- (2013) Min Si Zhong Zi No. 35
- Supreme Court of the People's Republic of China
- ThyssenKrupp Metallurgical Prods. GmbH v. Sinochem Overseas Comp.
BUYER'S RIGHT TO TERMINATE THE CONTRACT (ART. 49 CISG) - ONLY IF BREACH BY SELLER IS FUNDAMENTAL (ART. 25 CISG)
[CLOUT case no. 1701; abstract prepared by Xiang REN]
In 2008 the buyer, a Singaporean company, and the seller, a German company, concluded a contract for the purchase of petroleum coke, stipulating that the typical HGI index value of the petroleum coke should be 36 -46 and that the buyer had the right to lodge a claim against the seller in respect of quality or quantity within 60 days of the goods’ arrival at port. The contract was established, governed and interpreted in accordance with the laws of the United States State of New York. The contract price agreed upon by the parties was for the petroleum coke was US$ 301.56 per ton (or 2,057.6 yuan renminbi, applying the standard exchange rate of 6.8232). The buyer paid all charges immediately upon delivery of the goods. Meanwhile the market price of petroleum coke dropped to 1305 yuan renminbi per ton. Subsequently, the buyer demanded resolution from the seller, in that the seller was in breach of contract because the HGI index value [of the goods as delivered] was 32; subsequently the buyer sued in court to annul the contract, demanding that the seller refund payment with interest as well as assume responsibility for the buyer ’s losses.
During the proceedings before the Court of first instance, the Jiangsu Province Higher People’s Court, the buyer, seeking to avoid further losses from long -term in-port storage of the petroleum coke involved in the case, and after informing the seller in writing, arranged through [the buyer’s] parent company to sell the disputed petroleum coke to a third company not involved in the case at 1,575.50 yuan renminbi per ton.
The Court of first instance, applying the relevant provisions of the Convention, ruled that the difference in HGI value from that stipulated in the contract constituted breach of contract; furthermore, by creating extreme marketing hardship for the buyer and depriving the buyer of benefits expected from signing the contract, [the seller] was in fundamental breach of contract. The buyer had the right to declare the contract avoided, and that right had not lapsed through [the buyer’s] having exceeded a reasonable time limit. For those reasons, the Court of first instance ordered that the be declared null and void, and that the seller refund the price of the goods with interest (minus the buyer’s gains from the resale of the goods) and compensate the buyer’s losses.
The seller refused to accept the judgment and appealed it. The Supreme People’s Court held that the determination of the facts of the case by the court of first instance had been essentially clear, and that its application of the Convention had also been correct. However, with regard to issues involved in the case not governed by provisions of the Convention, New York State law, which had been chosen by the interested parties, should have been applied. According to Article 4(a) CISG, the Convention makes no provision regarding the issue of the effect of a contract, therefore the contract in the present case should be determined to be lawful and valid, on the basis of the United States laws submitted and verified by the two parties. Moreover, although the UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods is not a constituent part of the Convention, and cannot serve as a legal foundation in the present case, it can nevertheless serve as an appropriate reference for an accurate understanding of the meaning of the relevant articles of the Convention.
The Supreme People’s Court held that the buyer’s demand to cancel the contract should be understood as requesting the court to declare the contract null and void under the provisions of the Convention. However, the HGI value was only one of seven indices stipulated in the contract; moreover, the sale of the disputed petroleum coke to a third-party company at a reasonable price indicated that the disputed goods, while not meeting contract stipulations, nonetheless still had commercial value. For these reasons, the Supreme People’s Court held that while the failure of the HGI value of the disputed petroleum coke to meet the value stipulated in the contract constituted a breach of contract, it did not constitute a fundamental breach. Because the actions of the seller did not constitute a fundamental breach of contract, the buyer had no right to declare the contract avoided on that basis.
The Supreme People’s Court also held that the buyer had a trustee -beneficiary relationship with its parent company, thus establishing a contractual resale relationship with the third party. The buyer conducted numerous negotiations with the seller regarding the HGI-value discrepancy, and also entrusted its parent company to represent it in negotiations with the seller. The seller’s breach of contract objectively caused the buyer’s inability to resell the goods in a timely manner, producing a loss under the influence of market-price fluctuations. However, the Supreme People’s Court held that the buyer should also bear a portion of the losses created by market risk.
In the end, the Supreme People’s Court ruled that the declaration of the contract as null and void by the Court of first instance should be revoked, and ordered compensation by the seller for a portion of the difference in the price of the goods, as well as a portion of the buyer’s losses.
- available at www.cisg-online.org
Commented on by:
- Peng Guo & Shu Zhang, 'The Use of Extrinsic Materials in the Application and Interpretation of the CISG: China’s Approach adopted by the Supreme People’s Court', Internationales Handelsrecht (IHR) (2020), 230–236.
- Qiao Liu, 'The Chinese Guiding Case System through the Lens of a CISG Case', 51 Hong Kong Law Journal (HKLJ) (2021), 339–362.}}