As we mentioned in the previous post, “How Can A Chinese Court Determine the Transaction Content If there Is Only A Simple Order”, if the content of the purchase order or contract entered into between you and the Chinese company is very simple, Chinese court may refer to China’s Contract Law to interpret your transaction between the Chinese supplier.

This post was first published in CJO GLOBAL, which is committed to providing consulting services in China-related cross-border trade risk management and debt collection.

If you and your Chinese partner have clarified these matters in the contract, the Chinese judge will render judgment based on these matters stated in the contract.

If these matters are not stated in the contract (which refers to the circumstance where “the parties have not agreed on such matters or the agreement is unclear” under Chinese law), Chinese judges will need to “interpret the contract” to determine how you and your Chinese partner have agreed on these matters.

Specifically, the judges will refer to “Book III Contract” of the Civil Code of China (hereinafter referred to as the “Contract Law”) as supplementary terms and conditions to interpret the agreement between you and your Chinese partner.

In other words, in China, Contract Law is deemed as implied terms to fill in gaps not covered by express terms in a contract.

Therefore, if you fail to specify the default liability in the contract, the Chinese judge will determine what claim you are entitled to in accordance with the default liability provisions in the Contract Law.

Then, let’s take a look at China’s Contract Law to see how you can make a claim.

 1. Be remedied

Where the performance does not conform to the agreement, the aggrieved party may, by virtue of the nature of the object and according to the degree of the loss, reasonably request the other party to bear the default liability such as repair, redoing, replacement, return of the object, decrease in price or remuneration, and the like.

2. Be compensated

Where a party fails to perform his contractual obligation or his performance does not conform to the agreement, he shall make compensation if, after he has performed his obligation or has taken remedial measures, the other party still suffers loss. 

The amount of compensation shall be equivalent to the loss caused by the breach of contract, including the benefits expected to be obtained should the contract had been performed, except that it shall not exceed the loss that may be caused by the breach that the breaching party foresees or should have foreseen at the time of conclusion of the contract.

Where the contract of sale and purchase does not agree on the late payment liquidated damages or the calculation method of such liquidated damages, and the seller claims the late payment loss on the grounds of the buyer’s breach of contract:

 (1) if the breach of contract occurs before August 20, 2019, the People’s Court may calculate the late payment loss on the basis of the People’s Bank of China’s benchmark interest rate for similar RMB loans of the same period, with reference to the standard of late penalty interest rate;

(2) if the breach of contract occurs after August 20, 2019, the People’s Court may calculate the overdue payment loss based on the one-year loan market quotation rate (LPR) standard published by the National Interbank Lending Center authorized by the People’s Bank of China at the time of the default, and the overdue payment loss is calculated by adding 30-50%.

3. Terminate the contract

Where a subject matter fails to meet the quality requirements so that the purpose of the contract cannot be achieved, the buyer may refuse to accept the subject matter or may rescind the contract. Where the buyer refuses to accept the subject matter or rescind the contract, the risks of destruction, damage, or loss of the subject matter shall be borne by the seller.

Where the object of a contract is composed of several subject matters, if one of them fails to conform to the requirements agreed in the contract, the buyer may rescind the part of the contract in connection with that subject matter. However, where separation of the said subject matter from the other subject matters is to markedly harm the value of the subject matters of the contract, the buyer may rescind the contract in connection with the multiple subject matters concerned.

Where the subject matters are to be delivered by installment, if a seller fails to deliver one lot of the subject matters, or has delivered the lot in a manner not in conformity with the agreement, so that the purpose of the contract in connection with the said lot cannot be achieved, the buyer may rescind the part of the contract in connection with the said lot.

Where a seller fails to deliver one lot of the subject matters, or delivered the lot in a manner not in conformity with the agreement, so that the subsequent delivery of the remaining lots cannot achieve the purpose of the contract, the buyer may rescind the part of the contract in connection with the said lot and the remaining lots.

Where a buyer has rescinded a part of the contract in connection with one lot of the subject matters, if the said lot and any other lot are interdependent on each other, the buyer may rescind the contract in connection with all the lots disregarding whether they have been delivered or not.

The Cross-border Trade Dispute 101 Series (‘CTD 101 Series’) provides an introduction to China-related cross-border trade dispute, and covers the knowledge essential to cross-border trade dispute resolution and debt collection.

Photo by Lan Lin on Unsplash

Contributors: Meng Yu 余萌

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