In the memorandum of this contract, Article 1 stipulated:
"This memorandum cannot be separated from Contract No. 98NSN-1101 and Contract No. 99NSN-11-1. Contract No. 98NSN-1101 will be cancelled automatically upon the fulfillment of Contract No. 99NSN-11-1."
Therefore, it could be observed that the conclusion of Contract No. 99NSN-11-1 did not terminate Contract No. 98NSN-1101, but maintained it. The fact of the performance showed that [Buyer] altered the loading time many times and thus did not fulfill its obligations; this constituted a fundamental breach of contract. According section B5 of the term "FOB" under Incoterms 2000, [Buyer] should bear all the risks of these goods. Consequently, the total loss should include that under the aforesaid two contracts. When [Seller] delivered the goods to the port, they conformed to the requirements of the contracts; the goods had to be stored at the port due to [Buyer]’s breach of contract, which caused losses. [Seller] therefore had no default in this case. In addition, [Seller] in order to perform the contracts used the Letter of Credit provided by [Buyer] as a guarantee to get loans to maintain its business. Due to [Buyer]’s breach and alteration of the L/C, [Seller] could not reimburse the loan in time and further could not get loans from other banks as the evaluation of its credit was lowered for this. [Seller] therefore could not maintain its normal production and had to stop production. Consequently, [Buyer] should compensate [Seller]’s fees for implementing the contracts and loss of profits RMB 774,962.4 and US $9,060. [Seller]’s other claims were not supported. The suit fee corresponding to these claims should be borne by [Seller].
Pursuant to Articles 25, 73(1) and 74 of the CISG, the Court of First Instance decided:
[Buyer] should compensate [Seller] RMB 774,962.4 and US $9,060 in three days as of the coming into force of its judgment.
If the payment was delayed, Article 232 of the Civil Procedural Law of the People’s Republic of China would be applied.
The suit acceptance fee was RMB 48,525.85; [Seller] should bear RMB 34,241.68 and [Buyer] should bear RMB 14,284.17.
After this judgment was made, [Buyer] was not convinced and appealed to the present court. Its claims and corresponding accounts are:
The contentious focus of the present case is the quality of the goods. The quality of the goods accounts for the contractual dispute arising from the international transaction between the two parties. As the goods were polluted by breeze and water, they lost their original value. [Buyer] deems that [Seller]’s neglect during the packaging and transportation caused the problem of quality.
The evidence found in the process of the first instance was erroneous. In the judgment of the first instance, the evidence provided by the two parties was listed and partly confirmed, however, all the essential evidence provided by [Buyer] was not adopted. As to the evidence provided by the Yingkou Bayuquan Entry-Exit Inspection and Quarantine Bureau, [Buyer] alleges that: first, its inspection was in respect of whether the goods conformed to the requirements of the contract but did not inspect the mixture of the breeze; second, when the Court of First Instance collected this evidence on 3 August 2000, it sent only a clerk accompanied by [Seller] to the Bureau. This did not comply with the legal procedural requirement that evidence shall be collected by more than two persons of the People’s Court. Therefore, [Buyer] alleges that this evidence should be excluded.
The test of evidence during the process of the first instance was not impartial. As the quality was the focus of the dispute, the two parties both provided related evidence. Nevertheless, the Court of First Instance only confirmed the evidence provided by [Seller], which clearly showed its partiality.
The calculation of the compensation was erroneous. The goods in dispute in the present case amounted to 120 tons, but the Court of First Instance calculated the loss of profits on the basis of the 480 tons not delivered under the Contract No. 98NSN-1101 and held that [Buyer]’s breach caused the quality problem. This was clearly incorrect.
According the custody of the evidence, before the first instance hearing, the Court of First Instance made a ruling (2000 Shijingchuzi No.12-1) to take custody of the evidence, but due to the so-called problem of guarantee raised by [Seller] the custody measures were not taken at the end. Therefore, the behavior of the Court of First Instance to meet [Seller]’s request was actually to connive at [Seller]’s destroying of the evidence.
The false founding led to the false application of rules or laws. The Court of First Instance did not accept [Buyer]’s evidence, favored [Seller] and found [Buyer] in breach so that it applied Incoterms and directed [Buyer] to bear the risk of loss caused by the quality problem. In [Buyer]’s viewpoint, due to the inclination of the Court of First Instance, its founding of the key merits of the case was false, which led to its false application of international trade customs. According to the term FOB, the risk of the goods passes when the goods cross the ship’s rail, and the rule of advance passing of risk in the B5 provision should not be applied in the present case. Therefore, the risk of loss should be borne by [Seller].
In sum, [Buyer]’s claims are: 1) to overrule the original judgment and dismiss [Seller]’s claims; 2) to direct [Seller] to bear the acceptance fee of the appeal.
[Seller] asserts that:
[Buyer] regards the key issue of the present case as the quality problem, while [Seller] regards [Buyer]’s fundamental breach as the key issue.
In respect of the so-called quality problem, it was caused completely by [Buyer]’s fundamental breach. Therefore, [Buyer] should bear all the corresponding liabilities.
In [Seller]’s viewpoint, the test of evidence during the first instance was impartial and fair.
In respect of the calculation of the compensation, [Seller] held that Contract No. 98NSN-1101 and Contract No. 99NSN-11-1 could not be separated from each other. Due to [Buyer]’s fundamental breach, Contract No. 99NSN-11-1 was not implemented. So the calculation based on 480 tons of goods was proper.
In respect of the custody of the evidence, it was not taken because [Buyer] refused to offer the requisite guarantee.
In respect of the so-called false application of law held by [Buyer], [Seller] alleges that in the first instance judgment, Incoterms was not referred to nor was the advance passing of risk. It was just an envisage or presumption of [Buyer].
Therefore, [Seller] alleges that the Court of First Instance found the facts clearly, tested the evidence impartially and fairly, and applied the law correctly.
The present Court holds that this case arose from a sales contract which reflected the true minds of the two parties and did not violate the CISG or Chinese laws so that it was valid. When delivering the second installment of goods (120 tons of corundum) under Contract No. 98NSN-1101, [Buyer] was in delay of loading due to the price dispute and this caused the goods had to be stored at the port for a long time. To settle the dispute in respect of the aforesaid 120 tons of goods, the two parties entered into Contract No. 99NSN-11-1 and altered the loading period to November/December 1999. The Court holds that, this was a modification of the former contract by the two parties and should be implemented. When fulfilling the second contract, the two parties went to the port to change the packages and check the goods, when they found the goods were polluted by breeze and water. Three days before that, the Bayuquan Entry-Exit Inspection and Quarantine Bureau had inspecting personnel take samples from the goods and do inspection, who issued an inspection report claiming that they conformed to the requirements of the No. 99NSN-11-1 Contract. However, the Bureau did not provide a reasonable explanation for the pollution by breeze and water and the inspection conclusion could not negate the fact that the goods had been polluted. Therefore, the inspection report could not be regarded as proof that the goods conformed to the quality requirements of the contract. As neither party could provide evidence to prove the origins of the pollution, according to the CISG and Incoterms 2000, the risks of the goods should be transferred to [Buyer] when they cross the ship’s rail because FOB was the price term used in the contract. In addition, before loading, the two parties agreed to modify the contract and alter the loading period of the goods, which reflected the true minds of the parties and should be implemented. So, the risk of losses had not yet passed to [Buyer] and [Seller] did not take care of the goods in the proper manner before loading. Therefore, [Seller] should bear all the risks of the goods; its claims and accounts lack support by facts or laws and so could not be supported by the Court. [Buyer]’s appeal and accounts conform to the relevant stipulations of the CISG and Incoterms 2000, so that is supported by the Court.
In sum, pursuant to Article 153 paragraph 1 item 3 of the Civil Procedure Law of the People’s Republic of China, the Court makes the following judgment:
The Civil Judgment of Shizuishan Intermediate People’s Court of Ningxia Hui Autonomous Region ((2000) Shijingchuzi No. 12) is reversed;
[Seller]’s claims are dismissed;
The acceptance fee of the first instance and appeal costs (RMB 14,284.17 each) should be borne by [Seller].
The present judgment is final.}}
Original in Chinese:
- available at
- available at the University of Pace website, http://www.cisg.law.pace.edu/}}