Selected Chinese Cases on the CISG

Peng Guo
Haicong Zuo
Shu Zhang Editors

Selected Chinese
Cases on the UN
Sales Convention
(CISG) Vol. 1
Selected Chinese Cases on the CISG

Editor-in-Chief
Peng Guo, RMIT University, Australia

Editorial Board
Haicong Zuo, University of International Business and Economics, China
Shu Zhang, Deakin University, Australia

Assistant Editors
Geng Wang, University of International Business and Economics, China
Chaolin Zhang, Nankai University, China
This book series intends to provide a comprehensive and systemic analysis of Chinese
cases on the CISG to show international legal scholars and practitioners not only the
judicial interpretation and application of the CISG in China but also the scholastic
understandings of and approaches to it. This series will fill the gaps relating to the
lack of understanding of Chinese cases on the CISG and complement the discussion
and analysis of the CISG in leading commentaries on the CISG, which is already
endorsed by world renowned scholars in this filed.
Another aim of the series is to identify whether there is a special Chinese approach
to the interpretation and application of the CISG. If the answer is in the affirmative,
it will examines whether Chinese courts prefer to apply the CISG, whether Chinese
parties prefer to choose the CISG as the governing law, whether the application of
the CISG in China promotes its wider adoption and application by other countries
and whether the Chinese approach will contribute to the uniform interpretation and
application of the CISG at the international level.
In addition, the series will highlight the similarities and differences between
the Chinese approach to the interpretation and application of the CISG and the
approaches adopted by courts in other jurisdictions and discuss which approach is
more preferable and valuable to the further development of a uniform sales law. It
will also compare the similarities and differences of the understanding and inter-
pretation of the CISG between Chinese and foreign scholars which may affect the
approach to be adopted by a court. Both will prompt foreign legal practitioners and
companies to reconsider whether they should choose the CISG as the governing law
of the contract when doing business with companies the place of business of which
is in China.
Peng Guo · Haicong Zuo · Shu Zhang
Editors

Selected Chinese Cases

on the UN Sales Convention
(CISG) Vol. 1
Editors
Peng Guo Haicong Zuo
Graduate School of Business and Law Law School
RMIT University University of International Business
Melbourne, VIC, Australia and Economics (UIBE)
Beijing, China
Shu Zhang
Deakin Law School
Deakin University
Geelong, VIC, Australia

ISSN 2731-3573 ISSN 2731-3581 (electronic)

Selected Chinese Cases on the CISG
ISBN 978-3-662-65249-7 ISBN 978-3-662-65250-3 (eBook)
https://doi.org/10.1007/978-3-662-65250-3

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer-Verlag GmbH,
DE, part of Springer Nature 2022
This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether
the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse
of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and
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The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication
does not imply, even in the absence of a specific statement, that such names are exempt from the relevant
protective laws and regulations and therefore free for general use.
The publisher, the authors, and the editors are safe to assume that the advice and information in this book
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Foreword

In 1988, China was among the first 11 countries where the CISG entered into force.
In fact, joining forces with the United States in ratifying the Convention fulfilled
the prerequisites for this coming into force. Since then, the CISG has proven to be
a worldwide success. This is not only demonstrated by 94 member states and the
fact that nowadays more than 80% of world trade are potentially governed by the
CISG. It is most remarkable that since the coming into force of the CISG almost
all legislators on the international as well as on the domestic level took the CISG as
blueprint when revising contract and sales law. This is also especially true for China
where already the Chinese Contract 1999 heavily relied on the CISG; an influence
that was carried on in the Chinese Civil Code 2021.
Having regard to the role of the CISG in Chinese domestic law and China’s
role in the world economy the importance of its contribution to the application and
interpretation of the CISG does not need any further explanation. Although some
select Chinese cases have been translated into English, the bulk of Chinese case
law up to now remained inaccessible to the international CISG community due to
language barriers.
It is the great merit of Peng Guo and his team to have undertaken to gather, to
translate and, last but not least, to comment Chinese case law on the CISG thus
making it available to a greater public. Not only academics will welcome this new
source of interpretation of the CISG; practitioners throughout the world who expect
to litigate and maybe arbitrate in China will rely on this valuable tool in order to
attain more predictability with regard to possible outcomes of legal disputes.
The present book can, therefore, be highly recommended to anyone interested in
and dealing with the application and interpretation of the CISG.

Muellheim, Germany Prof. Dr. Ingeborg Schwenzer

2022 LL.M.

v
Preface

The United Nations Convention on Contracts for the International Sale of Goods
(CISG)1 has now 94 signatories.2 It is one of the most successful texts prepared
by the United Nations Commission on International Trade Law (UNCITRAL) and
represents a landmark in the course of the unification of international trade law and
has a huge impact on domestic law reforms in many countries, such as China.
Cases are considered a crucial source of learning, however, so far, no serial Chinese
casebooks on the CISG have been published. Also, despite the fact that there are many
Chinese cases on the CISG, there is no comprehensive and systematic analysis of
these cases. In addition, scholars from different countries have noticed the large
number of Chinese cases and realised their potential value in the promotion of the
uniform interpretation and application of the CISG, however, the language barrier
has hindered the access to the cases and subsequently of their potential influence on
and contribution to the global jurisprudence of the CISG. All this, in our opinion,
guarantees the high value and usefulness of the publication of a series of selected
Chinese cases on the CISG to make them assessable to the rest of the world.
The primary aim of this series is to, for the first time, provide the academics, judges,
legal practitioners, and law students with an important source to locate Chinese CISG
cases. Although existing databases on CISG cases, such as the CISG-Online database
and the Albert H. Kritzer Pace CISG database, have some Chinese cases, the coverage
is relatively limited. This series, therefore, intends to provide a collection of Chinese
CISG cases as comprehensive as possible.
The second aim is to track down the development of the court practice in relation to
the CISG. It is of great importance to perceive how Chinese courts understand, inter-
pret, and apply the CISG, which will help domestic and international businessmen
predict and avoid the potential problems or resolve the emerging disputes regarding
the CISG properly.

1 United Nations Convention on Contracts for the International Sale of Goods, opened for signature
11 April 1980, 1489 UNTS 3 (entered into force 1 January 1988) (CISG).
2 https://uncitral.un.org/en/texts/salegoods/conventions/sale_of_goods/cisg/status.

vii
viii Preface

The third aim is to conduct a systematic study of the selected Chinese CISG cases.
Both Chinese and international scholars and practitioners will provide comments
to the cases. They will provide a scholarly and practical analysis of the CISG
from different perspectives and identify the similarities and differences between
the Chinese approach and the approaches adopted in other jurisdictions when
appropriate.
We hope that this series will add China’s contribution to the uniform interpretation
and application of the CISG globally.

Melbourne, Australia Peng Guo

Beijing, China Haicong Zuo
Burwood, Australia Shu Zhang
February 2022
Contents

1 Novelact (Resources) Limited v Xiamen Special Economic

Zone International Trade Trust Company . . . . . . . . . . . . . . . . . . . . . . . 1
Geng Wang, Shu Zhang, and Peng Guo
2 Sanmei (Japan) Trading Co., Ltd v Fujian Zhangzhou
Metals & Minerals Import and Export Co., Ltd . . . . . . . . . . . . . . . . . . 13
Chaolin Zhang, Shu Zhang, and Peng Guo
3 Skandinaviska Metemo AB v Hunan Co. For International
Economy and Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Geng Wang, Shu Zhang, and Peng Guo
4 Xiamen Special Economic Zone Youli Trading Co., Ltd v
Hungary Gold Star International Trading Co., Ltd . . . . . . . . . . . . . . . 35
Xiaojun Chen
5 Hang TAT Food USA Inc. v Rizhao Aquatic Products Group
and Rizhao Rirong Aquatic Products Co. Ltd . . . . . . . . . . . . . . . . . . . . 41
Geng Wang, Peng Guo, and Shu Zhang
6 China Yituo Group Company v Germany Gerhard Freyso
Ltd GmbH & Co. KG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Geng Wang, Peng Guo, and Shu Zhang
7 Netherlands Akfam Co., Ltd v Sinochem Hainan Co., Ltd . . . . . . . . . 59
Mengsha Yang
8 Tunghang (Asia) Co., Ltd v Shenzhen Haizhongbao Aquatic
Products Trading Co., Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Chaolin Zhang, Peng Guo, and Shu Zhang
9 Hong Kong Zhenghongli Co., Ltd v Switzerland Gilbert
Finance Co., Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Siying Wu

ix
x Contents

10 Lianhe Enterprise (US) Ltd v Yantai Branch of Shandong

Foreign Trade Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Geng Wang, Peng Guo, and Shu Zhang
11 Singapore Daguangxing (Private) Co., Ltd v Jiangsu
Machinery Import and Export Group Co., Ltd . . . . . . . . . . . . . . . . . . . 95
Han Wang, Peng Guo, and Shu Zhang
12 Shenzhen Fengshen Industrial Development Co., Ltd v France
Eurasian International Technology Development Co., Ltd . . . . . . . . . 103
Han Wang, Shu Zhang, and Peng Guo
13 Nanjing Supplies Industrial Group Company v
Tian’an Insurance Co., Nanjing Branch . . . . . . . . . . . . . . . . . . . . . . . . . 113
Bruno Zeller
14 Shanghai Weijie Electronic Devices Ltd v Superpower Supply
Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
Jie Luo
15 Swiss Mirimet Company v Henan Native Products Import
and Export Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Mengsha Yang
16 Japanese Taiping Trading Co., Ltd v Jiangsu Sainty
International Group Garment Import and Export Nantong
Co., Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Han Wang, Shu Zhang, and Peng Guo
17 Carl Hill v Cixi Old Furniture Trading Co., Ltd . . . . . . . . . . . . . . . . . . 139
Han Wang, Peng Guo, and Shu Zhang
18 Shanghai Dongda Import & Export Co, Ltd v German
Laubholz-Meyer GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
Siying Wu
19 Sino-Add (Singapore) Pte Ltd v Karawasha Resources Ltd . . . . . . . . 155
Han Wang, Peng Guo, and Shu Zhang
20 Shanghai Shenhe Import and Export Co., Ltd v Itochu
Commercial Co., Ltd of Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
Mengsha Yang
21 Japanese Xinsheng Trade Company v Ningxia Hui
Autonomous Region Nihong Metallurgic Product Company . . . . . . . 171
Wenjing An
22 Wuhan Zhongou Clothes Factory v Hungary Wanlong
International Trade Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
Wenjing An
Contents xi

23 China Packaging Import and Export Hubei Company v

Phoenix Company Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
Haicong Zuo
24 Hyundai Corporation of Korea v Hubei Metals and Minerals
Import and Export Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
Chaolin Zhang, Peng Guo, and Shu Zhang
25 Resource Engineering Co, Ltd v Qing Li, Ming Sun
and Shanghai Donglin International Trade Co, Ltd . . . . . . . . . . . . . . . 207
Linxuan Li
26 Dong Feng Trade Co. Ltd v Hangzhou Dongli Rubber
and Plastic Products Co., Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
Xiaoying Fan
27 Zhuguang Petroleum Co, Ltd v Wuxi Joyray Import
and Export (Group) Co, Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
Linxuan Li
28 Wuhan Yinfeng Data Network Co, Ltd et al v Ming Xu, China
Electronics Import and Export (Wuhan) Corporation et al . . . . . . . . 227
Linxuan Li
29 Wang Ruixiang Fashion Co, Ltd v Trend Co, Ltd and Shanghai
Silk (Group) Co, Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235
Yan Shang
30 A (Singapore) Limited v Dongling Trading Co., Ltd;
Liquidation Team of Shanghai Xuyang Trading Co., Ltd. . . . . . . . . . 239
Jie Luo
31 Shunde Westband Furniture Co, Ltd v Panda Inc Ltd . . . . . . . . . . . . 247
Yan Shang
32 ACETO Corporation v Suzhou Lintong Electronic Technology
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253
Mengsha Yang
33 Sinochem Shanghai Co v Kolorit TM Co Ltd . . . . . . . . . . . . . . . . . . . . 263
Shaotang Wang
34 Shanghai Donglin International Trade Co. Ltd v Johnson
Trading Australia Pty Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269
Wenjing An
35 Xi’an Yunchang Trading Co., Ltd v Wentong Yuan &
American Antai International Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279
Chaolin Zhang, Peng Guo, and Shu Zhang
xii Contents

36 Baodeli Co., Ltd v Ceiec (Guangdong) . . . . . . . . . . . . . . . . . . . . . . . . . . . 293

Shaotang Wang
37 The Aterlight Electronic Control & Audio Systems Limited
v the Liquidating Group of Zhuhai Zhongyue New
Communication Technology Co., Ltd., Etc. . . . . . . . . . . . . . . . . . . . . . . 307
Qingkun Xu and Xintong Li
38 China Changzhou Kairui Weaving and Printing Company v
Taiwan Junlong Machinery Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 319
Chaolin Zhang, Shu Zhang, and Peng Guo
39 Qingdao Benefim Trading Co, Ltd v Sinochem International
FZE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331
Linxuan Li
40 Norway Royal Supreme Seafoods Versus Rizhao Jixiang
Ocean Food Co., Ltd. & China Rizhao Shanfu Food Co.,
Ltd.—Dispute Arising from a Sale of Goods Contract . . . . . . . . . . . . 335
Peng Wang, Yueshan Liu, and Geng Wang
41 WS China Import GmbH v Longkou Guanyuan Food
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343
Wenjing An
42 Yiwu Majiali Import & Export Co., Ltd. v Y & Q International
Trade (Group), Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353
Charles Caishun Guo and Charlie Xiao-chuan Weng
43 Vishaybc Components Beyschlag Gmbh versus Shanghai
Y.Hsu Trading Co., Ltd.—Dispute Arising from a Sale
of Goods Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361
Peng Wang, Yueshan Liu, and Chaolin Zhang
44 Skalli Corporation v Shanghai Tongya Liquor Co.,
Ltd—dispute arising from a sale of goods contract . . . . . . . . . . . . . . . 369
Jonathan Kolieb
45 Shanghai Shanshan Ruiyuan Import and Export Trade Co.,
Ltd v Lanificio Ing Loro Piana & C S P A Italy . . . . . . . . . . . . . . . . . . 377
Charles Caishun Guo and Charlie Xiao-chuan Weng
46 CITIC International Business & Trading Co., Ltd v Hokusan
Co., Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383
Xiaojun Chen
47 Shanghai Lianfu Food Co. Ltd v CSM N. V.—Dispute Arising
from a Sale of Goods Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 391
Edgardo Muñoz
Contents xiii

48 Possehl (HK) Ltd v China Metals and Minerals Import

and Export (Shenzhen) Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397
Xiaojun Chen

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403
Editors and Contributors

About the Editors

Dr. Peng Guo (Editor-in-Chief) is Lecturer in Law at RMIT University. At RMIT

Dr. Guo teaches Contract Law and Commercial Law to LLB and JD students. He
has held visiting positions at different universities, including Warwick University,
University of Amsterdam and University of Osnabrück. He has received scholarships
awarded by renowned research institutions and international organisations, including
the Max Planck Institute for Comparative and International Private Law, the Interna-
tional Institute for the Unification of Private Law (UNIDROIT), the Swiss Institute
of Comparative Law, and the European Union. His research interests lie in interna-
tional sale of goods, international commercial arbitration, comparative contract law,
and law and technology. He actively participates in Vis Moot and Alfred Deakin
International Commercial Arbitration Moot.

Dr. Haicong Zuo (Editorial Board) is a Professor in Law School at University of

International Business and Economics (UIBE). Prior to joining UIBC Law School,
he was Dean and Professor at Law School of Nankai University, and Professor at Law
School of Wuhan University. His research interests include, but not limited to inter-
national commercial law, WTO law, international economic law and international
dispute resolution. He has published on various topics on a number of books and
leading journals in both Chinese and English and has chaired or co-chaired different
research projects funded by various stakeholders.

Dr. Shu Zhang (Editorial Board) is a lecturer in commercial law at Deakin Law
School, Deakin University (Australia) and coached Deakin Law School’s Vis Moot
team. Prior to joining Deakin Law School, Dr. Zhang was a postdoctoral fellow
in the Chinese International Business and Economic Law Initiative, Law School,
University of New South Wales (Australia). Her research interests include inter-
national commercial law, dispute resolution and international arbitration, as well
as comparative contract law. She also completed internships at both the Australian

xv
xvi Editors and Contributors

Centre for International Commercial Arbitration (ACICA) and the Chinese Interna-
tional Economic and Trade Arbitration Commission (CIETAC). She is also admitted
to practice in New South Wales, Australia. Dr. Zhang obtained her Ph.D. in Law
from University of New South Wales (Australia), and her LLM, LLB and BA in
Economics (Double Degree) from Peking University (China). She has published
various manuscripts with leading journals in this area, such as the Journal of Contract
Law, Vindobona Journal of International Commercial Law and Arbitration, China
Quarterly.

Contributors

Wenjing An Lecturer in Law at North China Electric Power University, Baoding,

China
Xiaojun Chen Wincon Law Firm, Qingdao, Shandong, China
Xiaoying Fan Associate Professor in Law at Tianjin University of Finance and
Economics, Tianjin, China
Charles Caishun Guo Quanzhou Intermediate People’s Court, Quanzhou, China
Peng Guo RMIT University, Melbourne, Australia
Jonathan Kolieb RMIT University, Melbourne, Australia
Linxuan Li King & Wood Mallesons, Beijing, China
Xintong Li Dalian Maritime University, Dalian, China
Yueshan Liu Nankai University, Tianjin, China
Jie Luo Associate Professor in Law at Zhongnan University of Economics and Law,
Wuhan, China
Edgardo Muñoz School of Law, Universidad Panamericana, Guadalajara, Jalisco,
Mexico
Yan Shang Assistant Professor in Law at People’s Public Security University,
Beijing, China
Geng Wang University of International Business and Economics, Beijing, China
Han Wang Nankai University, Tianjin, China
Peng Wang Nankai University, Tianjin, China
Shaotang Wang Lecturer in Law at Nankai University, Tianjin, China
Charlie Xiao-chuan Weng University of New South Wales, Sydney, NSW,
Australia
Editors and Contributors xvii

Siying Wu Dentons Law Firm, Canton (Guangzhou), China

Qingkun Xu Shanghai University of Politics and Law, Shanghai, China
Mengsha Yang Lecturer in Law at Tianjin University, Tianjin, China
Bruno Zeller University of Western Australia, Crawley, WA, Australia
Chaolin Zhang Law School, Nankai University, Tianjin, China
Shu Zhang Deakin University, Geelong, Australia
Haicong Zuo Law School at University of International Business and Economics,
Beijing, China
Chapter 1
Novelact (Resources) Limited v Xiamen
Special Economic Zone International
Trade Trust Company

Geng Wang, Shu Zhang, and Peng Guo

Case Information
Case name: Novelact (Resources) Limited v Xiamen Special Economic Zone
International Trade Trust Company
Seller: Novelact (Resources) Limited (hereinafter referred to as “Novelact
Company”).
Place of business: Hong Kong, China
Buyer: Xiamen Special Economic Zone International Trade Trust Company (here-
inafter referred to as “Xiamen International Trade Company”)
Place of Business: Mainland, China
Details of First Instance:
Court: Xiamen Intermediate People’s Court, Fujian
Date of Decision: 19 April 1993
Case No: (1990) Xia Zhong Fa Jing Min Zi No 40
Judges: Yong Hao (Judge), Jinqing Chen (Judge), Hongyan Zhou (Judge)
CISG applied: Yes
Key CISG provisions interpreted and applied: Articles 74 and 78

G. Wang (B)
University of International Business and Economics, Beijing, China
e-mail: [email protected]
S. Zhang
Deakin University, Geelong, VIC 3220, Australia
e-mail: [email protected]
P. Guo
RMIT University, Melbourne, VIC 3000, Australia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 1

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_1
2 G. Wang et al.

Abstract
On April 6, 1989, the seller, Novelact Company, and the buyer, Xiamen Inter-
national Trade Company, concluded a contract for the purchase of fishmeal
(F89GDTD/9261031CK). According to the contract, Novelact Company should
provide 5,000 tons of Peruvian or Chilean fishmeal, which must meet the required
quality standards, to Xiamen International Trade Company in two batches, and
Xiamen International Trade Company should issue an irrevocable, at sight, docu-
mentary letter of credit in favor of Novelact Company. Xiamen International Trade
Company only issued a letter of credit of US$1,519,500 for 3,000 tons of fishmeal
(LC710890310), but did not issue a letter of credit for the remaining 2,000 tons
of fishmeal. On May 31, 1989, Novelact Company loaded 3,150 tons of Chilean
fishmeal onto the “Challenger” vessel, acquired the marine bill of lading issued by
the captain and subsequently submitted one set of negotiable documents to Po Sang
Bank (Hong Kong). However, these documents were rejected due to five discrepan-
cies. Xiamen International Trade Company agreed to pay 80% of the purchase price
to accept these documents, on the condition that the remaining 2,000 tons of fishmeal
would no longer trade, and the fishmeal must be quality inspected. Novelact Company
disagreed. On July 20, 1989, the “Challenger” vessel carrying 3,150 tons of Chilean
fishmeal arrived at Xiamen Port, and soon after, the goods were detected with live
insects. The relevant authorities required fumigation and insecticide treatment of the
goods. Xiamen International Trade Company then consulted with Novelact Company
and Novelact Company insisted that Xiamen International Trade Company should
pay 20% of the purchase price first, and later file a claim against the responsible
party for compensation. As the negotiation between the two companies remained
inconclusive, Novelact Company brought a suit to the court.
The court agreed to apply Chinese law, the CISG and relevant international prac-
tices to hear this case, and held that the buyer and seller had concluded a valid contract
pursuant to such rules. Xiamen International Trade Company constituted a breach of
contract by only paying 80% of the purchase price and failed to issue a letter of credit
for 2,000 tons of the fishmeal on time. For this reason, the court stated that Xiamen
International Trade Company should compensate Novelact Company for the losses
caused by its breach of contract.
1 Novelact (Resources) Limited v Xiamen Special … 3

Commentary on the Key Issues Related to the CISG

Issues

Issue 1: The Applicability of International Treaties and International Practice

Issue 2: Determination of the Breach of Contract
Issue 3: Consequences of Breach

Comments

Issue 1: The Applicability of International Treaties and International Practice

This case was between Novelact Company, whose place of business was located in
Hong Kong, and Xiamen International Trade Company, whose place of business was
located in Mainland China. In this case, the parties agreed to choose the Law of the
People’s Republic of China on Economic Contracts Involving Foreign Interest,1 the
CISG and relevant international practices applicable to such contracts.
I. The Applicability of the CISG
The applicability of the CISG is addressed in Chap. 1 of the CISG. There are two ways
to apply the CISG according to Article 1 of the CISG. When parties whose places
of business are in different Contracting States, the CISG is directly or autonomously
applicable, which is called “direct applicability” or “autonomous applicability”.2
Further, when the parties whose places of business are in different states, and the rules
of private international law lead to the application of the law of a Contracting State,
the CISG is also applicable, which is called “indirect applicability”.3 Contracting
states can make Article 95 reservations to avoid the indirect application of the CISG.
Given that China has made such reservations, Chinese courts are relieved of the
obligation to apply the CISG pursuant to Article 1(1)(b) of the CISG. In addition, the
parties whose places of business are in non-contracting states can choose to apply
the CISG based on the principle of party autonomy.
A. Hong Kong-related Contracts
In this case, one party to the contract had its place of business in Hong Kong and
the other party had its place of business in Mainland China. Strictly speaking, such
contracts do not fall under the CISG, because this Convention applies to contracts
between parties which have their places of business in different countries in accor-
dance with Article 1(1) of the CISG and Hong Kong is part of the territory of China.
Therefore, it has been argued that the CISG is not directly applicable in contracts

1 The Law of the People’s Republic of China on Economic Contracts Involving Foreign Interest.
(promulgated by the Standing Comm. Nat’l People’s Cong., Mar. 21, 1985, Effective Jul. 1, 1985,
Invalid Oct. 1, 1999).
2 United Nations Commission on International Trade Law [1], p. 5, paras 9–13.
3 United Nations Commission on International Trade Law [1], p. 5, paras 9–13.
4 G. Wang et al.

concluded between Mainland and Hong Kong merchants.4 Chinese courts also hold
this view. For instance, in Hyper Extension Limited v Zhejiang Shengda Industry
and Trade Co., Ltd., the court stated that it was a Hong Kong-related contractual
dispute, and the parties’ places of business were not in different countries, so the
court rejected the argument by Hyper company that the CISG should apply.5 The
court in this case also did not apply the CISG directly and autonomously.
However, since Chinese courts have heard cases in which one party from the Hong
Kong, the Macao or Taiwan area is involved in a manner comparable to foreign-
related cases, there is only a formal difference between “area” and “country”, and
the courts should not reject the application of the CISG on the grounds that parties
belong to the same country.6 This view argues that the key issue is whether China
has made a reservation under Article 93 of the CISG.
According to Article 93 of the CISG, a Contracting State with two or more terri-
torial units which apply different systems of law may declare that the CISG applies
to all or part of the country’s territorial units at the time of signature, ratification,
acceptance, approval or accession, and if a Contracting State did not make such
declaration, the CISG is to extend to its all territorial units. This provision was devel-
oped at the request of federal states such as Canada and Australia and is intended to
enable a state to accede to the Convention with respect to individual territorial units.7
It is noteworthy that Article 93 of the CISG limits the time at which a reservation
may be made. The reservation should be made at the time of signature, ratification,
acceptance, approval or accession.
So, did China make such a reservation on the application of CISG to Hong Kong?
In 1997, Hong Kong returned to China. Prior to the retrocession of Hong Kong to
China, China sent the United Nations Secretary-General a letter, which contained
a list of “Multilateral International Treaties applicable to the Hong Kong Special
Administrative Region from July 1, 1997”.8 The CISG was not included in this
list. Whether this letter can be considered as an Article 93 reservation has been
controversial. Scholars who hold a strict textual interpretation of Article 93 say that
this letter is only an implication, not a formal declaration, and cannot produce the
corresponding effect.9 Instead, scholars who hold a broad teleological interpretation

4 Schroeter [2], p. 328; Li [3], pp. 102–103.

5 Hyper Extension Limited v. Zhejiang Shengda Industry and Trade Co., Ltd., Hu 01 Min Zhong No.
5111 (Shanghai First Intermediate People’s Court, June 30, 2016). Also see Zhengwei Technology
(Shenzhen) Co., Ltd., etc. v. Yonglifeng Group Co., Ltd., etc., Yue Min Zhong No. 1552 (Guang-
dong Higher People’s Court, November 22, 2016); Yingshun Development Hong Kong Co., Ltd. v.
Zhejiang Zhongda Technology Export Co., Ltd., Zhe Shang Wai Zhong Zi No. 99 (Zhejiang Higher
People’s Court, December 15, 2010).
6 Han [4], p. 234.
7 Schroeter [2], p. 321.
8 Letter from Qin Huasan, Permanent Representative of the People’s Republic of China to the United

Nations, to Kofi Annan, Secretary General of the United Nations (June 27, 1997), Bulletin of the
State Council of the People’s Republic of China, 1997, No. 39, p. 1688, http://www.gov.cn/gon
gbao/shuju/1997/gwyb199739.pdf.
9 Wang [5], 140; Han [6], p. 227.
1 Novelact (Resources) Limited v Xiamen Special … 5

of Article 93 argue that this letter indicates that Hong Kong does not intend to apply
the CISG directly, and therefore it is not appropriate to extend the CISG to Hong
Kong.10 The Hong Kong Department of Justice also holds this viewpoint.11
The uncertainty of Hong Kong’s status under the CISG has caused inconvenience
to the courts when hearing the CISG-related cases, and the Hong Kong government
has been actively addressing this issue in recent years. In view of the increasing
popularity of the CISG worldwide, the Convention has become more attractive to
Hong Kong. Therefore, the Department of Justice of Hong Kong submitted a consul-
tation arrangement to Legislative Council to propose the application of the CISG to
Hong Kong, and published a consultation paper entitled “Proposed Application of
the United Nations Convention on Contracts for the International Sale of Goods to
the Hong Kong Special Administrative Region” in March 2021 for public consulta-
tion.12 Based on the outcome of the consultation, Sales of Goods (United Nations
Convention) Bill was introduced to Legislative Council on July 14, 2021, and was
passed on September 29. This Bill is currently completing the necessary procedures
under Article 153 of the Basic Law of the Hong Kong Special Administrative Region
of the People’s Republic of China, and is expected to come into force in the next
6–9 months. The Sale of Goods (United Nations Convention) Bill is very brief, with
only five articles. The fourth core Article simply states that the CISG has the force
of law in Hong Kong. Thus, it remains to be determined by the central legislature
and judiciary as to whether the CISG shall be directly applicable to a contract such
as this case, where one party had its place of business in Mainland China and the
other party had its place of business in Hong Kong.
B. Opting-in
In this case, the parties chose to apply the CISG, so the court ultimately agreed
to apply the relevant provisions of the CISG. This is a non-automatic application
situation.
The CISG does not expressly stipulate that the parties concerned may choose to
apply the CISG. In retrospect, Article 4 of the 1964 Uniform Law on the International
Sale of Goods (ULIS),13 the predecessor of the CISG,14 clearly provided that the
parties can choose to apply this Convention, which stipulates that:
The present Law shall also apply where it has been chosen as the law of the contract by the
parties, whether or not their places of business or their habitual residences are in different
States and whether or not such States are Parties to the Convention dated the 1st day of
July 1964 relating to a Uniform Law on the International Sale of Goods, to the extent that it

10 Liu and Ren [7], p. 887.

11 Proposed Application of the United Nations Convention on Contracts for the International Sale
of Goods to the Hong Kong Special Administrative Region, March 2020, https://www.doj.gov.hk/
sc/featured/consultation_paper.html.
12 Department of Justice of the Hong Kong Special Administrative Region Website, https://www.

doj.gov.hk/sc/featured/un_convention_on_contracts_for_the_international_sale_of_goods.html.
13 Convention relating to a Uniform Law on the International Sale of Goods, (The Hague, 1 July

1964).
14 Ferrari [8], p. 49.
6 G. Wang et al.

does not affect the application of any mandatory provisions of law which would have been
applicable if the parties had not chosen the Uniform Law.

However, because the representatives who participated in codifying the CISG

believed that the “mandatory legal provision” in this clause would bring ambiguity;
this clause did not remain.15 This fact does not mean that the parties are not entitled
to choose the CISG applicable to their contracts. The principle of party autonomy is
sufficient to allow parties to apply the CISG if they reach a consensus, and there is
no need for further stipulations.16
C. Chinese Law as Supplementary Law
Due to the limited scope of the CISG, some issues cannot be solved through provisions
of the CISG. At this time, some alternative methods need to be used. Article 7(2) of
the CISG takes this into account, which provides that:
Questions concerning matters governed by this Convention which are not expressly settled
in it are to be settled in conformity with the general principles on which it is based or, in the
absence of such principles, in conformity with the law applicable by virtue of the rules of
private international law.

Therefore, when an issue cannot be solved by virtue of provisions or general

principles of the CISG, the rules of private international law can be used.
In this case, the parties also chose the Law of the People’s Republic of China on
Economic Contracts Involving Foreign Interest. According to Article 145(1) of the
General Principles of Civil Law,17 the parties to a contract involving foreign interests
may choose the law applicable to the settlement of their contractual disputes except
as otherwise stipulated by law. Their choice was valid, so the court shall apply the
Law of the People’s Republic of China on Economic Contracts Involving Foreign
Interest when neither the CISG provisions nor its general principles can solve the
issue.
II. The Applicability of International Practice
The parties also agreed to apply international practice in the document transactions.
Therefore, the court also applied international practice. The court held that, according
to international practice, a party shall pay for the goods after receiving a full set of
negotiation documents, but the buyer only paid 80% of the purchase price after
accepting all the documents from the seller and did not pay the remaining 20% of the
purchase price even after the goods were inspected and released, which constituted
a breach of contract.
Before the promulgation of the Civil Code, the provision on how to apply international
practices was Article 142(3) of the General Principles of Civil Law, which provides
that:

15 Marshall [9], p. 193; Xuan and Wang [10], p. 128.

16 United Nations Commission on International Trade Law [1], p. 34, para 18.
17 General Principles of the Civil Law of the People’s Republic of China (promulgated by the Nat’l

People’s Cong., Apr. 12, 1986, Effective Jan. 1, 1987, Invalid Jan. 1, 2021).
1 Novelact (Resources) Limited v Xiamen Special … 7

International practice may be applied on matters for which neither the Law of the People’s
Republic of China nor any international treaty concluded or acceded to by the People’s
Republic of China has any provisions.

It is generally believed that the role of international practice is only complemen-

tary, and international practices are only applicable where there are no provisions in
Chinese law and international treaties concluded by China.18 The buyer also empha-
sized it in the statement of defense. Since neither Chinese domestic law nor interna-
tional treaties lack relevant provisions on the document transactions under the letter
of credit, the court did not comment on the issue of whether Chinese domestic law
or international treaties are applicable in preference to international practice. Many
scholars believe that Article 142(3) is inappropriate. It has been argued that Article
142(3) is contrary to Article 6 and Article 9 of the CISG, under which international
practices shall take precedence over international treaties.19 On January 1, 2021, the
Civil Code came into effect, which replaced the General Principles of Civil Law.
The Civil Code separates substantive law and conflict law and removes the appli-
cable norms of law like most countries,20 so there is no general provision on the
application of international practice in Chinese law nowadays.
Issue 2: Determination of the Breach of Contract

I. The Buyer’s Obligation to Issue Letter of Credit

The core issue in this case is whether the buyer breached the contract during the
performance of the contract, and whether the seller can apply for compensation.
Apart from failing to pay the full price, the buyer was also deemed in default of his
obligation to issue a letter of credits as agreed upon.
Issuing a letter of credit is an important obligation. In Trans Trust S P R L v
Danubian Trading Co. Ltd., Lord Denning pointed out that the letter of credit was
an essential condition for the performance of the contract and the buyer’s failure to
open a letter of credit led to a breach of contract, so the seller is discharged from any
further performance and had the right to demand compensation from the buyer.21
Failure to open a letter of credit within the specified time as agreed in the contract
is usually deemed to be a violation of Article 54 of the CISG, and even breach the
contract fundamentally if the buyer does not make the payment in the end. Unless
the buyer can prove that the seller has an anticipatory breach of contract, the buyer
cannot be relieved of his duty to open a letter of credit.
As the buyer in this case only issued a letter of credit for 3,000 tons of fishmeal,
and did not issue a letter of credit for the remaining 2,000 tons of fishmeal on time
even though the seller extended the deadline to May 20, 1989, the court found that
the buyer breached the contract. What’s more, in light of Article 32 of the Law of
the People’s Republic of China on Economic Contracts Involving Foreign Interest,

18 Chen and Wu [11], p. 111.

19 Liu and Ren [7], p. 914; Chen [12], p. 161.
20 Ding [13], p. 33.
21 Trans Trust S. P. R. L. v. Danubian Trading Co. Ltd. [1952] 1 Lloyd’s Rep. 348.
8 G. Wang et al.

the court rejected the buyer’s argument that the issuance of a letter of credit for
2,000 tons of fishmeal should be carried out in accordance with their oral agreement.
According to Chinese law, notices or agreements on the modification or rescission
of contracts shall be made in writing. Oral agreement cannot modify the contract.
In fact, judging from the facts and evidence found by the court in the judgment, the
buyer and the seller did not reach any oral agreement on the issuance of a letter of
credit for 2,000 tons of fishmeal. Both parties hold opposite views.
II. Responsibility for Live Insect Infestation
Furthermore, the buyer argued that, as the fishmeal was materially nonconforming
at the time of discharge because of live insect infestation, the seller should bear
the responsibility. By contrast, the seller stated that the responsibilities for insect
infestation need to be clarified as insect infestation can also be due to natural factors.
There are rules in the CISG to determine whether the buyer or seller bears the risk
of loss in the absence of a breach, but the contract included a C&F FO clause, which
has priority over the CISG rules pursuant to Article 9 of the CISG. Under a C&F FO
clause, the risk of loss of infested fishmeal is passed to the buyer when the goods
crossed the ship’s rail, and the seller would be relieved of his duty.22 The court did
not respond to the buyer’s such an argument. The breach of the contract by the seller
cannot exempt the buyer from liability for issuing a letter of credits and paying
for 3,000 tons of fishmeal. The buyer’s argument is not a rebuttal to the seller’s
statements, but a new and independent litigation request. The court dealt with the
buyer’s above-mentioned argument in another judgment, (1990) Xia Zhong Fa Jing
Min Zi No 39.23 To make the judgment more persuasive and complete, the court still
needs to explain why the buyer’s argument was not discussed in this judgment.
Issue 3: Consequences of Breach
In light of the buyer’s breach of contract, the court ruled that the seller was entitled to
the expected profit of 2,000 tons of fishmeal of US$21,000 as well as the interest on
the profit, and the remaining 20% of the purchase price plus interest for late payment.
The CISG provides rules for the calculation of damages. According to Article 74
of the CISG, damages consist of a sum equal to the loss, including loss of profit, which
generates a general principle of full compensation.24 However, such damages should
not exceed the loss which the party in breach foresaw or ought to have foreseen at the
time of the conclusion of the contract. The limitation of foreseeability is similar to the
common law requirement derived from the old English case of Hadley v Baxendale.25
In this case, the buyer and seller agreed to trade 5,000 tons of fishmeal, but in the
end only 3,000 tons were traded. The profit of the remaining 2,000 tons of fishmeal
was foreseeable by the buyer, so the seller is entitled to such profit.

22 International Chamber of Commerce, INCOTERMS 1980.

23 English abstract of this case is available at: https://iicl.law.pace.edu/cisg/case/china-september-
5-1994-intermediate-peoples-court-xiamen-trade-v-lian-zhong.
24 United Nations Commission on International Trade Law [1], p. 334, para 3.
25 Gabriel [14], p. 301.
1 Novelact (Resources) Limited v Xiamen Special … 9

Nevertheless, whether damages include interest on the expected profit remains

controversial. As can be derived from the text of Article 78, a party is entitled to
interest on sums in arrears, and interest on expected profits should not be included.
This is in line with Article 23 of the Law of the People’s Republic of China on
Economic Contracts Involving Foreign Interest that contain a similar provision. There
is no legal basis for the court to demand that the buyer pay interest on the expected
profit to the seller.
Another issue is the calculation of interest. The CISG does not stipulate a point in
time from which interest may be calculated. It is too difficult to reach an agreement
on this issue. A view was expressed that interest should be calculated from the time
when the party is obliged to pay and return the amount.26 The court in this case did
not hold this view. The court calculated the interest from the date when the seller
was aware that the buyer refused to pay all the purchase price and sent a fax to claim
payment on August 1, 1989, that is, the date when the right holder made a claim
for payment. A similar argument succeeded in Xi’an Yunchang Trading Co., Ltd. v
Yuan Wentong and others,27 while the dissident argued that payment is due when the
seller places the goods at the buyer’s disposal and the court did not follow the “full
compensation principle”.28 As for the interest on the expected profit, the court held
that it should be calculated from September 1, 1989, but from the facts of the case
recorded in the judgment, it is unclear why it was calculated from this date.
In general, the line of thoughts in ruling this case is relatively clear. The court
respected the intention of the parties to apply the Chinese law, the CISG and interna-
tional practices, and decided that the buyer should pay compensation to the seller for
not paying in full after receiving the full set of documents and not opening a letter of
credit as agreed upon. However, when calculating the actual amount of compensation,
the court over-calculated the interest on the expected profit, which is inconsistent with
the relevant provisions of the CISG and Chinese law. The reasoning here is simple
as the judgment was made in the late 1990s, when analyses about the provisions of
the CISG were still incomplete. The court invoked Article 74 and Article 78 but did
not explain the meaning of such provisions combined with the facts of the case. This
was also a common problem in many early judgments involving the CISG.

References

1. United Nations Commission on International Trade Law (2016) UNCITRAL digest of case
law on the United Nations convention on contracts for the international sale of goods. https://
uncitral.un.org/en/case_law/digests
2. Schroeter UG (2004) The status of Hong Kong and Macao Under the United Nations convention
on contracts for the international sale of goods. Pace Int Law Rev 16:307–332

26 Li [15], pp. 335–336.

27 Xi’an Yunchang Trading Co., Ltd. v. Yuan Wentong and others, Pu Min Er (Shang) Chu Zi No.
3221 (Shanghai Pudong New District People’s Court, September 23, 2005).
28 Xiao and Long [16], pp. 99–100.
10 G. Wang et al.

3. Li, W (2012) On the positive meanings of China’s withdrawing: its reservation to Article 1 (b)
of the CISG. The Jurist, 5:93–103+178
4. Han SY (2016) Application of CISG in Chinese international commercial arbitration. China
Legal Sci 5:218–238
5. Wang YZ (2013) The application of the CISG in Hong Kong: practical differences, legal
analysis and policy choices. Wuhan Univ Int Law Rev 16:127–147
6. Han J (2008) Application of CISG in China international commercial arbitration. Wuhan Univ
Int Law Rev 2:272–279
7. Liu Q, Ren X (2017) CISG in Chinese courts: the issue of applicability. Am J Comp Law
65:873–918
8. Ferrari F (2013) PIL and CISG: friends or foes? J Law Commer 31:45–107
9. Marshall B (2018) The Hague choice of law principles, CISG, and PICC: a hard look at a
choice of soft law to the text of the note. Am J Comp Law 66:175–217
10. Xuan ZY, Wang YY (2012) Application of UN convention of international sale of goods (CISG)
in China courts. Law Sci Mag 5:126–131
11. Chen ZD, Wu JH (2004) The application of the “United Nations convention on contracts for
the international sale of goods” in China—comments on Article 142 of general principles of
civil law. Law Sci 10:107–118
12. Chen JY (2011) On legal effect of international usage under CISG and modification of Article
142 of general principles of civil law. J Int Trade 5:157–165
13. Ding W (2019) Codification of civil code inspires the 2.0 version of law on the application law
for foreign-related civil relations. Oriental Law 1:30–42
14. Gabriel H (1997) A primer on the United Nations convention on the international sale of goods:
from the perspective of the uniform commercial code. Indiana Int Comp Law Rev 7:279–310
15. Li W (2002). A commentary on CISG. Law Press
16. Xiao YP, Long WD (2008) Selected topics on the application of the CISG in China. Pace Int
Law Rev 20:61–103

Ms. Geng Wang is a Ph.D. candidate in law at University of International Business and
Economics. Prior to that, she earned her LL.M. in International Law from Nankai University and
LL.B. from Shandong University, respectively. Her areas of research are international trade law
and international treaty law.

Dr. Shu Zhang is a lecturer in commercial law at Deakin Law School, Deakin University
(Australia) and coached Deakin Law School’s Vis Moot team. Prior to joining Deakin Law
School, Dr. Zhang was a post-doctoral fellow in the Chinese International Business and Economic
Law Initiative, Law School, University of New South Wales (Australia). Her research interests
include international commercial law, dispute resolution and international arbitration, as well as
comparative contract law. She also completed internships at both the Australian Centre for Interna-
tional Commercial Arbitration (ACICA) and the Chinese International Economic and Trade Arbi-
tration Commission (CIETAC). She is also admitted to practice in New South Wales, Australia.
Dr. Zhang obtained her Ph.D. in Law from University of New South Wales (Australia), and her
LLM, LLB and BA in Economics (Double Degree) from Peking University (China). She has
published various manuscripts with leading journals in this area, such as the Journal of Contract
Law, Vindobona Journal of International Commercial Law and Arbitration, China Quarterly.

Dr. Peng Guo Lecturer in Law at RMIT University. At RMIT Dr Guo teaches Contract Law and
Commercial Law to LLB and JD students. He has held visiting positions at different universities,
including Warwick University, University of Amsterdam, and University of Osnabrück. He has
received scholarships awarded by renowned research institutions and international organisations,
1 Novelact (Resources) Limited v Xiamen Special … 11

including the Max Planck Institute for Comparative and International Private Law, the Interna-
tional Institute for the Unification of Private Law (UNIDROIT), the Swiss Institute of Compara-
tive Law, and the European Union. His research interests lie in international sale of goods, inter-
national commercial arbitration, comparative contract law, and law and technology. He actively
participates in Vis Moot and Alfred Deakin International Commercial Arbitration Moot.
Chapter 2
Sanmei (Japan) Trading Co., Ltd v
Fujian Zhangzhou Metals & Minerals
Import and Export Co., Ltd

Chaolin Zhang, Shu Zhang, and Peng Guo

Case Information
Case name: Sanmei (Japan) Trading Co., Ltd v Fujian Zhangzhou Metals & Minerals
Import and Export Co., Ltd
Seller: Fujian Zhangzhou Metals & Minerals Import and Export Co., Ltd
Place of business: China
Buyer: Sanmei Trading Co., Ltd
Place of Business: Japan
Details of First Instance:
Court: Xiamen Intermediate People’s Court, Fujian
Date of Decision: August 1994
Case No: (1993) Xia Jing Chu Zi No 124; (1994) Xia Jing Chu Zi No 24
Judges: Zongjie Chen (Presiding Judge), Dongsheng Zhang (Judge), Yaling Ke
(Acting Judge)

C. Zhang (B)
Nankai University, Tianjin, China
e-mail: [email protected]
S. Zhang
Deakin University, Geelong, VIC 3220, Australia
e-mail: [email protected]
P. Guo
RMIT University, Melbourne, VIC 3000, Australia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 13

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_2
14 C. Zhang et al.

Details of Appeal:
Court: Fujian High People’s Court
Date of Decision: December 1994
Case No: (1994) Min Jing Zhong Zi No 123
Judges: Renzhe Lin (Presiding Judge), Guangyu Wei (Judge), Yimin Sun (Acting
Judge)
CISG applied: Yes
Key CISG provisions interpreted and applied: Article 30
Abstract
From 13 April 1992, Sanmei Trading Co., Ltd (Sanmei) signed several “Confirmation
of Transactions” numbered 92FL-001, 012, 015, 016, 020 and so on with Fujian
Zhangzhou Metals & Minerals Import and Export Co., Ltd (Zhangzhou) to purchase
granite stone materials. During the performance of these contracts, disputes arose
between the two parties regarding the quality of the stone materials delivered, the
quantity of goods, the timely payment of money and the commissions. Consequently,
Sanmei litigated to the Xiamen Intermediate People’s Court. Zhangzhou refused to
accept the judgment of the first instance and appealed to the Fujian High People’s
Court. The facts established by the court of second instance regarding the disputes
involved were essentially consistent with the facts of the original examination, but
are not identical in their legal determination and application.
With regard to the applicable law, the court of first instance ascertained that Sanmei
is a corporation based in Japan and that both parties shall be permitted to choose to
apply Chinese laws, international conventions and international practices. The court
confirmed the nature of several transactions were international economic contracts
and “recognised their legal validity”.
The first contract, 92FL-001, addresses the quality of the granite blocks (G623).
When the goods arrived in Japan, the customers of Sanmei found that some of the
stone materials had defects of quality such as stone urchins and decays. Sanmei
immediately compensated the customer, resulting in a total loss of US$40,558.81
with lost import costs, excise taxes, profits and so on. Sanmei forthwith issued a
specific list of non-conforming stone materials for compensation to Zhangzhou,
and Zhangzhou promised to gradually make compensation in following trades. The
above facts are well documented, and accordingly, the court of first instance ruled
that the damage caused to the Sanmei by the defects of the granite quality was valued
US$40,558.81 and Zhangzhou should pay for it in full. Zhangzhou appealed against
the amount of compensation, but lacked the proper evidence; the court of second
instance then upheld the verdict.
In the second contract, 92FL-012, it was agreed that the granite blocks (G666)
would be supplied by Zhangzhou in three shipments by sight Letter of Credit (sight
L/C). During the performance, Zhangzhou’s trucks were involved in an accident and
the company informed Sanmei of the loss of four blocks. After receiving, Sanmei
corrected the loss to six pieces and Zhangzhou did not raise any objections in their
2 Sanmei (Japan) Trading Co., Ltd v Fujian … 15

subsequent representations. Accordingly, the court of first instance held that the
short amount of stone should be determined to be six pieces rather than four pieces,
and awarded compensation of US$2,278.8 to Sanmei. The court of second instance
upheld the judgment in this matter.
Problems arose with the delivery of the goods and the payment of the goods during
the performance of the second shipment of 92FL-012, and here the decision of the
court of first instance and the court of second instance diverged. Sanmei changed
payment from sight L/C to wire transfer with the consent of Zhangzhou, but the
parties did not agree on a time for payment. The goods were then transported to the
Japanese port, but the two parties could not agree on the payment order of the bill of
lading or money. Finally, Zhangzhou had to sell the goods at a reduced price, resulting
in a total loss of US$15,850.385, including the reduced-price loss, the deposit fee
and six months’ interest. The court of first instance held that Zhangzhou’s claim for
payment in advance by Sanmei was manifestly unreasonable and constituted a breach
of contract for non-delivery, and, in accordance with Article 30 of CISG, Zhangzhou
should afford compensation in the amount of US$10,308.4 for commission losses of
Sanmei caused by the breach of Zhangzhou. Notably, it is not clear from the judgment
on what basis this amount was calculated. However, the court of second instance set
aside this judgment and, on the basis of the principle of fairness, held that the loss
of US$15,850.385 of Zhangzhou should be borne equally by the two parties.

Commentary to the Key Issues Related to the CISG

Issues

Issue 1: Determining the Admissibility and Validity of the Choice-of-Law

Agreement
Issue 2: The Delivery Order of the Money and the Goods
Issue 3: Compensation for Damages

Comments

Issue 1: Determining the Admissibility and Validity of the Choice-Of-Law

Agreement
As the judge in this case held, “the voluntary choice of the parties to apply the laws
of the People’s Republic of China, international conventions and international prac-
tice shall be permitted”. According to the laws on which the judgment was based,
it can be deduced that the Chinese law chosen by the parties was the Law of the
People’s Republic of China on Foreign Economic Contract Law (1985 FECL), and
the chosen international convention is the United Nations Convention on Contracts
for the International Sale of Goods (CISG). The Court granted this choice of appli-
cable law and handed down the judgment accordingly, which indicated that the court
16 C. Zhang et al.

“recognised the validity of the choice-of-law agreement by two parties”. The choice
of the lex causae, in theory, should be divided into the choice of substantive law and
the choice of conflict of laws; this difference was first proposed by German Professor
Ernst Zitelmann and well accepted by scholars in international private law today.1
The first choice is to choose specific substantive law to regulate the content of the
contract, and this is based on the principle of freedom of contract in international
sales law. The reflection in this case is the selection of the 1985 FECL and the CISG,
which would be used to decide the obligations and rights of the parties. The latter
choice is based on party autonomy which is one of the general legal principles in
conflict laws. Lex voluntatis is one of the formulas of attribution in conflict laws; it
“recognised that parties have the right to choose the law autonomously”.2 This is a
matter of the application of the law and will be further discussed in this part.
Contractual parties are allowed to participate in the determination of the law
which would govern their contracts, but such participation is not necessary and vital
for the judicial settlement of international contractual disputes. The supremacy of the
party autonomy does not amount to an “absolute unrestricted freedom to choose the
applicable law”.3 The admissibility of party autonomy would be limited by domestic
public rules of the forum, such as the mandatory provisions and public policies, as
well as some special protections to the parties regarded as being weaker.4 Specifically,
the judges should weigh the priority among these laws, and the principle of party
autonomy in conflict laws would not and cannot deprive the right of the judges to
decide and apply appropriate rules to resolve contractual disputes.5 In other words,
judges are the final decision-makers in deciding the applicable law in each case.
Besides party autonomy, the courts have a certain extent of independent space; they
may and need to exercise their functions to inspect whether the parties’ choice-of-law
is legitimate and effective.
Thus, the subsequent question is which law should the court use to determine the
admissibility of the choice-of-law agreement? There are several possible answers.
In the early years, Prof. Li Wang of Tsinghua University refined and grouped the
possibilities as follows: (1) According to the lex causae of the contract; (2) According
to the law of the forum (lex fori); (3) Not according to the substantive law of any
country but according to the substantive law of conflict law.6 It is held by some
scholars that lex causae is the law of the state and can only be used in domestic
legal regulations,7 thus the first two methods do not include international uniform
norms. But as CISG is well accepted to be used as the applicable law for international

1 Li [1], p. 273.
2 Han [2], p. 112.
3 Rinze [3], p. 412.
4 Ferrari [4], p. 80.
5 Shao [5], p. 25.
6 Li [6], p. 31.
7 Du [7]; see p. 56: An international treaty to which a State is a party becomes part of its domestic

law and thus indirectly becomes the lex causae. Also, international practices are not lex causae, but
a means of bridging loopholes for domestic law.
2 Sanmei (Japan) Trading Co., Ltd v Fujian … 17

contracts and could be covered by the two methods, the third classification might
be meaningless and will not be analysed here. Specifically, in this case, a party to a
Contracting State (China) and a party to a non-contracting state (Japan, at that time)
had reached a consensus to apply CISG, and the Court “recognised the validity and
admissibility of this legal option without any specification on the legal basis”. This
leaves the above two methods to find the possible answers.
I. Method of the Lex Causae of the Contract
The first method is to enforce the issue in the scope of party autonomy and decide
under the law “chosen” by the “agreement”.8 This method was adopted by the
Convention on The Law Applicable to Contracts for The International Sale of Goods
(1986), stipulating that “issues concerning the existence and material validity of the
consent of the parties as to the choice of the applicable law are determined, where the
choice satisfies the requirements of Article 7, by the law chosen”.9 It is also embraced
by Rome I Regulation10 which provides uniform private international law rules for
most of the member states of the EU.11 The most arresting advantage of this method is
that it meets the basic requirements of the parties for the foreseeability of the validity
of the choice-of-law clause they agreed to, as the validity of the choice-of-law clause
is determined by the law chosen by themselves. Still, there is the unavoidable fact
that this method has a fatal flaw in logic. Using a law to determine the effectiveness
of that law itself will “evoke the unavoidable imagery of the chicken and the egg
test”,12 and inevitably fall into a vicious circular logic.
In the present case, the two parties had reached an agreement for their contracts to be
governed by CISG; according to the method of the lex causae of contract, the validity
of this choice-of-law agreement should be confirmed by the specific provisions,
especially Article 6 of the Convention. The CISG does not directly address whether
it is appliable by a selection of parties from non-Contracting States. Article 6 allows
the parties to exclude or deviate from the CISG and almost all of its provisions,13
and it indicates the opt-out approach as choice-of-law regulations for the parties of
international contracts. The broad right to opt-out is seen by some as an expression
of the principle of party autonomy that underlies the entire CISG,14 and commentary

8 Symeonides [8], p. 380.

9 Convention on the Law Applicable to Contracts for The International Sale of Goods (Concluded
22 December 1986), Article 10 (1). The same solution is adopted in Article 6 of the Draft Hague
Principles and in Article 10(1) of the 1986 Hague Convention on the Law Applicable to Contracts
for the International Sale of Goods.
10 The Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June

2008 on the law applicable to contractual obligations (Rome I), Article 3 and Article 10.
11 Kuipers [9], p. 48.
12 Calliess [10], p. 68.
13 Article 6, CISG.
14 Gillette and Walt [11], p. 66; United Nations Commission on International Trade Law [12], p. 33,

para 3.
18 C. Zhang et al.

and some case laws allow opting in to the CISG.15 The question, then, is whether,
based on the claim that the parties have the freedom to exclude and derogate, can the
opposite view be derived, that is, the parties have the freedom to choose?
According to the method of literal interpretation, it cannot be inferred directly that
Article 6 “recognises the validity of the opt-in approach” since there may be some
legal gaps between opt-in and opt-out. The latter matters in a freedom of contract
context and the former also paints a complicated picture in conflict law. The only
unmediated conclusion that can be drawn is that this provision demonstrates the non-
mandatory nature of the CISG.16 When parties select the CISG without selecting a
Contracting State’s law, they are simply choosing a term they want to be included
in the contract, and the term is not “law”.17 Therefore, the choice-of-law might be
given effect as a “party selected rules” exception to predominant conflicts principles.
Another opinion analyses this problem more deeply and comprehensively. In their
point of view, other provisions—in particular Articles 30, 53, 35(1) (“required by
the contract”) or Article 32 (“in accordance with the contract”)—should be read in
conjunction with Article 6 which expresses a general principle “on which the CISG
is based” (Article 7(2)), namely the principle of freedom of contract.18 Some views
go even further, holding that Article 6 of the CISG provides for the principle of party
autonomy in relation to the choice-of-law and the choice of substantive law and
corresponds in that regard with that of most countries in that contractual freedom is
also the CISG rule.19 Apart from these theoretical analyses, admitting the validity
of parties’ opt-in choice of CISG as applicable law makes good sense, as a uniform
substantive law, such as CISG, will play a greater role in resolving international
contract disputes.
II. Method of the Lex Fori
The second option is to exempt this issue from the scope of party autonomy and to
decide under either: (a) the substantive law of the forum qua forum; or (b) the law that
would be applicable under the forum’s choice-of-law rules in its absence.20 There is
no dispute where it is the duty of the court to apply the conflict of laws rules. Even if
the parties have not made a choice-of-law, the court must determine the applicable
law through other rules of law. Since the law of the forum can determine the validity
of other conflicts of law rules, it is of course qualified and obliged to determine the
admissibility and validity of the choice-of-law agreement. Only when the right to
choose whether to apply various conflicting rules is unified and exercised by the
courts in accordance with the laws of the country can it conform to the general logic
of the exercise of judicial power. However, the shortcomings of this approach are
also obvious in practice. At the time the parties conclude an agreement on the choice

15 Gillette and Walt [11], p. 73.

16 United Nations Commission on International Trade Law [12], p. 33, para 3.
17 Gillette and Walt [11], p. 74.
18 Schwenzer and Hachem [13], p. 105. para 8.
19 Schlechtriem and Butler [14], p. 18, para 19.
20 Symeonides [8], p. 379.
2 Sanmei (Japan) Trading Co., Ltd v Fujian … 19

of applicable law, the place of consideration of the dispute may not be known.21
Therefore, the plaintiff’s selection of courts might have unfair consequences for the
defendant, which may make the defendant unable to guarantee the effectiveness of
the choice-of-law clause, thereby making the original choice-of-law unpredictable.
For this reason, although some scholars believe that there is an obvious logical error
in the first method, they have to admit that it is a feasible method in practice.22
The first step should seek out the obligations of the forum under public interna-
tional law. According to this method, whether the CISG should be selected at the
level of conflict of laws in this case should be answered in view of the laws of China,
where the forum of this case is located. China made a declaration under Article
95 of the CISG, and it excludes the declaring Contracting State’s obligation under
public international law to apply the Convention in accordance with Article 1(1)(b).
Making use of the reservation, on the contrary, does not prevent the courts in the
declaring State from applying the Convention in cases where the prerequisites of
Article 1(1)(a) CISG are not met, since the Article 95 reservation does not impinge
upon the declaring State’s freedom to apply the Convention despite its missing obli-
gation to do so.23 Such a situation is most likely to arise in practice in cases where
two Contracting parties—at least one of which does not have its place of business in
a CISG Contracting State (because then Article 1(1)(a) CISG would apply)—choose
the Convention as the law applicable to their contract; many courts are likely to accept
the parties’ choice of the CISG, thereby respecting party autonomy as “recognised
by the rules of private international law of the forum”.24
Next, the domestic regulations of the application of the CISG should be taken into
consideration. It is worth noting that the current practices of various countries reflect
a deviation from uniformity. Article 145 of 1987 General Principles of the Civil Law
of the People’s Republic of China (1987 GPCL) sets the rule; the parties to a contract
involving foreign interests may choose the law applicable to the settlement of their
contractual disputes, except as otherwise stipulated by law. As mentioned above,
the CISG can be regarded as an integral part of the Chinese domestic law system,
so it conforms to the scope of “law” of Article 145 of the 1987 GPCL. Usually,
like in this case, it is “recognised” by Chinese courts. Another two of the Article
95 CISG-reserving States, Singapore and the United States, take a different path.
The national regulations of Singapore explicitly exclude the application of the CISG
in all cases in which Article 1(1)(a) is not applicable.25 At least three US District
Courts have taken the same position and held that the only circumstance in which
the CISG can be applied by a US court is if all the parties to the contract are from

21 Asoskov [15].
22 Graveson [16], pp. 353–354.
23 Bell [17], p. 65; Bridge [18].
24 Herre [19], Article 95.
25 Singapore Sale of Goods (United Nations Convention) Act, Sub-Section 3(2): “Sub-paragraph

(1)(b) of Article 1 of the Convention shall not have the force of law in Singapore and accordingly
the Convention will apply to contracts of sale of goods only between those parties whose places of
business are in different States when the States are Contracting States.”.
20 C. Zhang et al.

Contracting States.26 In these two countries, the CISG could only be applied where
the prerequisites of Article 1(1)(a) CISG are fulfilled. However, the Netherlands takes
the opposing view. Article 2 of the Dutch Implementing CISG Act (1991) requests
foreign judges in Article 95 reservation States not to apply the Dutch Civil Code
provisions on sales but rather the CISG, if Dutch law is declared applicable by virtue
of the local conflict of laws rules. This suggestion is, of course, not binding on foreign
courts but by enacting this solution, the Dutch legislature has indicated that under
Dutch law it prefers a solution which enhances uniformity rather than one that relies
on the local Dutch law of sales.27
Issue 2: The Delivery Order of the Money and the Goods
One of the main substantial disputes lay in the delivery time of the second shipment
of the contract 92FL-012. The buyer and the seller reached a consensus on the change
in payment modalities of the money without an agreement on the order of the money
and the goods. After the seller had delivered the goods to the buyer’s port, the seller
required payment in advance, but the buyer required the priority to be on the goods.
In general, the delivery order of the money and the goods is left to the parties, because
laws usually do not set mandatory regulations for it. But in the present case, the parties
did not reach a new agreement after changing the payment method. However, such an
agreement, in the present case, was ignored before the contract was actually fulfilled.
By taking a step back, trade terms could play an important reference role, sometimes
even decisive, in the arrangement of the order, but relevant content was not reflected
in this judgment.
The payment method for this shipment was changed from the sight L/C to a wire
transfer. A sight payment credit entitles the beneficiary to payment at sight, that is,
on presentation of the documents.28 Wire transfer is a means of remittance in which
the remitting bank, at the request of the remitter, informs the paying bank in a foreign
country by telegraph or telex, and entrusts it with the payment of the remittance to
the designated recipient.29 It can be pointed out that the biggest difference between
the two is whether the bank checks the relevant documents before the payment. In the
context of the carriage of goods by sea, the relevant documents usually include bills
of lading that can be considered as the certificate of property rights of goods. Thus,
it is understandable that Sanmei required the delivery of the goods, being primarily
concerned about the condition of the goods since the previous delivery of goods

26 CISG Advisory Council [20], p. 10, para 3.9. Impuls v. Psion-Teklogix, U.S. District Court

[S.D. Florida], 22 November 2002, 234 F.Supp.2d 1267, 1272, available at: http://cisgw3.law.
pace.edu/cases/021122u1.html; Prime Start v. Maher Forest Products, U.S. District Court [W.D.
Washington], 17 July 2006, Internationales Handelsrecht (2006), 259 at 260, available at: http://
cisgw3.law.pace.edu/cases/060717u1.html; Princess d’Isenbourg et Cie Ltd. v. Kinder Caviar, Inc.,
U.S. District Court [E.D. Kentucky], 22 February 2011, available at: http://cisgw3.law.pace.edu/
cases/110222u1.html.
27 CISG Advisory Council [20].
28 Goode and Kronke [21], p. 330, para 11.17.
29 Liao [22], p. 143.
2 Sanmei (Japan) Trading Co., Ltd v Fujian … 21

was defective. Moreover, in the buyer’s view, according to the procedure of the L/C,
the bank will pay after the delivery of the required documents. In the absence of an
additional agreement, the trade habits of both parties do have important reference
value. For Zhangzhou, however, the inability of Sanmei to issue the L/C might result
in Zhangzhou’s distrust of Sanmei’s financial status and the ability to pay. So, there is
a certain degree of rationality for requiring the payment in advance while the goods
had been transported to the port of the buyer’s country. This is the most contentious
substantive issue in this case. The Court should have given a clear solution based
on the facts and evidence, inferring the most reasonable order of performance in
the context of this case, and then determined the relevant liability arrangement by
weighing the degree of breach and performance of the contracts. It is regrettable,
however, that the Court in this case did not present a specific and clear statement.
Issue 3: Compensation for Damages
Although the judges did not give specific reasoning and explanation of the perfor-
mance order of the parties, they dealt with the claims of both parties for damages. It
is interesting to note that the different judges in the two judgments draw two distinct
conclusions. The court of the first instance, according to Article 30 of the CISG, held
that the loss of the buyer (US$10,308.4) should be compensated by the seller fully.
However, the court of the second instance, on the basis of the principle of fairness,
awarded the seller’s damages (US$15,850.385) to be shared equally between the two
parties.
There is some room for discussion in this case on the application of the law on
which the judgment is based, and the choices of the legal basis for the two courts to
make the judgment on damages are not precise enough. Zhangzhou failed to fulfil
its obligation to deliver the bill of lading, which was set out in Article 30 of the
CISG as one of the seller’s core obligations. Therefore, it is appropriate for the
court of first instance to hold that the seller had breached the contract. However, the
Sanmei also could be at fault in fulfilling its payment obligations, which was not
dealt with by the court. As a result, it seems a more reasonable judgment of the court
of second instance which corrected this one-sided approach and determined that both
the parties had defaulted on the performance of the contract based on the principle
of fairness. Article 30 of the CISG, as well as the principle of fairness, is applied as
a default rule and is used to address the distribution of liability in contracts between
buyers and sellers.30 To be specific, these two rules can only be applied to conclude
whether the parties (especially the seller) had breached the contract in the course of
its performance. Actually, however, the Court would have to deal with the claims for
damages by both parties on the basis of Article 74 of the CISG which provides tightly
related and actionable rules. Aside from this issue, there are substantive issues related
to damages, a matter which has more to be considered regarding the judgments of
the Courts. For this particular shipment, there were two different claims for damages
based on different facts, one was the claimant’s loss for commission while the other
was the defendant’s loss as a result of the resale. Outside the context of the case,

30 Schwenzer [24], p. 514, para 1.

22 C. Zhang et al.

the theoretical issues involved in the latter are relatively less controversial, but in
the former issue, it is controversial at the theoretical level in the interpretation and
application of the CISG. Besides, the holdings of the two courts were not the same.
Hence, only Sanmei’s claim for damages of the commission will be discussed here.
There is the statement in the fourth point of the judgment of the first instance,
“the loss of commission to Sanmei is US$10,308.40”, but it does not specify the
counterparty to the commission contract, and it is insufficient in background infor-
mation in the judgment. In fact, this can be speculated according to the usual logic.
The third point of this judgment had already dealt with the issue of commission as
a whole between Sanmei and Zhangzhou, so, the other part of the judgment would
not deal with it repeatedly and separately even for a particular shipment. As a result,
it can be concluded that this “commission” is outside of this contract and related
to the third party. In addition, as disclosed in the judgment, Sanmei paid for the
quality problems of the goods discovered by its customers during the performance
of the previous instalment and informed Zhangzhou. Moreover, Sanmei’s website
provides the history and information of the company; it was positioned as a scaled
trading company and international trade was its core business at that time.31 It is very
likely that the context was known by Zhangzhou under normal circumstances, as a
rational cross-border trader should have a certain sense of rationality and conduct
basic investigations. Based on these, it can be inferred that the commission argued
by Sanmei was related to the third party in another independent sales contract, which
was known or should be known by Zhangzhou.
It has been argued that such commission may constitute the consequential damages
which are supported to be claimed under Article 74 of the CISG.32 The court of first
instance took this understanding and held that the buyer should be compensated
for the loss of commission in his contract with a third party due to the improper
performance of this contract. The judgment first confirmed that this commission of
resale met the criteria for the determination of damage, and further held that this
damage was within the scope of compensable damages. Such damages are those
special or indirect damages arising as a “reasonably foreseeable” consequence of the
breach. They normally result from special circumstances involving one of the parties
to the contract, where those special circumstances were made known, or should have
been known, by the other party.33 The resale in the present case is one of those special
circumstances, and it has been “recognised by several decisions which stated that
the seller of goods to a retail buyer should foresee that the buyer would resell the
goods”.34 There are also some cases that further defined the connotation and scope of
the “foreseeability” standard, and it has been noted that it is the possible consequences

31 See http://www.sanmei.co.jp/company-information/.
32 Schaffer et al. [23], p. 109.
33 Schaffer et al. [23], p. 109.
34 United Nations Commission on International Trade Law [12], p. 337, para 35. High People’s Court

of Tianjin Municipality, People’s Republic of China, 23 March 2007 (Canada Teda Enterprises Inc.
v. Shanxi Weite Food Co. Ltd) (2006) Jin Gao Min Si Zhong Zi No. 148 Civil Judgment, available
on the Internet at www.ccmt.org.cn; CLOUT case No. 168 [Oberlandesgericht Köln, Germany, 21
March 1996] (the seller of goods to a retail buyer should foresee that the buyer will resell the good).
2 Sanmei (Japan) Trading Co., Ltd v Fujian … 23

of a breach, not whether a breach would occur or the type of breach, that is subject
to the foreseeability requirement of Article 74.35 The judges dealt with the question
of whether the foreseeable consequences were limited to the performance of the
original contract, and their view was that it should not be so limited. Of course, the
party who argued such a claim for damages should bear the corresponding burden
of proof. Taking this case as an example, in addition to the commission, Sanmei
also mentioned that the default caused a loss of profits, which was supported more
directly by Article 74, “including loss of profit”. However, it was not supported by
the court since the evidence could not be conclusively provided by Sanmei.
Although the criterion of “reasonable foresight” under Article 74 of the CISG is
well affirmed,36 there are some views which seems to be relatively conservative on
the scope of damage, avoiding the issue of consequential damage.37 The practice of
the judges of the second instance was similar as they have not dealt with it in the
judgment. However, unlike the avoidance of academic writings, the non-treatment
of the court is itself a treatment, expressing its position that consequential damage
involving third parties to the contract should not be compensated. The judgment of the
second instance entirely dismissed the judgment of the first instance, which directly
demonstrated the holding that no damages should be awarded for such commission
losses with third parties. It does not seem to be a usual practice in domestic law
to support compensation for indirect damages. The English rule was codified in
the Sale of Goods Act, and it used the phrase “loss directly and naturally resulting
in the ordinary course of events” while German law followed a similar but slightly
different test by which direct causation is required.38 Similarly, the 1985 FECL set the
limitation that the compensation should be paid “for the breach of a contract”.39 The
landmark English case, Hadley v Baxendale,40 set down a principle and a rule.41 This
case may be said to stand for two propositions: (1) that it is not always wise to make
the defaulting promisor pay for all the damage which follows as a consequence of
his breach, and (2) that specifically the proper test for determining whether particular
items of damage should be compensable is to inquire whether they should have been
foreseen by the promisor at the time of the contract.42 Article 74 of the CISG does
not contain two parts, or branches; there is no need to conceptualise into which part
of the Hadley rule a loss governed by the CISG belongs. Under Article 74 of the

35 United Nations Commission on International Trade Law [12], p. 337, para 33.
36 August et al. [25], p. 606.
37 Schaffer et al. [23], p. 109. “Consequential damages are those special or indirect damages arising

as a ‘reasonably foreseeable’ consequence of the breach. They normally result from some special
circumstances involving one of the parties to the contract, where those special circumstances were
made known, or should have been known, by the other party.”.
38 August et al. [25], p. 606.
39 Article 18 and Article 19.
40 Hadley v. Baxendale (1854) 9 Exch 341.
41 Murphey [26], p. 430.
42 Fuller and Perdue [27], pp. 84–85.
24 C. Zhang et al.

CISG, damage is classified as either foreseeable or not foreseeable.43 Therefore, the

following case made the Hadley rules more uncertain.44 This will not be examined
in more detail here as the courts of this case did not apply Article 74. Ultimately,
the discussions of the two courts on the issue of compensation for damages were
both insufficient, and should have provided explicit understanding in the context of
Chinese laws.

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27. Fuller LL, Perdue RP (1936) The Reliance interest in contract damages: 1. Yale Law J 46:52–96

Ms. Chaolin Zhang is a Ph.D. candidate in international law at the law school of Nankai Univer-
sity, China. Prior to that, she obtained an LLM in International Economic Law from the School of
Law at the City University of Hong Kong, China. Her research interests lie in international trade
law, data law, and law and technology.

Dr. Shu Zhang is a lecturer in commercial law at Deakin Law School, Deakin University
(Australia) and coached Deakin Law School’s Vis Moot team. Prior to joining Deakin Law
School, Dr. Zhang was a post-doctoral fellow in the Chinese International Business and Economic
Law Initiative, Law School, University of New South Wales (Australia). Her research interests
include international commercial law, dispute resolution and international arbitration, as well as
comparative contract law. She also completed internships at both the Australian Centre for Interna-
tional Commercial Arbitration (ACICA) and the Chinese International Economic and Trade Arbi-
tration Commission (CIETAC). She is also admitted to practice in New South Wales, Australia.
Dr. Zhang obtained her PhD in Law from University of New South Wales (Australia), and her
LLM, LLB and BA in Economics (Double Degree) from Peking University (China). She has
published various manuscripts with leading journals in this area, such as the Journal of Contract
Law, Vindobona Journal of International Commercial Law and Arbitration, China Quarterly.

Dr. Peng Guo Lecturer in Law at RMIT University. At RMIT Dr Guo teaches Contract Law and
Commercial Law to LLB and JD students. He has held visiting positions at different universities,
including Warwick University, University of Amsterdam, and University of Osnabrück. He has
received scholarships awarded by renowned research institutions and international organisations,
including the Max Planck Institute for Comparative and International Private Law, the Interna-
tional Institute for the Unification of Private Law (UNIDROIT), the Swiss Institute of Compara-
tive Law, and the European Union. His research interests lie in international sale of goods, inter-
national commercial arbitration, comparative contract law, and law and technology. He actively
participates in Vis Moot and Alfred Deakin International Commercial Arbitration Moot.
Chapter 3
Skandinaviska Metemo AB v Hunan Co.
For International Economy and Trade

Geng Wang, Shu Zhang, and Peng Guo

Case Information
Case name: Skandinaviska Metemo AB v Hunan Co. for International Economy and
Trade
Seller: Hunan Co. for International Economy and Trade (hereinafter referred to as
“Hunan Company”)
Place of business: China
Buyer: Skandinaviska Metemo AB (hereinafter referred to as “AB Company”)
Place of Business: Sweden
Details of First Instance:
Court: Changsha Intermediate People’s Court, Hunan
Date of Decision: 18 September 1995
Case No: (1995) Chang Zhong Jing Chu Zi No 89
Judges: Haobo Li (Judge), Qing Li (Judge), Zhongxian Qiu (Judge)
CISG applied: Yes
Key CISG provisions interpreted and applied: Articles 1, 4, 18, 73, 74 and 77

G. Wang (B)
University of International Business and Economics, Beijing, China
e-mail: [email protected]
S. Zhang
Deakin University, Geelong, VIC 3220, Australia
e-mail: [email protected]
P. Guo
RMIT University, Melbourne, VIC 3000, Australia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 27

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_3
28 G. Wang et al.

Abstract
On 21 September 1993, Hunan Company agreed to export 36 tons of molybdenum-
iron at the price of US$5.35 per kilogram to AB Company under Contract No
60103. The goods were scheduled to be delivered in two installments: 18 tons in
October 1993 and the other 18 tons in November 1993. According to the contract,
AB Company should pay 90% price by collection (D/P at sight), and the other 10%
should be paid 30 days after all the goods arrived in the port of Rotterdam and the
inspection was completed. Hunan Company delivered the first installment on time,
then AB Company accepted it and paid 90% price in due time.
On 23 November 1993, AB Company sent an offer by telex to Hunan Company
to conclude a new Contract No 60117 for the purchase of 60 tons of molybdenum-
iron. Hunan Company modified this offer and telexed back to AB Company. After
receiving the modified offer, AB Company asserted that AB Company signed it and
sent it to Hunan Company again, while Hunan Company argued that AB Company
modified it again and Hunan Company refused to accept it, but neither party could
provide evidence to support its assertion. Subsequently, Hunan Company requested
AB Company to pay the other 10% price before delivering the second installment of
18 tons of goods under Contract No 60103. AB Company refused, and thus Hunan
Company did not deliver the second installment. Given the situation, AB Company
concluded a contract to import 18 tons of molybdenum-iron at the price of US$6.8 per
kilogram from Swiss Newco AC Company on 18 January 1994 to meet the needs of
its clients. On 20 April 1995, AB Company sued Hunan Company for the incomplete
performance of Contract No 60103 and non-performance of Contract No 60117.
The court found that the trade between AB Company and Hunan Company was
regarding the international sale of goods, and Contract No 60103 was valid and
both parties should strictly comply with it. It was manifestly unreasonable that AB
Company required to pay another 10% and Hunan Company should assume the
liabilities for breach of the contract given its refusal to deliver the second install-
ment. Further, the court denied AB Company’s claim for compensation based on the
non-performance of Contract No 60117, because AB Company could not prove that
Contract No 60117 had been concluded. Therefore, in accordance with Articles 1, 4,
18, 73, 74, and 77 of the CISG, the court stated that Hunan Company should compen-
sate AB Company for their losses, and AB Company should pay the other 10% price
of the first installment to Hunan Company. After the set-off, Hunan Company was
ordered to pay US$9,632.58 with interest.

Commentary on the Key Issues Related to the CISG

Issues
Issue 1: the Applicability of the CISG
Issue 2: Determination of the Performance of Contract No 60103
Issue 3: Determination of the Conclusion of Contract No 60117
3 Skandinaviska Metemo AB v Hunan Co. For International … 29

Comments

Issue 1: The Applicability of the CISG

I. Article 1 of the CISG

The court in this case did not strictly follow the rules for applying the CISG. In the
reasoning part of the judgment, the court held that the trade between the plaintiff and
the defendant regarded the international sale of goods, and then naturally invoked
the CISG rules to govern this dispute. The first step is for the court to determine
whether the legal relationship between the parties is foreign-related (or “interna-
tional”), as foreign-related cases may apply laws other than Chinese domestic law,
and not necessarily apply the CISG. The CISG also requires that either of the parties
have their places of business in the different Contracting States or that the rules of
private international law lead to the law of a Contracting State by virtue of Article 1
of the CISG. As China made an Article 95 declaration, China is relieved of its duty
to apply the CISG via Article 1(1)(b). Therefore, the court should also prove that
the places of business of the buyer and the seller were in the different Contracting
States. In this case, since the seller’s place of business was in China and the buyer’s
place of business was in Sweden, and Sweden and China are both Contracting States
of the CISG, the CISG should directly apply.
While the court ultimately applied the CISG correctly, it did not reasonably state
the reasons for applying the CISG. A similar case is Akfam Co., Ltd v Sinochem
Hainan Co., Ltd et al.1 In this case, the court of the first instance found that the
contract concluded by the parties is a contract for the international sale of goods and
then applied the CISG. In addition, in some cases, the Chinese courts did not explain
why the CISG was applicable at all. For example, in Cai Puzhong v Huang Xiaobin
and Liu Liya, the court directly invoked the relevant provisions of the CISG without
any explanation.2 It can be found that some Chinese courts are not standardized
enough in applying the CISG, and there is a bias in understanding the applicability
of CISG. It is necessary to improve the judges’ level of trial and legal writing.
II. The Scope of the CISG
However, the scope of the CISG is limited. The CISG is not a complete statement of
sales laws; it is the result of a compromise of interests, and a satisfactory compromise
cannot be achieved in all areas.3 If the dispute is within the scope of the CISG, it
can be completely resolved through the CISG, while if part or all of the dispute
exceeds the scope of the CISG, other laws should also be applicable. Articles 2 to 5
contain provisions for defining the scope of the CISG. Specifically, Article 2 excludes
from the CISG six specific categories based on the nature of the transaction and the

1 Akfam Co., Ltd. v. Sinochem Hainan Co., Ltd. et al., Hu Er Zhong Jing Chu Zi No. 403 (Shanghai
Second Intermediate People’s Court, not found).
2 Cai Puzhong v. Huang Xiaobin and Liu Liya, Wen Rui Shang Wai Chu Zi No. 18 (Ruian People’s

Court, May 10, 2013).

3 Zeller [1], p. 10.
30 G. Wang et al.

nature of the goods.4 Article 3 excludes three categories. The CISG does not apply
to contracts for the supply of goods to be manufactured or produced, and contracts
that include the supply of labor or other services. Article 4 stipulates the legal issues
governed by the CISG. From this provision, we can see that the CISG governs the
following: (1) the formation of the contract of sale and (2) the rights and obligations
of the seller and the buyer arising from such a contract. Further, Articles 4 and 5
exclude three issues, the validity of the contract, the effect on the property, and the
liability for death or personal injury.
In this case, there are two main issues. One is whether the buyer and the seller
breached Contract No 60103, and the other is whether Contract No 60117 was estab-
lished. The court cited Article 4 to indicate that two issues, in this case, were under
the CISG.
Issue 2: Determination of the Performance of Contract No 60103
Contract No 60103 was concluded on 21 September 1993, and it was an installment
contract for the delivery of goods as the parties agreed to ship the goods in two
installments. The buyer paid 90% of the payment for the first installment of goods as
agreed, but the seller refused to ship the second installment on the grounds that the
buyer had not paid the remaining 10% of the payment. The seller’s request did not
comply with the contract, because both parties agreed that the buyer would only pay
90% of the purchase price in advance, and the 10% of the purchase price would be
paid later. Thus, the buyer did not breach the contract. On the other hand, the seller
failed to comply with its obligation to ship the second installment of goods on time,
which constituted a fundamental breach of contract. The buyer was entitled to declare
the contract voided to this installment according to Article 73 of the CISG, and it
is reasonable and bona fide for the buyer to demand compensation from the seller
pursuant to Article 74 of the CISG. The buyer purchased 18 tons of molybdenum-iron
at a higher price from another company to meet the needs of upstream customers,
which shows that the buyer took reasonable measures to reduce losses. Therefore, in
the end, the seller needed to compensate for the price difference loss.
The buyer taking reasonable measures in accordance with Article 77 of the CISG is
derived from English common law, which is also called “duty to mitigate”. In British
Westinghouse Electric Co Ltd v Underground Electric Railways Co of London Ltd,5
Viscount Haldane pointed out that:
The fundamental basis is thus compensation for pecuniary loss naturally flowing from the
breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty
of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him
from claiming any part of the damage which is due to his neglect to take such steps.

Strictly speaking, it is not accurate to regard it as a duty. A similar view was

expressed in another case in the UK. The court in this case stated that:

4Honnold [2], p. 48.

5British Westinghouse Electric Co Ltd v Underground Electric Railways Co of London Ltd [1912]
A C 673.
3 Skandinaviska Metemo AB v Hunan Co. For International … 31

A plaintiff is under no duty to mitigate his loss, despite the habitual use by the lawyers of the
phrase ‘duty to mitigate’; He is completely free to act as he judges to be in his best interests.6

Seen from this point of view, the aggrieved party has great autonomy in how to
choose the measures to mitigate losses, but it must be reasonable. The main point of
the principle of mitigating loss is that the party who suffered the loss cannot recover
damages from the other party that he reasonably could have avoided, and the purpose
of this principle is to prevent the aggrieved party from passively waiting for the loss to
take place and then suing the party who has broken the contract.7 Similarly, Article 77
of the CISG is not intended to require the aggrieved party to bear the responsibility for
failing to avoid damages, but merely to prevent the aggrieved party from recovering
damages that could have reasonably been avoided.8 Further, the party in breach of the
contract is not liable for the loss suffered by the aggrieved party in consequence of its
unreasonable measures. The court in this case affirmed that the buyer took effective
and reasonable measures to mitigate losses, and requested the seller compensate for
the buyer’s increased costs.
Issue 3: Determination of the Conclusion of Contract No 60117
The buyer’s other claim was to require the seller to bear the losses caused by its
failure to perform Contract No 60117. Whether Contract No 60117 is established
or not was another important issue of the case. Contract formation is a process of
communication, and it is also a result of the exchange of concurrent declarations of
intention by the parties.9 The basic concept of effective communication in contract
formation is the concept of offer and acceptance. An offeror makes an offer to one
or more specific persons, which means the offerees are authorized to contract with
the offeror as required in this offer on a voluntary basis by sending an acceptance,
and if the acceptance is inconsistent with the offer, an agreement is not reached
and the contract will not be established.10 In common law, the degree of conformity
between an offer and an acceptance must meet the standard of “mirror image”. In
other words, the acceptance should be in strict conformity with the offer like a mirror
reflects an object. Although some courts held that Article 19(1) of the CISG reflects
the common law’s ‘mirror image’ rule,11 this viewpoint is not accurate. According
to Article 19(2) of the CISG, a reply to an offer is seen as an acceptance if it merely
contains different or additional terms that do not materially alter the offer unless the
offeror objects to these immaterial terms. The rule under the CISG is not as strict as
the common law’s ‘mirror image’ rule.
In this case, the buyer sent a new offer to the seller on 23 November, and the
seller modified the offer and sent it back. The buyer asserted that, after receiving
the modified draft contract, it signed and sent it to the seller again; while the seller

6 Sotiros Shipping Inc. v. Sameiet Solholt, [1983] 1 Lloyd’s Rep. 605.

7 Saidov [2], p. 350.
8 Schneider [3], p. 237.
9 Hahnkamper [4], p. 147.
10 Li [5], p. 89.
11 Magellan Int’l Corp. v. Salzgitter Handel GmbH, 76 F. Supp. 2d 919 (1999).
32 G. Wang et al.

asserted that the second draft contract was not an acceptance but a counter-offer, and
the seller did not accept it. Both parties had different opinions on whether the second
draft contract was an acceptance or a counter-offer, but they were unable to provide
evidence.
Based on current evidence, the buyer and the seller failed to reach an agreement
in the first negotiation because the seller modified the quantity, quality, and delivery
date in the offer. According to Article 19(3) of the CISG, these modifications were
considered to alter the terms of the offer materially, and the seller’s reply constituted
a counter-offer. As for the second negotiation, the court stated that the buyer was
the party claiming the establishment of the contract and bore the burden of proof.
However, the buyer could not prove that they had reached a consensus, so the court
did not think Contract No 60117 had been concluded and without sufficient evidence
could not support the relevant claim for compensation.
The court used the rule of burden of proof, allowing the party having the burden
of proof to bear the ensuing adverse consequence if no evidence was available to
support the factual claim or evidence insufficiency.12 First of all, the burden of proof
must be specifically allocated to one of the parties. Only in this way can the rule play
its role in legal proceedings and encourage litigants to actively exercise their rights.13
For instance, the burden of proof is on the buyer in this case. A well-known principle
is “who advocates, who proves”. Article 56(1) of the Civil Procedure Law of the
People’s Republic of China (For Trial Implementation) stipulated that: “A party shall
have the responsibility to provide evidence in support of his own propositions”.14
This provision was considered to be a concrete expression of that principle in Chinese
law, and it remains in the Civil Procedure Law today. However, this principle has
long been out of favor with many Chinese scholars. Some scholars consider that we
need a new understanding of this principle in conjunction with modern theories of the
burden of proof.15 “Who advocates” is not equivalent to the locus standi of plaintiff
or defendant according to judicial interpretations enacted thereafter. For example,
the judicial interpretation of evidence in civil procedures16 enacted in 2001 applies
Rosenbergsche’s theories.17 Another example is Article 91 of the interpretation of
the Civil Procedure Law.18 This provision stipulates that:
A people’s court shall determine the carrying of burden of proof under the following prin-
ciples, unless it is otherwise prescribed by any law: (1) A party claiming the existence of a
legal relationship shall carry the burden of proof on the basic facts giving rise to the legal

12 Li [6], p. 43.
13 Wang [7], p. 121.
14 Civil Procedure Law of the People’s Republic of China (For Trial Implementation) (promulgated

by the Standing Comm. Nat’l People’s Cong., Mar. 8, 1982, Effective Oct. 1, 1982).
15 Hu [8], pp. 109–110; Ren [9], pp. 26–27.
16 Some Provisions of the Supreme People’s Court on Evidence in Civil Procedures (promulgated

by Supreme People’s Ct., December 21, 2001, Effective April 1, 2002).

17 The First Civil Trial Chamber of the Supreme People’s Court [10], p. 24.
18 Interpretation of the Supreme People’s Court on the Application of the Civil Procedure Law of

the People’s Republic of China (promulgated by Supreme People’s Ct., January 30, 2015, Effective
February 4, 2015).
3 Skandinaviska Metemo AB v Hunan Co. For International … 33

relationship. (2) A party claiming the modification or extinction of a legal relationship, or the
impairment of a right shall carry the burden of proof on the basic facts about the modification
or extinction of a legal relationship or the impairment of a right.

This provision distinguishes between the circumstances that a party claims the
existence of a legal relationship and the circumstances that a party claims the modi-
fication or extinction of a legal relationship or the impairment of a right. In this case,
the buyer claimed that the contract was established, so he should carry the burden of
proof on the basic facts creating that legal relation. The court’s view was confirmed in
Article 5 of the judicial interpretation of evidence in civil procedures, which provides
that:
In a contractual dispute, the party that claims the establishment of contractual relation and
the contract has taken effect shall be responsible for producing evidence to prove that the
contract has been concluded and that it has taken effect.

Therefore, since the buyer could not prove the formation of the contract, its claim
for compensation for the seller’s failure to form the contract could not be upheld by
the court.
Moreover, it is not accurate to cite Article 18 of the CISG at the end of the
judgment. Since the focus of the dispute is the nature of the buyer’s last reply, Article
19 of the CISG should also be cited. For purposes of further regulating the citation
and improving the quality of rulings, the Supreme People’s Court enacted a relevant
judicial interpretation in 2009,19 requiring judgments made by Chinese courts at
all levels to cite relevant laws, regulations, and other normative legal documents
accurately and completely. Thus, this judgment is not qualified by today’s standards.

References

1. Zeller B (2008) CISG and the unification of international trade law. Routledge-Cavendish
Publishing
2. Saidov D (2002) Methods of limiting damages under the Vienna convention on contracts for
the international sale of goods. Pace Int Law Rev 14:307–377
3. Schneider EC (1997) Measuring damages under the CISG-Article 74 of the United Nations
convention on contracts for the international sale of goods. Pace Int Law Rev 9:223–237
4. Hahnkamper W (2005) Acceptance of an offer in light of electronic communications. J Law
Commer 25:147–151
5. Li W (2002) A commentary on CISG. Law Press
6. Li H (1986) A new study on the meaning of burden of proof in civil procedure in China. Sci
Law (J Northwest Univ Polit Sci Law) 3:43–45
7. Wang XY (2014) Burden of proof in civil procedure. Evid Sci 22(01):120–127
8. Hu DH (2017) The historical changes and modern application of the rule of “who advocates,
who proof.” China J Law 39(03):107–124

19Provisions of the Supreme People’s Court on Citation of Such Normative Legal Documents as
Laws and Regulations in the Judgments (promulgated by Supreme People’s Ct., October 26, 2009,
Effective November 4, 2009).
34 G. Wang et al.

9. Ren Z (2017) A new recognition on the Rosenbergsche’s theories and Article 90、91 and 108
of the judicial interpretation of the civil procedure law of China. J Law Appl 15:18–28
10. The First Civil Trial Chamber of the Supreme People’s Court (2002) Understanding and
application of judicial interpretation on evidence in civil procedures. China Legal Publishing
House

Ms. Geng Wang is a Ph.D. candidate in law at University of International Business and
Economics. Prior to that, she earned her LL.M. in International Law from Nankai University and
LL.B. from Shandong University, respectively. Her areas of research are international trade law
and international treaty law.

Dr. Shu Zhang is a lecturer in commercial law at Deakin Law School, Deakin University
(Australia) and coached Deakin Law School’s Vis Moot team. Prior to joining Deakin Law
School, Dr. Zhang was a post-doctoral fellow in the Chinese International Business and Economic
Law Initiative, Law School, University of New South Wales (Australia). Her research interests
include international commercial law, dispute resolution and international arbitration, as well as
comparative contract law. She also completed internships at both the Australian Centre for Interna-
tional Commercial Arbitration (ACICA) and the Chinese International Economic and Trade Arbi-
tration Commission (CIETAC). She is also admitted to practice in New South Wales, Australia.
Dr. Zhang obtained her PhD in Law from University of New South Wales (Australia), and her
LLM, LLB and BA in Economics (Double Degree) from Peking University (China). She has
published various manuscripts with leading journals in this area, such as the Journal of Contract
Law, Vindobona Journal of International Commercial Law and Arbitration, China Quarterly.

Dr. Peng Guo Lecturer in Law at RMIT University. At RMIT Dr Guo teaches Contract Law and
Commercial Law to LLB and JD students. He has held visiting positions at different universities,
including Warwick University, University of Amsterdam, and University of Osnabrück. He has
received scholarships awarded by renowned research institutions and international organisations,
including the Max Planck Institute for Comparative and International Private Law, the Interna-
tional Institute for the Unification of Private Law (UNIDROIT), the Swiss Institute of Compara-
tive Law, and the European Union. His research interests lie in international sale of goods, inter-
national commercial arbitration, comparative contract law, and law and technology. He actively
participates in Vis Moot and Alfred Deakin International Commercial Arbitration Moot.
Chapter 4
Xiamen Special Economic Zone Youli
Trading Co., Ltd v Hungary Gold Star
International Trading Co., Ltd

Xiaojun Chen

Case Information
Case name: Xiamen Special Economic Zone Youli Trading Co., Ltd v Hungary Gold
Star International Trading Co., Ltd
Seller: Xiamen Special Economic Zone Youli Trading Co., Ltd
Place of business: China.
Buyer: Hungary Gold Star International Trading Co., Ltd
Place of Business: Hungary
Details of First Instance:
Court: Xiamen Intermediate People’s Court, Fujian
Date of Decision: N/A
Case No: (1995) Xia Jing Chu Zi No 30
Judges: N/A
Details of Second Instance:
Court: Fujian High People’s Court
Date of Decision: 31 December 1996
Case No: (1996) Min Jing Zhong Zi No 166
Judges: Guangyu Wei (Judge), Ming Chen (Judge), Qi Xue (Judge)
CISG applied: Yes
Key CISG provisions interpreted and applied: Articles 1(1)(a), 53, 62 and 78

X. Chen (B)
Wincon Law Firm, Qingdao, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 35

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_4
36 X. Chen

Abstract
On 26 April 1994, a Chinese company as the seller signed a transaction confirmation
with a Hungarian company as the buyer, stipulating that the seller would provide a
batch of 21,600 sets of sportswear to the buyer. The contract agrees that the unit price
is US$4.75 per set, the price clause is CIF Budapest, the total value is US$102,600,
the quality of the clothing is checked and accepted according to samples, and the
two sets of samples sealed by the seller are used as inspection samples; the payment
terms stipulated in the contract are that the buyer shall notify the seller and Wire
transfer to the seller within 60 days from the date of shipment of the goods.
On 24 October 1994, after the clothing arrived in Budapest from Xiamen, China,
the buyer raised objections to the quality and arrival time of the sports clothing, and
the seller failed to collect the payment.
The seller filed a lawsuit with the court, requiring the buyer to pay the owed price
of US$102,600 and bear the corresponding interest loss (the interest loss is calculated
to the date of the actual repayment of the buyer).
The buyer argued that the batch of clothing did not enter its warehouse until
14 October which exceeded the delivery time agreed with the customer and the
local summer clothing sales season and that 60% of the batch of clothing had been
identified as having quality problems. In appeal, the buyer argued that this case was
a trade dispute between the parties from China and Hungary. When two parties had
not agreed on the applicable law, the CISG, to which both China and Hungary are
signatories, should be used as the applicable law. The court of the first instance
improperly applied the “Foreign Economic Contract Law”.
The Fujian Higher People’s Court held that the contract confirmation signed by
the buyer and the seller is an international contract for the sale of goods, and the two
parties did not agree on the application of the law in the contract. According to the
provisions of the CISG in which China participates, this case automatically applies
CISG as the governing law, and the court of the first instance applying the Economic
Contract Law is inappropriate.
On this basis, the court held that, according to the CIF price conditions agreed
by both parties, the seller bears the risk of the goods until the goods cross the ship’s
rail at the port of shipment. Therefore, after the seller ships the goods as agreed, the
shipping company is responsible for the delayed delivery of the goods and the seller
is not responsible. The buyer should pay the seller US$91,800 plus interest.

Commentary to the Key Issues Related to the CISG

Issues
Issue 1: Is CISG applicable to the dispute between the parties
4 Xiamen Special Economic Zone Youli Trading Co., Ltd v Hungary … 37

Comments

Issue 1: Is CISG applicable to the dispute between the parties

CISG became effective in China on 1 January 1988. In response, the Supreme
People’s Court (SPC) issued the “Circular of the Supreme People’s Court on Trans-
mitting Certain Issues of the MOFTEC in Connection with the Implementation of
United Nations Convention on Contracts for the International Sale of Goods”1 on 10
December 1987. The principles of the application of CISG made by MOFTEC (now
the Ministry of Commerce) were forwarded to all courts across the country.
Clause 1 of the circular stated that “So far the states which have already joined in
the Convention, except China, are America, Italy, Zambia, Yugoslavia, Argentina,
Hungary, Egypt, Syria, France, and Lesotho and so on. In 1986, our total amount
of import and export trade with the aforementioned 10 countries reached US$9.23
billion, and the amount of trade contracts is tremendous. Since our government has
already signed the Convention, it should assume the commitments on the imple-
mentation of the Convention. Therefore, according to the provision of Article (1) of
the Convention, from 1 January 1988, the contracts for the sale of goods reached
between the Chinese companies and the companies in the aforementioned countries
(except Hungary) will automatically apply to the provisions of the Convention and the
disputes or litigations arisen should be also settled under the Convention unless other-
wise agreed. Therefore, regarding general contracts for sales of goods, the companies
should consider the application of the Convention. However, the companies may also
reach with the foreign companies the contract clauses which are not in accordance
with the Convention or explicitly exclude the application of the Convention in the
contract and make the choice of the local law of some country as the applicable
law of the contract based on the nature of the transaction, the characteristics of the
products, the nationality, and other specific elements”.
Therefore, we find that the SPC directly stipulates that CISG does not apply to
trade disputes between Chinese companies and Hungarian companies.
Clause 4 of the document further explains the reason: “Although the agreement
on trade between China and Hungary belongs to sales of goods, however, it does not
apply to the Convention so far, but still applies to the “Common Conditions for the
Delivery of the Goods” reached by China and Hungary in 1962.”
According to the provisions of the above clauses, it is confirmed that at least when
CISG took effect in China on 1 January 1988, CISG does not automatically apply to
trade disputes between Chinese companies and Hungarian companies.
Additionally, China and Hungary signed a bilateral treaty on “Common Condi-
tions for the Delivery of the Goods” in 1962. Therefore, according to Article 90 of
CISG, the validity of “Common Conditions for the Delivery of the Goods” is higher
than CISG in China and Hungary; therefore, CISG is not applicable to trade disputes
between Chinese companies and Hungarian companies.

1 Circular of the Supreme People’s Court on Transmitting Certain Issues of the MOFTEC in Connec-
tion with the Implementation of United Nations Convention on Contracts for the International Sale
of Goods, Fa[Jing]Fa[1987]No.34, on 10 December 1987.
38 X. Chen

However, the Chinese courts seem to have not implemented the above regulations.
In this case, the judges thought that CISG can be applied to disputes between Chinese
companies and Hungarian companies. Publicly available judgments on trade disputes
between Chinese companies and Hungarian companies show that the Chinese courts
continue the application of CISG.
In the Wuhan Zhongou Garment Co., Ltd v Bandung International Trade Co., Ltd
International Goods Sales Contract Payment Dispute ((2002) Wujing Chuzi No 116)2
heard by the Wuhan Intermediate People’s Court of Hubei Province, the defendant
was a Hungarian company. The court held that when both parties did not choose the
application law, given that China and Hungary are both members of CISG, CISG
should be applied.
In the Hungarian Export Credit Insurance Co., Ltd (Magyar Exporthitel Biztosító
Zrt) v Xia Jingjun and other insurers over the right of subrogation dispute ((2015)
Zhejiang Yongshangwaichuzi No 181)3 heard by the Ningbo Intermediate People’s
Court of Zhejiang Province, the court also believed that CISG can be applied to trade
disputes between Chinese companies and Hungarian companies.
In the Oriental International Group Shanghai Foreign Trade Co., Ltd and Lanzhou
Jincheng Tourism Service (Group) Co., Ltd Confirmation Dispute Case (1998) Jing
Zhong Zi No 2794 heard by the Supreme People’s Court, the court mentioned Orient
International Group Shanghai Foreign Trade Co., Ltd once filed an arbitration with
a Hungarian company in the Shanghai branch of the China International Economic
and Trade Arbitration Commission. The arbitration tribunal considered that the case
was also based on CISG and made an award accordingly ((97) Hu Mao Zhong Zi
No 505). Since the content of the award is not public, we have no way of knowing
whether the arbitration case was because the parties chose CISG as the application
law in the contract or whether the arbitration tribunal automatically applied CISG.
If it is the latter, then it can be concluded that the arbitration tribunal in this case
also believed that CISG can be automatically applied to disputes between Chinese
companies and Hungarian companies.
However, in the judgments of the aforementioned cases, neither the court nor the
arbitration tribunal discussed why it did not follow the “Circular of the Supreme
People’s Court on Transmitting Certain Issues of the MOFTEC in Connection with
the Implementation of United Nations Convention on Contracts for the International
Sale of Goods”.

2 Wuhan Zhongou Garment Co., Ltd. v Bandung International Trade Co., Ltd. -International Goods
Sales Contract Payment Dispute—Appeal, (2002) Wu Jing Chu Zi No. 116, Wuhan Intermediate
People’s Court in Hubei Province, 11 May 2004.
3 Hungarian Export Credit Insurance Co., Ltd. (Magyar Exporthitel Biztosító Zrt) v Xia Jingjun—

Insurer Subrogation Dispute-Appeal, (2015) Zhe Jiang Yong Shang Wai Chu Zi No. 181, Ningbo
Intermediate People’s Court, Zhejiang Province, 24 March 2017.
4 Oriental International Group Shanghai Foreign Trade Co., Ltd. v Lanzhou Jincheng Tourism

Service (Group) Co., Ltd.- Confirmation Dispute—Appeal, (1998) Jing Zhong Zi No. 279, Supreme
People’s Court, 24 April 1999.
4 Xiamen Special Economic Zone Youli Trading Co., Ltd v Hungary … 39

In the Shenzhen Intermediate People’s Court of Guangdong Province (the “Shen-

zhen Court”), the Orion Electronics Co., Ltd (ORIONELEKTRONIKAIKFT) v Shen-
zhen Yicheng Electronic Technology Co., Ltd and Shenzhen Shenghuihui Electronics
Co., Ltd ((2019) Guangdong 03 Minzhong No 3155),5 the court discussed why CISG
can be applied to disputes between Chinese companies and Hungarian companies.
The Shenzhen Court held that after “Common Conditions for the Delivery of the
Goods” was extended to 1986 and continued to be effective, it was not found that
the two governments had renewed the protocol, and the 1962 Common Conditions
of Delivery Protocol did not appear in the “Protocol between the Government of
the People’s Republic of China and the Government of the Republic of Hungary on
the clean-up of bilateral treaties signed by the two countries and between the two
governments”.6 Therefore, this case falls within the scope of adjustment of the CISG,
and the CISG should be directly applied.
In other words, the Shenzhen Court thought that the “Common Conditions for
the delivery of” described in Clause 4 of the “Circular of the Supreme People’s
Court on Transmitting Certain Issues of the MOFTEC in Connection with the Imple-
mentation of United Nations Convention on Contracts for the International Sale of
Goods” expired on 1 January 1987, after which CISG can automatically apply to
trade disputes between Chinese companies and Hungarian companies.
This statement does clearly explain why the Chinese courts believe that CISG can
be applied to trade disputes between Chinese companies and Hungarian companies.
However, a thorough study of this point of view will reveal that the Shenzhen Court’s
point of view has not fully resolved the issue of whether CISG can be applied to trade
disputes between Chinese companies and Hungarian companies.
According to the provisions of the “Protocol on Common Conditions of Delivery
of Foreign Trade Institutions in 1986”7 by the MOFTEC and the Ministry of Foreign
Trade of Hungary, which came into effect on 16 December 1985, China and Hungary
agreed that the “Common Conditions for the Delivery of the Goods” signed in 1962
was extended to 1986. After that, no treaty regarding the validity of “Common
Conditions for the Delivery of the Goods” was found after 1987. Therefore, it is
completely reasonable to consider that this treaty expired on 1 January 1987.
However, the “Circular of the Supreme People’s Court on Transmitting Certain
Issues of the MOFTEC in Connection with the Implementation of United Nations
Convention on Contracts for the International Sale of Goods” was promulgated
in 1987. In accordance with the above-mentioned agreement between China and
Hungary, at this time, the “Common Conditions for the Delivery of the Goods”

5 Orion Electronics Co., Ltd. (ORIONELEKTRONIKAIKFT) v Shenzhen Yicheng Electronic Tech-

nology Co., Ltd. and Shenzhen Shenghuihui Electronics Co., Ltd.- Disputes of Sales Contract—
Appeal, (2019) Yue 03 Min Zhong No. 3155, Intermediate People’s Court of Shenzhen City,
Guangdong Province, 20 July 2020.
6 Protocol between the Government of the People’s Republic of China and the Government of the

Republic of Hungary on the clean-up of bilateral treaties signed by the two countries and between
the two governments, on 28 November 2000.
7 “Protocol on Common Conditions of Delivery of Foreign Trade Institutions in 1986” by the

MOFTEC and the Ministry of Foreign Trade of Hungary, 16 December 1985.

40 X. Chen

signed in 1962 had expired. MOFTEC indicates that, after 1 January 1988, trade
disputes between China and Hungary should still be resolved in accordance with
“Common Conditions for the Delivery of the Goods” instead of CISG, but there is
no reason for that.
Regrettably, we did not find any comment and basis on why SPC and MOFTEC
continue to believe that “Common Conditions for the Delivery of the Goods” is still
valid after 1988.
What is even more puzzling is that China and Hungary signed the “Protocol of the
Government of the People’s Republic of China and the Government of the Republic of
Hungary on the cleaning up of bilateral treaties between the two countries signed by
the two countries” in 2000. The protocol details all bilateral treaties signed between
China and Hungary from 1951 to 1999 and clearly stipulates which treaties continue
to be in force and which treaties are terminated.
However, we did not find the 1962 “Common Conditions for the Delivery of the
Goods” in the list of treaties listed in the annex to this protocol. The annex to the
protocol signed in 2000 lists many “Common Conditions for the Delivery of the
Goods”, and the earliest was signed in 1951. These “Common Conditions for the
Delivery of the Goods” are all listed in Annex II of the Protocol “Treaties that will
terminate the validity of the People’s Republic of China and Hungary” list, but none
of them was signed in 1962. As a result, we are even more unable to determine
whether the “Conditions for the Delivery of the Goods” signed in 1962 was valid
after 1988.
Despite the above-mentioned doubts, judging from the practice of the Chinese
courts, the Chinese courts seem to agree that the “Circular of the Supreme People’s
Court on Transmitting Certain Issues of the MOFTEC in Connection with the Imple-
mentation of United Nations Convention on Contracts for the International Sale of
Goods”, China’s regulations regarding the non-applicability of CISG to trade disputes
between Chinese companies and Hungarian companies, are no longer valid. There-
fore, unless the parties to the dispute agree to exclude the application of CISG or
there are other circumstances where CISG is not applicable, CISG can automati-
cally be applied to future trade disputes between Chinese companies and Hungarian
companies in China courts.

Mr. Xiaojun Chen is a partner of SHANDONG WINCON LAW FIRM. He is mainly engaged
in legal services in the fields of maritime commerce, maritime affairs, international trade, cross-
border investment, and corporate governance.Mr. Chen has been engaged in commercial litiga-
tion for many years, especially transnational commercial litigation and arbitration. He has repre-
sented Chinese or foreign clients for many times in transnational commercial litigation or arbitra-
tion cases in Mainland China, Hong Kong, Singapore, London, Paris and other places. He has rich
practical experience in legal services such as contract disputes, corporate disputes, and maritime
disputes.
Chapter 5
Hang TAT Food USA Inc. v Rizhao
Aquatic Products Group and Rizhao
Rirong Aquatic Products Co. Ltd

Geng Wang, Peng Guo, and Shu Zhang

Case Information
Case name: Hang TAT Food USA Inc. v Rizhao Aquatic Products Group and Rizhao
Rirong Aquatic Products Co. Ltd
Seller: Rizhao Aquatic Products Group (hereinafter referred to as “Rizhao Group”)
and Rizhao Rirong Aquatic Products Co. Ltd (hereinafter referred to as “Rirong
Company”)
Place of business: China
Buyer: Hang TAT Food USA Inc (hereinafter referred to as “Hang TAT Company”)
Place of Business: United States
Details of First Instance:
Court: Rizhao Intermediate People’s Court, Shandong
Date of Decision: 27 December 1999
Case No: (1997) Ri Jing Chu Zi No 29
Judges: Yujiang Teng (Presiding Judge), Tao Han (Acting Judge), Qianming Fu
(Acting Judge)

G. Wang (B)
University of International Business and Economics, Beijing, China
e-mail: [email protected]
P. Guo
RMIT University, Melbourne, VIC 3000, Australia
e-mail: [email protected]
S. Zhang
Deakin University, Geelong, VIC 3220, Australia
e-mail: [email protected]
© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 41
part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_5
42 G. Wang et al.

CISG applied: Yes

Key CISG provisions interpreted and applied: Articles 86 and 88
Abstract
On 30 June 1995, Hang TAT Company concluded an agreement PTO-9502 with
Rizhao Group to purchase frozen PTO shrimp. During the performance, Rirong
Company contacted Hang TAT Company, and they agreed to modify the contract.
After inspection by the Chinese Commodities Inspection Administration, Rirong
Company delivered the goods in the name of Rizhao Group to Great Five Oceans
Inc, the buyer to whom Hang TAT Company sold the goods. Rizhao Group then
issued the packing list and invoice to Hang TAT Company, and Hang TAT Company
paid for the goods.
Upon arrival in the United States, the goods were seized by the FDA. On 12
October 1995, the FDA sent a notification indicating that some of the goods had
decayed and were illegal. Then Hang TAT Company consulted with Rirong Company
on how to deal with the goods, and Rirong Company agreed to return the goods to
Rizhao Group if the case was true.
The US Treasury Department and Customs Service issued a notice of denial of
entry, and the goods were returned to Qingdao Harbour on 4 January 1996. However,
without the original set of Bills of Lading, Rirong Company could not pick up the
goods. Hang TAT Company requested Rirong Company to redeem the original set of
Bills of Lading, while Rirong Company wanted Hang TAT Company to notarize the
documents. After notarizing all the documents, Hang TAT Company notified Rirong
Company that the goods should be dealt with within seven days, otherwise it would
bring a suit. Rirong Company did not respond to this request, so Hang TAT Company
sued Rirong Company and Rizhao Group. As no one picked up the goods, the goods
were seized by Qingdao Customs and were sold on 15 April 1997. The proceeds of
the sale were turned over to the Treasury.
The court held that the agreement PTO-9502 and its modification were valid.
When the goods were rejected at entry, Hang TAT Company was entitled to return
the goods and get payment and other relevant costs as agreed upon. Also, Hang
TAT Company was entitled to ask for compensation, including foreseeable profits
and interest. After the goods arrived at Qingdao Harbour, Rirong Company and
Rizhao Group were obliged to receive them. They did not redeem the set of Bills
of Lading being suspicious of the documents or take positive measures to avoid
the losses, so they should be responsible for it. On the other hand, although Hang
TAT Company was entitled to keep the goods pursuant to the CISG, it still had the
obligation to preserve them. Hang TAT Company, who was neither the consignee
nor the consigner, held the set of Bills of Lading for a long time, and Hang TAT
Company did not take reasonable measures to preserve the goods while waiting for
the payment and brought a suit, so Hang TAT Company should assume the liabilities.
According to Articles 18, 19, 22, and 23 of the Law of the People’s Republic of China
on Economic Contracts Involving Foreign Interest, Article 6(1) of the Supreme Court
Answer on Some Problems of Application of the Law of the People’s Republic of
5 Hang TAT Food USA Inc. v Rizhao Aquatic Products Group … 43

China on Economic Contracts Involving Foreign Interests, and Article 86(1) and
Article 88 of the CISG, the court supported the claim of Hang TAT Company for
compensation, but it stated that the interest should be calculated since 3 May 1996.
Hang TAT Company also shall bear 70% of the loss of the goods.

Commentary to the Key Issues Related to the CISG

Issues
Issue 1: the Applicability of the CISG
Issue 2: Determination of the Breach of Contract
Comments

Issue 1: The Applicability of the CISG

The court in this case did not explain why the CISG applied. Similarly, in the China
Yituo Group Company v Germany Gerhard Freyso LTD GmbH & Co. KG1 and Cai
Puzhong v Huang Xiaobin & Liu Yali2 cases, the courts also did not explain the
reasons for the applicability of the CISG. The reasonings in these judgments are
not sufficient. In general, after determining the jurisdiction, the court should make a
statement on what laws are applicable to the trial of the case and then conduct a more
specific analysis in its judgment. In 2015, in order to further standardize and unify
the writing standards of adjudicative documents in foreign-related commercial and
maritime cases and improve the quality of judicial documents, the Supreme People’s
Court issued the Norms for Writing Judicial Documents in Foreign-related Commer-
cial and Maritime Cases.3 The Norms provide that the part of the reasoning is the core
part of a judicial document. In civil and commercial cases involving foreign coun-
tries, Hong Kong, Macao or Taiwan, the application of law in the dispute resolution
shall be analyzed and determined in accordance with laws and judicial interpreta-
tions. Unfortunately, some courts still did not explain why the CISG applied, for
example, in TDTopgznakcepvic v Wenzhou Zhengyang International Trade Co..4
Chinese courts need to improve in this regard.
This case is a typical dispute in an international contract of sale of goods. The
buyer, Hang TAT Company, had its place of business in the United States, and the

1 China Yituo Group Company v. Germany Gerhard Freyso LTD GmbH & Co. KG, Hu Er Zhong

Jing Chu Zi No. 161 (Shanghai Second Intermediate People’s Court, June 22, 1998).
2 Cai Puzhong v. Huang Xiaobin and Liu Liya, Wen Rui Shang Wai Chu Zi No. 18 (Ruian People’s

Court, May 10, 2013).

3 The Norms for Writing Judicial Documents in Foreign-related Commercial and Maritime Cases]

(promulgated by the Sup. People’s Ct., March 16, 2015, Effective March 16, 2015), Fa [2015] No.
67.
4 TDTopgznakcepvic v. Wenzhou Zhengyang International Trade Co., Zhe 0302 Min Chu No. 4804

(Wenzhou Lucheng District People’s Court, April 27, 2020).

44 G. Wang et al.

sellers, Rizhao Group and Rirong Company, had their places of business in China.
Since China and the United States are both Contracting States of the CISG, the CISG
should apply to resolve this dispute in accordance with Article 1(1)(a) of the CISG.
Issue 2: Determination of the Breach of Contract
The facts of this case are relatively complex. The court gave the parties the opportunity
to fully cross-examine the evidence and determined that the goods were rejected at
entry after the inspection of the US FDA and were lost finally after being returned
to Qingdao Harbour, which lays the foundation for reasoning.
I. The Seller’s Breach of Contract

A. The Seller’s Duty as to Quality

The buyer in an international contract for the sale of goods purchases goods for sale
or resale to obtain profits and wants the goods to meet their needs, so the buyer
would like to specify their requirements in their contract. For instance, in this case,
the parties agreed that: “the quality of goods shall meet US sanitation and health
standards, the color shall be natural, the number of the intermediate granules shall
be correct, and there shall be no extreme small specifications, no chemicals, and no
short of weight.” According to Article 35 of the CISG, the seller has a duty to deliver
goods that conform to the contract for sale, which is referred to as “warranty”.5
If the seller fails to perform their obligation as to the quality, the buyer can exercise
the rights to remedy provided in Articles 46 to 52 and claim damages by virtue of
Article 45 of the CISG. Of course, due to the existence of Article 6, the autonomy of
the parties takes precedence over the provisions of the CISG. The contract between
the parties in this case stipulated the method for dealing with the quality problems
of the goods. This contract states that: “If the goods are denied entry into the United
States by the US FDA, the seller shall be obliged to return the price paid (C&F) and
compensate the cost of freight to ship the goods back and other relevant costs”. The
court affirmed it and held that the buyer was entitled to return the PTO shrimp and
obtain the money paid and other relevant costs.
B. The Consequences of Breach
Since the seller, Rirong Company and Rizhao Group, breached the contract, the
buyer could demand compensation for foreseeable profits pursuant to Article 74 of
the CISG. In this case, the buyer instructed Rirong Company to deliver the goods
to Great Five Oceans Inc., which indicated that Rirong Company and Rizhao Group
knew the buyer was a reseller. The buyer failed to obtain the qualified goods as
expected and lost the sales profit, which is foreseeable by Rirong Company and
Rizhao Group. Therefore, the court stated that the seller was also entitled to obtain
foreseeable profits. Moreover, the buyer had the right to charge interest on the arrears
set forth in Article 78 of the CISG. The court determined that the sellers’ arrears

5 Honnold [1], p. 328.

5 Hang TAT Food USA Inc. v Rizhao Aquatic Products Group … 45

included payment for goods, DDC fee, freight fee, supervision of loading fee, and
certification fee.
However, the calculation of the interest did not start as the buyer’s claim on 20
December 1995, the day that the goods were delivered to the transportation company
and would return to China. Instead, it was calculated from 3 May 1996, and the court
did not explain the reason.
C. The Reasoning of the Court
It is worthwhile mentioning that the court in this case did not invoke provisions of
the CISG as in the previous analysis, but applied Articles 18,6 19,7 22,8 and 239 of
the Law of the PRC on Economic Contracts Involving Foreign Interest.10
The Law on Economic Contracts Involving Foreign Interest was promulgated in
1985. At that time, China adopted a separate legislative model for foreign-related
contractual relationships and domestic contractual relationships. The Economic
Contract Law, which governs domestic contractual relationships, was promulgated
in 1981,11 slightly earlier than the Law on Economic Contracts Involving Foreign
Interest. Both laws were born shortly after China signed the CISG. It has been believed
that this separate legislative model is probably an “experience” learned from the 1980
United Nations Diplomatic Conference in Vienna.12 There are some countries, like
Czechoslovakia, Germany, Poland, and Romania, where special legislation had been
enacted or would be enacted to govern transactions pertaining to international trade;
these countries wanted to apply their domestic laws more frequently, so made reser-
vations to some provisions of the CISG.13 Back then, China did not know about the
CISG and foreign-related economic activities were still emerging, so a special law
was enacted to promote the development of China’s foreign economic relations.14
The Law of Economic Contracts Involving Foreign Interest contains provisions
that are completely different from those of the CISG, most notably Article 7(1).15
This provision requires a contract to be concluded in writing, which is opposite to the

6 Article 18 of the Law of the PRC on Economic Contracts Involving Foreign Interest.
7 Article 19 of the Law of the PRC on Economic Contracts Involving Foreign Interest.
8 Article 22 of the Law of the PRC on Economic Contracts Involving Foreign Interest.
9 Article 23 of the Law of the PRC on Economic Contracts Involving Foreign Interest.
10 The Law of the People’s Republic of China on Economic Contracts Involving Foreign Interest]

(promulgated by the Standing Comm. Nat’l People’s Cong., Mar. 21, 1985, Effective Jul. 1, 1985,
Invalid Oct. 1, 1999).
11 Economic Contract Law of the People’s Republic of China (promulgated by the Standing Comm.

Nat’l People’s Cong., Dec. 13, 1981, Effective Jul. 1, 1982, Invalid Oct. 1, 1999).
12 Yang [2], p. 310.
13 United Nations Conference on Contracts for the International Sale of Goods, Vienna, 10 March–

11 April 1980, Official Records, Documents of the Conference and Summary Records of the Plenary
Meetings and of the Meetings of the Main Committees (1981), Document A/CONF.97/C.2/L.7,
p. 229, paras 80–81.
14 Zhen [3], pp. 148–149.
15 Article 7(1) of the Law of the PRC on Economic Contracts Involving Foreign Interest.
46 G. Wang et al.

principle of freedom from form requirements established in the CISG.16 Thus, China
made an Article 96 reservation, which was withdrawn after the Law of Economic
Contracts Involving Foreign Interest was abolished.17 On the other hand, there are
many provisions in the Law of Economic Contracts Involving Foreign Interest that
are similar to those of the CISG. For example, Articles 18, 19, 22, and 23 cited by
the court in this case are similar to Articles 45, 74, 77, and 78 of the CISG. Even so,
it is unreasonable for the court to invoke Chinese domestic law.
As an international uniform substantive law, the CISG should be considered in
preference to the rules of private international law.18 This is in line with the intent
of the CISG to adopt uniform rules and “contribute to the removal of legal barriers
in international trade”.19 Besides, uniform rules are more specific and lead to a
substantive solution directly, while rules of private international law require a two-
step approach.20 A Chinese judicial interpretation called Certain Issues in Connec-
tion with the Implementation of United Nations Convention on Contracts for the
International Sale of Goods21 also provides that:
Since our government has already signed the Convention, it should assume the commitments
on the implementation of the Convention. Therefore, according to the provision of Article
1(1) of the Convention, from January 1, 1988, the contracts for sale of goods reached between
the Chinese companies and the companies in the aforementioned countries (except Hungary)
will automatically apply to the provisions of the Convention and the disputes or litigations
arisen should be also settled under the Convention, unless otherwise agreed.

According to Article 7(2) of the CISG, questions which are not settled in the
CISG shall be settled in conformity with the general principles which the CISG is
based on, and the rules of private international law shall apply only when there is
no general principle. If the parties chose Chinese domestic law or the parties did not
choose any law, but Chinese law has the closest relation with this foreign-related
civil relationship, the Law of Economic Contracts Involving Foreign Interest shall
apply by virtue of the Chinese rule of private international law. The court in this case
applied the Law of Economic Contracts Involving Foreign Interest directly, which is
contrary to the provisions of the CISG.
II. The Preservation of the Goods
In this case, the sellers breached the warranty duty, and the goods were returned to
China as agreed. However, the goods were not disposed properly and caused the loss.
Deciding who is responsible for the loss has become controversial.

16 United Nations Commission on International Trade Law [4], p. 71, para 1.

17 United Nations Information Service, China Withdraws “Written Form” Declaration Under the
United Nations Convention on Contracts for the International Sale of Goods (CISG), https://unis.
unvienna.org/unis/pressrels/2013/unisl180.html.
18 United Nations Commission on International Trade Law [4], p. 4, para 2.
19 The preamble of the CISG.
20 United Nations Commission on International Trade Law [4], p. 4, para 2.
21 Certain Issues in Connection with the Implementation of United Nations Convention on Contracts

for the International Sale of Goods (promulgated by the Sup. People’s Ct, Dec. 10, 1987, Effective
Dec. 10, 1987).
5 Hang TAT Food USA Inc. v Rizhao Aquatic Products Group … 47

The CISG sets up two different rules for the preservation of the goods which are
stipulated in Article 85 and Article 86. The former applies to the situation where
the goods are controlled by the seller, and the latter applies to the situation where
the seller no longer retains the documents and controls the goods, and the goods
are under the control of the buyer. Article 85 stipulates the seller’s obligation to
preserve the goods, while Article 86 stipulates the buyer’s obligation to preserve the
goods. It is more efficient and realistic for the party who is in effective control of the
goods to preserve the goods. Like the CISG’s provisions on the passing of risk, these
provisions place responsibility for preserving the goods on the party who was in the
best position to prevent loss regardless of whether this party breaches the contract.22
This case belongs to the latter case.
When the dispute arose, Great Five Oceans Inc held the bill of lading. After the
goods were returned to Qingdao Harbour, Rirong Company was unable to pick up
the goods because they did not have the original bill of lading. At first, the buyer
asked Rirong Company to repay the holder of the bill of lading directly to redeem
the documents, but the parties failed to reach an agreement. A month later, the buyer
obtained the original bill of lading and other documents from the Great Five Oceans
Inc upon the surety, while Rirong Company questioned the authenticity of the bill
of lading and documents and insisted that the buyer should notarize the documents.
The buyer did not notarize all the documents until more than two months later. It
can be found that the buyer did not actively perform their obligation to preserve the
goods nor did they cooperate with Rirong Company in receiving the returned goods,
failing to fulfill their obligation under Article 86 of the CISG.
Meanwhile, Rirong Company and Rizhao Group did not actively take delivery.
The buyer notified Rirong Company that the notarization and certification of all the
documents were completed and requested Rirong Company to go to Qingdao to deal
with this problem in seven days, but the seller did not respond. Subsequently, Rizhao
Group was informed that it had been a long time since the arrival of the goods and
the overdue container fee was huge. The goods would be handed over to the Qingdao
Customs if Rizhao Group did not pick up the goods and pay the fee. Rirong Company
and Rizhao Group still did not contact the buyer to pick up the goods.
In such circumstances, in addition to exercising the right of litigation, the buyer
should also adopt any appropriate method to sell the goods in accordance with Article
88 of the CISG, especially since the goods were perishable frozen PTO shrimp.
However, the buyer in this case did not act in accordance with the CISG and allowed
the loss to expand until the value of the goods was completely lost. The buyer has
the primary responsibility for the loss.
The court ultimately held that the buyer, as the primary responsible party, bore
70% of the liability, and Rirong Company and Rizhao Group jointly bore 30% of the
liability by virtue of the court’s discretionary right.

22 Honnold [1], p. 677.

48 G. Wang et al.

References

1. Honnold J (2009) Uniform law for international sales under the 1980 United Nations Convention.
Kluwer Law International BV
2. Yang F (2008) China’s reservation to the CISG and its application in CIETAC arbitration. Wuhan
Univ Int Law Rev 2:307–329
3. Zhen P (2016) China’s Withdrawal of Article 96 of the CISG: a roadmap for the United States
and China to reconsider withdrawing the Article 95 reservation. Univ Miami Bus Law Rev
25:141–167
4. United Nations Commission on International Trade Law (2016) UNCITRAL digest of case law
on the United Nations convention on contracts for the international sale of goods. https://unc
itral.un.org/en/case_law/digests

Ms. Geng Wang is a Ph.D. candidate in law at University of International Business and
Economics. Prior to that, she earned her LL.M. in International Law from Nankai University and
LL.B. from Shandong University, respectively. Her areas of research are international trade law
and international treaty law.

Dr. Peng Guo Lecturer in Law at RMIT University. At RMIT Dr Guo teaches Contract Law and
Commercial Law to LLB and JD students. He has held visiting positions at different universities,
including Warwick University, University of Amsterdam, and University of Osnabrück. He has
received scholarships awarded by renowned research institutions and international organisations,
including the Max Planck Institute for Comparative and International Private Law, the Interna-
tional Institute for the Unification of Private Law (UNIDROIT), the Swiss Institute of Compara-
tive Law, and the European Union. His research interests lie in international sale of goods, inter-
national commercial arbitration, comparative contract law, and law and technology. He actively
participates in Vis Moot and Alfred Deakin International Commercial Arbitration Moot.

Dr. Shu Zhang is a lecturer in commercial law at Deakin Law School, Deakin University
(Australia) and coached Deakin Law School’s Vis Moot team. Prior to joining Deakin Law
School, Dr. Zhang was a post-doctoral fellow in the Chinese International Business and Economic
Law Initiative, Law School, University of New South Wales (Australia). Her research interests
include international commercial law, dispute resolution and international arbitration, as well as
comparative contract law. She also completed internships at both the Australian Centre for Interna-
tional Commercial Arbitration (ACICA) and the Chinese International Economic and Trade Arbi-
tration Commission (CIETAC). She is also admitted to practice in New South Wales, Australia.
Dr. Zhang obtained her PhD in Law from University of New South Wales (Australia), and her
LLM, LLB and BA in Economics (Double Degree) from Peking University (China). She has
published various manuscripts with leading journals in this area, such as the Journal of Contract
Law, Vindobona Journal of International Commercial Law and Arbitration, China Quarterly.
Chapter 6
China Yituo Group Company v Germany
Gerhard Freyso Ltd GmbH & Co. KG

Geng Wang, Peng Guo, and Shu Zhang

Case Information
Case name: China Yituo Group Company v Germany Gerhard Freyso Ltd GmbH &
Co. KG
Seller: China Yituo Group Company (hereinafter referred to as “Yituo Company”)
Place of business: China
Buyer: Germany Gerhard Freyso Ltd GmbH & Co. KG (hereinafter referred to as
“Freyso Company”)
Place of business: Germany
Details of First Instance:
Court: The Second Intermediate People’s Court of Shanghai
Date of Decision: 22 June 1998
Case No: (1997) Hu Er Zhong Jing Chu Zi No 161
Judges: Peiyu Geng (Presiding Judge), Nan Jiang (Acting Judge), Wei Li (Acting
Judge)
CISG applied: Yes
Key CISG provisions interpreted and applied: Articles 53, 74, 78, 85 and 88(1)(3)

G. Wang (B)
University of International Business and Economics, Beijing, China
e-mail: [email protected]
P. Guo
RMIT University, Melbourne, VIC 3000, Australia
e-mail: [email protected]
S. Zhang
Deakin University, Geelong, VIC 3220, Australia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 49

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_6
50 G. Wang et al.

Abstract
On 2 August 1995, Yituo Import & Export Company, a department of Yituo Company,
contracted with Freyso Company to sell 200,000 rakes. The contract stipulated that
30% of the price shall be paid in advance, and 70% shall be paid 10 days prior
to shipment. After the conclusion of the contract, Freyso Company inspected the
sample goods and informed Yituo Import & Export Company that the goods could
be manufactured after some modification. From December 1995 to February 1996,
Yituo Import & Export Company delivered the goods in six shipments, and Freyso
Company informed Yituo Import & Export Company that Freyso Company had paid
the price as stipulated in those payment applications and sent payment applications
to Yituo Import & Export Company as proof. On 3 February and 10 February, when
Yituo Import & Export Company sent 20,800 and 10,800 rakes respectively from
Zhengzhou to Rotterdam, Yituo Import & Export Company found that the payments
noted in the payment applications issued on 22 January and 30 January 1996 were
not made. Subsequently, Yituo Import & Export Company claimed payment for
the goods, withheld the bills of lading, and Yituo Import & Export Company told
Freyso Company that it would sell the goods to others if Freyso Company did
not pay the purchase price. Freyso Company refused to make the payment for the
quality problem, so Yituo Import & Export Company entrusted a third party called
Kulenkampef & Konitzky Import and Export Company to resell the goods. As both
parties had a fruitless negotiation, Yituo Company brought a suit against Freyso
Company.
The court held that, although it was improper for Yituo Company to sign the
contract in the name of Yituo Import & Export Company, it did not influence the
establishment of the contract between Yituo Company and Freyso Company. Then
the court examined whether there was a breach of contract in the performance of
the contract by Yituo Company. From the court’s view, Yituo Company delayed
shipping the goods, but the delivery dates had been confirmed and accepted by
Freyso Company. Additionally, Freyso Company did not express an objection with
regard to the departure port. With regard to the fifth shipment and sixth shipment,
because the parties modified the contract and Freyso Company was to pay 30% of
the price forty days prior to the shipment, it was proper for Yituo Company to deliver
the goods in February 1996. Therefore, Yituo Company did not breach the contract.
Meanwhile, Freyso Company refused to pay for the goods for the quality problem,
which had no contractual basis and constituted a breach of contract. Yituo Company
took reasonable measures to mitigate the loss. Given these facts, the court stated that
Freyso Company should pay compensation to Yituo Company pursuant to Article
142 of the General Principles of the Civil Law of the People’s Republic of China
and Articles 53, 74, 78, 85, and 88(1) and (2) of the CISG, which did not include the
BKW inspection fee or a refund for export tax. Moreover, the court did not support
Yituo Company’s claims that Freyso Company should continue the performance of
the contract and pick up the 3,000 pieces of goods, because there is no need to
perform the contract.
6 China Yituo Group Company v Germany Gerhard … 51

Commentary to the Key Issues Related to the CISG

Issues

Issue 1: The Applicability of the CISG

Issue 2: Determination of the Breach of Contract
Issue 3: Consequences of Breach

Comments

Issue 1: The Applicability of the CISG

In this case, the court invoked Article 142(2) of the General Principles of the Civil
Law of the PRC1 and some provisions of the CISG but did not explain why the CISG
applied. The seller’s place of business was in China, and the buyer’s place of business
was in Germany. Since both China and Germany are Contracting States of the CISG,
the court shall directly apply the CISG in accordance with Article 1(1)(a) of the
CISG. However, as the court also invoked Article 142(2) of the General Principles
of the Civil Law of the PRC, the court may not apply the CISG directly. Instead, the
court may apply the rule of private international law with priority.
Article 142(2) of the General Principles of the Civil Law of the PRC provides
that:
If any international treaty concluded or acceded to by the People’s Republic of China contains
provisions differing from those in the civil Laws of the People’s Republic of China, the
provisions of the international treaty shall apply, unless the provisions are ones on which the
People’s Republic of China has announced reservations.

This is one of the few provisions in Chinese law that mentions how international
treaties apply. This provision first appeared in Article 189 of the Civil Procedure
Law (for Trial Implementation),2 which stipulates that:
If any international treaty concluded or acceded to by the People’s Republic of China contains
provisions differing from those found in this Law, the provisions of the international treaty
shall apply, unless the provisions are ones on which China has announced reservations.

Similar provisions also exist in the Civil Procedure Law, the Negotiable Instru-
ments Law, the Maritime Law and the Civil Aviation Law. In 2010, China’s first
separate legislation on private international law, Law of the PRC on Choice of Law
for Foreign-related Civil Relationships,3 was promulgated, but it does not cover the

1 General Principles of the Civil Law of the People’s Republic of China (promulgated by the Nat’l
People’s Cong., Apr. 12, 1986, Effective Jan. 1, 1987, Invalid Jan. 1, 2021).
2 Civil Procedure Law of the People’s Republic of China (For Trial Implementation) (promulgated

by the Standing Comm. Nat’l People’s Cong., March 8, 1982, Effective Oct 1, 1982, Invalid April
9, 1991).
3 Law of the People’s Republic of China on Choice of Law for Foreign-related Civil Relationships

(promulgated by the Standing Comm. Nat’l People’s Cong., Oct. 28, 2010, Effective Apr. 1, 2011).
52 G. Wang et al.

rules about the application of international treaties. Seen from the judicial inter-
pretation of this law, the above provisions have not been invalidated.4 In 2021, the
Civil Code of the PRC5 came into effect and replaced the General Principles of
the Civil Law. The Civil Code separates substantive law and conflict of law, and
no longer includes rules about conflict of law like most countries.6 Therefore, there
is no basic provision for the application of international treaties in Chinese law at
this stage. Nevertheless, Article 142(2) of the General Principles of the Civil Law
has influenced the views of many people in the legal profession on the relationship
between domestic laws and international treaties. For example, Li Haopei, a famous
international scholar, holds that this provision is a principle for the implementa-
tion and application of international treaties by the Chinese highest legislature, and
treaties concluded between China and other countries will certainly be incorporated
into domestic law when they come into force according to this principle.7 Instead,
another Chinese scholar argues that Article 142(2) does not literally intend to stipu-
late the application of international treaties.8 Despite the differences, scholars often
start their research with this provision. What’s more, similar provisions in the Civil
Procedure Law, Maritime Law, Negotiable Instruments Law and Civil Aviation Law
will continue to apply. This provision is still the focus of our study.
There are two different interpretations of this provision. One view is that according
to Article 142(2) only when international treaties and domestic laws are inconsis-
tent, do international treaties apply. Some cases in Chinese courts reflect this view.9
Another view is that this provision means that international treaties should be appli-
cable with priority. Some courts followed this view,10 and most Chinese scholars also
support this view. They think that if international treaties apply under the circum-
stances where provisions in Chinese law and the CISG are different, it will depart
from the original intention of countries to conclude international treaties,11 and will
be unfair to foreigners who are unfamiliar with Chinese laws.12 Besides, how to
determine whether there is a difference, and who determines it remains to be solved.13

4 Interpretation of Supreme People’s Court on Several Issues Relating to Application of the Law
of the People’s Republic of China on Choice of Laws for Foreign-related Civil Relationships (I)
(promulgated by the Sup. People’s Ct., Dec. 28, 2012, Effective Jan. 7, 2013, Revised Dec. 29,
2020), Fa Shi (2012) No. 24, Article 4.
5 Civil Code of the People’s Republic of China (promulgated by the Nat’l People’s Cong., May 25,

2020, Effective Jan. 1, 2021).

6 Ding [1], p. 33.
7 Li [2], pp. 316–317.
8 Han [3], p. 226.
9 E.g. (2000) Hu Yi Zhong Jing Chu Zi No. 727, (2000) Ci Jing Chu Zi No. 560, and (2010) Zhe

Shang Wai Zhong Zi No. 77.

10 E.g. (2002) Wu Jing Chu Zi No. 211, (2004) Sui Zhong Fa Min San Chu Zi No. 297, (2019) Min

Min Zhong No. 578.

11 Song and Zhang [4], p. 107.
12 Xuan and Wang [5], p. 129.
13 Chen and Wu [6], p. 114.
6 China Yituo Group Company v Germany Gerhard … 53

Even so, when it is clear the court should apply the CISG, there is no need to
invoke Article 142(2) or other similar provisions. The CISG Digest clearly states
that:
In those countries, however, where international uniform substantive rules are in force, such
as those set forth by the Convention, courts must determine whether those international
uniform substantive rules apply before resorting to private international law rules at all.14

The Supreme People’s Court of China supports this and issued a judicial interpre-
tation15 to stress that, where the criteria of Article 1(1)(a) of the CISG are met, the
CISG should apply automatically, unless otherwise agreed. Thus, there is no need to
invoke Chinese rules of private international law in determining whether the CISG
is applicable to the contract.
Issue 2: Determination of the Breach of Contract

I. The Buyer’s Refusal to Pay the Purchase Price

According to Article 53 of CISG, the buyer is obliged to pay for the goods as required
by the contract and the CISG. The parties in this case agreed that 30% of the price
should be paid in advance, and 70% should be paid 10 days before shipment. For the
first two shipments, the buyer issued the payment applications as required and the
seller received the payment. However, the seller did not receive the remaining 70%
of the payment for the third shipment or any payment for the last three shipments.
The buyer only issued payment applications, but the payment was not made. The
buyer argued that, because the goods delivered by the seller were non-conforming,
they had the right to refuse to pay for the goods. The buyer’s argument had no legal
or contractual basis, and the court did not support it, stating that the buyer did breach
the contract.
II. The Seller’s Delivery of the Goods
The buyer claimed that the seller violated the contract and changed the port of
departure for the goods, but the buyer did not raise objections to the departure port
during the performance. The court found that the two parties modified the contract
when they performed the contract, so the seller’s behaviours did not constitute a
breach of the contract.
The modification of the contract needs to follow some rules. The CISG establishes
the principle of freedom from form requirements.16 The conclusion, modification
and termination of the contract can be made in any form. China made an Article
96 reservation, so the principle of freedom from form requirements in CISG would

14 United Nations Commission on International Trade Law [7], p. 4, para 2.

15 Circular of the Supreme People’s Court on Transmitting Certain Issues of the MOFTEC in
Connection with the Implementation of United Nations Convention on Contracts for the Interna-
tional Sale of Goods (promulgated by the Sup. People’s Ct., Oct. 10, 1987, Effective Oct. 10, 1987),
Fa [Jing] Fa (1987) No. 34.
16 United Nations Commission on International Trade Law [7], p. 71, para 1.
54 G. Wang et al.

not be binding in China. Although the reservation was withdrawn in 2013,17 it was
still in effect when the case occurred. In such circumstances, we should find the
governing law via rules of private international law to deal with the issue of a contract
modification. At that time, China had not promulgated the Law of the PRC on Choice
of Law for Foreign-related Civil Relationships, and the Chapter on the Application
of Laws in Civil Relations with foreigners in the General Principles of Civil Law
stipulates the general rules of private international law. The parties in this case did not
choose the applicable law, so Chinese law, the law of the country that has the closest
connection with the contract, should apply pursuant to Article 145 of the General
Principles of Civil Law. Concretely, the Law of the PRC on Economic Contracts
Involving Foreign Interest.18 Article 28 of the Law of the PRC on Economic Contracts
Involving Foreign Interest provides that:
A contract may be modified if both parties agree through consultation.

This provision is not like Article 7 of this law which stipulates that a contract shall
be formed when the parties to it have reached a written agreement on the terms, and
have signed the contract. On the contrary, the parties can modify the content of the
contract in any form, which is consistent with CISG’s position. In this case, part of
the content of the contract was changed by behaviour. Since the seller’s change was
accepted by the buyer by behaviour, the change did not violate the agreement of the
parties and the modification of the contract was effective.
Issue 3: Consequences of Breach

I. Calculation of Damages
As the buyer in this case failed to pay the purchase price as agreed during the
performance of the contract which constituted a breach of contract, the buyer should
compensate the seller’s loss with interest in accordance with Article 74 and Article
78 of the CISG. The seller claimed that the buyer should compensate: (1) loss of
payment and interest on the payment; (2) the export tax.
A. The Refund for Export Tax
For the refund for export tax, the court held that, since it was not foreseeable by the
buyer that the seller was to receive a refund for export tax, this loss is not accepted.
The court used the foreseeability principle set forth in Article 74 of the CISG. This
provision provides that:
Such damages may 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 the light of the facts and matters

17 United Nations Information Service, China Withdraws “Written Form” Declaration Under the
United Nations Convention on Contracts for the International Sale of Goods (CISG), https://unis.
unvienna.org/unis/pressrels/2013/unisl180.html.
18 The Law of the People’s Republic of China on Economic Contracts Involving Foreign Interest

(promulgated by the Standing Comm. Nat’l People’s Cong., Mar. 21, 1985, Effective Jul. 1, 1985,
Invalid Oct. 1, 1999).
6 China Yituo Group Company v Germany Gerhard … 55

of which he then knew or ought to have known, as a possible consequence of the breach of
contract.

The foreseeability principle is rooted in the common law of contracts.19 In Hadley

v Baxendale,20 Alderson stated that:
Where two parties have made a contract which one of them has broken, the damages which
the other party ought to receive in respect of such breach of contract should be such as
may fairly and reasonably be considered either arising naturally, i.e., according to the usual
course of things, from such breach of contract itself, or such as may reasonably be supposed
to have been in the contemplation of both parties, at the time they made the contract, as the
probable result of the breach of it.

Alderson also said that, if the party who broke the contract did not know those
special circumstances, he should not be responsible for the loss occurring under
the special circumstances.21 The foreseeability principle aims at limiting the risk of
liability to the extent that the party in breach ought to have taken into account when
he concluded the contract22 so that the parties can assess the risks and plan their
next actions reasonably at the conclusion of the contract, thus enabling that party
to consider taking the risk, taking out insurance or abstaining from concluding the
contract. This principle contributes to balancing the interests of the breaching party
and the observant party.23
B. The Loss of the Payment
As for the loss of the payment, the court found that the inspection fee was not a
necessary cost and the claim was disregarded, but the other losses were reasonable.
The seller took reasonable measures to reduce losses after the contract was suspended.
When the seller found that the buyer did not pay part of the purchase price, they
immediately decided to stop delivering the fifth and sixth shipments. The goods
were still under the seller’s control. According to Article 85 of the CISG, the seller
shall take reasonable steps in the circumstances to preserve the goods. After that,
the buyer refused to pay the payment and had a dispute with the seller. The seller
exercised its rights under Article 88(1) of the CISG to sell the goods, and provide
reasonable notice of the intention to the buyer in advance. The seller then entrusted
Kulenkampef & Konitzky Import and Export Company to resell the goods. After
deducting the cost of the inspection fee, storage fee, transportation fee, commission,
procedure fee, sales promotion fee, and travelling fee, the balance is zero. The seller
has the right to retain out of the proceeds of sale an amount equal to the reasonable
expenses of preserving the goods and of selling them in accordance with Article
88(3) of the CISG. The CISG does not explain the term “reasonable”. Judging from
the interpretation rules under Article 7(1) of the CISG, when explaining the term

19 Honnold [8], p. 576.

20 Hadley v Baxendale [1854] EWHC Exch J70.
21 Id.
22 Mullis and Huber [9], p. 272.
23 Wang [10], p. 69.
56 G. Wang et al.

“reasonable”, we should consider the CISG’s international character and need to

promote uniformity in the CISG’s application and good faith in international trade.
Unlike the court’s view, this commentary considers that the seller’s expenses for
inspection are reasonable. There are two reasons. One is that the parties did not reach
any agreements on the issue of the quality of the goods, and then the seller decided to
find another buyer, which indicates that the goods may have quality problems. The
other is that the seller has the obligation to deliver goods that conform to the contract
for sale. In order to ensure the smooth progress of the subsequent trading activities,
it is necessary to inspect the goods to eliminate hidden dangers.
C. Interest
With regard to the interest, the court ruled that the buyer should pay the interest on
the price and other sums which is in arrears pursuant to Article 78 of the CISG. The
CISG does not contain explicit directions on the rate of interest. Because of this,
it has been the focus of much litigation and controversy.24 The legislative history
shows that the Contracting States could not agree on the rate of interest,25 so the
CISG could not cover this issue. There are at least three ways to determine the law
that governs the rate of interest: (1) the rate of interest is determined by the general
principle of the CISG; (2) the rate of interest is determined in conformity with the law
applicable by virtue of the rules of private international law; and (3) rate of interest
is determined by the law of the forum.26 Regrettably, this judgment did not mention
the starting time or the rate of the interest.
II. Continuation of Contracts
The seller also asked the court to rule that the buyer continue performing the contract
and pick up the remaining goods at the seller’s factory. The court rejected this request.
Since the buyer can compensate the seller in the form of pecuniary compensation,
there is no need to continue the performance of the contract.

References

1. Ding W (2019) The compilation of the civil law leads to a new version of the law of the PRC
on choice of law for foreign-related civil relationships. Oriental Law 1:30–42
2. Li HP (2003) Introduction to treaty law, (2nd). Law Press
3. Han SY (2016) Application of CISG in Chinese international commercial arbitration. China
Legal Sci 5:218–238
4. Song XX, Zhang Q (2008) Problems in the application of United Nations convention on
contracts for the international sale of goods and its practice in China. Law Sci 1:103–110
5. Xuan ZY, Wang YY (2013) Application of UN convention of international sale of goods (CISG)
in China courts. Law Sci Mag 33(05):125–131

24 Gotanda [11], p. 106.

25 Koneru [12], p. 123.
26 Schneider [13], pp. 234–235.
6 China Yituo Group Company v Germany Gerhard … 57

6. Chen ZD, Wu JH (2012) On the application of United Nations convention on contracts for the
international sales of goods in China-a comment on Article 142 of general principles of civil
law. Law Sci 10:107–118
7. United Nations Commission on International Trade Law (2016) UNCITRAL digest of case
law on the United Nations convention on contracts for the international sale of goods. https://
uncitral.un.org/en/case_law/digests
8. Honnold J (2009) Uniform law for international sales under the 1980 United Nations
convention. Kluwer Law International BV
9. Mullis A, Huber P (2007) The CISG: a new textbook for students and practitioners. Peter Huber
and Alastair Mullis. Sellier-European Law Publishers, Munich
10. Wang H (2014) The research on the damages foreseeability rule of CISG. J Shanghai Univ Int
Bus Econ 21(05):66–80
11. Gotanda JY (2005) Awarding damages under the United Nations convention on the international
sale of goods: a matter of interpretation. Georgetown J Int Law 37:95–140
12. Koneru P (1997) The international interpretation of the UN convention on contracts for the
international sale of goods: an approach based on general principles. Minnesota J Global Trade
6:105–152
13. Schneider EC (1997) Measuring damages under the CISG-Article 74 of the United Nations
convention on contracts for the international sale of goods. Pace Int Law Rev 9:223–237

Ms. Geng Wang is a Ph.D. candidate in law at University of International Business and
Economics. Prior to that, she earned her LL.M. in International Law from Nankai University and
LL.B. from Shandong University, respectively. Her areas of research are international trade law
and international treaty law.

Dr. Peng Guo Lecturer in Law at RMIT University. At RMIT Dr Guo teaches Contract Law and
Commercial Law to LLB and JD students. He has held visiting positions at different universities,
including Warwick University, University of Amsterdam, and University of Osnabrück. He has
received scholarships awarded by renowned research institutions and international organisations,
including the Max Planck Institute for Comparative and International Private Law, the Interna-
tional Institute for the Unification of Private Law (UNIDROIT), the Swiss Institute of Compara-
tive Law, and the European Union. His research interests lie in international sale of goods, inter-
national commercial arbitration, comparative contract law, and law and technology. He actively
participates in Vis Moot and Alfred Deakin International Commercial Arbitration Moot.

Dr. Shu Zhang is a lecturer in commercial law at Deakin Law School, Deakin University
(Australia) and coached Deakin Law School’s Vis Moot team. Prior to joining Deakin Law
School, Dr. Zhang was a post-doctoral fellow in the Chinese International Business and Economic
Law Initiative, Law School, University of New South Wales (Australia). Her research interests
include international commercial law, dispute resolution and international arbitration, as well as
comparative contract law. She also completed internships at both the Australian Centre for Interna-
tional Commercial Arbitration (ACICA) and the Chinese International Economic and Trade Arbi-
tration Commission (CIETAC). She is also admitted to practice in New South Wales, Australia.
Dr. Zhang obtained her PhD in Law from University of New South Wales (Australia), and her
LLM, LLB and BA in Economics (Double Degree) from Peking University (China). She has
published various manuscripts with leading journals in this area, such as the Journal of Contract
Law, Vindobona Journal of International Commercial Law and Arbitration, China Quarterly.
Chapter 7
Netherlands Akfam Co., Ltd v Sinochem
Hainan Co., Ltd

Mengsha Yang

Case Information
Case name: Netherlands Akfam Co., Ltd v Sinochem Hainan Co., Ltd
Seller: Sinochem Hainan Co., Ltd
Place of business: China
Buyer: Netherlands Akfam Co., Ltd
Place of Business: Netherlands
Details of First Instance:
Court: The Second Intermediate People’s Court of Shanghai
Case No: (1996) Hu Re Zhong Jing Chu Zi No 403
Judges: Peiyu Geng (Presiding Judge); Shengxin Li (Acting Judge); Nan Jiang
(Acting Judge)
Details of Appeal:
Court: Shanghai High People’s Court
Case No: (1997) Hu Gao Jing Zhong Zi No 53
Judges: Cheng Yang (Judge), Wencai Tian (Judge), Jialin Ji (Judge)
CISG applied: Yes
Key CISG provisions interpreted and applied: Articles 24, 35(1), 38(1)(3) and 78

M. Yang (B)
Tianjin University, Tianjin, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 59

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_7
60 M. Yang

Abstract
The plaintiff, Akfam Company, and the defendant, Hainan Company, had entered into
a contract for international sale of goods, under which the defendant shall supply to
the plaintiff 5,000 kg of RANITIDINEHCL BP88/USP22 at a unit price of US$48.90
CIF Rotterdam, and the total amount of payment for goods was US$244,500. The
contract stated that the port of destination was Rotterdam. There was no clause
about the inspection of goods in the contract. The defendant provided the plaintiff
with 2,000 kg of the subject matter under the contract on 21 January 1994 and 27
February 1994, respectively, and provided the plaintiff with 1,000 kg of the subject
matter of the contract on 12 May 1994. The plaintiff received all the goods and paid
for them in full. Upon receipt of the goods, the plaintiff immediately transhipped
the goods to Bulgaria, the country of the plaintiff’s customer. On 26 October 1994,
the plaintiff raised a quality objection against the defendant on the grounds that the
Bulgarian customer refused to accept part of the goods. The plaintiff also provided the
defendant with an analytical certificate issued on 1 November 1994 by the Bulgarian
National Institute for Drug Control, which proved that some of the subject matter
provided by the defendant did not conform to the quality standards agreed upon in
the contract, which was confirmed by the defendant.
On 28 March 1995, the defendant wrote to the plaintiff stating that the third party,
Changzhou Dabang Pharmaceutical and Chemical Co., Ltd., was the directly respon-
sible party, and that the plaintiff could directly negotiate with the third party about the
replacement of the goods, and that the defendant would still bear the legal liability as
a party to the contract. On 25 August 1995, the plaintiff and the defendant entered into
another separate agreement (hereinafter referred to as the goods replacement agree-
ment), whereby the defendant would exchange 9,500 kg of cimetidine for 3,920 kg
of ranitidine hydrochloride. Later, due to the fact that the defendant failed to perform
the obligation of goods replacement according to the goods replacement agreement,
the plaintiff made repeated negotiations with the defendant which failed. Therefore,
the plaintiff requested the court to order the defendant to fulfil the obligation of
goods replacement or to refund the plaintiff’s payment for goods of US$191,688
and bear the loss of interest, and compensate the plaintiff for the loss of profits of
US$23,000 and the storage fee, attorney’s fee and transportation fee of US$10,000
that the plaintiff had already paid.
The defendant argued that the quality inspection report on which the plaintiff relied
was made by the inspection authority at the port of destination of the transhipment
rather than by the inspection authority at the agreed port of destination and that the
defendant was not aware of the transhipment of the goods, so the inspection report
had no proof effect on this case. The defendant asserted that the faxed copy provided
by the plaintiff concerning the defendant’s admission of the quality objection was
not officially sealed by the defendant and was untrue. The defendant also argued
that it had never signed a goods replacement agreement with the plaintiff, and the
signatory on the goods replacement agreement as claimed by the plaintiff was not
authorised by the defendant, so the agreement was invalid.
7 Netherlands Akfam Co., Ltd v Sinochem … 61

In accordance with the provisions of Article 38(1)(3) of the CISG, the court of the
first instance held that the claims of the plaintiff shall not be supported. The court held
that, although the international sale of goods contract signed by the plaintiff and the
defendant was legally formed and both parties shall abide by it, the plaintiff had not
examined the goods in a reasonable manner at Rotterdam, but directly transhipped
the goods to Bulgaria. The defendant, therefore, could not be aware of the possibility
of such transhipment at the time of the conclusion of the contract. The court also
held that the defendant’s signatory was not authorised by the defendant, so the goods
replacement agreement was not formed.
The court of the second instance held that the court of the first instance had
wrongfully applied the CISG. The goods replacement agreement was the voluntary
and true expression of both parties and therefore was valid. According to Article 35
rather than Article 38 of the CISG, the appellant’s request was supported.

Commentary on the Key Issues Related to the CISG

Issue

Issue 1: The Uniform Interpretation of the CISG

Comments

Issue 1: The Uniform Interpretation of the CISG

I. Introduction
The key issue of this case is whether the goods replacement agreement made sepa-
rately by the plaintiff and the defendant during the performance of the disputed
contract should be observed. The plaintiff claims that the goods replacement agree-
ment was valid, so the defendant shall perform the goods replacement obligation
according to the agreement. However, the defendant argued that the goods replace-
ment agreement had not been authorised by the defendant, and the plaintiff did not
make a timely inspection of the goods at the agreed port of arrival and raise the
quality problem of the goods immediately. The first instance court held that the
plaintiff did not inspect the goods according to Article 38 of CISG, while Shanghai
Higher People’s Court corrected this wrong application of CISG and held that the
goods replacement agreement between the two parties was true and effective, so the
provisions of Article 38 of CISG on inspection of goods should not be applied, but
the provisions of Article 35 on the obligation of quality assurance of goods and the
provisions on compensation for damages should be applied.1

1 Yu and Li [1], p. 140.

62 M. Yang

The error in the application of CISG by the first instance court mistakenly inter-
preted the substantive provisions of CISG. Specifically, the court failed to consider the
important role of party autonomy as the fundamental principle of CISG. According
to the uniform interpretation obligation stipulate in Article 7 of CISG when matters
fall within the scope of the Convention but are not explicitly specified, this shall
be first solved in accordance with the general principles of the Convention; in the
absence of general principles, it shall be solved in accordance with the applicable
laws of private international law. Obviously, the court of the first instance had not
mastered the method of uniform interpretation of CISG.
II. The Methods of Uniform Interpretations of the CISG
Article 7(1) of CISG sets forth the basic principles of uniform interpretation, namely,
adhering to its “international character”, guaranteeing “the promotion of the unity of
its application” and “the need to observe good faith in international trade”. Article
7(2) of CISG specifies the method of filling the gap, requiring judges and arbitrators
to follow a certain sequence: first, the general legal principles method recognised by
CISG itself shall be adopted; when this method fails to achieve the goal, the conflict
method is then used.
The uniform interpretation rule in Article 7 undoubtedly imposes a special obli-
gation on judges and arbitrators, that is, they should not simply apply domestic law
to supplement the gaps of CISG, but should first seek answers from CISG itself.2
In practice, the Vienna Convention on the Law of Treaties (VCLT) interpretation
method, the case law interpretation method and the general principle interpretation
method are often used and are deemed to conform with the uniform interpretation
jurisprudence.
A. VCLT Interpretation Method
In order to avoid defaulting to domestic law, the court is obliged to follow the inter-
pretation method of Articles 31 and 32 of the VCLT, to dig deeply into the implied
meaning and overall purpose of the CISG provisions. International economic law is a
branch of international law, so the general principles of international law concerning
the interpretation of treaties can be applied to the field of international economic
law.3 The interpretation methods of treaty law specifically include textual interpreta-
tion, systematic interpretation, objective interpretation and historical interpretation.
In other words, judges and arbitrators mainly interpret the CISG according to its own
provisions, system structure, legislative purpose and drafting history so as to avoid
referring to domestic legal traditions.
B. Case Law Interpretation Method
Some scholars believe that the judgements of interpretation of CISG itself can be
an important basis to guarantee the internationality and unity of CISG.4 In this

2 Zuo and Yang [2], p. 150.

3 Jackson [3], p. 81.
4 Koneru [4], pp. 105 + 152.
7 Netherlands Akfam Co., Ltd v Sinochem … 63

view, the disclosure of CISG cases serves to demonstrate the consistency of CISG
jurisprudence and improve the possibility of their uniform application. So, the case
law interpretation method requires judges and arbitrators to refer to foreign CISG
legal decisions to a certain extent.
C. General Principles Interpretation Method
The general principles interpretation method requires judges or arbitrators to apply
the general principles embodied in the provisions of CISG to the issues that are not
clearly stipulated in the CISG in a broader scope. Although this method is legally
recognised by Article 7(2) of CISG, it has its own application limits. Because CISG
itself does not clearly stipulate the general legal principle recognised by it, but almost
every provision of CISG is the embodiment and reflection of the general principles,
application difficulties arise when judges or arbitrators need to extract the general
principles from the legal provisions first. Although the UNCITRAL Digest of Case
Law on CISG has abstracted some general legal principles for reference, it is still
difficult to identify the general legal principles embodied in specific issues, and
different judges and arbitrators are liable to draw different conclusions.
III. General Principles of CISG
General principles are broad and abstract basic rules found in the provisions of the
CISG.5 As the first method to fill the gaps in CISG according to Article 7, the general
principles are very important to the uniform application of the Convention, but in fact,
they are often interpreted differently or even ignored. An important reason is that the
Convention itself does not define, explain or clarify the general principles recognised
by the Convention, which makes it difficult to understand and determine the general
principles, thus increasing difficulties in the application for judges and arbitrators.
The general principles of the Convention are the non-codification expression implied
in the provisions of the Convention, and the general principles of the Convention
summarised by UNCITRAL through the analogy of case law can provide some
reference and guidance to the judicators.
According to UNCITRAL’s Digest of Case Law on the CISG, there are many
general principles of the Convention that courts have found. These general princi-
ples are as follows: Party autonomy, Good faith, Estoppel, Privity of contract, Place
of payment of monetary obligations, Currency of payment, Burden of proof, Full
compensation, Informality, Dispatch of communications, Mitigation of damages,
Binding usages, Set-off, Right to withhold performance and the principle of simulta-
neous exchange of performances, Right to interest, Costs of one’s own obligations,
Changed circumstances and Right to renegotiate. The principle of party autonomy
is the undisputedly primary principle of CISG.
IV. Party Autonomy Principles in CISG
Party autonomy is the primary principle of contract law, and the CISG also fully
embodies this principle in specific provisions. According to several courts, one of

5 Lassila [5], p. 116.

64 M. Yang

the general principles upon which the Convention is based on party autonomy.6
According to Schlechtriem, party autonomy “operates on two levels” in the context
of the CISG.7 In private international law, the parties can choose the application law of
the contract, so Article 1 of the Convention can be excluded by Article 6. At the level
of substantive law, party autonomy or freedom of contract means that both parties
may vary the content of their contracts by modifying the CISG’s provisions. Usually,
the understanding of Article 6 at the level of private international law has been well
confirmed in case law, but the role of Article 6 of CISG at the substantive law level
cannot be ignored. The purpose of Article 6 is to reveal the non-mandatory nature
of CISG, and parties to a contract are free to determine the content of the contract
at the level of substantive law. In other words, the parties’ agreements prevail over
the provisions of the CISG, the CISG respects parties’ authority to regulate their
relationship and the CISG only supplements the parties’ agreement.8
The party autonomy principle is also reflected in other CISG articles aside
from Article 6. For example, CISG provides various remedies available to parties,
including continued performance, damages, etc. Therefore, not only can the parties
agree to exclude or deviate from the application of the Convention, but they also
should abide by the principles in dealing with contract disputes.
In this case, the parties negotiated and signed a performance agreement on the
assumption and settlement of the liability for breach of contract. The agreement is
a consensus between the parties, and the parties shall strictly follow the agreement,
without considering the quality of the original contract goods and other issues.9
The parties’ subsequent replacement agreement is the full embodiment of the party
autonomy principle, which derogates the application of CISG Article 38 which should
have been applied. According to Article 4(a) of the Convention, the validity of the
contract does not fall within the scope of the Convention, so the validity of the
replacement agreement should be resolved by the relevant domestic law guided by the
private international law of the court. The court of the second instance did not directly
indicate whether the validity of the replacement agreement was based on Chinese
law, but it clarified in detail the reasons for supporting the effect of the replacement
agreement. Tang Zhongjun, who signed the replacement agreement on behalf of
Hainan Company, is a manager in the import department of Hainan Company and
also the business agent of the disputed contract. Therefore, his behaviour of handling
contract disputes according to his duties shall be regarded as duty behaviour, and
the legal consequences arising from his duty behaviour shall be borne by Hainan
Company. Therefore, the focus of this case is not on the issue of goods inspection,
but that the party autonomy has already derogated the application of Article 35.

6 CLOUT case No. 229 [Bundesgerichtshof, Germany, 4 December 1996].

7 Schlechtriem and Schwenzer [6].
8 Magnus [7], p. 42.
9 Wang [8], p. 154.
7 Netherlands Akfam Co., Ltd v Sinochem … 65

References

1. Yu ZJ, Li J (2016) Discussion on the strait and outlet of Chinese convention judicial application
system. Polit Law (8)
2. Zuo, H. C. & Yang, M. S. (2016). Study on interpretive and supplementary functions of PICC
to CISG—taking the damages system as examples. J Compar Law (1)
3. Jackson JH (2009) Sovereignty, the WTO, and changing fundamentals of international law.
Social Sciences Academic Press
4. Koneru P (1997) The international interpretation of the UN convention on contracts for the
international sale of goods: an approach bases on general principles. Minnesota J Global Trade
(6)
5. Lassila L (2017) General principles and convention on contracts for the international sale of
goods (CISG)—Uniformity under an interpretation umbrella. Russ Law J 5(2)
6. Schlechtriem P, Schwenzer I (2005) Commentary on the UN-convention on the international
sale of goods (CISG). Oxford University Press
7. Magnus U (1997) General principles of UN-Sales law. Int Trade Bus Law Ann (3)
8. Wang Y (2014) Study on the deficiency and perfection of the application of United Nations
convention on contracts for the international sale of goods by chinese court. Gansu Soc Sci (2)

Dr. Mengsha Yang is a lecturer and master supervisor in Law School at Tianjin University, China.
Prior to that she got her graduated degree and doctoral degree in Nankai University. Her research
area is international trade law and international commercial law.
Chapter 8
Tunghang (Asia) Co., Ltd v Shenzhen
Haizhongbao Aquatic Products Trading
Co., Ltd

Chaolin Zhang, Peng Guo, and Shu Zhang

Case Information
Case name: Tunghang (Asia) Co., Ltd v Shenzhen Haizhongbao Aquatic Products
Trading Co., Ltd
Seller: Tunghang (Asia) Co., Ltd
Place of business: Hong Kong SAR, China
Buyer: Shenzhen Haizhongbao Aquatic Trading Co., Ltd
Place of Business: Shenzhen, China
Details of First Instance:
Court: Shenzhen Intermediate People’s Court, Guangdong
Case No: (1997) Shen Zhong Fa Jing Er Chu Zi No 029
Details of Appeal:
Court: Guangdong High People’s Court
Date of Decision: 3 January 1999
Case No: (1998) Yue Fa Jing Er Shang Zi No 424
Judges: Shunxian Zheng (Presiding Judge), Heng Wang (Acting Judge), Yanhui
Deng (Acting Judge)

C. Zhang (B)
Nankai University, Tianjin, China
e-mail: [email protected]
P. Guo
RMIT University, Melbourne, VIC 3000, Australia
e-mail: [email protected]
S. Zhang
Deakin University, Geelong, VIC 3220, Australia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 67

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_8
68 C. Zhang et al.

CISG applied: No
Key CISG provisions interpreted and applied: N/A
Abstract
On 16 August 1995, the buyer, Shenzhen Haizhongbao Aquatic Trading Co., Ltd
(Haizhongbao Company), purchased Frozen whole round seatrout (cynoscions-
triatus) from the seller, Tunghang (Asia) Co., Ltd (Tunghang Company). On the same
day, the two parties jointly completed the sealing of the fish sample. The contract stip-
ulated that (1) the fish species shall be consistent with the samples jointly confirmed
by both parties, and the samples will prevail; (2) the two parties had put forward
specific standards for the quality of the goods, and (3) if the goods do not conform to
the provisions of the contract, the Tunghang Company will agree to return the goods
and immediately return the amount of the returned goods.
This contract of the goods import was signed in Shenzhen, China, with a total
contract value of CN¥4.45 million, using the trade term CIF Whampoa, Guangzhou.
After 8 days, the two parties further agreed that Tunghang Finance Co., Ltd (Finance
Company) shall provide guarantees for this purpose. If the Tunghang Company does
not perform, the Financial Company will be responsible for refunding the deposit,
CN¥0.8 million, paid by Haizhongbao Company. Haizhongbao Company completed
the transfer the next day.
On 15 October 1995, the goods arrived at the port of destination. Haizhongbao
Company refused to accept the goods at the time of the handover of the goods, as
it objected to the variety and quality of the fish. Tunghang Company then stored
the fish in the name of “white mushroom fish” in freezer factories in Guangzhou.
The next day, the legal persons of Haizhongbao Company and Tunghang Company
jointly signed a repayment table, and the agreement was made for the return of a
total of CN¥1,269,885 by the Tunghang Company to Haizhongbao, including the
deposit, CN¥0.8 million.
In accordance with the contract, Haizhongbao Company with Tunghang Company
as the respondent, submitted an application for arbitration to the Shenzhen Branch
of the China International Economic and Trade Arbitration Commission (Shenzhen
CIETAC). However, due to procedural irregularities, the original arbitration award
was annulled by the Shenzhen Intermediate People’s Court on 29 April 1997, upon
the application by Haizhongbao Company.1
On 8 May 1997, Haizhongbao Company filed a lawsuit to Shenzhen Interme-
diate Court for deposits and other economic losses. The court of first instance ruled
that Tunghang Company returned CN¥0.8 million and its interests to Haizhongbao
Company, and the Financial Company was jointly and severally liable for the debt.
The other claims for compensation for economic losses of Haizhongbao Company

1 On 29 April 1997, the Shenzhen Intermediate People’s Court issued a civil decision, (1996) Shen
Zhong Fa Jing Er Chu Zi No. 078, ruling that the arbitration award of the Shenzhen CIETAC, (1996)
Shen Guo Zhong Jie Zi No122, had been set aside. The court held that, the arbitrator had violated
the relevant legal provisions by altering the arbitral tribunal’s decision without authorization, as it
delivered extra another fish sent by the Asian Company to the identification together.
8 Tunghang (Asia) Co., Ltd … 69

were rejected. Tunghang Company appealed against the first-instance judgment. The
Guangdong High People’s Court held that the original judgment found that the facts
were clear, that the applicable law was correct, and it was properly handled, so the
judgment should be upheld.

Commentary on the Key Issues Related to the CISG

Issues

Issue 1: Whether the CISG should be applied in this case?

Issue 2: Is the CISG an integral part of the legal system of the State party?
Issue 3: Whether the CISG is applicable to disputes between parties in Hong
Kong, China and Mainland China?

Comments

Issue 1: Whether the CISG should be applied in this case?

In this contract for the fish import, Haizhongbao Company and Tunghang Company
had agreed on the applicable law, that the laws of the People’s Republic of China
shall be applied, if the place of signing of this contract or the place of dispute is
located within the territory of the People’s Republic of China, or the respondent
is a legal person of the People’s Republic of China. In addition to this, the United
Nations Convention on Contracts for the International Sale of Goods (the CISG)
shall be applied. The court of first instance held that the case was a dispute over
an international contract for the sale of goods and that the parties had agreed in the
contract on the laws applicable to the settlement of the dispute, so that the laws of
the People’s Republic of China and the United Nations Convention on Contracts for
the International Sale of Goods should be applied in the case. The court of second
instance held that, firstly, the agreement of the parties was in conformity with the
provisions of Article 5(1), of the Law of the Peoples Republic of China on Foreign
Economic Contract Law (1985 FECL), and should be recognized as valid. Secondly,
since the place of the contract was in Shenzhen, China, and the location of the goods
at the time of the dispute was also in the port of Guangzhou, China, it was the
Law of the People’s Republic of China that shall be the applied Law, rather than
the CISG. Accordingly, according to the agreement of the parties, the laws of the
People’s Republic of China should be applied in this case and not the United Nations
Convention on Contracts for the International Sale of Goods.
In this case, the parties agreed on the applicability of Chinese laws and the CISG,
so the most immediate question in the application of the laws is which of the two
prevails. The answer to the question is the relatively clear agreement on the specific
circumstances in which the rules shall be applied. In accordance with the agreement
of two parties, the circumstances of the application of Chinese laws include the
70 C. Zhang et al.

following: (1) the place where the contract was concluded is within China, or (2) the
location of the goods in China at the time of the dispute, or (3) the respondent is a
legal person of China. In fact, the CISG should apply when the above does not exist.
Briefly, this agreement of applicable law gives an explicit instruction and is highly
operable, so it would be easy for the court to make a decision on the application of
the law on the basis of the particular context of the case.
In the present case, the Guangdong High People’s Court upheld the first instance
judgment of Shenzhen Intermediate Court. The decisions of the two courts are essen-
tially the same in terms of the application of the law, but the former is more perfect in
its related reasoning and logic. The Guangdong High People’s Court dealt with the
application of the law in this case step by step. First, the court affirmed the validity of
the parties’ legal choice agreement in accordance with the specific regulation of the
law of the forum (the lex fori) of the specific regulation, 1985 FECL. This is one of
the common practices to decide the admissibility and validity of the choice-of-law
agreement.2 In the second step, the parties agreed in the contract on three situations
in which Chinese law was applicable, and the facts of the case were consistent with
two of them, so that the Chinese law, not the CISG, became the applicable law in the
case. This process was a satisfactory practice of the application of law. As supported
by specific suitable legal provisions, the problem was handled gradually, in depth and
in accordance with general reasoning and logic. All of this was presented concisely
and accurately in the court’s judgment. In contrast, the single vague sentence, “Chi-
nese law and the CISG should be applied” in the judgment of the first instance, was
a relatively poor handling of the problem. The court could have noted the specific
condition of the application of the laws which were explicitly agreed upon by the
parties in the contract. Even this juxtaposition, with unclear expression, would lead
to ambiguity. In the present case, following the parties’ agreement, the application
of the two laws is mutually exclusive. The application of Chinese laws shall be in
accordance with the specific circumstances, and at this time, the application of the
CISG is excluded. This juxtaposed expression of the court of first instance has instead
created confusion about the application of law which was originally clear, even if
the result of the applicable law in the judgment was consistent with the expectations
of the parties.
Issue 2: Is the CISG an integral part of the legal system of the State party?
The application of “Chinese laws” in this case should address the relationship
between international treaties and the domestic legal system. In other words, should
the CISG be considered as a part of the legal system of the state which is a contracting
party of this Convention? What role did CISG play in Chinese legal system when it
was applied by the courts?
The relationship between an international treaty and a domestic legal system is
an ancient problem at the theoretical level, which may have existed since the birth
of international law. As for international law, there are three attitudes: (1) denying
it as true law; (2) recognize it as law, but assert it belongs to two legal systems

2 Li [1], p. 31.
8 Tunghang (Asia) Co., Ltd … 71

distinct from domestic law; (3) recognize it as law and that it belongs to the same
legal system as domestic law. Although there are still some people who hold the first
negative view, they do not deny the existence of international law as a set of rules,
but merely deny its legal nature.3 More commonly, in connection with treaties, the
basic concepts of “dualism” and “monism” have long been used to explain some of
the relationships between treaty law and domestic law,4 corresponding to the second
and third attitudes. There are a lot of theoretical arguments and theoretical studies
which focus on this, and the data are numerous.
In considering the practical impact of these two views (dualism and monism)
when a treaty is applied, this paper focuses on the judicial practice, and takes China
as an example to illustrate. China is a party to the CISG, so when the parties of
the contract choose to apply the laws of this member state (Chinese law), should
this choice automatically supersede the CISG? As there is a precondition for the
automatic application of Article 1(1)(a) of CISG—the place of business of the two
parties should be located in two Contracting States—the issue is divided into two
situations, as described below.
First, both parties have business places in Contracting States of the CISG. Both
parties choose to apply the law of a Contracting State in the international sale of goods
contract, but do not explicitly choose to apply or exclude the Convention. Can the
court apply the Convention directly and automatically? There is no positive response
to this problem as Chinese laws do not clarify where the CISG is positioned in the
Chinese legal system, but the former Ministry of Foreign Economic Relations and
Trade (MOFTEC) had responded to this issue in an official document, “according
to the provision of Article 1 of the Convention, from 1 January 1988, the contracts
for sale of goods reached between the Chinese companies and the companies in the
aforementioned countries (except Hungary) will automatically apply to the provi-
sions of the Convention and the disputes or litigations arisen should be also settled
under the Convention, unless otherwise agreed”.5 It can be specifically interpreted
that, in the settlement of the CISG dispute, even if the parties do not make a choice,
if there is no clear agreement on the exclusion, in the legal context of China, the
CISG should be automatically applied between the contracting parties. That is to
say, if the parties do not explicitly declare that the CISG is excluded in the contract,
but believed that only the laws of the selected Contracting States are included in the
contract, this cannot be regarded as exclusion of the CISG, or directly equivalent to
the implicit selection of the CISG.6
This MOFTEC document was notified and forwarded by the Supreme People’s
Court, requiring courts to correctly implement the Convention in foreign-related

3 Chen, Zhou and Jiang [2], pp. 117–118.

4 Jackson [3], p. 311.
5 Certain Issues in Connection with the Implementation of United Nations Convention on Contracts

for the International Sale of Goods. (4 December, 1987). (87) Wai Jing Mao Fa Zi No. 22.
6 Yang [4], p. 99.
72 C. Zhang et al.

economic trials,7 and this method has indeed been repeatedly followed in judicial
practice.8 For example, in C & J Sheet Metal Co., Ltd v Wenzhou Chenxing Machinery
Co., Ltd,9 three trial procedures occurred, but each court was consistent in their
approach to this issue. The court of first instance held that the parties’ places of
business were divided between China and the United States, both of which were
Contracting States, and the application of the Convention was not excluded, so the
Convention shall prevail.10 C & J filed an appeal, arguing that the case should be
governed by the Contract Law of the People’s Republic of China. The second instance
at the Zhejiang High People’s Court held that the law applied in the first instance was
not unjustified and the reason for the appeal was untenable.11 C & J subsequently
applied for a retrial on the grounds that the application of laws by the first and second
judgments was wrong. After the retrial, the Supreme People’s Court confirmed that
the original judgments were correct in their application of CISG.12 In addition, an
analysis of the arbitral awards Foreign Trade Arbitration Committee (FTAC) showed
that, subject to Article 1(1)(a) of the CISG, in 5/6 cases, the arbitral tribunal had
applied the CISG directly and automatically.13 As mentioned above, the CISG has
been repeatedly invoked and applied by judges and arbitrators in China and has
become the practice of courts and arbitration commissions.
In summary, if the requirements of the “places of business of the parties are in
different member states” are met, then the CISG is generally applicable to disputes
between the parties.14 According to Chinese trial experience, when both parties
respectively had their business places in Contracting States, the CISG was actively
invoked by the court if applicable conditions are met, and there was no need to
examine whether the parties chose to apply “Chinese laws”. For judges of Chinese
courts, the CISG is an important legal basis for making judgments. On the premise
of meeting applicable conditions, judges not only “can” but also “should” invoke
this Convention to resolve disputes. Indeed, judges are increasingly following this
binding approach in practice, in other words, the enforceability of the applicable
rules mentioned above has been verified. From this point of view, for the court, the
CISG does not seem to be very different from other domestic law tools, and there
seems to be no argument against concluding that the CISG is part of Chinese legal
system.
For the second hypothetical but common situation, when at least one of the parties
does business in a non-Contracting State and both parties choose the law of a state

7 Circular of the Supreme People’s Court on Transmitting Certain Issues of the MOFTEC in Connec-
tion with the Implementation of United Nations Convention on Contracts for the International Sale
of Goods. (10 December, 1987). Fa (Jing) Fa <1987> No. 34.
8 Zheng [5], p. 80.
9 (2014) Min Shen Zi No. 266.
10 (2012) Zhe Wen Shang Wai Chu Zi No. 340.
11 (2013) Zhe Shang Wai Zhong Zi No. 144.
12 Supa. Note 9.
13 Han [6], p. 224.
14 Schlechtriem and Butler [7], p. 13, para. 11.
8 Tunghang (Asia) Co., Ltd … 73

party to the CISG, will the answer change? If, as previously considered, the CISG
and Chinese domestic laws have similar status in the legal system and both have
compulsory applicability, the court should take the initiative to invoke them for
application, then in this second case, the treatment of the CISG seems to be the
same. But obviously, this is not the case, and a large number of judicial decisions
present different results. These judgments, based on the same provisions as above,
Article 1(1)(a) of the CISG, excluded the application of this Convention. The possible
explanation is that every law has its preconditions. Law can be simply understood
as third-party enforcement rules implemented by a third party (the court) and the
limitations of law in supporting transactions come from the fact that the conditions
required by law to enforce contracts are often not met.15 But such an argument does
not seem to be a strong response to possible scepticism.
In the face of this apparent impasse, it seems natural to seek a diffuse approach
to monism and dualism. Neither theory adequately illustrates the practice of inter-
national and national courts, whose role in clarifying the positions of various legal
systems is crucial.16 Juristic abstraction does not seem to be the best place to debate
the relationship between the relevant legal systems. In fact, legal systems are expe-
rienced by those who work within them as having relative autonomy, and the only
theory which can adequately account for that fact is some form of pluralism.17 Fitz-
maurice attempted to bypass the debate by arguing that there was no common field
of operation: the two systems do not come into conflict as systems since they work
in different spheres, each supreme in its own field.18
Fortunately, in the context of this case, the consensus of the parties avoided this
issue. In accordance with the agreement of the parties, Chinese law applied in certain
circumstances and the CISG applied otherwise. According to the logical reasoning
of general rationality, the “Chinese law” in this agreement should not be regarded
as an attempt to contain the CISG. If understood to the contrary, this agreement, in
addition to adding contradictions and complexity, would be meaningless, unhelpful,
and even detrimental in the application of the law. Therefore, the “Chinese laws” in
the contract in this case do not cover the CISG.
In addition, it could be added that, if the parties of an international contract for
the sales of goods expressly agree to apply certain specific domestic laws of the
Contracting States, such as the Chinese contract Law enforced then or the Chinese
Civil Law Code currently, the parties should be considered to exclude the application
of the CISG.
Issue 3: Whether the CISG is applicable to disputes between parties in Hong
Kong, China, and Mainland China
Recently, there have been some legislative developments regarding the application
of the CISG in Hong Kong SAR. Considering the purpose of the CISG is to provide a

15 Zhang [8], p. 4.
16 Nollkaemper [9], p. 523.
17 Crawford [10], p. 47.
18 Ibid.
74 C. Zhang et al.

modern, uniform and fair regime for contracts for the international sale of goods and
the CISG contributes significantly to introducing certainty in commercial exchanges
and decreasing transaction costs,19 The government conducted a public consultation
on the application of the CISG to the Hong Kong SAR during the period from March
to September 2020 (the Consultation 2020).20 There was general support for the
proposal to apply the Convention. Following the outcome of the Consultation (the
Outcome 2021),21 the Sale of Goods (United Nations Convention) Bill (the Bill
2021),22 which aims to implement the CISG in the Hong Kong SAR, was introduced
into the Legislative Council on 14 July 2021. The Bill was passed on 29 September
2021 and will commence in 6–9 months after its passage.
For the sale of goods between Mainland China and Hong Kong SAR, when the
parties to the transaction are divided between these two places, does the CISG apply?
In numerous cases, the Convention was applied based on parties’ designation, either
by choice within the underlying contracts, or during the arbitral proceedings.23 But
can the CISG be automatically applied as an international treaty when the parties
do not choose or fail to agree on the application of the law? In other words, is
Hong Kong regarded as a Contracting State? First of all, it is indisputable that the
Hong Kong SAR is an administrative region of the People’s Republic of China and
not an independent country. Hong Kong cannot be considered a party to the CISG
because the Article 1(1)(a) of the CISG expressly requires that the parties to the
dispute have their places of business in different Contracting States.24 As a result,
this international Convention cannot be automatically applied to contracts for the sale
of goods between parties in Mainland China and in Hong Kong. This view has also
been verified and repeated in the practice of judicial trial in China. For example, in the
Yingshun Development Hong Kong Co., Ltd v Zhejiang Zhongda Technology Export
Co., Ltd case, the Zhejiang High Court held that, as the Chinese Government has not
issued a declaration of CISG’s application to the Hong Kong SAR in accordance with
the provisions of Article 93(1) of CISG, and that Hong Kong is an administrative

19 United Nations Commission on International Trade Law (UNCITRAL), Purpose of the United
Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980) (CISG),
[Retrieved 11 October, 2021], https://uncitral.un.org/zh/texts/salegoods/conventions/sale_of_g
oods/cisg.
20 Consultation Paper on the Proposed Application of the United Nations Convention on Contracts

for the International Sale of Goods to the Hong Kong Special Administrative Region. (May 27,
2019). CB(4)908/18-19(03). [Retrieved 10 October, 2021], from https://www.legco.gov.hk/yr18-
19/chinese/panels/ajls/papers/ajls20190527cb4-908-3-c.pdf.
21 Outcome of the Consultation: Administration’s paper for the Legislative Council Panel on Admin-

istration of Justice and Legal Services on “Proposed Application of the United Nations Convention
on Contracts for the International Sale of Goods to the Hong Kong Special Administrative Region”.
(March 22, 2021). CB(4)648/20-21(03). [Retrieved 10 October, 2021], from https://www.legco.
gov.hk/yr20-21/chinese/panels/ajls/papers/ajls20210322cb4-648-3-c.pdf.
22 Sale of Goods (United States Convention) Ordinance. (2021). Ord. No. 30 of 2021, A3235.

(Retrieved 10 October, 2021), https://www.gld.gov.hk/egazette/pdf/20212540/es12021254030.pdf.

The chief Executive, Carrie Lam, signed the Ordinance on October 07, 2021.
23 Long [11], pp. 104–105.
24 Cartoni [12], p. 10.
8 Tunghang (Asia) Co., Ltd … 75

region of the People’s Republic of China and is not an independent country, the CISG
shall not be applied to the contract for the sale of goods between parties with their
places of business between Hong Kong SAR and the Mainland.25 In another case,
Sino-China Enterprise (Resources) Co., Ltd v Xiamen International Trade Group
Ltd, the Supreme People’s Court held that the CISG applies to contracts for the sale
of goods concluded between parties in different countries, but despite factors that
occurred before the return of Hong Kong SAR to China, the United Kingdom is
not a party to CISG, and therefore, the CISG should not be applied in this case.26
However, the decision further stated that, when the parties agreed to apply the terms
of the CISG, it will constitute the content of the contract between the parties.27
This view was also confirmed in the Consultation 2020 that the CISG could
not be automatically applied in the contract for the sale of goods between Hong
Kong and Mainland parties in the status of an international treaty.28 However, in
view of the economic relations between the two places and business transactions
among companies, the Consultation 2020 proposed that, on a unilateral basis, the
New Ordinance would contain provisions which would in effect apply the CISG rules
also to Hong Kong/Mainland transactions.29 The Department of Justice considers that
it may also be an opportune time to consider the possibility of having a reciprocal
arrangement in place between Hong Kong and Mainland China such that a sale
of goods contract between businesses in the two places would be treated by both
jurisdictions as if it were a contract between businesses in different Contracting
Parties to the CISG.30
Annex 6 of the Outcome 202131 is a summary of Consultation Question 4: “in
respect of sale of goods transactions between Mainland China and Hong Kong, should
local legislation of Hong Kong, which seeks to implement the CISG, also apply where
the parties to those transactions have their respective places of business in Mainland
China and Hong Kong?” Mainly, taking into account economic interests and trade
development, the Hong Kong Bar Association, the Law Society of Hong Kong, one
lawyer and three scholars all expressed a supportive opinion, but also put forward
consideration of details of the legal convergence and application.32 Conversely, Prof
LI Wei of the School of International Law, China University of Political Science and
Law, held an opposing attitude that, even if it was applied and implemented in Hong
Kong, the CISG would not apply to transactions between Mainland China and Hong
Kong parties. He further suggested that one possible solution was to encourage Hong

25 (2010) Zhe Shang Wai Zhong Zi No. 99.

26 (2016) the Supreme People’s Court Zai No. 373.
27 Ibid.
28 Supa. Note 20, at p. 11, para. 22.
29 Ibid, at p. 12, para. 23.
30 Ibid, at p. 13, para. 27.
31 Supa. Note 21, at Annex 6.
32 Ibid, at Annex 6. pp. 1–5.
76 C. Zhang et al.

Kong businesses, to choose CISG as applicable law to govern their contracts when
entering into sales contracts with Mainland China businesses.33

References

1. Li W (2004) Application of law concerning contract involving foreign interests and problems
consisting in the application of the principle of party autonomy. J Tsinghua Univ (Philos Soc
Sci Ed) 19(06):29–33
2. Chen HF, Zhou WG, Jiang H (2000) Relationship between International treaties and national
law: its practice in China. Trib Polit Sci Law 2:117–123
3. Jackson JH (1992) Status of treaties in domestic legal systems: a policy analysis. Am J Int Law
86(2):310–340
4. Yang MS (2020) Study on the priority application of the United Nations convention on contracts
for the international sale of goods. Law Press China
5. Zheng XY (2018) A study on the application of CISG in Chinese courts based on 108 judgments
of Chinese courts. J Weinan Norm Univ 33(02):79–84
6. Han SY (2016) Application of CISG in the international commercial arbitration of China.
China Leg Sci 05:218–238
7. Schlechtriem P, Butler P (2009) UN law on international sales: the UN convention on the
international sale of goods. Springer
8. Zhang WY (2002) Reputational foundation of the legal system. Econ Res J (01):3-13+92-93
9. Nollkaemper A (2014) Conversations among courts: domestic and international adjudicators.
In: Romano CPR, Alter KJ, Shany Y (eds) The Oxford handbook of international adjudication.
Oxford University Press, pp 523–550
10. Crawford J (2019) The relations of international and national law. In: Crawford J (eds)
Brownlie’s principles of public international law, 9th edn. Oxford University Press, pp 45–104
11. Long W (2011) The reach of the CISG in China: declarations and applicability to Hong Kong
and Macao. In: The 2nd annual MAA Schlechtriem CISG conference, pp 83–129
12. Cartoni B (2015) Is the CISG applicable to Hong Kong-related disputes? https://doi.org/10.
2139/ssrn.2648323

Ms. Chaolin Zhang is a Ph.D. candidate in international law at the law school of Nankai Univer-
sity, China. Prior to that, she obtained an LLM in International Economic Law from the School of
Law at the City University of Hong Kong, China. Her research interests lie in international trade
law, data law, and law and technology.

Dr. Peng Guo Lecturer in Law at RMIT University. At RMIT Dr Guo teaches Contract Law and
Commercial Law to LLB and JD students. He has held visiting positions at different universities,
including Warwick University, University of Amsterdam, and University of Osnabrück. He has
received scholarships awarded by renowned research institutions and international organisations,
including the Max Planck Institute for Comparative and International Private Law, the Interna-
tional Institute for the Unification of Private Law (UNIDROIT), the Swiss Institute of Compara-
tive Law, and the European Union. His research interests lie in international sale of goods, inter-
national commercial arbitration, comparative contract law, and law and technology. He actively
participates in Vis Moot and Alfred Deakin International Commercial Arbitration Moot.

33 Ibid, at Annex 6. p. 3.
8 Tunghang (Asia) Co., Ltd … 77

Dr. Shu Zhang is a lecturer in commercial law at Deakin Law School, Deakin University
(Australia) and coached Deakin Law School’s Vis Moot team. Prior to joining Deakin Law
School, Dr. Zhang was a post-doctoral fellow in the Chinese International Business and Economic
Law Initiative, Law School, University of New South Wales (Australia). Her research interests
include international commercial law, dispute resolution and international arbitration, as well as
comparative contract law. She also completed internships at both the Australian Centre for Interna-
tional Commercial Arbitration (ACICA) and the Chinese International Economic and Trade Arbi-
tration Commission (CIETAC). She is also admitted to practice in New South Wales, Australia.
Dr. Zhang obtained her PhD in Law from University of New South Wales (Australia), and her
LLM, LLB and BA in Economics (Double Degree) from Peking University (China). She has
published various manuscripts with leading journals in this area, such as the Journal of Contract
Law, Vindobona Journal of International Commercial Law and Arbitration, China Quarterly.
Chapter 9
Hong Kong Zhenghongli Co., Ltd v
Switzerland Gilbert Finance Co., Ltd

Siying Wu

Case Information
Case Name: Hong Kong Zhenghongli Co., Ltd v Switzerland Gilbert Finance Co.,
Ltd
Seller: Switzerland Gilbert Finance Co., Ltd
Place of Business: British Virgin Islands
Buyer: Hong Kong Zhenghongli Co., Ltd
Place of Business: Mainland China
Details of First Instance:
Court: The High People’s Court of Xinjiang Uygur Autonomous Region
Date of Decision: 1998
Case No: (1996) Xin Jing Chu Zi No 15
Judges: N/A
Details of Appeal:
Court: The Supreme People’s Court of the People’s Republic of China
Date of Decision: 20 July 1995
Case No: (1998) Jing Zhong Zhi No 208
Judges: Jian Li (Presiding Justice), Jinlian Fu (Justice), Xiaolong Lu (Justice)
CISG Applied: No
Key CISG provisions interpreted and applied: N/A

S. Wu (B)
Dentons Law Firm, Canton (Guangzhou), China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 79

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_9
80 S. Wu

Abstract
On 5 January 1996, Hong Kong Zhenghongli Co., Ltd (Zhenghongli, the buyer) and
Switzerland Gilbert Finance Co., Ltd (Gilbert, the seller) entered into a sale and
purchase contract for steel (No 96/0040), by which Gilbert agreed to supply cold-
rolled steel and black iron sheet to Zhenghongli. In the contract, both parties agreed
on the quantity, unit price, delivery time and place of delivery, etc. and agreed that
the delivery would be subject to Zhenghongli’s application for an irrevocable letter
of credit for payment in US dollars. After the signing of the contract, Zhenghongli
did not apply for a letter of credit, and therefore Gilbert did not deliver the goods.
On 27 March 1996, the two parties confirmed by fax that the additional transport
charges would be added to the price since 15 April 1996 and that the payment method
would be changed to wire transfer immediately after the buyer received the goods.
Zhenghongli then requested Gilbert to arrange shipping immediately.
On 20 and 21 May of the same year, Gilbert delivered the goods to Alashankou as
agreed by both parties. On 24 May, Zhenghongli notified that the consignee would
be changed to Ningbo Keren Trading Co., Ltd (Keren). However, on 25 June, Keren
instructed the Alashankou Public Bonded Warehouse to declare only 36 wagons of
goods that it has accepted at the customs and to reject the rest of the coming wagons
until receiving further instructions from Keren.
Due to the dispute between the parties with respect to the performance of the
contract, the buyer received 36 wagons of goods and then rejected all the rest. The
buyer refused to make a corresponding payment and withheld part of the goods as
compensation for the losses arising from the late supply. The seller then applied to the
Urumqi Railway Transportation Intermediate Court for property preservation before
filing the lawsuit and detained nine out of 36 wagons of goods at Alashankou. The
property preservation incurred over RMB¥200,000 (paid by the seller) in storage
costs during the preservation period; at the same time, the remaining 26 wagons
of goods received by the designated party on behalf of the buyer were detained at
the Sinotrans Warehouse in Shanghai, incurring freight and storage costs of over
RMB¥890,000 (paid by the buyer).
On 25 February 1997, Zhenghongli filed a lawsuit at the Xinjiang High Court,
requesting Gilbert to pay its direct losses of RMB¥4,860,000 and indirect losses
of RMB¥600,000 caused by Gilbert’s breach of contract. In addition, Zhenghongli
requested Gilbert to pay the storage costs of over RMB¥890,000 and losses of quality
for over RMB¥1,500,000 and also the lawyers’ fees, appraisal fees and all litigation
costs. Gilbert filed a counterclaim, requesting Zhenghongli to pay over US$600,000
in payment of goods, plus economic losses, cost expenses, interest loss, storage costs
and payment for returning the goods, totalling over US$310,000.
In the first instance, the Xinjiang High Court held that the Contract No 96/0040
signed between both parties was clear on the performance period and payment terms,
which was binding on both parties. Since Zhenghongli did not issue a letter of credit
within the period agreed by both parties, Gilbert could suspend the performance
of its obligations in accordance with the relevant provisions of the United Nations
Convention on Contracts for the International Sale of Goods (CISG). Additionally,
9 Hong Kong Zhenghongli Co., Ltd … 81

since there was no evidence proving the loss of profit and quality losses, such claims
were not supported by the Xinjiang High Court. In addition, as for the storage costs
incurred by the property preservation applied by Gilbert, since Gilbert did not take
appropriate measures to avoid the expansion of losses, which resulted in an unrea-
sonable delay, it was not fair that all storage costs should be borne by Zhenghongli.
Therefore, the court of the first instance finally decided that Gilbert should bear 30%
of the storage costs.
The Supreme Court held in the second instance that the case was a dispute over a
foreign-related economic contract and the parties had chosen to apply Chinese law in
the first instance. Therefore, the case should be governed by the Law of the People’s
Republic of China on Foreign-Related Economic Contracts (the Economic Contracts
Law). The Supreme Court noted that the judgement of the first instance improperly
applied CISG. The Supreme Court also held that Zhenghongli failed to issue a letter
of credit in accordance with the contract, which constituted a breach of contract, and
Gilbert could therefore suspend the performance of the contract. On 20 and 21 May
1996, Gilbert shipped the goods to Alashankou in accordance with the contract, while
Zhenghongli failed to make payment for the goods, which constituted a breach of
contract. Therefore, Zhenghongli should be held liable for the breach. Regarding the
storage costs incurred by Gilbert for property preservation, the Supreme Court also
held that Gilbert was justified in applying property preservation due to Zhenghongli’s
refusal to pay for the goods. However, it failed to take reasonable measures to avoid
the expansion of losses. Therefore, the costs should be reasonably shared between
the parties. The Supreme Court stated that the judgement of the first instance was
supported by clear facts and that despite the improper application of the law, the
decisions were properly made and should be upheld. Finally, in accordance with
the provisions of Articles 18 and 19 of the Law of the People’s Republic of China
on Foreign-related Economic Contracts, the Supreme Court decided that the appeal
should be dismissed and the judgement of the first instance should be affirmed.

Commentary on the Key Issues Related to the CISG

Issues

Issue 1: The Applicability of CISG

Issue 2: Court’s Decisions in Regard to Allocation of Storage Costs

Comments

Issue 1: The Applicability of CISG

In the first instance, the Xinjiang High Court noted that CISG should be applied.
However, in the second instance, the Supreme Court decided that Chinese law
82 S. Wu

should be applied based on the principle of party autonomy, therefore the Economic
Contracts Law should be the applicable law.
According to Article 1(1) of the CISG and also the Digest of Case Law on the
United Nations Convention on Contracts for the International Sale of Goods (DOCL),
if the places of business of both parties to a dispute over international contracts
for sales of goods are in different countries, and (1) both of those countries are
Contracting States to the CISG, or (2) the rules of private international law led
to the application of the law of a Contracting State, the Convention is “directly” or
“autonomously” applicable.1 Since the places of business of Zhenghongli and Gilbert
were in different states, analysis is required of the applicability of CISG in two sub-
issues to verify the correctness of the conclusion of the Supreme Court. The first
issue is whether the requirements of Article 1(1)(a) were satisfied; in other words,
whether the places of business of Zhenghongli and Gilbert are the Contracting States
of CISG. The second issue is whether the requirement of Article 1(1)(b) was satisfied,
which required that the rules of private international law led to the application of the
law of a Contracting State.
As for the first sub-issue, there is no doubt that the requirements of Article 1(1)(a)
have not been satisfied, because Gilbert’s place of business is the British Virgin
Islands. The British Virgin Islands is one of the territorial units of the British, and
either the British or the British Virgin Islands are one of the Contracting States of
CISG. But before moving to the second sub-issue, it is worth discussing whether
Zhenghongli’s place of business, Hong Kong, is a Contracting State of CISG.
Some legal jurisdictions consider that CISG applies to Hong Kong after its retro-
cession. The most concrete proof that supports this view is China never expressly
declared to the Secretary-General of the United Nations (the UN) that the CISG
was not to extend to Hong Kong under Article 93. According to Article 93(1), a
Contracting State has two or more territorial units in which the Contracting State
may at any time declare that the CISG is to extend to all its territorial units or one
or more of them. Besides, according to Article 93(4), if a Contracting State makes
no declaration under Article 93(1), the CISG is to extend to all territorial units of
that State. Since Hong Kong did not return to China until 1997, China made no
declaration in respect of Hong Kong at the time of ratifying the CISG on 1 January
1988. On 20 June 1997, China sent the UN the “Letter of Notification of Treaties
Applicable to Hong Kong after 1 July 1997”, which referred to the provision in
the Sino-British Joint Declaration and the Hong Kong Basic Law already cited and
submitted an extensive list of treaties to be applied to the Hong Kong with effect
from 1 July 1997. However, the CISG was not included in this list. Even though the
CISG was absent from the list, lots of courts in different states consider that this
declaration does not “expressly state” that the CISG is not to extend to Hong Kong,
therefore does not satisfy the requirement of the CISG Article 93(2). Such a point of
view is supported by the UN Commission on International Trade Law (UNCITRAL)

1 UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the Interna-
tional Sale of Goods (2016 Edition), p. 5, https://uncitral.un.org/sites/uncitral.un.org/files/media-
documents/uncitral/en/cisg_digest_2016.pdf.
9 Hong Kong Zhenghongli Co., Ltd … 83

in DOCL.2 As examples, two cases hold such a point of view trialled by the court
of the United States as mentioned by the UNCITRAL in DOCL, which are CNA
International, Inc v Guangdong Kelon Electronical Holdings et al.3 and Electrocraft
Arkansas, Inc v Super Electric Motors, Ltd and Raymond O’Gara.4 The Court in the
CNA International case noted that Article 93(1) of the CISG gives Contracting States
having two or more territorial units in which different systems of law are applicable,
the opportunity to declare that the Convention is to extend to these territorial units or
one or more of them, therefore since China has never formally declared that CISG
does not apply to Hong Kong, the Convention extends to all territorial units of China,
including Hong Kong. In the Electrocraft Arkansas case, the Court held the same
opinion and considered that Hong Kong is a Contracting State.
Other legal jurisdictions consider that the CISG does not apply to Hong Kong
either before or after its retrocession. Two main proofs support this. Firstly, as
mentioned above, the CISG is not included in the list of treaties applicable to Hong
Kong in the declaration deposited by China with the UN. Many cases trialled outside
of China which support such a point of view were mentioned in DOCL by UNCI-
TRAL, like Innotex Precision Limited v Horei, Inc., et al.5 and America’s Collectibles
Network, Inc., d/b/a Jewelry Television, and BBJ Bangkok, Ltd v Timlly (HK), Timlly
BBK Co., Ltd, et al.6 Secondly, on 17 October 2017, the UNCITRAL Secretariat
acknowledged at the 2nd UNCITRAL Asia Pacific Judicial Summit that the CISG
does not apply to Hong Kong. This acknowledgement proves that from the UNCI-
TRAL’s point of view, which shows the absence of the CISG in the Declaration
constituted an express statement, which contradicts UNCITRAL’s opinion in DOCL.
Furthermore, on 31 May 2020, the Department of Justice of Hong Kong issued a
Consultation Paper to invite comments and views from the community on a proposal
to extend the application of the CISG in Hong Kong Special Administrative Region.
This Consultation Paper proves that from the viewpoint of the Department of Justice
Hong Kong, the CISG has not been extended to Hong Kong. There remains a divi-
sion among court decisions as to whether the CISG applies to Hong Kong. With
such widespread controversy, many think that China should resolve the ambiguity
by making a subsequent declaration to clarify the issue of the application of the
CISG in Hong Kong. However, such debate has become a historical one, as on 5
May 2022 China deposited a declaration of extension of the territorial application
of the CISG to Hong Kong SAR. The territorial application will take effect on 1
December 2022 according to Article 97(3) of the CISG. The declaration that China
is not bound by Article 1(1)(b) CISG shall not apply the Hong Kong SAR. Thus, this
latest development has ended the long controversy.

2 UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the
International Sale of Goods (2016 Edition), p. 422.
3 UNILEX Database: http://www.unilex.info/cisg/case/1637.
4 UNILEX Database: http://www.unilex.info/cisg/case/1543.
5 UNILEX Database: http://www.unilex.info/cisg/case/1489.
6 UNILEX Database: http://www.unilex.info/cisg/case/1563.
84 S. Wu

As for the second sub-issue, the private international law of China must be consid-
ered. The Law of the People’s Republic of China on the Application of Laws to
Foreign-related Civil Relations came into force in 2011. In 1996, when the case of
Zhenghongli and Gilbert was filed, the valid law concerning foreign-related civil
relations was the General Principles of Civil Law of the People’s Republic of China
(GPCL). According to Article 145 of GPCL, the parties may choose the law appli-
cable to the handling of disputes arising from the contract. If the parties have not
made a choice, the law of the country of closest connection to the contract should
be applied. In short, the court should decide the applicable law in accordance with
the principle of party autonomy first when facing foreign-related contract disputes,
then consider the principle of closest connection. In the present case, even though
the Supreme Court stated that both parties agreed that the Chinese law should be
applied, CISG should also be the applicable law.
The reasons are as follows: Firstly, the requirements of Article 1(1) of the CISG
were satisfied. The places of business of Zhenghongli and Gilbert were in different
countries, and the rules of private international law led to the application of Chinese
law, which is the law of a Contracting State of CISG. According to CISG Articles
1(1) and 1(3), CISG should be applied and it should be applied pre-emptively.
Secondly, choosing the law of a Contracting State without particular reference
to a domestic law of that state could not constitute a valid exclusion of CISG. The
Explanatory Note by the UNCITRAL Secretariat on CISG7 makes two examples
when explaining the requirement of clarity of party autonomy concerning the exclu-
sion of the CISG. In addition to the express exclusion, the parties can exclude CISG
impliedly by choosing the law of a non-Contracting State or the substantive domestic
law of a Contracting State as the law applicable to the contract. These examples hint,
on the other hand, that choosing the law of a Contracting State without particular
reference to a domestic law of that state cannot constitute a valid exclusion of CISG.
In DOCL, UNCITRAL explained that since CISG is also part of the law of the
Contracting State whose law the parties chose, it is not clear enough to exclude the
applicability of CISG.8 In judicial practice, the aforementioned opinion is the general
consensus adopted by most court decisions.
In conclusion, even though the requirements of Article 1(1)(a) were not satisfied
since the rules of private international law led to the application of Chinese law
and choosing the law of a Contracting State was not considered a clear and valid
exclusion of CISG, CISG should be applied in this case.
Issue 2: Court’s Decisions in Regard to Allocation of Storage Costs
Both the Xinjiang High Court and the Supreme Court decided that Gilbert should
be partially liable for the storage cost for its failure to adopt appropriate measures to

7 Explanatory Note by the UNCITRAL Secretariat on the United Nations Convention on Contracts
for the International Sale of Goods: https://uncitral.un.org/sites/uncitral.un.org/files/media-docume
nts/uncitral/en/19-09951_e_ebook.pdf.
8 UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the

International Sale of Goods (2016 Edition), p. 34.

9 Hong Kong Zhenghongli Co., Ltd … 85

mitigate the loss. However, different laws were applied by the Xinjiang High Court
and the Supreme Court when reaching the same conclusion. CISG was applied in
the first instance by the Xinjiang High Court, and the Economic Contracts Law was
applied in the second instance by the Supreme Court. Interestingly, the principle
applied by the Xinjiang High Court and the Supreme Court is both the principle of
duty to mitigate, a common-law doctrine known as the obligation of the aggrieved
party to prevent further loss from occurring by undertaking reasonable measures.
This doctrine can be found in most legal systems.9
Generally, the duty to mitigate is related to contractual loss. Like Article 77 of the
CISG, it contains a rule under which a damage award can be reduced by the amount
of losses that the aggrieved party could have mitigated by taking measures that were
reasonable in the circumstances. Similarly, Article 22 of Economic Contracts Law10
stipulates that the aggrieved party shall take appropriate measures to mitigate the
loss, and Article 114 of the GPCL rules that if the aggrieved party fails to take
immediate measures and the damage does extend, it shall have no right to claim
compensation for the additional damage. The difference between CISG and Chinese
law is that CISG specifically states the seller’s duty for preserving the goods in the
circumstance that the buyer fails to pay the price and the seller is in possession of the
goods in Article 85. Besides, Article 87 states that the other party shall be liable for
the storage cost unless it is unreasonable, and Article 88 states that the party who is
bound to preserve the goods may sell them by appropriate means. Article 85, Article
87 and Article 88 of CISG which was applied by the court of the first instance not
only rules out the seller’s duty to preservation but also its duty to mitigate in such
circumstances. Even though the storage cost is not considered a type of contractual
loss, with the stipulations of Article 85, Article 87 and Article 88 of CISG, Gilbert
should have taken the duty-to-mitigate rules into consideration in this transaction.
Therefore, the Xinjiang High Court was entitled to exercise its discretionary power
when considering the allocation of storage cost by applying duty to mitigate. As for
the second instance, the Supreme Court supported the decision of the Xinjiang High
Court also following the principle of duty to mitigate and the principle of fairness and
reasonableness. In respect of the discretionary power of the Xinjiang High Court,
the conclusion reached by the Supreme Court is both lawful and reasonable.

Reference

1. Stoll H, Gruber G (2005) Commentary on the UN convention on the international sale of goods
(CISG), 2nd edn. Oxford University Press, New York

9 Stoll and Gruber [1], p. 787.

10 The Economic Contracts Law, art. 22.
86 S. Wu

Siying Wu worked as a judge in the Civil Trial Division of Guangdong Provincial Court for
nearly ten years and started to practice as a lawyer in 2016. Since then, he has been focusing on
finance, real estate and foreign business. He provides legal services in banking, asset management,
financial leasing, bond and asset securitization, private equity funds, corporate M&A and other
investment and financing business. His legal services also cover overseas real estate and infras-
tructure investment in various countries and regions, such as the United States, Australia, France,
Cyprus, Korea, Malaysia, Cambodia, Laos and Hong Kong. He has published a personal mono-
graph the Unification of International Commercial Contract Law: Grounds, Aims and Approaches,
and participated in the writing of several works such as International Business Law. He has also
published a number of papers in core law journals, such as Study on Legal Issues of Foreign
Financial Leasing Contracts, Legal Risks Control for Global Enterprises, and Research on Open
Price Contracts in International Sale of Goods.
Chapter 10
Lianhe Enterprise (US) Ltd v Yantai
Branch of Shandong Foreign Trade Co

Geng Wang, Peng Guo, and Shu Zhang

Case Information
Case name: Lianhe Enterprise (US) Ltd v Yantai Branch of Shandong Foreign Trade
Co.
Seller: Yantai Branch of Shandong Foreign Trade Co (hereinafter referred to as
“Yantai Company”)
Place of business: China
Buyer: Lianhe Enterprise (US) Ltd (hereinafter referred to as “Lianhe Company”)
Place of Business: United States
Details of First Instance:
Court: Shandong High People’s Court
Date of Decision: N/A
Case No: (1998) Lu Fa Jing Chu Zi No 11
Judges: N/A

G. Wang (B)
University of International Business and Economics, Beijing, China
e-mail: [email protected]
P. Guo
RMIT University, Melbourne, VIC 3000, Australia
e-mail: [email protected]
S. Zhang
Deakin University, Geelong, VIC 3220, Australia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 87

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_10
88 G. Wang et al.

Details of Appeal:
Court: Supreme People’s Court of the People’s Republic of China
Date of Decision: 8 August 2000
Case No: (1998) Jing Zhong Zi No 358
Judges: Yun Wang (Presiding Judge), Bailing Chen (Acting Judge), Xiaochen Qian
(Acting Judge)
CISG applied: Yes
Key CISG provisions interpreted and applied: Articles 1 and 53
Abstract
On 16 June 1993 and 5 August 1993, Lianhe Company concluded three contracts with
Yantai Company to buy garlic. From 3 July to 6 November 1993, Yantai Company
delivered the goods to the United States in 39 shipments. Lianhe Company paid Yantai
Company US$120,000 at the end of 1993 but still needed to pay US$1,935,972.5.
On 9 December 1993, Lianhe Company negotiated with Yantai Company to deal
with quality problems of the goods, but no agreement was reached. The first 31
shipments, totalling 119 units, had no severe problems and were sold out, but among
the 32nd through 39th instalments, totalling 80 units, there were 20 units which were
not inspected by USDA and there were 60 units which had quality problems found
by USDA. On 25 February 1998, Yantai Company filed a lawsuit in Shandong High
People’s Court, claiming that Lianhe Company should pay the remaining price and
compensate for its losses.
Shandong High People’s Court, the court of the first instance, held that the
three contracts between the parties were valid. For the first 31 shipments, since the
goods had no severe problems and were sold out, Lianhe Company should make the
payment. For the last eight shipments, they should determine liabilities for the quality
problems, and Yantai Company’s claims for these shipments should be dismissed.
Therefore, the court stated that Lianhe Company should pay the purchase price of
US$1,214,642.50 and the late payment fee of US$623,416.97 in accordance with
Article 53 of the CISG.
Lianhe Company appealed to the Supreme People’s Court of the People’s Republic
of China, alleging that the court of the first instance had no jurisdiction, severely
violated the legal procedure, and had erred in determining the facts and applying the
law.
The court of appeal held that because the places of performance of three contracts
were in Shandong, Shandong High People’s Court had jurisdiction over the case
by virtue of Article 243 of the Law of Civil Procedure of the People’s Republic of
China. Further, Lianhe Company did not raise an objection to jurisdiction within
the period prescribed for the submission of defence in the first instance, so it lost
the right. For the application of the law, the parties did not choose the applicable
law to settle a dispute of contract. As Lianhe Company is registered in the United
States, and China and the United States are Contracting States of the CISG, the CISG
should apply. The court of appeal stated that the court of the first instance correctly
10 Lianhe Enterprise (US) Ltd … 89

applied the CISG to the case. For the legal procedure, the court of appeal found that
the court of the first instance served legal documents to the legal representative of
Lianhe Company in China, which did not violate Chinese law. Besides, the court
gave Lianhe Company sufficient time, but it did not submit relevant evidence. As for
its claim about quality problems, Lianhe Company could not prove it, so the court
did not support this claim. Given that Lianhe Company did not make a payment as
agreed, the court of appeal sustained the holding of the court of the first instance.

Commentary on the Key Issues Related to the CISG

Issues

Issue 1: The Applicability of the CISG

Issue 2: Determination of the Breach of Contract
Issue 3: Consequences of Breach

Comments
Issue 1: The Applicability of the CISG
I. The Courts’ View
In this case, both the court of the first instance and the court of appeal applied the
CISG. The court of the first instance invoked Article 53 of the CISG, but it did not
explain why the CISG applied. Instead, the court of appeal gave its reason. The court
of appeal held that the parties in this case had not agreed on the law applicable to the
contract, and since the seller was a Chinese company and the buyer was a company
registered in the United States, and both China and the United States were Contracting
States of the CISG, this Convention should apply. There are two problems with this
reasoning from the court of appeal. One is that the court did not cite Article 1(1)(a)
of the CISG, and the other is that it confused the concepts of “place of business” and
“residence”.
The concept of “place of business” is used to determine the internationality, and
only international disputes over contracts for the sale of goods are governed by
the CISG.1 The CISG provides a single primary criterion of internationality, inher-
iting the idea of the 1964 Hague Conventions.2 The 1964 Hague Conventions, the
Uniform Law on the International Sale of Goods (ULIS), and the Uniform Law on
the Formation of Contracts for the International Sale of Goods (ULFC) stipulate that
conventions shall apply to some contracts of sale of goods entered into by parties
whose places of business are in the territories of different states, or if a party does
not have a place of business, reference shall be made to their habitual residence, and

1 United Nations Commission on International Trade Law [1], p. 4, para. 4.

2 Honnold [2], p. 30.
90 G. Wang et al.

the application shall not depend on the nationality of the parties.3 The application
of the CISG also only depends on the criterion of the place of business. The CISG
has been praised for simplifying the application by considering only one criterion,
the place of business, and not a series of complicated criteria such as the nationality
of the parties, the place of contracting, and the place of performance, which is great
progress.4 Although the CISG does not clarify the concept of “place of business”,
and sometimes the party’s place of business needs to be determined on a case-by-case
basis, it is clear that the CISG wants the focus on the parties’ places of business first,
rather than on their habitual residences or nationalities.
However, in this case, the court of appeal did not focus on the buyer’s place of
business, but on its residence. In fact, if a party’s residence and place of business
are in different countries, it may be incorrect to apply the CISG. Fortunately, in this
case, there was no evidence which shows that the buyer’s residence and place of
business were in different countries. Though the court depended on the criterion of
the residence to determine whether the CISG applied, it confirmed the internationality
of the contract and ultimately applied CISG correctly.
The court first considered the parties’ residence, which may be affected by the
Chinese rules of private international law. Chinese courts are used to identifying
whether the parties to a dispute are foreign-related (international) or civil according
to Chinese rules of private international law. It is reasonable because Lex fori shall
apply to the determination of the nature of foreign-related civil relations. At that
time, the Law of the PRC on Choice of Law for Foreign-related Civil Relationships5
had not yet been promulgated, so the determination of the nature of foreign-related
civil relations was governed by the 1988 Judicial Interpretation for the General Prin-
ciples of the Civil Law of the PRC.6 According to Article 178(1) of the 1988 Judicial
Interpretation, if either party or both parties in a civil relationship is a foreign legal
person, such relations shall be called foreign-related civil relationships. Further, the
criterion for determining the nationality of a legal person is the residence in accor-
dance with Article 184 (1), which is adopted by the court in this case to determine
the internationality.
The correct path for determining the applicability of the CISG is as follows. The
first step is determining whether the dispute is foreign-related pursuant to Chinese
rules of private international law. As the seller and the buyer were registered in
the United States and China, respectively, the dispute was foreign-related, and the
court may apply laws other than Chinese law. As the second step, because China
is one of the Contracting States of the CISG, Chinese courts need to determine
whether international uniform substantive rules like the CISG apply before resorting

3 Article 1 of the Uniform Law on the International Sale of Goods (ULIS) and article 1 of the
Uniform Law on the Formation of Contracts for the International Sale of Goods (ULFC).
4 Chen and Wu [3], p. 108.
5 Law of the People’s Republic of China on Choice of Law for Foreign-related Civil Relationships

(promulgated by the Standing Comm. Nat’l People’s Cong., Oct. 28, 2010, Effective Apr. 1, 2011).
6 The Opinions on Several Issues concerning the Implementation of the General Principles of the

Civil Law of the People’s Republic of China (For Trial Implementation) (promulgated by the Sup.
People’s Ct., Apr. 2, 1988, Effective Apr. 2, 1988, Invalid, Jan. 1, 2021).
10 Lianhe Enterprise (US) Ltd … 91

to private international law rules.7 The third step is invoking Article 1(1)(a) of the
CISG to determine whether the parties’ places of business are in different contracting
states. In this case, the CISG should apply because the places of business of the seller
and the buyer are in the United States and China, respectively, and both the United
States and China are Contracting States.
II. The Buyer’s Argument
It is worth mentioning that the parties did not choose the applicable law, and the
buyer, Lianhe Company, appealed that American law should apply according to
the principle of closest association and the court of the first instance had erred in
applying the CISG directly. The buyer ignored the priority of the CISG. As an
international uniform substantive rule, the CISG should apply in preference to the
rules of international private law, which is helpful to get comparatively consistent
results and remove legal barriers in international trade.8 The Supreme People’s Court
of China also issued a judicial interpretation to stress the priority of the CISG, which
provides that:
Therefore, according to the provision of Article(1) of the Convention, from January 1, 1988,
the contracts for sale of goods reached between the Chinese companies and the companies
in the aforementioned countries (except Hungary) will automatically apply to the provisions
of the Convention and the disputes or litigations arisen should be also settled under the
Convention, unless otherwise agreed.9

The court has the right to apply the CISG directly when the conditions are met,
without the consent of the parties. Therefore, it is reasonable for the court of appeal
to reject this ground for appeal.
Issue 2: Determination of the Breach of Contract
The focus of this dispute is whether the buyer’s default in payment constitutes a
breach of contract.
According to Article 53 of the CISG, the buyer shall pay the price for the goods
as required by the contract and the CISG. Payment is a basic obligation of the buyer.
The reason for the buyer’s refusal to pay was that some of the goods among the 32nd
through 39th instalments had quality problems. However, the goods of the first 31
shipments had no deficiency and were all sold. There was no basis for the buyer to
refuse to pay for the purchase price of these goods on the grounds that other goods
may be non-conforming. Thus, the court ruled that the buyer breached the contract.
Regarding the 32nd to 39th instalments, the court held that the payment issue should
be decided after the parties resolved the quality problems, and then rejected the
seller’s claims on these instalments.

7 United Nations Commission on International Trade Law [1], p. 4, para. 2.

8 Callaghan [4], p. 185.
9 Circular of the Supreme People’s Court on Transmitting Certain Issues of the MOFTEC in Connec-

tion with the Implementation of United Nations Convention on Contracts for the International Sale
of Goods (promulgated by the Sup. People’s Ct., Oct. 10, 1987, Effective Oct. 10, 1987), Fa [Jing]
Fa (1987) No. 34.
92 G. Wang et al.

The facts of the case were very clear, and the judges’ opinion was reasonable. In
China, there are many cases where the buyer refused to pay the price for the goods on
the grounds that the goods may have quality problems, such as Novelact (Resources)
Ltd v Xiamen Special Economic Zone International Trade Trust Co.10 and A Korean
Company v Dalian Seafood Co.11 There is no basis for this in the CISG. The buyer
and seller should perform their obligations as agreed in the contract and then seek
remedies for any breach of contract in the performance.
Issue 3: Consequences of Breach
Due to a breach of contract, the buyer must compensate the seller. The seller filed
a lawsuit requesting the buyer to pay the purchase price that was in arrears and
liquidated damages, rather than the payment of the arrears and their interest pursuant
to Article 74 and Article 78 of the CISG. The court eventually made a judgment in
accordance with the seller’s claim and did not consider the interest.
Liquidated damage, or late payment fee, is a kind of “fixed sum” payable upon
a specified breach.12 The CISG does not take a stand on liquidated damages and
leaves this issue to national legal systems. The main reason is that common law and
civil law have big differences on this issue.13 The civil law believes that liquidated
damages are all punitive, while the common law distinguishes between “liquidated
damages” and “penalty clauses”.14 Further, the civil law holds that penalties are
enforceable unless they are excessive, while the common law holds that penalty
clauses are unenforceable and provides a void-only remedy.15 Since the CISG does
not stipulate the liquidated damage, and there are no general principles in the CISG,
we need to resort to the rules of private international law by virtue of Article 7(2) of
the CISG.
When the court made such judgement, Chinese general rules of private interna-
tional law were stipulated in the General Principles of the Civil Law of the PRC.16
According to Article 145(2) of this law, if the parties have not made a choice, the
law of the country to which the contract is most closely connected shall apply. In
China, the theory of the characteristic performance (the doctrine of characteristic
obligation) is used to determine the closest connection, which means that when the
parties to an international contract have not chosen the governing law applicable to
the contract, the law shall be determined according to the particular characteristic

10 Novelact (Resources) Limited v. Xiamen Special Economic Zone International Trade Trust
Company, Xia Zhong Fa Jing Min Zi No. 40 (Xiamen Intermediate People’s Court, 19 April 1993).
11 A Korean company v. Dalian Seafood Co., Da Min Si Chu Zi No. 20 (Dalian Intermediate People’s

Court, July 13, 2009).

12 Graves [5], p. 153.
13 Solorzano [6], p. 780.
14 Graves [5], p. 153.
15 DiMatteo and Ostas [6], pp. 395–397.
16 General Principles of the Civil Law of the People’s Republic of China (promulgated by the Nat’l

People’s Cong., Apr. 12, 1986, Effective Jan. 1, 1987, Invalid Jan. 1, 2021).
10 Lianhe Enterprise (US) Ltd … 93

of the contract.17 Article 2(6)(i) of the Response of the Supreme People’s Court to
Certain Questions Concerning the Application of the Foreign Economic Contract
Law18 provides that:
In the case of an international contracts of sale of goods, the law of the regions where the
seller has its place of business at the time of the signing of the contract shall apply.

The seller, Yantai Company, had its place of business in China, so Chinese law
was the law of the country to which the contract is most closely connected. The
buyer’s appeal that American law is the law of closest connection lacks legal basis.
The Law of the PRC on Economic Contracts Involving Foreign Interest19 should
apply supplementarily.
Article 20 of the Law of the PRC on Economic Contracts Involving Foreign
Interest provides that:
(1) The parties may agree in a contract that, if one party breaches the contract, it shall pay
a certain amount of breach of contract damages to the other party; they may also agree
upon a method for calculating the damages resulting from such a breach. (2) The breach
of contract damages as stipulated in the contract shall be regarded as compensation for the
losses resulting from breach of contract. However, if the contractually agreed breach of
contract damages are far more or far less than is necessary to compensate for the losses
resulting from the breach, the party concerned may request an arbitration body or a court to
reduce or increase them appropriately.

Therefore, the parties could specify in the contract liquidated damages, which is
legal and effective. As for the relationship between liquidated damages and deferred
interest, it is generally believed that the parties can choose the one they prefer.20 This
way helps to balance the interests of buyers and sellers so that the injured party will
not gain additional benefits while receiving compensation. This was also the case in
this case, where the seller asked the court to rule that the buyer should pay liquidated
damages and waived its claim for deferred interest.

References

1. United Nations Commission on International Trade Law (2016) UNCITRAL Digest of case law
on the United Nations convention on contracts for the international sale of goods. https://unc
itral.un.org/en/case_law/digests
2. Honnold J (2009) Uniform law for international sales under the 1980 United Nations convention.
Kluwer Law International BV

17 Pei [8], pp. 113–114.

18 Response of the Supreme People’s Court to Certain Questions Concerning the Application of the
Foreign Economic Contract Law (promulgated by the Sup. People’s Ct., Oct. 19, 1987, Effective
Oct. 19, 1987, Invalid Jul. 25, 2000).
19 The Law of the People’s Republic of China on Economic Contracts Involving Foreign Interest

(promulgated by the Standing Comm. Nat’l People’s Cong., Mar. 21, 1985, Effective Jul. 1, 1985,
Invalid Oct. 1, 1999).
20 Jia and Zhao [9], p. 69.
94 G. Wang et al.

3. Chen ZD, Wu JH (2012) On the application of United Nations convention on contracts for the
international sales of goods in China -a comment on Article 142 of General Principles of Civil
Law. Law Sci 10:107–118
4. Callaghan JJ (1995) U.N. convention on contracts for the international sale of goods: examining
the gap-filling role of CISG in two French decisions. J Law Commer 14:183–200
5. Graves J (2012) Penalty clause and the CISG. J Law Commer 30(2):153–172
6. Solorzano JS (2009) An uncertain penalty: a look at the international community’s inability to
Harmonize the law of liquidated damage and penalty clauses. Law Bus Rev Am 15:779–818
7. DiMatteo LA, Ostas DT (2011) Comparative efficiency in international sales law. Am Univ Int
Law Rev 26:371–439
8. Pei P (1999) The application of the most significant relationship theory in foreign-related
contracts. Mod Law Sci 4:111–114
9. Jia L, Zhao HZ (2012) The application of liquidated damages in contracts for the international
sales of goods. J Shanxi Polit Law Inst Adm 25(4):67–69

Ms. Geng Wang is a Ph.D. candidate in law at University of International Business and
Economics. Prior to that, she earned her LL.M. in International Law from Nankai University and
LL.B. from Shandong University, respectively. Her areas of research are international trade law
and international treaty law.

Dr. Peng Guo Lecturer in Law at RMIT University. At RMIT Dr Guo teaches Contract Law and
Commercial Law to LLB and JD students. He has held visiting positions at different universities,
including Warwick University, University of Amsterdam, and University of Osnabrück. He has
received scholarships awarded by renowned research institutions and international organisations,
including the Max Planck Institute for Comparative and International Private Law, the Interna-
tional Institute for the Unification of Private Law (UNIDROIT), the Swiss Institute of Compara-
tive Law, and the European Union. His research interests lie in international sale of goods, inter-
national commercial arbitration, comparative contract law, and law and technology. He actively
participates in Vis Moot and Alfred Deakin International Commercial Arbitration Moot.

Dr. Shu Zhang is a lecturer in commercial law at Deakin Law School, Deakin University
(Australia) and coached Deakin Law School’s Vis Moot team. Prior to joining Deakin Law
School, Dr. Zhang was a post-doctoral fellow in the Chinese International Business and Economic
Law Initiative, Law School, University of New South Wales (Australia). Her research interests
include international commercial law, dispute resolution and international arbitration, as well as
comparative contract law. She also completed internships at both the Australian Centre for Interna-
tional Commercial Arbitration (ACICA) and the Chinese International Economic and Trade Arbi-
tration Commission (CIETAC). She is also admitted to practice in New South Wales, Australia.
Dr. Zhang obtained her PhD in Law from University of New South Wales (Australia), and her
LLM, LLB and BA in Economics (Double Degree) from Peking University (China). She has
published various manuscripts with leading journals in this area, such as the Journal of Contract
Law, Vindobona Journal of International Commercial Law and Arbitration, China Quarterly.
Chapter 11
Singapore Daguangxing (Private) Co.,
Ltd v Jiangsu Machinery Import
and Export Group Co., Ltd

Han Wang, Peng Guo, and Shu Zhang

Case Information
Case name: Singapore Daguangxing (Private) Co., Ltd v Jiangsu Machinery Import
and Export Group Co., Ltd
Seller: Jiangsu Machinery Import and Export Group Co., Ltd
Place of business: China
Buyer: Bumi Raya Utama Group
Agent: Singapore Daguangxing (Private) Co., Ltd
Place of business: Singapore
Details of First Instance:
Court: Jiangsu High People’s Court
Date of decision: No information
Case No: (1997) Su Jing Chu Zi No 18
Judges: N/A

H. Wang (B)
Nankai University, Tianjin, China
e-mail: [email protected]
P. Guo
RMIT University, Melbourne, VIC 3000, Australia
e-mail: [email protected]
S. Zhang
Deakin University, Geelong, VIC 3220, Australia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 95

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_11
96 H. Wang et al.

Details of Appeal:
Court: Supreme People’s Court of the People’s Republic of China
Date of decision: 11 January 2001
Case No: (1999) Jing Zhong Zi No 448
Judges: Yun wang (Presiding Judge), Bailing Chen (Acting Judge), Xiaochen Qian
(Acting Judge)
CISG applied: Yes
Key CISG provisions interpreted and applied: Articles 1; 4(a); 25; 53; 60; 63; 64
Abstract
In 1991, the buyer, Bumi Raya Utama Group, and the seller, Jiangsu Machinery
Import and Export Group Co., Ltd, concluded six contracts (Nos. 3–8) for the
purchase of turbo-generator sets and power station boilers of a particular type. Each
contract stipulated the terms of the deposit, the letter of credit and the time of shipment
by the seller. After these contracts were signed, Bumi Raya Utama Group entrusted
Singapore Daguangxing (Private) Co., Ltd with all matters relating to the acquisition
of the turbo-generator sets and the power station boilers under the above-mentioned
contracts. Singapore Daguangxing, an agent, paid a 20% deposit to the seller. On 20
January 1992, the parties reached an agreement to postpone the delivery date of the
boiler under Contract No. 8 to September 1992, which is the same as the delivery date
of Contract No. 7. On 24 March 1992, Singapore Daguangxing requested the seller
to postpone the manufacture of the turbo-generator set and the boiler under Contract
No. 3 and Contract No. 6, respectively, until it gave further notice. The seller had no
objection to this, and it did not commence the manufacture under Contract Nos. 3
and 6. On 30 June 1992, the seller requested the buyer and its agent to confirm the
date of shipment but received no reply. On 30 July 1992, the parties in an agreement
confirmed that the seller had manufactured the boilers under Contract Nos. 7 and 8
and ordered all the auxiliary equipment and materials. But the buyer did not arrange
the shipment according to the agreement. On 10 September 1992, in view of the
fact that the buyer did not arrange shipment for goods manufactured under Contract
Nos. 7, 8, 4 and 5, the seller requested the buyer to arrange shipment again. On 20
May 1993, the buyer stated it was very difficult to obtain operating permits for these
devices in Indonesia. In order not to postpone the shipment, the seller was requested
to sell these devices on behalf of the buyer or to build a joint-venture plant with
the buyer in China. Renegotiations on performance failed. On 22 January 1994, the
seller proposed to terminate the contracts. On 28 January 1997, the buyer sued the
seller for breach of contract and requested the seller to return the deposit in double.
During the trial in the court of the first instance, the parties agreed to apply the
CISG and Chinese law. Since the buyer failed to accept the devices supplied by the
seller and stated it was impossible to transport them to Indonesia, the court held that
the buyer’s behaviour constituted a fundamental breach of contract. Therefore, the
court of the first instance, applying Chinese law and the CISG, terminated the six
contracts (Nos 3–8) between the parties.
11 Singapore Daguangxing (Private) Co., Ltd … 97

The buyer appealed. The Supreme People’s Court held that the seller could termi-
nate Contract Nos 4, 5, 7 and 8 on the basis of the buyer’s fundamental breach;
however, it could not terminate Contract Nos 3 and 6 on the same ground as the
parties had reached an agreement upon the delay in the manufacture and shipment.
The Supreme People’s Court concluded that the determination of the facts of the
case by the court of the first instance had been essentially clear, that its application
of law had also been correct, and that since the parties did not insist on performance,
the judgement of the court if the first instance to terminate all six contracts were
appropriate.

Commentary on the Key Issues Related to the CISG

Issues

Issue 1: The applicability of the CISG

Issue 2: The validity of the contract
Issue 3: Determination of the fundamental breach under the CISG

Comments

Issue 1: The applicability of the CISG

Regarding the application of law, since this case was an international sale of goods
dispute and the parties chose to apply the CISG and Chinese law, the court applied
the CISG and Chinese law at the same time. As a basis for judgement, the court
clarified the application of specific provisions of Chinese law without addressing the
relevant provisions of the CISG.
In this case, there was no specific explanation of the application of the specific
provisions of the CISG in the judgement. It was unclear whether the CISG had
priority in its application to domestic law in the judgement. The CISG is an inter-
national commercial treaty, and under the range of CISG’s application conditions,
the application of the CISG should be prior to the application of conflict of laws
and relevant domestic substantial law, and directly apply to international disputes.1
It is determined by the CISG’s own regulations. Article 1(1)(a) of the CISG stipu-
lates that the treaty applies “directly” or “automatically” when the business places of
the parties are in the different Contracting States, regardless of whether the parties
are aware of the fact that the States where their places of business are located are
Contracting States.2 Article 1(1)(b) of the CISG directly excludes the application
of conflicting rules from the method of application of the law. Even if private inter-
national law guides the laws of the Contracting States, the Convention should still

1 De Ly [1], p. 270.
2 Ferrari [2], p. 60.
98 H. Wang et al.

be applied with priority. It strengthens the pre-emptive application of the CISG to a

large extent.3
The CISG can also be applied at the party’s choice, in which case there is no need
to consider the party’s place of business. The choice of the parties can either be a
clear agreement in the contract, or the parties can clearly express the application of
the CISG during the litigation process, or they can directly invoke the provisions of
the CISG to put forward a law application claim. Article 3 of Law of the People’s
Republic of China on Choice of Law for Foreign-related Civil Relationships stip-
ulates that the parties may explicitly choose the laws applicable to foreign-related
civil relations in accordance with the provisions of law. Article 41 stipulates that the
parties concerned may choose the laws applicable to contracts by agreement. There-
fore, according to the relevant regulations of China, the parties can choose the appli-
cable law in the foreign-related civil contract and the legal choice of the parties in
this case is effective.
In this case, the parties chose both the CISG and Chinese law. But as the regulations
of the CISG and Chinese law are not exactly the same, there will be a question
of which applies first. The preamble of CISG states that the adoption of uniform
rules to govern contracts for the international sale of goods, taking into account
the different social, economic and legal systems, contributes to the removal of legal
barriers in international trade and promotes the development of international trade.
The legislative purpose of its uniform rules determines that the CISG will inevitably
go beyond diversified domestic laws and be applied first.4 Besides, Article 142(2) of
The General Principles of the Civil Law of the People’s Republic of China stipulates
that if any international treaty is concluded or acceded to by the People’s Republic
of China contains provisions differing from those in the Civil Laws of the People’s
Republic of China, the provisions of the international treaty shall apply unless the
provisions are the ones on which the People’s Republic of China has announced
reservations. It can be seen from this article that the court should apply the relevant
provisions of the CISG first, and then apply domestic law to supplement matters
that are not stipulated by the CISG.5 However, the Civil Code promulgated after the
repeal of the General Principles of Civil Law did not make further provisions on this
issue, leading to a legal gap. The author suggests that the international private law of
China can be revised to clarify the priority status of the international trade treaties.
In this case, the buyer and the seller chose to apply the CISG and Chinese law to
settle the dispute during the first trial. Therefore, Chinese law should be a supplement
to the CISG and apply when the CISG does not have relevant provisions.
Issue 2: The validity of the contract
As for the validity of the contract, there was a mistake that should be clarified. The
court of the first instance determined that the contract between the parties was valid
according to the provisions of the CISG and Chinese law. However, Article 4(a) of the

3 Honnold [3], pp. 82–83.

4 Yang [4], p. 2.
5 Li [5], p. 113.
11 Singapore Daguangxing (Private) Co., Ltd … 99

CISG stipulates that the CISG is not concerned with the validity of the contract. The
court of the first instance should only use Chinese law as its legal basis to determine
whether the contract is valid. During the appealing hearing, this issue was corrected,
and the contract was determined to be valid on the basis of Chinese law.
Issue 3: Determination of the fundamental breach under the CISG
In this case, the buyer postponed the delivery date several times and indicated its
unwillingness to perform the contract due to the failure to obtain certain permits,
which constituted a fundamental breach of contract. But the court did not explain
the definition of a fundamental breach of contract and the reason why the buyer’s
actions constituted a fundamental breach of contract.
As analysed above, the court should apply relevant clauses of the CISG first.
Article 53 and Article 60 of the CISG stipulate the buyer’s obligation to receive
the goods. The buyer’s failure to perform the obligation of delivery constituted a
breach of contract. The CISG distinguishes between a general breach of contract and
a fundamental breach of contract. The purpose is to limit the circumstances in which
the parties claim termination of the contract due to minor flaws in performance
so as to promote the stable development of international trade.6 In the case of a
general breach of contract, the injured party can only claim damages and cannot
declare the contract voided. If it is a fundamental breach of contract, the injured
party can claim damages and declare the contract voided. According to Article 25,
a breach of contract committed by one of the parties is fundamental if it results in
such detriment to the other party to substantially deprive him of what he is entitled to
expect under the contract, unless the party in breach did not foresee, and a reasonable
person of the same kind in the same circumstances would not have foreseen such a
result. A fundamental breach of contract as defined by the CISG should contain two
conditions: (1) the degree of detriment caused by the breach; (2) whether the results
of the detriment can be foreseen. As far as the first condition is concerned, the term
“detriment” has a special meaning in the CISG and differs from other domestic law
concepts. It should be interpreted broadly, including both material losses and non-
material losses.7 The detriment caused by a breach of contract should be substantial
and constitute “substantive deprivation” to the interests of the injured party. The term
“substantial” is very flexible in essence,8 contains the dual requirements of quantity
and degree, and case analysis should be conducted from the nature and quantity of
breach of contract. The UNCITRAL Secretariat’s commentary on the 1978 CISG
draft pointed out that determining whether the detriment is substantial should be
based on the circumstances of each event, such as the amount of the contract, the
amount of loss caused by the breach of the contract, or the degree of effects caused
by the breach of the contract on the other activities of the injured party.9 Although

6 China International Economic and Trade Arbitration Commission [6], p. 67.

7 Bianca and Bonell [7], pp. 205–225.
8 Jiao [8], p. 45.
9 UNCITRAL Secretariat. Commentary on the Draft convention on Contracts for the International

Sale of Goods[R]. Document A/CONF. 97/5, 14 March 1979.

100 H. Wang et al.

one party’s breach of contract causes economic losses to the other party, if the losses
are only minor and do not substantially deprive them of the benefits they are entitled
to expect under the contract, it will not constitute a fundamental breach of contract.
As far as the delay in performance of the contract is concerned, since the contract
may still be performed, it will not constitute a fundamental breach of contract in a
general way. Where the performance time of the contract clearly stipulated in the
contract is very important, or the performance time becomes very important due
to the seasonal characteristics of the goods, the CISG allows the injured party to
extend the performance period. Article 63 of the CISG stipulates that the seller
may fix an additional period of time of reasonable length for the buyer to perform
their obligations. If the defaulting party still fails to perform the contract after the
extended period, it constitutes a fundamental breach of contract. Article 64 of the
CISG stipulates that the seller may declare the contract voided: (b) if the buyer
does not, within the additional period of time fixed by the seller in accordance with
paragraph (1) of Article 63, perform their obligation to pay the price or take delivery
of the goods, or if they declare that they will not do so within the period so fixed.
The second condition that constitutes a fundamental breach is that the detriment
results can be reasonably foreseen. This depends, firstly, on whether the defaulting
party can foresee, and secondly, whether a person with the same qualifications and
reasonableness as the defaulting party in the same situation can foresee. The ficti-
tious “reasonable person” standard proposed by the CISG is not a highly abstract
standard.10 A reasonable person is a professional who is familiar with the practices
of a certain trade sector in international trade. Attention should also be paid to the
word “and” here. The use of this term indicates that when the defaulting party proves
whether the detriment is foreseeable, he should not only prove the detriment cannot
be foreseen by himself, but also prove that the detriment cannot be foreseen by a
“reasonable person”. Both need to be met at the same time. In Article 25 of the
CISG, the foreseeability standard exists as an exception to the fundamental breach
of contract. Therefore, it is not necessary to invoke this standard when judging a
fundamental breach of contract. Once this standard is invoked and it is proved that
the defaulting party and reasonable people do not foresee the detrimental results, the
breach of contract by the defaulting party will not constitute a fundamental breach of
contract. It can be seen that the foreseeability standard is an exemption condition for
a fundamental breach of contract.11 This is a manifestation of the CISG that balances
the interests of the defaulting party and the non-defaulting party.
In this case, on 10 September 1992, in view of the fact that the buyer did not
arrange shipment for goods manufactured under Contract Nos. 7, 8, 4 and 5, the
seller requested the buyer to arrange shipment again. These facts indicate that the
buyer had a delay in the performance of the contract. At this time, the buyer cannot
constitute a fundamental breach of the contract, unless the buyer still failed to perform
the contract within the extended period or directly declared that they would not
perform the contract. On 20 May 1993, the buyer stated it was very difficult to

10 Li [9], pp. 49–50.

11 Koch [10], pp. 264–265.
11 Singapore Daguangxing (Private) Co., Ltd … 101

obtain operating permits for these devices in Indonesia. In order not to postpone the
shipment, the seller was requested to sell these devices on behalf of the buyer or to
build a joint-venture plant with the buyer in China. The buyer’s declaration of no
longer performing contracts due to its failure to obtain certain permits constituted
the “substantial deprivation” of the seller’s interests. The “substantial deprivation”
means the party cannot get the expected benefits of performing the contract12 and
the impossibility to perform the contract is a typical situation of it.13 Above all, the
buyer constituted a fundamental breach of contract.
Additionally, Article 64 of the CISG stipulates, “If the failure by the buyer to
perform any of their obligations under the contract or this Convention amounts to a
fundamental breach of contract, the seller may declare the contract voided”. So, the
seller could terminate those contracts.

References

1. De Ly F (1992) International business law and Lex Mercatoria. Emerald Publishing Limited
Publisher
2. Ferrari F (2012) Contracts for the international sales of goods-applicability and application of
the 1980 United Nations sales convention. Martinus Nijhoff Publishers
3. Honnold JO (1987) Uniform law for international sales under the 1980 United Nations
convention. Kluwer Law and Taxation Publisher
4. Yang MS (2020) An analysis on legal models of the CISG’ preemptive application—a concur-
rent discussion on legislation and judicial practice of application of international commercial
treaties in China. J Northeast Univ (Soc Sci Ed) 22(04):97–103
5. Li W (2017) On the application of international civil and commercial treaties-from the perspec-
tive of the relationship between international civil and commercial treaties and international
private law. The Jurist, 04, 107–115+178
6. China International Economic and Trade Arbitration Commission (2021) The application of
the United Nations convention on contracts for the international sales of goods in Chinese
arbitration. China Law Press
7. Bianca CM, Bonell MJ (1987) Commentary on the international sales law, the 1980 Vienna
sales convention. Giuffrè Publishers, Milan
8. Jiao JH (1993) On fundamental breach. Chin Foreign Law J 03:43–48
9. Li W (2002) Commentary on the United Nations convention on contracts for the international
sale of goods. China Law Press
10. Koch R (1999) The concept of fundamental breach of contract under the United Nations
convention on contracts for the international sale of goods. Review of the Convention on
Contracts for the International Sale of Goods (CISG). Kluwer Law International
11. Wang LM (1995) On the relationship between fundamental breach of contract and dissolution
of contract. China Leg Sci 03:18–26
12. Ferrari F (2005) Fundamental breach of contract under the UN sale convention-25 years of
article 25 CISG. J Law Commer 25:489–490

12 Wang [11], p. 20.

13 Ferrari [12], pp. 489–490.
102 H. Wang et al.

Han Wang Ph.D. student of Nankai University Law school, majoring in International Economic
Law and International Commercial Law. The tutor is the famous scholar Professor Haicong Zuo.
Participated in projects of the Supreme People’s Court, major projects of the National Social
Science Fund, etc.

Dr. Peng Guo Lecturer in Law at RMIT University. At RMIT Dr Guo teaches Contract Law and
Commercial Law to LLB and JD students. He has held visiting positions at different universities,
including Warwick University, University of Amsterdam, and University of Osnabrück. He has
received scholarships awarded by renowned research institutions and international organisations,
including the Max Planck Institute for Comparative and International Private Law, the Interna-
tional Institute for the Unification of Private Law (UNIDROIT), the Swiss Institute of Compara-
tive Law, and the European Union. His research interests lie in international sale of goods, inter-
national commercial arbitration, comparative contract law, and law and technology. He actively
participates in Vis Moot and Alfred Deakin International Commercial Arbitration Moot.

Dr. Shu Zhang is a lecturer in commercial law at Deakin Law School, Deakin University
(Australia) and coached Deakin Law School’s Vis Moot team. Prior to joining Deakin Law
School, Dr. Zhang was a post-doctoral fellow in the Chinese International Business and Economic
Law Initiative, Law School, University of New South Wales (Australia). Her research interests
include international commercial law, dispute resolution and international arbitration, as well as
comparative contract law. She also completed internships at both the Australian Centre for Interna-
tional Commercial Arbitration (ACICA) and the Chinese International Economic and Trade Arbi-
tration Commission (CIETAC). She is also admitted to practice in New South Wales, Australia.
Dr. Zhang obtained her PhD in Law from University of New South Wales (Australia), and her
LLM, LLB and BA in Economics (Double Degree) from Peking University (China). She has
published various manuscripts with leading journals in this area, such as the Journal of Contract
Law, Vindobona Journal of International Commercial Law and Arbitration, China Quarterly.
Chapter 12
Shenzhen Fengshen Industrial
Development Co., Ltd v France Eurasian
International Technology Development
Co., Ltd

Han Wang, Shu Zhang, and Peng Guo

Case Information
Case Name: Shenzhen Fengshen Industrial Development Co., Ltd v France Eurasian
International Technology Development Co., Ltd
Seller: France Eurasian International Technology Development Co., Ltd
Place of Business: France
Buyer: Shenzhen Fengshen Industrial Development Co., Ltd
Place of Business: China
Details of First Instance:
Court: People’s Court of Wuhan Economic and Technological Development Zone,
Hubei
Date of Decision: 30 June 2000
Case No.: (2000) Wu Kai Fa Jing Chu Zi No 25
Judges: Xiaoqin Zhu (Presiding judge), Shanxiang Liu (Acting judge), Yun Zhang
(Acting judge)

H. Wang (B)
Nankai University, Tianjin, China
e-mail: [email protected]
S. Zhang
Deakin University, Geelong, VIC 3220, Australia
e-mail: [email protected]
P. Guo
RMIT University, Melbourne, VIC 3000, Australia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 103

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_12
104 H. Wang et al.

CISG Applied: Yes

Key CISG provisions interpreted and applied: Articles 35(1), 35(2)d, 38(1) and
79
Abstract
On 23 March 1998, the buyer, Shenzhen Fengshen Industrial Development Co.,
Ltd, and the seller, France Eurasian International Technology Development Co.,
Ltd, concluded a contract for the purchase of brooches, stipulating that the goods’
total amount was FFR540,630, delivered by CIF Hong Kong, and packed in wooden
boxes. On 20 May 1998, the brooches under the contract were delivered to Hong
Kong. After receiving the goods, the buyer accepted the payment by letter of credit
as agreed and transported the brooches to Wuhan Shenlong Automobile Co., Ltd.
The buyer did not examine the goods in Hong Kong. In July 1998, Hubei Import and
Export Commodity Inspection Bureau carried out an unpacking examination of the
brooches. It found that six boxes of the brooches had different degrees of corrosion.
The examination opinion was, “in view of the intact outer packaging of the brooches,
the corrosion of the brooches was caused by the lack of effective moisture-proofing
measures on the packaging, which caused the brooches to become damp”. On 23
July 1998, the seller and the buyer reached an agreement to return all the goods.
On 19 August 1998, the seller requested the buyer to return the brooches within
20 days. The brooches were returned by the buyer on 26 September 1998. The seller
promised that it would return the entire payment and interest totalling FFR587,448
to the buyer. On 4 June 1999, the seller paid FFR200,000 to the buyer, but no further
payment was made thereafter. Therefore, the buyer sued the seller for the remaining
payment.
The court, applying the relevant provisions of the CISG, held that the claim of the
buyer was contrary to the basic principle of equality and mutual benefit of the CISG,
so the court cannot fully support it. Since the packaging of the goods did not take
effective moisture-proof measures, the seller had responsibility for the occurrence of
losses. The buyer failed to examine the goods in Hong Kong, and could not provide
the China Customs Examination and Acceptance of the Goods Release Certificate
so that the responsibility for brooches corrosion could not be accurately divided and
determined. After receiving the written letter from the seller to return the goods
within 20 days, the buyer neither expressed objection nor returned the goods within
the time limit required by the letter. In this regard, the buyer has the unfavourable
legal consequences of being unable to provide evidence, as well as the responsibility
of causing increased losses. Therefore, the court determined that the seller should
refund the buyer FFR124,378 and its interest. Other economic losses of the buyer
and the seller shall be borne separately.
12 Shenzhen Fengshen Industrial Development … 105

Commentary on the Key Issues Related to the CISG

Issues

Issue 1: The applicability of the CISG

Issue 2: The seller’s obligation to package the goods
Issue 3: The time for the buyer to examine the goods
Issue 4: A party’s responsibility can be exempted due to certain impediments

Comments

Issue 1: The applicability of the CISG

In this case, CISG is the applicable law for the judgement. In view of the fact that the
seller’s place of business is in France and the buyer’s place of business is in China,
both of which are Contracting States of the CISG, and the contract in this case did
not specifically exclude the application of the CISG or choose the domestic law of a
certain country as the applicable law. Therefore, in accordance with the provisions
of Article 1(a) of the CISG, the CISG shall be applied in this case. The judgement
of this case was complete and comprehensive for the reasoning of the application of
the CISG and has a strong reference value for similar cases.
According to CISG Article 1(1)(a), if the sales contract is between parties whose
places of business are in different CISG Contracting States, the CISG applies “auto-
matically” and “directly”. The court need not—indeed should not—use rules of
“conflict of laws” or “private international law” to decide whether the CISG applies.1
However, under the premise that the CISG is automatically applied, the parties can
exclude the application of the CISG in accordance with Article 6. This provision
shows that the application of the CISG is arbitrary, not mandatory. By allowing both
parties to exclude the application of the CISG or derogate from any provisions of the
CISG, the drafters of the convention affirmed that the principle of party autonomy is
at the core of international sales activities.2 There are two ways to exclude the appli-
cation of the CISG: express exclusion and implied exclusion. Express exclusion of
the CISG application means that the parties to the contract expressly agree not to
apply the CISG. For example, the parties stipulate in the contract that “the rights and
obligations of the parties under this contract shall not apply to the CISG”. In the case
of express exclusion, the parties’ intention to exclude the application of the CISG is
clear. After the CISG is excluded by the parties, the law to be applied to the contract
shall be determined in accordance with the conflict rules. The typical way of implied
exclusion of the CISG is to exclude by choice of law clause,3 the parties agree to
choose non-CISG sources of law as the applicable law in the course of the contract or

1 Lookofsky [1], p. 13.

2 UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the
International Sale of Goods (2004 Edition). p. 2.
3 Ferrari [2], p. 86.
106 H. Wang et al.

litigation process. The circumstances in which the parties choose non-CISG sources
of law mainly include the following three situations: (1) the parties generally choose
the law of the Contracting States; (2) the parties choose the specific substantive law
of the Contracting States; and (3) the parties choose the laws of the non-Contracting
States. In the first circumstance, most scholars believe that CISG should be applied
because the laws of the Contracting States should include the CISG. The CISG, as
a part of the laws of the Contracting States, does not conflict with the choice of
law clause. The law chosen by the parties can be applied as a supplement to the
CISG. For example, in the case of St. Paul Guardian Insurance v Neuromed Medical
Systems & Support GmbH,4 the parties agreed to apply German law in which the
CISG is included. For the purpose of the CISG to unify the law of international
sales of goods, the CISG should be applied to this case. Another example is Guiding
Cases No 107, Sinochem International (Singapore) Co., Ltd v. ThyssenKrupp Metal-
lurgical Products Co., Ltd 5 promulgated by the Supreme People’s Court of China.
The parties agreed, in the contract, that the laws of New York in the United States
should be applied. Since the United States is a Contracting State to the CISG, the
court held that the parties did not exclude the application of the CISG and applied the
CISG for judgement. The laws of the New York State of the United States applied
when the CISG did not have relevant regulations. However, it is necessary to consider
whether the parties have the intention to exclude the application of the CISG from the
overall situation of the case. For instance, in a case heard by the California Court of
Appeals, the parties chose to apply California laws in the contract. One party argued
that the CISG should be applied, but the court’s final judgment was the opposite. The
court held that, through the evidence shown in the drafting process of the contract,
the applicable clauses of the CISG were subsequently deleted, indicating that the
intention of the parties was to exclude the application of the CISG. Therefore, the
CISG should not be applied in this case.6 In the second circumstance, if the parties
expressly choose the specific substantive law of the Contracting States to apply to
the contract, the CISG must be regarded as excluded.7 Professor Peter Schlechtriem
pointed out that the parties’ choice of German law in the contract cannot exclude
the application of the CISG, but the choice of the German Civil Code indicates the
parties’ intention to exclude the application of the CISG.8 In the third circumstance,
the parties’ intention to exclude the application of the convention is relatively clear,
and the application of the CISG must be excluded if the parties choose the laws of

4 St. Paul Guardian Insurance v. Neuromed Medical Systems & Support GmbH. 2002 WL 465312
(S.D.N.Y).
5 (2013) Min Si Zhong Zi No. 35.
6 Orthotec v. Eurosurgical. 2007 Cal. App. Unpub. LEXIS 5276.
7 UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the

International Sale of Goods (2016 Edition). p. 34.

8 Schlechtriem [3], p. 6.
12 Shenzhen Fengshen Industrial Development … 107

the non-contracting party.9 If the parties choose English law in the contract, as the
United Kingdom is not a Contracting State of the CISG, the CISG cannot be applied.
Based on the above analysis, the court cannot determine whether the CISG is
applicable only based on whether the parties’ place of business meets the require-
ments of the Article 1, paragraph 1 of the CISG, but must also clarify whether the
parties have agreed to exclude the application of the CISG based on the principle of
party autonomy. However, there are no explanations for the specific provisions of the
CISG applied in this case, it has only listed the applicable articles and paragraphs. It
lacks sufficient reasoning and rigour in explaining the application of the provisions
to make a judgement.
Issue 2: The seller’s obligation to package the goods
Article 35(1) of the CISG stipulates that the seller must deliver goods which are
contained or packaged in the manner required by the contract. Generally, the parties
agree on the packaging of the goods in the contract detailing such things as the pack-
aging materials (cartons, wooden boxes, etc.), condition (new or old), packaging
methods, units, unit packaging quantities, etc. The seller needs to strictly perform
their obligations in accordance with the contract. Article 35(2)(d) is a supplement to
Article 35(1). If the parties fail to specify packaging requirements in their contract,
then Article 35(2)(d) should apply. It states that the seller should contain or package
goods in the manner usual for such goods or, where there is no such manner, in a
manner adequate to preserve and protect the goods. This “usual” standard generally
refers to the packaging standard accepted by the seller’s country.10 The corresponding
provision of the 1978 Draft Convention did not include the concluding clause, “or,
where there is no such manner, in a manner adequate to preserve and protect the
goods”. It was suggested that the Draft failed to deal with contracts for new types of
commodity for which no “usual” manner of packing had yet developed. In consid-
ering this proposal, it was noted that this new language should not be construed
to require packaging where the packaging was not usual. Nor was it contemplated
that packing must be able to withstand unprecedented shocks and hazards; what is
required is the degree of protection that is usual for goods of comparable fragility.11
In this case, the court holds that the packaging of the goods did not take effective
moisture-proof measures, and the seller shall be liable for the loss due to the brooches
corrosion. Based on the information in the judgement, it cannot be judged whether the
parties have made relevant agreements on the packaging of the goods in the contract.
If there is no agreement, the brooches should be boxed or packaged in a manner usual
for such goods. If there are no such manners, they should be boxed or packaged in a
manner sufficient to preserve and protect the brooches. The packaging of the brooches
should take into account their moisture-proof requirements and ensure that they are

9 Explanatory Note by the UNCITRAL Secretariat on the United Nations Convention on Contracts
for the International Sale of Goods. pp. 35–36.
10 UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the

International Sale of Goods (2016 Edition). p. 34.

11 Honnold [4], p. 229.
108 H. Wang et al.

not corroded. If the seller fails to pack the brooches in a manner sufficient to preserve
and protect the goods, he shall be liable for compensation.
Issue 3: The time for the buyer to examine the goods
Article 38 of the CISG stipulates the buyer’s examination time. If the parties have not
agreed on relevant matters in the contract, the buyer must examine the goods within
as short a period as is practicable. The practicable short period should be understood
as being as soon as is reasonable. It is not necessarily immediately or within a fixed
period of time. It should be determined according to the specific circumstances of
each transaction, the trade practices chosen by the parties, the type of goods, the
circumstances of the parties and other factors.12 If the goods need to be transported,
the examination can be carried out after the goods arrive at the destination; if the
goods are redirected in transit or redispatched by the buyer without a reasonable
opportunity for examination by him, and at the time of the conclusion of the contract
the seller knew or ought to have known of the possibility of such redirection or
redispatch, the examination may be deferred until after the goods have arrived at
the new destination. The CISG regards the examination of the goods as an important
responsibility that the buyer should perform. Although the buyer’s failure to examine
the goods in such period does not constitute a breach of contract, the buyer has to bear
the negative consequences.13 According to Article 39 of the CISG, if the buyer does
not give notice to the seller specifying the nature of the lack of conformity within
a reasonable time after it is discovered or ought to have discovered, the buyer will
lose the right to request the non-conformity. Therefore, as long as the examination
conditions are met, regardless of whether the buyer actually examines the goods,
the CISG presumes that the buyer has found that the goods do not conform to the
contractual situation within the shortest time, and “the reasonable time” of noticing
to the seller begins. “The reasonable time” of notifying the seller depends on the
court’s determination case-by-case on the basis of many complicated factors, such
as the nature of the subject matter, the nature of the defect, the situation of the
parties, relevant trading practices, etc.14 In this case, the buyer has the conditions for
examination in Hong Kong but did not examine the goods. “The reasonable time”
of notifying the seller that the goods were not in conformity should be counted from
the time the goods are shipped to Hong Kong. It can be seen from the judgement
that the buyer’s notice was within “the reasonable time”, but the court did not give a
detailed explanation.
Issue 4: A party’s responsibility can be exempted due to certain impediments
Article 79(1) of the CISG states that a party’s responsibility can be exempted when
certain impediments arise. Under this provision, the impediment must have the
following three characteristics (1) the impediment is beyond the control of the party;
(2) when entering into a contract, the impediment cannot be foreseen by the party;

12 Zhang [5], p. 251.

13 Bianca and Bonel [6], p. 296.
14 Shiomi, Nakata and Matsuoka [7], p. 122.
12 Shenzhen Fengshen Industrial Development … 109

(3) the impediment and its consequence cannot be overcome or avoided.15 First,
the interpretation of the “uncontrollable” element should emphasise its objectivity.
An objective impediment hinders the performance of the contract but has nothing
to do with the parties’ insufficient subjective efforts. The objective impediment to
the exemption is the only reason that the party cannot perform.16 This objective
impediment should be supported by sufficient evidence, and the party claiming the
exemption should bear the burden of proof. Second, with regard to the “unforesee-
able” element, the required impediment is that the parties did not foresee or have
no reason to foresee it when the contract was concluded. Even if the impediment
occurs beyond the control of the obligor, as long as the obligor should foresee it,
the obligor still cannot be exempted from the liability [10].17 Whether it can be
reasonably foreseen is a matter of fact, and it must be judged on a case-by-case basis
based on all the facts related to the contract. There is no fixed uniform standard
that applies to all cases. The CISG’s rational third-party standard can be used as a
basis to help judge whether the impediment is foreseeable. If a rational third party
under the same conditions as the party can reasonably foresee, the party’s request
cannot be supported. For example, a seller requested an exemption because it was
unable to purchase milk powder that complies with the import regulations of the
buyer’s country. The court held that the seller should understand these regulations
when entering into the contract and bear the risk of finding suitable goods. There-
fore, the seller’s responsibility cannot be exempted due to this impediment.18 Third,
the “insurmountable or avoidable” element generally focuses on the behaviour of
the parties. This is where the party who has the obligation performs all reasonable
measures to prevent the impediment or the consequences of the impediment, but the
impediment and its consequences are still insurmountable or avoidable. The courts
of various countries generally believe that when the original performance method
of the parties to the contract is affected, if there are other performance methods to
choose from, they usually cannot meet the requirements of this element. For example,
a seller’s supplier failed to produce the goods due to the emergency shutdown of the
factory, and the seller can choose a new supplier to supply the goods within the
time allowed.19 This is not an impediment, so the seller cannot be exempted from its
liabilities.
In this case, on 23 July 1998, the buyer and the seller reached an agreement on
all returns. On 19 August 1998, the seller requested the buyer to return all the goods
within 20 days, and the buyer raised no objections. Although the seller entered a
one-month holiday from 26 July 1998, it did not constitute an impediment for the
buyer to return the goods as scheduled. The buyer returned the goods to the seller
on 26 September. The buyer’s delay in returning the goods caused the brooches

15 Schwenzer [8], pp. 1133–1136.

16 China International Economic and Trade Arbitration Commission [9], p. 181.
17 Li [10], p. 351.
18 CLOUT case No.331. Handelsgericht des Kantons Zürich, Switzerland, 10 February 1999.
19 CLOUT case No.140.Tribunal of International Commercial Arbitration at the Russian Federation

Chamber of Commerce and Industry, Arbitral award No. 155/1994.

110 H. Wang et al.

to be rusted irreparably. The seller’s one-month holiday cannot be regarded as an

impediment to the buyer’s delay in returning the goods. The buyer can reasonably
foresee this. And the buyer can complete the return within the time limit specified by
the seller. Therefore, the buyer should be responsible for the expansion of the losses.

References

1. Lookofsky J, Understanding the CISG: a compact guide to the 1980 United Nations convention
on contracts for the international sale of goods (5th Edition), Kluwer Law International B.V.
Publishers
2. Ferrari F (1995) Specific topics of the CISG in the light of judicial application and scholarly
writing. J Law Commer 15(1):1–126
3. Schlechtriem P (1992) Excerpt from uniform sales law: the experience with uniform sales laws
in the federal republic of Germany. Jurid Tidskr (Stock) 03:1–28
4. Honnold JO (2009) Uniform law for international sales under the 1980 United Nations
convention. Wolter Kluwer International
5. Zhang YQ (2009) Commentary on the United Nations convention on contracts for the
international sale of goods, 3rd edn. China Commerce and Trade Press
6. Bianca CM, Bonell MJ (1987) Commentary on the international sales law, the 1980 Vienna
sales convention. Milan Publishers, Giuffrè
7. Shiomi Y, Nakata K, Matsuoka H (2021) A concise international of United Nations convention
on contracts for the international sale of goods. People’s Court Press
8. Schwenzer I (2016) Schlechtriem & Schwenzer: commentary on the UN convention on the
international sale of goods, 4th edn. Oxford University Press
9. China International Economic and Trade Arbitration Commission (2021) The application of
the United Nations convention on contracts for the international sales of goods in Chinese
arbitration. China Law Press
10. Li W (2002) Commentary on the United Nations convention on contracts for the international
sale of goods. China Law Press

Han Wang Ph.D. student of Nankai University Law school, majoring in International Economic
Law and International Commercial Law. The tutor is the famous scholar Professor Haicong Zuo.
Participated in projects of the Supreme People’s Court, major projects of the National Social
Science Fund, etc.

Dr. Shu Zhang is a lecturer in commercial law at Deakin Law School, Deakin University
(Australia) and coached Deakin Law School’s Vis Moot team. Prior to joining Deakin Law
School, Dr. Zhang was a post-doctoral fellow in the Chinese International Business and Economic
Law Initiative, Law School, University of New South Wales (Australia). Her research interests
include international commercial law, dispute resolution and international arbitration, as well as
comparative contract law. She also completed internships at both the Australian Centre for Interna-
tional Commercial Arbitration (ACICA) and the Chinese International Economic and Trade Arbi-
tration Commission (CIETAC). She is also admitted to practice in New South Wales, Australia.
Dr. Zhang obtained her PhD in Law from University of New South Wales (Australia), and her
LLM, LLB and BA in Economics (Double Degree) from Peking University (China). She has
published various manuscripts with leading journals in this area, such as the Journal of Contract
Law, Vindobona Journal of International Commercial Law and Arbitration, China Quarterly.
12 Shenzhen Fengshen Industrial Development … 111

Dr. Peng Guo Lecturer in Law at RMIT University. At RMIT Dr Guo teaches Contract Law and
Commercial Law to LLB and JD students. He has held visiting positions at different universities,
including Warwick University, University of Amsterdam, and University of Osnabrück. He has
received scholarships awarded by renowned research institutions and international organisations,
including the Max Planck Institute for Comparative and International Private Law, the Interna-
tional Institute for the Unification of Private Law (UNIDROIT), the Swiss Institute of Compara-
tive Law, and the European Union. His research interests lie in international sale of goods, inter-
national commercial arbitration, comparative contract law, and law and technology. He actively
participates in Vis Moot and Alfred Deakin International Commercial Arbitration Moot.
Chapter 13
Nanjing Supplies Industrial Group
Company v Tian’an Insurance Co.,
Nanjing Branch

Bruno Zeller

Case Information
Case Name: Nanjing Supplies Industrial Group Company v. Tian’an Insurance Co.
Nanjing Branch
Seller: Nissho Iwai Corporation
Place of business: Japan (Note by the translator: this is not reported in the case, but
the Court referred to it as a Japanese company)
Buyer: Shanghai Nanjing Supplies Industrial Group Company
Place of business: China
Details of First Instance:
Court: Wuhan Maritime People’s Court
Date of Decision: 10 September 2002
Case No: (2000) Wu Hai Fa Shang Zi No. 91
Judges: Shaolin Xu (Presiding Judge), Xiangbin Xie (Acting Judge), Zumin Xu
(Acting Judge)
CISG Applied: No
Key CISG provisions interpreted: Articles 30 and 34
Abstract
The plaintiff, Nanjing Supplies Industrial Group Company (‘Nanjing Supplies’)
agreed to purchase logs (total value: USD1,435,000) from a Japanese company,
Nissho Iwai Corporation on 23 August 1999. The key contractual terms included:

B. Zeller (B)
University of Western Australia, Crawley, WA 6009, Australia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 113

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_13
114 B. Zeller

– delivery on the term of CFR (F.0) Zhangjiagang or Shanghai, China;

– payment due 88 days after the Bill of Lading date, irrevocable Letter of Credit.
On 29 August 1999, the Bill of Lading was issued by Setramar France SA, a
French Company, at Port-Gentil, Gabon.
On 21 September 1999, Hua Xia Bank Nanjing Branch issued an irrevocable
Letter of Credit under UCP500.
On 27 September 1999, Nanjing Supplies obtained the insurance policy from the
Defendant, Tian’an Insurance Co. Nanjing Branch (‘Tian’an’) for the carriage of
goods by sea.
On 11 October 1999, the ship ‘Sanaga’ sunk.
In the meanwhile, from 10 to 25 October, there were some amendments to the
letter of credit and to the letter of credit.
On 11 November 1999, Hua Xia Bank (the issuing bank) noticed the Plaintiff (the
Applicant) that the advising bank found the documents submitted non-compliant.
The Plaintiff refused to accept the inconsistencies identified, or any inconsistencies.
The advising bank then refused to pay under the Letter of Credit. The seller then
requested the carrier to issue a new bill of lading and handed it over to the Plaintiff.
These facts were not made known to the insurer.
On 29 November 1999, Plaintiff claimed full loss of the goods, which was rejected
by the Defendant. Plaintiff brought the claim before the Wuhan Maritime People’s
Court.
The defendant argued that the underlying sale of goods contracts and its perfor-
mance were severely faulted. Neither the title of goods was transferred nor the letter
of credit was properly issued and operated. Thus, the sale of goods contract had
terminated due to the breaches from both the seller and the buyer, and the risk of
the loss of goods remained with the seller. The Plaintiff breached the principle of
upmost good faith and failed to disclose substantial facts relevant to the goods to
the insurer in a timely manner. Further, the insurance benefit did not exist when the
losses occurred. On either of these two grounds, the insurer had no liability.
At the time of the trial, the amount due under the sale of goods contract was not
paid, nor any method of payment was arranged.
The court identified two legal issues in this case: first, whether the Plaintiff had
disclosed to the insurer all relevant facts; and second, whether the insurance benefit
existed at the time of the loss of goods.
The first issue was solved under the Chinese Maritime law, the Chinese Contract
law and the Chinese Insurance Law. The court rejected the Defendant’s argument
that the Plaintiff failed to disclose and breached the principle of upmost good faith
on factual grounds.
In dealing with the second issue, the court relied on the ICC Incoterms 1990,
UCP500, and the CISG. The insurance contract in dispute arose from the underlying
sale of goods and carriage of goods contracts, thus the law and custom applicable
to the international sale of goods should be considered. Both the ICC Incoterms and
the CISG recognised the separation of the ownership of the goods and the risks. In
particular, the CISG only regulated the passing of risks, not the transfer of title. The
13 Nanjing Supplies Industrial Group Company … 115

former should be determined by the sale of goods contracts, while the latter would
be determined on the basis of the status of the bill of lading in practice. The court
proceeded to hold that the risk remained with the seller in this particular scenario of
this case on the basis of the term CFR and the facts. As a result, the insurance benefit
did not exist.
[A more detailed version of the reasoning:
Under a sale of goods transaction, payment and delivery are the essential terms.
However, one party’s failure to perform any of the essential terms could not auto-
matically be seen as the termination of the contract. When the advising bank refuses
to pay the amount, the seller no longer bears the risk of the loss of goods, while
whether the risk passes to the buyer would be determined on the basis of the specific
circumstances.
Under the term CFR (Incoterms 1990), the ownership and risk separate when the
goods pass the ship’s rail at the port of departure. If the exchange of bill of lading
for payments is conducted properly, the ownership and risk will integrate; if not, the
risk is with the seller if the parties can agree on new terms of payment and delivery
before the loss of the goods, but would be with the buyer if the parties fail to reach
such an agreement. In any case, if the parties knew the goods were fully lost before
or when modifying the contract, then the subject of the sale of goods contract no
longer exists, and the delivery of goods would be impossible. Thus, the meaning of
passing the bill of lading as a passing of ownership extinguishes. In this situation,
the buyer does not bear the risk of the loss of goods.
In this case, the seller did not pass the relevant documents to the buyer on a timely
manner, which barred the proper exchange of the bill of lading and the payment.
Originally, Plaintiff as the buyer should bear the risk since the goods passed the
ship’s rail under the term CFR, but the risk would remain with the seller because
of the seller’s failure above. Further, because of the non-compliance of the letter
of credit, the payment was never completed, and any alternative means of payment
were never agreed to by the parties. Thus, the ownership and risk remained with the
seller. Although the bill of lading was passed to the Plaintiff, it could not be seen as
the transfer of ownership due to the total loss of the goods. Further, the completion
of the amendments to the bill of lading and the letter of credit was after the loss of
goods, so the changes would not affect the allocation of risks. The risk remained
with the seller. As a result, the insurance benefit did not exist.
Finally, the court rejected the Plaintiff’s claims on the basis of art 11 of the Chinese
Insurance Law, art 216 of the Chinese Maritime Law, art 58 of the Chinese Contract
Law, arts 30 and 34 of the CISG, as well as art 128 of the Chinese Civil Procedure
Law.
116 B. Zeller

Commentary to the Key Issues Related to the CISG

The conflict in principle is of a maritime matter and The Wuhan Maritime People’s
Court concentrated on the interpretation of the contractual terms which were
governed by the bill of lading. The CISG was only used in a comparative way in
conjunction with the UCP500 and the Incoterm CFR. It must be noted that Japan was
not a contracting state at the time of the loss, and, in addition, it must be assumed
that the conflict of laws rule would determine that Japanese law would govern the
contract, but it appears that the governing law was Chinese as the court took into
consideration art 11 of the Chinese Insurance Law, art 216 of the Chinese Maritime
Law, art 58 of the Chinese Contract Law. Therefore, pursuant to article 1 the CISG
is potentially applicable. However, in dispute was whether a contract was validly
executed which pursuant to article 4 is outside the sphere of the CISG and hence to
be governed by Chinese law.
In addition, the second question to be decided was whether risk and ownership
were passed to the buyer. However also in this case the CISG is not applicable as
pursuant to article 6 the CISG was excluded or modified by contractual terms. The
Incoterms, therefore, excluded the application of the relevant terms of the CISG
namely articles 30 and 34 as both are only a fallback provision and give primacy
to the terms within the contract. This case demonstrates that the Maritime Court
understood the effect of the CISG even though the CISG did not apply.
As a note of explanation, the CFR Incoterms are designed for cases where the
seller arranges all the relevant clearances and loads the goods. He is not required
to ensure the goods However, once the shipment is loaded into the vessel, the risk
of loss or damage falls to the buyer. Hence to repeat Article 30 and 34 reinforce
the obligations contained in the contract—in this case, the incoterms—in relation to
handing over documents and transferring the property in the goods.
In sum, the CISG was only used to note the relationship between the passing
of risk and the ownership of the goods and to reinforce the mandate of the CFR
regulations. In addition, as the question was one of validity of contract the CISG was
not applicable pursuant to article 4.

Professor Dr. Bruno Zeller B.Com (University of Melbourne), B.Ed (Melb). M.Int’l.Trade Law
(Deakin) PhD (Law, Melb.). He is a Professor in Transnational Commercial Law at The University
of Western Australia, Perth. His teaching interests include international trade law, trade finance,
conflict of laws, international arbitration and maritime law. His extensive research and publica-
tions contribute to the understanding of uniform international laws, which have been developed
under the auspices of the United Nations and other international bodies. Currently the third edition
of the Monograph on Damages Under the Convention on Contracts for the International Sale
of Goods has been published. In addition, he has also published on alternative dispute resolu-
tion mechanisms and free trade agreements in international journals. He has supervised numerous
domestic and international PhD students. Besides having taught short course at many interna-
tional Universities he is also an Adjunct Professor at Murdoch University, Perth, and an Adjunct
Professor the Sir Zelman Cowan Centre, Victoria University, Melbourne.
Chapter 14
Shanghai Weijie Electronic Devices Ltd v
Superpower Supply Inc

Jie Luo

Case Information
Case name: Shanghai Weijie Electronic Devices Ltd v Superpower Supply Inc
Seller: Shanghai Weijie Electronic Devices Ltd
Place of business: China
Buyer: Superpower Supply Inc
Place of business: United States
Details of First Instance:
Court: The First Intermediate People’s Court of Shanghai
Date of Decision: N/A
Case No: (2000) Hu Yi Zhong Jing Chu Zi No 727
Judges: N/A.
CISG applied: Not clear
Key CISG provisions interpreted and applied: Article 1(1)
Abstract
Claimant Shanghai Weijie Electronic Equipment Co., Ltd, the plaintiff, sued the
defendant, Superpower Supply Inc, on the grounds that the place where the contract
was performed was within the jurisdiction of our court. After the case was filed
and accepted on 28 November 2000, our court formed a collegial panel according
to law and held three public hearings on 29 August 2002, 15 January 2003 and
25 April 2003. The plaintiff’s entrusted agent attended three court hearings; the

J. Luo (B)
Zhongnan University of Economics and Law, Wuhan, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 117

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_14
118 J. Luo

defendant’s entrusted agent attended the first and third court hearings. The trial has
been concluded.
According to the original report, from 4 January 2000 to 15 August 2000, the
defendant ordered various computer casings and other goods from the plaintiff,
agreed that the transaction terms were FOB, and the payment method was T/T 90 days
after shipment. Prior to this, on 10 July 1999, the defendant’s representatives, Wu
Jiansheng and Wang Yanhui, signed and confirmed the unit price of various goods
on the list of OEM prices of various models and the list of panel components. Goods
with a total value of US$1,875,718.54 were issued by the plaintiff according to the
defendant’s purchase order, and the defendant had paid $516,460.55 to the plaintiff,
but still owed $1,359,257.99 to the plaintiff, which is in violation of the agreement.
Therefore, we requested the court to rule that the defendant must pay the plaintiff
$1,359,257 for the goods and liquidated damages for late payment calculated at
2.1/10,000 per day from 18 November 2000.
The defendant argued that Wu Jiansheng and Wang Yanhui were representatives
of Xinhong Electronics Co., Ltd working in the plaintiff’s office, not the defendant’s
representatives; there is no sales contract relationship between the original plaintiff
and the defendant, and the defendant only received part of the goods; the price on the
purchase order provided by the plaintiff is zero, and the paid amount is paid by the
defendant on behalf of the customer, and the defendant has no contractual obligation
to pay the plaintiff for the goods.
According to the parties’ pleadings, there are three aspects in dispute in this
case: first, the status of Wu Jiansheng, Wang Yanhui, etc.; second, the existence of a
sales contract between the plaintiff and the defendant; third, the amount of payment
involved in the actual performance of the contract.
The court is of the view that, based on the consistent behaviour of Wu Jiansheng
and others, the expression of the legal representative of the defendant, and other facts
in this case, the plaintiff has reason to believe that Wu Jiansheng has the right to sign
contracts on behalf of the defendant, and that the behaviours of other relevant staff
members of the defendant can perform certain contract behaviours on behalf of the
defendant.
Therefore, Wu Jiansheng’s behaviours of signing contracts and performing
contracts on behalf of the defendant are legally binding on the defendant. After
the plaintiff provided the goods, the value of the goods was specified in accordance
with the valuation method determined by the parties and the relevant invoice. The
defendant failed to pay for the goods in accordance with the agreed payment method
and time, which is obviously a breach of contract, and he shall bear the corresponding
liability for breach of contract according to law.
14 Shanghai Weijie Electronic Devices Ltd v Superpower Supply Inc 119

Commentary to the Key Issues Related to the CISG

Issues

Issue 1: The applicability of the CISG in China

Issue 2: The conclusion of the contract

Comments
Issue 1: The applicability of the CISG in China
I. Introduction
The United Nations Convention on Contracts for the International Sale of Goods
(CISG), as the “lingua franca” of international trade, has important practical value
for coordinating and unifying international trade in goods. Especially for China, the
significance of CISG is self-evident. However, the confusion of applicability and the
approaches of application in China have always troubled the adjudication regarding
CISG, due to the absence of a unified sequence. Compounding this, since the General
Principles of Civil Law (1986) (GPCL) and Contract Law (1999) (CL1999)1 could
also serve a role in adjudication, there exists the inextricable overlap between the
three instruments.
The abovementioned conflicts and confusions can be illustrated. In casu, as the
contract between the US buyer and the PRC seller did not include a choice of law
clause, the Shanghai No 1 Intermediate People’s Court adopted a four-step approach
in deciding the applicable law issue. First, using the closest connection test, it deter-
mined that the law of the PRC applied. Second, it also found the CISG applicable,
citing Article 1(1)(a) of the CISG. Third, relying upon Article 142 of the GPCL,
the Court then held that where an inconsistency existed between the CISG and PRC
law, the former should prevail. Fourth, the Court found that “there is no difference”
between the CL1999 and the CISG on (1) the principle of good faith, (2) seller’s
obligation to deliver conforming goods, (3) buyer’s obligation to pay the price and
(4) damages resulted from buyer’s breach of contract. Thus, the Court concluded that
the case should be decided according to the CL1999.
The aforementioned four-step approach also was shared in Shanghai Wang Ruix-
iang Fashion Co. Ltd v US Trend Co. Ltd, Shanghai Silk (Group) Co. Ltd. Seemingly
explicit as it is, there still exists ample room for every stage to need clarifying. For
example, how to recognise the connection between the case at trial and the potential
applicable rules? and what is the relationship between CISG, GPCL? Therefore, it
is of paramount importance to fully explore the application of CISG in China and its
cooperation and confliction with other applicable conventions.

1 As China promulgated General Provisions of the Civil Law in 2017, and in 2021 the Civil Code
of China also came to effect, the General Provisions of the Civil Law (1986) is no longer applied.
However, at the time of the case discussed here, it was still the legal basis and it is still worthy to
resolve the uncertainty of the application.
120 J. Luo

II. Background
The following provides a modus for the court in China when hearing cases that may
require the application of CISG.
A. Direct application of CISG
Article 1, paragraph 1(a) of CISG is generally regarded as a “direct (autonomous)
application clause”, which means that when certain conditions are met, the court of a
contracting state can directly apply CISG without the express consent of the parties
regardless of the regulation of private international law.2
Many cases in China adopt this approach to adjudicate. For example, in Zhe jiang
Jin Mao Trade Co. Ltd v Yearly Trading Co. Ltd, the court held that the place of
business of the parties were located in China and Singapore, both of which are CISG
Contracting States, and the parties did not agree to exclude the automatic application
of the Convention, so the sales contract between the parties should automatically
apply the provisions of CISG which would take precedence over domestic law.3
B. Indirect application of CISG through Article 142(2) of GPCL
In addition to the direct application of CISG, under the current legal system of
China, courts may also invoke Article 142(2) of GPCL to decide the application
order of domestic law and international treaties, and then apply CISG in foreign-
related commercial cases. For instance, in Servi Trade v Jiande City Dawei Plastic
Products Co., Ltd,4 the court ruled that, according to the second paragraph of Article
142 of the GPCL, China and the United States are both members of CISG, so the
provisions of CISG shall be applied first.
III. Indirect exclusion of CISG through the rules of private international law
When the conditions for direct application of the CISG are met, there are still courts
that rely on the rules of private international law and do not directly apply the CISG.
For example, in the Korean Zhenglong Trading Co., Ltd v Dalian Hongfeng House-
hold Products Co., Ltd,5 the court held that the parties did not choose the applicable
law, and according to the relevant judicial interpretation, the Chinese law which
is most closely related to the contract should be applied in this case, so CISG was
excluded. Furthermore, in the Penglai Foreign Trade Group Co., Ltd v Universal Co.,
Ltd,6 the court held that China is the country with the closest connection with this
case, and this case was governed by Chinese law according to Article 145, paragraph
2, of the GPCL.

2 Honnold [1], p. 35; Schlechtriem [2], p. 24; Schwenzer [3], p. 267.

3 Zhe jiang Jin Mao trade Co. Ltd. v. Yearly Trading Co. Ltd., No.74 Civil Judgment of People’s
Court of Keqiao District (2013).
4 Servi Trade v. Jiande city Dawei plastic products co., ltd., Civil Judgment No.41 of Zhejiang

Hangzhou Intermediate People’s Court (2014).

5 Korean Zhenglong Trading Co., Ltd.v. Dalian Hongfeng Household Products Co., Ltd, Civil

Judgment No.120 of Liaoning Higher People’s Court (2009).

6 Penglai Foreign Trade Group Co., Ltd. v. Universal Co., Ltd, Civil Judgment No.88 of Shandong

Higher People’s Court (2002).

14 Shanghai Weijie Electronic Devices Ltd v Superpower Supply Inc 121

IV. Indirect exclusion of CISG through Article 142 (2) of GPCL

Article 142(2) rules that “if any international treaty concluded or acceded to by
the People’s Republic of China contains provisions differing from those in the civil
laws of the People’s Republic of China, the provisions of the international treaty
shall apply, unless the provisions are ones on which the People’s Republic of China
has announced reservations”. In judicial practice, some courts, on the basis of this
clause, think that CISG is applicable only when it is inconsistent with domestic civil
laws. These courts then exclude the application of CISG, which is an erroneous
interpretation and application of CISG.
III. The correct application in theory
According to the general theory in academic circles of China, general international
commercial treaties can be directly applied. The reasons for this are: (1) international
commercial treaties should be directly applied when conforming to the applicable
CISG, which should form part of the domestic law in a broad sense, and CISG is
the multilateral code of conduct of the contracting state in dealing with commercial
disputes. Regardless of whether the domestic law and CISG are the same or not, they
should not be applied when the basis of Article 142 of GPCL prescribing the precon-
dition that disparities exist7 ; (2) in the direct application of treaties, it should be made
clear that all commercial treaties should be applied preferentially and uniformly, and
their application is a substitute for the counterpart of domestic laws8 ; (3) according
to China’s current laws and judicial interpretations, CISG can be directly applied
in China without the guidance of conflicting rules in domestic laws9 ; (4) according
to Article 142, paragraph 2, of GPCL and similar provisions in other laws, interna-
tional treaties should take precedence over domestic laws and be applied10 ; and (5)
if Article 1, Paragraph 1, of CISG is met and the application is not excluded by the
parties, the court shall directly apply it.11
IV. The remark on application in casu
Obviously, in casu, the four-step approach, from a holistic perspective, is largely in
line with the correct application; however, the most controversial stage will be the
last step. The perception that there is no difference between these two regimes, in
turn, creates as a significant barrier to the application and uniform interpretation of
the CISG in the PRC.12 However, the conclusion still cannot be easily found. For
example, Article 12 of the CL1999 does not resemble any particular provision of the
CISG. It recommends that contracts contain at least the following in keeping with
common practice: (1) the titles or names and domiciles of the parties; (2) the subject
matter; (3) quantity; (4) quality; (5) price or remuneration; (6) time limit, place and

7 Chen & Wu [4], pp. 113–114.

8 Zuo [5], p. 6.
9 Liu [6], pp. 85–86.
10 Li [7], p. 111.
11 Wang [8], p. 153.
12 Yang [9], para. 2.62.
122 J. Luo

method of performance; (7) liability for breach of contract; and (8) methods for
resolving disputes, all of which are not directly reflected in CISG.13 Aside from that,
there still exists glaring differences when comparing the other provisions.14 Further-
more, CISG, as the international convention, established preconditioned successful
reconciliation among states and various commercial customs to express and enact
the common will of the contracting party, while CL1999 functions as the dedicated
instrument under the context of Chinese society and its legal system. Consequently,
since the two independent instruments dwell in different legal forums, play different
roles and express differences, it is unreasonable to consider them as the same thing.
Issue 2: The conclusion of the contract
I. Introduction
Another dispute, in this case, surrounds the determination of the conclusion of
the contract. In accordance with the CISG, the establishment of a valid contract
commences with an offer and is completed with the acceptance. Acceptance occurs
as a result of a declaratory act or equivalent conduct.15 With regards to the former,
the statement of acceptance must express the offeree’s assent to the offer, that is, a
clear intention to be bound by the contract and its terms.16
An acceptance does not require any specific wording, form, or language; nor is
it necessary to use the term ‘acceptance’. Acceptance may, in principle, be indi-
cated using any method of communication. The acceptor is not obliged to use the
same means as the offeror; Article 18(1) of CISG also permits acceptance by ‘other
conduct’, which indicates that it is not necessary for the party to express the accep-
tance explicitly. Therefore, with the practical performance of the substance of the
contract, there is no reason to deny the fact that the acceptance has been made.
Whether certain conduct of the offeree indicates assent to an offer could be deter-
mined in accordance with Article 8, pursuant to the precedent. Examples of such
declaratory conduct are the dispatch of the goods,17 collection of the goods being
arranged by the buyer,18 delivery of the goods by the seller19 or the buyer taking
delivery of the goods.20
II. The conclusion of the contract in casu
In the case at hand, the letter from the legal representative of the defendant on 3
August 1998, reflected the fact that the defendant had collected the goods provided
by the plaintiff and owed the plaintiff payment for the goods. The receipt of invoices

13 Ibid, para. 3.17.

14 Ibid, paras. 3.22–3.27.
15 Schwenzer [10], p. 703.
16 Ibid, p. 704.
17 Oberster Gerichtshof, 31 August 2005–7 Ob 175/05v, CISG-online 1093.
18 OLG Schleswig, 29 October 2002, CISG-online 717.
19 OLG Dresden, 10 November 2006, CISG-online 1625.
20 Barbara Berry, S A de C V v Ken M Spooner Farms, Inc, WD Wash, 13 April 2006, CISG-online

1354.
14 Shanghai Weijie Electronic Devices Ltd v Superpower Supply Inc 123

in the invoice handover and in the receipt book and the fact that the defendant paid
over $500.000 to the plaintiff can also prove that both parties had a sales contract
relationship before 2000. Among the three undated letters from the legal represen-
tative of the defendant, it can be inferred from the content that all three letters were
written around the beginning of 2000, which is reflected by the fact that the defen-
dant asked the plaintiff to provide the goods within 2000. Therefore, Wu Jiansheng
signed these purchase orders to represent the will of the defendant. Combined with
the purchase orders, the unit price confirmation form, and the fact that Cai Xue
signed invoice number 000097, it is clear that there was a disputed sales contract
relationship between the plaintiff and the defendant since 17 February 2000.

References

1. Honnold JO (1982) Uniform law for international sales under the 1980 United Nations
convention. Deventer/Netherlands, Kluwer Law and Taxation Publishers
2. Schlechtriem P (1986) Uniform sales law-The UN convention on contracts for the International
sales of goods. Manz, Vienna
3. Schwenzer I (2016) Commentary on the UN convention on the international sale of goods
(CISG). Oxford University Press
4. Chen ZD, Wu JH (2004) On the application of the united nations convention on contracts for
the international sale of goods in China—also on Article 142 of general principles of civil law
of China. Law Sci 2(10):107–118
5. Zuo, H. C. (2007). On The Priority Application of Unified Substantive Law in International
Commercial Cases. Newspaper of People’s Court, 6
6. Liu Y (2009) On The direct application of the United Nations convention on contracts for the
international sale of goods in Chinese courts. Law Rev 27(5):83–88
7. Li W (2017) On the application of international civil and commercial treaties-from the
perspective of the relationship between international civil and commercial treaties and private
international law. The Jurist 31(4):107–115+178
8. Wang Y (2014) On the deficiencies and promotion of the application of the United Nations
convention on contracts for the international sale of goods by Chinese Courts. Gansu Soc Sci
35(2):153–156
9. Yang F (2011) Barriers to the application of the United Nations convention on contracts for the
international sale of goods (1980) in The People’s Republic of China. Queen Mary University
of London, Centre for Commercial Law Studies
10. Schwenzer I (2016) Schlechtriem & Schwenzer: commentary on the UN convention on the
international sale of goods, 4th edn. Oxford University Press

Jie Luo is an associate professor of Zhongnan University of Economics and Law. She obtained
a MA in Law from University of East Anglia in 2004, a Ph.D in International Law from Wuhan
University in 2008 and a Ph.D in Private Law from University of Paris Sud in 2010. Her main
research interests lie in international trade law. She is the principal investigator for several research
projects, and she has published the monograph “the Study of Uniform Interpretation of CISG”.
Chapter 15
Swiss Mirimet Company v Henan Native
Products Import and Export Corporation

Mengsha Yang

Case Information
Case name: Swiss Mirimet Company v Henan Native Products Import and Export
Corporation
Seller: Henan Native Products Import and Export Corporation
Place of business: China
Buyer: Mirimet S A of Switzerland
Place of business: Switzerland
Details of First Instance:
Court: Zhengzhou Intermediate People’s Court, Henan
Case No: (1999) Zheng Jing Chu Zi No 386
Details of Appeal:
Court: Henan High People’s Court
Date of Decision: 17 July 2000
Case No: (2000) Yu Jing Er Zhong Zi No 256
Judges: Wenxuan Tong (Presiding Judge), Xiaodong Peng (Acting Judge), Gang
Feng (Acting Judge).
CISG applied: Yes
Key CISG provisions interpreted and applied: Articles 7, 74 and 78

M. Yang (B)
Tianjin University, Tianjin, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 125

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_15
126 M. Yang

Abstract
On 23 October 1992, Native Products Import and Export Corporation, as the seller,
and Mirimet Company, as the buyer, signed two transaction confirmations: Contract
No 007 and Contract No 008. Contract No 07 mainly stipulates that: the goods sold
by both parties are dried sweet potatoes of China, with the quantity of 18,000 metric
tons, with 5% increase or decrease to be selected by the seller; the unit price is
US$130 per metric ton, and the shipment date is December 1992. Contract No 08
stipulates that the supply quantity of dried sweet potato is 10,000 metric tons, the unit
price is US$129.50 per metric ton, and the shipment period is from March to April
1993; payment terms are that the buyer must open the irrevocable letter of credit
at sight to the seller before 5 February 1993, and other contract terms are the same
as those of Contract No 007. On the same day, both parties signed a supplementary
agreement to Contract No 007, reducing the price stipulated in the original contract
from US$130 per metric ton to US$128. On 26 November of the same year, Mirimet
Company opened a letter of credit for Contract No 007. On 9 February 1993, Mirimet
Company informed Native Products Import and Export Company that the chartered
Ayane will arrive in Lianyungang from 15 to 25 February 1993 for shipment of dried
sweet potatoes, but the ship can only carry 15,000 metric tons of goods. The actual
shipment of dried sweet potatoes after the port’s turn is 13,580 metric tons. In order
to fulfill Contract No 008, Native Products Import and Export Corporation prepared
10,446.618 metric tons of dried sweet potatoes to be stored in the warehouse of
Lianyungang Ocean Shipping Pre-hospital Storage and Transportation Company,
waiting for Mirimet Company to pick up the goods. However, Mirimet Company
has neither issued a letter of credit nor dispatched a ship to receive the goods. On
10 June 1993, the Native Products Import and Export Corporation sold 4,420 metric
tons of surplus goods under Contract No 007 to Wheaton Company of the United
Kingdom at a price of US$82 per metric ton, and received the payment on 3 July
1993. On 10 May 1993, Native Products Import and Export Corporation sold 10,000
metric tons of goods under Contract No 008 to Molina Company of Italy at a price
of US$95 per ton, and received the payment in June of the same year. The Native
Products Import and Export Company filed a lawsuit with the court, demanding that
Mirimet Company compensate for the price difference, storage, interest, loss and
other losses of US$800,000 caused by breach of contract.
The court of first instance applied the relevant provisions of the Convention and
held that the Native Products Import and Export Corporation had fulfilled its obliga-
tions as stipulated in the Contract No 007 and No 008 by fully storing the goods to
be delivered at the place of delivery. In the performance of Contract No 007, Mirimet
Company issued a letter of credit according to the contract, but the ships dispatched
by Mirimet Company failed to fully fulfill its contractual obligations due to insuffi-
cient tonnage. For Contract No 008, Mirimet Company cannot prove that it reached
an understanding with Native Products Import and Export Corporation on the perfor-
mance of this contract, and should bear the liability for breach of contract for failure
to perform Contract No 008. After the breach of contract by Mirimet Company, the
Native Products Import and Export Company resold the goods in order to prevent
15 Swiss Mirimet Company v Henan Native … 127

the loss from expanding, which was in line with the provisions of the Convention.
Therefore, the court of first instance ruled that Mirimet Company would refund the
difference between the contract price and the resale price of Native Products Import
and Export Company and the interest loss.
Mirimet Company refused to accept the judgment and appealed. The Henan
Higher People’s Court held that the Contract No 007 and Contract No 008 signed
by both parties and the supplementary agreement were legal and valid. For Contract
No 007, Mirimet Company clearly stated in the letter of 8 February 1993 that the
surplus goods that cannot be shipped by Ayane Ship will be shipped by another ship
according to the requirements of Native Products Import and Export Corporation, but
Native Products Import and Export Corporation did not raise any objection to this in
its reply the next day, so it can be concluded that both parties have reached an agree-
ment on the performance of the surplus goods. Because the Native Products Import
and Export Company did not request to send a ship to Mirimet Company, the request
of the Native Products Import and Export Company was to ask Mirimet Company to
assume the liability for breach of contract of the remaining goods. For Contract No
008, Miriam Company claims that both parties have reached a settlement agreement
and actually performed it, but the evidence submitted by Mirimet Company can only
prove that Mirimet Company paid Sanyi Company US$10,000 in compensation, but
it is not clear whether the US$10,000 in compensation is for Contract No 007 or
Contract No 008, nor can it prove that US$10,000 is the total compensation agreed
by both parties. Therefore, it was correct for the first trial to order Mirimet Company
to assume the liability for breach of contract for failure to perform Contract No 008,
but the second trial held that it was improper for Mirimet Company to assume the
interest loss. Finally, Henan Higher People’s Court announced that it would revoke
the judgment of the court of first instance, and only supported the loss of the differ-
ence between the contract price and resale price of 10,000 metric tons of goods not
mentioned under Contract No 008.

Commentary to the Key Issues Related to CISG

Issue

Issue 1: Calculation standard of interest damages under the framework of CISG

Comments
Issue 1: Calculation standard of interest damages under the framework of CISG
I. Introduction
The core dispute, in this case, is the calculation of interest in damages. In Mirimet’s
case, the court of first instance not only supported the interest on the difference
between the contract price and the resale price but also supported the interest on the
slow-moving loss of goods caused by the buyer’s breach of contract. The court of
128 M. Yang

the second instance did not support the application for interest. The reason why the
courts of first instance and second instance made completely different judgments on
interest is that judges have different understandings and applications of Article 78
and other relevant provisions of CISG.
II. Interest damage compensation under CISG framework
Article 78 of CISG stipulates the creditor’s right to receive interest if the debtor
fails to pay the price or fails to fulfill its obligation to pay the amount within the
time stipulated in the contract or within the time stipulated in the Convention.1
However, the calculation method of interest, such as the principal of interest, the
interest rate, the starting and ending time of interest and other factors, is not clearly
stipulated in Article 78.2 When faced with the loopholes in the Convention, the
referee needs to take a “two-step” approach to solve the problem: the first step is
to judge whether the problem falls within the scope of the Convention,3 that is, it
belongs to the “internal gap” of the Convention; secondly, under the condition of
making a positive judgment,4 the referee needs to close this loophole according to
the obligation of uniform law interpretation in Article 7 of CISG.5 Specifically, it
should be interpreted uniformly according to the general principles on which the
Convention is based, and then seek the provisions of private international law to
solve it when the conclusion of unified interpretation cannot be reached. According
to this legal principle,6 first, it is necessary to judge whether the interest calculation
falls within the scope of adjustment of the Convention. Secondly, the interpretation of
interest claim should be determined according to the principle of total damages and
predictability in Article 74. Secondly, the interpretation of interest claim should be
determined according to the principle of total damages and predictability in Article
74.
Although the Convention itself does not explicitly list the scope of its general
legal principles, the case law of the Convention has shown that the principle of total
damages is the basic principle of the Convention.7 According to Article 74 of CISG,
the principle of total damages means that the amount of damages payable by one
party for breach of contract should be equal to the amount of losses suffered by
the other party due to the breach of contract, including profits. The purpose of the
principle of full compensation for damages is to make the injured party return to
its economic position when the contract is executed reasonably (compensation and
protection of expected benefits).8 Or, as an alternative, compensation shall be given

1 https://www.cisg-online.ch last visited on 10/11/2020.

2 Liu and Wei [1].
3 Andersen [2].
4 Ferrari [3].
5 Schlechtriem [4], p. 65.
6 Bridge [5], p. 73.
7 UNCITRALDigest of Case Law on the United Nations Convention on Contracts for the

International Sale of Goods, 2016 edition, case 166 and 348.

8 Yu [6].
15 Swiss Mirimet Company v Henan Native … 129

when the reasonable expenses incurred by the injured party during the performance
of the contract become meaningless due to breach of contract. Therefore, according
to the principle of total damages,9 interest is within the scope of compensation for
CISG damages.
III. Development of CISG case law on interest calculation standards
The focus of the dispute, in this case, is the period of interest compensation. With
regard to the determination of the interest period, a court pointed out that, since the
Convention does not cover the issue of whether the amount is due or not, the issue
is determined by the applicable domestic law.10 However, there are also rulings that
domestic laws should not be fully applied. For example, the right to receive interest
in Article 78 of this Convention does not depend on whether or not a formal notice is
given to the debtor. Therefore,11 the debt starts to bear interest as soon as it defaults.
A court claimed that interest was calculated from the date when damages were
due and payable.12 But both an arbitral tribunal and a court claimed that interest
will not begin until the creditor has given the debtor in default a formal notice
requesting payment.,13,14 Nor does the right to receive interest in Article 78 depend
on whether the creditor proves that it has suffered a loss. Therefore, the interest can
be claimed separately, without prejudice to the claim for damages caused by arrears
of payment.15
In international judicial practice,16 there have been a large number of cases in
which Article 7.4.9 of PICC was used to close the loopholes in Article 78 of CISG.
For example, in ICC Decision No 8769,17 the French company and the Austrian
company agreed in the contract to apply the CISG and French law. After the contract
dispute entered the arbitration procedure, the arbitration tribunal pointed out that the
CISG did not provide for the interest rate, so it decided to apply the interest rate
it thought appropriate. The sole arbitrator quoted paragraph 2 of Article 7.4.9 of
PICC to support his practice but did not give more explanation. In arbitration Case
No 100/2002 of the International Commercial Arbitration Institute of the Russian
Federation Chamber of Commerce and Industry,18 Russia’s buyers filed arbitration
for India’s sellers’ failure to fulfill their transportation obligations and demanded
damages including interest. The applicable law, in this case, is CISG. Since the CISG

9 Bai [7].
10 UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the
International Sale of Goods, 2016 edition, case 1038.
11 https://www.cisg.law.pace.edu last visited on 10/11/2020.
12 UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the

International Sale of Goods, 2016 edition, case 328.

13 https://www.unilex.info, last visited on 10/11/2020.
14 https://www.cisg-online.ch, last visited on 10/11/2020.
15 https://www.cisg.law.pace.edu, last visited on 10/11/2020.
16 Zuo and Yang [8].
17 http://www.unilex.info/case.cfm?id=397, last visited on 10/11/2020.
18 http://www.unilex.info/case.cfm?id=1079, last visited on 10/11/2020.
130 M. Yang

does not provide for the interest rate, the arbitration tribunal follows the following
logic when determining the interest rate: firstly, the provisions of Russian domestic
law apply: the interest rate shall be the interest rate of the bank where the creditor
is located when performing the debt. As there is no interest rate on Indian currency
in the place where the creditor is located (Russia), the arbitral tribunal then applied
the provisions of Article 7.4.9, paragraph 2 of PICC, and finally adopted the relevant
interest rate in India. In the above two cases, the arbitral tribunal finally supplemented
the interest rate problem not stipulated in the CISG with the help of the relevant
provisions of PICC but did not explicitly explain whether PICC could be applied
to answer the interest rate question.19 The interest rate determination method in
Article 7.4.9 of the General Principles of International Commercial Contracts is
more in line with the basic principle of total damages in CISG and the development
needs of international trade practice. The prescribed interest rate shall be the average
short-term loan interest rate of the paying bank for the currency usually paid by the
borrower. If there is no such interest rate, it is the interest rate of the country where
the currency is issued. When there is no such interest rate in the above two places,
the interest rate stipulated by the laws of the currency-issuing country shall be paid.
Article 7.4.9 also stipulates that the payment period of interest for monetary default
is the interest from the maturity date of the debt to the payment date, regardless of
whether the non-payment can be exempted from liability or not.20 For example, in
Case No 11739 of the International Court of Arbitration of the International Chamber
of Commerce, the arbitral tribunal judged the nature of the contract, the interpretation
of the contract, the liability for breach of contract, the amount of damages, the interest
right, the applicable interest rate and the payment method according to PICC. This
reflects the development trend of international trade practice.21 It was also supported
by most drafters of CISG and confirmed in case law.22
As far as this case is concerned, the court of first instance took the quantity
stipulated in Contract No 008 as the standard, and it is in full compliance with
the provisions of CISG to judge Mirimet Company to bear the interest loss arising
from breach of contract under this contract. As for the period of interest, the court
ruled that the interest from the due date of this debt to the payment date is also
in compliance with the provisions of PICC, so the judgment result of Contract No
008 is in full compliance with the provisions of international law. For Contract No
007, the court of the second instance held that there was no liability for breach of
contract, so it rejected the interest claim under this contract. As to why the court of
second instance did not support the claim for interest loss of Contract No 008, the
author speculates that the court may have comprehensively considered the business

19 Yu [9], pp. 158–159.

20 http://www.unilex.info/principles/case/1687, last visited on 10/11/2020.
21 See e.g., Ministry of Defense and Support for the Armed Forces of the Islamic Republic of Iran

v. Cubic Defense System, Inc., ICC International Court of Arbitration, Award No 7365/FMS of 5
May 1997.
22 http://cisgw3.law.pace.edu/cases/940614g1.html, last visited on 10/11/2020.
15 Swiss Mirimet Company v Henan Native … 131

environment between China and the international community at that time, and the
judgment was made by the principle of mutual benefit.

References

1. Liu K, Wei YD (2011) On CISG’s “filling in the vacancy” rule. Chin Foreign Entrep 14:163–168
2. Andersen CB (2008) General principles of the CISG-generally impenetrable. Wildy,
Simmonds & Hill Publishing
3. Ferrari F (1994) Uniform interpretation of the 1980 Uniform Sales Law. Georgia J Int Comp
Law 24:217–228
4. Schlechtriem P (2006) Commentary on the United Nations convention on contracts for the
international sale of goods, 5th ed. (trans: Li HN). Peking University Press
5. Bridge M (2004) The international sale of goods law and practice, 2th edn. (trans: Lin YF). Law
Press
6. Yu WR (2005) On the basic principle of damages for breach of contract in the United Nations
convention on contracts for the international sale of goods. J Wuhan Instit Technol 7:85–87
7. Bai L (2014) A comparative study of judicial interpretation of sales contracts and interest reim-
bursement provisions in the United Nations convention on contracts for the international sale of
goods-from the perspective of trial of international sales contracts. Appl Law 3:105–109
8. Zuo HC, Yang MS (2016) On the function of the general principles of international commercial
contracts to explain and supplement the United Nations convention on contracts for the interna-
tional sale of goods—taking the damage compensation system as an example. Comp Law Res
1:149–161
9. Yu WR (2012) Research on the legal system of damages for breach of international commercial
contracts. J Wuhan Textile Univ 7:85–87

Dr. Mengsha Yang is a lecturer and master supervisor in Law School at Tianjin University, China.
Prior to that she got her graduated degree and doctoral degree in Nankai University. Her research
area is international trade law and international commercial law.
Chapter 16
Japanese Taiping Trading Co., Ltd v
Jiangsu Sainty International Group
Garment Import and Export Nantong
Co., Ltd

Han Wang, Shu Zhang, and Peng Guo

Case Information
Case name: Japanese Taiping Trading Co., Ltd v Jiangsu Sainty International Group
Garment Import and Export Nantong Co., Ltd
Seller: Japanese Taiping Trading Co., Ltd
Place of business: Japan
Buyer: Shanghai Yintuo Enterprise Development Co., Ltd
Agent: Jiangsu Sainty International Group Garment Import and Export Nantong Co.,
Ltd
Place of Business: China.
Details of First Instance:
Court: Nantong Intermediate People’s Court, Jiangsu.
Date of Decision: 29 September 2000.
Case No: 2000 Tong Zhong Jing Chu Zi No 134.
Judges: Wenquan Xu (Presiding Judge), Ji Zhang (Acting Judge), Yan Wang (Acting
Judge).

H. Wang (B)
Nankai University, Tianjin, China
e-mail: [email protected]
S. Zhang
Deakin University, Geelong, VIC 3220, Australia
e-mail: [email protected]
P. Guo
RMIT University, Melbourne, VIC 3000, Australia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 133

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_16
134 H. Wang et al.

CISG applied: Yes.

Key CISG provisions interpreted and applied: Article 30.
Abstract
On 18 August 1999, the buyer entrusted Jiangsu Sainty International Group Garment
Import and Export Nantong Co., Ltd (Sainty Company) as an agent to order four
excavators from the seller. The seller signed the purchase confirmation letter and
faxed it to the Sainty Company on 20 August 1999, but the seller did not receive a
purchase confirmation signed by Sainty Company. The Sainty Company applied to
Bank of China Nantong Branch for a letter of credit, which specifically stated that
the beneficiary’s certificate was required, and the beneficiary needed to mail a full set
of original documents by DHL express, including an original bill of lading, signed
commercial invoice and packing list to the applicant. At the end of August 1999,
the seller failed to fulfil the obligation of mailing documents to the Sainty Company
in accordance with the terms of the letter of credit and the purchase confirmation.
Instead, the seller handed over the original bill of lading to another company, and
the other company took delivery of the goods. The seller applied to the bank for a
letter of credit negotiation, and the bank refused to pay on the grounds that the Sainty
Company had not received a full set of materials from the seller. Besides, the Sainty
Company also rejected the seller’s request of payment. On 30 June 2000, the seller
sued the Sainty Company for the unpaid payment.
The court held that the international commercial agreement between the seller
and the Sainty Company had actually been established, which is based on the fact
that the Sainty Company had actually fulfilled the obligation to apply for a letter of
credit as stipulated in the purchase confirmation. The necessary condition for bank
payment is that the documents provided by the seller must be consistent with those
required by the letter of credit. The letter of credit stipulated that the beneficiary
should send a set of documents including the corresponding invoice and the original
bill of lading directly to the buyer by DHL express, and issue a mailing receipt to
the bank. However, the seller did not fulfil the obligation of mailing documents to
the buyer. Instead, the original bill of lading was handed over to another company,
and the other company took delivery of the goods. As the seller failed to fulfil the
obligation of mailing documents to the Sainty Company in accordance with the terms
of the letter of credit and the purchase confirmation letter, the negotiation of the letter
of credit was rejected. In view of the fact that the seller did not deliver the goods’
ownership certificate to the Sainty Company, and there were no objective facts that
the Sainty Company had received the goods, the court dismissed the seller’s claim.
16 Japanese Taiping Trading Co., Ltd v Jiangsu Sainty International … 135

Commentary to the Key Issue Related to the CISG

Issues

Issue 1: The applicability of the CISG

Issue 2: The seller’s basic obligations under Article 30 of the CISG

Comments

Issue 1: The applicability of the CISG

There is no explanation of the application of law in this judgment. The explanation
of whether the case meets the applicable conditions of the CISG was omitted, and the
specific provisions of the CISG were directly cited for this judgment, which lacked
sufficient rigour.
Article 1(1) stipulates the applicable conditions of the CISG, which are divided
into two types: direct application and indirect application. Direct application means
that if the parties’ places of business are located in different Contracting States of the
CISG, the CISG is directly applicable to the contract for the sale of goods between the
parties. The application of the CISG is related to the party’s place of business. Neither
the nationality of the parties nor the civil or commercial character of the parties or
the contract is to be taken into consideration in determining the application of the
CISG.1 Indirect application means that, although it does not meet the requirements
of the above-mentioned place of business, the law of a certain Contracting State of
the CISG is applied according to the rules of private international law, then the CISG
also applies to the contract. It should be apparent this provision extends the CISG’s
sphere of application which otherwise would have been too restrictive. Furthermore,
the CISG’s approach has another advantage: it coordinates the rules of the CISG with
those of private international law.2 However, when China submitted its approval to
participate in the CISG on 11 December 1986, it filed a reservation to Article 1(1)b
in accordance with Article 95 of the CISG. Therefore, when the rules of private
international law lead to the application of Chinese law, there is no issue with the
application of the CISG, and China’s domestic law should be directly applied.
This case is a dispute over an international sale of goods contract. The seller’s
place of business is in Japan, and the buyer’s place of business is in China, both
of which are Contracting States of the CISG now. But Japan had not yet joined the
CISG in 2000. When the facts of the case occurred, Japan was not a party to the CISG
(Japan joined the CISG in 2008). Therefore, CISG cannot be applied in accordance
with Article 1(1)a of the CISG. China has made a reservation to the provisions of
Article 1(1)b, so the CISG cannot be applied indirectly in this case. Besides, the
parties, in this case, did not make any agreement on the application of the CISG, and
the court can not apply the CISG in accordance with the principle of party autonomy.

1 Mazzotta [1], p. 13.

2 Ferrari [2], p. 83.
136 H. Wang et al.

Therefore, this case does not have the conditions for the application of the CISG,
and the CISG should not have been applied.
Issue 2: The seller’s basic obligations under Article 30 of the CISG
In this case, Article 30 of the CISG was used as one basis for the judgment. Article 30
of the CISG stipulates the obligations of the seller in principle. According to Article
30, the seller shall perform the obligation of delivering the goods, handing over all
the documents related to the goods, and transferring the property in the goods. These
obligations must be performed in accordance with the provisions of the contract
between the parties and the specific provisions of the CISG in the Seller’s Obligations
chapter. The obligation to hand over all documents related to the goods is specified in
Article 34. These documents generally include bills of lading, commercial invoices,
packing lists, terminal receipts, warehouse receipts, insurance policies, certificates
of origin, quality certificates, etc.3 International sales of goods are also called sales
of documents. It can be seen that various documents related to the goods under
the contract play a vital role in international trade. The seller must hand over these
documents at the time and place and in the form, required by the contract. This
is mainly for the buyer to smoothly pick up the goods after the goods reach the
destination, go through customs formalities, inspect the goods, and handle possible
claims and other matters. In the case of payment by letter of credit, the seller submits
the matching documents to get the payment. When paying by documents, the bank
implements the “strict compliance principle”, that is, the documents submitted by the
seller must be in full compliance with the requirements of the letter of credit before
the bank can make payment. If the documents do not match, the negotiating bank
has the right to refuse to pay. In this case, the seller failed to submit the documents
in accordance with the requirements of the contract, which caused the goods to be
taken away by the other company. Therefore, the seller was not entitled to obtain the
corresponding payment.
This case also involves the issue of letter of credit fraud. In order to obtain the
payment under the letter of credit, the seller provided the bank with the altered postal
receipt to prove that the original bill of lading was sent to the buyer by DHL. This
act is a fraud of the documents of the letter of credit. The specific method is that
the beneficiary uses forged or altered documents to make the documents conform
to the requirements of the letter of credit. The Supreme People’s Court of China
promulgated the “Regulations on Several Issues Concerning the Trial of Cases of
Letter of Credit Disputes” in 2005, which clearly pointed out several types of letter
of credit fraud. The first type is the beneficiary’s forged documents or submission
of documents with false records.4 In the case of letter of credit fraud, the bank can
refuse the payment, and the applicant can also apply to the court to suspend the bank

3Zhang [3], p. 217.

4See Article 8 of the “Provisions on Several Issues Concerning the Trial of Cases of Letter of Credit
Disputes” of the Supreme People’s Court of China.
16 Japanese Taiping Trading Co., Ltd v Jiangsu Sainty International … 137

payment, which is called the “letter of credit fraud exception”.5 Therefore, in view
of the seller’s letter of credit fraud, the court, in this case, did not support the seller’s
request for payment.

References

1. Mazzotta FG (2018) A practitioner’s guide to the CISG, 2nd edn. JurisNet, LLC
2. Ferrari F (2012) Contracts for the international sales of goods-applicability and application of
the 1980 United Nations sales convention. Martinus Nijhoff Publishers
3. Zhang YQ (2009) Commrntary on the United Nations convention on contracts for the
international sale of goods, 3rd edn. China Commerce and Trade Press
4. Buckley RP, Gao X (2002) The development of the fraud rule in letter of credit law: the journey
so far and the road ahead. Univ PA J Int Econ Law 33:663–693

Han Wang PhD student of Nankai University Law school, majoring in International Economic
Law and International Commercial Law. The tutor is the famous scholar Professor Haicong Zuo.
Participated in projects of the Supreme People’s Court, major projects of the National Social
Science Fund, etc.

Dr. Shu Zhang is a lecturer in commercial law at Deakin Law School, Deakin University
(Australia) and coached Deakin Law School’s Vis Moot team. Prior to joining Deakin Law
School, Dr. Zhang was a post-doctoral fellow in the Chinese International Business and Economic
Law Initiative, Law School, University of New South Wales (Australia). Her research interests
include international commercial law, dispute resolution and international arbitration, as well as
comparative contract law. She also completed internships at both the Australian Centre for Interna-
tional Commercial Arbitration (ACICA) and the Chinese International Economic and Trade Arbi-
tration Commission (CIETAC). She is also admitted to practice in New South Wales, Australia.
Dr. Zhang obtained her PhD in Law from University of New South Wales (Australia), and her
LLM, LLB and BA in Economics (Double Degree) from Peking University (China). She has
published various manuscripts with leading journals in this area, such as the Journal of Contract
Law, Vindobona Journal of International Commercial Law and Arbitration, China Quarterly.

Dr. Peng Guo Lecturer in Law at RMIT University. At RMIT Dr Guo teaches Contract Law and
Commercial Law to LLB and JD students. He has held visiting positions at different universities,
including Warwick University, University of Amsterdam, and University of Osnabrück. He has
received scholarships awarded by renowned research institutions and international organisations,
including the Max Planck Institute for Comparative and International Private Law, the Interna-
tional Institute for the Unification of Private Law (UNIDROIT), the Swiss Institute of Compara-
tive Law, and the European Union. His research interests lie in international sale of goods, inter-
national commercial arbitration, comparative contract law, and law and technology. He actively
participates in Vis Moot and Alfred Deakin International Commercial Arbitration Moot.

5 Buckley and Gao [4], p. 663.

Chapter 17
Carl Hill v Cixi Old Furniture Trading
Co., Ltd

Han Wang, Peng Guo, and Shu Zhang

Case Information
Case name: Carl Hill v Cixi Old Furniture Trading Co., Ltd
Seller: Cixi Old Furniture Trading Co., Ltd
Place of business: China
Buyer: Carl Hill
Place of business: China
Details of First Instance:
Court: Cixi People’s Court, Zhejiang
Date of Decision: 18 July 2001
Case No: (2001) Ci Jing Chu Zi No 560
Judges: Yu Lv (Presiding Judge), Wenqiong Huang (Judge), Jianxiang Zou (Judge)
CISG applied: Yes
Key CISG provisions interpreted and applied: Article 32(2)

H. Wang (B)
Nankai University, Tianjin, China
e-mail: [email protected]
P. Guo
RMIT University, Melbourne, VIC 3000, Australia
e-mail: [email protected]
S. Zhang
Deakin University, Geelong, VIC 3220, Australia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 139

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_17
140 H. Wang et al.

Abstract
On 28 November 1999, the buyer, Carl Hill, and the seller, Cixi Old Furniture Trading
Co., Ltd, concluded a contract for purchase of old furniture, worth RMB¥40,000.
Afterwards, both parties agreed that the seller was responsible for the customs decla-
ration, export and consignment of the goods, and the buyer would bear the freight and
other expenses. The buyer also confirmed to the seller that the consignee address was
Illinois, and the port of arrival was Los Angeles or San Francisco. But the two parties
did not agree on whether the mode of transportation was international maritime cargo
transportation or international multimodal transportation. In view of the fact that the
seller had no right to export, he entrusted Ningbo Cixi Import and Export Company
to handle customs declaration, export and consignment matters on his behalf. For
this reason, Ningbo Cixi Import and Export Company entrusted CMA Company to
carry the shipment according to the seller’s instruction. After the cargo was loaded
on the ship on 16 March 2000, CMA Company issued the port-to-port bill of lading
(CNANB 5,803,634). The bill of lading states that the consignor was Ningbo Cixi
Import and Export Company, and the consignee address was Illinois, freight collect,
the port of loading was Ningbo, the port of discharge was Los Angeles. The final
place of delivery column on the bill of lading was blank. CMA Company deliv-
ered the goods to the Port of Los Angeles, causing economic losses to the buyer.
Therefore, the buyer sued the court for compensation from the seller.
The court held that the seller must enter into necessary contracts with others and
transport the goods to the place designated by the buyer in accordance with the usual
transportation conditions and use appropriate means of transportation to achieve the
buyer’s contractual purpose. The seller’s statement that Los Angeles was the place of
delivery designated by the buyer was not accepted by the court. The detailed location
of Illinois should be considered as the place of delivery designated by the buyer.
Ningbo Cixi Import and Export Company was an agent entrusted by the seller to
handle the customs declaration and shipment matters. The consequences of its actions
on the buyer should be borne by the seller. The court stated that unloading the cargo
in Los Angeles was obviously not a performance method that was conducive to the
buyer’s fulfilment of the contract purpose. The seller’s improper performance of the
delivery obligation should be considered as a breach of contract. The corresponding
economic losses caused to the buyer shall be compensated by the seller. Additionally,
the consignee designated by the buyer received the bill of lading on 30 March 2000
and the goods left Ningbo Port on the next day. The consignee picked up the goods
on 16 May 2000. In consideration of the usual time of transportation from Ningbo
Port to Los Angeles Port, the postal time of the bill of lading and receipt, and the
reasonable time for the consignee to pick up the goods at the place of arrival, it
should be deemed that the consignee designated by the buyer did not pick up the
goods within a reasonable time and did not take appropriate measures to prevent
losses. Therefore, the buyer shall not demand compensation from the seller for the
expansion of the loss.
17 Carl Hill v Cixi Old Furniture Trading Co., Ltd 141

Commentary to the Key Issue Related to the CISG

Issues

Issue 1: The applicability of the CISG

Issue 2: The seller’s obligation to transport the goods
Issue 3: The obligation to take reasonable measures to mitigate the loss

Comments

Issue 1: The applicability of the CISG

In this case, the court applied the CISG regarding the seller’s transportation obliga-
tions. But the contract, in this case, was not actually within the scope of application of
the CISG. In accordance with Article 1, the CISG applies to contracts for the sale of
goods between parties whose places of business are in different Contracting States.
The CISG adopts the standard of places of business to judge the internationality of
the parties. It has nothing to do with factors such as the nationality of the parties, the
place of contract conclusion or performance, whether the transportation of the goods
crosses national borders, or where the offers and acceptances are issued.1 The buyer,
in this case, is Carl Hill, who lives in Nankai District, Tianjin, although his nationality
is American. Article 10(b) stipulates that if a party does not have a place of business,
reference is to be made to their habitual residence. Therefore, the buyer’s place of
business is located in China. And the seller is Cixi Old Furniture Trading Co., Ltd,
whose place of business is located in the Development Zone of Tianyuan Town, Cixi
City, China. It can be seen that the place of business of both the buyer and the seller
is in China, which does not meet the requirements of CISG’s scope of application. In
addition, according to the principle of party autonomy, the parties can also choose to
apply the CISG. However, the judgment of this case did not indicate that the parties
had agreed to apply the CISG in the contract or chose to apply the CISG during the
litigation process. Therefore, the application of the CISG, in this case, did not come
from the choice of the parties. The judge, in this case, explained the application of
law as “based on the fact that the contractual acts of both parties, in this case, took
place in China, and based on the principle of the closest connection, this case should
be governed by the Chinese law. If any international treaty concluded or acceded
to by the People’s Republic of China contains provisions differing from those in
the civil laws of the People’s Republic of China, the provisions of the international
treaty shall apply”. In this case, Chinese law is the governing law. The basis for the
application of the CISG is Article 142 of the “General Principles of Civil Law of the
People’s Republic of China”. The CISG is only applicable when there are provisions
different to Chinese law.

1 Zhang [1], p. 14.

142 H. Wang et al.

First of all, this approach does not comply with the rule of priority application of
the CISG as the uniform international commercial law.2 The application of the CISG
does not require the citation of private international law. As long as the applicable
conditions are met, it is “automatically” and “directly” applied.3 Secondly, according
to the previous analysis, this case does not meet the applicable conditions of the CISG
at all. Therefore, the application of the CISG regulations, in this case, was wrong.
This case should be decided in accordance with the Chinese law.
Issue 2: The seller’s obligation to transport the goods
Article 32(2) of the CISG stipulates that, if the seller is bound to arrange for carriage
of the goods, he must make such contracts as are necessary for carriage to the place
fixed by means of transportation appropriate in the circumstances and according to
the usual terms for such transportation. This provision applies to situations where the
seller is obliged to arrange transportation, provided that both parties have no special
agreements on transportation matters. In a case heard by the Swiss District Court,
the seller was obliged to arrange transportation. The buyer did not provide sufficient
evidence to prove that the two parties agreed that the goods need to be transported by
a specific means of transportation (truck). The court determined that the seller had
the right to choose an appropriate means of transportation in accordance with Article
32(2) of the CISG.4 Under the CIF or CFR delivery conditions, the seller must be
responsible for the transportation of the goods. However, under the FOB delivery
condition, the buyer arranges the transportation of the goods. If the two parties reach
an agreement that the buyer entrusts the seller to handle the transportation of the
goods and the buyer bears freight and other expenses, the seller shall be responsible
for arranging the transportation of the goods. The situation, in this case, is the same.
The parties agreed that the delivery condition was FOB, but the parties agreed that
the seller was responsible for the export declaration and transportation of the goods,
and the buyer bore all the costs. If this case meets the applicable requirements of
the CISG, according to Article 32(2) of the CISG, the seller should transport the
goods to the designated place under the usual transportation conditions and using
suitable means of transportation. Specifically, the seller should choose the usual
route without excessive trans-shipment or unloading; the seller should follow the
usual transportation conditions with the carrier, and there should be no excessively
unreasonable exemption clauses; the seller should deliver the goods to the place
designated by the buyer.5 In this case, the detailed location of the consignee, in
Illinois in the United States, should be considered as the place of delivery designated
by the buyer, but the seller delivered the goods to Los Angeles. The seller and his
agent should be aware that there is still a considerable distance between Los Angeles
and Illinois. The reasonable way of performance should be to choose the international

2 Andersen [2], pp. 25–26.

3 Ferrari [3], p. 60.
4 CLOUT case No.140. Bezirksgericht [District Court] der Saane, Switzerland. T 171/95. February

20, 1997.
5 Zhang [1], p. 210.
17 Carl Hill v Cixi Old Furniture Trading Co., Ltd 143

multimodal transportation method to transport the goods. The seller and his agent
chose the international maritime cargo transportation method in actual performance.
Only entrusting the carrier to unload the cargo in Los Angeles is obviously not a way
of performance that is conducive to the buyer’s fulfilment of the contract purpose.
The seller’s improper performance of the delivery obligation should be deemed to
constitute a breach of contract. Therefore, the seller shall compensate the buyer for
the corresponding economic losses.
Issue 3: The obligation to take reasonable measures to mitigate the loss
Article 77 of the CISG stipulates that the non-defaulting party should mitigate the
loss. This is in line with, not only the argument that the CISG seller is under a
general duty of good faith but also (more specifically) the rule that losses otherwise
recoverable under the Article 74 are limited by the mitigation principle in Article
77—a general principle which applies to buyers and sellers alike.6 The breach of
contract stipulated in this article includes the general breach and the fundamental
breach. Where one party breaches the contract, the other party is obliged to mitigate
the loss. “Reasonable measures” are measures that require the non-defaulting party
to take measures aimed at mitigating loss based on objective circumstances. If the
measures taken by the non-defaulting party are ineffective, and it is judged that there
are more effective measures to mitigate the loss based on the situation, it cannot
be determined that the non-defaulting party has taken reasonable measures at this
time. If the measures taken by the non-defaulting party only avoided the expansion
of the loss but the initial loss remains, the expansion of the loss should be deducted
from the compensation. The obligation to mitigate damages exists only in regard to
damages claims and not claims related to the performance of the contract. Limiting
this obligation to damages claims avoids adverse consequences for the injured party.7
In addition, the non-defaulting party may claim compensation from the breaching
party for the cost of taking reasonable measures to mitigate the loss.8 The obligation
to mitigate damages will only be considered by the court when the breaching party
raises it as a defence. The breaching party shall bear the burden of proving that the
non-defaulting party has not reasonably performed the obligation since it needs to
deduct the damages that cannot be reasonably avoided.
In this case, the buyer did not pick up the goods within a reasonable time. There-
fore, the buyer failed to take reasonable measures to prevent the expansion of losses
caused by the seller’s breach of contract (the failure to deliver the goods to the desig-
nated destination). If the case meets the applicable conditions of the CISG, the court
shall invoke Article 77 of the CISG to determine that the increased storage fee due
to the buyer’s failure to take timely delivery measures is an extended part of the loss.
The buyer cannot claim compensation from the seller for this part of the loss.

6 Lookofsky [4], p. 166.

7 Schlechtriem and Butler [5], p. 221.
8 UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the

International Sale of Goods (2016 Edition). p. 357.

144 H. Wang et al.

References

1. Zhang YQ (2009) Commentary on the United Nations convention on contracts for the
international sale of goods, 3rd edn. China Commerce and Trade Press
2. Andersen CB (2007) Defining uniformity in law. Uniform Law Rev 12:5–55
3. Ferrari F (2012) Contracts for the international sales of goods-applicability and application of
the 1980 United Nations sales convention. Martinus Nijhoff Publishers
4. Lookofsky J (2017) Understanding the CISG: a compact guide to the 1980 United Nations
convention on contracts for the international sale of goods, 5th edn. Kluwer Law International
B.V Publishers
5. Schlechtriem P, Butler P (2009) UN law on international sales-the UN convention on the
international sale of goods. Springer-Verlag

Han Wang PhD student of Nankai University Law school, majoring in International Economic
Law and International Commercial Law. The tutor is the famous scholar Professor Haicong Zuo.
Participated in projects of the Supreme People’s Court, major projects of the National Social
Science Fund, etc.

Dr. Peng Guo Lecturer in Law at RMIT University. At RMIT Dr Guo teaches Contract Law and
Commercial Law to LLB and JD students. He has held visiting positions at different universities,
including Warwick University, University of Amsterdam, and University of Osnabrück. He has
received scholarships awarded by renowned research institutions and international organisations,
including the Max Planck Institute for Comparative and International Private Law, the Interna-
tional Institute for the Unification of Private Law (UNIDROIT), the Swiss Institute of Compara-
tive Law, and the European Union. His research interests lie in international sale of goods, inter-
national commercial arbitration, comparative contract law, and law and technology. He actively
participates in Vis Moot and Alfred Deakin International Commercial Arbitration Moot.

Dr. Shu Zhang is a lecturer in commercial law at Deakin Law School, Deakin University
(Australia) and coached Deakin Law School’s Vis Moot team. Prior to joining Deakin Law
School, Dr. Zhang was a post-doctoral fellow in the Chinese International Business and Economic
Law Initiative, Law School, University of New South Wales (Australia). Her research interests
include international commercial law, dispute resolution and international arbitration, as well as
comparative contract law. She also completed internships at both the Australian Centre for Interna-
tional Commercial Arbitration (ACICA) and the Chinese International Economic and Trade Arbi-
tration Commission (CIETAC). She is also admitted to practice in New South Wales, Australia.
Dr. Zhang obtained her PhD in Law from University of New South Wales (Australia), and her
LLM, LLB and BA in Economics (Double Degree) from Peking University (China). She has
published various manuscripts with leading journals in this area, such as the Journal of Contract
Law, Vindobona Journal of International Commercial Law and Arbitration, China Quarterly.
Chapter 18
Shanghai Dongda Import & Export Co,
Ltd v German Laubholz-Meyer GmbH

Siying Wu

Case Information
Case Name: Shanghai Dongda Import & Export Co, Ltd v German Laubholz-Meyer
GmbH
Seller: German Laubholz-Meyer GmbH
Place of Business: Germany
Buyer: Shanghai Dongda Import & Export Co, Ltd
Place of Business: China
Details of First Instance:
Court: Shanghai Yangpu District People’s Court
Date of Decision: N/A
Case No: (2001) Yang Jing Chu Zi No 1179
Judges: N/A
CISG applied: Yes
Key CISG Provisions interpreted and applied: Articles 25; 49(1)(a); 49(2)(b);
51(2); 81(2); 86(1)
Abstract
On 15 March 2001, Shanghai Dongda Import & Export Co, Ltd (Dongda Company,
the Plaintiff) and Shanghai Chenchuan Industrial Co, Ltd (Chenchuan Company)
entered into an Import Service Agreement, by which the Plaintiff shall act as the
import agent of Chenchuan Company to import 15 cubic metres of Hornbean wood.
On the same day, the Plaintiff and German Laubholz-Meyer GmbH (Laubholz

S. Wu (B)
Dentons Law Firm, Canton (Guangzhou), China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 145

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_18
146 S. Wu

Company, the Defendant) entered into a Sales Contract, agreeing on the quantity,
quality, price and payment method, etc. of the Hornbean wood. On 28 May 2001,
the Plaintiff received the wood but believed that the wood did not conform with the
Sales Contract, so entrusted China Waigaoqiao Entry-Exit Inspection and Quarantine
Bureau to carry out inspection in June 2001. On 14 June 2001, the Inspection and
Quarantine Bureau issued an inspection certificate, assessing that both the species
and the quality of goods did not conform with the Sales Contract. On 11 June 2001,
the Defendant paid for the goods by letter of credit applied by Chenchuan Company,
and the Plaintiff paid other fees for the customs declaration etc.
The Plaintiff filed a lawsuit with the court, claiming a refund of the payment
for the goods and the customs declaration fees, the compensation to the principal,
Chenchuan Company, for its economic loss of RMB¥100,000 which is the liquidated
damages suffered by it for breach of contract due to its failure to produce and deliver
the goods to a Japanese company on time, for its loss of goodwill of RMB¥50,000,
and bearing the full costs of returning and handling the wood. The Defendant argued
that the inspection report lacked legitimacy and relevance, and it could not prove that
the goods involved in the case did not conform with the quality standards agreed in
the Sales Contract. The Plaintiff did not follow the statutory procedures to carry out
the commodity inspection right after the goods arrived at the port, but carried out
the inspection only when the Plaintiff opened the goods for use and believed they
had quality issues. At that time, the goods were classified and seriously damaged,
the goods under the inspection unilaterally commissioned by the Plaintiff cannot be
determined as the goods delivered by the Defendant, so the inspection certificate
shall not be recognised. In addition, the United Nations Convention on Contracts for
the International Sales of Goods (CISG) should be applied with priority to this case.
The court held that: 1. Regarding the probative value of the inspection certificate,
the Plaintiff was at some fault since it did not inspect the imported goods in time,
commissioned commodity inspection only after the goods were delivered to the
factory and opened for use, and failed to notify the Shanghai Representative Office
of the Defendant to be present at the site of inspection. However, the probative value
of the inspection certificate cannot be denied because of the fault of the Plaintiff. 2.
Regarding the application of law, according to the Circular of the Supreme People’s
Court on Several Issues that Shall be Paid Attention to in the Trial and Enforcement
of Foreign-related Civil and Commercial Cases, since the Plaintiff and the Defendant
did not agree on the applicable law in the Sales Contract, both the Plaintiff and the
Defendant are domiciled in the countries that are Contracting States to the CISG,
and therefore the dispute falls within the sphere of application of the CISG, so the
CISG shall be applied with priority. 3. Regarding the legal liability, according to the
provisions of the CISG, the Defendant shall take the legal liability if it fails to supply
the goods in accordance with the species and quality agreed in the contract. The
claims made by the Plaintiff for the return of goods, bearing various fees incurred by
the import of goods and all costs relating to the returning and handling of the imported
wood are the consequences foreseeable by the Defendant, therefore such claims of
the Plaintiff should be supported. However, the claims made by the Plaintiff for the
loss of liquidated damages of RMB¥100,000 paid to the Japanese company and the
18 Shanghai Dongda Import & Export Co, Ltd v German … 147

loss of goodwill of RMB¥50,000 should not be supported because the Plaintiff did
not produce the evidence of having fulfilled the obligation to inform the Defendant in
advance so that the Defendant can anticipate the consequence for breach of contract.
The court finally decided that the Defendant should return to the Plaintiff the
payment for the goods and the customs declaration fees, etc., and bear all costs
relating to the returning and handling of the wood.

Commentary to the Key Issues Related to the CISG

Issues

Issue 1: Applicability of CISG

Issue 2: Doctrine of Fundamental Breach in CISG and Chinese Law
Issue 3: Time Period for Inspection of Goods in CISG and Chinese Law
Issue 4: Reasonable Period for Avoidance of Contract in CISG and Chinese Law
Issue 5: Foreseeability Test on “Damages for Loss of Profit” in CISG and Chinese
Law

Comments

Issue 1: Applicability of CISG

Regarding the preemptive application of the CISG, according to Article 1(1)(a) of the
CISG, if the parties have their places of business in different Contracting States, the
CISG is “directly” or “autonomously” applicable, which is also expressly required
in the Circular on Several Issues that Shall be Paid Attention to in the Trial and
Enforcement of Foreign-related Civil and Commercial Cases (Fa [2002] No. 51)
issued by the Supreme People’s Court on 17 April 2000. In the Circular, Article
2 provides that “except for the three types of contract that shall be governed by
Chinese law as provided by Paragraph 2 of Article 126 of the Contract Law of the
People’s Republic of China (“Contract Law of China”), the applicable law for all the
other cases shall be accurately chosen according to relevant laws and the agreement
between the parties; the international conventions with China’s participation shall
be applied with priority, except the terms and conditions reserved by our country
through statement, and the international customs may also be taken reference to.”
This case is a dispute over an international contract for the sale of goods, the places
of business of the parties are in the Contracting States to the CISG, the parties have
neither an agreement to choose the applicable law nor an agreement to rule out the
application of the CISG. Therefore, in accordance with the provisions of the CISG
and the applicable rules of Chinese law, the CISG should be preemptively applied
in this case. Although the court did not directly rely on Article 1(1)(a) of the CISG
as the basis for the premptive application of the CISG, its reasoning showed that it
fully respected the automatic application of the CISG, which is applaudable.
148 S. Wu

Issue 2: Doctrine of Fundamental Breach in CISG and Chinese Law

Regarding fundamental breach, the CISG adopts the expression of “fundamental
breach of contract”, which is the doctrine confirmed in the general provisions of the
“Sale of Goods” part in the CISG. Article 25 provides that “[a] breach of contract
committed by one of the Parties is fundamental if it results in such detriment to the
other party as substantially to deprive him of what he is entitled to expect under
the contract, unless the party in breach did not foresee and a reasonable person of
the same kind in the same circumstances would not have foreseen such a result”.
From this definition, it could be concluded that there are two criteria to determine
the fundamental breach of contract: the criterion of substantial detriment, and that
of foreseeability.
The criterion of substantial detriment is to determine whether a party has
committed fundamental breach based on whether the consequence of the breach
has reached certain level of severity. CISG provides that a fundamental breach must
be of such seriousness that it substantially deprives the aggrieved party of what it is
entitled to expect under the contract. In practice, the courts vary in their criteria, but
determine mainly based on an overall consideration of the circumstances such as the
purpose for which the parties entered into the contract, the value of the goods, the
severity of the consequences of the breach and the availability of remedies.
The criterion of foreseeability considers the subjective part of the breaching party,
i.e., whether the serious consequences of the breach could have been foreseen.
CISG adopts a dual standard of subjectivity and objectivity, the subjective standard
being the foreseeability of the consequences of the breach by the breaching party
and the objective standard being the foreseeability of the consequences of the breach
by a reasonable person of the same kind under the same circumstances.
The idea of fundamental breach has been adopted by the Contract Law of China,
although the Contract Law of China does not expressly employ the concept of “fun-
damental breach”. Instead, it borrowed the relevant provisions in the CISG on funda-
mental breach and formed the five circumstances under which the parties may have
the right to rescind the contract in Article 94 (now Article 563 of the Civil Code of
China). The circumstances provided in Article 94 subparagraph (2)(3)(4) are those
under which the other party is granted the right to rescind a contract: (2) one party
to the contract indicates expressly or by conduct, before expiration of the perfor-
mance period, that it will not perform its principal obligations; (3) one party to the
contract delays in performance of its principal obligations and fails to perform the
same within a reasonable time period after being urged to do so; and (4) one party
to the contract delays in performance of the obligations or commits other acts in
breach of the contract, resulting in the impossibility for the other party to achieve
the purpose of the contract.
There are some differences between the provisions in the Contract Law of China
and Article 25 of the CISG. Firstly, the circumstances provided in the Contract Law
of China basically consider only the consequentialist criterion of substantial detri-
ment. With regard to this difference, some Chinese scholars have pointed out that
“the criteria for determining fundamental breach under our law are not as strict as
18 Shanghai Dongda Import & Export Co, Ltd v German … 149

those under the CISG, in that our law does not use the criterion of foreseeability
to justify the constitution of fundamental breach, but emphasises the seriousness of
the consequences of breach as a criterion for determining fundamental breach. This
actually abandons the subjective standard and thus reduces the arbitrariness in deter-
mining fundamental breach and the factors detrimental to the protection of creditors
caused by the intervention of the subjective standard”.1 Secondly, with regard to
the contractual obligations breached, CISG does not have any further requirements
thereon and only emphasises the results. In the Contract Law of China, Articles 94(2)
and (3) provides that the breach is of the “principal obligations”, and while Article
94(4) does not require the “principal obligations”,2 the result of “the impossibility to
achieve the purpose of the contract” indicates that generally such case occurs when
the principal obligation is breached.
In this case, the Defendant failed to supply the goods of the species and quality
agreed upon in the Sales Contract, resulting in the Plaintiff being unable to obtain
the specific goods it expected by entering into the Sales Contract. Whether on the
basis of Article 25 of CISG or Article 94(4) of the Contract Law of China, it meets
the requirements of the doctrine of fundamental breach in terms of the seriousness
of the results and the foreseeability of the consequences.
Issue 3: Time Period for Inspection of Goods in CISG and Chinese Law
In the CISG, Articles 38(1) and (2) provide that “(1) The buyer must examine the
goods, or cause them to be examined, within as short a period as is practicable in the
circumstances. (2) If the contract involves carriage of the goods, examination may be
deferred until after the goods have arrived at their destination”. Generally speaking,
the commencement of time period for inspection under the CISG corresponds to
the time when the risk of loss passes to the buyer: the buyer is presumed to have
discovered within the shortest possible time that the goods do not conform with the
contract, as long as the conditions for inspection are in place, regardless of whether
the buyer actually inspects the goods. In practice, the shortest time ranges from a few
days to several months, depending generally on the personal and business situation
of the buyer, the type of goods to be inspected, the complexity or perishability or
their character as seasonal goods, the volume of delivery, the effort necessary for an
inspection, etc.3
Where there is no agreement between the parties in the contract on the time period
for inspection of goods, the 2nd paragraph of Article 158 in the Contract Law of China
(now Article 621 of Civil Code of China) provides that “the buyer shall give a notice
to the seller within a reasonable time period after it found or ought to have found
that the quantity or quality of subject matter fails to conform with the contract. If the
buyer fails to give a notice within such reasonable time period or within two years
as of the date of receiving the subject matter, it shall be deemed that the quantity or

1 Wang [1], p. 544; Wang [2], pp. 287–288.

2 Han [3], pp. 8–9.
3 UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the

International Sale of Goods, 2016 edition, p.158.

150 S. Wu

quality of the subject matter has conformed with the contract. However, if there is
a quality guarantee period for the subject matter, the said quality guarantee period
shall apply instead of the above said two years”. It can be seen that the law does
not require a separate time period for the inspection of goods, but rather combines
the “inspection period” and the “notice period” into one and applies the maximum
time limit of 2 years or the quality guarantee period; however, according to the third
paragraph of the same Article, the time period does not apply if the seller knew or
ought to have known that there are problems with the goods.
In this case, although Article 38 of the CISG was not cited by the court in its
judgment, yet in the findings part, as to the first question regarding the probative
value of the inspection certificate, it held that the Plaintiff was at some fault since
it did not inspect the imported goods in time, commissioned commodity inspection
only after the goods were delivered to the factory and opened for use, and failed
to notify the representative of the Defendant to be present at the site of inspection.
However, the probative value of the inspection certificate cannot be denied because
of the fault of the Plaintiff. In other words, the underlying logic of the court is that,
although the Plaintiff had not inspected the goods within the shortest time required
by the CISG, it was not appropriate to be too harsh on the Plaintiff by denying the
probative value of the inspection report in its entirety, but rather to take into account
other factors to find the sameness of the goods inspected and then accept the probative
value of the inspection report.
Issue 4: Reasonable Period for Avoidance of Contract in CISG and Chinese Law
As stated in the UNCITRAL Digest of Case Law on the United Nations Convention
on Contracts for the International Sale of Goods, “generally the buyer is not required
to declare the contract avoided within a certain period of time; he can do so at
any time if a ground for avoidance exists. This principle is, however, subject to a
limitation under Article 49(2) if the goods have been delivered. In such a case, the
buyer must declare avoidance within a reasonable time. The moment as of which the
reasonable time begins to run differs depending on whether the breach involves late
delivery or a different kind of breach. In case of late delivery, the period starts when
the buyer becomes aware that delivery was made (Article 49(2)(a)). In the case of
other breaches, the reasonable period of time for declaring the contract avoided starts
running when the buyer becomes aware or ought to have been aware of the breach”.
But the point in time that a reasonable period of time is calculated, a few days, a few
months, a year, 2 years is inconsistent. The judicial practice varies from country to
country.
In the Contract Law of China, Article 95 provides that “[w]here the law provides
for or the parties agree upon a time limit for the exercise of the right to rescind a
contract, and no party has exercised the right within the time limit, the said right
shall be extinguished. Where the law does not provide for or the parties does not
agree upon a time limit for the exercise of the right to rescind a contract, and no
party exercises the right within a reasonable time period after being urged by the
other party to do so, the said right shall be extinguished”. Accordingly, there are
three main scenarios in which the period of exercise of the right to rescind a contract
18 Shanghai Dongda Import & Export Co, Ltd v German … 151

is determined: first, the period of exercise of the right to rescind as agreed by the
parties; second, the period of exercise of the right to rescind as provided by special
law or judicial interpretation; and third, the issue of determination of the reasonable
period after the notice of urging in the absence of a provision of law or an agreement
of the parties concerned. In practice, however, a fourth scenario arises from the third
one, that is, whether there is period of exercise of the right to rescind a contract and
how to determine the period if anywhere there is not a provision of law, an agreement
of the parties concerned or the notice of urging. It is worth discussing the third and
fourth scenarios, namely: in the absence of a provision of law or an agreement of
the parties concerned, how to determine a reasonable period for exercising the right
of rescission in case there is a notice of urging, and in case there is no such notice
of urging. There was no clear and unified adjudication rule for such a reasonable
period before. However, after the implementation of the Civil Code of China, Article
564 of the Civil Code of China distinguished the circumstance of “the party knew or
should have known of the cause of rescission” and “after the notice of urging”. For the
former, that is the fourth scenario, the Civil Code of China provides that the period for
exercising the right of rescission is 1 year from the date when the party knew or should
have known of the cause of rescission, that is, the statute of repose for such right is
definitely one year. While as for the latter, that is the third scenario, the Civil Code of
China also requires it shall be exercised within reasonable period after the notice of
urging. Regarding the determining of a “reasonable period” in judicial practice, the
period is generally determined reasonably according to the specific circumstances of
the case. For example, Article 14 of the Guiding Opinions of Sichuan High People’s
Court on Several Issues Concerning the Trial of Contract Rescission Disputes clearly
provides that “Where the law does not provide for or the parties do not agree upon
a time limit for the exercise of the right of rescission, the person with the right of
rescission shall exercise it in a timely manner within a reasonable period after the
right of rescission arises. If the person with the right of rescission fails to exercise
it within a reasonable period, the right shall be extinguished. The reasonable period
stipulated in the preceding paragraph shall be determined by the judge in accordance
with the principles of fairness and honesty and trust, taking into account the nature of
the contract, its performance and the reasonable reliance interests of the other party”.
In this case, Article 49(2) of the CISG was cited by the court in its judgment,
yet in the reasoning part, it did not find whether the Plaintiff’s right to rescind the
contract exceeded a reasonable period. However, in the circumstance of this case
where the contract was signed by the Plaintiff and the Defendant in March 2002, the
results of the inspection of goods were issued in the middle of June of the same year,
and the case number is for the year of 2001, therefore, it can be presumed that the
Plaintiff made the claim against the Defendant within five and half months after the
inspection report was issued, which would be within the reasonable period, taking
consideration of the fact that the goods are not of a perishable nature.
152 S. Wu

Issue 5: Foreseeability Test on “Damages for Loss of Profit” in CISG and Chinese
Law
Although the court did not refer to Article 74 of the CISG in its judgment, yet it in fact
relied on the article when it rejected the Defendant’s claim for liquidated damages
due to its failure to supply goods to its buyer on the grounds that the consequences
of the breach could not have been foreseen by the Defendant. Article 74 of the CISG
provides that “[d]amages for breach of contract by one party consist of a sum equal
to the loss, including loss of profit, suffered by the other party as a consequence of
the breach. Such damages may 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 the light of
the facts and matters of which he then knew or ought to have known, as a possible
consequence of the breach of contract”. Literally, the foreseeable time is “at the time
of the conclusion of the contract”, and the foreseeable consequences are not explicitly
stated, but from the context, all compensable losses shall be foreseeable. The CISG
does not expressly state whether the extent of foreseeable loss should be specific
to the amount of money, and the practice varies from case to case according to the
relevant interpretations in the UNCITRAL Digest of Case Law on the United Nations
Convention on Contracts for the International Sale of Goods. Some suggested that
Article 74 does not demand that the specific details of the loss or the precise amount
of the loss be foreseeable.4 On the other hand, several court decisions have explicitly
found that claimed damages were foreseeable.5
With regard to the assessment of the loss of profit, Article 113 of the Contract Law
of China (now Article 584 of Civil Code of China) provides that “[w]here either party
to a contract fails to perform the contractual obligations or its performance of the
obligations does not meet the terms of the contract, thereby causing losses to the other
party, the amount of compensation for losses shall be equal to the losses caused by
breach of contract, including benefits receivable after the performance of the contract,
provided that it shall not exceed the probable losses caused by breach of contract
which was foreseen or ought to have been foreseen by the breaching party at the time
of conclusion of the contract”. Literally, the foreseeable time is also “at the time of the
conclusion of the contract”, but the scope of the foreseeable is not expressly defined.
Referring to the Understanding and Application of the Judicial Interpretation of the
Supreme People’s Court on Contracts of Sale and Purchase compiled by the Second
Civil Trial Division of the Supreme People’s Court (published by the People’s Court
Press, 2012 edition), the prevailing doctrine in academic fields and general practice
in courts in China is that, it is only necessary that a party foresee or should have

4 CLOUT case No. 541 [Oberster Gerichtshof, Austria, 14 January 2002] (see full text of the
decision). See also Polimeles Protodikio Athinon, Greece, 2009 (docket No. 4505/2009 (Bullet-
proof vest case), English translation available on the Internet at www.cisg.law.pace.edu.
5 CLOUT case No. 427 [Oberster Gerichtshof, Austria, 28 April 2000] (breaching buyer can foresee

that aggrieved seller of fungible goods would lose its typical profit margin).
CLOUT case No. 217 [Handelsgericht des Kantons Aargau, Switzerland, 26 September 1997]
(dissent argues that seller had not sufficiently proven the amount of its damages).
18 Shanghai Dongda Import & Export Co, Ltd v German … 153

foreseen the types of damage, but not the extent of the damage, the specific amount
of damages.
In this case, the court held that the Defendant could not have foreseen the conse-
quences of the breach on the ground that the Plaintiff had not informed the Defendant
in advance that the goods would be processed and resold to an overseas buyer, the
court fundamentally denied the possibility of foreseeing the consequences by the
Defendant, and therefore there is no way to examine whether in this case, the court’s
determination of the losses of obtainable benefits required the breaching party to
foresee or that they should have foreseen the specific amount of damages based on
the CISG or Contract Law of China.

References

1. Wang LM (2003) Studies on new issues of contract law. China Social Science Press
2. Wang LM (2003) Studies on contract law, vol. 2. People’s University of China Press
3. Han SY (2011) Chinese contract law and CISG. J Jinan Univ (Philos Soc Sci) 2:7–14

Siying Wu worked as a judge in the Civil Trial Division of Guangdong provincial court for nearly
ten years, and started to practice as a lawyer in 2016. Since then, he has been focusing on finance,
real estate and cross-border business. He provides legal services in banking, asset management,
financial leasing, bond and asset securitization, private equity funds, corporate M&A and other
investment and financing business. His legal services also cover real estate and infrastructure
investment in various countries and regions, such as the United States, Australia, France, Cyprus,
Korea, Malaysia, Cambodia, Laos and Hong Kong. He has published a personal monograph,
the Unification of International Commercial Contract Law: Grounds, Aims and Approaches, and
has participated in the writing of several works such as International Business Law. He has also
published a number of papers in core law journals, such as Study on Legal Issues of International
Financial Leasing Contracts, Legal Risks Control for Global Enterprises, and Research on Open
Price Contracts in International Sale of Goods.
Chapter 19
Sino-Add (Singapore) Pte Ltd v
Karawasha Resources Ltd

Han Wang, Peng Guo, and Shu Zhang

Case Information
Case name: Sino-Add (Singapore) Pte. Ltd. v. Karawasha Resources Ltd
Seller: Karawasha Resources Ltd
Place of business: China
Buyer: Sino-Add (Singapore) Pte. Ltd
Place of Business: Singapore
Details of First Instance:
Court: Beihai Maritime Court
Date of Decision: 5 March 2002
Case No: (2001) Hai Shang Chu Zi No. 119
Judges: Xuewei Ni (Presiding Judge), Qiaofa Liu (Judge), Qinghua Tan (Judge)
CISG applied: Yes
Key CISG provisions interpreted and applied: Article 41

H. Wang (B)
Nankai University, Tianjin, China
e-mail: [email protected]
P. Guo
RMIT University, Melbourne, VIC 3000, Australia
e-mail: [email protected]
S. Zhang
Deakin University, Geelong, VIC 3220, Australia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 155

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_19
156 H. Wang et al.

Abstract
On March 15, 2001, the buyer, Sino-Add (Singapore) Pte. Ltd., and the seller,
Karawasha Resources Ltd., signed a contract for the sale of goods numbered
KLR/2001/02. The contract agreed that the buyer would purchase from the seller
60,000 tons of iron ore originating in India (±10% of the buyer’s choice), and the
port of loading would be Panaji Port or Mormugao Port (India), and the unloading
port is China (the specific port was to be confirmed). The buyer should open an
irrevocable letter of credit with the seller as the beneficiary before April 13, 2001.
The buyer shall provide the seller with all the information of the ship and inform the
seller of the type of ship and the distribution of cargo space 10 days before the ship
arrived at Panaji Port or Mormugao Port. Within 3 working days of the completion of
shipment, the seller notified the buyer of the contract number, name of the ship, name
of the product, approximate invoice value, gross weight, and date of shipment. After
the contract was signed, the buyer issued a letter of credit with the seller as the bene-
ficiary under the aforementioned KRL/2001/02 contract. The letter of credit stated:
the amount of the goods is US$943,578, the port of loading is Panaji Port in India,
the port of unloading is Zhanjiang or Fangcheng in China, the latest loading period
is 15 May 2001, and the cargo is 60,000 (±10%) tons of iron ore. The buyer signed
a voyage charter party with Panama Changyun Company on April 27, 2001. The
contract stipulated that the buyer leased the “Angel Spirit” ship owned by Panama
Changyun Company to carry iron ore. Prior to the arrival of the “Angel Spirit” at the
port of Panagi, the seller further requested that the place of shipment be changed to
the port of Mormugao, and the buyer agreed to this request. On May 13, 2001, the
ship “Angel Spirit” arrived at Mormugao Port and began loading. From May 20 to
June 1, 2001, due to wind and waves, the ship could not depart. In accordance with
the seller’s instructions, the ship sailed to Chennai Port on the east coast of India,
but it was found that there was no cargo to load after arriving at the port. The “Angel
Spirit” ship only loaded about 20,000 tons of cargo at Mormugao Port. The “Angel
Spirit” ship waited for loading in Chennai Port for several days to no avail. It left the
port on June 7, 2001 and arrived at the Fangcheng Port in China on June 17, 2001
for unloading. In view of the above circumstances, Panama Changyun Company
sued the buyer, demanding compensation for the losses under the voyage charter
party. The buyer paid US$550,000 to Panama Changyun Company as compensation
due to the buyer’s breach of the voyage charter party. So, the buyer filed a recovery
lawsuit against the seller, demanding that the seller pay the buyer’s compensation of
US$550,000 to the carrier and the attorney fees of HK$85,975.42 and SG$39,424.17.
The court held that, as far as the voyage charter party was signed between the buyer
and Panama Changyun Company, after the chartered ship arrived at the designated
port of shipment, there were insufficient quantities of goods at that port, which
caused a series of losses to the carrier. This is the loss caused by the buyer’s breach
of the voyage charter party, so it shall be liable for compensation for the loss. The
buyer’s failure to properly perform the voyage charter party was due to the seller’s
serious breach of contract, that is, the seller’s failure to provide sufficient quantities
of goods at the designated port as stipulated in the contract. Therefore, the buyer
19 Sino-Add (Singapore) Pte Ltd v Karawasha Resources Ltd 157

sought compensation from the seller after paying the relevant losses of the voyage
charter party of US$550,000, which was supported by the court. The court held that
the buyer’s attorney fees in Hong Kong and Singapore for resolving voyage charter
party disputes were inevitable expenses incurred in resolving disputes and should
also be borne by the seller. Therefore, the court supported the plaintiff’s claim.

Commentary to the Key Issues Related to the CISG

Issues

Issue 1: The applicability of the CISG

Issue 2: Application of Article 41 of the CISG

Comments

Issue 1: The applicability of the CISG

This case actually applied Article 41 of the CISG, but there was no relevant expla-
nation on why the CISG was applied. The judgment stated that, in accordance with
Article 269 of the Maritime Law of the People’s Republic of China, “The parties to
a contract may choose the law applicable to such contract, unless the law provides
otherwise. Where the parties to a contract have not made a choice, the law of the
country having the closest connection with the contract shall apply,” the substantive
disputes in this case shall be governed by relevant laws of the People’s Republic of
China, such as the Maritime Law and the Contract Law of the People’s Republic of
China, as well as relevant international conventions. However, the application of the
law of the country having the closest connection does not directly derive the applica-
tion of international conventions in this case. “Relevant international conventions”
did not indicate what kind of international conventions it is. There are flaws in the
reasoning of the application of law in this case.
The CISG applies to contracts for the sale of international goods. Article 1 of the
CISG stipulates that the CISG applies to contracts of sale of goods between parties
whose places of business are in different Contracting States. Article 2 of the CISG
restricts the “goods” in the sale of goods contracts, clearly stipulating that the sale of
six types of goods does not fall within the scope of the CISG. Article 3 of the CISG
restricts the “sale” in the sale of goods contracts, clearly stipulating that the sale of
two types of contracts does not fall within the scope of the CISG. Further analysis
is needed to determine whether this case is a dispute over an international sale of
goods contract.
The judgment of this case pointed out that the case was a dispute over the recovery
of voyage charter party rent and other expenses. When the law is applicable, it is
also based on the voyage charter party. However, the author believes that the case
should be a dispute over an international sale of goods contract, and the court made a
158 H. Wang et al.

wrong identification. Before applying conflict rules to determine the applicable law
in foreign-related civil cases, it is necessary to determine the nature of the facts of
the case and classify it into a specific legal category. This process is called “iden-
tification.”1 The object of the identification step is examining the “scope” in the
conflict rules.2 When foreign-related civil issues require the application of conflict
rules, the “scope” of which conflict rule is consistent with the facts must be identi-
fied. The basis for identification is a very controversial issue in private international
law. Mainly the Lex fori theory is applied; however, the new Lex fori theory, the
applicable law theory, the analytical comparative law theory, the case identification
theory, and the function qualitative theory may also be applied.3 Based on China’s
judicial practice, China has adopted the Lex fori theory. It is more reasonable to
interpret the conflict norms of the country where the court is located based on Lex
fori. The judge is also more familiar with Lex fori, so identification errors are less
common.
Article 8 of Law of the People’s Republic of China on Choice of Law for Foreign-
related Civil Relationships stipulates that Lex fori shall apply to the determination
on the nature of foreign-related civil relations. Therefore, in this case, Chinese law
should be applied to identify foreign-related civil relations, and then the correct
conflict rules should be applied to determine the applicable law. Article 92 of
Maritime Law of the People’s Republic of China defines a voyage charter party:
“A voyage party is a charter party under which the shipowner charters out and the
charterer charters in the whole or part of the ship’s space for the carriage by sea of the
intended goods from one port to another and the charterer pays the agreed amount
of freight.” The plaintiff and the defendant in this case are not in a contractual rela-
tionship between the shipowner and the charterer. That relationship is between the
buyer and Panama Changyun Company. The contract between the plaintiff and the
defendant in this case was an iron ore sales contract. The purpose was for the seller
to transfer the ownership of the iron ore to the buyer and the buyer to pay the corre-
sponding price. This is a typical international sale of goods contract. Because the
seller did not deliver a sufficient quantity of goods in accordance with the contract
between the seller and the buyer, the ship chartered by the buyer suffered a huge
loss of space and caused major economic losses. Therefore, the buyer sued the court
and requested the seller to compensate the buyer for the losses caused by its breach
of contract. This case should be identified as a dispute over an international sale of
goods contract, not a dispute over a voyage charter party (the dispute between the
buyer and Panama Changyun Company had been resolved).
The parties in this case did not reach any agreements on the application of the
applicable law. The court should consider which law should be applied and give a
sufficient explanation. Since this case is a dispute over an iron ore sales contract, it
has not been excluded from the scope of CISG and involves the issue of whether the
CISG is applicable.

1 Han [1], p. 173.

2 Hu [2], p. 146.
3 Qin [3], p. 119.
19 Sino-Add (Singapore) Pte Ltd v Karawasha Resources Ltd 159

Article 1 of the CISG stipulates the application of CISG. If the sales contract is
between parties whose places of business are in different CISG Contracting States,
the CISG applies “automatically” and “directly.” The court does not need to apply
conflict of law or private international law to determine the applicable law.4 In this
case, the seller’s place of business is in Hong Kong, China, and the buyer’s place
of business is in Singapore. Both countries are Contracting States of the CISG.
Therefore, the CISG should be applied to resolve disputes in this case. If it involves
matters not stipulated by the CISG, the principle of the closest connection shall be
applied to determine the domestic law to solve the problem.
Issue 2: Application of Article 41 of the CISG
This case applies the provisions of Article 41 of the CISG, which stipulates the
seller’s rights guarantee obligations: “The seller must deliver goods which are free
from any right or claim of a third party, unless the buyer agreed to take the goods
subject to that right or claim.” It requires the seller to have true ownership of the
goods it sells, and there is no defect or deficiency in ownership. In this way, after the
seller transfers the ownership to the buyer, the buyer can fully obtain the ownership
of the goods. What the buyer expects from the contract is to accept the goods and
obtain benefits from it. Therefore, the seller should not only be liable to the buyer
for a lawsuit filed by a third party who owns the goods, but also should the buyer
be liable if the third party makes any claims against the goods under the contract.
Another clause related to ownership is Article 4 of the CISG.
Article 4 of the CISG stipulates matters not covered by the CISG and item (b)
indicates that the contract’s possible influence on the ownership of the goods does
not fall within the scope of the CISG. In international trade, determining when
the ownership of the goods is transferred from the seller to the buyer is a major
issue related to the economic interests of the parties. Countries have clear legislation
on this issue, but there are big differences.5 For example, the French Civil Code
stipulates that when both parties reach an agreement on the subject matter and price,
the ownership of the subject matter will also be transferred.6 Common law countries
divide the sale of goods into the sale of specific goods and the sale of non-specific
goods. The sale of specific goods is based on the time when the goods are in the
“deliverable state” as the time of ownership transfer; the sale of non-specific goods
is based on the time when the goods are “allocated” in the contract.7 The Chinese
Contract Law stipulates that the ownership of the goods shall be transferred upon
delivery, unless otherwise provided by law or agreed upon by the parties.8 The laws
of some countries also provide that the parties can agree on when the ownership of

4 Lookofsky [4], p. 13.

5 Zhang [5], p. 40.
6 See Article 1583 of the French Civil Code.
7 See Article 2–401 of the Uniform Commercial Code of the United States and Article 16 of the

Sale of Goods Act of the United Kingdom.

8 See Article 133 of the Contract Law of the People’s Republic of China.
160 H. Wang et al.

the goods will be transferred.9 It is quite difficult for the CISG to regulate the transfer
of ownership in goods trade, so it is resolved by domestic law.
In combining the provisions of Article 41 and Article 4 of the CISG, the specific
attribution of ownership is resolved by domestic law. But the performance of the
seller’s rights guarantees obligation belongs to the category of contract breach, and
CISG can govern this matter. In this case, the judge invoked Article 41 of the CISG
not to prove that the seller has the rights guarantee obligation, or that the performance
of the obligation is flawed, but to prove that the ownership of the goods under the
contract had not been transferred to the buyer. This is clearly an error in the application
of the article. The CISG does not adjust the attribution of ownership of the goods.
Therefore, it cannot be concluded that the ownership of the goods in this case remains
with the seller through the application of the CISG.
The judge should apply Article 74 (Damage Clause) to solve the problems in
this case. This clause applies not only to the claims of the injured seller, but also
to the claims of the injured buyer.10 It is always a monetary claim, aiming at what
courts often refer to as the “positive interest,” that is, everything the damaged party
would have obtained, had the contract been duly performed, including costs and
expenses borne in view of the contract, as well as the loss of profits.11 The overall
compensable losses included both the reduction in the assets that existed at the time
of the conclusion of the contract, and the increase in assets that performance of
the contract would have made possible, but that the breach prevented. The amount
of damages shall be limited by the “predictability” rule. Article 74 of the CISG
stipulates that damages for breach of the contract “may 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 facts and matters of which they then knew or ought to
have known, as a possible consequence of the breach of contract.” The foreseeability
requirement operates under the CISG as the legal criterion to be used in order to
assess the amount of damages that the aggrieved party may recover, in a fashion that
may also be predictable to the party in breach, so as to make it possible for the latter
to pre-estimate the risk and consequences resulting from the breach.
In this case, the seller did not provide enough goods as agreed in the contract at
the port, and there was a serious breach of contract. Because the seller’s breach of
contract resulted in the buyer owing compensation to the carrier, there was a causal
relationship between the seller’s breach of contract and the buyer’s loss. Based on
Article 74 of the CISG, the seller should compensate the buyer for the loss requested
by the buyer.

9 Bianca and Bonell [6], p. 247.

10 UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the
International Sale of Goods: 2016 Edition. p. 334.
11 Ferrari and Torsello [7], p. 311.
19 Sino-Add (Singapore) Pte Ltd v Karawasha Resources Ltd 161

References

1. Han DP (1997) New theory on private international law. Wuhan University Press
2. Hu Y (2010) Identification issues in private international law—Also on the design of the Iden-
tification clauses of the “Law of the Application of Law for Foreign-related Civil Relations of
the People’s Republic of China.” Quest Mag 03:145–147
3. Qin RT (2013) Private international law, 2nd edn. Nankai University Press
4. Lookofsky J (2017) Understanding the CISG: a compact guide to the 1980 United Nations
convention on contracts for the international sale of goods, 5th edn. Publishers, Kluwer Law
International B.V
5. Zhang YQ (2009) Commrntary on the United Nations convention on contracts for the
international sale of goods, 3rd edn. China Commerce and Trade Press
6. Bianca CM, Bonell MJ (1987) Commentary on the international sales law, the 1980 Vienna sales
convention. Milan Publishers, Giuffrè
7. Ferrari F, Torsello M (2014) International sales law–CISG. West Academic Publishing, In A
Nutshell

Han Wang Ph.D. student of Nankai University Law school, majoring in International Economic
Law and International Commercial Law. The tutor is the famous scholar Professor Haicong Zuo.
Participated in projects of the Supreme People’s Court, major projects of the National Social
Science Fund, etc.

Dr. Peng Guo Lecturer in Law at RMIT University. At RMIT Dr Guo teaches Contract Law and
Commercial Law to LLB and JD students. He has held visiting positions at different universities,
including Warwick University, University of Amsterdam, and University of Osnabrück. He has
received scholarships awarded by renowned research institutions and international organisations,
including the Max Planck Institute for Comparative and International Private Law, the Interna-
tional Institute for the Unification of Private Law (UNIDROIT), the Swiss Institute of Compara-
tive Law, and the European Union. His research interests lie in international sale of goods, inter-
national commercial arbitration, comparative contract law, and law and technology. He actively
participates in Vis Moot and Alfred Deakin International Commercial Arbitration Moot.

Dr. Shu Zhang is a lecturer in commercial law at Deakin Law School, Deakin University
(Australia) and coached Deakin Law School’s Vis Moot team. Prior to joining Deakin Law
School, Dr. Zhang was a post-doctoral fellow in the Chinese International Business and Economic
Law Initiative, Law School, University of New South Wales (Australia). Her research interests
include international commercial law, dispute resolution and international arbitration, as well as
comparative contract law. She also completed internships at both the Australian Centre for Interna-
tional Commercial Arbitration (ACICA) and the Chinese International Economic and Trade Arbi-
tration Commission (CIETAC). She is also admitted to practice in New South Wales, Australia.
Dr. Zhang obtained her PhD in Law from University of New South Wales (Australia), and her
LLM, LLB and BA in Economics (Double Degree) from Peking University (China). She has
published various manuscripts with leading journals in this area, such as the Journal of Contract
Law, Vindobona Journal of International Commercial Law and Arbitration, China Quarterly.
Chapter 20
Shanghai Shenhe Import and Export Co.,
Ltd v Itochu Commercial Co., Ltd
of Japan

Mengsha Yang

Case Information
Case name: Shanghai Shenhe Import and Export Co., Ltd. v. Itochu Commercial
Co., Ltd. of Japan
Seller: Itochu Corporation of Japan
Place of business: Japan
Buyer: Shanghai Shenhe Trading Company
Place of business: China
Third-party: Jiangyin Jiangcheng Chemical Raw Materials Company, Jiangsu
Province
Details of First Instance:
Court: Wuxi Intermediate People’s Court, Jiangsu
Date of decision: 16 October 1998
Details of Appeal:
Court: Jiangsu High People’s Court
Date of decision: 3 May 1999
Case No: (1999) Su Jing Zhong Zi No 67
Details of Retrial:
Court: Jiangsu High People’s Court
Date of decision: 28 November 2001
Case No: (2001) Su Min Zai Zhong Zi No 027

M. Yang (B)
Tianjin University, Tianjin, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 163

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_20
164 M. Yang

CISG applied: Yes

Key CISG provisions interpreted and applied: Articles 1(b), 36(1) and 77
Abstract
In March 1996, the Nanjing Office of Itochu Corporation of Japan (hereinafter
referred to as Nanjing Office) negotiated with Jiangyin Jiangcheng Chemical Raw
Material Company of Jiangsu Province (hereinafter referred to as Jiangcheng
Company) for Jiangcheng Company to import styrene from Nanjing Office.
Jiangcheng Company entrusted Shanghai Shenhe Trading Company (known as
Shanghai Shenhe Import and Export Co., Ltd. after restructuring in 1998, hereinafter
referred to as Shenhe Company) with the right to operate the import and export busi-
ness. On April 2, 1996, Shenhe Company and Nanjing Office signed the JHI9605
purchase and sales contract. According to the contract, Nanjing Office will supply
1500 tons of styrene produced in Japan or South Korea to Shenhe Company; the
unit price is US$650 per ton CFR Jiangyin (cost and freight, the port of destination
is Jiangyin), and the total payment is US$975,000; payment shall be made by irre-
vocable usance letter of credit 90 days after the date of bill of lading; specification:
polymer 10 ppm max, polymerization inhibitor 15–20 ppm, etc. The goods arrived
at Jiangyin Port, China on April 24, 1996. On May 24, 1996, the content of poly-
merization inhibitor was inspected by the Commodity Inspection Bureau, and the
evaluation conclusion was that the content of polymerization inhibitor of the goods
did not meet the contract requirements. The Japanese commodity inspection report
also made it clear on the quality of styrene supplied by Nanjing Office that “the
commodity inspection sample is from shore tank, and the content of polymerisation
inhibitor is 12.5 ppm.” In this regard, Jiangcheng Company sent letters to Nanjing
Office on 15 May, 21 May, and 24 May of the same year, asking for negotiation.
Nanjing Office replied to Jiangcheng Company on 17 May, 24 May, and 28 May,
saying that the content of polymerization inhibitor meets the contract requirements
and there is no quality problem. On 30 May, Jiangcheng Company added 11.8 kg
of polymerization inhibitor to the storage tank at the request of Nanjing Office.
On July 24, 1996, Shenhe Company paid Nanjing Office US$974,840.10 (equiva-
lent to RMB 8,120,223.06 according to the foreign exchange rate on that day) on
behalf of Jiangcheng Company, and paid import tariff and value-added tax of RMB
2,233,233.17. From June to September 1996, Jiangcheng Company and Nanjing
Office negotiated on the risk transfer of goods, the quality of goods, and the amount
of compensation, but no agreement was reached.
During the first instance, according to the requirements of both parties, the inter-
mediate people’s Court of Wuxi City, Jiangsu Province convened both parties to
negotiate on October 15, 1996 and reached the following agreement on the handling
of the goods: the batch of styrene was first sold by Jiangcheng Company at a price of
no less than 5300 yuan per ton before November 19, 1996. By November 19, 1996,
Jiangcheng Company had sold the goods, with an average sales price of 5153 yuan
per ton.
20 Shanghai Shenhe Import and Export … 165

It was also found that on April 10, 1996, Jiangcheng Company signed a bonded
storage and transfer agreement with Jiangyin Petrochemical Corporation of Jiangsu
Province, which agreed that the charging standard for unloading and storage of 1500
tons of styrene was 95 yuan per ton within 25 days, and the settlement for exceeding
the agreed storage time was 3 yuan per ton per day, and the storage time was from
April 24, 1996 to June 24, 1996. It was also found that on April 10 and April 20,
1996, Jiangcheng Company signed styrene sales contracts with Changzhou Zhonghe
Chemical Co., Ltd. and Shanghai Maoxin Industrial Company, with the quantities
of 800 tons and 700 tons, respectively, the unit prices of 7400 yuan per ton and
7500 yuan per ton, respectively, the delivery dates were all raised in May 1996, and
the quality requirements clearly stipulated that “according to the import commodity
inspection certificate.” The two contracts above were not performed because styrene
did not meet the contract requirements.

Commentary to the Key Issues Related to the CISG

Issues

Issue 1: Application of CISG Convention

Issue 2: Determination of Damages
Issue 3: Derogation Obligations

Comments

Issue 1: Application of CISG Convention

According to CISG, the conditions for the application of the Convention need to
meet Article 1, “Article 1(1) This Convention applies to contracts of sale of goods
between parties whose places of business are in different States: (a) when the States
are Contracting States; or (b) when the rules of private international law lead to the
application of the law of a Contracting State.” In this case, the final decision was
made in 2001, and the CISG convention entered into force for Japan on August 1,
2009. Therefore, the Convention cannot be directly applied in this case in accordance
with Article 1(1)(a), of CISG as Japan was not a contracting state at that time. Since
the parties did not agree on the applicable law and did not exclude the application
of the Convention in accordance with Article 6 of CISG, the court shall apply the
lex fori, that is, the Chinese law to determine the applicable law. Since China made
a reservation to Article 1(1)(b) when acceding to the CISG, although the judge
in this case did not clarify whether the applicable law selected according to private
international law was the domestic law of the contracting state, the Convention could
not be applied in this case according to Article 1(1)(b).
However, it can be noted that the trial of this case still referred to the relevant
provisions of CISG. Since CISG is the most mature uniform law of international
166 M. Yang

commercial contracts in the world, judges use their discretion to refer to the provisions
of CISG as the source of interpretative law on the premise of determining China’s
domestic law as the applicable law.
Issue 2: Determination of Damages
One of the controversial points in this case is whether Nanjing Office should bear the
obligation of compensation. The key points to judge whether Nanjing Office should
bear the obligation of compensation in this case are: first, when the risk of goods loss
was transferred and second, whether the goods crossed the ship’s rail in accordance
with the provisions of the contract. In this regard, there are relevant CISG precedents
in the world, which can provide some references for this case.
According to Articles 35 and 36 of CISG, the goods delivered by the seller must be
in conformity with the quantity, quality, and specifications specified in the contract,
and must be boxed or packed in the manner specified in the contract. According
to the contract and CISG, the Seller shall be liable for any non-conformity when
the risk passes to the buyer, even if the non-conformity becomes apparent after that
time.1 CISG shows that the time point of determining the risk transfer is the key
factor to determine when deciding whether the defaulting party will bear damages
for the non-conformity of the goods. For example, in a case decided by the judicial
tribunal of the Supreme Court of arbitration of the Russian Federation, according to
the contract, the defendant (the seller) promised to provide the goods, and the quality
of the goods met the Russian national standards and the manufacturer’s technical
specifications, and the claimant (the buyer) promised to receive the goods and pay
for the goods in accordance with the delivery terms and conditions delivered to the
carrier. The parties agreed that the terms of the contract should be interpreted in
accordance with Incoterms 2000 and CISG. According to the contract, the manufac-
turing date of the goods to be delivered shall not be earlier than August 2005. The
court found that the production date stamped on the engine of the machine delivered
to the buyer was 1989. Therefore, the seller cannot be considered to have properly
performed its contractual obligations. In addition, the equipment did not pass the
customs declaration, which was also the reason why, taking into account Article
36 of CISG and the specific conditions for delivery to the carrier, the court finally
came to the correct conclusion that the seller was responsible for any non-conformity
when the risk transferred to the buyer.2 In a case tried by the fifth circuit of the United
States Court of appeal, the seller, a company with its place of business in the United
States, agreed to sell 140,000 barrels of unleaded gasoline to the buyer, who was a
company with its place of business in Ecuador. The contract stipulates that the gum
content of gasoline is less than 3 mg per 100 ml and this shall be determined by a
third party before shipment. The delivery method is “CFR Ecuador–La Libertad.”
The third party proved that the limit of colloid content was met before shipment.

1 Case law of UNCITRAL. Case 1112. June 24, 2006. United Nations Commission on international
trade law.
2 Case law of UNCITRAL. Case 1371. October 18, 2007. United Nations Commission on

international trade law.

20 Shanghai Shenhe Import and Export … 167

However, the buyer tested the oil after receiving the goods in La Libertad and found
that it did not meet the standard. The court found that the seller had not defaulted on
the quality of the oil sold because the gasoline was up to standard when the risk of
loss was transferred to the buyer (Article 36(1) CISG).3
In this case, Nanjing Office’s defence was: “the delivery condition of the contract
is CFR, the goods inspected by Japan meet the contract standards, and the risk
of the goods crossing the ship’s rail will be transferred to the buyer,” “even if the
content of polymerisation inhibitor is insufficient, our responsibility only lies in
the cost of adding polymerisation inhibitor.” According to Article 36(1) of CISG
and referring to the above CISG jurisprudence, it can be concluded that the risk
of loss of goods does pass to the buyer when crossing the ship’s rail. However, as a
middleman, Jiangcheng Company entrusted Shenhe Company to sign a contract with
Nanjing Office according to the needs of the turnover time of the purchase and sales
business. The content of polymerization inhibitor was agreed to be 15–20 ppm. After
the quality dispute of the goods, the styrene quality inspection certificate provided
by Nanjing Office made it clear that the polymerization inhibition dose was only
12.5 ppm. Therefore, it should be determined that the quality of the goods before they
crossed the ship’s rail did not meet the agreement. Although the Chinese enterprise
actually found that the goods delivered by Nanjing Office did not meet the contract
requirements after the goods crossed the ship’s rail, Nanjing Office could still be
held responsible according to Article 36(1) CISG. Referring to the judgment of the
above case, Nanjing Office should be required to bear the liability for breach of
contract when the goods cross the ship’s rail in accordance with Article 36(1) CISG.
As Nanjing Office provided goods that were not in conformity with the contract,
Jiangcheng Company did not have the certificate of conformity of the quality of
the goods assessed by China Commodity Inspection, so it was unable to perform
the contract with its next company. Therefore, Nanjing Office has no objection to
the breach of contract and should bear the economic losses caused to Jiangcheng
Company due to the breach of contract.
Issue 3: Derogation Obligations
On the premise that Nanjing Office should bear the liability for breach of contract,
another controversial issue in this case is the determination of the scope of damages
that Nanjing Office should bear. In this case, the key dispute affecting the scope
of damages is whether Shenhe Company (the actual operator is the third-party
Jiangcheng Company) should bear the corresponding derogation obligation. First,
whether the Chinese buyer handles the defaulted goods at a reasonable price. Second,
the distribution of the burden of proof on whether the derogation obligation has been
fulfilled in this case. For these two issues, the relevant precedents of China and other
countries applying CISG provide us with some reference.
In the case of China’s application of CISG, there have been cases where the court
or arbitral tribunal found that there was no reasonable derogation because the final

3 3 F.R. 332,333, http://www.ca.uscourts.gov/opinions/pub/02/02-20166-cv0pdf (2) Correction:

http://www.ca5.uscourts.gov/opinions/pub/02/02-20166-cv1.pdf.
168 M. Yang

derogation measures of the injured party were lower than the contract modification
conditions proposed by the breaching party. For example, in an arbitration case, the
suggested price proposed by the defaulting buyer (US$11.2 or US$11.4 per box) is
lower than the contract price (US$12.2 per box), but higher than the seller’s final
resale price (US$7.79 per box). The arbitration tribunal held that the buyer did not
reasonably reduce the loss and did not use the difference between the contract price
and the resale price to calculate the loss. Instead, it comprehensively referred to
the average price in the German market and the recommended price put forward
by the buyer based on the Chinese market price to determine the reduction (finally
determined as US$10.4 per case), and subtracted it from the contract price to obtain
the amount of loss.4 Other countries have also applied CISG Article 77 to require the
observant party to perform the corresponding derogation obligations. For example,
in a case decided by the high court of Zelle, Germany, the Dutch seller sent a batch of
vacuum cleaners to the German buyer. After the vacuum cleaner sold out, the buyer
raised an objection to the quality of the vacuum cleaner, declared the contract invalid,
and refused to pay. The seller sued the buyer for payment of arrears, and the buyer
claimed to set off the loss compensation with the loss of profits. The court held that the
buyer had failed to mitigate its losses in accordance with Article 77 CISG because it
had only sought to replace the original goods in the region without considering other
suppliers from Germany or abroad.5 In a case decided by the Supreme Court of Spain,
the seller arranged a substitute sale in accordance with Article 75 CISG at a price
much lower than that agreed with the buyer. In addition, the quantity of alternative
sales was also much lower than the renegotiated price quoted by the original buyer.
The seller then claimed the difference between the original price and the alternative
price from the Spanish buyer in accordance with Articles 74 and 75. The court held
that the buyer had breached its obligation to reduce losses under Article 77 CISG and
therefore appropriately reduced the amount claimed.6 There are other cases where
the observant party is required to bear the impairment obligation in accordance with
Article 77 of CISG. For example, the case of the Yugoslav seller selling cow leather
to the defendant Italian buyer7 ; the German Darmstadt State Court ruled that the
German seller delivered 8,000 video recorders and other electrical appliances to the
Swiss buyer (i.e., the defendant), but did not deliver the instructions in the common
language of Switzerland8 ; the case of the German seller (plaintiff) selling 12,600 kg

4 Liu [1], pp. 100–108.

5 [1999] Oberlandesgerichts-Rechtsprechungsreport Celle, 360.
6 Internationale Jute Maatschappij BV v. Marin Palomares SL.
7 The buyer did not report the defects found after inspection to the seller, but asked for a price

reduction according to the low-speed market situation of cowhide. The seller refused to reduce the
price. The tribunal noted that even if the buyer had given notice in time, it had violated its obligation
to mitigate losses under Article 77 CISG. In this regard, the tribunal noted that the buyer did not
provide evidence that the cowhide was sold at loss due to its alleged defects.
8 UNCITRAL case law. Case 343. 9 May. 2000. United Nations Commission on international trade

law. The German seller delivered 8000 video recorders and other electrical appliances to the Swiss
buyer, the defendant. The buyer stated that the seller only delivered the instructions in German, but
not in other languages commonly used in Switzerland. The court stated that if the buyer was entitled
20 Shanghai Shenhe Import and Export … 169

of venison to the Belgian buyer (defendant) ruled by the high court of Brunswick,
Germany9 ; a judgment of the court of appeal of Paris, France, on the obligation of
derogation10 ; and the German buyer’s purchase of ten batches of “encapsulated”
bacon from the plaintiff’s Italian seller was decided by the high regional court of
Hamm, Germany.11 In other cases, the court also found that the observant party had
fulfilled the derogation obligation according to Article 77 of CISG. For example,
in the case of the sale of winter shoes between a German Company and an Italian
manufacturer ruled by a German court, a German Company purchased a batch of
winter shoes from an Italian manufacturer. The contract was not completed in the
end due to the defendant’s Italian manufacturer. After that, the plaintiff sold 21 pairs
of these shoes at the same price as the price agreed by the defendant, 109 pairs
at a much lower price, and 10 pairs were not sold. It could be considered that the
plaintiff did not fulfill the obligation of derogation as it sold most of the shoes at a low
price. However, according to the specific situation of the market, when the plaintiff
resold, most manufacturers had prepared their winter supply and were preparing the
supply for the next season. No one would buy winter shoes at a higher price at that
time. Therefore, the plaintiff’s resale is a reasonable way to fulfill the derogation

to these instructions, it would order them elsewhere rather than ask the seller to deliver them. The
buyer’s conduct violated his obligation to mitigate losses under Article 77 CISG.
9 [2000] transportrecht intermationales handelsrecht. The German seller (plaintiff) sold 12,600 kg

of venison to the Belgian buyer (defendant). The contract provides for the shipment of meat to
Antwerp. Shipment will be made after payment of invoice. Shortly after the conclusion of the
contract, the seller informed the buyer that part of the venison would be transported to Brussels by
air. The seller asked the buyer to receive the goods in Brussels and Antwerp and invoice for the
two batches. The buyer refused to receive the goods in Brussels. The seller then offered to deliver
all the goods to Antwerp within the time limit specified in the contract and stressed its demand
for immediate payment. The buyer failed to pay, claiming that the seller had refused to perform
the provisions of the contract on the place of performance. The seller then filed a complaint for
liquidated damages. The court held that as long as the contract remained in force, Article 77 did not
provide in principle that the party seeking to claim the other party’s breach of contract was obliged
to mitigate the loss caused by the non-performance of the sales contract through alternative sales.
10 http://witz.jura.uni-sb.de/ClSG/decisions/120601.htm. A judgment of the court of appeal of Paris,

France, stated that the plaintiff was obliged to mitigate the loss in accordance with Article 77 CISG.
The Court pointed out that if the inventory was resold and if the amount of the investment agreement
could be amortized in different ways, the loss claimed by the plaintiff—the loss of profits and the
cost of unusable raw materials—might not be so large.
11 [1994]0berlandesgerichtsrechusprechungs-ReportHamm27.The German buyer proposed to

purchase ten batches of “encapsulated” bacon from the plaintiff’s Italian seller. In reply to the
buyer’s offer, the seller mentioned “unpacked” Bacon. However, in its reply to the seller, the buyer
did not object to the change of wording. After sending four shipments, the buyer refused to accept
further shipments. Therefore, the seller declared the contract null and void and sold the remaining
six batches at a price much lower than the market price and the agreed purchase price. The seller
requires payment of loss fee, unpaid price and interest. In order to evaluate the loss, the calculation
method must first be considered in accordance with Article 75 CISG. However, in order to reduce
the loss, the seller is obliged to resell the goods for profit (Article 77 CISG). Since the seller could
not resell the goods at a price higher than the market price, the market price at the place of ship-
ment, rather than at the seller’s place of business, was used in the calculation method provided for
in Article 76 CISG.
170 M. Yang

obligation.12 By this case, we could learn that considering whether the parties fulfill
the obligation of derogation should be judged according to the specific situation of
the market. With regard to the burden of proof, in a case decided by the court of
the Canton of Vaud, Switzerland, the court noted that if the defendant proposed that
conditions that could mitigate his loss objectively existed, the court would also deny
the application of Article 77 CISG.13
In this case, both parties agreed that the styrene involved in the case was sold by
Jiangcheng Company at a price of no less than RMB 5300 per ton before November
19, 1996. By November 19, 1996, Jiangcheng Company had sold the goods, with an
average sales price of 5153 yuan per ton. The final average sale of goods is obviously
lower than the lowest price agreed by both parties. The sales contract signed between
Jiangcheng Company and its two buyers was 7400 yuan per ton and 7500 yuan per ton,
respectively. Obviously, the final average price of goods is also lower than those of
the two contracts. And, according to some courts in the described cases, they require
the defendant to put forward the objective existence of conditions that can mitigate
its loss, otherwise the court will deny that such circumstances apply to Article 77
CISG. I believe that, according to the general requirements of the procedural law, the
party claiming positive facts should bear the burden of proof. That is, the party which
has the obligation of derogation should prove that it has fulfilled the obligation of
derogation, rather than the other party proving that it has not fulfilled the obligation
of derogation. That is, in this case, Shenhe Company (Jiangcheng Company) shall
bear the burden of proof to prove that it has reasonable grounds for selling the goods
at a price lower than the agreed minimum price. If Shenhe Company (Jiangcheng
Company) cannot prove these grounds, it shall bear corresponding responsibilities
according to Article 77 of CISG. In this case, the average resale price of Shenhe
Company (Jiangcheng Company) is too low, and no reasonable reason is provided.
Therefore, the case should be judged according to Article 77 of CISG that Shenhe
Company (Jiangcheng Company) has not fully fulfilled the derogation obligation
and should bear the responsibility for the corresponding part of the loss.

Reference

1. Liu Y (2013) CISG derogation rules and their application in China. Presentday Law Sci
11(06):100–108

Dr. Mengsha Yang is a lecturer and master supervisor in Law School at Tianjin University, China.
Prior to that she got her graduated degree and doctoral degree in Nankai University. Her research
area is international trade law and international commercial law.

12 Case law of UNCITRAL. Case 130. January 14, 1994. United Nations Commission on
international trade law.
13 Case law of UNCITRAL. Case 1403. December 8, 2000. United Nations Commission on

international trade law.

Chapter 21
Japanese Xinsheng Trade Company v
Ningxia Hui Autonomous Region Nihong
Metallurgic Product Company

Wenjing An

Case Information
Case name: Japanese Xinsheng Trade Company v. Ningxia Hui Autonomous Region
Nihong Metallurgic Product Company
Seller: Ningxia Hui Autonomous Region Nihong Metallurgic Product Company
Place of Business: China
Buyer: Japanese Xinsheng Trade Company
Place of Business: Japan
Details of First Instance:
Court: Intermediate People’s Court of Shizuishan, Ningxia Hui Autonomous Region
Date of Decision: 2 December 2001
Case No: (2000) Shi Jing Chu Zi No 12
Judges: N/A
Details of Appeal:
Court: High People’s Court of Ningxia Hui Autonomous Region
Date of Decision: 27 November 2002
Case No: (2002) Ning Min Shang Zhong Zi No 36
Judges: Jinzhong Ye (Presiding Judge), Guohua Kang (Judge), Hong Zhu (Judge)
CISG applied: Yes
Key CISG provisions interpreted and applied: Articles 25, 66, 67 and 73(1)

W. An (B)
North China Electric Power University, Baoding, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 171

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_21
172 W. An

Abstract
In November 1998, the Chinese seller, Nihong Company, and the Japanese buyer,
Xinsheng Company, signed a white corundum sales contract No. 98NSN-1101. The
delivery term was FOB, and the loading period was from January to June 1999. The
seller transported the goods to the loading port as agreed, but the buyer changed
the loading time many times, resulting in the second batch of 120 tonnes of white
corundum not being loaded. The seller asked the buyer five times to fulfil the contract,
but the buyer requested a price reduction. After negotiation, the two parties signed
a second contract No. 99NSN-11–1, which modified the shipping period. However,
before the shipment of the second batch of goods, when the buyer and the seller
inspected the goods, they found that the goods were polluted by coal ash and partially
wet. The buyer raised a quality objection and took the seller to court in 2001.
In the first instance, the court held that the buyer repeatedly modified the loading
time and failed to fully perform the contract, which constituted a fundamental breach
of the contract. According to Section B5 of Incoterms 2000 FOB, the buyer shall
bear all risks of the goods. The seller is not at fault for the long-term detention of the
goods in the port and losses caused by the buyer’s breach of the contract. According
to Article 25, 73(1) and 74 of CISG, the buyer, Xinsheng Company, should pay the
seller, Nihong Company, the loss of RMB¥ 774,962.4 and USD$9060.
The buyer appealed to the Higher People’s Court, Ningxia Hui Autonomous
Region. After the hearing, the appeal court held that the Contract No. 99NSN-11–1
was changed to the Contract No. 98NSN-1101, and it should be strictly performed.
During the performance of the Contract No. 99NSN-11–1, both parties found that the
goods were polluted by coal ash and partially wet. Since neither party could provide
strong evidence of the source of pollution, according to the relevant provisions of
CISG and FOB in Incoterms 2000, the time of risk transfer of the goods in this case
should be bounded by the goods passing the ship’s rail at the designated loading
port, and the provisions of Section B5 of FOB do not apply. Both parties agreed to
change the contract before shipment, and specifically the shipment period, which
was the true intention of both parties for the contract change and should be strictly
performed. Since the risk had not been transferred to the buyer, the seller shall fulfil
the obligation of keeping the goods properly before shipment. The seller shall be
responsible for the pollution and moisture of the goods.
21 Japanese Xinsheng Trade Company v Ningxia Hui … 173

Commentary to the Key Issues Related to the CISG

Issues

Issue 1: The Applicability of CISG and Incoterms

Issue 2: The Impact of Modification of Contract on the Determination of

Fundamental Breach of Contract

Issue 3: Impact of Modification of Contract on Risk Transfer

Comments
Issue 1: The Applicability of CISG and Incoterms
I. Introduction
In 2002, the Higher People’s Court Ningxia Hui Autonomous Region handed down
its decision on Japanese Xinsheng Trade Company v. Ningxia Hui Autonomous
Region Nihong Metallurgic Product Company1 (Xinsheng Case). The application of
law is the primary problem to be solved in disputes over contracts for the international
sale of goods. In the Xinsheng Case, the two companies with their places of business
in China and Japan reached a sales contract in November 1998 and agreed to apply
FOB trade terms for transactions. Later, the parties modified the contract on the
issue of shipping time in November 1999, and then a dispute arose over the quality
of the goods. Both the court of first instance and the court of appeal applied CISG and
Incoterms, but the reasons for application were not explained clearly in the judgement
of the court of appeal. Articles 1 and 9 of CISG provide for the application of CISG
and Incoterms. Part II mainly discusses the application of CISG in this case. Part III
examines the application of Incoterms in the Xinsheng Case. Part IV provides some
closing remarks.
II. The Applicability of the CISG
A. Special Circumstances of the Application of CISG in the Xinsheng Case
The scope of application of CISG is stipulated in Articles 1 to 6 of the Convention.
Article 1 is an important provision2 ; according to the provision of Article 1(1)(a),
the Convention may apply to contracts for the international sale of goods between
parties whose places of business are in different contracting states. Article 1(1)(b)
stipulates that if the law of a contracting state is applied due to the guidance of the
rules of private international law, the Convention can also be applied at this time.

1 Japanese Xinsheng Trade Company v. Ningxia Hui Autonomous Region Nihong Metallurgic
Product Company–Dispute of Contracts for International Sale of Goods–Appeal, (2002) Ning Min
Shang Zhong Zi No. 36, Higher People’s Court Ningxia Hui Autonomous Region, 27 November
2002.
2 Zuo [1], p. 57.
174 W. An

Due to the optional characteristics of the Convention,3 Article 6 of the convention

allows the parties to exclude the application of the Convention through autonomy of
will.
In the Xinsheng Case, the application of the Convention is somewhat special.
The business places of the parties in this case are located in China and Japan. The
Convention entered into force for China on 1 January 1988 and for Japan on 1
August 2009.4 The Xinsheng Case occurred in 1999, when Japan had not yet joined
CISG. Therefore, the parties involved in this case have their places of business in the
territory of a contracting state and a non-contracting state. The court of first instance
and appeal clearly cited CISG in the paper of judgement. It can be seen that the court
applied CISG in this case, but there was no specific explanation on the application
of the Convention. The court failed to state arguments on why the Convention was
applicable to the sales contract between two parties whose places of business were
in a contracting state and a non-contracting state.
The author believes that Article 1(1)(a) of CISG cannot be applied. Since China has
made a reservation to Article 1(1)(b) of the Convention, it is impossible to apply CISG
through the guidance of private international law. The possible situation is that the
parties have made a clear agreement that the contract applies to CISG. Or during the
trial, the parties reached an agreement on the application of the Convention. In view
of this situation, China has made clear provisions. According to the Interpretations
of the Supreme People’s Court on Several Issues Concerning Application of the
Law of the People’s Republic of China on Choice of Law for Foreign-Related Civil
Relationships (I) (revised in 2020),5 Article 6 provides that if the parties agree to
choose or change the applicable law before the end of the debate in the court of first
instance, the court should support it.
B. The Court’s Citation and Interpretation of Specific Provisions of CISG
As for the reference of the ruling basis of court judgement, Article 1 of the Provisions
of the Supreme People’s Court on Citation of Such Normative Legal Documents as
Laws and Regulations in the Judgments6 stipulates that the content of the ruling
basis of court judgement shall be quoted in a standardised manner, and the whole
article shall be cited if it is necessary to cite the specific article.7 In this case, there
are ambiguities in the citation of specific provisions of CISG from both the court of
first instance and the appeal.

3 Li [2], p. 29.
4 https://uncitral.un.org/en/texts/salegoods/conventions/sale_of_goods/cisg/status last visited on
09/08/2021.
5 Interpretations of the Supreme People’s Court on Several Issues Concerning Application of the

Law of the People’s Republic of China on Choice of Law for Foreign-Related Civil Relationships
(I) (revised in 2020), Interpretation No. 18 [2020] of the Supreme People’s Court, 01–01–-2020.
6 Provisions of the Supreme People’s Court on Citation of Such Normative Legal Documents as

Laws and Regulations in the Judgments, Interpretation No. 14[2009] of the Supreme People’s Court,
11–04–2009.
7 He [3], p. 188.
21 Japanese Xinsheng Trade Company v Ningxia Hui … 175

The court of first instance referred to “pursuant to articles 25, 73(1) and 74 of
the CISG” when reaching the judgement conclusion and did not cite the contents
of specific articles or analyse the reasons for the application of specific provisions.
The court of appeal did not even mention the articles applicable to CISG, and only
proposed “conform to the relevant interpretations of the CISG” when reaching the
judgement conclusion.8 Although both courts mentioned CISG, they did not quote
the contents of specific provisions, and it is difficult to find the reasons for applying
the specific articles of CISG from the judgement. When overturning the conclusion
of the court of first instance, the court of appeal did not explain the relevant articles
of CISG discussed by the court of first instance. This is a problem often encountered
before the promulgation of the judicial interpretation of the Supreme Court in 2009.
III. Application of Incoterms
In international trade, practices and usage play a very important role. Therefore, in
Article 9 of CISG, the Convention clearly stipulates that practices and usage have
legal affect between the parties.9 The representative business practices are Incoterms
compiled by the International Chamber of Commerce, which has been widely used all
over the world and can be considered as well-known business practices by default.10
Therefore, according to Article 9 of CISG, the parties clearly choose trade terms in
the contract, the risk transfer rules established in Incoterms will be applied prefer-
entially, with the effect that the Convention’s own risk regulating rule is effectively
displaced.11
In the Xinsheng Case, the parties clearly agreed on the application of the trade
term FOB in the contract. Therefore, the courts of first instance and appeal directly
invoked the Incoterms rule to judge the problem of risk transfer. However, the court
of first instance’s understanding on contract alteration in this case is different from
that of the court of appeal, which leads the court of first instance to determine that
the buyer’s behaviour constitutes a fundamental breach of contract. “According to
Section B5 of the Incoterms 2000 term ‘FOB’, Buyer should bear all the risks of
these goods”.12 It can be seen that the court of first instance applied Section B5 of
the Incoterms 2000 term “FOB”. According to the analysis of the court of appeal,
the court did not consider that the buyer’s behaviour was a fundamental breach of
contract, and both parties had changed the contract by modifying the shipping period.
Therefore, in the performance of the second contract, there was no application of

8 Japanese Xinsheng Trade Company v. Ningxia Hui Autonomous Region Nihong Metallurgic
Product Company – Dispute of Contracts for International Sale of Goods–Appeal, (2002) Ning Min
Shang Zhong Zi No. 36, Higher People’s Court Ningxia Hui Autonomous Region, 27 November
2002.
9 Zhang [4], p. 79.
10 Zhou [5], p. 29.
11 Lookofsky [6], p. 107.
12 Japanese Xinsheng Trade Company v. Ningxia Hui Autonomous Region Nihong Metallurgic

Product Company–Dispute of Contracts for International Sale of Goods–Appeal, (2002) Ning Min
Shang Zhong Zi No. 36, Higher People’s Court Ningxia Hui Autonomous Region, 27 November
2002.
176 W. An

Section B5 of the Incoterms 2000 term “FOB”. So, the general provisions of FOB
on risk transfer, that is, the rules on risk transfer of goods passing the ship’s rail,
should be applied. It can be seen that the court of first instance and the appeal differ
in their understanding of the issue of contract change, resulting in different specific
articles invoked in the application of Incoterms rules. Nevertheless, on the issue of
legal application, the two courts both agree that the provisions of trade terms should
be applied to the issue of risk transfer first, and then the articles of the Convention
and domestic law should be considered.
In addition, the initial contract in this case was concluded in 1998 and the contract
was changed in 1999. The contract agreed to apply FOB, but the specific version
was not indicated. According to the conclusion time of the contract, the 1990 version
of Incoterms should apply. Incoterms 2000 came into force on 1 January 2000.
Incoterms 2000 did not apply when the contract was concluded and changed but
only when there was a dispute. The court of first instance heard the case in 2001
and the court of appeal heard the case in 2002. When interpreting FOB, both courts
directly applied Incoterms 2000. Although there was no major change in the FOB
rules in the two versions, it is obviously more appropriate to apply the 1990 version
of Incoterms to interpret FOB according to the principle of non-retroactivity of law.
IV. Closing Remarks
Firstly, on the application of the Convention, when only one of the countries where
the parties are located is contracting states of the Convention, the parties can make
clear and specific provisions on the applicable law in the contract. When hearing such
cases, Chinese courts should clearly analyse the reasons for the application of the
applicable law in the judgement to prevent a wrong application. As of 2018, Chinese
courts have discussed the application of CISG in 204 cases,13 which shows that this
problem is gradually being addressed. Due to the complexity of CISG’s articles on
the scope of application and China’s reservation to Article 1(1)(b), it is necessary to
explain the application of the Convention, which is also a problem neglected in the
early jurisprudence of Chinese courts.
Secondly, with regard to the citation and interpretation of specific articles of CISG,
the citation and interpretation of both the courts of first instance and appeal in the
Xinsheng Case are vague and unreasonable. It makes it difficult for the parties to
understand and enforce the judgement. International trade disputes are complex, so
it should be specific and clear when citing treaties and demonstrating or analysing
specific provisions, being the original intention of the Supreme Court issued judicial
interpretation in 2009.
Finally, with regard to the application of international trade terms, this case follows
the provisions of Article 9 of the Convention. When the parties choose trade terms,
the provisions of trade terms shall prevail. The articles of the Convention shall be
invoked for judgement only on issues not specified in trade terms. However, in the
application of a version of trade terms, we should also pay attention to the influence
of the principle of non-retroactivity of law. In addition, the parties can freely choose

13 Zuo [1], p. 57.

21 Japanese Xinsheng Trade Company v Ningxia Hui … 177

the version of trade terms and clearly agree which version of international trade
terms to apply in the contract, so that the court can more accurately apply the rules
to resolve disputes.
Issue 2: The Impact of Modification of Contract on the Determination of
Fundamental Breach of Contract
I. Introduction
The determination of a fundamental breach of contract is a problem often encoun-
tered in disputes over international sales contracts, and the determination will affect
the form of responsibility of both parties. If it constitutes a fundamental breach of
contract, the parties can terminate the contract, but if it does not constitute a funda-
mental breach, the dispute can only be solved by continuing performance, delivering
substitutes, giving a grace period or other means. The authors here focus on whether
it will be recognised as a fundamental breach of contract in the case of contract
modification caused by one party’s breach of contract. Part II briefly introduces the
provisions of the convention on the determination of fundamental breach of contract.
Part III analyses the identification of a fundamental breach of contract in this case.
Part IV concludes this part.
II. Identification Rules of Fundamental Breach of CISG
CISG’s provisions on fundamental breach of contract are in Article 25 of the
Convention and provide that:
A breach of contract committed by one of the parties is fundamental if it results in such
detriment to the other party as substantially to deprive him of what he is entitled to expect
under the contract, unless the party in breach did not foresee and a reasonable person of the
same kind in the same circumstances would not have foreseen such a result.

This article is a general provision on the determination of fundamental breach

of contract and is vague. When the Convention was formulated, the article was
amended several times. At the 1980 Vienna Diplomatic Conference, there were still
great differences in the understanding of representatives of various countries on
the fundamental breach system. Even the representatives of countries that agreed
with the adoption of the article believed that “the adopted text may cause some
difficulties in interpretation”.14 Some scholars believe that it is impossible to define
fundamental breach of contract, and it can only be summarised through precedents in
practice.15 Scholars have summarised several criteria for judging the composition of
fundamental breach of contract through national jurisprudence, such as “the nature of
the breached contractual obligation”, “the conformity of goods” and “the possibility
of relief”. Professor Robert Koch believes that these standards have their limitations
and cannot summarise all the situations involved in fundamental breach of contract.

14 United Nations, United Nations Conference on Contracts for the international sale of goods
official records, Part Two, Summary Records-Plenary meetings, 7th plenary meeting, 8 April 1980.
A/CONF. 97/SR.7.
15 Lorenz [7].
178 W. An

Finally, the scholar puts forward a new method to judge fundamental breach of
contract, that is, to judge whether the breach of contract destroys the purpose of the
contract and whether the injured party needs to terminate the contract or seek relief
for delivery of substitutes.16 It provides a simple standard to judge the fundamental
breach of contract, that is, if the breach destroyed the legitimately expected outcome
of a contract, a fundamental breach has occurred.17
III. Determination of Fundamental Breach of Contract in the Xinsheng Case
In the first instance of this case, the court held that the buyer had repeatedly changed
the loading time and failed to fully perform the contract, which constituted a funda-
mental breach of the contract. In the view of the court of appeal, the buyer delayed
the shipment time due to price problems, resulting in the long-term detention of 120
tonnes of white corundum in the port. In order to solve this problem, the parties
changed the contract and revised the shipping period through negotiation. When
performing the modified contract, both parties found that the goods had coal dust
and water moisture, so they had a dispute over the product quality. The court of appeal
did not consider that there was a fundamental breach of contract in the performance
of the contract.
The authors agree with the court of appeal that the buyer’s delay in the time of
shipment constitutes a violation of the contract signed in 1998. However, after the
occurrence of this problem, the parties negotiated and changed the time of shipment.
Article 29(1) of the Convention also clearly stipulates that the contract can be changed
or terminated only by agreement between the parties. In this case, the buyer’s breach
of contract was remedied by changing the contract, and the seller did not request to
terminate the contract. Therefore, the buyer’s breach of contract did not substantially
destroy the seller’s contract expectation, and so it should not be recognised as a
fundamental breach of contract. The quality of the goods may indeed be due to
pollution and wet damage caused by the long-term, non-delivery of the goods in the
warehouse, but neither party can provide evidence to prove who caused the damage.
Therefore, it is not appropriate to consider the damage as the result of the buyer’s
delay in shipment. The seller agreed to change the delivery time and adjust the price of
the goods, both parties settled the problem of delayed shipment through negotiation,
so the seller must ensure that the goods are in normal condition before delivery. If
the seller violates this obligation, it shall be liable for breach of contract.
IV. Closing Remarks
The determination of fundamental breach of contract should be more cautious,
because it will lead to the termination of the contract and has a significant impact
on the interests of both parties in international trade. Although the provisions on
fundamental breach of CISG are vague, courts and arbitral tribunals in various coun-
tries generally have a more cautious attitude when determining fundamental breach

16 Koch [8].
17 Zeller [9], p. 93.
21 Japanese Xinsheng Trade Company v Ningxia Hui … 179

of contract. If there is the possibility of remedy, it will not be declared a funda-

mental breach of contract. In this case, the problem of the buyer’s breach of contract
was solved by changing the contract, so it does not constitute substantial damage
to the seller’s expectation of the contract outcome, so it should not be considered a
fundamental breach of contract.
Issue 3: Impact of Modification of Contract on Risk Transfer
I. Introduction
Risk transfer is an important issue involved in disputes over contracts for the interna-
tional sale of goods. According to Article 6 of the Convention, the parties are free to
agree on the issue of risk transfer. In practice, the parties usually agree on trade terms
to determine the time of risk transfer.18 The provisions of articles 66 to 70 of CISG
can regulate the transfer of risk in areas not specified in trade terms. The risk transfer
in the Xinsheng Case is also special. The focus of this case is whether the contract
has been changed and the shipping period modified and this also is the disagreement
between the court of first instance and the appeal. Part II discusses the provisions of
CISG and FOB trade terms on risk transfer and Part III analyses the special problems
of risk transfer in this case. Part IV is the conclusion.
II. Provisions on Risk Transfer in CISG and FOB
If the international contract for the sale of goods clearly stipulates trade terms, the
risk transfer shall first comply with the provisions of trade terms, supplemented by
the provisions of CISG. FOB 2000 was involved in this case and, according to the
provisions of Section A5, the risk of goods is transferred from the seller to the buyer
when the goods pass the ship’s rail at the port of shipment. According to Section B5,
if the buyer fails to perform the notification obligation, or delays in performing or
fails to receive the goods, the risk shall be transferred to the buyer from the agreed
delivery date or the expiration date of the delivery period if the goods are specific. At
the same time, on the premise of applying FOB, CISG has also made supplementary
provisions on the transfer of risk involving transportation. As stipulated in Article
67(1), if the seller is obliged to deliver the goods to the carrier at a specific place, the
risk will not be transferred to the buyer until the goods are delivered to the carrier at
that place.
III. Impact of Contract Change on Risk Transfer in the Xinsheng Case
According to the provisions mentioned in Part II, the specific time of risk transfer can
usually be determined. In this case, when the buyer delayed the performance of the
shipment obligation, the buyer and the seller renegotiated and changed the delivery
date. The court of first instance held that the buyer’s delay in performance constituted
a fundamental breach of contract. However, compared with the provisions of FOB
Section B5 in Incoterms 2000, the delivery period had not expired, so it fails to trigger
the application of B5, and it should not constitute an early risk transfer. The buyer’s
behaviour was not serious enough to constitute a fundamental breach of contract.

18 China International Economic and Trade Arbitration Commission [10], p. 126.

180 W. An

Therefore, the court of appeal held that the risk had not been transferred according
to the general provisions of A5, so the seller should bear the risk of pollution and
moisture loss of the goods.
The author agrees with the view of the court of appeal. Combined with the judge-
ment of fundamental breach of contract, the agreement of both parties to change the
contract has changed the shipment date of the contract. During the performance of
the changed contract, the quality defects of the goods were found before shipment.
At this time, the goods had not been loaded, so the risk had not been transferred, and
the goods’ damage shall be borne by the seller.
IV. Closing Remarks
In case of any dispute during the performance of the contract, the parties may change
the contract at any time to facilitate the performance of the contract. Therefore, the
impact of contract change on risk transfer should be noted. This needs to be judged
in combination with the trade terms selected by the parties and the applicable laws.
However, in any case, the impact of contract changes on the application of relevant
rules should be considered.

References

1. Zuo HC (2021) The application of CISG and incoterms in risk transfer from neuromed case. J
Henan Univ Econ Law 36(1):54–59
2. Li W (2009) A commentary on CISG, 2nd edn. Law Press
3. He H (2019) Problems, causes and improvements in the application of CISG by Chinese courts.
Law 4:181–192
4. Zhang YQ (2009) Uniform law on international sales of goods: interpretation of the United
Nations convention on contracts for the international sale of goods, 3rd edn. China Business
Press
5. Zhou LK (2019) Contact law for international merchant trade: a study on CISG based on
commercial views approach. China Fortune Press
6. Lookofsky J (2017) Understanding the CISG: a compact guide to the 1980 United Nations
convention on contracts for the international sale of goods. Kluwer Law International BV
7. Lorenz A (1998) Fundamental breach under the CISG, pace essay submission. http://cisgw3.
law.pace.edu/cisg/biblio/lorenz.html
8. Koch R (1999) The concept of fundamental break of contract under the United Nations Conven-
tion on Contracts for the international sales of goods (CISG). In Pace (eds) Review of the
convention on contracts for the international sales of goods (CISG) 1998, pp 177–354. Kluwer
Law International
9. Zeller B (2004) Fundamental breach and the CISG- a unique treatment or failed experiment?
Vindobona J Int Commer Law Arbitr 8:81–94
10. China International Economic and Trade Arbitration Commission (2021) The application of
the United Nations convention on contracts for the international sale of goods in Chinese
arbitration. Law Press
21 Japanese Xinsheng Trade Company v Ningxia Hui … 181

Wenjing An female, graduated from the Law School of Nankai University in 2017, the research
direction is international economic law. The title of graduation thesis is “Study on the Deter-
mination of Fundamental Breach in the International Commercial Contracts”. Since 2008, she
has served as a Lecturer in Law in the Department of Law and Political Science of North
China Electric Power University, teaching International Economic Law and International Law
courses for undergraduates and postgraduates. She published the following papers: “The Anal-
ysis of Decision-Making Mechanism of Multilateral Development Banks and the Inspiration for
the Asian Infrastructure Investment Banks”, Social Sciences in Chinese Higher Education Insti-
tutions, Issue 4, 2015; “Theoretical and Empirical Study on the Foreseeability Standard of CISG
Fundamental Breach”, Hebei Law Science, Issue 1, 2019.
Chapter 22
Wuhan Zhongou Clothes Factory v
Hungary Wanlong International Trade
Company

Wenjing An

Case Information
Case name: Wuhan Zhongou Clothes Factory v Hungary Wanlong International
Trade Company
Seller: Wuhan Zhongou Clothes Factory
Place of business: China
Buyer: Hungary Wanlong International Trade Company
Place of Business: Hungary
Details of First Instance:
Court: Wuhan Intermediate People’s Court, Hubei
Date of Decision: 11 May 2004
Case No: (2002) Wu Jing Chu Zi No 116
Judges: Chen Jun (Presiding Judge), Ai Zhihua (Judge), Chen Yanping (Acting
Judge)
CISG applied: Yes
Key CISG provisions interpreted and applied: Articles 1(1)(a), 53 and 78
Abstract
In June 1998, the Chinese seller, Zhongou Clothes Factory, signed three clothes
sales contracts with the Hungarian buyer, Wanlong International Trade Company.
The actual quantity of goods delivered by the seller was less than that agreed in the
contract, and the delivery date of the latter two batches of goods was also delayed.
However, the buyer received the bill of lading and took delivery of the goods without

W. An (B)
North China Electric Power University, Baoding, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 183

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_22
184 W. An

raising any objection. The actual value of the goods delivered by the seller was
US$156,822.60. According to the agreement, the buyer should pay the payment
before 31 December 1998. After the buyer paid US$77,000, there was US$79,822.60
outstanding. Therefore, the seller sued the court and asked the buyer to pay the
remaining payment and interest.
Wuhan Intermediate People’s Court held that the parties did not choose the law
applicable to the contract. According to Article 1(1)(a) of CISG, the places of business
of both parties are located in the Contracting States of the Convention, so CISG should
be applied. For issues beyond the scope of the CISG, the law of the country which
has the closest connection with the Contracts shall be applied. Since the place of
performance of the contract is in China, Chinese law shall be applied.
The court held that, in the course of performing the contract, the seller changed
the transaction quantity and delivery time, and the buyer did not raise any objection
after receiving the bill of lading and taking delivery of the goods, and this was
regarded as recognition of the changed matters. The price claimed by the seller
is calculated according to the quantity of goods actually delivered. Therefore, the
buyer’s failure to pay the payment within the time limit agreed in the contract is a
breach of contract. According to Article 53 of CISG, the buyer shall pay the seller
US$79,822.60. According to the provisions of Article 78, the buyer shall reimburse
the seller for the interest on the unpaid payment and deferred payment. The interest
shall be calculated from 1 January 1999 to the effective date of the judgment according
to the bank interest rate at the place of remittance, that is, the annual interest rate of
the US dollar loan of the People’s Bank of China in the same period.

Commentary to the Key Issues Related to the CISG

Issues
Issue 1: The Applicability of the CISG
Issue 2: The Obligation to Pay the Price of Goods of the CISG
Issue 3: Determination of the Rate of Interest under the CISG
Comments
Issue 1: The Applicability of the CISG
I. Introduction
In 2004, Wuhan Intermediate People’s Court heard the case of the dispute over the
sales contract between Zhongou Clothes Factory and Wanlong International Trade
Company (Zhongou Case).1 The application of the Convention in this case is typical

1 Wuhan Zhongou Clothes Factory v. Hungary Wanlong International Trade Company—Dispute of

Contracts for International Sale of Goods—First Instance, (2002) Wu Jing Chu Zi No. 116, Wuhan
Intermediate People’s Court, 11 May 2004.
22 Wuhan Zhongou Clothes Factory … 185

and representative. The parties did not agree in the contract on the law applicable
to the contract. When hearing the case, the court held that the places of business
of both parties were located in the Contracting States of the Convention. Therefore,
CISG was applicable in accordance with Article 1(1)(a) of the Convention. Part II
briefly introduces the rules applicable to Article 1(1)(a) of the Convention, Part III
analyses the application of the Convention in the Zhongou Case, and Part IV draws
a conclusion.
II. Automatic Application of CISG Article 1(1)(a)
Article 1 of CISG stipulates the subject scope of the Convention and the criteria
for determining the “internationality” of the contract.2 Article 1 of the Convention
provides that:
(1) This Convention applies to contracts of sale of goods between parties whose
places of business are in different States:
(a) When the States are Contracting States; or
(b) When the rules of private international law lead to the application of the
law of a Contracting State.
(2) The fact that the parties have their places of business in different States is to
be disregarded whenever this fact does not appear either from the contract or
from any dealings between, or from information disclosed by, the parties at
any time before or at the conclusion of the contract.
(3) Neither the nationality of the parties nor the civil or commercial character of
the parties or of the contract is to be taken into consideration in determining
the application of this Convention.
With regard to the application of Article 1(1)(a) of the Convention, the United
Nations Commission on International Trade Law, the creator of the Convention,
pointed out in the Digest of Case Law on the United Nations Convention on Contracts
for the International Sale of Goods:
According to the criterion set forth in Article 1(1)(a), the Convention is “directly” or
“autonomously” applicable, i.e., without the need to resort to the rules of private inter-
national law, or contracting parties’ mutual agreement upon its application, when the States
in which the parties have their relevant places of business are Contracting States.3

The above views have also been widely recognized by scholars in various coun-
tries. Some scholars believe that contracts that meet the requirements of Article
1(1)(a) are directly applicable to CISG without private international law.4 The court
need not use rules of “conflict of laws” to decide whether the CISG applies.5 As

2 Li [1], p. 6.
3 UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the
International Sale of Goods (2016 Edition), p. 5.
4 Shiomi et al. [2], p. 31.
5 Lookofsky [3], 13.
186 W. An

for the nature of this Article, some scholars believe that Article 1(1)(a) is a unilat-
eral conflict rule, which directly specifies the applicable law.6 As for the purpose of
the Article, some scholars believe that the rule is to exclude the application of the
provisions of private international law.7
Before the Convention came into force in 1987, China stipulated the automatic
application of the Convention in the Notice on Certain Issues of the Ministry of
Foreign Trade and Economic Cooperation in Connection with the Implementation
of the United Nations Convention on Contracts for the International Sale of Goods.8
Article 1 of the Notice stipulates:
According to the provision of Article (1) of the Convention, from January 1, 1988, the
contracts for sale of goods reached between the Chinese companies and the companies in
the aforementioned countries (except Hungary) will automatically apply to the provisions
of the Convention and the disputes or litigations arisen should be also settled under the
Convention, unless otherwise agreed.9

It can be seen that before the Convention came into force, China had a clear grasp
of the direct application of the Convention.
III. Application of the Convention in the Zhongou Case
Since China made reservations to Article 1(1)(b) of CISG, if the parties have not
chosen the law applicable to the contract, the court shall consider whether the case
complies with the provisions of Article 1(1)(a) of the Convention. If a positive conclu-
sion is reached, it is necessary to examine whether the parties have excluded the
application of the Convention in accordance with Article 6 of CISG.10 In this case,
Wuhan Intermediate People’s Court held that the seller’s place of business was in
China and the buyer’s was in Hungary, and the parties failed to specify the applicable
law. According to Article 1(1)(a) of the CISG, the CISG shall be the applicable law
in this case, the Convention is directly applicable. One deficiency in the judgment
is that the court only investigated whether Article 1(1)(a) is applicable and did not
analyze whether the parties exclude the application of the Convention according to
Article 6 of CISG. Therefore, the court’s analysis is not rigorous enough in this
regard.
In addition, for issues not provided for in the Convention, the rules of domestic
law can be applied through the guidance of the rules of private international law. In
the Zhongou Case, the court held that,

6 Li [1], p. 9.
7 Shiomi et al. [2], p. 31.
8 China International Economic and Trade Arbitration Commission [4], 20.
9 Certain Issues of the Ministry of Foreign Trade and Economic Cooperation in Connection with

the Implementation of United Nations Convention on Contracts for the International Sale of Goods,
Wai Jing Mao Fa Zi [1987] No. 22, December 4, 1987.
10 Liu [5], p. 193.
22 Wuhan Zhongou Clothes Factory … 187

for issues beyond the scope of the CISG, the law of the country which has the closest
connection with the Contracts shall be applied. Since the Contracts were performed in China,
Chinese law shall be applied.11

At the same time, this case also involves the trade term FOB, and the parties
expressly choose the trade term in the contract; when it comes to the place of delivery,
the provisions of trade terms may prevail in accordance with Article 9 of CISG.
In practice, there are many similar cases. Many parties pay more attention to
their economic interests than legal obligations, as they are not experienced in the
choice of law. There are often no provisions for the application of law in contracts.
Article 1(1)(a) of CISG is applicable in such circumstances. The China International
Economic and Trade Arbitration Commission (CIETAC) selected 109 arbitral awards
from 2002 to 2009 for analysis. It was found that 89 arbitral awards were automat-
ically applied to the Convention through Article 1(1)(a) of CISG, accounting for
about 82% of the total number of cases.12 The 2016 edition of UNCITRAL Digest
of Case Law on the United Nations Convention on Contracts for the International
Sale of Goods also lists nearly 200 cases of automatic application of conventions.
There are many precedents of the Supreme Court in various countries, such as China,
Belgium, Austria, Germany, France, Italy, Switzerland, and the Netherlands.13 It can
be seen that, in practice, the automatic application of the Convention according to
Article 1(1)(a) of CISG has been very common.
IV. Conclusion
As a typical case applicable to CISG Article 1(1)(a), the court’s interpretation of
the application of the law is clear and definite, which is easy for both parties to
understand and accept. As an early case, it provides a good reference for the courts
to hear similar cases. However, when judging the application of Article 1(1)(a) of
the Convention, it is also necessary to consider whether the parties have excluded
the application of the Convention. The court ignored the analysis of this issue, so the
analysis of the application of the law is not complete. In this regard, in 2021, CIETAC
summarised the typical wording on the automatic application of the Convention. The
authors believe that it is more rigorous, which can be used for reference by courts
and arbitral tribunals. The specific expression is as follows:

11 Wuhan Zhongou Clothes Factory v. Hungary Wanlong International Trade Company—Dispute

of Contracts for International Sale of Goods—First Instance, (2002) Wu Jing Chu Zi No. 116,
Wuhan Intermediate People’s Court, 11 May 2004.
12 China International Economic and Trade Arbitration Commission [4], pp. 20–21.
13 See e.g. Supreme People’s Court, People’s Republic of China, 30 June 2014, (ThyssenKrupp

Metallurgical Products GmbH v. Sinochem International (Overseas) Pte Ltd), (2013) Min Si Zhong
Zi No. 35 Civil Judgment, available on the Internet at www.court.gov.cn; CLOUT case No. 428
[Oberster Gerichtshof, Austria, 7 September 2000], also in Internationales Handelsrecht 2001, 42
ff.; CLOUT case No. 319 [Bundesgerichtshof, Germany, 3 November 1999]; CLOUT case No. 315
[Cour de cassation, France, 26 May 1999]; CLOUT case No. 644 [Corte di Cassazione, Italy, 7
August 1998]; CLOUT case No. 248 [Bundesgericht, Switzerland, 28 October 1998]; CLOUT case
No. 834 [Hoge Raad, Netherlands, 26 September 1997], Nederlands Juristenblad 1997, 1726 f.
188 W. An

Considering that one party has its place of business in a certain country and the other party has
its place of business in China, both a certain country and China are contracting states of CISG.
And the parties do not exclude the application of the Convention in the contract. Therefore,
according to Article 1 of CISG, the Convention applies to contracts signed between parties
with their place of business in a certain country and parties with their place of business in
China.14

Issue 2: The Obligation to Pay the Price of Goods of the CISG

I. Introduction
In the Zhongou Case, the buyer and the seller signed a sales contract and clearly
agreed on the quantity of goods, delivery time and place, price terms, and payment
time. During the performance of the contract, the seller actually delivered less goods
than the agreed quantity. The buyer took delivery of the goods based on the bill of
lading without raising any objection. However, within the payment period, the buyer
only paid part of the payment for the goods and did not fully pay for the goods
delivered by the seller. Accordingly, the court held, in accordance with Article 53
of the Convention, that the buyer should fulfill the obligation to pay. The Zhongou
Case is also a typical case of applying Article 53 to determine the buyer’s payment
obligation. Part II briefly introduces the provisions of Article 53 of CISG, and Part III
analyses the application of Article 53 in the Zhongou Case. Part IV is the conclusion.
II. Article 53 in the CISG
Article 53 summarises the main obligations of the CISG buyer.15 The specific
stipulations are as follows:
The buyer must pay the price for the goods and take delivery of them as required by the
contract and this Convention.

According to Article 53, payment of the price is the basic obligation of the buyer.
Article 53, as a general provision of the buyer’s obligations, corresponds to the general
provisions of Article 30 on the seller’s obligations. According to the Secretariat’s
Commentary on Article 53 of the Convention, the buyer must perform its contractual
obligations in accordance with the contract and the provisions of the Convention, and
the contractual agreement takes precedence over the application of the Convention.16
Therefore, the buyer shall first perform its payment obligations in the manner and
time agreed in the contract, and the Convention shall apply to the matters not agreed
in the contract.
In judicial practice, there are many precedents cited by judges to explain the
buyer’s obligations. As of 1 September 2021, the CLOUT Database contains 959
CISG precedents17 and 171 cases related to Article 53, including 136 cases selected

14 China International Economic and Trade Arbitration Commission [4], p. 21.

15 Lookofsky [3], p. 102.
16 UNCITRAL Secretariat, Commentary on the Draft convention on Contracts for the International

Sale of Goods, Document A/CONF. 97/5, 14 March 1979.

17 https://www.uncitral.org/clout/index.jspx?lng=zh#legislativeText last visited on 09/01/2021.
22 Wuhan Zhongou Clothes Factory … 189

by the Supreme Court, the arbitral tribunal, and the Digest of Case Law. Of the 136
cases, 103 cited Article 53 to show that the buyer had an obligation to pay. In such
cases, the buyer generally fails to perform or fully perform the payment obligations.
If the court finds that the buyer refuses to pay without justified reasons, the buyer is
required to continue to perform the payment obligations under Article 53.
III. The Obligation to Pay the Price of Goods of the CISG in this Case
This case is a typical case of invoking Article 53 to explain the buyer’s payment
obligation. The performance of the buyer’s obligations in Article 53 is usually closely
related to the performance of the seller’s obligations in Article 30. In this case, the
seller had defects in the performance of delivery obligations, the quantity of goods
did not meet the contract, and some batches of goods were delayed in delivery.
However, when the bill of lading was delivered to the buyer, the buyer did not raise
any objection, took delivery of the goods, and paid part of the payment on the basis of
the bill of lading. It can be seen that the buyer recognized the goods delivered by the
seller. As the analysis of Wuhan Intermediate People’s Court said, “when performing
the contract, the seller changed the delivery quantity and delivery time, and the buyer
did not raise any objection after receiving the bill of lading and taking delivery of
the goods, which is deemed to be recognition of the change. The amount of payment
claimed by the seller is calculated according to the actual delivery quantity and the
agreed price conditions, and its authenticity should be confirmed”.18 In this case,
according to the contract, the buyer should pay off, within 40 days from the date of
receiving the goods, while the buyer paid less than 50% of the purchase price during
this period, so the court ruled to continue to pay the remaining amount.
In the Zhongou Case, both the seller and the buyer have breached the contract. The
seller’s change in the performance of the contract had been recognized by the buyer,
so the buyer only needs to continue to perform the changed contract, and the seller did
not constitute a fundamental breach of the contract. After the contract was changed,
the buyer refused to pay after paying nearly 50%, and the court did not find that there
was a fundamental breach of contract in the buyer’s refusal. The authors agree with
the court’s view that, at this time, the buyer still has the possibility of continuing
to perform, and it is not suitable to terminate the contract as a fundamental breach
of contract. Therefore, it is a more appropriate solution for the buyer to continue to
perform the contract.
IV. Conclusion
Article 53 is invoked in this case mainly to illustrate that the buyer needs to perform
the payment obligation. The provision of Article 53 itself is relatively simple. In
judicial practice, many courts and arbitral tribunals cite this Article in the same way
as in this case. According to the contract, the buyer has the obligation to pay. The
buyer refused to pay after paying part of the payment, which constitutes a breach

18Wuhan Zhongou Clothes Factory v. Hungary Wanlong International Trade Company—Dispute

of Contracts for International Sale of Goods—First Instance, (2002) Wu Jing Chu Zi No. 116,
Wuhan Intermediate People’s Court, 11 May 2004.
190 W. An

of contract. Therefore, the buyer can continue to perform the payment obligation
according to Article 53. The judgment in this case invokes Article 53 with clear
reasoning and proper analysis, which can be used as a reference for subsequent
similar cases.
Issue 3: Determination of the Rate of Interest under the CISG
I. Introduction
In the Zhongou Case, the buyer failed to pay the full purchase price. Therefore, as
an amount is outstanding after the expiration of the performance period, the court
ordered the buyer to pay interest on the delayed payment of the purchase price
according to Article 78 of CISG, which is calculated from the date of the expiration
of the performance period to the date when the judgment takes effect. The interest
rate is calculated according to the bank interest rate at the place of remittance, that
is, according to the interest rate at the place where the seller is located. This case is
a typical case of applying Article 78 to calculate the interest rate. Part II introduces
the provisions of Article 78 of the Convention, Part III analyses the application of
Article 78 in this case, and Part IV draws a conclusion.
II. Article 78 in the CISG
Article 78 is one of the most controversial articles in the formulation of the Conven-
tion. The domestic laws of various countries have different provisions on interest
rates, and Article 78 was designed to establish a general rule that would be free
from the variation of domestic law.19 Due to the influence of various countries’ reli-
gious, political, and economic systems, the current version of CISG Article 78 is an
unsatisfactory compromise.20 Article 78 of the Convention provides that:
If a party fails to pay the price or any other sum that is in arrears, the other party is entitled
to interest on it, without prejudice to any claim for damages recoverable under Article 74.

Many scholars have criticized the ambiguity of this Article. Some scholars believe
that Article 78 is more conspicuous for the questions it fails to answer than the
questions it answers.21 Article 78 provides that, when one party fails to pay the
price or any other amount in arrears, the other party has the right to receive interest.
UNCITRAL believes that:
Entitlement to interest requires only that the sum for which interest is sought is due, and
that the debtor has failed to comply with its obligation to pay the sum by the time specified
either in the contract or, absent such specification, by the Convention.22

In addition, Article 78 defines the relationship between the right to charge interest
and the right to claim damages. The two rights are independent and do not affect

19 Honnold [6], p. 466.

20 Schlechtriem [7], p. 213.
21 Ziegel and Samson [8].
22 UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the

International Sale of Goods (2016 Edition). p. 364.

22 Wuhan Zhongou Clothes Factory … 191

each other. However, there is no specific provision on how to determine the interest
rate. In practice, most courts believe that the interest rate issue does not belong to
the adjustment scope of the Convention and should be handled by the applicable law
determined by the rules of private international law.23 There is an obvious trend in
judicial practice that the interest rate problem should be solved by the law applicable
to the sales contract.24 In addition, some courts did not consider the rules of private
international law, but directly applied the interest rate of the country where the
creditor is located, the country where the price is paid, the country where the debtor
is located, the place of litigation, etc. to solve this problem. In addition, due to
different national conditions, there is no unified practice on whether the interest rate
is determined according to the legal interest rate or the average commercial interest
rate, and whether the interest rate is determined according to the bank deposit interest
rate or the loan interest rate.
III. Analysis of the Application of Article 78 in the Zhongou Case
In this case, the buyer had not paid US$79,822.60 by the expiration of the performance
period, that is, 31 December 1998. This situation just meets the applicable conditions
of Article 78 of the Convention. For the unpaid amount, the seller has the right to
require the buyer to pay interest. In its judgment, the court invoked the provisions of
Article 78 and decided that the interest paid by the seller was from 1 January 1999
to the effective date of the judgment. For the starting date of interest calculation,
this issue is unified and clear in judicial practice, that is, the interest is calculated
from the due date. Scholars pay less attention to the issue of when to terminate. In
practice, some judges believe that it should be until the date of actual payment, while
some judges believe that it should be until the date of effectiveness of the award,
such as in this case. There will be differences between the two in the actual payment.
For example, the judgment in this case also states that “the above payment shall be
performed within 30 days from the effective date of this judgment”.25 Therefore, it
is very likely that the effective date of the judgment is not the same as the actual
performance date. Since there is no detailed provision in Article 78, there are still
differences in determining when the interest will terminate in practice.
In addition, the settlement of the interest rate issue in this case does not involve the
analysis of the rules of private international law from the expression of the judgment,
but directly stipulates that it is calculated according to the bank interest rate at the
place of remittance, that is, the annual interest rate of US dollar loan of the People’s
Bank of China in the same period. The judgment clearly stipulates the specific interest
rate, but it does not explain why the bank interest rate at the place of remittance is
selected and why the annual interest rate of the US dollar loan of the People’s Bank
of China in the same period is selected.

23 Sun [9], p. 123.

24 UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the
International Sale of Goods (2016 Edition). p. 365.
25 Wuhan Zhongou Clothes Factory v. Hungary Wanlong International Trade Company—Dispute

of Contracts for International Sale of Goods—First Instance, (2002) Wu Jing Chu Zi No. 116,
Wuhan Intermediate People’s Court, 11 May 2004.
192 W. An

IV. Conclusion
The determination of interest and interest rate in this case is a problem that will be
encountered in most cases. Due to the ambiguity of Article 78 of the Convention,
there is no unified judgment method for judges in various countries in practice. At
present, an agreement has been reached on the starting point of interest, but there are
still differences on when to terminate. How to determine the interest rate is also a
problem with more variance among judges. The author believes that in order to avoid
such disputes, the easiest way is for the parties to clearly agree on how to calculate
the interest rate. In this case, the court’s method for determining the interest rate is
very clear, but it lacks a specific demonstration process, which is easy to generate
disputes in the implementation.

References

1. Li W (2009) A commentary on CISG, 2nd edn. Law Press

2. Shiomi Y, Nakata K, Matsuoka H (2021) A concise interpretation of United Nations convention
on contracts for the international sale of goods. Kobayashi M, Han SY (translated). People’s
Court Press
3. Lookofsky J (2017) Understanding the CISG: a compact guide to the 1980 United Nations
convention on contracts for the international sale of goods. Kluwer Law International BV
4. China International Economic and Trade Arbitration Commission (2021) The application of the
United Nations convention on contracts for the international sale of goods in Chinese arbitration.
Law Press
5. Liu Y (2019) Application of CISG by domestic courts of contracting states. Sci Law J Northwest
Univ Polit Sci Law 3:191–201
6. Honnold JO (1999) Uniform law for international sales under the 1980 United Nations
convention, 3rd edn. Kluwer Law International
7. Schlechtriem P (2006) Comments on the United Nations convention on contracts for the
international sale of goods, 3rd edn. Li HN (compiled). Peking University Press
8. Ziegel JS, Samson C (1981) Comment on Article 78 in report to the uniform law conference of
canada on the convention on contracts for the international sale of goods. https://iicl.law.pace.
edu/sites/default/files/bibliography/english2_0.pdf
9. Sun H (2012) A study of the calculation of interest rate under Article 78 of the United Nations
convention on contracts of international sales of goods. J Jiangxi Univ Financ Econ 2:122–128

Dr. Wenjing An, female, graduated from the Law School of Nankai University in 2017, the
research direction is international economic law. The title of graduation thesis is “Study on the
Determination of Fundamental Breach in the International Commercial Contracts”. Since 2008,
she has served as a Lecturer in Law in the Department of Law and Political Science of North
China Electric Power University, teaching International Economic Law and International Law
courses for undergraduates and postgraduates. She published the following papers: “The Anal-
ysis of Decision-Making Mechanism of Multilateral Development Banks and the Inspiration for
the Asian Infrastructure Investment Banks”, Social Sciences in Chinese Higher Education Insti-
tutions, Issue 4, 2015; “Theoretical and Empirical Study on the Foreseeability Standard of CISG
Fundamental Breach”, Hebei Law Science, Issue 1, 2019.
Chapter 23
China Packaging Import and Export
Hubei Company v Phoenix Company
Limited

Haicong Zuo

Case Information
Case Name: China Packaging Import and Export Hubei Company v Phoenix
Company Limited
Seller: China Packaging Import and Export Hubei Company
Place of Business: People’s Republic of China
Buyer: Phoenix Company Limited
Place of Business: Russia
Details of First Instance:
Court: Hubei High People’s Court
Date of Decision: 9 September 2002
Case No: (2002) Wu Jing Chu Zi No 211
Judges: Jun Chen, Xiaoxia Wang, Zhihua Ai
Case of Appeal: N/A
CISG applied: Yes
Key CISG Provisions interpreted and applied: Articles 1(1); 53; 62
Abstract
On 7 December 1998, the China Packaging Import and Export Hubei Company
(hereinafter referred to as Hubei Packaging) signed contracts numbered 98cph-201a
and 98cph-201b with the Russian Phoenix Company Limited (hereinafter referred to
as Phoenix). The two contracts agreed that Hubei Packaging would supply coats of

H. Zuo (B)
Law School at University of International Business and Economics, Beijing, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 193

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_23
194 H. Zuo

pig skin and fur to Phoenix, totaling 1018 pieces; the total amount is US$100,779.05;
the payment terms are FOB Beijing; shipment date: 11 December 1998. After the
contracts were signed, Hubei Packaging ordered 1018 pieces of leather clothes from
Wuhan Xiongying Quilt Factory and delivered them to Phoenix on 23 December
1998. Phoenix sent a letter to Hubei Packaging on 24 June 1999, expressing its deep
regret for its failure to perform the payment in time, and promised to pay it off
before the end of October of the same year. After that, it issued letters of payment
commitment to Hubei Packaging four times. The last commitment letter issued on 24
September 2001 stated that “Party B (Phoenix) promises again to deliver the arrears
or offset goods to Party A (Hubei Packaging) in Wuhan before October 15, 2001”.
It was also found that Phoenix was a company invested abroad by the Silk
Company. According to the statements made by the plaintiff and the defendant in
the trial, the company ceased operation in 1999.
The court held that the two contracts 98cph-201a and 98cph-201b were catego-
rized as contracts for the international sale of goods. There were no provisions on the
applicable law in the contract. According to the principle of priority of international
treaties stipulated in paragraph 2 of Article 142 of the General Principles of Civil Law
of China, and in combination with the fact that both parties in this case were located
in Contracting States of the United Nations Convention on the International Sale
of Goods (hereinafter referred to as CISG), the CISG shall apply. Because Phoenix
failed to perform the obligation of payment to Hubei Packaging after receiving the
goods, in violation of the provisions of Article 53 of the CISG which provides that
“the buyer must pay the price for the goods and take delivery of them as required by
the contract and this Convention”, the claim that Hubei Packaging requires Phoenix
to perform the payment under the contract is tenable. The court upheld the claim.
The court then discussed another issue, that is whether the Silk Company, as an
investor of Phoenix, should be responsible for the arrears of Phoenix. According to
the first paragraph of Article 184 of the Opinions of the Supreme People’s Court on
Several Issues concerning the Implementation of the General Principles of the Civil
Law of China, “foreign legal persons shall take the law of the country where they are
registered as their national law, and the capacity of legal persons shall be determined
in accordance with their national law”. As the registration place of Phoenix was in
Russia, its cancellation and liquidation shall be determined by Russian law. Since
both parties failed to provide relevant Russian laws, the plaintiff’s reason that the
creditor’s rights and debts after the closure of Phoenix should be cleared by the Silk
Company had no basis, and its claim could not be established. In accordance with
Article 1(1)(a) and Article 62 of the CISG, Article 184(1) of the Opinions of the
Supreme People’s Court on Several Issues concerning the Implementation of the
General Principles of the Civil Law of China and Article 130 of the Civil Procedure
Law of China, the court ordered that the defendant, Phoenix, pay the plaintiff, Hubei
Packaging, US$100,779.05 in arrears within 30 days from the effective date of the
judgment and rejected the other claims of the plaintiff.
23 China Packaging Import and Export Hubei Company … 195

Commentary to the Key Issues Related to the CISG

Issues

Issue 1: The Application of the CISG

Issue 2: Determination of the damages under the CISG

Comments

Issue 1: The Application of the CISG

The judges hold that the CISG applies in this case according to the principle of
priority application of international treaties stipulated in paragraph 2 of Article 142
of the General Principles of Civil Law of China and that the countries where both
parties are located in this case are Contracting States of the CISG.
The judges’ reasoning is quite straight and with three characteristics. The first
is that the tribunal refers to the principle of priority application of the CISG under
Article 142(2) of the General Principles of Civil Law. Another is that the tribunal
does not refer to Article 1(1)(a) of the CISG. The third is that the tribunal notices
that the contract does not choose applicable law.
The first characteristic reflects an important fact, that Chinese judges are quite
active in applying the CISG, which is mainly due to the national-wide training
courses on CISG sponsored by the Supreme People’s Court. China’s diplomatic
representatives from the Ministry of Foreign Trade and Economic and Cooperation
(predecessor of the Ministry of Commerce) participated in the negotiation of the
CISG after 1978, when China began to adopt the reform and open-up policy. China
became one of the Contracting States when the CISG took effect in 1988. In 1988,
and afterward, the Ministry of Foreign Trade and Economic Cooperation and the
Supreme People’s Court issued a joint document, which declared the coming-into-
force of the CISG and encouraged China’s enterprises to apply the CISG in forming
and performing international sales contracts. In the meantime, the Supreme People’s
Court organized training courses on the CISG in some people’s courts. Probably,
most judges dealing with foreign-related cases started to understand the CISG as
applicable law in these training courses. The first case applying the CISG happened
in 1990. In 2002, when the present case was heard, most judges dealing with foreign
commercial cases had the awareness to apply the CISG with similar techniques.
The basis on which the court made the decision on applicable law is the principle
of priority application of the international treaty, which originates from Article142(2)
of the General Principles of Civil Law. This reasoning indicates that the CISG, as an
international treaty, is adopted as part of Chinese Law and shall be applied and be
superior to domestic law.
The second characteristic reflects the weakness in reasoning. Although the prin-
ciple of the priority application is one basis for determining the applicable law, the
more important basis is the scope of the application clause, that is, Article 1(1)(a) of
the CISG. Unfortunately, the court does not mention Article1(1)(a) in its reasoning
196 H. Zuo

on the applicable law but refers to the clause only in conclusions. It would be better
for the court to also refer to this article in its reasoning on the applicable law.
The third one is also a condition for the application of the CISG, which is worth
discussing. This condition is that the contract does not have a choice of law clause,
that is, the parties did not choose the applicable law. The reasoning seems to indicate
that the judges may have considered Article 6 of the CISG to decide whether the
contracting parties had excluded the application of the CISG. But actually, the court
does not explicitly invoke Article 6.
It should be mentioned that the techniques which Chinese courts apply are contin-
ually developing. In Sinochem International (Singapore) Pte Ltd v Thyssenyklupp
Metallurgical Products Gmbh (No.35(2013), Final Fourth Civ. Division, SPC), the
Supreme People’s Court has applied a much-advanced technique to determine the
applicable law, especially when the CISG should apply. In this case, the Supreme
Court adopts a sound approach to factor analysis. To determine whether a Chinese
court shall apply CISG, three factors must be examined. The first is whether the case
is classified as a dispute on a contract for the international sale of goods in accordance
with the CISG. If the object is tangible thing and the seller’s and buyer’s places of
business are in different countries, the case can be identified as an international sale
case. The second factor is whether the seller’s and buyer’s places of business are
located in the different Contracting States according to Article1(1)(a) of the CISG.
If the answer is in the affirmative, it is preliminarily presumed that the CISG shall
apply. The third factor is to examine whether the parties have explicitly or impliedly
excluded the application of the CISG according to Article 6. If the answer is nega-
tive, the CISG shall apply. If the parties choose the law of a Contracting State as the
governing law, it cannot exclude the application of the CISG, but it can be regarded
as a supplementary governing law where the CISG has not covered an issue and the
gap cannot be filled by resorting to general principles of the CISG.
Issue 2: Breach of contract by the defendant and remedies by the plaintiff
The court invokes Article 53 to determine that the defendant has breached the contract
by not paying the price stipulated by the contract, and therefore the plaintiff’s claim
that the defendant shall pay the price is supported.
In its conclusions, the court refers to Article 62 as the basis for supporting the
plaintiff’s claim. Article 62 provides the seller’s remedy in such provisions as “the
seller may require the buyer to pay the price, take delivery or perform his other
obligations, unless the seller has resorted to a remedy which is inconsistent with this
requirement”. In this case, the seller has delivered the goods to the buyer, so it has the
right to require the buyer to pay the price as a remedy. The court correctly invokes
both articles. But if the court could invoke Article 62 twice, that is, both when it
invokes Article 53 and when it reached its conclusions, it would be better.
In conclusion, the court refers to Articles 1(1)(a), 53, 62 of the CISG to determine
whether the CISG applies, whether the buyer breached the contract, and how the
seller can resort to remedies, which indicates that the judges have the awareness to
apply the CISG and the reasoning line is clear. But the reasoning techniques are not
so sound, and the interpretation of the CISG is quite weak.
23 China Packaging Import and Export Hubei Company … 197

Dr. Haicong Zuo is a Professor in Law School at University of International Business and
Economics (UIBE). Prior to joining UIBC Law School, he was Dean and Professor at Law School
of Nankai University, and Professor at Law School of Wuhan University. His research interests
include, but not limited to international commercial law, WTO law, international economic law
and international dispute resolution. He has published on various topic on a number of books
and leading journals in both Chinese and English and has chaired or co-chaired different research
projects funded by various stakeholders.
Chapter 24
Hyundai Corporation of Korea v Hubei
Metals and Minerals Import and Export
Company

Chaolin Zhang, Peng Guo, and Shu Zhang

Case Information
Case name: Hyundai Corporation of Korea v Hubei Metals and Minerals Import
and Export Company
Seller: Hyundai Corporation of Korea
Place of business: Korea
Buyer: Hubei Metals and Minerals Import and Export Company
Place of Business: China
Details of First Instance:
Court: Wuhan Intermediate People’s Court, Hubei
Date of Decision: 4 April 2001
Case No: (2002) Wu Jing Chu Zi No 410
Judges: Yihong Li (Presiding Judge), Zhihua Ai (Acting Judge), Wei Yin (Acting
Judge)
CISG applied: Yes
Key CISG provisions interpreted and applied: Articles 53 and 78

C. Zhang (B)
Law School, Nankai University, Tianjin, China
e-mail: [email protected]
P. Guo
RMIT University, Melbourne, VIC 3000, Australia
e-mail: [email protected]
S. Zhang
Deakin University, Geelong, VIC 3220, Australia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 199

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_24
200 C. Zhang et al.

Abstract
The plaintiff, Hyundai Corporation of Korea (hereinafter Hyundai Corporation),
was the seller of the case and its place of business was in the Republic of Korea.
The defendant, Hubei Metals and Minerals Import and Export Company (hereinafter
Hubei Company), was the buyer of the case and its place of business was in China. On
30 October 1995, the two parties signed a contract for the sale of goods. According
to the contract, Hubei Company would purchase 300 tons of stainless-steel coils
from Hyundai Corporation, using the trade term C&F (cost and freight). The total
price of the goods was US$770,280. It was agreed in the contract that the transaction
adopted the international payment method of commercial credit, bank collection, and
documents against acceptance. The expiry date of the commercial draft is 90 days
after the defendant receives the bill of lading.
There was also a third party, Jiangbei Industry and Trade Development Corpo-
ration (hereinafter Jiangbei Company), which was closely related to this case. On 1
September 1995, Jiangbei Company signed an import agent agreement with Hubei
Company. The former company entrusted Hubei Company to import 450 tons of
stainless-steel coils from Hyundai Corporation. In order to fulfill this agreement,
Hubei Company entered into a sales contract, which was the contract at issue in the
case mentioned above.
In accordance with the trade terms and the contract, the Hyundai Corporation
booked space on the usual terms and paid the freight to the port of destination, and
loaded the goods on board according to the port and time of shipment stipulated in
the contract. The actual value of the stainless-steel coil sent exceeded the contract
stipulations and was valued at US$776,468.22. After the buyer accepts the bill of
exchange, the seller gives the buyer all the shipping documents. When the goods
arrived at the destination port, Hubei Company immediately went through customs
clearance and picked up the goods and delivered the goods to the third party, Jiangbei
Company.
However, there was a dispute between all three companies overpayment. As stip-
ulated in the contract, Hubei Company shall make payment by D/A within 90 days
after the date of the bill of lading. However, Jiangbei Company misappropriated the
payment for goods and failed to pay Hubei Company according to the import agency
agreement, which led to the failure of Hubei Company to make the payment for goods
to the Hyundai Corporation on schedule. On 6 November 1996, Hubei Company
issued a repayment plan to the Hyundai Corporation and promised to pay off the
arrears in batches before 31 May 1997. But this was never actually implemented.
Accordingly, Hyundai Corporation filed a lawsuit against Hubei Company to the
Intermediate People’s Court in Wuhan, Hubei Province. Hyundai Corporation said
it had received the advance payment of US$115,542 from Hubei Company, and it
actually sent the goods worth US$776,482.22. Based on this, the arrears of Hubei
Company included two parts, US$99,935 from when the commercial draft was due,
and US$560,991.22 was the remaining payment, totaling US$660,926.22. Based on
the above facts, the Hyundai Corporation argued that it would ask the court to order the
defendant to repay US$400,000 in arrears and to reserve the right to claim a portion
24 Hyundai Corporation of Korea … 201

of the remaining payment. During cross-examination at the trial, Hubei Company

provided two foreign exchange receipts of US$100,000 each for the amount of arrears
claimed by Hyundai Corporation. The plaintiff did not dispute this fact and waived
the right to the right to claim for the rest payment, but there was no change in
the lawsuit for the payment of the US$400,000 owed. The judgment of the court
upheld Hyundai Corporation’s claim. In addition, they filed a request to order Hubei
Company to pay CN¥300,000 for economic losses caused by the overdue payments
to Hyundai Corporation. In response, the court held that Hubei Company should pay
the corresponding interest, based on the deferred payment of US$400,000 and that
the total amount should not exceed CN¥300,000 after conversion into Chinese Yuan.

Commentary to the Key Issues Related to the CISG

Issue

Issue 1: Calculation of the Interest

Comments

Issue 1: Calculation of the Interest

At the time of signing the contract, the parties made no choice as to the applicable
law of the contract. The parties’ businesses were located in Korea and China and
these are both the Contracting States of the United Nations Convention on Contracts
for the International Sale of Goods (hereinafter the CISG). Accordingly, the judge in
the present case directly and automatically applied the CISG to the regulation of the
contract of sale between the plaintiff and the defendant, in accordance with Article
1(1)(a) of the CISG.
In dealing with the substantive issues of the rights and obligations of the parties,
the judges invoked Article 78 of the CISG, which sets out the rules for solving
interest disputes: “If a party fails to pay the price or any other sum that is in arrears,
the other party is entitled to interest on it, without prejudice to any claim for damages
recoverable under Article 74”. But on closer inspection, there were literal differences
between the judge’s decision and Hyundai Corporation’s claim.
The first difference lay in the nature of the compensation.
The CN¥300,000 requested by Hyundai Corporation referred to the repayment of
the economic losses caused by the late payment. According to Article 74, economic
losses in the context of the CISG were not limited to profits. The first sentence of
Article 74 provides, “Damages for breach of contract by one party consist of a sum
equal to the loss, including loss of profit suffered by the other party as a consequence
202 C. Zhang et al.

of the breach”. This sentence provides for the recovery of all losses, including loss
of profits, suffered by the aggrieved party as a result of the other party’s breach.1
Further, a general principle of full compensation has been derived from the damage
formula in Article 74.2 This claim had also been accepted by many courts or arbitral
tribunals. For example, the arbitrator of an Austrian case found that full compensation
was one of the general principles underlying the CISG, referring to Articles 78 and
74.3 In another example, in a Swiss case, the court stated that all costs incurred in the
reasonable pursuit of a claim are refundable, which included retaining a lawyer in the
country of each party.4 However, it should be clarified that the expression “full” here
is used to define the scope of the damages. The amount or extent of compensation
should be limited based on the “predictability” criteria set out in the second sentence
of Article 74. Poland’s Supreme Court dealt with a related case in 2008, T K M E
GmbH v. P K S A. In that case, the foreseeability referred to the changes in prices of
coke fuel on the international market, and the Supreme Court reprimanded the lower
court for not calling an expert opinion, who could assess the foreseeability of the
price change.5
In the current case, the court held that the defendant should pay Hyundai Corpora-
tion US$400,000 with the interest on the delayed payment. According to the value of
the goods actually delivered, the court confirmed that the total amount payable by the
buyer was US$776,468.22, which was US$6,199.22 higher than the original contract.
After cross-examination, it was found the buyer had prepaid US$115,542 and made
a US$200,000 overdue payment upon receipt of the goods, with US$460,926.22
outstanding. In this regard, the buyer gave up the right to claim part of the goods and
only claimed that the defendant should pay part of the payment to Hyundai Corpo-
ration, namely US$400,000. Further, the court calculated the amount of interest on
a base of US$400,000 and specifically invoked Article 78 of the CISG. It may be
concluded that the court upheld the amount demanded by Hyundai Corporation to
be paid in addition to the payment for goods, which was of the nature of interest.
The language of Article 78 of the CISG illustrated the regulation of interests, and
it is a supplement to Article 84, which establishes such an obligation (only) for the
reimbursement of the price.6 As mentioned above, Article 74 is a general provision
for damages. So, the natural question is, what is the difference in content between
Article 78 and Article 74? Under what scenarios will they each be applied? What is

1 UNCITRAL [1], p.334, para.1.

2 UNCITRAL [1], p. 334, para. 3.
3 UNCITRAL CLOUT case 93. (15 June 1994). Austria: Internationales Schiedsgericht der

Bundeskammer der gewerblichen Wirtschaft–Wien. https://www.uncitral.org/clout/clout/data/aut/

clout_case_93_leg-1296.html. UN.Doc: A/CN.9/SER.C/ABSTRACTS/7. p. 4.
4 UNCITRAL CLOUT case 254. (19 December 1997). Switzerland: Handelsgericht des

Kantons Aargau. OR.97.00056. https://www.uncitral.org/clout/clout/data/che/clout_case_248_leg-

1471.html?lng=en. UN.Doc: A/CN.9/SER.C/ABSTRACTS/25. p. 6.
5 UNCITRAL CLOUT case 1306: T.K.M.E. GmbH v. P.K. S.A. (9 October 2008). Poland:

Supreme Court. V CSK 63/08. https://www.uncitral.org/clout/clout/data/pol/clout_case_1306_leg-

3072.html. UN.Doc: A/CN.9/SER.C/ABSTRACTS/137. p. 7.
6 Bacher [2], p. 1111, para. 1.
24 Hyundai Corporation of Korea … 203

the relationship between the two articles? Some intuitive differences can be drawn
from the text itself. First, there are clear differences in the respective premise of their
application. Article 74 is obviously aimed at the broader picture. This clause may
be invoked as long as the parties breach the contract and cause losses. Article 78,
however, could be applied on a narrower premise and is limited to the existence of
arrears. Generally, interest awardable under Article 78 is not awarded as damages.7
Second, both provisions could be used to resolve interest issues, but there would be
differences in an application based on preconditions. The interest recovery supported
by Article 78 requires a party to have a prior act of defaulting on the price. Article 78
does not cover situations where interest recovery is not related to the amount owed.
Article 74 should be applied instead, and there are indeed several judgments that
do.8 Third, Article 78 also makes it clear that this provision shall not prevent any
damages recoverable under Article 74. In other words, invoking both provisions to
satisfy different claims is likely to be accepted by the court.
In the present case, the judgment was very brief and abbreviated, and Hyundai
Corporation’s claim was simply expressed as “economic damages due to overdue
payment”. However, according to the above analysis, it can also be considered that the
economic loss claimed by Hyundai Corporation was based on the overdue payment
of the defendant, so it was appropriate for the court to apply Article 78 to deal with
the interest issue. But whether the “economic damages” used in Hyundai Corpora-
tion’s claims attempted to include claims other than interest was not disclosed in the
judgment papers. Since there is no way to know the specific meaning of the parties,
it is difficult to know whether the parties only claimed the interest part, or the parties
claimed all related economic losses but only the interest part was upheld by the court.
If it was the latter, Article 74 should have been added when the court concluded its
decision.
The second difference was the way interest rates were calculated.
Hyundai Corporation’s request was for a lump sum of CN¥300,000. But the
court’s decision provides a specific calculation method: (1) the defendant shall pay
the interest from 6 November 1996 until the date of payment; (2) The repayment shall
be calculated at the annual interest rate of US dollar loans of the People’s Bank of
China for the same period, and within the range of CN¥300,000 after conversion into
Chinese Yuan. The judgment did not reveal what the legal basis for such a decision
was.
Several courts have pointed out that Article 78 merely sets forth a general entitle-
ment to interest but it does not specify the interest rate to be applied, which is why
one court considered Article 78 a “compromise”.9 Since the CISG did not provide
an operational solution in terms of volume or proportion, divergence could be recog-
nised from the juridical process, and different methods of calculating interest were
available. An arbitrator provided a solution within the scope of the CISG, “since the
interest rate was a matter governed but not expressly settled by CISG, it should be

7 Gillette and Walt [3], p. 356.

8 UNCITRAL [1], p. 334, para. 8.
9 UNCITRAL [1], p. 364, para. 9.
204 C. Zhang et al.

settled in conformity with the general principles on which CISG is based (Art.7(2)
CISG)”.10 Some decisions reflected the view that the issue of interest was subject
to the Convention and should therefore be addressed within the framework of the
Convention. As a result, some courts and arbitral tribunals have invoked Article
9 of the CISG and determined interest rates in the light of relevant trade prac-
tices.11 Similar decisions were made primarily on the grounds of the uniformity
of the Convention, in the hope of maximising the maintenance of uniform proce-
dures for interpretation and application. However, the majority of courts consider the
interest rate issue to be a matter outside the scope of the Convention and, therefore,
pursuant to Article 7(2), subject to domestic law.12 For example, in the judgment of
the Supreme Court of Poland mentioned above, the judge rejected other possibilities
(such as attempts to create a uniform rule) so the Court invoked case law from other
European countries (such as Germany, Netherlands, and France) and concluded that
the rate of interest should be established in conformity with the law applicable by
virtue of the rules of private international law of the forum.13 Under domestic laws,
the legal position regarding the rate of interest varies considerably.14 But, even if it
is determined which country’s law should be applied, there are still many criteria at
the domestic legal level for the calculation of interest.15

References

1. United Nations Commission on International Trade Law (2016) UNCITRAL digest of case law
on the United Nations convention on contracts for the international sale of goods. https://unc
itral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/cisg_digest_2016.pdf
2. Bacher K (2016) United Nations convention on contracts for the international sale of goods
(1980)—Full Text, Part III Sale of goods, Ch.V Provisions common to the obligations of the
seller and of the buyer, s.III Interest, Article 78. In: Schwenzer I, Schlechtriem, Schwenzer
(eds) Commentary on the UN convention on the international sale of goods, 4th edn. Oxford
University Press, pp.1111–1127
3. Gillette CP, Walt SD (2016) The UN convention on contracts for the international sale of goods:
Theory and practice, 2nd edn. Cambridge University Press

10 UNCITRAL CLOUT case 93. (15 June 1994). Austria: Internationales Schiedsgericht der
Bundeskammer der gewerblichen Wirtschaft–Wien. https://www.uncitral.org/clout/clout/data/aut/
clout_case_93_leg-1296.html UN.Doc: A/CN.9/SER.C/ABSTRACTS/7. p. 4.
11 UNCITRAL [1], p. 365, para. 11.
12 UNCITRAL [1], p. 365, para. 13.
13 UNCITRAL CLOUT case 1306. T.K.M.E. GmbH v. P.K. S.A. (9 October 2008). Poland:

Supreme Court. V CSK 63/08. https://www.uncitral.org/clout/clout/data/pol/clout_case_1306_leg-

3072.html. UN.Doc: A/CN.9/SER.C/ABSTRACTS/137. p. 7.
14 Bacher [2], p. 1122–1123.
15 For a more detailed discussion, see Wuhan Zhongou Clothes Factory v Hungary Wanlong

International Trade Company in this book.

24 Hyundai Corporation of Korea … 205

Ms. Chaolin Zhang is a PhD candidate in international law at the law school of Nankai Univer-
sity, China. Prior to that, she obtained an LLM in International Economic Law from the School of
Law at the City University of Hong Kong, China. Her research interests lie in international trade
law, data law, and law and technology.

Dr. Peng Guo , Lecturer in Law at RMIT University. At RMIT Dr. Guo teaches Contract Law and
Commercial Law to LLB and JD students. He has held visiting positions at different universities,
including Warwick University, University of Amsterdam, and University of Osnabrück. He has
received scholarships awarded by renowned research institutions and international organisations,
including the Max Planck Institute for Comparative and International Private Law, the Interna-
tional Institute for the Unification of Private Law (UNIDROIT), the Swiss Institute of Compara-
tive Law, and the European Union. His research interests lie in international sale of goods, inter-
national commercial arbitration, comparative contract law, and law and technology. He actively
participates in Vis Moot and Alfred Deakin International Commercial Arbitration Moot.

Dr. Shu Zhang is a lecturer in commercial law at Deakin Law School, Deakin University
(Australia) and coached Deakin Law School’s Vis Moot team. Prior to joining Deakin Law
School, Dr. Zhang was a post-doctoral fellow in the Chinese International Business and Economic
Law Initiative, Law School, University of New South Wales (Australia). Her research interests
include international commercial law, dispute resolution and international arbitration, as well as
comparative contract law. She also completed internships at both the Australian Centre for Interna-
tional Commercial Arbitration (ACICA) and the Chinese International Economic and Trade Arbi-
tration Commission (CIETAC). She is also admitted to practice in New South Wales, Australia.
Dr. Zhang obtained her PhD in Law from University of New South Wales (Australia), and her
LLM, LLB and BA in Economics (Double Degree) from Peking University (China). She has
published various manuscripts with leading journals in this area, such as the Journal of Contract
Law, Vindobona Journal of International Commercial Law and Arbitration, China Quarterly.
Chapter 25
Resource Engineering Co, Ltd v Qing Li,
Ming Sun and Shanghai Donglin
International Trade Co, Ltd

Linxuan Li

Case Information
Case Name: Resource Engineering Co, Ltd v Qing Li, Ming Sun and Shanghai
Donglin International Trade Co, Ltd
Seller: Resource Engineering Co, Ltd (“Engineering”)
Place of Business: Japan
Buyer: Qing Li and Ming Sun
Place of Business: China
Details of First Instance:
Court: The First Intermediate People’s Court of Shanghai
Date of Decision: 16 January 2004
Case No: (2002) Hu Yi Zhong Min Wu Shang Chu Zi No 127
Judges: Tong Wang (Presiding Judge), Hong Liu (Acting Judge), Liping Zhang
(Acting Judge)
CISG applied: No
Key CISG provisions interpreted: Article 1(1)
Abstract
In 2001, the buyers, Qing Li and Ming Sun, Chinese citizens, ordered some industrial
waste, including 150 tons of motors, 10 tons of radiators, and 12 tons of discarded
hardware, from the seller, Engineering, a Japanese company. The relevant transac-
tions under the contract for an international sale of goods involved in this case was
transmitted by email between the buyers and the seller. From June to August 2001,

L. Li (B)
King & Wood Mallesons, Beijing, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 207

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_25
208 L. Li

the seller and the buyer, Qing Li, negotiated on the transaction of goods through
emails. On 1st August 2001, the seller delivered the 125,660 metric tons of mixed
scrap cooper to the seller. On the same day, Orient Overseas Container Line Ltd, as
the carrier, issued a bill of lading, which designated the seller as the consignor and
Shanghai Donglin International Trade Co, Ltd as the consignee.
The Court of first instance held that, since there was no agreement between the
parties on the applicable law, and Japan was not a Contracting Party to the CISG, the
most closely related law should be the applicable law. In the present case, the buyers
and the seller made the offer and the acceptance by emails. In the emails, the buyer,
Qing Li, made the offer of the main terms of the contract to the seller, including
the variety of goods and the method of performance of the contract, and the seller
accepted the offer. Since the buyer, Qing Li received the acceptance in China, and
China was the place of domicile of the buyer and the place of establishment of the
contract, China was the country that was most closely connected with the contract,
and Chinese laws shall apply to the current contract dispute in this case.
With regard to the issue of deciding the parties of the contract, the Court of first
instance held that the international transaction was established by emails and both
Ming Sun and Qing Li were buyers to the contract, because Ming Sun confirmed
that he bought the goods and Qing Li negotiated on the condition of goods, terms of
payment, and shipment with the seller in the emails. Although Shanghai Donglin
International Trade Co, Ltd was the consignee to the bill of lading, it was not
supported by the evidence to treat Donglin as one of the parties to the contract.
Additionally, the Court held that the buyers of the contract should perform the obli-
gation of payment in a timely manner, while only US$15,000 was paid to the seller,
and thus the buyers should fully perform their obligation of payment and should bear
the liability for breach of contract.
In the end, the Court of first instance ruled that the buyers should pay the seller
US$14,421.89 as well as the interest on overdue payment.

Commentary to the Key Issues Related to the CISG

Issue
Issue 1: Applicability of the CISG
Comments
Issue 1: Applicability of the CISG
Article 1(1) of the CISG mainly focuses on the sphere of its application. Under
Article 1(1)(a) of the CISG, the essential criteria to determine whether to apply the
CISG is the “place of business” criteria, under which the parties to the sales contract
25 Resource Engineering Co, Ltd v Qing Li, Ming Sun … 209

should have their places of business in different countries that are Contracting Parties
to the CISG (CISG Parties).1
Determining a party’s “place of business” is not always easy. In commercial
practice, one party can have more than one place of business. If the place of business
of a party is not clearly mentioned in the case, when determining the relevant place of
business, generally there are several locations to be considered, such as the location
of the seller’s agent or sales representative, the location where the goods will be
shipped from, and the location where the goods will be delivered to.2 However, these
locations can only serve as reference to the determination of place of business. Some
scholars also hold that the locations mentioned above are irrelevant. For example,
Jacob Ziegel has argued that unless the agent was actually authorised to conclude
the contract on his own initiative, the agent’s location is irrelevant in determining
whether Article 1(1)(a) has been satisfied or negated.3
As to the present case of Resource Engineering Co, Ltd v Qing Li, Ming Sun and
Shanghai Donglin International Trade Co, Ltd, one problem of the decision of the
Court of first instance is that the Court did not give clear reasoning for not applying
the CISG. Specifically, the Court did not analyse the specific places of business of the
two parties under the issue of application of law and simply excluded the application
of the CISG because Japan was not a CISG party. Whether Japan was the place where
the seller was incorporated or where the seller’s place of business was located was not
clarified in the reasoning part of the issue of application of law. Therefore, it seems
that the decision of the present case is not made systematically. When analysing the
application of the CISG, this problem could have been avoided had more attention
been paid to the requirement of the place of business.4
It should be noted that the determination of applicable law, although appearing
quite simple, lays the foundation of the whole decision. Therefore, it would be more
convincing if the Chinese courts could elaborate more on their understanding of the
application of law, instead of arbitrarily making their decisions.

References

1. Hirsch JB (2019) UN convention on contracts for the international sale of goods

(CISG). https://www.daypitney.com/~/media/files/insights/publications/2013/01/commercial-
litigation-counsel-jillian-hirsch-wri__/files/dp442pdf/fileattachment/dp_442.pdf
2. Ziegel J (2005) The scope of the convention: reaching out to article one and beyond. J Law
Commer 25:59–73
3. Xiao YP, Long WD (2008) Selected topics on the application of the CISG in China. Pace Int
Law Rev 20:61–103

1 CISG, Art. 1(1)(a).

2 Hirsch [1].
3 Ziegel [2], p. 63.
4 Xiao and Long [3], p. 65.
210 L. Li

Linxuan Li is a lawyer at King & Wood Mallesons, Department of Financial Services. She
holds an LLM degree in International Law from the University of International Business and
Economics.
Chapter 26
Dong Feng Trade Co. Ltd v Hangzhou
Dongli Rubber and Plastic Products Co.,
Ltd

Xiaoying Fan

Case Information
Case name: Dong Feng Trade Co. Ltd v Hangzhou Dongli Rubber and Plastic
Products Co., Ltd
Buyer: Hangzhou Dongli Rubber and Plastic Products Co., Ltd
Place of business: China
Seller: DONG FENG TRADE CO., Ltd
Place of business: Korea
Details of First Instance:
Court: The Second Intermediate People’s Court of Shanghai
Case No: (2002) Hu Er Zhong Min Wu (Shang) Chu Zi No 44
Judges: Nan Jiang (Presiding Judge), Yumin Tang (Judge), Xuejie Cui (Acting
Judge)
CISG applied: No
Key CISG provisions interpreted: Articles 1(1)(a), 1(1)(b) and 95
Abstract
On 25 October 2000, the plaintiff Dong Feng Trade Co., Ltd (hereinafter referred
to as Dong Feng Company) in Busan, South Korea concluded a sales contract with
Hangzhou Dongli Rubber and Plastic Products Co., Ltd (hereinafter referred to as
Dongli Company) in Hangzhou, China. The contract stipulated that Dong Feng
Company would sell raw materials for shoes to Dongli Company, with a total
payment of US$152,805. After concluding the contract, Dongli Company issued

X. Fan (B)
Tianjin University of Finance and Economics, Tianjin, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 211

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_26
212 X. Fan

a letter of credit on 8 November 2000, in which the price clause was specified as
CFR (Shanghai). On 25 November 2000, Dong Feng Company shipped the goods
under the contract. The packing list recorded the type and quantity of consignment,
and the invoice stated the value of the goods was US$109,396.20. On 28 November
2000, the goods arrived at the port of destination, Shanghai Baoshan Port Corporation
(14th district). However, Dongli Company failed to fulfill its payment obligations
after taking delivery of goods at the port of destination. Dong Feng Company failed
to negotiate and sued Dongli Company to the court, arguing that both parties as both
sides of the contract for the international sale of goods, should fulfill the obligations
under the contract as agreed. Therefore, Dong Feng Company requested that the
court should order Dongli Company to pay the purchase price US$109,396.20 and
the legal fare.
The defendant (counter plaintiff), Dongli Company, replied and counterclaimed
that Dong Feng Company did not fully perform the raw material supply contract (No
xxx. DF-001025), which resulted in its failure to perform the export contract (No Df-
001024) resulting in huge economic losses. Dongli Company hence requested that
the court should order Dong Feng Company to carry back the raw materials under
contract No xxx. DF-001025 by itself, and compensate Dongli Company for the
economic loss of RMB592,470.18 in total. Dong Feng Company argued that Dongli
Company should provide specific evidence to prove the fact that the quantity and
value of the goods it actually received were short, and that the evidence for Dongli
Company’s damages claim was not sufficient.
The Court held that, since the Republic of Korea was not a party to the United
Nations Convention on contracts for the International Sale of Goods (CISG), the
relevant provisions of the Convention should not be applied to the proceedings of
the case. The court determined the applicable law in this case in accordance with
the most significant relationship doctrine, and accordingly, the legal relationship of
the sale in this case should be governed by the laws of China. Dong Feng Company
failed to fulfill its obligation of supplying raw materials as agreed in the contract,
resulting in Dongli Company’s failure to perform the relevant export contract No
xxx. Df-001024. Its behavior constituted a fundamental breach of contract, which
directly leads to the failure to realize the purpose of the two contracts involved.
Dongli Company, which counterclaimed to call for the return of goods, actually
intended to terminate the contract, and the court considered supporting the request.
In order to reduce the loss, Dongli Company used the raw materials under the contract
for partial processing. Thus, Dongli Company may return the finished shoes, semi-
finished shoes, and the remaining materials to Dong Feng Company after fulfilling the
relevant customs formalities. Meanwhile, Dongli Company should pay Dong Feng
Company a total of US$4,268.89 for the goods in short after receiving the goods.
Dong Feng Company should also compensate Dongli Company for the expected loss
of profit of US$14,579.77 and the wage loss of US$27,137.12 due to the suspension
of production, a total of US$41,716.89.
26 Dong Feng Trade Co. Ltd … 213

Commentary to the Key Issues Related to the CISG

Issue

Issue 1: Conditions of Application as Prescribed by CISG

Issue 2: Conditions for CISG to Apply in Chinese Courts
Issue 3: Specific Ways for Chinese Courts to Apply CISG

Comments

Issue 1: Conditions of Application as Prescribed by CISG

Article 1 of CISG provides the basic conditions for the contracts for the International
Sale of Goods applicable to CISG, and paragraph (1) states:
First, the sale of goods must be international in nature, which means that the parties
to the contract have their place of business in the different Contracting States. The
place of business shall be interpreted as a permanent place for the regular conduct of
general business transactions. The place of a temporary office, representative office,
or liaison office shall not be regarded as such. If a company has more than one place
of business, the place of business should be indicated in the contract so as to deter-
mine the international nature of the contract or its applicable law. In addition, the
other elements concerning foreign affairs of contract are not included into CISG for
judging the international nature of contract, such as the nationality of the parties, the
transnational nature of the transportation of goods under the contract, The transna-
tional nature of the offer and acceptance, and the conclusion and performance of
the contract in different countries.1 Moreover, for the purposes of CISG, the civil or
commercial nature of the parties is not a consideration.
Secondly, the sales contract has a certain connection with one or more Contracting
States of CISG. First of all, if the contracting parties’ places of business are in different
countries which are both parties to CISG, and the parties have not chosen which law
will govern contract disputes explicitly or implicitly in the sales contract, according
to the principle of autonomy of will, then the contract would automatically apply
CISG rather than the relevant domestic law in accordance with the principle of private
international law. This applicable method of CISG is the direct application. CISG
cannot be directly applied if one party’s place of business is in a State Party to CISG
and the other is not, or if neither party’s place of business is in a State Party to
CISG. Second, Article 1(1)(b) of CISG provides for the indirect application of the
Convention, that is, if the rules of private international law lead to the application
of the law of a Contracting State, CISG shall apply, not the domestic law of the
Contracting State to which the rules are directed. For instance,

1 Zhang [1], pp. 13–15.

214 X. Fan

1. the seller’s place of business is in CISG contracting country A, and the buyer’s
place of business is in country B which is not a CISG contracting state, more-
over, the contract is signed in country A, and later the disputes arise from
the performance of the contract between the parties who submit to an arbitra-
tion institution in country A. There is no applicable law clause in the contract.
According to the rules of private international law, Contracting State A has the
most significant relationship with the contract and the law of Contracting State
A shall apply. However, according to Article 1(1)(b), because A is a party to
CISG, the Convention shall be applied rather than the domestic law of A.
2. Neither of the parties’ places of business is in the Contracting States, the sales
contract is concluded in a third country C, and the goods under contract are trans-
ported to C. According to the rules of private international law, when disputes
of the contract arise, an arbitral tribunal decides to apply the law of C. Never-
theless, according to Article 1(1)(b), if C is a party to CISG, the Convention
shall be applied rather than the substantive domestic law of C.
3. Party A and Party B stipulate in the sales contract that in case of dispute, the
law of country C should apply (without specifying whether the domestic law or
not). As country C is a contracting party to CISG, then the Convention rather
than the domestic law of country C shall apply.2 The purpose of Article 1(1)(b)
of CISG is to broaden the scope of its use.
Issue 2: Conditions for CISG to Apply in Chinese Courts
I. The General Application of International Treaties in China and the
Application of CISG
The mainstream view in China considers that the application of treaties in China is
based on the principle of incorporation and transformation is the exception. Some
scholars further believe that public international law treaties are mainly transformed,
while private international law treaties are mainly incorporated.3 According to the
practice of various countries, the domestic application of treaties can be gener-
ally divided into two categories. The first is to transform the treaty provisions into
domestic law, that is, after the treaty enters into force internationally, it must be
translated into domestic law through domestic legislation before the treaty enters
into force domestically. Second, there is no need to transform, but the provisions
of the treaty are directly incorporated into the domestic law through general provi-
sions of domestic legislation. After the treaty enters into force internationally, it will
automatically enter into force domestically.4 The author holds that although China’s
constitution does not stipulate the way of treaty application in China, it can be seen
from China’s specific legislative provisions and judicial practice that China tends to
adopt the way of incorporation. For example, Article 142 of the General Principles
of the Civil Law stipulates that “If any international treaty concluded or acceded to
by the People’s Republic of China contains provisions differing from those in the

2 Li [2], p. 8.
3 Xiao [3], p. 342.
4 Li and Ou [4], p. 18.
26 Dong Feng Trade Co. Ltd … 215

civil laws of the People’s Republic of China, the provisions of the international treaty
shall apply, unless the provisions are ones on which the People’s Republic of China
has announced reservations.”5 Although the General Principles of the Civil Law has
been abolished after the Civil Code came into force, its provisions are also reflected
in other legislation currently in effect, indicating China’s consistent position on the
domestic application of the treaty. The Civil Procedure Law of 1991, the Maritime
Law of 1992, the Negotiable Instruments Law of 1995, and the Civil Aviation Law of
1995 all have similar provisions. They stipulate the issue that who takes precedence in
the conflict between treaties and domestic law, and this means that they also indirectly
answer the question of the acceptance of treaties in domestic law, that is, after treaties
enter into force internationally, they are directly incorporated into domestic law and
directly applied in China without the need to be transformed into domestic law of
China. However, the 2020 Civil Code did not retain provisions like Article 142 of the
General Principles of the Civil Law, and some other laws deleted similar provisions
when they were revised. This shows that China’s legal provisions on the relationship
between international law and domestic law are in the process of developing from
decentralized provisions to centralized and comprehensive provisions.6
The application of the treaty in China after its incorporation is mainly reflected
in the direct invocation of the treaty by the court in specific cases, and the court
has discretion over the application of the treaty in specific cases. The court needs to
examine whether the following conditions are met when it considers the direct appli-
cation of treaties: first, the treaty itself is self-executing; second, the disputed matters
fall within the scope of application of the treaty; third, the disputed matter complies
with the application conditions stipulated in the treaty; and fourth, China has made
no reservations to the relevant provisions of the treaty.7 In the case of the first condi-
tion, there is a distinction between self-executing and non-self-executing treaties.
The former refers to a treaty whose provisions are so clearly defined that the court
can apply them directly; the latter refers to a treaty which only provides for general
and policy-based obligations that are able to be undertaken only by government
departments and cannot be directly applied by courts. The application of non-self-
executing treaties requires the adoption of supplementary legislation (in the form of
the application of domestic law). This includes first, the treaty expressly provides
for legislative implementation by States Parties; second, treaties of a political nature,
in principle, relate only to the governments of the Contracting States themselves
and are not directly related to individuals. And hence, the extension of the effect of
such treaties to individuals shall be supplemented by domestic legislation; third, the
treaty provisions were outlined and not specific enough.8 In short, the court needs to
distinguish whether a treaty is a self-executing treaty or a non-self-executing treaty.
If it is a self-executing treaty, the court also needs to judge its scope of application. In

5 General Principles of The Civil Law of The People’s Republic of China, Article 142.
6 Zeng [5], p. 70.
7 Wan and Yu [6], p. 14.
8 Zeng [5], p. 70.
216 X. Fan

this regard, the court should first seek the opinions of the contracting authorities and
make a judgment after examining the intention of the state to conclude the treaty.9
As a matter of fact, China has formulated, amended, or supplemented a series
of domestic laws and regulations in accordance with the international treaties it has
concluded or acceded to. For example, China has formulated special laws in accor-
dance with the contents of international treaties, adapting or supplementing them in
light of China’s national conditions, or fulfilled its treaty obligations by amending or
supplementing its domestic laws. At the same time, these special laws or the revised
domestic laws all provide that if there are different provisions in the international
treaties concluded or acceded to by China, the provisions of the international treaties
shall apply directly.10 This shows that the relevant treaties or treaty provisions which
are not transformed into China’s domestic laws are attributed to the self-executing
treaties or treaty provisions. If the court confirms that the application conditions of
a self-executing treaty are met and the disputed matter falls within the application
scope of the treaty, then the treaty may be directly applied.
In China, the treaties directly applicable are mainly international civil and
commercial treaties and industrial technical treaties, such as CISG. Therefore, the
application conditions of CISG in Chinese courts mainly depend on the scope of
application of its own provisions, and Article 1 takes precedence over conflict treaties
and conflict laws in the place of the court. In practice, Chinese courts should first
examine whether the contract for the international sale of goods in dispute meets
the applicable conditions of Article 1 of CISG. After reaching a positive conclusion,
the courts then should examine whether the parties have effectively excluded the
application of CISG according to Article 6.11 The exception is that CISG allows a
State party to make a reservation to a specific extent, that is, a reservation made by
China to Article(1)(b) pursuant to Article 95 of CISG.
II. China’s Reservations to Article 1(1)(b) of CISG
Article 95 of CISG states: “Any State may declare at the time of the deposit of its
instrument of ratification, acceptance, approval or accession that it will not be bound
by subparagraph (1)(b) of Article 1 of this Convention”.12 “Upon approving the
Convention, the People’s Republic of China declared that it did not consider itself
bound by subparagraph (b) of paragraph (1) of Article 1”.13
Article 1(1)(b) actually expands the scope of CISG, because even if neither party
to the sales contract has its place of business in a Contracting State, according to
this provision, CISG shall apply as long as the rules of private international law
lead to the laws of a Contracting State. The application of CISG in this way will
largely exclude the application of special domestic legislation on international sale
contracts. However, when signing CISG (on 30 September 1981), China was at

9 Wan and Yu [6], p. 19.

10 Zeng [5], pp. 76–77.
11 Liu [7], p. 193.
12 United Nations Convention on Contracts for The International Sale of Goods, Article 95.
13 United Nations Convention on Contracts for the International Sale of Goods, Annex (e).
26 Dong Feng Trade Co. Ltd … 217

the dawn of economic reform and opening up, and had no domestic legislation
regulating economic contracts, whether foreign-related or not. So at that time, China
made the Article 95 reservation declaration, implying that in order to protect the
relatively immature domestic economic contractual relations and provide a period
for the domestic market to adapt from a planned economy to a market economy,
China will make different regulations on foreign-related and non-foreign-related
contractual relations through separate legislation.14 Indeed, China’s first Economic
Contract Law, passed in 1981, applies only to domestic economic contracts. And
China passed its first Foreign Economic Contract Law in 1985. Therefore, in China,
a court or an arbitral tribunal will only apply the provisions of CISG if both parties’
places of business are located in States Parties to the Convention. If this is not the
case, but the parties expressly choose the Convention, the Chinese courts or arbitral
tribunals will also recognize the validity of their choice and apply the Convention.15
In addition to these two cases, if the applicable law of the contract for the international
sale of goods guided by the rules of private international law is Chinese law, then
China’s foreign Contract Law should be applied. Therefore, China guarantees the
application of its domestic law through the reservation declaration, so as to ensure
the effective implementation of its own policies.
Specifically, in this case, one party of this case has its business based in China,
while the other party has its business based in South Korea. As South Korea does not
participate in CISG, the contract for the international sale of goods in this case does
not meet the applicable conditions stipulated in Article 1(1)(a) of the Convention.
Furthermore, Article 145(2) of the General Principles of the Civil Law of China (now
abolished),16 China’s private international law rules relating to this case, provides
that: “If the parties to a contract involving foreign interests have not made a choice, the
law of the country to which the contract is most closely connected shall be applied.”17
Based on the facts of the case, the court determined that the country most closely
connected with the contract was China. Since the price terms under the contract
involved is CIF Shanghai, and Dongli Company received the goods under the contract
in the destination port Shanghai, China, that is, the place of performance of the
contract is in China. Therefore, the legal relationship of the contract of international
sale of goods in this case shall be governed by Chinese law. At the same time, since
China has made a reservation declaration on Article 1(1)(b) of the Convention, the
Convention will not be applied to the case due to the application of Chinese law.
Therefore, relevant Chinese laws shall ultimately apply to the case, including Article
10 of the Law of the People’s Republic of China on Chinese-foreign Equity Joint

14 Yang [8], pp. 309–310.

15 Yu [9], p. 62.
16 On May 28, 2020, the Third Session of the 13th National People’s Congress of the People’s

Republic of China voted to adopt the Civil Code of the People’s Republic of China which will come
into force on January 1, 2021, and the General Principles of the Civil Law of the People’s Republic
of China will be abolished at the same time.
17 General Principles of The Civil Law of The People’s Republic of China, Article 145.
218 X. Fan

Ventures, Article 94(4), Article 97, and Article 113(1) of Contract Law of the People’s
Republic of China.
However, some scholars believe that the practical significance of the reservation
declaration made by China under Article 95 of CISG no longer exists. This is because
with the promulgation and implementation of the Contract Law of the People’s
Republic of China in 1999, the Economic Contract Law of the People’s Republic
of China, and the Technology Contract Law of the People’s Republic of China has
been abolished simultaneously. The steady and sustainable development of China’s
national economy and the further deepening of reform and opening up require China
to adopt internationally accepted practices to further develop and complete domestic
legislation. The current Contract Law of the People’s Republic of China has replaced
and unified China’s separate legislative norms on foreign-related and non-foreign-
related contracts, which is undoubtedly a solid and positive step towards the modern
legislative model of unified commercial law, especially unified contract law, which is
widely practiced internationally. If the reservation of Article 95 made by China when
it joined CISG at that time was to prepare for different regulations on foreign-related
and non-foreign-related economic contracts in China through separate legislation, the
current contract law that unified and standardized foreign-related and non-foreign-
related contracts makes this reservation no longer have any practical significance
for China.18 The author agrees with this view. In fact, China’s current contract law
and CISG are consistent in content with no conflict, and the incorporation of CISG
into Chinese law also makes the treaty a part of Chinese law, complementing the
Chinese Contract Law. Therefore, the author believes that in the future, the Chinese
Government may consider withdrawing its reservation under Article 95 of CISG.
Issue 3: Specific Ways for Chinese Courts to Apply CISG
I. Direct Application of CISG in Chinese Courts
Article 1(1)(a) of CISG stipulates that “this Convention applies to contracts of sale
of goods between parties whose places of business are in different States: when
the States are the Contracting States.”19 Accordingly, UNCITRAL Digest of Case
Law on the United Nations Convention on Contracts for the International Sale of
Goods states: “In those countries, however, where international uniform substantive
rules are in force, such as those set forth by the Convention, courts must determine
whether those international uniform substantive rules apply before resorting to private
international law rules at all. This means that recourse to the Convention prevails
over recourse to the forum’s private international law rules. This approach has been
justified on the grounds that, as a set of uniform substantive law rules, the Convention
is more specific insofar as its sphere of application is more limited and leads directly
to a substantive solution, whereas resort to private international law requires a two-
step approach—that is, the identification of the applicable law and the application

18 Yang [8], p. 310.

19 United Nations Convention on Contracts for The International Sale of Goods, Article 1(1)(a).
26 Dong Feng Trade Co. Ltd … 219

thereof”.20 “According to the criterion set forth in Article 1(1)(a), the Convention
is “directly” or “autonomously” applicable, that is, without the need to resort to
the rules of private international law, or contracting parties’ mutual agreement upon
its application, when the States in which the parties have their relevant places of
business are the Contracting States, unless the parties have designated a given law
with the intention to exclude the Convention, which they are allowed to do pursuant to
Article 6”.21 Therefore, Article 1(1)(a) of CISG is regarded as a “directly applicable
provision”.22 If a Chinese court confirms that the international sales contract of goods
in a dispute case complies with the provisions of Article 1(1)(a) of CISG, CISG shall
be directly applied, excluding the application of the rules of private international law,
without the express consent of the parties.
For example, in the case of Sarahpinkman, Inc v Guangdong Lauters Enterprise
Co., Ltd, the opinion of the court of second instance is as follows: “The case is
a contract dispute over the international sale of goods. Both parties have made a
choice on the applicable law for the legal relationship of this case, that is, Chinese
law is the applicable law for the dispute of this case. The parties of the sales contract,
Sarahpinkman Company, and Lauters Company have their business places in the
United States and China respectively, and the United States and China are both
countries of CISG. According to paragraph (1) (a) of Article 1 of CISG, CISG applies
to contracts for the sale of goods concluded between parties whose places of business
are in different countries. Even if CISG is not chosen by the parties, the provisions of
CISG shall apply to sales contracts in dispute between the parties, unless the parties
expressly exclude the application of CISG. Although Sarahpinkman Company and
Lauters Company choose to apply Chinese laws, both parties have not explicitly
excluded the application of CISG. Therefore, CISG shall be first applied to the sales
contract in this case, and relevant provisions of Chinese laws shall be applied to those
not provided by CISG”.23
II. Indirect Application of CISG in Chinese Courts
If one party or both parties to the contract for the international sale of goods in a
dispute case do not have their place of business in a State Party to CISG, but the
parties expressly choose to apply CISG, Chinese courts shall, before 1 April 2011,
follow paragraph 2 of Article 145 of the General Principles of the Civil Law and after
following Article 41 of the Law of the Application of Law for Foreign-related Civil
Relations of the People’s Republic of China to recognize the validity of the party’s
choice and apply CISG.

20 UNCITRALDigest of Case Law on the United Nations Convention on Contracts for the
International Sale of Goods (2016 edition). Article 1, para.2.
21 UNCITRALDigest of Case Law on the United Nations Convention on Contracts for the

International Sale of Goods (2016 edition). Articles 1, para.9,10.

22 Schlechtriem [10], p. 24.
23 Civil Judgment of Guangdong Higher People’s Court (2018) Yue Min Zhong No. 1424.
220 X. Fan

III. Unconventional Application of CISG in Chinese Courts

The unconventional application of CISG raises a question: if the applicable law of
the international sales contract of goods guided by the rules of private international
law is Chinese law, is CISG absolutely excluded from application? In this regard,
there is a view that if there are no relevant provisions in the Contract law of China,
relevant provisions of CISG can be applied. Because CISG, as a part of Chinese law,
can play a supplementary role to Chinese Contract Law as it is generally believed by
Chinese legal scholars that the current Chinese contract law is basically consistent
with the Convention and has no substantive conflict. Moreover, the view holds that:
As one of the most important international conventions in the field of international
unification of private law, CISG has many rules that reflect the most widely accepted
international commercial practice, and thus is also one of the major international legal
references for China’s current contract law, so the status of CISG as one of the so-
called “international practices” in China’s civil and commercial law and other laws
should be beyond doubt. Article 142(3) of the General Principles of the Civil Law of
China Provides: “International practice may be applied to matters for which neither
the law of the People’s Republic of China nor any international treaty concluded or
acceded to by the People’s Republic of China has any provisions”. Therein, “may
be applied” can be interpreted as the court has the discretion to consider whether
the international practice is applicable or not, that is, the decision to apply or not lies
with the court. According to this, CISG can be applied by a court in a specific case as
an international commercial practice.24 However, another point of view considers:
“There is no survey case in which the court explicitly applied the CISG in such
a manner, but only a legitimate suspicion that the CISG, which was inapplicable
on the facts, was resorted to as international practice despite being openly counte-
nanced by Article 142(3), it remains to be seen how Chinese courts might develop a
practice of applying the CISG as international practice.”25 In this regard, the author
holds that according to the legal provisions and judicial practice of Chinese courts,
CISG cannot be applied in Chinese courts as an international practice to supplement
the deficiency of Chinese contract Law, nor can CISG be applied as a Convention
(despite being a part of Chinese law) to supplement Chinese contract law. Firstly,
generally speaking, international practice does not have universal and compulsory
legal effects. The application mode of international practice is mainly that the parties
agree in the contract that international practice is the applicable law of the contract.
In this case, the international practice is confirmed and implemented by the court as
the contract terms. If the contract for the international sale of goods does not meet
the applicable conditions of CISG, and the parties have not agreed to apply CISG,
then CISG cannot be applied when the applicable law of the contract for the interna-
tional sale of goods guided by the rules of private international law is Chinese law.
Meanwhile, China has made reservations to Article 1 (1)(b) of CISG, which indi-
cates that China intends to explicitly exclude CISG under the circumstances, so that

24 Yang [8], pp. 311–313.

25 Liu and Ren [11], p. 915–916.
26 Dong Feng Trade Co. Ltd … 221

CISG, even though it is part of Chinese law, cannot be used to supplement Chinese
Contract Law either. Secondly, the General Principles of Civil Law were abolished
on 1 January 2021, and the Civil Code that replaced them has no provisions on the
application of international practices, resulting in an uncertain relationship between
international practices and domestic law. Therefore, an application of CISG as inter-
national practices lacks legal basis. Thirdly, Chinese courts have not yet used CISG
as an international practice to supplement the application of Chinese Contract Law in
judicial practice.26 Therefore, if the parties to a dispute case agree on the application
of an international practice in the contract, the international practice can be given
priority over the application of international treaties and domestic law, because the
international practice is equivalent to the terms of the contract, applying the prin-
ciple of application of legal sources of “special law is superior to general law”. In
addition, the court will not directly apply international practice in the case, because
international practice has not yet acquired formal legal effect in China. Moreover,
with the promulgation of the Civil Code, China’s domestic civil and commercial law
rules are becoming more and more perfect, and the legal interpretation technology
is becoming more and more mature. Basically, there will be no domestic civil and
commercial legislation that needs to be supplemented by international practices.

References

1. Zhang YQ (2009) Commentary on the United Nations convention on contracts for the
international sale of goods, 3rd edn. China Commerce and Trade Press
2. Li W (2002) Commentary on the United Nations convention on contracts for the international
sale of goods. Law Press
3. Xiao YP (2008) Conflict law from the perspective of jurisprudence. Higher Education Press
4. Li SY, Ou YF (eds) Private international law, 5th edn. Peking University Press
5. Zeng LL, et al (eds) (2018) International public law, 3rd edn. Higher Education Press
6. Wan EX, Yu XH (2018) Analysis on the application of international treaties to domestic civil
relations without foreign-related factors. China Leg Sci 5:5–20
7. Liu Y (2019) On the application of united nations convention on contracts for the international
sale of goods in Chinese courts. Legal science. J Northwest Univ Polit Sci Law 3:191–201
8. Yang F (2008) China’s reservation to CISG and the application of CISG in CIETAC arbitration.
Int Law Rev Wuhan Univ 2:307–329
9. Yu JS (eds) (2019) International economic law, 2nd ed. Higher Education Press
10. Schlechtriem P (1986) Uniform sales law: the UN-convention on contracts for the international
sale of goods. Manz
11. Liu Q, Ren X (2017) CISG in Chinese courts: the issue of applicability. Am. J. Comp. Law
65:873–918

26 The author searched the three database of Wolters Kluwer, China Judicial Documents website
and PKU Law with key words “United Nations Convention on Contracts for the International Sale
of Goods”, and found no cases in which Chinese courts used CISG as an international practice to
supplement the application of Chinese contract law.
222 X. Fan

Xiaoying Fan holds a PhD in International Law, graduated from Nankai University in 2015,
and now she is an associate professor and master supervisor of Law School of Tianjin Univer-
sity of Finance and Economics, China, teaching international economic law, WTO law, interna-
tional public law and private international law courses for undergraduates and postgraduates. Her
main research interests include, but not limited to WTO law and international commercial law.
She has published a number of academic papers and a monograph entitled “WTO Legal Inter-
pretation under the Fragmentation of International Law: Legitimacy, Legality and Constitutional
Interpretation”. She has chaired and participated in several research projects.
Chapter 27
Zhuguang Petroleum Co, Ltd v Wuxi
Joyray Import and Export (Group) Co,
Ltd

Linxuan Li

Case Information
Case Name: Zhuguang Petroleum Co, Ltd v Wuxi Joyray Import and Export (Group)
Co, Ltd
Seller: Wuxi Joyray Import and Export (Group) Co, Ltd (“Wuxi Joyray”)
Place of Business: People’s Republic of China (“China”)
Buyer: Zhuguang Petroleum Co, Ltd (“Zhuguang”)
Place of Business: South Korea
Details of First Instance:
Court: Wuxi Intermediate People’s Court, Jiangsu
Case No: (2001) Xi Jing Chu Zi No 15
Judges: N/A
Details of Second Instance:
Court: Jiangsu High People’s Court
Date of Decision: 25 December 2002
Case No: (2002) Su Min San Zhong Zi No 086
Judges: Xiaofu Tang (Presiding Judge), Chunyan Zhu (Judge), Meifen Xu (Acting
Judge)
CISG applied: No
Key CISG provisions interpreted: Article 1(1)

L. Li (B)
King & Wood Mallesons, Beijing, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 223

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_27
224 L. Li

Abstract
In 1997, Zhuguang, a Korean buyer, contacted Chunhe Piao, a Korean businessman
engaging in trade in China, asking Chunhe Piao to look for sellers of 28/2100%
bulky high-lustre acrylic yarn. Through the contact with Chunhe Piao, the buyer
signed a sales contract with Huaiyin Foreign Trade Co. The parties agreed in the
contract that the buyer would buy 28 s/2100% bulky high-lustre acrylic yarn from
Huaiyin Foreign Trade Co, with a quantity of 38,000 kg, the unit price of US$3.28/kg
FOB Shanghai, the total price of US$124,640, and the loading port in Shanghai and
the destination of Santos, Brazil. After signing the contract, the buyer opened an
irrevocable documentary letter of credit with the beneficiary of Huaiyin Foreign
Trade Co.
Because Huaiyin Foreign Trade Co could not perform the contract, Chunhe Piao
then contacted Wuxi Joyray, a Chinese seller, which offered to provide the above
goods required by the buyer. The buyer then modified the beneficiary of the letter of
credit to the new seller. Except for the terms contained in the letter of credit, the buyer
and the seller did not make a written agreement on other terms of the contract. The
manufacture of goods was supervised by Chunhe Piao. In 1998, during the packaging
of the first batch of goods for shipment, Chunhe Piao was present. After inspecting
the goods, it was found that the goods were damp, and the goods were returned
and then shipped after drying. During the packing of the second batch of goods for
shipment, Chunhe Piao entrusted his company’s staff to inspect the goods, and the
quality of goods was recognized by the staff of the seller and the stuff of Chunhe
Piao’s company. After the shipment of the goods, the seller received the payment
of US$124,640, and it paid a commission of US$2,950 to Chunhe Piao. After two
batches of goods arrived at Santos port, Brazil, the end-users in Brazil found that
the goods were seriously damp and could not be used. In October 1998 and March
1999, the buyer filed a claim against the seller through Chunhe Piao, while the seller
denied the existence of quality problems, and so the buyer brought the suit in court.
Regarding the application of law, the buyer requested to apply the United Nations
Convention on Contracts for the International Sale of Goods (CISG). The Court of
first instance held that, although China was a Contracting Party to the CISG, it also
had made a reservation under Article 95 declaring the exclusion of Article 1(1)(b).
Therefore, China only agreed to apply the CISG to the international sales contract
between parties whose places of business were in Contracting States to the CISG. In
the present case, given that the place of business of the seller was in China and the
buyer’s place of business was in South Korea, which was not a Contracting State to
the CISG, the CISG should not be applied to this case. Absent an agreement by the
parties on the choice of law, under Article 145(2) of the General Principles of the
Civil Law of the People’s Republic of China, the law of the country most closely
related to the contract should apply to this case. Considering that both the place of
performance of the contract and the place where the seller was located were in China,
the law of China should be the governing law in this case. With respect to the issues
of contract, the Court of first instance held that an unwritten contract could be valid
if there were no other grounds for avoidance of contract, Chunhe Piao in this case
27 Zhuguang Petroleum Co, Ltd … 225

worked as the agent of the buyer, and pursuant to the rules of transfer of risk under
the term FOB, the seller should not take liability for the dampness of the goods.
The buyer then filed applications before the Court of second instance. The Court
of second instance upheld the decisions of the Court of first instance, holding that
the Court of first instance was right in applying Chinese law to the case under the
principle of the closest connection when there was no choice of law by the parties.
Chunhe Piao’s identity as the agent of the buyer and the decision of the seller not
bearing liability for dampness of the goods were also confirmed by the Court of
second instance.

Commentary to the Key Issues Related to the CISG

Issue

Issue 1: Application of the CISG

Comments

Issue 1: Application of the CISG

Since the decision in the case of Zhuguang Petroleum Co, Ltd v Wuxi Joyray Import
and Export (Group) Co, Ltd of not applying the CISG is similar with that of the case
of Resource Engineering Co, Ltd v Qing Li, Ming Sun and Shanghai Donglin Inter-
national Trade Co, Ltd (Resource Engineering), specific comments to the present
case may refer to the commentary to the case of Resource Engineering.

Linxuan Li is a lawyer at King & Wood Mallesons, Department of Financial Services. She
holds an LLM degree in International Law from the University of International Business and
Economics.
Chapter 28
Wuhan Yinfeng Data Network Co, Ltd
et al v Ming Xu, China Electronics
Import and Export (Wuhan)
Corporation et al

Linxuan Li

Case Information
Case Name: Wuhan Yinfeng Data Network Co, Ltd et al v Ming Xu, China Electronics
Import and Export (Wuhan) Corporation et al
Seller: Hong Kong Ming Bo Hong Inc (Ming Xu is the owner of this company)
Place of Business: Hong Kong SAR
Buyer: Wuhan Yinfeng Data Network Co Ltd (“Yinfeng”)
Place of Business: People’s Republic of China (“China”)
Details of First Instance:
Court: Wuhan Intermediate People’s Court, Hubei
Case No: (2001) Wu Jing Chu Zi No 441
Details of Second Instance:
Court: Hubei High People’s Court
Date of Decision: 19 March 2003
Case No: (2002) E Min Si Zhong Zi No 53
Judges: Gongrong Wang (Presiding Judge), Jinfen Qian (Judge), Jiang Su (Acting
Judge)
CISG Applied: No
Key CISG provisions interpreted: Article 93

L. Li (B)
King & Wood Mallesons, Beijing, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 227

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_28
228 L. Li

Abstract
On 22 July 1999, Datacraft (China) Ltd (“Datacraft”) faxed Xiangyang Zhan of
Yinfeng with an introduction of Datacraft, Cisco Systems, Inc (“Cisco”) and details of
a project to promote broadband network products. In September 1999, Cisco Systems
(China) Network Technology Co, Ltd issued a letter of authorisation to Datacraft,
authorising Datacraft as the only agent and integrator of Cisco, to participate in
the bidding in the network project of Wuhan Cable Broadcast Television Network
Co, Ltd (“Wuhan TV”) and to provide Cisco’s products and related services. On 3
December 1999, Datacraft and Wuhan TV signed a purchase contract, agreeing that
Wuhan TV would purchase Cisco’s broadband network products from Datacraft,
with a total value of US$2.7 million. On the same day, Wuhan TV signed a contract
with Yinfeng to purchase a set of Cisco’s TV broadband network products integrated
by Datacraft, with a total price of RMB¥31,545,405.20. Both contracts stipulated
the essential items of the contract, and the places of delivery were both in Wuhan,
China.
On 13 December 1999, Wuhan TV issued a letter of authorisation to Datacraft,
entrusting Yinfeng company as the foreign trade agent of the contract (NoWH-
CATV1299SCH), to sign the foreign sales contract with Datacraft on behalf of
Wuhan TV, to clear and export the goods and to pay the contract price to Datacraft.
On 8 January 2000, Yinfeng and China National Electronics Import & Export Co
(“CEIEC Wuhan”) of Wuhan signed an import agency contract, which agreed that
CEIEC Wuhan would import broadband network products as an agent, with a total
contract price of US$2.7 million. Under that contract, CEIEC Wuhan should engage
in agency work within the scope of authority granted by Yinfeng, and should fully
handle all business disputes. CEIEC Wuhan and Hong Kong Ming Bo Hong Inc
(the seller) should sign an import contract, under which the annexes and contract
(NoWHCATV1299SCH) mentioned in Articles 9 and 14 would be held responsible
by Yinfeng, and Yinfeng should be liable for penalties.
On 14 February 2000, Datacraft issued a letter of authorisation to entrust the seller
as the commercial agent of the contract (No WHCATV1299SCH) to sign a supply
contract with Yinfeng or its representative, and to be responsible for delivery, export
and collection. On the same day, CEIEC Wuhan purchased high-speed switching
routers from the seller, Hong Kong Ming Bo Hong Inc, and they agreed on the
contract clauses on damages for breach of contract.
The seller delivered all the products to Wuhan Customs on 3 April 2000. On 4
April 2000, the seller delivered the goods to CEIEC Wuhan, and then CEIEC Wuhan
delivered all the products to Wuhan TV. Dalei Chen, representing Yinfeng, received
the goods and signed the receipt. On the same day, Yinfeng delivered all the products
to Wuhan TV. The products were tested, and the results showed that they operated
well.
From 24 December 1999 to 6 December 2000, Wuhan TV paid the amount of
RMB¥28,390,864 to Yinfeng. And then on 10 March 2000, Yinfeng made a prepay-
ment of RMB¥6,840,000 to CEIEC Wuhan. Since Ming Xu only received part of
the payment for the goods, he brought a lawsuit in Court demanding CEIEC Wuhan,
28 Wuhan Yinfeng Data Network Co … 229

Yinfeng, Wuhan TV and Wuhan Bureau of Radio and TV to jointly pay the remaining
price of the goods, as well as the interest and other fees and expenses arising out of
the litigation. During the first instance, Ming Xu changed his claims and requested
Wuhan TV and Wuhan Bureau of Radio and TV to take the joint responsibility for
all the civil liabilities.
Regarding the application of law, the Court of first instance held that, this case is a
dispute on international sales contract and the Contract Law of the People’s republic
of China should be the governing law of the present case.
When the buyer filed applications before the Court of second instance, the Court
of second instance held that since CEIEC Wuhan and Ming Xu did not agree on
the applicable law for dispute settlement, the applicable law should be determined
according to the principle of closest connection, and thus the law of the place where
the seller or the buyer’s place of business is located should be applied. In this case,
because Hong Kong is a Special Administrative Region of China with different legal
systems, and has not concluded or acceded to the United Nations Convention on
CISG, the CISG should not be applied. The purchase contract was signed in Wuhan
City, Hubei Province, where the buyer’s business office is located, and the parties had
no objection to the application of the Chinese laws during the Court trial, so Chinese
laws shall apply to this case. The contractual behaviour, in this case, occurred after
the implementation of the Chinese Contract Law, and the relevant provisions of the
Contract Law may apply. The Interim Provisions on foreign trade agency system
issued by the Ministry of Foreign Economic Relations and Trade of China is a
departmental rule, not a special law. In accordance with the spirit of Article 4 of
the interpretation of the Supreme People’s Court on Several Issues Concerning the
Application of the Contract Law of the People’s Republic of China (I), the Court
can only refer to and implement it. Since Chinese Contract Law does not directly
stipulate the content of the foreign trade agency system, the provisions of the Foreign
Trade Law of the People’s Republic of China can be applied to issues related to the
foreign trade agency system.

Commentary on the Key Issues Related to the CISG

Issues
Issue 1: Applicability of the CISG to territorial units of a Contracting State
Comments
Issue 1: Applicability of the CISG to territorial units of a Contracting State
Although China is a contracting party to the CISG,1 the status of Hong Kong
Special Administrative Region (“Hong Kong”) under the CISG remains controversial

1The CISG entered into force for China on 1 January 1988. For details please refer to: http://www.
uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG_status.html.
230 L. Li

for a long time. It is arguable though, pursuant to Article 93(4) of the CISG, in the
absence of a declaration under Article 93(1), that the application of the CISG is to
extend to all territorial units of China.
Since the present case, Wuhan Yinfeng Data Network Co, Ltd et al v Ming Xu,
China Electronics Import and Export (Wuhan) Corporation et al, involves a party
in Hong Kong, this commentary will mainly discuss the application of the CISG in
Hong Kong. Specifically, the issue of application can be split into two problems: one
is whether the CISG can be applied to disputes between Mainland China and Hong
Kong, and the other is whether the CISG can be applied to disputes between Hong
Kong and the other Contracting States to the CISG.
I. Application of the CISG Between Mainland China and Hong Kong
Concerning the application of the CISG to Mainland China–Hong Kong transactions,
most Chinese judges and scholars hold a negative attitude towards it, regardless of
whether cases are from before or after the handover of Hong Kong.
Historically, Hong Kong has not been included in the CISG framework. Prior to
Hong Kong’s return in 1997, Hong Kong was a colony of the UK, and the UK was
not a party to the CISG, so the CISG could not be applied to Hong Kong.2 After
Hong Kong’s return in 1997, under the framework of the “one country, two systems”
principle, Hong Kong is a territorial unit of China, and it enjoys a high degree of
autonomy. The international conventions concluded by the central government of
China are not necessarily applicable to Hong Kong, and the central government of
China has never said that it would apply the CISG to Hong Kong. When resuming
sovereignty over Hong Kong, the Chinese government submitted a written notifica-
tion to the Secretary General of the United Nations on 20 June 1997, which listed
the conventions to which China has acceded that will apply to Hong Kong after its
return, which excluded the CISG.
Most Chinese courts also support not applying the CISG when a Hong Kong party
is involved, as the CISG is an international convention applied to international sales
of goods while Hong Kong is a part of China. In the decision of the present case,
the Court of second instance supported the former opinion.3 Similarly, in the case
of Yinshon Development Hong Kong Co, Ltd v Zhejiang Zhongda Technical Export
Co, Ltd, the Court held that Hong Kong had not formally acceded to the CISG, and
China had not declared that the CISG was applicable to Hong Kong after Hong Kong’s
return.4 In accordance with Article 93(1) of the CISG, “if a Contracting State has
two or more territorial units in which, according to its constitution, different systems
of law are applicable in relation to the matters dealt with in this Convention, it may,
at the time of signature, ratification, acceptance, approval or accession, declare that

2 Supreme People’s Court Decision, Lianzhong Qiye (Energy) Co., Ltd.v. Xiamen ITG Group
Corp.,Ltd, (2016) Supreme Fa Min Zai No. 373 (14 March 2017).
3 Wuhan Intermediate People’s Court, Hubei Province, Wuhan Yinfeng Data Network Co., Ltd. et al.

v Ming Xu, China Electronics Import and Export (Wuhan) Corporation et al. (2001) Wu Jing Chu
Zi No.441 (19 March 2003).
4 Zhejiang High People’s Court, Yinshon Development Hong Kong Co., Ltd. v. Zhejiang Zhongda

Technical Export Co., Ltd., (2010) Zhe Shang Wai Zhong Zi No. 99.
28 Wuhan Yinfeng Data Network Co … 231

this Convention is to extend to all its territorial units or only to one or more of them,
and may amend its declaration by submitting another declaration at any time”. Since
the Chinese government had not yet made a declaration in this regard, it cannot be
considered that the CISG will be applied to Hong Kong. Moreover, the Court held
that Hong Kong belonged to China and it was not an independent country. Therefore,
the CISG should not apply to the contract for the sale of goods between parties whose
business places are located in Hong Kong and Mainland China.5
For the above reasons, it is agreed by most people that, unless the parties to the
contract expressly choose the CISG as the applicable law, the CISG will not be
applied to a Mainland China–Hong Kong dispute. In the absence of an agreement on
the applicable law between Mainland China and Hong Kong parties, after the Court
determined that CISG was not applicable to the case, Chinese law is often applied
in accordance with Article 145 of the General Principles of the Civil Law of the
People’s Republic of China and Article 126(1) of the Contract Law of the People’s
Republic of China (hereinafter referred to as the “Contract Law”) which prescribes
that “if the parties to a foreign-related contract have no choice, the law of the country
most closely related to the contract shall apply”.
II. Application of the CISG Between Hong Kong and the Other Contracting
States
As for the application of CISG to disputes between Hong Kong and foreign parties,
relevant judgments of courts in various countries are quite different. Based on the
special states of Hong Kong, some countries acknowledge that the CISG can be
applied to Hong Kong, while other countries hold opposite opinions.
Some courts, including the Supreme Court of France, held that since China did
not include CISG in the international conventions applicable to Hong Kong in its
written notification to the Secretary General of the United Nations on 20 June 1997,
China intended to exclude the applicability of the CISG in Hong Kong and thus
CISG should not be applicable.6 On the contrary, some US courts held that the CISG
should be applied in Hong Kong because Hong Kong is a territory belonging to
China.7 Such difference is based on different understandings of the implications of
Article 93 of the CISG.8
III. Public Consultation on Proposed Application of CISG to Hong Kong
With the number of Contracting States to the CISG is growing, the Panel on Adminis-
tration of Justice and Legal Services in Hong Kong considers that it is the appropriate
time to consult the relevant stakeholders, in particular, the legal and business sectors,
on the proposal to extend the CISG to Hong Kong. Accordingly, the Department of

5 Zhejiang High People’s Court, Yinshon Development Hong Kong Co., Ltd. v. Zhejiang Zhongda
Technical Export Co., Ltd., (2010) Zhe Shang Wai Zhong Zi No. 99.
6 Supreme Court (France), Societe L. v. CM Ltd.), 2 April 2008, Appeal No. 04-17,726; Gillette [1],

p. 34.
7 Fan [2], p. 348.
8 Mo [3], p. 64.
232 L. Li

Justice of Hong Kong launched a public consultation on the applicability of CISG

to all sectors of society during the period 2 March to 30 September 2020 (the “CISG
Consultation”).9
The CISG Consultation questions consider: (1) the current application of CISG
in Hong Kong’s foreign trade; (2) whether CISG should be applied in Hong Kong;
(3) whether they are willing to use CISG in foreign transactions and the reasons; (4)
the application of CISG between Mainland China and Hong Kong; (5) comments on
the draft legislative provisions.10
On 22 March 2021, the Department of Justice submitted the Consultation results to
the Legislative Council and announced them to the public. The results of the Consul-
tation showed that respondents generally supported the view of applying the CISG
to Hong Kong and gave their opinions and reasons based on the public consultation
questions.11
On 29 September 2021, the Sale of Goods (United Nations Convention) Ordinance
(Cap 641) (“Ordinance”) was passed by the Legislative Council and it will come into
operation on a day to be appointed by the Secretary for Justice by notice published
in the Gazette.12 Considering that it may take some time for all sectors of Hong
Kong society to adapt to changes and appropriately adjust their business methods
and businesses, the Hong Kong Government plans to extend the effective date of the
Ordinance. At present, the Hong Kong Government is seeking the assistance of the
central government of China according to Article 153 of the Basic Law to complete
the essential steps for applying CISG to Hong Kong.
IV. Consultation
There exist close ties between Mainland China and Hong Kong. The application
of CISG will effectively promote the unification of laws in commercial transac-
tions between the two places and promote economic and trade exchanges. However,
considering that Mainland China and Hong Kong belong to different jurisdictions, the
Hong Kong Government proposes to sign arrangements with the central government
of China to solve the application of CISG between the two places.
As Ms. Zheng Ruohua, Secretary of the Department of Justice of the HKSAR
Government, addressed on 19 November 2021, extending the CISG to Hong Kong
has many benefits. For instance, the implementation of the CISG in Hong Kong
will help to reduce the risks encountered by Hong Kong enterprises due to unclear
laws in international goods sales and improve the construction of the legal system of

9 The Administration issued the public consultation paper on 2 March 2020. The public consultation
period was for three months but had been extended to the end of September 2020 owing to the current
public health situation.
10 Public Consultation on Proposed Application of CISG to the Hong Kong Special Administrative

Region Commences.
11 Legislative Council Panel on Administration of Justice and Legal Services, “Proposed Application

of the United Nations Convention on Contracts for the International Sale of Goods to the Hong
Kong Special Administrative Region”.
12 The Sale of Goods (United Nations Convention) Ordinance No. 30 of 2021, For details please

refer to: https://www.gld.gov.hk/egazette/pdf/20212540/es12021254030.pdf.

28 Wuhan Yinfeng Data Network Co … 233

international goods sales in Hong Kong. Moreover, the application of the CISG will
solidify Hong Kong’s important position as an international trade centre.
To embrace the idea of harmonisation and adopt the CISG, it is important that
China clarifies the status of Hong Kong under the CISG. China should also apply
the CISG as the default uniform sales law that governs the sale of goods contract
between all its territorial units.

References

1. Gillette CP (2016) The UN convention on contracts for the international sale of goods: theory
and practice, 2nd edn. Cambridge University Press
2. Fan Y (2011) A uniform sales law for the mainland China, Hong Kong SAR, Macao SAR and
Taiwan—the CISG. Vindobona J Int Commer Law Arbitr 15:345–364
3. Mo JS (2015) Transfer of sovereignty and application of an international convention: CISG in
China in the context of “one country, two systems.” J Int Comp Law 2:61–86

Linxuan Li is a lawyer at King & Wood Mallesons, Department of Financial Services. She
holds an LLM degree in International Law from the University of International Business and
Economics.
Chapter 29
Wang Ruixiang Fashion Co, Ltd v Trend
Co, Ltd and Shanghai Silk (Group) Co,
Ltd

Yan Shang

Case Information
Case Name: Wang Ruixiang Fashion Co, Ltd v Trend Co, Ltd and Shanghai Silk
(Group) Co, Ltd
Seller: Wang Ruixiang Fashion Co, Ltd
Place of Business: China
Buyer: Trend Co, Ltd
Place of Business: N/A
Details of First Instance:
Court: Shanghai No 1 Intermediate People’s Court
Date of Decision: June 2003
Case No: (2003) Hu Yi Zhong Min Wu (Shang) Chu Zi No 21
Judges: Huangying (Presiding Judge), Liulinmin (Acting Judge), Lichun (Acting
Judge)
CISG Applied: No
Key CISG provisions interpreted and applied: None
Abstract
The seller, Wang Ruixiang Fashion Co, Ltd, entered into two contracts of clothing
sales with the buyer, Trend Co, Ltd. According to the first contract, the buyer would
buy 2,500 cashmere sweaters from the seller for a total of ¥533,500. Right after the
conclusion of the contract, since the seller lacked money to process the cashmere
sweaters, Shanghai Silk (Group) Co, Ltd (the other defendant) paid ¥300,000 to the

Y. Shang (B)
Assistant Professor in Law at People’s Public Security University, Beijing, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 235

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_29
236 Y. Shang

seller as an advance payment and signed the Advance Payment Agreement with the
seller, in which they agreed that the seller should bear 8% monthly interest on the
advance payment, and stated that the agreement is a part of the contract of clothing
sales between the buyer and the seller. After completion of production, the seller
actually delivered 2,491 cashmere sweaters worth ¥530,376. After taking delivery,
the buyer requested to pay the price at a 50% discount on the grounds of quality
problems with the goods. Accordingly, the seller sent an invoice to the buyer for the
goods, with a total price of ¥265,162.84.
According to the second contract, the buyer would purchase 1,532 clothes, with a
value of $27,332.20 in total, which were divided into three orders based on different
styles. Later, the seller notified the buyer to cancel Order 401,623. Therefore, the
seller actually delivered 572 items and 654 items, respectively, under the other two
orders and sent an invoice with a total of ¥211,353.76.
After deducting the advance payment of ¥300,000 and the interest of ¥5,040,
Shanghai Silk (Group) Co, Ltd paid another ¥171,476.60 to the seller.
The seller, as the plaintiff, brought an action against the buyer and Shanghai
Silk (Group) Co, Ltd to the Shanghai No 1 Intermediate People’s Court. The seller
claimed the buyer constituted a breach of contract, and requested the buyer and
Shanghai Silk (Group) Co, Ltd to undertake joint liability for the buyer’s unpaid
purchases. As to the first contract, the seller claimed that there was no problem with
the quality of the goods, but he sent the invoice with a 50% discount as Shanghai Silk
(Group) Co threatened to not make the balance payment. Under the first contract,
the buyer still owed ¥265,216.52. As to the second contract, the seller claimed that
the reason he agreed to the buyer’s request to cancel Order 401623 was to avoid
the buyer not paying the remaining payment. Under the second contract, the buyer
still owed $5,232. The buyer argued that, for the first contract, the buyer requested
a discount because of quality problems with the goods, and the parties had reached
an agreement on a 50% discount. Furthermore, for the second contract, it was due to
late delivery by the seller that the parties agreed to cancel Order 401623. Therefore,
the buyer requested the court to dismiss the claims of the seller.
The court held that the plaintiff’s claims have no factual or legal basis, and
dismissed all the claims in accordance with the Civil Procedure Law of the People’s
Republic of China and the Contract Law of the People’s Republic of China.

Commentary on the Key Issues Related to the CISG

Issues
Issue 1: Whether the CISG should be applied autonomously and pre-emptively?
Comments
Issue 1: Whether the CISG should be applied autonomously and pre-emptively?
29 Wang Ruixiang Fashion Co, Ltd v Trend Co, … 237

I. Legal basis for the direct or autonomous application of the CISG

According to Article 1(1)(a) of the CISG, the convention applies to contracts of sale
of goods between parties whose places of business are in different Contracting States;
this article is considered for the provision of direct or autonomous applicability of
the CISG. With the surge of international trade, there are more and more disputes
over international contracts of goods. As an international convention on uniform
substantive law, the Convention is widely applied in resolving disputes over interna-
tional sales of goods. In the Digest of Case Law on the United Nations Convention
on Contracts for the International Sale of Goods (DOCL) compiled by the United
Nations Commission On International Trade Law (UNCITRAL), it is interpreted that,
if the places of business of both parties to a dispute over international contracts for
sales of goods are in different countries, and both of those countries are Contracting
States to the CISG, the Convention is “directly” or “autonomously” applicable.1 As
to the Chinese law, after China formally became a Contracting State of the CISG
in 1986, the Supreme People’s Court issued, in 1987, the Circular on Transmitting
Certain Issues of the MOFTEC in Connection with the Implementation of United
Nations Convention on Contracts for the International Sale of Goods2 which was
published by the Ministry of Foreign Economic Relations and Trade of People’s
Republic of China in the same year, which says, “the contracts for sale of goods
reached between the Chinese companies and the companies in the aforementioned
countries (except Hungary) will automatically apply to the provisions of the Conven-
tion and the disputes or litigations arisen should be also settled under the Convention,
unless otherwise agreed”.
II. The pre-emptive application of the CISG
As to the pre-emptive application, DOCL mentioned that “convention prevails over
recourse to private international law”, that is, under the traditional mode, in the
case of international situations, courts resort to private international law rules in
force in their country to determine which substantive rules to apply. However,
involving disputes concerning the international sale of goods, recourse to the CISG
prevails over recourse to the forum’s private international law rules. Hence, in those
Contracting States, where international uniform substantive rules are in force, courts
must determine whether those international uniform substantive rules apply or not
before resorting to private international law rules at all.3

1 UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the Interna-
tional Sale of Goods (2016 Edition), September. 28 2021, p. 5. https://uncitral.un.org/sites/uncitral.
un.org/files/media-documents/uncitral/en/cisg_digest_2016.pdf.
2 Circular of the Supreme People’s Court on Transmitting Certain Issues of the MOFTEC in Connec-

tion with the Implementation of United Nations Convention on Contracts for the International Sale
of Goods (Fa (Jing) Fa [1987] No. 34), December 10 1987.
3 UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the Interna-

tional Sale of Goods (2016 Edition), September. 28 2021, p. 4. https://uncitral.un.org/sites/uncitral.

un.org/files/media-documents/uncitral/en/cisg_digest_2016.pdf.
238 Y. Shang

III. The court should have applied the CISG

Therefore, if the criteria stipulated in Article 1(a) of the CISG have been met, and
the parties have not agreed to exclude the application of the CISG, the CISG should
be applied automatically and pre-emptively, rather than recourse to the private inter-
national law rules. As the places of business of Wang Ruixiang Fashion Co, Ltd
and Trend Co, Ltd in this dispute are in different Contracting States to the CISG,
whether pursuant to CISG, DOCL compiled by UNCITRAL, or the Circular of the
Supreme People’s Court of China, the CISG shall be automatically applied with no
need for the parties to agree on it specifically. The main reason for the said issue is
that Chinese courts are not familiar with the CISG, and therefore, they are inclined
to apply Contract Law.
The failure to apply CISG may be due to the court’s lack of understanding of the
object and purpose of CISG as a unification of substantive rules, and the automatic
and pre-emptive applicability of CISG.

Yan Shang Ph.D. of International Law, Assistant professor of Law School of People’s Public
Security University of China, Researcher of ‘Belt and Road’ Rule of Law Research Center of
University of International Business and Economics, mainly engaged in teaching and research of
international economic law and private international law. Research area: Substantive and proce-
dural issues in international civil and commercial disputes.
Chapter 30
A (Singapore) Limited v Dongling
Trading Co., Ltd; Liquidation Team
of Shanghai Xuyang Trading Co., Ltd.

Jie Luo

Case Information
Case name: A (Singapore) Limited v Dongling Trading Co., Ltd; Liquidation Team
of Shanghai Xuyang Trading Co., Ltd.
Seller: A (Singapore) Limited
Place of business: Singapore
Buyer: Dongling Trading Co.
Place of business: China
Details of First Instance
Court: The First Intermediate People’s Court of Shanghai
Date of Decision: 23 March 2004
Case No: (2003) Hu Yi Zhong Min Wu (Shang) Chu Zi No 83
Judges: Yuzhen Li (Presiding Judge), Chun Li (Acting Judge), Yongqing Hu (Acting
Judge)
CISG applied: Yes
Key CISG provisions interpreted and applied: Articles 1(1) and 4
Abstract
From July to October 2001, the plaintiff, A (Singapore) Limited, and the defendant,
Dongling Trading Co., Ltd, signed eight contracts of sale of goods. The contract
agreed that the plaintiff provided the defendant with the corresponding chemicals,
the destination port of the goods was Shanghai, and the total amount of the goods
was a total of US $246,999. The defendant, Dongling Company, shall perform the

J. Luo (B)
Associate Professor in Law at Zhongnan University of Economics and Law, Wuhan, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 239

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_30
240 J. Luo

payment obligation within 85 days from the date of issuance of the goods’ bill of
lading. After the contract was signed, the plaintiff delivered the goods in accordance
with the contract, but Dongling Company did not pay in time after receiving the
goods. In the process of negotiation, Dongling Company stated that it was a foreign
trade agent of Shanghai Xuyang Trading Co., Ltd, and the two parties had an agency
relationship. The payment method for the goods was first by Xuyang Company to
pay Dongling Company, and then Dongling Company was to pay for the goods to
the plaintiff, so the plaintiff should claim the rights from Xuyang Company. On 22
September 2002, Xuyang Company set up a liquidation group, including Xi Jingfang
and Luo Yunli. The liquidation group then issued a liquidation report, which indicates
the company’s debts and liabilities by the defendant Xi Jingfang, Luo Yunli.
The Shanghai First Intermediate People’s Court held that there were two major
points of contention in this case: first, whether Dongling Company was the foreign
trade agent of Xuyang Company. Second, whether the plaintiff’s request for payment
by the defendant from A Singapore Limited should be supported.
On the issue of application of law, the court pointed out that the business places of
A Singapore Limited and Dongling Company were located in Singapore and China,
respectively. Singapore and China are both Contracting States of the United Nations
Convention on Contracts for the International Sale of Goods. An agreement was
reached on the application of law in this case. Therefore, in accordance with the first
paragraph of Article 1 of the Convention, disputes arising from the above-mentioned
contract shall be governed by the “United Nations Convention on Contracts for the
International Sale of Goods (CISG)”. According to Article 4 of CISG, the Convention
only applies to the formation of a contract of sale and the rights and obligations of
the seller and the buyer arising from such a contract. The first issue involved in the
case did not fall within the scope of application of the Convention, so the applicable
law should be determined in accordance with the rules of private international law.
According to Article 145(2) of the General Principles of the Civil Law of the People’s
Republic of China and Article 126(1) of the Contract Law of the People’s Republic
of China, if the parties of a foreign contract do not choose the law applicable to
the contract dispute, the law of the country with which the contract is most closely
connected, that is, the law of the People’s Republic of China shall apply. The second
legal issue falls within the scope of application of the Convention, and CISG shall
apply to the resolution of the issue.
Finally, the court held that Dongling Company failed to provide sufficient evidence
to prove the existence of an agency relationship with Xuyang, and Xuyang was not
bound by the eight international contracts for the sale of goods at issue in this case.
After the plaintiff, A Singapore Limited delivered the goods in accordance with the
contract, Dongling Company shall bear the responsibility of paying the purchase
price.
30 A (Singapore) Limited v Dongling Trading … 241

Commentary on the Key Issues Related to the CISG

Issues
Issue 1: Application of CISG in this case
Issue 2: China’s legislative provisions on the application of CISG
Issue 3: Chinese judicial practice regarding the application of CISG

Comments
Issue 1: Application of CISG in this case
Chinese courts have mainly adopted two modes of CISG application, namely, the
convention mindset and the conflict of laws mindset.1 In this case, the court adopted
the convention mindset in the application of CISG. The court applied CISG directly
after relying on Article 1(1)(a) of the Convention, that is, both parties’ places of
business were located in countries that were the Contracting States of the Convention,
and after finding that the parties had not reached an agreement on the application of
the law in this case. This case is directly applicable to CISG.
The kind of convention mindset adopted in this case is in line with the general
understanding of Chinese scholars on the application of CISG and its legislative
purpose of it. Chinese scholar, Liu Ying, believes that the direct application of
Article 1(1)(a) of the Convention actually reflects the obligation of the Contracting
State whose place of business is located and the Contracting State whose forum is
located to jointly follow the Convention, and the basis of direct application lies in
the joint performance of treaty obligations.2 Chinese scholar, Li Wei, believes that
if the parties to a contract whose places of business are located in different coun-
tries are both Contracting States of the Convention, the parties did not expressly
or impliedly choose the law for the settlement of contractual disputes in the sales
contract according to the principle of autonomy, Article 1(1)(a) of the Convention
will automatically apply, instead of applying the relevant domestic law according to
the principle of private international law.3 In other words, Chinese scholars believe
that if both parties have their places of business in Contracting States of the Conven-
tion and the parties have not chosen the law applicable to the contract of international
sale of goods, the Convention should be applied directly in accordance with Article
1(1)(a) of CISG.
In addition to Article 1(1)(a) of CISG, Article 4 of CISG applies in this case.
Article 4(1) of CISG sets out the contractual matters to which the Convention prevails
over domestic law. Article 4(2) states that, unless otherwise specified, the Convention
does not provide for the following issues: the validity of the contract or its terms and
the conventions cited in the contract; the validity of the contract on the ownership of
the goods sold. Matters not covered by this provision shall be dealt with in accordance
with the applicable uniform rules, or in accordance with applicable domestic law.

1 Zhao [1], p. 26.

2 Liu [2], p. 84.
3 Li [3], p. 7.
242 J. Luo

The first point of contention, in this case, involved determining whether Dongling
Company and Xuyang were in a foreign trade agency relationship, and thus whether
the eight international contracts for the sale and purchase of goods at issue, in this
case, were directly bound to Xuyang. Agency relationships are not covered by the
Convention. Ultimately, the court determines the applicable law in accordance with
the rules of private international law. The second dispute lies in whether the plain-
tiff’s request for payment by the defendant from A Singapore Limited should be
supported. The essence of this dispute is whether the defendant should fulfil the
buyer’s obligation of timely payment after the plaintiff fulfilled the seller’s delivery
obligation on time. According to Article 4 of CISG, the dispute between the rights
and obligations of the buyer and the seller is within the scope of application of the
Convention, thus CISG should apply to the solution of this problem.
Issue 2: China’s legislative provisions on the application of CISG
China’s constitutional laws do not directly regulate the relationship between treaties
and domestic laws, or the domestic application of treaties.4 The Constitution of the
People’s Republic of China, the Legislative Law of the People’s Republic of China,
the Civil Code and other relevant laws also do not make specific provisions on the
application of CISG.
I. Before the introduction of the Civil Code of the People’s Republic of China
Prior to the promulgation of the “Civil Code”, Article 142 of the General Principles of
Civil Law, which has been invalidated, and Article 4 of the revised “Explanation on
Certain Issues of the Law on the Application of Laws in Civil Relations Concerning
Foreign Affairs (1)” (hereinafter referred to as Interpretation 1) were once consid-
ered to be the legal basis for the CISG’s application. Article 4 of Interpretation I
mentioned that, where the legal application of foreign-related civil relations involves
the application of international treaties, the people’s courts shall apply them in accor-
dance with Article 142(2) of the General Principles of the Civil Law of the People’s
Republic of China.
Article 142(2) of the lapsed “General Principles of Civil Law” stipulates that,
“Where an international treaty concluded or participated in by the People’s Republic
of China has different provisions from the civil laws of the People’s Republic of
China, the provisions of the international treaty shall apply, except for those provi-
sions which the People’s Republic of China has declared to be reserved”. The legisla-
tive intent of this provision is to determine the priority application of international
treaties, but the deviations in the formulation of the text of the provision have led
to inconsistent interpretations of the provision by Chinese courts at all levels. For
example, some courts have held that Article 143(2) of the General Principles of Civil
Law provides for the priority applicability of international treaties, and judges should
first consider whether CISG applies in the application of the provision.5 However,

4Liu [4], p. 193.

5For example, in the case of the dispute between American Land and Sea Company and Seaford
Company over the sale and purchase contract ((2004) Guangdong High Court Civil IV Final Word
30 A (Singapore) Limited v Dongling Trading … 243

other courts have held that Article 143(2) of the General Principles of Civil Law
requires that an international treaty be applied only when there is any inconsistency
between Chinese domestic law and the provisions of the international treaty.6
II. After the introduction of the Civil Code of the People’s Republic of China
The Civil Code, as a basic civil law, did not succeed the provisions of Article 142(2) of
the General Civil Law and does not expressly regulate the application of international
treaties. Interpretation I was also revised with the expiration of the General Principles
of Civil Law, and the revised Interpretation I does not provide for the application
of international treaties in any way. In other words, after the entry into force of the
Civil Code, there is no clear domestic law basis for the application of international
treaties in domestic civil or commercial cases.
Although China currently does not have an explicit domestic law basis, the existing
civil and commercial laws that make provisions for international treaties all adopt
the direct application approach, such as Article 142 of the former General Principles
of Civil Law, Article 268 of the Maritime Law, Article 184 of the Civil Aviation
Law, Article 95 of the Bills Law, Article 97 of the Marine Environment Law, and
Article 267 of the Civil Procedure Law all adopt the same legislative technique which
reflects China’s active practice of the basic principles of international law such as
treaties must be honoured and international treaty obligations must be fulfilled in good
faith. Secondly, in 2015, the Supreme People’s Court issued the Specifications for
Writing Commercial Maritime Judgement Instruments Involving Foreign Countries,
which clearly stipulates that, when applying a convention, the specific provisions
of the applicable convention shall be cited. The order of citing the provisions of
the convention shall be placed before the law and judicial interpretation. This also
reflects the preference at the judicial level in China for conventions to be incorporated
ex officio into domestic law and be directly applied.
Issue 3: Chinese judicial practice regarding the application of CISG
I. The path of application of CISG in Chinese judicial practice
The judicial practice of Chinese courts on the application of CISG is divided into
two stages. Prior to the issuance of the Supreme People’s Court Guiding Case No
107: Sinochem International (Singapore) Co., Ltd v ThyssenKrupp Metallurgical
Products Co., Ltd International Sales Contract Dispute, different levels of courts
have a different understanding of the relationship between international treaties and

No. 84), the court of second instance finally applied CISG based on the precedence of international
treaties under Article 142(2) of the General Principles of Civil Law when the parties did not agree
to choose the applicable law.
6 For example, in The Case of Baodelli Co., Ltd. v. China Electronic Import and Export Guangdong

Company’s International Contract For the Sale of Goods (2004) In the absence of an agreement
between the parties to choose the application of the law, the court first applied CISG to the mainland
law of the People’s Republic of China on the basis of the principle of the closest connection, and
then applied CISG in accordance with Article 142, paragraph 2, of the General Principles of Civil
Law, because China’s domestic law does not expressly provide for the contract for the sale of
international goods.
244 J. Luo

domestic law, leading to different ways of applying CISG. After the issuance of
Guiding Case No. 107, the people’s courts at all levels unified the application of
CISG and directly applied them in accordance with Article 1(1) of the Convention.
Prior to the issuance of Guiding Case No. 107, when the parties did not choose the
applicable law of the contract, the Chinese courts applied the CISG in the following
two ways: Direct application in accordance with Article 1(1) of the Convention, and
invoking Article 1 of the General Principles of Civil Law Article 142(2), and the
principle of the place of closest connection and other conflict of laws rules.
The number of cases in which China directly applied CISG pursuant to Article
1(1)(a) of the Convention is considerable, and the path of deducing the application
of CISG is basically the same.7 For example, in the case of Sinochem International
(Singapore) Ltd v ThyssenKrupp Metallurgical Products Co., Ltd, the court held that
the parties had not agreed to choose the law applicable to the contract, and both
parties had their places of business in countries that were Contracting States of the
CISG, so the CISG should be applied first.8
In addition to the direct application of CISG, there are also a significant number of
cases where CISG was applied by invoking Article 142(2) of the General Principles of
Civil Law and the conflict of laws rules such as the principle of closest connection. For
example, in the appeal case between Jie Dong County Hai Fu Fishery Development
Co., the Court of Appeal held that CISG should be applied based on Article 142(2) of
the General Principles of Civil Law and Article 1(1)(a) of the Convention.9 Another
example is the case of Rizhao Zhonggang Grain v Oil Co. In this case, after finding
that the case was a dispute over an international contract for the sale of goods, the
court directly relied on the principle of closest connection and found the substantive
law of the People’s Republic of China as the governing law, and ultimately applied
the Contract Law of the People’s Republic of China.10
II. Common situations in which CISG is applied in Chinese judicial practice
Summarising the judicial practice in China over the years, we can find that
the common situations in which Chinese courts apply CISG mainly include the
following: (1) both parties agree to apply CISG and exclude other domestic laws,
regardless of whether one or both parties are Contracting States of the CISG; (2) both
parties agree to apply CISG in preference to other domestic laws without excluding
other domestic laws, regardless of whether one or both parties are Contracting States
of the CISG; (3) both parties are the CISG Contracting States and have not agreed on
the applicable law and have not excluded CISG; (4) both parties are CISG Contracting
States and have agreed on the applicable law, but have not excluded the application
of CISG.

7 He [5], p. 183.
8 See Supreme People’s Court Guiding Case No. 107 (2013) Civil 4 Final Word No. 35 Civil
Judgment.
9 See Guangdong High People’s Court (2004) Guangdong High Court Civil No. 84.
10 See Civil Judgment No. 7 of the Nissin Sanchu Word no. 7 of the Rizhao Intermediate People’s

Court (2013) in Rizhao City, Shandong Province.

30 A (Singapore) Limited v Dongling Trading … 245

A. The parties agree to apply CISG and exclude other domestic laws
If the parties have agreed to apply CISG to the exclusion of other domestic law,
then naturally the autonomy of the parties should be respected and the CISG should
be applied, and for cases involving issues not expressly settled by the Convention
but falling within the scope of the Convention, the general principles on which the
Convention is based should be applied in accordance with Article 7(2) of the CISG.
B. The parties agreed to give priority to CISG but did not exclude other domestic
laws
If the parties agree that the CISG does not exclude other domestic law, then the rele-
vant provisions of the CISG shall prevail for issues within the scope of the Conven-
tion. For issues outside the scope of the Convention in the case under consideration,
according to Article 7(2) of the CISG, the court shall determine the applicable law
in accordance with the rules of private international law.11
C. Both parties are Contracting States of the CISG, have not agreed on the
applicable law, and have not excluded the CISG
In the above case, since both parties’ places of business are in countries that are
Contracting States of the CISG, there is no need to apply the conflicting norms
and CISG should be applied directly in accordance with the provisions of Article
1(1)(a) of CISG. For the part that does not fall within the scope of application of
CISG, the court can determine the applicable law according to the principle of closest
connection in the Law Applicable to Foreign-related Civil Relations. For example,
in the case of Sanya Yuanhai Real Estate Marketing Planning Co., Ltd v Tianjin
Tianzhu Building Materials Co., the court relied on Article 1(1)(a) of the CISG,
which provides that the CISG shall apply to this case.12
D. Both parties are CISG Contracting States and have agreed on the law of the
contracting parties, but have not agreed to exclude the application of CISG
As we all know, in the theory and practice of the relationship between international
treaties and domestic law, there have been two different views of “monism” and
“dualism” for a long time. In terms of the domestic validity of international treaties,
two situations arise: one is that a treaty must be transformed before it can become a
domestic law; the other is that a treaty can be directly incorporated into domestic law
without transformation.13 Authoritative Chinese international law scholars generally
believe that the direct application of treaties in the country is a universal legal system.
For example, Mr. Li Haopei believes, “When a treaty between my country and a
foreign country comes into force, it will of course be incorporated into the domestic

11 Ibid.
12 See Tianjin High People’s Court (2019) Jinmin Final Civil Judgment No. 284.
13 Wang [6], p. 426.
246 J. Luo

law and be applied by the competent authority of our country without the need to
transform it into a domestic law by another law”.14
The prevailing view in judicial practice is that the choice of the parties to apply
the law of a Contracting State is not the same as excluding the application of CISG.
Once China accedes to a convention, it forms part of China’s legal system, such as
CISG, which is a law regulating the sale of international goods under the Chinese
legal system. Therefore, in such a case, it should be concluded that the parties have
chosen to apply CISG implicitly. Such as Sara Pinkman Company v Guangdong
Lautus Enterprise Co., Ltd international goods contract dispute, the court of second
instance held that, although the parties have agreed to choose Chinese law as the
applicable law but did not exclude the application of CISG, the CISG should be
preferentially applied in this case, yet the CISG does not provide for the application
of the relevant provisions of Chinese law.15

References

1. Zhao HY (2016) On the direct application of CISG in Chinese courts. Foreign Trade Econ
(09):26–29+34
2. Liu Y (2009) On the direct application of the United Nations convention on contracts for the
international sale of goods in Chinese courts. Law Rev 27(05):83–88
3. Li W (2002) Commentary on the United Nations convention on contracts for the international
sale of goods. Law Publishing House, Beijing
4. Liu Y (2019) On the application of the United Nations convention on contracts for the
international sale of goods in Chinese courts. Leg Sci (J Northwest Univ Polit Sci Law)
37(03):191–201
5. He H (2019) Problems, causes and improvements in the application of CISG in our courts.
Jurisprudence 04:181–192
6. Wang TY (1995) International law. Law Press, Beijing
7. Li HP (1987) Introduction to the law of treaties. Law Press, Beijing

Jie Luo is an associate professor of Zhongnan University of Economics and Law. She obtained
a MA in Law from University of East Anglia in 2004, a Ph.D in International Law from Wuhan
University in 2008 and a PhD in Private Law from University of Paris Sud in 2010. Her main
research interests lie in international trade law. She is the principal investigator for several research
projects, and she has published the monograph “the Study of Uniform Interpretation of CISG”.

14Li [7], p. 384.

15See The Guangdong Provincial High People’s Court (2018) Guangdong People’s Final Civil
Judgment No. 1424.
Chapter 31
Shunde Westband Furniture Co, Ltd v
Panda Inc Ltd

Yan Shang

Case Information
Case Name: Shunde Westband Furniture Co, Ltd v Panda Inc Ltd
Seller: Panda Inc Ltd
Place of Business: Italy
Buyer: Shunde Westband Furniture Co, Ltd
Place of Business: China
Details of First Instance:
Court: Foshan Intermediate People’s Court
Date of Decision: N/A
Case No: N/A
Judges: N/A
Details of Second Instance:
Court: Guangdong High People’s Court
Date of Decision: N/A
Case No: N/A
Judges: N/A
Details of First Retrial:
Court: Guangdong High People’s Court
Date of Decision: N/A
Case No: N/A
Judges: N/A

Y. Shang (B)
Assistant Professor in Law at People’s Public Security University, Beijing, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 247

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_31
248 Y. Shang

Details of Second Retrial:

Court: The Supreme People’s Court
Date of Decision: 21 September 2005
Case No: (2004) min si ti zi No 4
Judges: Luxiaolong (Presiding Judge), Renxuefeng (Acting Judge), Gaoxiaoli
(Acting Judge)
CISG Applied: No
Key CISG provisions interpreted and applied: None
Abstract
Shunde Westband Furniture Co, Ltd (Westband Co), residing in Shunde City, Guang-
dong Province, signed an agreement with Panda Inc Ltd (Panda Inc), located in
Pesaro, Italy, on 5 December 1997. It was agreed as follows: Article 1: Panda Inc is
responsible for exclusively supplying Italian furniture for sale in the Chinese market;
Article 2: Westband Co is responsible for purchasing Italian furniture from Panda Inc
and would no longer trade Italian furniture with any other Italian or foreign company;
Article 3: Westband Co shall guarantee to purchase Italian furniture worth $100,000
per year at a minimum from Panda Inc; Article 4: Panda Inc should guarantee to
use containers to ship the furniture, and deliver goods in Hong Kong on CIF terms,
and at the same time, Westband Co should ensure to take delivery on time when the
ship reaches the port; Article 5: Panda Inc would supply the furniture only shipped
in the whole containers to Westband Co, which meant that the portion of each order
beyond the whole containers would be scheduled to consign in the next order; Article
6: Panda Inc reserves the right to evaluate each order of Westband Co. Each order
would only be valid after receiving written confirmation from Panda Inc; Article 7:
The parties agreed that a certain amount of goods would be used for display and
storage, but in any case, the goods for display and storage couldn’t exceed $100,000.
Once the agreement is suspended for any reason, the goods has been used for display
and storage could be paid by Westband Co at a low price negotiated by both parties;
Article 8: Westband Co guarantees to pay each order unconditionally in the form
of an irrevocable letter of credit when the order is executed. However, the goods
mentioned in Article 7 would not be included in this Article; Article 9: The contract
is valid from 1 January 1998 and the validation period is for three years. The contract
may be revised; Article 10: The two parties shall not terminate the contract unilat-
erally unless Westband Co cannot reach the minimum volume of sales specified in
Article 3. After the conclusion of the contract, Panda Inc, respectively, sent three
batches of Italian furniture on 18 January, 24 January, and 17 February 1998. The
invoice issued by Panda Inc and the quotation to the customs were both $105,326.
On 18 May 2000, Panda Inc sued Westband Co on the grounds of non-
performance, requesting the court to order Westband Co to pay $105,326 for the
goods, an overdue payment of ¥265,534, and damages of ¥1,500,000. Westband Co
claimed that the furniture was only items for display and the ownership of furniture
did not transfer from Panda Inc to Westband Co. Therefore, Westband Co filed a
counterclaim, requesting the court to order Panda Inc to immediately move out the
31 Shunde Westband Furniture Co, Ltd v Panda Inc Ltd 249

exhibits, or sell them to Westband Co at a discount according to the agreement, and

to pay the booth fee and storage expenses of ¥100,000 in total. Foshan Interme-
diate People’s Court, as the first instance court, held that the laws of the People’s
Republic of China shall be the governing law on the doctrine of a most significant
relationship, due to the parties not choosing the applicable law. According to the
relevant laws of China, Westband Co, the importer, had no qualification to engage
in foreign trade and didn’t get the permission of the Ministry of Commerce of the
People’s Republic of China, which violated Chinese foreign trade administration
laws and regulations. Therefore, the agreement signed by the parties was null and
void. Both parties had faults for leading to the avoidance of the contract so they shall
bear their corresponding legal liabilities. Based on this, Westband Co shall bear the
loss of storage expenses incurred by taking charge of the above goods for Panda Inc.
Foshan Intermediate Court dismissed the claims of both parties.
Panda Inc disagreed with the judgment of the first instance and appealed to Guang-
dong High People’s Court, arguing that the Convention on the International Sale of
Goods (CISG) should be applied in this case. According to the CISG, the sales
contract was established. Since Panda Inc had performed its obligations, Westband
Co shall bear full liability for contract breach. Guangdong High Court thought that the
CISG had the priority to be applied for two reasons, firstly, both China and Italy, where
the places of business of two parties located, were parties to the CISG; secondly, the
parties didn’t to choose a governing law. Although the contract was voided by virtue
of violating Chinese foreign trade administration laws and regulations, according to
the CISG Article 4(1)(a), this Convention governs only the formation of the contract
of sale and the rights and obligations of the seller and the buyer arising from such a
contract, it is not concerned with the validity of the contract, therefore, the avoidance
of the contract, in this case, did not affect the rights and obligations between Panda
Inc and Westband Co as the buyer and seller of international goods. Under the provi-
sions provided for in Articles 53 and 78 of the CISG, Westband Co had the obligation
to make the payment and interest to Panda Inc. The Westband Co’s opinion that the
goods were merely exhibits was rejected by the court. In view of the fact that Panda
Inc said that, during the first and second instance of the lawsuit, he was willing to
give Westband Co a 20% discount of the price recorded on the invoice, Guangdong
High Court held that Westband Co should pay $84,260.80 and interest to Panda Inc.
Westband Co disagreed with the judgment of the second instance and applied to
the Supreme People’s Court for a retrial. The Supreme People’s Court held that it was
a lack of factual and legal basis that the judgment of the second instance identified
the goods involved in the case as the goods purchased by Westband Co, therefore, it
ordered the Guangdong High Court to start the retrial of the case.
Guangdong High Court held that, firstly, the two parties didn’t reach an agreement
on the quantity, specifications, variety, and quality of the goods, which didn’t consti-
tute the characteristics of the sales contract. Besides, both parties clearly agreed that
each order would take into effect when Westband Co got the written confirmation
from Panda Inc. Therefore, in this case, the agreement was not a sales contract. The
agreement is the basic framework and in-principle agreement between the parties on
the Westband Co’s exclusive sale of Italian furniture. The two parties reached the
250 Y. Shang

agreement voluntarily, the character of the agreement was merely a letter of intent,
only on the Westband Co’s exclusive sale of Italian furniture in China. Secondly, the
agreement should be deemed to be valid. The content of the agreement didn’t violate
the prohibitive provisions of Chinese laws and regulations, and the agreement didn’t
agree that Westband Co was responsible for taking charge of the import and export of
goods. Thirdly, as for the application of the law, Guangdong High Court believed that
on the principle of a most significant relationship, this case should apply the Chinese
law rather than the CISG. Fourthly, as for the responsibilities of both parties, Guang-
dong High Court held that Westband Co and Panda Inc had an unclear agreement on
whether the three batches of furniture were exhibits or the goods, so the requests of
both parties should be rejected, and both parties should bear culpa in contrahendo.
In view of the actual situation that the three batches of furniture involved in this case
were shipped to China, Guangdong High Court decided to auction the three batches
of furniture, the auction proceeds belonged to Panda Inc, while the loss would be
borne by both Westband Co and Panda Inc.
Westband Co still disagreed with the judgment and applied to the Supreme
People’s Court for a retrial, and the application was accepted and the Supreme
People’s Court brought the case to trial. The Supreme People’s Court concluded
that the disputed issues were as follows: (1) the nature of the dispute and the applica-
tion of the law; (2) the nature and validity of the agreement; (3) the nature of the three
batches of furniture; (4) the disposition of the goods for display and storage; and (5)
the burden of expenses of storage. As for the application of law, the Supreme People’s
Court held that although both China and Italy are members of the CISG, however,
the legal relationship established by the parties in the agreement not only includes
the sale of goods, but include the display and storage. The agreement on the display
and storage of furniture is the pre-step in establishing legal relations of furniture sale
or purchase. Only disputes arising during and after the ordering process involve the
question of whether a sale or purchase legal relationship has been reached. In the case
of disputes arising from whether three batches of furnitures are exhibits and storage
or purchase, it should not be simply applied CISG to deal with. Finally, according
to Chinese law, the court determined that there was no sale relationship between the
two parties and CISG was not applicable.

Commentary on the Key Issues Related to the CISG

Issues
Issue 1: The identification determines whether the CISG applies or not
Comments
Issues 1: The identification determines whether the CISG applies or not
31 Shunde Westband Furniture Co, Ltd v Panda Inc Ltd 251

I. The identification should be carried out before determining the applicable

law
The primary focus in private international law is to determine the applicable law to
resolve the international civil and commercial dispute, for a court, having satisfied
itself that it possesses jurisdiction. Whether resorting to international unification of
substantive rules or resorting to private international law for a court, determining the
judicial nature of the question should be given the priority procedurally. Identification
is the process of classifying the natural facts of a case, and the result of identification
is the determination of the case as a cause of action according to the Chinese law,
when the Chinese courts are the forum specifically. The identification is limited by
the legal facts or legal relationship established relating to the fact, on the basis of the
legal documents or the oral presentation during the court session, including the claims
in the statement of complaints, the opinions on the answer brief, and the evidence
submitted. In brief, it is the primary task of a judge to decide the nature of the legal
relationship in a case, otherwise, the court will not know which choice-of-law rule
to apply to the case.
CISG is applied after determining that the nature of the case is a dispute over a
contract for sale. Article 1(1)(a) of the CISG introduces a number of criteria for appli-
cation: the CISG requires the underlying transaction to be a contract of sale according
to Article 1(1)(a), the Convention applies to contracts of sale of goods between parties
whose places of business are in different Contracting States. After China formally
became a Contracting State of the CISG in 1986, the Supreme People’s Court issued,
in 1987, the Circular on Transmitting Certain Issues of the MOFTEC in Connection
with the Implementation of the United Nations Convention on Contracts for the Inter-
national Sale of Goods1 which was published by the Ministry of Foreign Economic
Relations and Trade of the People’s Republic of China in the same year, which
says, “the contracts for sale of goods reached between the Chinese companies and
the companies in the aforementioned countries (except Hungary) will automatically
apply to the provisions of the Convention and the disputes or litigations arisen should
be also settled under the Convention, unless otherwise agreed”. That is to say, the
CISG deals with complex issues raised in international sale of goods contracts.
For contract disputes involving foreign elements when the Chinese court is the
forum, CISG does not apply even if the contract may include the sale or purchase
matters, if the focus of the dispute has nothing to do with the sale issues. In particular,
if the contract stipulates the contents of the sale or purchase but also the storage, care,
display, and other matters, especially where the purchase relationship may not be
reached after display or exhibition such as in the present case, where the ownership
of the subject matter is not transferred, the court should not simply determine the
nature of the case as a sale contract dispute though the plaintiff may bring a lawsuit
based on a sales contract.

1 Circular of the Supreme People’s Court on Transmitting Certain Issues of the MOFTEC in Connec-
tion with the Implementation of United Nations Convention on Contracts for the International Sale
of Goods (Fa (Jing) Fa [1987] No. 34), December 10 1987.
252 Y. Shang

Therefore, as both China and Italy are Contracting States of the CISG, the provi-
sions of the CISG shall apply to disputes arising from sales contracts between the
relevant parties whose place of business are in China and Italy in general. However,
the CISG should not be simply applied in the present case. Firstly, the legal relation-
ship established by the parties in the agreement not only includes the legal relationship
of sale of furniture, but also the content of the display and storage, and the agreement
on the display and storage of furniture as the pre-step in establishing legal relations
of a furniture sale or purchase. Secondly, Westband Co and Panda Inc had an unclear
agreement and disputed whether the three batches of furniture were merely exhibits
or contractual goods. After making the proper identification by the Supreme People’s
Court, it was concluded that the CISG shall not be applied for the nature of their
legal relationship is only concerning the display and storage.
II. The identification is based on Chinese law and not on the CISG
Generally, there are different methods to identify conflicts in foreign-related cases in
private international law theoretically and in different judicial practices, such as lex
fori or lex causae. The doctrine of lex fori is applied to determine the nature of legal
relationship in foreign-related cases in current Chinese courts. Pursuant to Article 8 of
the Law of the People’s Republic of China on Choice of Law for Foreign-related Civil
Relationships, “The qualification of foreign-related civil relations shall be governed
by the law of forum”. Therefore, as the law in force at that time, the court should
invoke the legal provisions of Chinese substantive law, the General Principles of the
Civil Law of the People’s Republic of China, and the Foreign Economic Contract
Law of the People’s Republic of China, to determine the nature of the problem in
this case.
It is worth noting that, although Chinese current law adopts the principle of lex fori,
scholars have different views. Pursuant to Article 9 of the Model Law of the People’s
Republic of China on Private International Law, “The identification of international
civil and commercial relations shall be governed by the law of forum, however, if
the court and local law cannot properly resolve the case under the law of forum,
the case can be resolved by referring to the applicable law chosen by the parties
concerned”. The model law drawn up by the Chinese Society of Private International
Law in 2000 is academic in nature, and has since been revised several times by
scholars, having been widely accepted in academia and serves as a reference for
future legislative amendments. It means that the methods of qualification of lex
causae may be included, when revising the Law of the People’s Republic of China
on Choice of Law for Foreign-related Civil Relationships in the future.

Yan Shang Ph.D. of International Law, Assistant professor of Law School of People’s Public
Security University of China, Researcher of ‘Belt and Road’ Rule of Law Research Center of
University of International Business and Economics, mainly engaged in teaching and research of
international economic law and private international law. Research area: Substantive and proce-
dural issues in international civil and commercial disputes.
Chapter 32
ACETO Corporation v Suzhou Lintong
Electronic Technology Company

Mengsha Yang

Case Information
Case Name: ACETO Corporation v Suzhou Lintong Electronic Technology Company
Seller: Suzhou Lintong Electronic Technology Company
Place of Business: China
Buyer: ACETO Corporation
Place of Business: United States
Case of First Instance:
Court: Shanghai Second Intermediate People’s Court
Date of Decision: 13 June 2006
Case No: (2004) Shanghai Second Intermediate People’s Court, Civil Court No 5
(Business) No 1
CISG applied: No
Key CISG Provisions Interpreted and Applied: Article 6, 25 and 49
Abstract
On 19 February 2001, ACETO Corporation (ACETO) signed a sales contract with
Suzhou Lintong Electronic Technology Company (LinTong Electronics), which stip-
ulated that: (1) ACETO will purchase a certain quantity of 2-hydroxy-6-naphthoxylic
acid from LinTong Electronics three times within three years, and ACETO will pay
LinTong Electronics every six months. (2) Due to overseas transactions, LinTong
Electronics will establish a new company. Once the new company is established, the

M. Yang (B)
Lecturer in Law at Tianjin University, Tianjin, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 253

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_32
254 M. Yang

rights and obligations of LinTong Electronics under the contract will be automat-
ically transferred to the new company. (3) The contract shall be governed by and
performed in accordance with the CISG and the laws of the People’s Republic of
China. Any dispute under the contract shall be settled in accordance with the Contract
Law of the People’s Republic of China. Any dispute arising from the interpretation
or performance of this contract shall be submitted to China International Economic
and Trade Arbitration Commission for arbitration.
On 7 March 2001, ACETO issued a transmissible credit in favour of Lintong Dye
Company to pay for the first purchase under the instruction of LinTong Electronics.
On 26 April 2001, Lintong New Material Company was established by LinTong
Electronics.
On 11 May 2001, Xu Aofeng, on behalf of Lintong New Material Company, sent a
letter to ACETO, stating that the rights and obligations of LinTong Electronics under
the sales contract were automatically transferred to Lintong New Material Company.
The ultimate client of ACETO, TICONA, considered the goods supplied by
Lintong New Material to have quality problems. Also, TICONA’s business had been
heavily impacted by the 9/11 attacks. ACETO and TICONA, therefore, negotiated
with LinTong Electronics and Lintong New Material Company, requesting them to
postpone the fulfilment of the sales contract. Their request was refused, and they were
required to complete the subsequent performance. Subsequently, ACETO failed to
pay the second tranche by 18 February 2002 as agreed.
ACETO subsequently sent several letters to Xu Aofeng, tried its best to avoid
lawsuits and negotiated and communicated the purchase contract ordering scheme,
etc.
On 7 August 2002, ACETO sent an email to Xu Aofeng, requesting him to continue
to perform the contract, and stated that, in the case of no objection or reply, it would
pay the purchase price as agreed in the contract within 10 days.
On 15 August 2002, Xu Aofeng replied to ACETO through email, stating that the
sales contract shall be performed by Lintong New Materials Company, and that the
dispute under the contract had been submitted to CIETAC Shanghai for arbitration.
From 12 March 2003 until 9 June 2004, Lintong New Materials Company exported
396 tonnes of 2-hydroxy-6-naphthoxylic acid for a total amount of US $3,085,650
to TICONA through Lintong Dye Company.
On 15 December 2003, the court rendered a judgement, confirming that the arbi-
tration clause in the sales contract was not binding on ACETO and Lintong New
Material Company.
ACETO claimed to terminate the contract and asked Lintong New Material
Company for compensation. It also requested LinTong Electronics and Lintong New
Material Company to take joint responsibilities on the grounds that LinTong Elec-
tronics still participated in the contract performance after the contract had been trans-
ferred. LinTong Electronics countersued, requesting the termination of the contract
and asked ACETO for compensation.
The court held that the evidence provided by ACETO to prove the existence of
quality problems of the products was only the emails between ACETO and TICONA,
which could not prove the existence of quality problems of the products. At the same
32 ACETO Corporation v Suzhou Lintong Electronic Technology Company 255

time, although the 9/11 attacks had a certain impact on the American economy,
they did not have a direct impact on the fulfilment of sales contracts. ACETO also
failed to declare the occurrence of force majeure events as stipulated in the contract.
Therefore, ACETO’s request for a delay in the performance of the contract, based
on quality problems and the 9/11 attacks, was not valid. ACETO’s failure to issue
the second L/C as agreed constituted a breach of contract. During the performance
of the contract over the three years, ACETO only made one request to delay the
performance, and put forward various solutions, but never claimed to terminate the
sales contract. Also, the seller did not consider ACETO’s default behaviour leading
to the impossibility of contract performance. It only requested ACETO to issue the
L/C as soon as possible and to continue to perform the contract, so the breach of
contract of ACETO did not constitute a fundamental breach.
On 7 August 2002, ACETO sent an email to Xu Aofeng, requesting to continue
to perform the contract, but was rejected. In view of Xu Aofeng’s special status, it
should be regarded as Lintong New Material Company rejecting ACETO’s request to
continue to perform the contract. After that, Lintong New Material Company sold the
target products directly to TICONA, through Lintong Dye Company. This behaviour
constituted a fundamental breach of contract.
In the end, the court held that since both ACETO and Lintong New Materials
Company requested to terminate the contract, in this case, the court agreed to termi-
nate the contractual relationship between them. In the process of performing the sales
contract, although ACETO’s behaviour led to a breach of contract first, the breach
did not constitute a fundamental breach. Lintong New Materials Company refused
ACETO’s request to issue a second L/C, and sold the product to TICONA within the
contract performance period, which resulted in the failure of ACETO to obtain the
expected interests of the contract. Therefore, Lintong New Material Company shall
compensate ACETO for the loss of ¥800,000. And the counterclaim filed by Lintong
New Material Company was not supported by the court.

Commentary on the Key Issues Related to the CISG

Issues

Issue 1: Application of CISG

Issue 2: Fundamental breach

Comments

Issue 1: Application of CISG

According to Article 1 of CISG, when disputes over the sale of goods contracts meet
the applicable conditions of CISG, they have the effect of automatic application and
256 M. Yang

priority application.1 The precedents of CISG also indicate that the application of
CISG excludes the application of international private law and domestic law.
Article 6 of CISG stipulates that the convention itself is not compulsory. According
to the principle of autonomy of will, both parties to the contract have the freedom to
choose the applicable law.2 The parties, in this case, agreed in the original contract that
the contract shall be governed by and performed in accordance with the CISG and the
laws of the People’s Republic of China, and that any dispute under the contract shall
be settled in accordance with the Contract Law of the People’s Republic of China. In
accordance with CISG’s preferential application and exclusion of domestic law, the
parties’ choice to apply both CISG and domestic law does not constitute an effec-
tive exclusion of the Convention under Article 6 of CISG. In the Cybernetix v CD
Systems case, for example, the Aix-en-Provence Court of Appeal ruled on 7 May
2009 that CISG did not apply to the dispute because, in Article 17 of the “Appendix”
to the sales contract signed by the parties, the parties expressly choose to apply
French law to disputes concerning contractual relations. The Court of Appeal, there-
fore, concluded that the parties wished to settle their dispute under French domestic
contract law, excluding the application of the CISG under Article 6. The Supreme
Court of Appeal quashed the ruling on the grounds that the Aix-en-Provence Court of
Appeal had failed to apply the Convention. The Supreme Court of Appeal held that
the Convention established uniform rules for the international sale of goods, and that
CD Systems had not settled its dispute with Cybernetix under French domestic law,
but under the substantive law of France based on the Convention, meaning that the
parties to the dispute did not in fact exclude the application of the Convention. If the
Aix-en-Provence Court of Appeal applied a law other than that of the Convention, it
would be in violation of Article 6 of the Convention.3 To sum up, CISG should still
be chosen as the applicable law in this case to solve the dispute, but the court still
takes the Contract Law of the People’s Republic of China as the basis for the trial,
which is wrong in the application of law.
Issue 2: Fundamental breach

I. Constitution of fundamental breach under the CISG

Article 25 of CISG defines a fundamental breach of contract. It can be seen from this
article that a fundamental breach has three elements: satisfying the requirements of
a general breach of contract, the severity of the consequence of the breach and the
predictability of the consequences of the breach.

1 Yang [1].
2 Case Law on UNCITRAL Texts, case No. 1203 [Courtof Rechtbank Breda, Jan. 16th 2009], www.
cisg.law.pace.edu.
3 Case Law on UNCITRAL Texts, case No. 1513 [Court of Cassation, Commercial Division,

Sep. 13th 2011].

32 ACETO Corporation v Suzhou Lintong Electronic Technology Company 257

A. Satisfying the requirements of a general breach of contract

In a breach of contract, there must be both a valid contract between the two parties
and there must be a breach of contract. Where it is one’s own behaviour that causes
difficulties in the performance of the contract, even if it is a breach of incidental
liability, there is a prerequisite for a fundamental breach of contract. For example,
some courts have held that if a manufacturer is obligated to reserve goods of a
particular trademark exclusively for the buyer, it is a fundamental breach of contract
if the manufacturer displays goods of that trademark at a trade show prior to delivery
(display even after the buyer warns).4
B. The severity of the consequence of breach
A fundamental breach requires that the expected interests of the non-breaching party
have been materially violated and it becomes impossible to expect to obtain the
agreed achievement under the contract. Therefore, the fundamental breach of contract
should be serious enough to cause the other party to lose its legitimate and reasonably
expected benefits. For example, in the case of a New Zealand mussel dispute heard
by the Federal Court of Germany, the seller (from Switzerland) provided the buyer
(from Germany) with New Zealand mussel with toxins exceeding the standard in the
seller’s country of business, but was deemed as not meeting the applicable standard
in the buyer’s country of business.5 This is an unexpected issue, so it cannot be
identified as a fundamental breach of contract. In international trade, a party cannot
expect the laws in other countries to be completely consistent with the laws of his
own country.6 Of course, there are exceptions to this situation, for example, where
the buyer and the seller are very familiar with the laws of the other country before a
transaction and are well aware of the different regulations.7
C. The predictability of the consequence of a breach
This requirement shows that if the defaulter breaks the contract with subjective
malice, this will be identified as a fundamental breach of contract. If the defaulter
does not know that his breach may cause serious consequences to the other party,
then his behaviour cannot be regarded as malicious behaviour, and the consequences
of his breach are not predictable.
In determining whether there is a fundamental breach, discretion is often needed
when considering the severity and the predictability of the consequences of a breach.
Each case shows a different attitude toward the fundamental breach clause, some
precedents show that interpretation of a fundamental breach of contract needs to
be limited, in order to prevent the expansion of application of the terms without

4 Case Law on UNCITRAL Texts, case No. 2 [Court of Oberlandesgericht Frankfurt a.M., Sep. 17th
1991].
5 Case Law on UNCITRAL Texts, case No. 426 [Court of Oberster Gerichtshof, Apr. 13th 2000].
6 Case Law on UNCITRAL Texts, case No. 123 [Court of Bundesgerichtshof, Mar. 8th 1995].
7 Case Law on UNCITRAL Texts, case No. 418 [U.S. [Federal] District Court for the Eastern

District of Louisiana, May 17th 1999].

258 M. Yang

restraint, such as considering delayed delivery is a fundamental breach.8 There are

also precedents that take a stricter standard, stating that if there is doubt in the case,
then the fundamental breach cannot be applied.9
II. Analysis of specific criteria of fundamental breach
There are three situations related to contract breach in this case: the first, that ACETO
considered that part of the goods delivered were unqualified; the second, ACETO
did not pay the second tranche on the agreed date; the third, Lintong New Mate-
rial Company resold the target goods on, meaning that there was no possibility of
further performance of the contract. The main focus of the disputes, in this case, is
to determine which party’s behaviour constitutes a fundamental breach of contract,
resulting in the failure to perform the sales contract. Therefore, we can analyse the
three specific breach situations based on the criteria of the fundamental breach.
A. Defective performance of the seller does not constitute a fundamental breach
One of the reasons for ACETO’s delay in payment was that it believed that the seller
had defective performance in delivering some substandard products. However, even
if the delivered goods have defects, it is not a one-size-fits-all criterion to judge a
fundamental breach of contract. For example, in the case of Sinochem International
(Overseas) Pte Ltd v ThyssenKrupp Metallurgical Products GmbH in an interna-
tional sales of goods contract dispute, the Supreme People’s Court believed that,
although the seller delivered flawed goods, as long as the buyer makes reasonable
efforts, the goods can be used or resold, so it should not be regarded as constituting
a fundamental breach of CISG.10 In the case of a commemorative coins sale dispute
heard by the China International Economic and Trade Arbitration Commission, after
purchasing and reselling 75% of the commemorative coins, the buyer believed that
the other 25% had quality defects and demanded to terminate the contract. The Arbi-
tration Commission finally concluded that the seller’s behaviour did not constitute a
fundamental breach of contract, because, for the remaining 25% of the commemo-
rative coins, the buyers could still resell it at a lower price or otherwise process it.11
So for this case, even if some quality problems existed in the goods delivered by the
seller, it will not lead to the complete loss of the value of the goods, so from this
perspective, the behaviour of the seller cannot be identified as a fundamental breach
of contract.
In addition, in this case, ACETO resold the goods and actually gained a certain
profit. Only when the defective goods were delivered and the buyer failed to use or
resell the goods through efforts to realise the value of the goods, can the fundamental
breach be identified. In the Socinter v Wallace case, for example, although in 928
cases of meat, only two cases were wrongly labelled with the date of use, the errors

8 Swiss Federal Court, Apr. 2nd 2015, www.servat.unibe.ch.

9 Swiss Federal Court, May 18th 2009.
10 Supreme People’s Court of People’s Republic of China, Jun. 30th 2014, www.court.govcn
11 Case Law on UNCITRAL Texts, case No. 988 [China International Economic and Trade

Arbitration Commission, Jan. 1st 2000].

32 ACETO Corporation v Suzhou Lintong Electronic Technology Company 259

lead to veterinary authorities seizing 600 kg of meat. If the buyer refuses all the goods
and the seller fails to prove that the wrong labels do not affect the whole container
of cases, it will constitute a fundamental breach of contract.12 In another example, if
the buyer needs flowers to bloom throughout the summer, but the flowers bloom only
for a short period of time before they completely fade, these defective flowers can be
considered serious defects that cannot be recovered.13 If the goods are merchantable
anyway, there is no fundamental breach of contract. For example, in the No 171 case of
Case Law on UNCITRAL Texts (CLOUT), the German Supreme Court held that the
delivery of wrong certificates of origin and of quality did not amount to a fundamental
breach of contract since the defendant could obtain correct documents from other
sources. The defendant failed to prove that selling South African cobalt sulphate in
Germany is impossible, therefore, with no evidence, the defendant was essentially
being deprived of rights according to the contract, payment cannot be withheld on the
grounds that the plaintiff has committed a fundamental breach of contract.14 When
the goods are materially defective and the buyer needs to manufacture other products
from the goods conforming to the contract, such a breach is a fundamental breach.15
If the non-conformity of the goods is caused by the addition of materials that are
illegal in both countries, this also constitutes a fundamental breach of contract.16
Obviously, ACETO has not been unable to resell the defective goods because of
the defective performance of the seller, and the purpose of ACETO to purchase the
goods is to obtain profits through further resale, and there is no need to use the target
products to manufacture other products, so it does not conform to the criteria for
fundamental breach.
Although the behaviour conforms to the criteria for a general breach of contract,
the quality defect does not make the contract unable to be performed and lacks the
severity of consequences for a breach.
B. The overdue performance of the contract by ACETO shall not constitute a
fundamental breach
In this case, ACETO failed to pay the second tranche within the agreed time, which
is indeed overdue, but overdue performance does not necessarily lead to a funda-
mental breach of contract. In No 7585 of International Chamber of Commerce in
International Court of Arbitration, the arbitration tribunal points out that the fact
of the delayed payment itself does not necessarily constitute a fundamental breach.

12 Case Law on UNCITRAL Texts, case No. 1505 [Court of Cassation, Commercial Division, Dec.
17th 2013].
13 Case Law on UNCITRAL Texts, case No. 107 [Court of Oberlandesgericht Innsbruck, Jul. 1st

1994].
14 Case Law on UNCITRAL Texts, case No. 171 [Court of Bundesgerichtshof, Apr. 3rd 1996].
15 Case Law on UNCITRAL Texts, case No. 138 [U.S. [Federal] Court of Appeals, Second Circuit,

Dec. 6th 1995] (The compressor required by the buyer to manufacture air conditioners has a lower
refrigeration capacity than the commodity stipulated in the contract, but consumes more electricity
than the commodity stipulated in the contract).
16 Case Law on UNCITRAL Texts, case No. 170 [Court of Landgericht Trier, Oct. 12th] (Wine

with water).
260 M. Yang

When the buyer failed to advise the due date on the L/C, the seller waited for a few
months until declaring the contract relationship termination, and this period between
the buyer’s default and the seller’s terminating declaration was regarded as an “addi-
tional term” by the arbitration tribunal.17 If one party delays in performance, the
other party shall generally allow the other party to continue to perform the contract
within a reasonable period according to the actual situation. According to the study of
legal precedent, for delayed performance to be directly identified as a fundamental
breach of contract, time must be stipulated as a special item in the contract. For
example, in the No 277 case of CLOUT,18 the two parties made agreements of CIF
Rotterdam and the corresponding time of delivery. Since the seller failed to deliver,
the buyer granted the seller an additional delivery period; the buyer then entered a
substitute transaction with a third party and sued the seller for the difference between
the actual price paid and the price stipulated in the contract after the expiry of the
period. The court held that, although the delay in delivery is not generally regarded
as a fundamental breach of contract, the delay in delivery, in this case, resulted in
the buyer forfeiting the benefit that could have been foreseen at the time the contract
was signed and that the seller, therefore, committed a fundamental breach of the
contract. A fundamental breach of contract is also directly determined when the
contract is delayed as the time of contract performance is the expected interest that
the parties attach great importance to.19 If the delivery time has been agreed upon
in the contract, but the other party’s overdue performance has not caused the funda-
mental loss, a fundamental breach cannot be declared solely because of the overdue
problem.20 In the practice of transnational trade of bulk goods, short-term contract
performance delays caused by uncertainties in transportation and weather conditions
are basically an industry consensus. Any delay in delivery of documents,21 goods22
or payment23 is not directly deemed a material breach.
Although ACETO did not pay on time, it had actively communicated with the
seller and tried to get the seller involved in negotiations to follow-up, but the seller
did not show a positive attitude to the consultation and repeatedly neglected and
rejected the request of ACETO to continue to perform the contract. So, the seller’s
claim for compensation for ACETO’s breach cannot be supported.

17 Case Law on UNCITRAL Texts, case No. 301 [International Court of Arbitration, Jan. 1st 1992]
(delayed payment).
18 Case Law on UNCITRAL Texts, case No. 277 [Court of Oberlandesgericht Hamburg, Feb. 28th

1997].
19 Italy: Milan: Corte di Cassazione, Mar. 20th 1998.
20 Case Law on UNCITRAL Texts, case No. 846 [U.S. [Federal] Court of Appeals, Third Circuit,

Jul. 19th 2007] (A delay of two days will not prevent delivery and is regarded as a non-fundamental
breach).
21 Swiss Federal Court, Apr. 2nd 2015,www.servat.unibe.ch.
22 Case Law on UNCITRAL Texts, case No. 275 [Court of Oberlandesgericht Düsseldorf, Apr.

24th] (delayed delivery).

23 Case Law on UNCITRAL Texts, case No. 301 [International Court of Arbitration, Jan. 1st 1992]

(delayed payment).
32 ACETO Corporation v Suzhou Lintong Electronic Technology Company 261

It can be seen from ACETO’s repeated initiatives to seek communication that it

did not want to nullify the contract, so its delay in performance lacks the criteria of
predictability of consequence of the breach.
C. Seller’s resale of the goods shall constitute a fundamental breach of contract
A key point lies in how to judge whether a breach affects the fundamental interest of
the contract. In the No 248 case of CLOUT, the court noted that the CISG was based on
the principle that a contract should be terminated only in exceptional circumstances
and that the right to terminate a contract was a remedy for the buyer in the case of
the most serious contractual breach.24 Whether the remedy is reasonable or not must
be determined by taking all the relevant circumstances of the particular case into
account. In the No 248 case, these factors included the buyer’s ability to otherwise
process the goods or sell them at a lower price. The court confirmed that the buyer had
such an alternative, and therefore, held that the seller did not commit a fundamental
breach of contract and the seller had no right to declare the contract null and void
and should only obtain a 25.5% reduction.
If the goods delivered are not defective but improperly negate the seller’s contrac-
tual rights, the buyer shall be deemed to be in fundamental breach.25 Additionally,
improperly negating the valid contract after obtaining the sample of goods,26 mate-
rially violating the exclusive supply obligation or resale restriction,27 or when the
buyer refuses to fulfil their obligation of chartering under the FOB meaning that the
seller cannot make delivery, would also constitute a fundamental breach of contract.28
In this case, both the defective performance of the seller and the delayed payment
of ACETO mentioned above have not actually impacted the fundamental interests
of the contract, but the resale behaviour of the seller was different. It directly resold
the goods to TICONA which were supposed to be sold to ACETO itself, and after
the delivery of goods, the seller did not have any intention to fulfil the contractual
obligation of delivery, which resulted in the contract not being fulfilled. Reselling
when knowing the consequences of breach, constitutes predictability of consequence
of the breach. On the other hand, the act of directly reselling the goods to TICONA,
deprives ACETO of the possibility of achieving the fundamental purpose of the

24 Case Law on UNCITRAL Texts, case No. 248 [Court of SchweizerischesBundesgericht (I.
Zivilabteilung) Oct. 28th 1998].
25 Case Law on UNCITRAL Texts, case No. 308 [Federal Court of Australia, Apr. 28th 1995].
26 Case Law on UNCITRAL Texts, case No. 313 [Cour d’ appel de Grenoble, Oct. 21st 1999].
27 Case Law on UNCITRAL Texts, case No. 1517 [Supreme Court of Austrian (Oberster Gericht-

shof), Nov. 15th 2012] (The seller’s breach of the exclusive supply contract is not a fundamental
breach, since the seller delivered the Italian-designed autumn and winter clothing collection to one
of the buyer’s competitors only at one of the buyer’s retail stores, then stopped delivery and with-
drew the clothing a month later; In addition, the buyer demands a 50% discount on the garments
already delivered in order to continue the contract).
28 Case Law on UNCITRAL Texts, case No. 987 [China International Economic and Trade

Arbitration Commission [CIETAC], Mar. 22nd 2001].

262 M. Yang

contract while substantially depriving it of what it was entitled to expect under the
contract.29 It should be regarded as the fundamental breach.
Summary
To sum up, in the process of performing the sales contract, although ACETO broke
the contract first, their breach does not constitute a fundamental breach. The seller
refused the request of ACETO to issue a second L/C, and sold the product to TICONA
through Lintong Dye Company within the contract performance period, which made
ACETO unable to realise the purpose of the contract, and finally caused the contract
to be unable to be performed, constituting the fundamental breach of the contract.
Therefore, the seller should compensate for the economic loss to ACETO.

Reference

1. Yang MS (2020) Analysis of law model of CISG preferential application—with commentary

of international commercial treaty application and legislation and judicial practice in China. J
Northwest Univ Soc Sci 22(04):97–103

Dr. Mengsha Yang is a lecturer and master supervisor in Law School at Tianjin University, China.
Prior to that she got her graduated degree and doctoral degree in Nankai University. Her research
area is international trade law and international commercial law.

29Case Law on UNCITRAL Texts, case No. 882 [Handelsgericht des Kantons Aargau, Nov. 5th
2002].
Chapter 33
Sinochem Shanghai Co v Kolorit TM Co
Ltd

Shaotang Wang

Case Information
Case Name: Sinochem Shanghai Co v Kolorit TM Co Ltd
Seller: Sinochem Shanghai Co
Place of Business: China
Buyer: Kolorit TM Co Ltd
Place of Business: Russia
Case of First Instance:
Court: Shanghai 2nd Intermediate People’s Court
Date of Decision: 24 May 2005
Case No: (2004) Hu Er Zhong Min Wu (Shang) Chu Zi No 17
Judges: Nan Jiang (Presiding Judge), Yimin Wang (Acting Judge), Zhongliang Shou
(Acting Judge)
CISG Applied: Yes
Key CISG Provisions Interpreted and Applied: Articles 1, 30
Abstract
The defendant, Kolorit TM Co Ltd (‘Kolorit’), ordered medical products from the
plaintiff, Sinochem Shanghai Co (‘Sinochem’), via emails. Sinochem supplied goods
valued at US $49,088 but the defendant only paid US $32,169, leaving an amount
due of US $16,919. Sinochem brought claims before the Shanghai 2nd IPC for the
payment and interests. Kolorit did not respond to the claims or participate in the court
proceeding.

S. Wang (B)
Lecturer in Law at Nankai University, Tianjin, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 263

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_33
264 S. Wang

The court determined that the CISG should apply because both parties were from
different Contracting States of the CISG. In particular, the court rejected Sinochem’s
request to apply the Chinese law on the basis that they failed to prove a mutual
consent between the parties for choosing the Chinese law.
The court referred to Article 30 of the CISG, pointing out that the seller should
‘deliver the goods, hand over any documents relating to them and transfer the property
in the goods, as required by the contract and this Convention’. In this case, Sinochem
failed to provide evidence to prove the fulfilment of its own contractual obligations.
Therefore, its claims against the defendant should be rejected.

Commentary on the Key Issues Related to the CISG

Issues

Issue 1: The Applicability of the CISG

Issue 2: Seller’s Principal Obligations

Comments

Issue 1: The Applicability of the CISG

This case is a foreign-related case. In order to make an accurate and reasonable
judgement, this court first resolved the issue of applicable law, that is, the choice of
law. After hearing the case, the court, in this case, proposed that the CISG should be
applied for the following reasons:
It is the applicable law in this case. Since the defendant is a company registered and
established in the Russian Federation, this case is a dispute over a foreign-related
contract. According to relevant laws and regulations, the parties have the right to
choose the law applicable to the settlement of the dispute. Although the plaintiff
requested that the laws of the People’s Republic of China should be the governing
law for the handling of this case, the plaintiff failed to provide evidence to prove
that the plaintiff and the defendant had formed a consensus on the choice of law, so
this court does not support it. In view of the fact that the respective countries of the
plaintiff and the defendant are both parties to the CISG, this court adopted the CISG
as the applicable law for handling the dispute in this case.
Although the court’s reasoning is relatively simple, we can still examine the
judge’s thinking and analyse it. In general, the judge, in this case, decided on the
application of law along the following path: identifying the facts involved in the
case, clarifying the choice of law of the plaintiff and defendant and analysing the
applicable provisions of the CISG.
33 Sinochem Shanghai Co v Kolorit TM Co Ltd 265

I. Identifying the facts involved in the case

One of the primary issues in the trial of this case is to identify the facts involved in the
case, and then determine the legal relationship to which they belong. The function
of identification is to classify and characterise civil relations, determine the conflict
norms through classification or characterisation and then determine the applicable
law.1 The court did not specify the law basis for identification, just pointed out the
relevant facts of the case.2 The court finally considered this case to be a dispute over
a foreign-related contract.
In fact, China did not have clear regulations related to “identification” at the
time of the trial of the case. Actually, lex fori may be adopted in practice a lot.3
According to the Contract Law of the People’s Republic of China (Contract Law)
and other relevant regulations, as this case involves the sale of medical products and
companies from two different countries, the court made it clear that this case was a
dispute over foreign-related contracts.
II. Clarifying the choice of law of the plaintiff and defendant
After identification, the court of this case subsequently proposed that “in accordance
with relevant laws and regulations, the parties have the right to choose the law appli-
cable to the settlement of disputes”. The court did not specify a clear legal basis.
Based on the time period of this case, the legal basis of the court should be Article
142 and Article 145 of “General Principles of Civil Law of the People’s Republic of
China” (General Principles of Civil Law). Article 142(1) of “General Principles of
Civil Law” clarifies the general basis for the application of China’s foreign-related
civil relations, which should be determined in accordance with Chap. 8 of “General
Principles of Civil Law”. Article 145 of the “General Principles of Civil Law” also
specifically stipulates that the applicable law for foreign-related contract disputes
should first be determined in accordance with the “party autonomy”.
The court pointed out that, although the plaintiff had opinions on the application
of the law, there was no evidence to prove that both parties agreed on the application
of the law. Therefore, the plaintiff’s unilateral choice of law was not supported.
According to Article 145(2) of the “General Principles of Civil Law”, if the parties
to a contract involving foreign interests have not made a choice, the law of the country
to which the contract is most closely connected shall be applied. However, the court,
in this case, did not analyse related issues.
This issue has a certain relevance to Article 6 of the CISG. Article 6 of the CISG
provides as follows:
The parties may exclude the application of this Convention or, subject to Article 12, derogate
from or vary the effect of any of its provisions.

1 Qi [1], p. 7.
2 The defendant is registered in Russia, so it can be clear that the case has a foreign-related nature.
3 Qi [1], p. 9.
266 S. Wang

From the provisions, it can be shown that the CISG has no direct coercive force
on the parties.4 Article 6 is an expression of party autonomy and permits parties
to exclude, at the time of or after the conclusion of the contract, the application of
the CISG in whole or in part.5 Some scholars believe that the court, in this case,
applied Article 6 of the CISG in dealing with the issue of the parties’ choice of
law. It is undeniable that the CISG is a uniform substantive rule. Whether the CISG
is applicable should be directly specified in accordance with the provisions of the
CISG. Unless the parties agree otherwise, as long as the parties’ places of business are
located in the different Contracting States and the contract involved is an international
contract for the sale of goods regulated by the CISG, the CISG will be directly
applicable.6 However, we can see from the court hearing process that the court did
not directly apply the CISG, but first analysed the applicable law in this case based
on the rules of private international law. In other words, the CISG has not yet been
applied when analysing the parties’ legal choices, and it is even more impossible to
judge the parties’ choice of law based on Article 6 of the CISG.
Furthermore, Articles 1–6 of the CISG should be applied in a sequential order. The
courts of the Contracting States first need to examine the provisions of Article 1 of
the CISG to determine whether the CISG should be applied to the contract disputes
involved in the case from the perspective of the contracting party, and then to determine
whether the goods sold in the contract involved and the method of sale are adjusted by
the CISG in accordance with Articles 2–3 of the CISG within the scope, and the last step
is to determine whether the parties effectively excluded the application of the CISG
according to Article 6.7 Obviously, the court of this case has not yet begun to analyse
Article 1 of the CISG, so it is impossible to analyse Article 6.
In short, as far as the court hearing, in this case, is concerned, Article 6 of the
CISG has not been applied.
III. Analysing the applicable provisions of the CISG
The court pointed out that, since the respective countries of the plaintiff and the
defendant are parties to the CISG, this court used the CISG as the applicable law for
handling the dispute in this case. As the last step in the application of the law, the court
analysed whether the CISG is applicable in accordance with the relevant provisions
of the CISG. But the court’s analysis was too brief and not detailed enough. Article
1 of the CISG clearly stipulates that the CISG applies to contracts for the sale of
goods concluded between parties whose places of business are located in different
Contracting States. Obviously, the court should analyse the place of business of the
parties. The court here only briefly mentioned the countries where both parties were
located and did not indicate whether it is the place of business of both parties or the
country where the place of registration is located.

4 Wang [2], p. 23.

5 Brunner and Gottlieb [3], p. 77.
6 Liu [4], p. 84.
7 Liu [5], p. 74.
33 Sinochem Shanghai Co v Kolorit TM Co Ltd 267

In general, this case is another example that reflects the logic of the application
of the CISG in China. As in the case of Chap. 36,8 this case adopted the practice
of giving priority to the rules of private international law when deciding whether to
apply the CISG, rather than directly applying CISG. However, in the case of meeting
the applicable conditions stipulated in Article 1(1)(a) of the CISG, the courts of the
Contracting States of the CISG are obliged to directly apply the CISG as the default
governing law with regard to the matters of the international contracts for the sale of
goods that fall within the scope of the CISG adjustments.9
The application of the CISG should precede the rules of private international
law. Article 1 of the CISG takes precedence over the application of the rules of
private international law. Within the scope of the CISG adjustment, the courts of
the Contracting States have no discretion to apply the domestic law that has been
replaced by the CISG, nor can they first apply the private international law rules of
the country of the court.10 The CISG has given itself a position superior to the rules
of conflict of laws within a certain range.11
Issue 2: Seller’s Principal Obligations
In the follow-up trial, the court pointed out that the parties have the responsibility
to provide evidence to prove their claims, otherwise they should bear the adverse
consequences of not being able to provide evidence. After referring to Article 30 of
the CISG, the court held that the plaintiff who claimed payment for the goods from
the defendant was obliged to provide corresponding evidence to prove that it had
fulfilled all the obligations of the seller. Although Article 30 of the CISG is quoted
here, the court did not directly decide on specific matters based on Article 30 of the
CISG. Instead, it quoted Article 30 of the CISG to explain the seller’s obligation,
stating that the plaintiff, in this case, should hand over the corresponding goods and
documents. In this case, because the evidence materials submitted by the plaintiff
lacked the corresponding competence of evidence, and could not even prove the
contract facts claimed by the plaintiff, it was unnecessary to analyse whether the
plaintiff performed the contract. The court did not follow up on the detailed content
of Article 30 of the CISG.

References

1. Qi XQ (2010) Several disputes and settlements during the drafting of the “Law of the People’s
Republic of China on Choice of Law for Foreign-related Civil Relationships.” Law Sci Mag
2:7–11
2. Wang H (2011) Principles of international trade law. Peking University Press, Beijing

8 The specific content can be seen in Chap. 36 of this book.

9 Liu [6], p. 192.
10 Liu [6], p. 192.
11 Shi [7], p. 83.
268 S. Wang

3. Brunner C, Gottlieb B (2019) Commentary on the UN sales law. Wolters Kluwer, Alphen aan
den Rijn
4. Liu Y (2009) On the direct application of “United Nations Convention on Contracts for the
International Sale of Goods” in Chinese courts. Law Rev 5:83–88
5. Liu Y (2019) Exclusion clause and application of CISG. J Polit Sci Law 4:68–84
6. Liu Y (2019) On the application of “United Nations Convention on Contracts for the International
Sale of Goods” in Chinese courts. Sci Law 3:191–201
7. Shi H (2015) On the court’s application of the “United Nations Convention on Contracts for
the International Sale of Goods”-the connection with the conflict of law rules. Law Sci Mag
12:81–88

Shaotang Wang is a Lecturer in Law from Law School of Nankai University. He holds a Master
in Law and a PhD from Peking University. He specilializes in international investment law and
international trade law. He has published related articles in some core journals in China.
Chapter 34
Shanghai Donglin International Trade
Co. Ltd v Johnson Trading Australia Pty
Ltd

Wenjing An

Case Information
Case name: Shanghai Donglin International Trade Co. Ltd v Johnson Trading
Australia Pty Ltd
Seller: Shanghai Donglin International Trade Co. Ltd
Place of business: China
Buyer: Johnson Trading Australia Pty Ltd
Place of Business: Australia
Details of First Instance:
Court: The Second Intermediate People’s Court of Shanghai
Date of Decision: 24 June 2005
Case No: (2004) Hu Er Zhong Min Wu (Shang) Chu Zi No 127
Judges: Jiang Nan (Presiding Judge), Cui Xuejie (Acting Judge), Wang Yimin
(Acting Judge)
CISG applied: Yes
Key CISG provisions interpreted and applied: Articles 1(1)(a), 53, 59 and 74
Abstract
In July 2003, the Chinese seller, Shanghai Donglin International Trade Co., Ltd
(Donglin Company), signed a contract with the buyer, Johnson Trading Australia Pty
Ltd (Johnson Company), which agreed that the seller would provide the buyer with
children’s furniture with a total payment of RMB ¥911,654.80. Donglin Company is

W. An (B)
Lecturer in Law at North China Electric Power University, Baoding, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 269

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_34
270 W. An

an agency engaged in a foreign trade business year round. According to the require-
ments of the buyer, Donglin Company signed a purchase contract with the actual
supplier, Shanghai Jianwei Wood Industry Co., Ltd (Jianwei Company). According
to the contract, Jianwei Company provides Donglin Company with the agreed chil-
dren’s furniture in the above contract, with a value of RMB ¥459,062.90. Johnson
Company confirmed that Jianwei Company shipped three batches of goods. Donglin
Company delivered the goods to the carrier for transportation, and mailed three
bills of lading to Johnson Company. Donglin Company actually delivered goods
worth RMB ¥308,720.06. Johnson Company received all the goods and paid RMB
¥100,000. After that, it raised an objection to the quality of furniture, and the rest
was not paid. Donglin Company filed a lawsuit to the court.
Shanghai No 2 Intermediate People’s Court held that Donglin Company and
Johnson Company had a sales contract relationship. When Donglin Company and
Johnson Company signed the contract, there was no agreement on the applicable
law of the contract or the exclusion of the application of relevant conventions, and
Australia and China were both parties to CISG. Therefore, CISG was applicable to
this case.
After the establishment of the sales contract between the two parties, Donglin
Company fulfilled its delivery obligations, and Johnson Company confirmed the
receipt of goods valued RMB ¥308,720.06. Johnson Company refused to pay the
remaining payment on the grounds of quality objection after paying RMB ¥100,000,
but there was no sufficient or effective evidence of goods quality objection. Therefore,
the court held that, according to Articles 53 and 59 of CISG, Johnson Company should
pay RMB ¥208,720.06 to Donglin Company.
In addition, Donglin Company and Jianwei Company also had a dispute over
the payment for the goods and sued Shanghai Baoshan District People’s Court.
The court ruled that Donglin Company should pay RMB ¥210,540.16 to Jianwei
Company, and bear interest and case acceptance fee. Therefore, Donglin Company
claimed its economic loss of RMB ¥6415 from Johnson Company in this case, based
on the arrears interest and case acceptance fee mentioned in the judgment made
by Shanghai Baoshan District People’s Court. Shanghai No 2 Intermediate People’s
Court held that Donglin Company had signed sales contracts with Johnson Company
and Jianwei Company, respectively, which were two independent sales contracts.
Donglin Company’s claim that it was actually an export agent could not be estab-
lished. Johnson Company’s failure to pay Donglin Company does not constitute a
legitimate reason for Donglin Company’s failure to pay Jianwei Company in time.
There is no causal relationship between the two. Donglin Company’s claim against
Johnson Company for economic losses based on the court’s judgment of compen-
sation after a dispute between Donglin Company and Jianwei Company cannot be
established.
34 Shanghai Donglin International Trade Co. Ltd … 271

Commentary to the Key Issues Related to the CISG

Issues
Issue 1: The Applicability of the CISG
Issue 2: The Obligation to Pay the Price of Goods of the CISG
Issue 3: Determination of the Damages for Breach of Contract Under the CISG
Comments
Issue 1: The Applicability of the CISG
I. Introduction
In 2005, Shanghai No 2 Intermediate People’s Court tried the sales contract dispute
between Shanghai Donglin International Trade Co. Ltd (Donglin Company) and
the buyer, Johnson Trading Australia Pty Ltd (Johnson Company),1 (Donglin Case).
The automatic application of CISG Article 1(1)(a) involved in this case is typical and
representative under the foreign trade agency system. Part II introduces the foreign
trade agency system and the automatic application of the Convention. Part III analyses
the application of the Convention in this case, and Part IV draws a conclusion.
II. Chinese Foreign Trade Agent System and Automatic Application of CISG
Article 1(1)(a)
China’s foreign trade agency system originated from the reform of the foreign trade
system from 1979 to 1987.2 Before the amendment of the Foreign Trade Law of
the People’s Republic of China in 2004, the foreign trade right was subject to the
examination and approval system, and only a few companies had the foreign trade
rights and could act as foreign trade agents. Foreign trade agents handle import and
export businesses in their own name for civil subjects without foreign trade rights.3
The general practice of foreign trade agency is that the principal (usually a production
enterprise) signs an entrustment contract with the foreign trade agent, and then the
foreign trade agent signs a foreign-related contract with foreign companies. The
subjects of foreign-related contracts are foreign trade agents and foreign companies,
and their rights and obligations do not directly bind the principal.4 As for the nature of
foreign trade agency, scholars have different views. Some scholars believe that it is an
agency system with Chinese characteristics, which is different from the general civil
and commercial agency system.5 Some scholars believe that it is an “innovation”

1 Shanghai Donglin International Trade Co. Ltd. v. Johnson Trading Australia Pty Ltd.—Dispute
of Contracts for International Sale of Goods—First Instance, (2004) Hu Er Zhong Min Wu (Shang)
Chu Zi No. 127, Shanghai No. 2 Intermediate People’s Court, 24 June 2005.
2 Deng [1], p. 167.
3 Hu [2], p. 96.
4 Zhou [3], p. 118.
5 Zhang [4], p. 4.
272 W. An

of the traditional discipline system in the name of the traditional “agent”.6 Some
scholars classify it as indirect agency practice.7 After the amendment of the Foreign
Trade Law of the People’s Republic of China in 2004, the foreign trade right was
changed to the registration system, which expanded the scope of subjects that can
engage in foreign trade. However, the foreign trade agency system is still stipulated
in Article 12, which is as follows:
A foreign business operator may accept the entrustment of other people and handle foreign
trade businesses on their behalf within its scope of business.

There is often a problem in the foreign trade agency system in judicial practice,
that is the problem of “true agency and false trading”.8 This problem means that
the essence relationship between production enterprises and foreign trade agent is
foreign trade agency relationship. However, in order to facilitate foreign trade enter-
prises’ financing and accelerate export tax rebate, production enterprises and foreign
trade agent will ostensibly sign sales contracts. In judicial practice, some courts will
determine that there is a sales contract between the two parties, while some courts
will determine that there is a foreign trade agency relationship based on the true
intention of the parties.
If the relationship between the production enterprise and the foreign trade agent is
recognised as a sales contract, and the foreign trade agent signs a sales contract with
the foreign trader, the two sales contracts are not directly related, and there is no legal
relationship between the production enterprise and the foreign trader, and the foreign
trade agent shall bear the legal risks caused by the breach of contract by the production
enterprise and the foreign trader under the two contracts. In case of disputes, the two
contract disputes shall be handled separately, for foreign trade agent, the burden is
heavy. From the perspective of law application, the sales contract between production
enterprises and foreign trade agents belongs to domestic contractual relationship,
which is directly applicable to domestic law. The sales contract between foreign trade
agents and foreign businessmen belongs to foreign-related contract. If both parties
have their business places in CISG Contracting States and there is no agreement
between the parties and does not exclude the application of the Convention, according
to Article 1(1)(a) of CISG, CISG shall be automatically applied. However, the subject
is limited to foreign trade agents and foreign businessmen.
If the relationship between a production enterprise and a foreign trade agent is
recognised as a foreign trade agency relationship, which is often defined as indi-
rect agency in judicial practice, the sales contract signed between a foreign trade
agent and a foreign trader, although it still does not directly restrict the produc-
tion enterprise, can make the principal (production enterprise) and the third person
(foreign trader) claim relevant rights through the principal’s right of intervention
and the third person’s option of indirect agency. At this time, on the issue of law
application, firstly, it is necessary to identify the legal relationship between the three

6 Zhou [3], p. 118.

7 Hu [2], p. 96.
8 Deng [1], p. 169.
34 Shanghai Donglin International Trade Co. Ltd … 273

subjects. CISG can still be applied to the foreign-related sales contract signed by
the foreign trade agent and the foreign trader when the parties have no agreement
on law application. However, the existence of the foreign trade agency relationship
makes the relationship between the subjects more complex when performing the
contract and claiming rights, and the production enterprise may also intervene in the
foreign-related sales contract, and undertake corresponding rights and obligations.
The application of law can be further solved only after the legal relationship is
clearly identified. According to Articles 1 and 6 of CISG, if there is an agreement
between the parties to the contract, the law shall be applied according to the agreement
of the parties. If there is no agreement and it does not exclude the application of the
Convention, the Convention applies to contracts for the international sale of goods
between parties with their places of business in two contracting states in accordance
with Article 1(1)(a) of CISG.
III. Application of the Convention in the Donglin Case
This case is a typical case that is identified as two independent sales contracts.
Although Donglin Company claims that it is actually a foreign trade agent, according
to the evidence submitted by it, there are only two sales contracts signed between
Donglin Company and Jianwei Company, and Donglin Company and Johnson
Company. There is no entrustment agreement or other relevant evidence. Therefore,
Shanghai No 2 Intermediate People’s Court did not recognise Donglin Company as
a foreign trade agent. This case only deals with the sales contract dispute between
Donglin Company and Johnson Company. The contract dispute between Donglin
Company and Jianwei Company has been handled separately, and Donglin Company
has been judged to be liable for breach of contract.
Whether it is recognised as two independent sales contracts or foreign trade
agency, there is no unified practice in China’s judicial practice, and there is some
ambiguity in the judgment of specific legal issues of foreign trade agency. The situa-
tion of this case is relatively simple, and the legal relationship is relatively clear. The
authors believe that the court’s determination of the legal relationship is accurate
according to the evidence provided by the parties. According to the identification
results, it is clear that CISG should be applied to solve these disputes. From the
statement of the judgment, it is clear and rigorous on the application of law. Firstly,
it emphasises that the contract does not stipulate the law applicable to the settlement
of disputes. Secondly, it also points out that the parties have not agreed to exclude
the application of the Convention. Since Australia and China are both Contracting
States of CISG, the Convention should be applied. However, it should be noted that
the judgment does not mention which articles of the Convention are applicable to
reach the above conclusion, which still needs to be improved.
IV. Conclusion
Although there is no problem in the judgment of this case from the perspective of
identification and legal application, the separate treatment of the two sales contracts
in this case is not the most convenient way for Donglin Company. As an actual foreign
trade agent, Donglin Company has undertaken more legal risks in the transaction with
274 W. An

Johnson Company and Jianwei Company. From the perspective of legal application,
the Convention does not involve agency. If similar disputes are encountered, the court
still needs to judge its legal relationship based on evidence, and then decide whether
CISG should be applied to solve sales contract disputes.
On the issue of automatic application of CISG, the statement of the judgment in
this case is comprehensive, considering whether the parties have a positive agreement
and whether the parties exclude the application of the Convention. However, it is not
clear which articles of CISG are used to draw conclusions, so it still needs to be
improved.
Issue 2: The Obligation to Pay Price of Goods of the CISG
I. Introduction
In the Donglin Case, the buyer and the seller signed a sales contract for children’s
furniture. The seller, Donglin Company, delivered goods worth RMB ¥308,720.06.
The buyer, Johnson Company, confirmed the receipt of the goods and paid RMB
¥100,000 for the goods. Later, Johnson Company claimed that there were quality
problems in the goods, but there was no corresponding evidence. Therefore, the
court judged that the buyer fulfilled the payment obligation and paid the arrears of
RMB ¥208,720.06 according to Articles 53 and 59 of CISG. The case is a typical
case of applying Articles 53 and 59 to judge the buyer’s payment obligation. Part II
introduces the relevant provisions of Articles 53 and 59 of the Convention, Part III
analyses the application of Articles 53 and 59 in Donglin Case, and Part IV draws a
conclusion.
II. Article 53 and Article 59 in the CISG
CISG Article 53 is a general provision on the buyer’s contractual obligations, it sets
out the two characteristic obligations of the buyers: to pay the purchase price and to
take delivery of the goods.9 Article 53 specifically states as follows:
The buyer must pay the price for the goods and take delivery of them as required by the
contract and this Convention.

Article 59 of CISG specifies the starting time of the buyer’s payment obligation.
This article specifically states as follows:
The buyer must pay the price on the date fixed by or determinable from the contract and this
Convention without the need for any request or compliance with any formality on the part
of the seller.

According to this article, the buyer shall make payment when it is due on the
payment date specified in the contract or convention without the seller’s notice or
other formalities.10 If the buyer fails to perform its payment obligations due, the seller
may take remedial measures. The Secretariat’s commentary states that this article is
intended to deny the applicability of the rule in some legal systems which states that

9 Schwenzer [5], p. 821.

10 Li [6], p. 259.
34 Shanghai Donglin International Trade Co. Ltd … 275

in order for the payment to become due the seller must make a formal demand for it
from the buyer.11
In judicial practice, there are many cases applying CISG Article 53, mainly to
explain the buyer’s payment obligation and receipt obligation. There are relatively
fewer cases applying Article 59, mainly to explain the buyer’s absolute payment
obligation, which shall be performed from the due date without requiring the seller
to take other measures. In addition, Article 59 is often combined with Articles 58
and 78 to judge the starting date of default interest calculation.
III. The Obligation to Pay the Price of the Goods of the CISG in the Donglin
Case
In the Donglin Case, Donglin Company had a sales contract relationship with Johnson
Company. After Donglin Company delivered the goods, Johnson Company paid part
of the payment. Although it raised a quality objection, it did not provide corre-
sponding evidence to prove the quality defect. Therefore, the court ruled that Johnson
Company should fulfil its payment obligations and pay the remaining amount to
Donglin Company according to Articles 53 and 59 of CISG. This case is a rela-
tively simple case of the buyer’s failure to fully perform the payment obligation. The
citation of Articles 53 and 59 in the judgment mainly shows that the buyer has the
payment obligation, which is similar to many precedents invoking Article 53. Article
59 further states that the buyer’s payment obligation is absolute, and the application
of the two articles is relatively simple and clear. It is worth noting that the judgment
in this case clearly demonstrated the buyer’s payment obligation, but did not analyse
it in combination with Articles 53 and 59 of the Convention, nor did it list the specific
contents of the articles. It only mentioned in the conclusion that the judgment was
made in accordance with Articles 53 and 59 of CISG, which can be further improved.
IV. Conclusion
In the case of the buyer’s performance of the payment obligation, most judges will
invoke Article 53 of the Convention and sometimes explain the buyer’s absolute
payment obligation in combination with Article 59. This case is a typical representa-
tive. However, as an early case, the court’s analysis of the provisions of the Convention
is relatively simple, and the content of the specific articles of the Convention is not
listed in the judgment. Although the analysis of the buyer’s payment responsibility
is clear, it ignores the elaboration combined with the provisions of CISG.
Issue 3: Determination of the Damages for Breach of Contract Under the CISG
I. Introduction
The determination of damages is a common controversial issue in disputes over
contracts for the international sale of goods. Article 74 of CISG establishes the basic
rules for the calculation of damages.12 In this case, the court did not refer to Article

11 UNCITRAL Secretariat, Commentary on the Draft convention on Contracts for the International
Sale of Goods, Document A/CONF. 97/5, 14 March 1979.
12 Gao [7], p. 432.
276 W. An

74 of the Convention in its judgment, but it involved the problem stipulated in Article
74 when calculating damages. Therefore, the authors analyse this problem. Part II
introduces Article 74 of CISG, Part III analyses the damages involved in this case,
and Part IV draws a conclusion.
II. Article 74 in the CISG
Damage compensation is an important system of the Convention. It is one of the
main ways of remedy for breach of contract.13 On the issue of damages for breach of
contract, Article 74 sets forth the general principle by which the Convention measures
liability for breach.14 It stipulates the scope and limit of the breaching party’s liability
for damages.15 Article 74 specifically provides as follows:
Damages for breach of contract by one party consist of a sum equal to the loss, including
loss of profit, suffered by the other party as a consequence of the breach. Such damages may
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 the light of the facts and matters of which he then knew
or ought to have known, as a possible consequence of the breach of contract.

The scope of damages determined in Article 74 of CISG usually includes actual

loss and loss of profits. It is generally believed that actual loss includes incidental
loss16 and indirect loss. The main losses related to this case are indirect losses, the
aggrieved party is entitled to damages for pecuniary loss resulting from claims by
third parties as a result of the breach of contract.17 For example, when the buyer
rejects the goods, the seller shall compensate the upstream supplier for liquidated
damages.18 The principle of proximate cause should also be complied with when
determining indirect losses.
III. Analysis of the Application of Article 74 in the Donglin Case
In the Donglin Case, the court analysed the economic losses claimed by the plaintiff,
Donglin Company. Based on the foregoing determination of the two sales contracts,
the court held that the failure of Johnson Company to pay the arrears to Donglin
Company did not constitute a legitimate reason for Donglin Company’s failure to
pay the payment to Jianwei Company in time, and there was no causal relationship
between the two. The amount of damages obtained by Donglin Company and Jianwei
Company through litigation cannot be used as the basis for damages in this case.
The authors agree with the court’s view that the dispute between Donglin Company
and Jianwei Company mainly involves the non-payment of the buyer, and does not

13 Shenzhen Court of International Arbitration, China Academy of International Arbitration,

Selection of Typical Arbitration Cases of The United Nations Convention on Contracts for the
International Sale of Goods (Peking University Press, 2020), p. 168.
14 Lookofsky [8], p. 163.
15 China International Economic and Trade Arbitration Commission [9], p. 147.
16 UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the

International Sale of Goods (2016 Edition). p. 336.

17 CISG Advisory Council Opinion No. 6, Calculation of Damages under CISG Article 74. http://

www.cisgac.com/cisgac-opinion-no6/.
18 Li [6], p. 346.
34 Shanghai Donglin International Trade Co. Ltd … 277

involve the delivery of the goods themselves or the expenses arising from the defects
or storage of the goods. Therefore, the non-payment of Johnson Company to Donglin
Company will not have a direct impact on whether Donglin Company can pay Jianwei
Company. The performance of the payment obligation does not depend on specific
goods. Currency is a special kind product. Even if Johnson Company fails to pay,
the obligation of Donglin Company to pay Jianwei Company under another contract
will not be exempted. The situation of this case is different from the indirect losses
involved in Article 74 of CISG. Although they are both the situations of third-party
claims caused by the other party’s breach of the contract, Article 74 involves various
losses related to the delivered specific goods. The non-payment and interest loss of
the middleman purely caused by the non-payment of the downstream buyer are not
in line with the principle of proximate cause because they do not have an inevitable
causal relationship. Therefore, in this case, the court did not determine that it belonged
to the scope of damages in this case.
In this case, it should also be noted that the court’s analysis did not indicate that
the conclusion was drawn according to Article 74 of CISG, but in the data of this
case provided by the CISG database of Pace University, scholars believe that the key
provision of CISG involved in this case is Article 74.19 In the process of analysis,
the court did analyse according to the rule of Article 74, but did not mention this
clause in the judgment. Therefore, this issue needs to be paid attention to in the trial
of future cases.
IV. Conclusion
In the Donglin Case, the court held that the two sales contracts were independent legal
relationships. Because the two contracts only involved the payment of goods, they
were not strongly dependent on the goods themselves. Therefore, although the court
recognised Donglin Company’s liability for damages in the judgment of Donglin
Company and Jianwei Company, this could not be the reason for Donglin Company
to claim against Johnson Company. There is no direct causal relationship between
the two. Therefore, the economic loss cannot be recognised as damage under Article
74 of CISG. The court’s analysis is clear and accurate, but it is worth noting that the
judgment does not mention that the court made its judgment according to Article
74 of CISG, but in essence, the judge drew the above conclusion according to this
article. Therefore, the reasoning part of the judgment should be more rigorous, first
listing the specific provisions of CISG, and then carrying out the analysis.

References

1. Deng X (2011) The problem and reconstruction of the system of foreign trade agency. J Int
Trade 6:167–173

19https://iicl.law.pace.edu/cisg/case/china-june-24-2005-intermediate-peoples-court-shanghai-
donglin-international-trade-co-ltd, last visited on 26/10/2021.
278 W. An

2. Hu DH (2021) Commentary on article 926 of civil code (indirect agency). J Soochow Univ (Law
Ed) 2:95–111
3. Zhou J (2007) The dilemma and improvement of Chinese foreign trade agency system in the
post-foreign trade law era. Polit Sci Law 5:117–122
4. Zhang YJ (1997) Tripartite confrontation and division of the world: legal problems faced by
Chinese foreign trade agency system. Intertrade 2:4–7
5. Schwenzer I (2016) Commentary on the UN Convention on the International Sale of Goods
(CISG), 4th edn. Oxford University Press, Oxford
6. Li W (2009) A commentary on CISG, 2nd edn. Law Press, Beijing
7. Gao XJ (2017) Comments on CISG. China Renmin University Press, Beijing
8. Lookofsky J (2017) Understanding the CISG: a compact guide to the 1980 United Nations
convention on contracts for the international sale of goods. Kluwer Law International BV, Alphen
aan den Rijn
9. China International Economic and Trade Arbitration Commission (2021) The application of the
United Nations convention on contracts for the international sale of goods in Chinese arbitration.
Law Press, Beijing

Dr. Wenjing An female, graduated from the Law School of Nankai University in 2017, the
research direction is international economic law. The title of graduation thesis is “Study on the
Determination of Fundamental Breach in the International Commercial Contracts”. Since 2008,
she has served as a Lecturer in Law in the Department of Law and Political Science of North
China Electric Power University, teaching International Economic Law and International Law
courses for undergraduates and postgraduates. She published the following papers: “The Anal-
ysis of Decision-Making Mechanism of Multilateral Development Banks and the Inspiration for
the Asian Infrastructure Investment Banks”, Social Sciences in Chinese Higher Education Insti-
tutions, Issue 4, 2015; “Theoretical and Empirical Study on the Foreseeability Standard of CISG
Fundamental Breach”, Hebei Law Science, Issue 1, 2019.
Chapter 35
Xi’an Yunchang Trading Co., Ltd v
Wentong Yuan & American Antai
International Co

Chaolin Zhang, Peng Guo, and Shu Zhang

Case Information
Case name: Xi’an Yunchang Trading Co., Ltd v Wentong Yuan & American Antai
International Co.
Seller: Xi’an Yunchang Trading Co., Ltd
Place of business: China
Buyer: American Antai International Co.
Place of Business: United States
Details of First Instance:
Court: The Primary People’s Court of Pudong New District of Shanghai Munici-
pality
Date of Decision: 23 September 2005
Case No: (2004) Pu Min Er (Shang) Chu Zi No 3221
Judges: Huizhen Chen (Presiding Judge), Li Sun (Judge), Donghui Cai (Acting
Judge)
CISG applied: Yes
Key CISG provisions interpreted and applied: Articles 59, 62 and 74

C. Zhang (B)
Law School of Nankai University, Tianjin, China
e-mail: [email protected]
P. Guo
Lecturer in Law at RMIT University, Melbourne, VIC 3000, Australia
e-mail: [email protected]
S. Zhang
Lecturer in Commercial Law at Deakin University, Geelong, VIC 3220, Australia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 279

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_35
280 C. Zhang et al.

Abstract
The plaintiff, Xi’an Yunchang Trading Co., Ltd (Yunchang Company), is the seller
of the case and its place of business is located in China. The defendant, American
Antai International Co. (Antai Company), is the buyer in this case and its place of
business is in the United States. The other defendant was the legal representative
and chairman of Antai Company. Prior to the conclusion of the contract, Yunchang
Company provided Antai with samples of the wine bottle. On 19 May 2004, the two
sides entered into an export contract for 2,100 wine bottles with a total price of US
$9,723. Thus, the nature of the contract between the two parties is the international
contract for the sale of goods by sample. In addition, the contract also agreed that
the purchase of bottles by sea transport, using the trade term FOB (Free On Board)
Tianjin, China.
Yunchang Company sent the goods three times in succession, on 1 July, 15 July
and 21 July 2004. In accordance with the requirement of Antai Company, 300 of these
bottles were shipped for the first time and then the mode of transport of the shipment
was changed to air transport. Subsequently, 258 bottles were issued by air for the
second time as the replacement cargo for the first shipment, due to the disapproval of
the quality of the first batch of the goods by Antai Company. The third shipment of
1,800 bottles, as originally agreed, was by sea to complete the delivery of the goods
required by the contract. However, Antai Company still expressly objected to the
quality of the third batch of the bottles and refused to pay the purchase price. Based
on this, Yunchang Company filed a lawsuit against Antai Company in the Pudong
New District People’s Court in Shanghai, China. The court heard the case on 17
December 2004.
As far as payment is concerned, the parties did not agree on the time of payment
in the contract. In the actual performance of the contract, Yunchang Company
completed the delivery of 2,100 bottles in accordance with the quantity agreed in the
contract, and the actual total number of the goods exceeded the contract agreement by
258. Accordingly, Yunchang Company requested the court to order Antai Company
to pay the amount originally agreed upon in the contract between the parties in the
amount of US $9,723, and Yunchang Company did not make an additional payment
claim for the additional goods. In the process of settlement, the buyer and seller
never had a disagreement over the quantity of goods delivered. Yunchang Company
provided sufficient evidence in this regard, and the validity of the evidence was
recognised by the court. Therefore, the number of bottles that were sent is clear.
As an explanation for the refusal to pay the purchase price, Antai Company noted
in their defence that there were quality problems with the three shipments sent by
the plaintiff. During the performance of the contract, the buyer received the three
batches of wine bottles from Yunchang Company on time, but each time, the buyer
raised quality problems of the goods and gave this feedback to Yunchang Company.
In the defence to the plaintiff’s suit, the defendant stated that only 57 of the 2358 (300
+ 258 + 1800) bottles sent by the plaintiff were eligible. As a result, the defendant
refused to pay the purchase price and offered the plaintiff a return. The two parties
submitted their own evidence on this issue, but since most of the evidence did not
35 Xi’an Yunchang Trading Co., Ltd … 281

meet statutory evidentiary requirements, for instance, exceeding the time limit for
proof, lack of originals or failure to go through notarisation procedures, the evidence
presented by the parties were almost non-conclusive to the court.
In addition, the plaintiff, Yunchang Company, filed another claim for the compen-
sation of RMB ¥10,153.83 for its economic loss, which included the loss of export
tax rebates and the loss of interest on the purchase price. In response, the defendant,
Antai Company, provided a statement (evidence 6) issued to it on 16 September 2004
by the plaintiff’s supplier, Wenshui Jizhou Hongxing Hardware Factory, certifying
that the factory had undertaken to waive the payment for the wine bottles and would
no longer pursue Yunchang Company. Antai Company then put forward that in this
case, the plaintiff does not have any economic loss.
On the basis of the facts ascertained and the relevant evidence substantiated by the
examination, the court upheld the plaintiff’s first claim and ruled that the defendant
pay the full amount of the goods, US $9,723. In addition, the court upheld the
plaintiff’s claim for interest compensation, but not for other economic loss, including
tax refund losses.
Neither side appealed and the case was closed.

Commentary to the Key Issues Related to the CISG

Issues
Issue 1: The rules on the burden of proof under the CISG and their application
Issue 2: Impact of the application of INCOTERMS on the risk allocation rules
of the CISG

Comments
This case is an international contractual dispute between a Chinese company and an
American company, both of the countries are parties to the United Nations Conven-
tion on Contracts for the International Sale of Goods (hereinafter the CISG). Further-
more, the two parties concerned unanimously agreed to the application of the CISG
to the settlement of a dispute between them. Therefore, the court easily established
the applicable law in this case as the CISG, and finally rendered its judgment in
accordance with the Article 59, 62 and 74.
Issue 1: The rules on the burden of proof under the CISG and their application

I. The general principle of the burden of proof on buyers and sellers under the
CISG
In resolving disputes over contracts for the international sale of goods, courts often
encounter situations where the facts are unclear. This case is an example of a case
in which the parties are each committed to the existence of flaws and defects in the
282 C. Zhang et al.

quality of the goods, and the evidence submitted separately is not sufficient to support
their respective insistence on the statement. For the judges in this case, the question
of whether there was a problem with the quality of the goods is difficult to get a
real answer for. Even so, the court had to rule ex officio, regardless of the facts. The
question then becomes which party would benefit from the uncertainty and which
party would be burdened by that uncertainty?1 From the court’s point of view, the
issue had turned to the distribution of the burden of proof, where the party bearing
the corresponding burden of proof should provide sufficiently strong evidence for its
claim, or it will face the consequences of poor proof.
In the CD media case,2 part of the judgment of the Austrian Supreme Court relates
to the burden of proof. This part of the presentation is very representative, demon-
strating the core mentality of the court in dealing with the distribution of the burden
of proof at the CISG. The court noted that the general burden of proof pursuant to the
CISG was on the party that wanted to rely on a provision in its favour, unless reasons
of equity would demand otherwise.3 Specifically, the Austrian Supreme Court held
that “generally, under the CISG, the burden to prove the factual prerequisites of a
provision is on the party that intends to employ it to its own advantage”.4 But imme-
diately afterward, the court also acknowledged the possibility that the rule could be
broken, “in exceptional circumstances, considerations of equity can lead to a shifting
of the burden of proof, e.g., a closeness to evidence or unacceptable difficulties for
one party to furnish evidence”.5 That is, for the CISG, to achieve uniformity, the law
must not only be predictable, but it must also be capable of being stated in a way that
could be applied fairly in different situations.6
A well-known expert on the CISG, Professor Franco Ferrari, in his earlier study,
concretely concluded three general principles of the rules on the burden of proof
under the CISG: (a) any party which wants to derive beneficial legal consequences
from a legal provision has to prove the existence of the factual prerequisites of that
provision; (b) any party claiming an exception has to prove the existence of the
factual prerequisites of that exception; (c) those facts that exclusively in a party’s
sphere of responsibility and which therefore are, at least theoretically, better known
to that party have to be proven by that party, since it is that party who exercises the
control over that sphere.7

1 Linne [1], p. 31.

2 UNCITRAL CLOUT Case No. 753, https://www.uncitral.org/clout/clout/data/aut/clout_
case_753_leg-2374.html; [OGH] [Supreme Court] 10 Ob 122/05x, 12/09/2006 (Austria),
https://iicl.law.pace.edu/cisg/case/austria-ogh-oberster-gerichtshof-supreme-court-austrian-case-
citations-do-not-generally-12.
3 United Nations Commission on International Trade Law. (2007). Case Law on UNCITRAL

Texts (CLOUT). UN. Doc. A/CN.9/SER.C/ABSTRACTS/71. https://documents-dds-ny.un.org/

doc/UNDOC/GEN/V07/890/92/PDF/V0789092.pdf?OpenElement, p. 7.
4 Ibid.
5 Ibid.
6 Linne [1], p. 43.
7 Ferrari [2], pp. 667–668.
35 Xi’an Yunchang Trading Co., Ltd … 283

From a different perspective and when compared with Chinese domestic law, the
three general principles concluded by Professor Ferrari for international sales law
are essentially the same as the domestic norms of civil burden of proof in China.
There are two kinds of burden of proof norms in Chinese law. (1) The basic rule of
burden of proof is “who advocates, is who gives evidence”. As specified in Article
64 of Civil Procedure Law of the People’s Republic of China, “It is the duty of a
party to an action to provide evidence in support of his allegations”.8 (2) In addition,
there are a large number of special rules of burden of proof, mainly in the civil law
and related judicial interpretation. The Tort Liability Act, for example, is considered
to be the civil law with the most provisions of such special rules.9 For the parties,
although they have put forward their claims in the dispute settlement process, in some
specific circumstances, parties may not in fact have the corresponding evidentiary
conditions and evidentiary capacity. In the case of international contracts for the sale
of goods, the controlled state of the goods alternates between the buyer and the seller.
When the goods are controlled by one party, it is difficult or may even be impossible,
in many cases, to prove the condition of the goods at this stage and other relevant
background. Therefore, it may not be possible for the non-controlling party to the
goods to bear the burden of proof when it claims the problem arising from this stage.
II. Is Article 79 of the CISG a rule of burden of proof that the court can rely
on?
An important fact in this case is that the parties did not agree in advance on the timing
of payment. In the course of the performance of this contract, the seller fulfils the
main obligation of the contract, that is, the delivery of the goods, and the buyer has
not fulfilled its payment obligations from start to finish. As the normative document
applicable in this case to resolve the parties’ dispute in obligation performance, the
CISG itself does not provide an independent, specific provision for the burden of
proof. And what may be relevant to the context of the case is Article 79(1), which
refers to the specific requirements of “proof”: “A party is not liable for a failure to
perform any of his obligations if he proves that the failure was due to an impediment
beyond his control and that he could not reasonably be expected to have taken the
impediment into account at the time of the conclusion of the contract or to have
avoided or overcome it, or its consequences”. It needs to be analysed whether the
text of Article 79 of CISG is intended to allocate the burden of proof in terms of
content. Is this article a rule for burden of proof that the court can actually apply? If
so, how does the court apply it?
At a relatively early stage, scholars had paid systematic attention to this problem.
The conclusion of the research is that, even though there were a few voices that
disagreed that the issue of burden of proof is governed by the CISG, the prevailing

8 In this provision, the latest 2017 amendment currently in force in China, Civil Procedure Law of
the People’s Republic of China (2017 Amendment) (Order No. 71 of the President of the People’s
Republic of China), did not modify the 1991 version, Civil Procedure Law of the People’s Republic
of China (Order No. 44 of the President of the People’s Republic of China), which should be applied
in the context of the present case.
9 Hu [3], p. 93.
284 C. Zhang et al.

view was that it is (somehow) governed by the CISG,10 at least “implicitly”.11 There
is another disagreement with the former view. The view was expressed that the
rule of burden of proof was procedural law and should therefore be decided on the
basis of the lex fori, while another view was expressed that the issue should be
decided on the basis of the domestic law to which the rules of private international
law referred. In response, Professor Ferrari pointed out that, the latter solution is
preferable to the one according to which one should resort to domestic law, since it
is the only one which promotes uniformity, which is any uniform commercial law
convention’s ultimate goal.12 Updated information in UNCITRAL Digest of Case Law
on the United Nations Convention on Contracts for the International Sale of Goods
(2016 Edition), also responded to this issue. Based on Article 79, the compilation
consolidated the claims of a number of judgements and established a subsection
specifically on the burden of proof. The study reached a more detailed conclusion:
several decisions assert that Article 79(1)—in particular the language indicating that
expressly allocates the burden of proving the requirements for exemption to the party
claiming the exemption.13
On the basis of these conclusions, UNCITRAL Digest of Case Law and Case Law
on UNCITRAL Texts (CLOUT), noted that some of the judgments that go further.
These decisions regarded the burden of proof provision as a general principle within
the scope of the convention as a whole. There is a typical example, the Rheinland
Versicherungen v S r l Atlarex and Allianz Subalpina s p a case,14 which presents
the complete reasoning on this issue. The court first admitted that the burden of
proof is a matter governed but not expressly settled by CISG, and which therefore
has to be settled in conformity with the general principles underlying CISG (Article
7(2) CISG). Subsequently, the court noted, it is a general principle underlying the
CISG that the claimant should bring evidence in favour of its cause of action. And
that’s exactly what the court derived from Article 79(1). In another case, the judges
took a similar approach and dealt with the issue of compensation for damages and
corresponding proof relating to interest under Article 78 on the basis of the status of
Article 79(1) as a general principle.15 There is a newer case in 2018, Rudolf Hertz
v New GI and Max SRL, Italian Supreme Court (Corte Suprema di Cassazione)
continued to follow the above-mentioned logic of reasoning and the application of

10 Ferrari [2], p. 667.

11 Ibid. at p. 666.
12 Ibid. at p. 669.
13 UNCITRAL [4], p. 378, para. 20.
14 UNCITRAL CLOUT case 378. Rheinland Versicherungen v. S.r.l. Atlarex and Allianz Subalpina

s.p.a. (12-07-2000). Italy: Tribunale di Vigevano (Judge A. Rizzieri). In United Nations

Commission on International Trade Law. (2001). Case Law on UNCITRAL Texts (CLOUT).
UN. Doc. A/CN.9/SER.C/ABSTRACTS/34. https://www.uncitral.org/clout/clout/data/ita/clout_
case_378_leg-1602.html, p. 3.
15 UNCITRAL CLOUT case 380. (29-12-1999). Italy: Tribunale di Pavia (Judge Frangipani). In

United Nations Commission on International Trade Law. (2001). Case Law on UNCITRAL Texts
(CLOUT). UN. Doc. A/CN.9/SER.C/ABSTRACTS/34. https://www.uncitral.org/clout/clout/data/
ita/clout_case_380_leg-1604.html, p. 5.
35 Xi’an Yunchang Trading Co., Ltd … 285

rules. Furthermore, the court held that the question of the burden of proof, while not
expressly governed by the CISG, did not represent a loophole in the convention in
that regard, taking into account the provisions of Article 7(2).16
While the prevailing view is that Article 79 of the CISG is indeed the rule of the
burden of proof that the court may apply, as mentioned above, there a few voices
that claim that the issue of burden of proof is not governed by the CISG. Although
the latter view is relatively limited, these concerns should be taken into account and
responded to, as it may involve theoretical obstacles to the application of the norms of
burden of proof to domestic courts. Professor Ferrari summed up the arguments of the
supporters for this negative view. They were based primarily on the considerations
of the legal nature of the burden of proof norm, which was considered to be matters
within procedural law rather than substantive law.17 The general view is that the
court could apply the applicable law confirmed by the conflict norms which contains
only substantive law.18 Thus, according to this view, the court naturally cannot apply
Article 79.
It is not difficult to refute this view and its arguments. Firstly, from the broader
perspective of the CISG convention as a whole, the nature and purpose of the treaty
is recognised as the harmonising substantive norms; Moreover, as Professor Ferrari
retorted, it was clear that treating the rules of the burden of proof already contained
in the treaty itself, in the context and platform of the convention rather than the
domestic law of national courts, would convincingly contribute to the promotion of
uniformity in legal understanding and application throughout the world. Secondly,
after reviewing the definition of substantive law, a scholar declared that some “pro-
cedural” norms are essential to the definition of the rights of the parties and have
a significant impact on the outcome of the case, and should therefore be treated
as substantive law.19 In addition, based on the careful analysis of ALI/UNIDROIT
Principles of Transnational Civil Procedure adopted by the International Institute
for the Unification of Private Law, a more detailed conclusion has been drawn from
a study on the burden and standard of proof of the international law of the model, the
rules for distribution are part of substantive law, while the rules for the production
of evidence are primarily procedural.20
Thus, in general, in the context in which the CISG is applied as applicable law,
the view that the allocation rules of burden of proof covered in Article 79 is a
general principle has been adopted by some courts in theory and practice, albeit
somewhat controversially. However, there is currently no impediment to considering
the allocation of the burden of proof as an exemption from liability and apply this
rule in the status of substantive law.

16 Rudolf Hertz v. New GI and Max SRL. (25-01-2018). Docket Number: 9340/2013
R.G./1867/2018. Corte Suprema di Cassazione [Supreme Court]. https://iicl.law.pace.edu/cisg/case/
italy-january-25-2018-corte-suprema-di-cassazione-supreme-court-rudolf-hertz-v-new-gi-and.
17 Ferrari [2], p. 666.
18 Lu [5], p. 81.
19 Linne [1], p. 31.
20 Skontzos [6], p. 577–578.
286 C. Zhang et al.

III. Whether the seller in this case can be exempt from the obligation to pay on
the basis of the non-conformity of the goods
From the language of Article 79 of the CISG, it appears that the article seeks to
provide a criterion for judgement as to whether the parties to the contract can be
exempted from liability if they fail to perform their obligations. This article is a
general exemption clause that can be invoked by any party to the contract and is not
exclusive to the buyer or the seller. For the court to determine whether a party can be
exonerated, the factual circumstances of the case must meet the specific conditions
set out in the article after confirming the content of the obligation of the invoking
party.
The contract in this case is a contract for the sale of international goods, and
there is no special agreement between the parties, so the obligations of the buyer
and the seller are traditional and clear. Yunchang Company, the seller of the bottles,
sent the goods to the buyer at the buyer’s request as agreed in the contract. The
buyer, Antai Company, received the goods within a reasonable time, in other words,
the seller fulfilled their core obligation to deliver the goods. However, the buyer’s
core obligation to pay for the goods, until the trial had not been fulfilled. Moreover,
according to the circumstances presented in the judgement instrument, the buyer did
not intend to perform the obligation on the grounds that (1) there were problems
with the quality of the goods, and (2) the seller’s supplier had made it clear that it
would not claim for the price from the seller and that the seller would not have any
loss. Thus, the court needs to determine whether, in the circumstances of the case,
the buyer’s obligation to pay met the conditions set out in Article 79 in order to
obtain an exemption. That is, whether the buyer’s non-payment was reasonable and
lawful. This issue actually contains two dimensions: how to distribute the burden
of proof between the two parties and what legal criteria or conditions must be met
before it can be accepted by the court? The following is an analysis combining the
circumstances of the case.
In accordance with the basic principle of the distribution of the burden of proof,
if the Antai Company profits from the outcome and is relieved of their obligations
originally stipulated in the contract, this buyer is required to prove those reasons
in accordance with the statutory requirements. The court in this case has always
followed this basic approach. The buyer’s second reason is relatively easy to deal
with in court. The manufacturer of the wine bottles provided a statement to Antai
Company, stating that it would no longer seek payment from the plaintiff, Yunchang
Company. The court recognised the validity of the evidence provided by the defendant
(defendant’s evidence 6). The court held that relativity is a fundamental aspect of
this case, and that the contract of sale between the plaintiff and the defendant, and
the contract between the plaintiff and the manufacturer, are two separate contracts.
The statement provided by the defendant, therefore, does not constitute an obstacle
to the plaintiff’s claim for payment. That is, the evidence was insufficient to support
the buyer’s claim that it was exempt from the obligation to pay for the purchase price.
Antai Company’s arguments for supporting its non-payment of the goods are
related to additional factual and evidentiary complications. Being an international
35 Xi’an Yunchang Trading Co., Ltd … 287

contract for the sale of goods by sample, as stated in the Article 35(2)(c), the goods
must “possess the qualities of goods which the seller has held out to the buyer as a
sample or model”. Characteristics of goods as tendered that deviate from the charac-
teristics in a sample or model, therefore, constitute nonconformities for purposes of
Articles 35 and 36.21 The sample in this case had been delivered to the buyer prior
to the conclusion of the contract and the sample remained under the control of Antai
Company. Unfortunately, Antai Company was unable to submit evidence relating to
the provided sample in court as the sample had been lost. This is a fact recognised
by both sides. This constitutes the greatest obstacle to the confirmation of the quality
of the goods being in conformity with the contract. Therefore, regardless of whether
the sample is actually lost or not, the buyer is responsible for the loss of the sample
and should bear the adverse consequences accordingly.
In addition, the two sides in this case agreed that, before each shipment, Antai
Company should send someone to the factory to inspect the quality of the wine
bottles, and Yunchang Company could only deliver the goods after the acceptance.
The parties had followed this agreement in practice, and three inspection reports22
and one clean bill of lading issued by the ship carrier had been submitted to the court
as evidence. However, after actually receiving three shipments, the buyer claimed
the three batches of the goods to be all non-conforming each time. In response, the
relevant evidence provided by the buyer is as follows:
1. Upon examination, Antai Company concluded that the vast majority of the goods
had quality problems. Yunchang Company provided the e-mails between them
which sent and communicated the relative information (defendant’s evidence
2). In this regard, the court held that this evidence was immaterial and that the
defendant did not notarise or certify the evidence within the required period
after the plaintiff objected. Moreover, even if Antai Company considered it
ineligible, it is a matter of agreement on quality between the two parties to the
contract. Based on the principle of relativity of the contract, this evidence could
not constitute proof that the goods delivered by the plaintiff did not conform to
the contractual agreement between the two sides.
2. In the inspection report of the second shipment, Antai Company challenged the
quality of the goods (defendant’s evidence 3). The validity of the evidence was
determined by the Tribunal, but the court illustrated that the evidence provided
by the defendant detailed only part of the information in the document and that
the complete inspection report affirmed the quality of this batch of the goods.
3. The buyer also provided 26 detailed photographs of the goods, taken during
the sampling of the goods in the third shipment upon arrival in the United

21 Gillette [7], p. 236.

22 The buyer provided three inspection reports (plaintiff’s evidence 5), certifying that the defendant
had sent staff members to inspect the goods before the three shipments, and that the plaintiff had
only sent the goods after passing the inspection. However, the court recognised the validity of only
one part of the evidence. The court found that two of the inspection reports had exceeded the time
limit for proof, and they were not original and were vague. These two reports were inconsistent with
the provisions of the procedural law, and therefore, the court refused to cross-examine the evidence.
288 C. Zhang et al.

States. These photographs show the quality and packaging problems of the
bottles (defendant’s evidence 5). The veracity of the evidence was acknowl-
edged, but the court did not recognise them as conclusive evidence. The court
held that, first of all, the defendant did not entrust the authoritative commodity
inspection agency to issue a commodity inspection report, and the inspection
institution entrusted by the defendant did not meet the legal requirements.
Secondly, according to the defendant’s statement, the bottles in question had
been completely destroyed and samples of the bottle could also not be provided.
Additionally, the quantity of wine bottles that the plaintiff supplied far exceeded
the contract, but the number of photographs provided by the defendant was very
limited. The court, therefore, concluded that the evidence provided by the defen-
dant could not prove that the quality of the goods provided by the plaintiff did
not conform to the agreement of the parties to the contract of sale. In the end,
the court’s decision upheld the plaintiff’s claim that the buyer should settle the
purchase price of 2,100 bottles in accordance with the contract.
A similar case was dealt with by a German court, in which the buyer was accused of
refusing to pay for the goods because of quality problems of the goods. The German
buyer in the case, having received and installed the computer program provided by
the French seller, merely requested the seller’s assistance without express notice.
The German courts have handled the case in a very similar way to the Chinese courts
in this case. The court held that the defendant could not rely on a possible lack of
conformity and ordered the buyer to pay the purchase price and interest.23
It may be added that the evidence provided by the buyer in the present case never
constituted an effective support for the facts of its claim, and the court’s treatment
ends at the factual aspect. In accordance with Article 79, even if the facts claimed
by the buyer were true and could be proved, it does not necessarily mean that an
exemption judgment will be obtained. Because Article 79 also sets specific condi-
tions: the party’s non-performance was “due to an impediment”; the impediment was
“beyond his control”; the impediment is one that the party “could not reasonably be
expected to have taken into account at the time of the conclusion of the contract”; the
party could not reasonably have “avoided” the impediment; and the party could not
reasonably have “overcome” the impediment “or its consequences”.24 The specific
understanding and application of these words need to be further developed. But it is
clear that the interpretation of the exemption clause of Article 79 revolves around
the fundamental concept that the performance of the contract is prevented by an
impediment which cannot be controlled by the promisor.25

23 UNCITRAL CLOUT Case 131. (08-02-1995). Court reference. 8 HKO 24667/93. German:
Landgericht München I. In United Nations Commission on International Trade Law. (1996). Case
Law on UNCITRAL Texts (CLOUT). UN. Doc. A/CN.9/SER.C/ABSTRACTS/10. https://www.
uncitral.org/clout/clout/data/deu/clout_case_131_leg-1334.html?lng=en, p. 3.
24 UNCITRAL [4], p. 374, para. 1.
25 Schwenzer [8], p. 1133, para. 11.
35 Xi’an Yunchang Trading Co., Ltd … 289

Issue 2: Impact of the application of INCOTERMS on the risk allocation rules

of the CISG
As for the third batch of goods there were 1,800 bottles shipped by sea, and the carrier
issued a clean bill of lading. But the buyer found that 56 of them were completely
broken when receiving the goods. This issue relates to the distribution and under-
taking of the risk of cargo damage in the course of shipping. In view of this, there
are two relevant contractual and legal provisions in this case. (1) The applicable law
in this case is the CISG, and the CISG focuses on the passing of risk in Chapter 4.
(2) The trade term agreed by both parties is FOB TianJin, China. The common view
is, INCOTERMS do not replace the CISG’s provisions on delivery and the passing
of risk in toto, but merely supersede them in so far as they are mutually exclusive,
and for the rest, they function in tandem.26 Based on the high respect of the CISG
for the autonomy of will of the parties, if the contracting parties have chosen the
INCOTERMS, for the delivery and risk transfer, the rules of INCOTERMS may
deviate from or modify the rules of CISG.
The risk clause in Article 67(1) of the CISG is closely related to this case. It rules,
“If the contract of sale involves the carriage of goods, …If the seller is obligated
to deliver the goods to the carrier at a particular place, the risk shall not transfer to
the buyer until the goods are delivered to the carrier at that place”. FOB means that
the goods are considered delivered when the goods pass the ship’s rail at the seller’s
port of shipment. This means that the buyer has to bear all costs and risks of loss of
or damage to the goods from that point.27 The common understanding is that, the
Rules and the CISG are closely aligned insofar as terminology is concerned.28 The
Introduction to the 2000 edition of INCOTERMS explicitly states that, in drafting
the Rules, where possible, the same expressions as in the CISG have been used.29
But there are subtle differences between them, mainly on the place where goods
are delivered and risk is transferred. The notion of “handing over to a carrier” is a
broader concept than “loading onto the vessel”.30 Fortunately, the issue of risk-taking
in this case does not need to be dealt with in such fine detail. The court sentenced
that the risk should be borne by the buyer on the basis of the fact that the breaking of
the bottle occurred during the transport on the sea. Therefore, the loss of 56 broken
bottles shall be borne by the defendant, Antai Company.
In fact, the differences in content and the priority of application of INCOTERMS
and the CISG may result in varying results due to the different choices made by the
parties in different cases.

26 Coetzee [9], p. 1.
27 ICC. INCOTERMS 2000. U.N. Doc. A/CN.9/479. https://undocs.org/en/A/CN.9/479, p. 31.
28 Coetzee [10], p. 246.
29 ICC [11].
30 Coetzee [9], p. 12.
290 C. Zhang et al.

References

1. Linne AL (2008) Burden of proof under article 35 CISG. Pace Int Law Rev 20:31–44
2. Ferrari F (2000) Burden of proof under the United Nations convention on contracts for
international sale of goods (CISG). Int Bus Law J 5:665–670
3. Hu DH (2019) Application of legal rule of “Who Advocated That, Who Presents Evidence.”
Law Sci 03:92–105
4. United Nations Commission on International Trade Law (2016) UNCITRAL digest of case
law on the United Nations convention on contracts for the international sale of goods. https://
uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/cisg_digest_2016.pdf
5. Lu YF (2004) Outline of applicable laws’ theory and method. Jilin Univ J Soc Sci Ed 5:80–92
6. Skontzos AV (2018) The burden and standard of proof in model international procedural law:
dealing with the burden and standard of proof in international disputes. Unif Law Rev 23(3–
4):569–592
7. Gillette CP, Walt SD (2016) The UN convention on contracts for the international sale of goods:
theory and practice, 2nd edn. Cambridge University Press, Cambridge
8. Schwenzer I (2016) United Nations convention on contracts for the international sale of goods
(1980)—full text, Part III sale of goods, Ch. V Provisions Common to the Obligations of the
Seller and of the Buyer, S. IV Exemptions, Article 79. In: Schwenzer I (ed) Schlechtriem and
Schwenzer: commentary on the UN convention on the international sale of goods, 4th edn.
Oxford University Press, Oxford, pp 1129–1154
9. Coetzee J (2013) The interplay between incoterms and the CISG. J Law Commer 32(1):1–22
10. Coetzee J (2019) Incoterms® and the standardization of the international sales law. In: Saidov
D (ed) Research handbook on international and comparative sale of goods law. Edward Elgar
Publishing Limited, Cheltenham, pp 240–276
11. ICC (1999) INCOTERMS 2000: ICC official rules for the interpretation of trade terms. https://
www.cardel.ru/eng/mezhdunar/incoterms/

Ms. Chaolin Zhang is a Ph.D. candidate in international law at the law school of Nankai Univer-
sity, China. Prior to that, she obtained an LLM in International Economic Law from the School of
Law at the City University of Hong Kong, China. Her research interests lie in international trade
law, data law, and law and technology.

Dr. Peng Guo is a Lecturer in Law at RMIT University. At RMIT Dr. Guo teaches Contract Law
and Commercial Law to LLB and JD students. He has held visiting positions at different univer-
sities, including Warwick University, University of Amsterdam, and University of Osnabrück. He
has received scholarships awarded by renowned research institutions and international organisa-
tions, including the Max Planck Institute for Comparative and International Private Law, the Inter-
national Institute for the Unification of Private Law (UNIDROIT), the Swiss Institute of Compar-
ative Law, and the European Union. His research interests lie in international sale of goods, inter-
national commercial arbitration, comparative contract law, and law and technology. He actively
participates in Vis Moot and Alfred Deakin International Commercial Arbitration Moot.

Dr. Shu Zhang is a lecturer in commercial law at Deakin Law School, Deakin University
(Australia) and coached Deakin Law School’s Vis Moot team. Prior to joining Deakin Law
School, Dr. Zhang was a post-doctoral fellow in the Chinese International Business and Economic
Law Initiative, Law School, University of New South Wales (Australia). Her research interests
include international commercial law, dispute resolution and international arbitration, as well as
comparative contract law. She also completed internships at both the Australian Centre for Interna-
tional Commercial Arbitration (ACICA) and the Chinese International Economic and Trade Arbi-
tration Commission (CIETAC). She is also admitted to practice in New South Wales, Australia.
35 Xi’an Yunchang Trading Co., Ltd … 291

Dr. Zhang obtained her PhD in Law from University of New South Wales (Australia), and her
LLM, LLB and BA in Economics (Double Degree) from Peking University (China). She has
published various manuscripts with leading journals in this area, such as the Journal of Contract
Law, Vindobona Journal of International Commercial Law and Arbitration, China Quarterly.
Chapter 36
Baodeli Co., Ltd v Ceiec (Guangdong)

Shaotang Wang

Case Information
Case name: Baodeli Co., Ltd v Ceiec (Guangdong)
Buyer: Baodeli Co., Ltd
Place of Business: USA
Seller: Ceiec (Guangdong)
Place of Business: China
Details of First Instance:
Court: Guangzhou Intermediate People’s Court, Guangdong
Case No: (2004) Sui Zhong Fa Min San Chu Zi No 297
Judges: N/A
CISG applied: yes
Key the CISG provisions interpreted and applied: Articles 1(1) and 39(2).
Abstract
On 16 November 2000, the buyer, Baodeli Co., Ltd and the seller, Ceiec (Guangdong),
concluded a contract for the purchase of fresh ginger. The contract stipulated that the
first container should be shipped out at the end of November 2000, and the second
container should be shipped out one week after the first container was shipped; the
fresh ginger must meet food hygiene standards, not rotten, broken or sprouted; and
other matters. Two batches of ginger were shipped at Huangpu Port in Guangzhou
on 6 December 2000 and 13 December 2000.

S. Wang (B)
Nankai University, Tianjin, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 293

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_36
294 S. Wang

On 1 January 2001 and 17 January 2001, the buyer submitted the two batches
of ginger it received to the United States Department of Agriculture for inspection,
and the results showed that both batches of goods were of poor quality. Afterwards,
the buyer disposed of the batch of ginger as garbage. The buyer believed that Ceiec
(Guangdong)’s actions constituted a breach of contract, and they should assume
responsibility for the buyer’s losses.
The Intermediate People’s Court of Guangzhou Municipality held that the case
was a dispute over a contract for the international sale of goods. Since the plaintiff,
Baodeli Co., Ltd and the defendant, Ceiec (Guangdong), did not choose the law
applicable to the settlement of the contract dispute, the court, in accordance with
the doctrine of the most significant relationship, confirmed the law of the People’s
Republic of China as the applicable law for resolving the dispute in this case. The
court pointed out that the place of business of the plaintiff and the place of business
of the defendant were both contracting parties of the CISG, but the contractual
relationship between the plaintiff and the defendant on the sale of goods does not fall
within the scope of the exclusion of Articles 2 and 3 of the CISG. There are no clear
provisions on Contracts for the international sale of goods in China’s law. According
to Article 142(2) of the “General Principles of Civil Law of the People’s Republic
of China” (General Principles of Civil Law), the CISG is applicable to this case.
The court pointed out that the evidence showed that the plaintiff did not issue a
lawyer’s letter to the defendant on the quality of goods until 5 August 2003. According
to Article 39 of the CISG, the plaintiff failed to notify and claim the quality of the
goods to the defendant within two years from the date of actually receiving the two
batches of goods in this case. The plaintiff had lost the right to claim that the quality
of the two batches of goods was not in conformity with the contract.
In the end, the court held that the plaintiff’s request for the defendant to refund the
payment and compensate for the loss was unfounded and the court did not support
it.

Commentary to the Key Issues Related to the CISG

Issues
Issue 1: The Applicability of the CISG in China
Issue 2: The Buyer’s Duty to Notify Defects

Comments

Issue 1: The Applicability of the CISG in China

36 Baodeli Co., Ltd v Ceiec (Guangdong) 295

I. Chinese Practice Related to the Application of the CISG

At present, the application of CISG in China’s courts is not uniform. Some specific
practices involving Article 142(2) of the “General Principles of Civil Law” include:
1. Analysing whether the CISG is applicable in light of the parties’ place of busi-
ness first, and then clarifying whether the CISG should be applied in priority
according to Article 142(2). The civil law of the People’s Republic of China
shall apply if the CISG does not provide for it.1
2. Citing Article 142(2) first, to clarify whether the CISG is automatically appli-
cable and superior to domestic law, and then analysing whether the CISG is
applicable or not.2
3. First choosing China’s law as the governing law in accordance with the rules
of private international law, and then analysing whether the CISG is applicable
based on the place of business of the parties. According to Article 142(2), it is
determined that the CISG should be applied in priority.3
Of course, there are also a large number of cases in practice that do not invoke
Article 142(2), and directly apply the CISG. From the above list, it is clear that the
application of the CISG is not uniform in practice.
II. The Court’s Application of the CISG in this Case
A. Introduction to the Court Application Process in this Case
When analysing whether the CISG is applicable, the court reasoned as follows:
The Guangzhou Intermediate People’s Court hold that the case is a dispute over an inter-
national sale of goods contract... Because the plaintiff and the defendant did not choose
the law applicable to the settlement of contract disputes, according to the principle of the
most significant relationship, as the defendant’s place of business and where the contract
was performed are both in China, this court confirmed law of the Mainland of the People’s
Republic of China shall be the applicable law for resolving disputes in this case. Since the
United States where the plaintiff’s business office is located and China, where the defendant’s
business office is located, are both parties to the United Nations Convention on Contracts for
the International Sale of Goods, the contractual relationship established between the plaintiff
and the defendant does not fall under Articles 2 and 3 of the United Nations Convention on
Contracts for the International Sale of Goods. China’s domestic law does not have clearly
rules on international goods sales contracts. According to the spirit of Article 142(2) of

1 Repro Trade v Jinan Darin Machinery Co., Ltd.—Dispute of Contracts for International Sale of
Goods—Appeal, (2020) Lu Min Zhong No.947, Shandong High People’s Court; Shenzhen Future
Lead-Free Technology Co., Ltd. v Mirae Corporation—Dispute of Contracts for International Sale
of Goods—Appeal, (2017) Yue Min Zhong No.3022, Guangdong High People’s Court.
2 C&J Sheet Metal Co., Ltd. v Wenzhou Chenxing Machinery Co., Ltd.—Dispute of Contracts for

International Sale of Goods—Appeal, (2013) Zhe Shang Wai Zhong Zi No.144, Zhejiang High
People’s Court; Chentang (Beijing) Technology Co., Ltd. v Société des Anciens Etablissements
LUCIEN GEISMAR—Dispute of Contracts for International Sale of Goods—Appeal, (2019) Jing
02 Min Zhong No.12136, Beijing’s Second Intermediate People’s Court.
3 M.C.OR-Shyltd. v Hangzhou Fuming Refrigeration Technology Co., Ltd., Hangzhou Silk Garment

Import and Export Co., Ltd.—Dispute of Contracts for International Sale of Goods—First Instance,
(2012) Zhe Hang Shang Wai Chu Zi No.281, Hangzhou Intermediate People’s Court.
296 S. Wang

General Principles of Civil Law of the People’s Republic of China, “Where the international
treaties concluded or acceded to by the People’s Republic of China have different provisions
from the civil laws of the People’s Republic of China”, therefore, the relevant provisions of
the United Nations Convention on Contracts for the International Sale of Goods should be
applied in this case.

From the above analysis, we can see that the court adopted a four-step method
to determine whether the CISG was applicable or not. Firstly, it applied the rules of
private international law in choosing the applicable law. Secondly, it analysed the
legal system of China. Furthermore, it analysed the possibility of application of the
CISG, and finally, exceptions were excluded according to the relevant provisions of
the “General Principles of Civil Law”.
1. Applying the rules of private international law to find the applicable law
Initially, the court needs to identify the facts involved in the case and then determine
the legal relationship to which they belong. The court classifies and characterises civil
relations, determines the conflict norms and then determine the applicable law.4 The
court did not specify the law basis for identification in this case. In fact, China did not
have clear regulations related to identification until the 2010 “Choice of Law” was
promulgated.5 However, at that time, scholars in China had already formed a certain
consensus on identification.6 The relevant materials from “Choice of Law” infer that
lex fori may be frequently adopted in practice.7 The judge in this case may consider
this an international contract for the sale of goods based on the understanding of the
“Contract Law” and “Law on Economic Contracts Involving Foreign Interest” at that
time.
After clarifying that this case was a dispute over a contract for the international
sale of goods, the court accordingly cited Article 145 of “General Principles of Civil
Law”, which is a private international law rule concerning foreign-related contracts.8
The court successively analysed the choice of law by the parties to the contract and the
law of the country that has most significant relationship to the case. After confirming
that the parties in this case did not choose which law should govern any dispute, the
court concluded that the law of China should be applied as the applicable law based
on the principle of most significant relationship.
2. The relationship between treaties and China’s domestic laws
The court proposed that “according to the principle of most significant relationship,
this court affirms that…the law of the People’s Republic of China shall be the appli-
cable law for resolving the dispute in this case”. Subsequently, the court confirmed
the possibility of the CISG’s application by clarifying the country where the plaintiff
and defendant’s places of business were located.

4 Qi [1], p. 7.
5 Law of the People’s Republic of China on Choice of Law for Foreign-Related Civil Relationships,
Article 8.
6 Tian [2]. p. 69; Song [3], p. 196.
7 Qi [1], p. 9.
8 General Principles of Civil Law of the People’s Republic of China, Article 145.
36 Baodeli Co., Ltd v Ceiec (Guangdong) 297

From this, it can be inferred that, at least in the view of the court, the CISG is part
of China’s legal system, and it also reflects China’s understanding of the relationship
between treaty and domestic law to a certain extent. In fact, by observing China’s
practice, it can be said that treaties that are effective for China have constituted
an integral part of China’s legal system.9 When the applicable law is China’s law,
the treaties China has concluded should also be applied. It must be noted that the
Supreme People’s Court promulgated the “Several Issues Concerning the Trial and
Enforcement of Foreign-Related Civil and Commercial Cases” on 17 April 2000,
which stated that “the international conventions that China accessed should be given
priority, except for the clauses that China has declared reservations.”10 Some scholars
also put forward that China’s courts have a series of criminal, civil and commercial,
and intellectual property cases that directly apply international treaties, indicating
that judges have cited international treaties as the source of China’s law.11 Although
this can also reflect the relationship between treaty and China’s domestic law, this
is a one-step judgment through the direct application of the treaties concluded by
China by the court, rather than the two-step judgment following the guidance of the
above private international law rules.
3. Analyse the application of the CISG
The third step taken by the court was to analyse the application of the CISG with the
facts of this case. The court held that the United States, where the plaintiff’s place
of business was located, and China, where the defendant’s place of business was
located, are both parties to the CISG. The contractual relationship did not fall within
the scope of the exclusion of Articles 2 and 3 of the CISG. In other words, the court
analysed the case in accordance with Articles 1, 2 and 3 of the CISG.
4. Analysis of Article 142(2) of the “General Principles of Civil Law”
Finally, the court held that China’s domestic law does not clearly stipulate the provi-
sions of international goods sales contracts and, in accordance with Article 142(2),
it applied the CISG. Article 142(2) seems to have become a “general exception”,
which is the last procedure for the application of international treaties. International
treaties that comply with its provisions can be applied, while those that do not comply
cannot be applied. Article 142 is also an important basis for the application of the
CISG in practice.
B. Comment on the Analysis Method of this Case
The domestic academic circles have had very rich discussions on the application of
the CISG, and they have fully analysed the various situations in which the CISG is
applied in judicial practice and have also formed a relatively unified understanding:
that is, the CISG should be directly applied and superior to the rules of private

9 Zhao [4], pp. 190–193.

10 Several Issues Concerning the Trial and Enforcement of Foreign-Related Civil and Commercial
Cases, Fa (2000) No. 51, Article 2.
11 Song [5], p. 55.
298 S. Wang

international law. In this case, the mainstream view of the academic community is
critical of the court’s application of the CISG for the following reasons:
First, the CISG should be directly applied. It can be seen from Article 1 of the
CISG that the CISG should be “directly applied.” On the one hand, direct application
means that it can be directly cited by the court as the basis for judicial decisions.
On the other hand, it means that a certain regulation can directly adjust the foreign-
related civil and commercial legal relations in accordance with the regulation scope
set by the regulation without being guided by the rules of conflict of international
private law.12 In the case of meeting the applicable conditions stipulated in Article
1(1) (a) of the CISG, the courts of the contracting states of the CISG are obliged to
directly apply the CISG as the default governing law with regard to the matters of
the international sales contract for the sale of goods that fall within the scope of the
CISG adjustments.13
Second, the application of the CISG should precede the rules of private interna-
tional law. Article 1 of the CISG takes precedence over the application of the rules
of private international law. the CISG is not applied as a foreign law in the courts
of the contracting states. Within the scope of the CISG adjustment, the courts of the
contracting states have no discretion to apply the domestic law that has been replaced
by the CISG, nor can they first apply the private international law rules of the country
of the court.14 the CISG has given itself a position superior to the rules of conflict of
laws within a certain range.15
Third, the application of Article 142(2) of the “General Principles of Civil Law”
is incorrect. the CISG should be directly applicable, and Article 142(2) of General
Principles of Civil Law should not be used as a prerequisite for the application of the
CISG. Therefore, it is wrong to analyse further based on Article 142(2) of “General
Principles of Civil Law” after analysing the applicable conditions of the CISG.16
Fourth, there is a misunderstanding of Article 142(2) of “General Principles of
Civil Law”. Although Article 142(2) of “General Principles of Civil Law” stipulates
that in the case where the treaty concluded by China are different from the domestic
laws, the treaty shall be applied, what it conveys is the priority application of treaty,
and there is no need to examine whether the provisions of domestic law are consistent
with treaty.17
Fifth, the examination of the application of the CISG is not complete. Although the
court in this case examined Article 1 of the CISG and judged the scope of application
of the CISG, it still needs to analyse whether the parties exclude the application of
the CISG in accordance with Article 6 of the CISG.
In short, although there have been various ways of applying the CISG in judicial
practice, academics only recognise one mode: to determine whether the CISG can

12 Liu [6], p. 83.

13 Liu [7], p. 192.
14 Ibid.
15 Shi [8], p. 83.
16 Liu [6], p. 85.
17 Xuan and Wang [9], p. 129; Li [10], p. 113.
36 Baodeli Co., Ltd v Ceiec (Guangdong) 299

be applied directly in accordance with the relevant regulations of the CISG in the
disputes of international goods sales contracts.
III. How to Understand Article 142(2) of “General Principles of Civil Law”
Through the above analysis, we have seen that the Article 142(2) of the “General
Principles of Civil Law” is of great significance to the application of treaty in China.
This section will make a detailed analysis of Article 142(2). The “General Principles
of Civil Law” was passed in 1986. It is a separate civil law with the nature of
the general provisions of civil law. It establishes the basic principles of civil law,
civil subjects and civil juristic acts and agency systems for China, and establishes a
relatively complete civil liability system.18 Before the “Civil Code” (including the
“General Provisions of Civil Law”) came into effect, General Principles of Civil
Law, as the basic legislation in the field of civil and commercial matters, has played
a great role in building a loose civil law together with “Contract Law”, “Property
Law of the People’s Republic of China” and”Tort Law of the People’s Republic of
China”.19 Due to flaws in legislative technology, civil law theoretical research and
other reasons, the “General Principles of Civil Law” has certain defects. We can get
a glimpse from Article 142(2).20
A. Interpretation of Article 142(2)
In order to clarify the understanding of Article 142(2), we first start with its literal
meaning and proceed to explain it. The second paragraph has three parts, which
respectively stipulate the conditions for the application of treaty, the results of the
application of treaty, and the exceptions for the application of treaty. The combi-
nation of the first two parts makes it clear to us that under normal circumstances,
if the provisions of an international treaty are different from China’s civil law, the
provisions of the international treaty shall apply. Of course, there are two prerequi-
sites here: first, the international treaty must be concluded or acceded to by China;
second, from the content point of view, the content of the international treaty should
involve the civil field. The terminology of paragraph 2 is relatively clear, the concept
is relatively accurate, and it is basically unlikely that there will be discrepancies
in semantic understanding. The theoretical and practical circles have also formed a
basic consensus on this and have recognised that treaty can be directly applied under
such circumstances.21
However, the literal interpretation of the two paragraphs could hardly answer two
questions: First, does the international treaty apply only when the provisions are
different? Second, can treaty be applied when the provisions of China’s civil laws
and treaty are the same? The first question is indeed difficult to find a clear answer
from the text of this paragraph. If y can be derived from x, it is difficult for us to
conclude that y can deduce x based on this. But if we explain it from the language

18 Yang [11], p. 72.

19 Ibid, at p. 73.
20 Article 142 is stipulated in Chapter VIII, Application of law in foreign-related civil relations.
21 Liu [6], p. 86.
300 S. Wang

sense of Chinese, it is very easy to understand the expression in paragraph 2 as “only

applicable when” the provisions are different. In fact, this can also be corroborated
from the many practices of the court.
As for the second question, there are still some controversies in the theoretical
circle. Some scholars believe according to the principle of “argumentum a maiore ad
minus”, when the domestic law regulations are consistent with the CISG regulations,
the CISG is directly applied. This is more logical and more operable and feasible
in practice.22 However, some scholars believe that since international treaties are
applicable when the provisions are different, if the provisions of the international
treaties are the same as the provisions of the civil law, the provisions of the civil law
are of course applicable.23 Some scholars have also put forward that this provision
emphasises the priority of treaty when the two conflicts and is in line with China’s
international obligations. However, it cannot be concluded from this provision that
when the treaty is the same or similar to the provisions of China’s domestic law, the
treaty may not be applicable. The emphasis on priority in conflict is by no means
tantamount to denying the application of the CISG in other situations.24 It is difficult
to draw a clear conclusion from semantics alone, and there is no clear legal basis for
the application of international treaties when the provisions are the same.
Therefore, it is difficult to draw accurate conclusions based on the literal inter-
pretation of Article 142(2). Not only that the literal interpretation of this clause will
also cause some contradictions, which has also attracted many criticisms from the
academic circle. According to this clause, a judgment must be made before concretely
confirming whether the international treaty is applicable, that is, whether the provi-
sions of the international treaty are different from the domestic civil law. This will
bring new problems.
First, who will judge whether there are different regulations? It is the jurisdiction
of the legislature to judge whether an international treaty is in conformity with
China’s domestic law. However, China’s legislature has not made a judgment on the
consistency of treaty and domestic laws. In this way, the court will face a dilemma:
if the court applies the CISG, it means that there are “different provisions” between
the CISG and China’s domestic law, but it is not the court’s power to judge whether
there are “different provisions”; if the court does not apply the CISG, it will cause
China to violate its international obligations.25
Second, this provision does give people a wrong impression. It seems to impose the
burden of proof on those who advocate the application of treaty: Whoever advocates
the application of treaty should prove the existence of “different provisions”. Such
“burden of proof” is absurd, “and I am afraid it is unique in the world.”26
Third, what criteria are used to judge the difference between domestic law and
international treaty. Under what conditions can it be determined that the CISG is

22 Lin [12], p. 119.

23 Liang [13], pp. 10–11.
24 Liu [6], p. 86.
25 Liu [6], p. 86.
26 Han [14], p. 227.
36 Baodeli Co., Ltd v Ceiec (Guangdong) 301

similar or identical to the provisions of China’s domestic laws, and that similar or
identical conclusions can be drawn on the rights and obligations of the parties?27
Fourth, taking different provisions as the premise will deviate from the basic
spirit of international treaties and the original intention of States to sign international
treaties.28
Therefore, an interesting phenomenon has arisen in the academic circles, that
is, the importance of Article 142(2) is generally recognised, and Article 142(2) is
regarded as an important basis for China to apply international treaties, but the
academic circle does not accept the content directly expressed in the text of this
article. Therefore, the academic circles have proposed to understand according to its
purpose, that is, according to the “spirit” of Article 142(2).
B. Using Systematic Interpretation and Teleological Interpretation to Under-
stand Article 142(2)
The academic circles have reached a more consistent conclusion on the purpose
of this article, that is, Article 142 is the basis for the application of treaty. As a
prerequisite, it clearly affirms that the treaties that China has concluded or accessed
to are China’s “source of law”; as the main normative purpose of this paragraph,
it stipulates the level of effectiveness within the source of China’s civil law: treaty
are higher than the general civil law.29 That is to say, this clause is formulated to
clarify two purposes: the treaty that China has accessed to or concluded are China’s
important source of law and an important basis for judicial judgment; treaties can be
applied in preference to domestic laws.
However, the method of systematic Interpretation should also be used to assist the
understanding of its purpose. As mentioned above, the “General Principles of Civil
Law” was the basic law of China’s civil legal system. Article 142 of the “General
Principles of Civil Law” stipulates in its Chapter 8 “Application of Law in Civil
Relations Concerning Foreign Affairs”. Therefore, Article 142 is the basic legal
basis for China’s courts to apply civil and commercial treaties. Even if other civil
and commercial laws do not have provisions on the application of treaty, the courts
can still apply corresponding treaty in accordance with the provisions of Article
142.30 In this way, at least in the scope of civil matters, treaties are superior to the
law as a general rule.
So now we can at least make a preliminary judgment. Article 142(2) is an important
legal basis for the court to deal with the application of treaty when dealing with
foreign-related civil and commercial cases. Its importance is to indicate the priority
of treaty, regardless of whether the domestic civil laws and regulations are the same
or not.

27 Chen [15], p. 109.

28 Song [16], p. 107.
29 Han [14], p. 227.
30 Che [17], p. 6.
302 S. Wang

C. Understanding of the nature of Article 142(2)

The next question is how should we understand the nature of this clause? There are
two views on the nature of Article 142(2): one considers this paragraph to be civil
substantive law; the other considers it to be the source of private international law
and belongs to conflict of laws rules.
The former holds that Article 142(2) is a civil substantive law, which is stipulated
in Chapter 8 of “General Principles of Civil Law” only because the object of its
adjustment belongs to foreign-related civil legal relations. “Choice of Law” that
entered into force in 2011 did not provide rules for the application of treaty for
the same reason.31 The latter believes that Article 142 is understood as the source
of China’s private international law. As the source of private international law, it
is also the legal basis for judicial organs to apply the types of rules when hearing
foreign-related civil cases. It should not be included in the category of applicable law
and should not be selected and applied by conflicting norms.32 Correspondingly, the
former understanding means that Article 142 can only be applied after China’s law
is selected as the applicable law.
Therefore, when dealing with foreign-related civil and commercial cases, if the
Article 142(2) is applicable, it might be used as a private international law rule
to assist the court in finding the applicable law; or it might be regarded as a civil
substantive law and be applied after Chinese law is the applicable law. In judicial
practice, these two kinds of understandings are both reflected. When we look back
at this case, the application of Article 142(2) in this case is placed in the fourth step,
that is, Article 142(2) was applied by the court after applying the rules of private
international law to determine the applicable law as China’s law. Article 142(2) is
obviously regarded as a civil substantive law.
D. Impact on the CISG application
Although we have concluded that Article 142(2) is an important basis for China to
apply treaty in civil law. But what is interesting is that when the CISG was applied,
the mainstream view in the academic circle was that Article 142(2) should not be used
as the basis under any circumstances. In other words, regardless of the nature of the
interpretation of this clause, it cannot be used as a prerequisite for the application of
the CISG. However, when Article 142(2) is adopted as a rule of private international
law, the reasons are still sufficient. When it is understood as civil substantive law,
the academic interpretation is slightly pale. On the one hand, when analysing Article
142(2), it is believed that the interpretation should not be based on its content alone.
It should be noted that its purpose is to express the priority application of treaty; on
the other hand, it is believed that the court only paid attention to its content when
invoking this clause in judicial practice. It is undeniable that some cases emphasised
the difference between domestic civil law and treaty when citing this paragraph (such
as this case), but there are also some cases that directly apply the CISG after citing
this clause, without emphasising the content of the clause. Obviously, these courts

31 Liang [13], pp. 10–11; Wang [18], p. 204.

32 Huang [19], p. 127.
36 Baodeli Co., Ltd v Ceiec (Guangdong) 303

only clarify the symbolic nature of Article 142(2). Therefore, the reason for denying
the application of Article 142 is difficult to stand on at this time.
Since the academic community denies the application of Article 142(2) when the
CISG is involved, why is there still so much application in practice? Apart from the
factors often mentioned by scholars (the quality of judges, understanding of Article
142(2), insufficient understanding of the CISG, etc.), are there other more reasonable
reasons?
This comment believes that since the academic circles have reached a unified
consensus and recognised that Article 142(2) is more declarative than the content
expressed in the text, the court can clearly receive the corresponding information.
Then, taking Article 142(2) as a prerequisite for the application of the CISG is to use
it as a substantive civil law, and to express the priority of treaty in the spirit it conveys,
and to further affirm that the CISG can be directly applied. The second is that we
should also pay attention to China’s specific judicial system and the reality of the
court’s judicial decisions. For example, in 2009, the Supreme People’s Court promul-
gated the “Regulations of the Supreme People’s Court on the Citation of Laws, Regu-
lations and Other Normative Legal Documents”, requiring that the People’s Court’s
judgment documents should cite relevant laws, regulations and other normative legal
documents in accordance with the law as the basis for judgment.33 The judge will
consider whether he complies with the relevant regulations if he has not cited the
relevant domestic law.
E. Future prospects
Indeed Article 142(2) has certain problems, it brings certain difficulties to practice.
However, its subsequent development has made the application of treaty (including
the CISG) more confusing. This comment has reviewed the applicable rules of treaty
in China’s civil and commercial matters. We can see that after entering the era of
“Civil Code”, Article 142(2) has completely disappeared. Not only that, the “Civil
Code” era did not make any provision for the application of treaty in other ways. In
other words, up to now, the application of treaty in the field of civil and commercial
affairs lacks uniform regulations. This may be because China’s legislature seems to
have not made up its mind, and the academic community has not been able to provide
sufficient theoretical support for this.34 It is still unclear how the international treaty
will be applied in the future.
So, in the future, what kind of impact will it have on the application of the CISG?
This comment believes that the CISG will still be reasonably applicable. First of all,
in practice, there are cases in which Article 142(2) is not invoked and the CISG is
reasonably applied. Secondly, in practice, there are cases in which Article 142(2)
is invoked but has little effect on the application of the final applicable law. In the
above two cases, the CISG is applied either through the autonomy of the parties’
will, or choose China’s law as the applicable law through the principle of the most

33 Regulations of the Supreme People’s Court on the Citation of Laws, Regulations and Other
Normative Legal Documents, Fa Shi (2009) No. 4, Article 1.
34 Che [17], p. 3.
304 S. Wang

significant relationship and then apply the CISG, or the CSIG is directly applied in
accordance with the provisions of Articles 1 to 6 of the CISG. In this case, the spirit
conveyed by Article 142(2) is applied. Furthermore, according to the guiding cases
announced by the Supreme People’s Court, we can see that the Supreme People’s
Court recognises the direct application of the CISG.35 Finally, the “notification” has
not expired. Although it is unlikely to be used in practice, it still provides a basis for
the actual application of the CISG to a certain extent.
In fact, Article 142(2) demonstrates the priority application of treaty in China in the
form of civil substantive law, which has a very strong declarative effect. At the same
time, it also potentially expresses the recognition that treaty is part of China’s legal
system. This regulation has existed for more than 30 years, and this understanding
has been implemented in the theoretical and practical circles. Deleting Article 142(2)
in the Chinese Civil Code will not affect China’s understanding of the relationship
between treaty and domestic laws. The Supreme People’s Court recognises that the
direct application of the CISG may also be based on the judgment of the status of
international treaties and does not need to be supported by the provisions similar to
Article 142.36
In short, deleting Article 142(2) may not be a bad thing for the application of the
CISG, but may promote the direct application of the CISG.
Issue 2: The Buyer’s Duty to Notify Defects
This case also involves the application of Article 39(2) of CISG, which clarifies that
the buyer must notify the seller the lack of conformity of the goods within two years
after actual receiving, otherwise the corresponding rights will be lost. Although the
court in this case made a decision directly in accordance with Article 39(2), it is a
pity that the court did not delve into this issue rather than only applying this article. It
is, therefore, unable to make further analysis on the court’s judgment in this regard.

References

1. Qi XQ (2010) Several disputes and settlements during the drafting of the "Law of the People’s
Republic of China on Choice of Law for Foreign-related Civil Relationships”. Law Sci Mag
2:7–11
2. Tian LX (1993) On the issue of identification in private international law. Tribune of Polit Sci
Law 4:71–77
3. Song X (2009) The object of identification and the development of identification theory. Chin
J Law 2:193–206
4. Zhao JW (2010) The status of international treaties in China’s legal system. Chin J Law 6:190–
206

35 Supreme People’s Court: Guiding Case No. 107 “Sinochem International (Overseas) Pte Ltd
v ThyssenKrupp Metallurgical Products GmbH—Dispute of Contracts for International Sale of
Goods—Appeal”.
36 Of course, this comment still hopes that the legislature will speed up the formulation of relevant

rules so that the application of international treaties can be guided by law.

36 Baodeli Co., Ltd v Ceiec (Guangdong) 305

5. Song JL (2015) Several issues concerning the domestic application of international treaties.
People’s Judicature 5:51–55
6. Liu Y (2009) On the direct application of “United Nations Convention on Contracts for the
International Sale of Goods” in Chinese courts. Law Rev 5:83–88
7. Liu Y (2019) On the application of “United Nations Convention on Contracts for the
International Sale of Goods” in Chinese courts. Sci Law 3:191–201
8. Shi H (2015) On the court’s application of the “United Nations Convention on Contracts for
the International Sale of Goods”-the connection with the conflict of law rules. Law Sci Mag
12:81–88
9. Xuan ZY, Wang YY (2012) The application of the “United Nations Convention on Contracts
for the International Sale of Goods” by Chinese courts. Law Sci Mag 5:125–131
10. Li W (2017) On the application of international civil and commercial treaties—from the
perspective of the relationship between international civil and commercial treaties and private
international law. The Jurist 4:107–115+178
11. Yang LX (2018) From general principles of civil law to general provisions of civil law: a
historical leap of contemporary Chinese civil law. Soc Sci China 2:72–97
12. Lin N (2017) A study on the application of the “United Nations Convention on Contracts for
the International Sale of Goods” by Chinese courts. Presentday Law Sci 4:114–121
13. Liang HX (2016) General provisions of the civil law of the People’s Republic of China (Draft)”:
interpretation, comments and suggestions for revision. ECUPL J 5:5–24
14. Han SY (2016) Application of the CISG in China international commercial arbitration. China
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International Sale of Goods” in China. Law Sci 10:107–118
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the International Sale of Goods” and Its practice in China. Law Sci 1:103–110
17. Che PZ (2020) The application of international treaties and conventions in China After the
promulgation of the “Civil Code.” China Rev Adm Just 6:1–15
18. Wang MN (2021) The legislation mode of the status of international treaties in the age of civil
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Shaotang Wang is a Lecturer in Law from Law School of Nankai University. He holds a Master
in Law and a PhD from Peking University. He specilializes in international investment law and
international trade law. He has published related articles in some core journals in China.
Chapter 37
The Aterlight Electronic Control &
Audio Systems Limited v the Liquidating
Group of Zhuhai Zhongyue New
Communication Technology Co., Ltd.,
Etc.

Qingkun Xu and Xintong Li

Case Information
Case Name: The Aterlight Electronic Control & Audio Systems Limited v The
Liquidating Group of Zhuhai Zhongyue New Communication Technology Co., Ltd.,
etc
Seller (Appellee): Zhuhai Taili Dimming Equipment Co., Ltd. (hereinafter referred
to as “Taili Company”)
Place of Business: China
Buyer (Defendant/Appellant): The Aterlight Electronic Control & Audio Systems
Ltd. (hereinafter referred to as “T company”)
Place of Business: New Zealand
Shareholder (Plaintiff/Appellee): The Liquidating Group of Zhuhai Zhongyue New
Communication Technology Co., Ltd. (hereinafter referred to as “The Liquidating
Group”)
Details of First Instance
Court: Intermediate People’s Court of Zhuhai City of Guangdong Province
Date of Decision: 2004
Case No: (2003) Zhu Zhong Fa Min Si Chu Zi No 94
Judges: N/A

Q. Xu (B)
Shanghai University of Politics and Law, Shanghai, China
e-mail: [email protected]
X. Li
Dalian Maritime University, Dalian, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 307

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_37
308 Q. Xu and X. Li

Details of Second Instance:

Court: High People’s Court of Guangdong Province
Date of Decision: 11 January 2005
Case No: (2004) Yue Gao Fa Min Si Zhong Zi No 274
Judges: Yang Huiyi (Presiding Justice), Liu Hanping (Justice), Li Yunchao (Justice)
CISG Applied: Yes
Key CISG Provisions Interpreted and Applied: Unclear
Abstract
In 1994, Zhuhai Zhongyue New Communication Technology Co., Ltd. (hereinafter
referred to as Zhongyue Company) established the Taili Company, a Chinese-foreign
contractual joint venture, in Zhuhai City with T Company. The co-operation lasted for
10 years, and Rex Gilfillan served as the chairman of Taili Company. Since then, most
of the products of Taili Company were exported to T Company; however, no payment
was made by T Company for the goods involved. By August 2002, the payments
owed had reached a total amount of RMB¥4,091,025.51 according to the plaintiffs.
In order to recover the payment, Taili Company filed a lawsuit against T Company on
3 November 2002, which was withdrawn by Rex Gilfillan as the legal representative
of Taili Company. The withdrawal was approved by the Intermediate People’s Court
of Zhuhai City of Guangdong Province, with the trial court of this action (hereinafter
referred to as “the trial court”) on 30 June 2003.1 For the legitimate interests of
the joint venture, Zhongyue Company, as a shareholder, brought a derivative action
against T Company for the payment of RMB¥4,091,025.51 and the corresponding
interest.
This case involved foreign parties and the transaction involved foreign elements.
To be specific, T Company is a New Zealand corporation, while Taili Company is a
Chinese-foreign contractual joint venture, and the goods involved were sold to New
Zealand as well. As for such apparent foreign contacts, the courts of the two instances
could easily classify the case as a dispute involving foreign elements. Therefore,
among other issues,2 the choice of law became a core matter of prime importance.
Although there were no written contract and no agreement on the applicable law
in advance, the trial court held that the existing evidence was sufficient to prove a
valid contractual relationship between the parties and that Chinese law, which was
most closely related to the parties and the commercial transaction, should apply
in accordance with Article 145(2) of the General Principles of Civil Law of the
People’s Republic of China (1986) (hereinafter referred to as “GPCL 1986”). Aside
from providing for the relevant Chinese law and the facts of the case, the trial court
allowed this shareholder derivative action. According to Articles 62 and 129 of the
Contract Law of the People’s Republic of China (hereinafter referred to as “Contract

1 (2002) Zhu Zhong Fa Min Si Chu Zi No. 14.

2 The other issues are as follows: Whether there is a valid contractual relationship between the
parties; Whether the liquidating group has the right to bring a shareholder derivative action; How
to calculate the specific amount of payment and interests; The statute of limitations.
37 The Aterlight Electronic Control & Audio Systems … 309

Law 1999”), and referring to the market price of the place of performance at the
time of its conclusion, as well as the statute of limitations in this case,3 the trial court
determined that the defendant had to pay the amount of US$281,710 and HK$14,441,
as well as corresponding interest, to the plaintiffs.
T Company then appealed to the High People’s Court of Guangdong Province
(hereinafter referred to as “the court of appeal”) on the grounds that the decision of the
first instance was wrong for both the determination of the facts and the applicable law.
T Company appealed and argued that New Zealand was both the place of performance
and the place of business of the defendant; therefore (as the principle of the closest
connection), the law of New Zealand shall govern the issues. Moreover, since this case
involves contracts for the international sale of goods, the United Nations Convention
on Contracts for the International Sales of Goods (hereinafter referred to as CISG)
and the INCOTERMS 2000 shall also apply. However, the court of appeal denied
part of T Company’s request to apply the law of New Zealand because the place
of business of the seller and the place of performance were both in Zhuhai City
(China), so Chinese law has the closest connection to the transaction and the parties
and should be applied to the case under certain provisions. Nonetheless, the court of
appeal also confirmed the application of CISG with the holding that the provisions
of CISG should also apply to this case, except for the terms reserved by China, in
accordance with Article 142(2) of the GPCL 1986. As for the other issues, the court
of appeal upheld the decision of the trial court with a subtle supplement.
Finally, the court of appeal denied the appeal and maintained the trial judgment.

Commentary to the Key Issues Related to the CISG

Issues
The major issue of this case is the choice of law which determines the resolution
of other issues and balances the rights and interests of the parties. According to the
judgments, the following four aspects relating to the choice of law are worth noting:

3 The action against T Company brought by Taili Company on 3 November 2002 suspended the
statute of limitations. Therefore, as for the statute limitations of a contract for the international sale
of goods is four years, the plaintiff’s claims before 3 November 1998 were not supported by the
court.
310 Q. Xu and X. Li

Issue: 1 The role of the conflict of laws in foreign-related cases

Issue: 2 The application of the principle of the closest connection
Issue: 3 The application of CISG and the choice of law
Issue: 4 The legal basis for the application of CISG in Chinese courts

Comments

Issue: 1 The role of the conflict of laws in foreign-related cases: false conflict or
true conflict?
For a considerably long time, Chinese courts have adhered to a consistent position of
applying the choice-of-law rules ex officio and initiating the choice-of-law process
by the determination of “foreign elements”. That is, once a case has a foreign contact
of any type, such as the nationality of the parties, place of subject matters, or the
facts affecting the rights and obligations of parties, the judges presume that there is
a true conflict of laws. The present case has this issue. However, it is worth noting
that the foreign elements do not mean that the parties always have disputes over
the applicable law. Even if the parties choose the laws of different jurisdictions, the
content of the laws regarding a particular issue may be the same. In terms of the
present case, there is actually no conflict among the contract laws of New Zealand,
Contract Law 1999 and the CISG, with respect to the specific issues.4 It is common
practice in Chinese courts to presume a conflict of laws,5 which is obviously different
from the practice of common law systems.
The conflict of laws refers to the difference in the laws of different states or
countries in a case that has a connection to at least two jurisdictions.6 Although there
is a certain conceptual consensus on the conflict of laws in various countries,7 its
practical effect is far from being consistent. In common law countries, the conflict of
laws is a matter of prime importance for the choice of law. For example, American
judges do not choose laws or apply foreign laws ex officio, and a case involving
“foreign factors” will not necessarily lead to the choice of law. Only when parties
plead and prove the differences of the laws involved which may cause a significant

4 For example, regarding the formation, none of the laws requires a written form. See Article 10
of the Contract Law 1999, Art.11 of CISG; New Zealand is a common law country that traces the
origins of its contract law to the laws of England. The early common law of contract did not require
a written form, except for special contracts, such as the contracts involving the land or guarantees.
See Willmott, Christensen, Butler & Dixon [1]. Recently, the legislation on contract of New Zealand
shows the same position as well; see New Zealand Contract and Commercial Law Act 2017, Art.
125.
5 Another similar case is CMA CGM vs. Shandong Eastern International Trade Co., Ltd. (2002)

Lu Min Si Zhong Zi No. 20 (In this case, the parties could not agree on applying the Maritime
Law of China or Russia. However, with respect to the issues of “whether the carrier’s delivery of
goods without the original bill of lading constitutes a breach of contract”, and “whether such a
breach of contract (if established) is limited by the damages limitation”, the maritime laws of the
two countries are basically the same.).
6 Garner [2].
7 Han [3].
37 The Aterlight Electronic Control & Audio Systems … 311

influence on the substantive outcome, with respect to specific issues, will the judges
have to decide the issue of choice of law. Otherwise, based on the territorialism of
common law, the American judges would merely apply the law of the forum.
B Currie, who proposed the governmental interests analysis theory, categorised
the three types of conflicts as true conflict, false conflict, and unprovided-for cases,8
by examining the policies and the interests in realising the legal policies of the
jurisdictions involved.9 Currie believed that judges need to consider the choice of
law only when there is a “true conflict”, which means that the laws of different
jurisdictions are different and two or more jurisdictions have an interest in having
their law to govern the case. In a case involving a “false conflict”, which means that,
even though a case involves two or more jurisdictions, only one jurisdiction has an
interest in allying its laws, judges have to apply the law of the interested jurisdiction.10
Later, American scholars enlarged the scope of the false conflict definition to include
where the potentially applicable laws either are the same or would produce the same
decision in the case.11 Whatever rules or methods might apply in foreign-related
cases, the judges should first eliminate a false conflict.12 Further, emphasising the
concept and types of the conflict of laws also implies that the core concern of the
American modern choice-of-law theory and practices is the contents and policies
of the conflicting laws. Although civil law countries do not adopt Currie’s theory,
the situations in which the potentially applicable laws either are the same or would
produce the same decisions have usually been excluded from the scope of the conflict
of laws by some statutes.13
Thus, the Chinese practice can be improved. After determining that a case is
foreign-related, the courts should further decide if there is a true conflict of laws.
If the laws of relevant jurisdictions are the same, or the different laws will lead to
the same result, it is not necessary to make a choice of law. As for this case, the
court of appeal held that, in accordance with Article 142 of GPCL 1986, the relevant
provisions of CISG should also govern the issues. However, as the appellee claimed,
the provisions of Contract Law 1999 are basically consistent with the ones in CISG,
with respect to specific issues. Moreover, Article 142 of GPCL 1986 requires that
the international treaties shall apply with priority on the grounds that its provisions,
except for the reservations by China, differ from those of the Chinese civil law.
However, in this case, there is no such difference in provisions.14 Therefore, the

8 In such cases, no jurisdiction has an interest in applying its law. See Currie [4].
9 Currie [4].
10 Ibid.
11 Garner [2].
12 Weinberg [5], p. 2011.
13 For example, Rome I Regulation 2008, Art. 1 (1) “This Regulation shall apply, in situations

involving a conflict of laws, to contractual obligations in civil and commercial matters”.

14 For example, when the price is not quite clear, both the Contract Law 1999 and CISG stipulate

the market price of similar goods at the time of the conclusion; see, respectively, Art. 62 (2) of
Contract Law 1999 and Art. 55 of CISG.
312 Q. Xu and X. Li

judges should have indicated that there was no conflict of laws involved in this case,
then the decision of applying Chinese law would be more convincing.
Issue: 2 The application of the principle of the closest connection: grouping of
contacts or policy analysis?
In this case, the parties did not choose the applicable law before the trial, nor did
they reach an agreement on the applicable law during the trial. Therefore, the judges
reached the conclusion of applying the Chinese law according to the principle of
the closest connection. However, as to the reasoning for this judgment, the judges
did not make an appropriate analysis of how to decide on the place which was most
closely connected with the case.
The principle of the closest connection was considered to be derived from the cases
of Auten v Auten15 and Babcock v Jackson,16 which were decided by the New York
court of appeal in 1954 and 1963, respectively. On the basis of such cases, Professor
Willis L M Reese established the doctrine of the most significant relationship on
which the Restatement (Second) of Conflict of Laws was compiled. Meanwhile,
the doctrine had a significant influence on the legislation of choice of law in various
countries, including the civil law countries. However, it is a great challenge for courts
to determine which state has the closest connection with a dispute or parties. This is
also the case in the United States. The American practice had undergone a transition
from the method of “grouping of contacts” to the one of “policy analysis”. As to
the former, it is also known as the doctrine of the centre of gravity, which was first
adopted in the Auten v Auten case, and this replaced the traditional rule of lex loci
celebrationis in the contract. However, in Babcock v Jackson, the judge analysed not
only the contacts, but also the policies and interests of the relevant jurisdictions to
decide which state had the most significant relationship to the issue and parties. The
decision of Babcock v Jackson, a precedent of New York State and a leading case in
the American Conflicts Revolution, had a far-reaching influence on judicial practice
all over the United States. After Babcock, the decision of Tooker v Lopz17 manifestly
exhibited the opinion of the New York court of appeal regarding the method, that
is, “the basis and core of the new method (the most significant relationship) should
be policy analysis, and the contacts, as the medium to determine the geographical
affiliation, should not be given a grouping effect”. This is mainly because the theory of
grouping of contacts may mislead the judges into calculating the number of contacts
and may reduce the stability and predictability of the choice of law. After all, the
contacts gather or scatter differently in different cases. The precedent could hardly
presume in advance which contact, or contacts, affected the choice of law. Moreover,
different panels had various positions on this issue as well. In addition, by only
calculating the number of contacts, it isolated the contacts analysis from the issues
in the wrong way.

15 Auten v. Auten. 308 N. Y. 155 (1954).

16 Babcock vs. Jackson. 191 N.E.2d 279 (1963).
17 Tooker vs. Lopz. 24 N.Y. 2d 569 (1969).
37 The Aterlight Electronic Control & Audio Systems … 313

However, it is quite difficult for judges to analyse and even compare the policies of
different jurisdictions. Therefore, although the European conflicts law introduced the
principle of the closest connection, the method of policy analysis has been applied in
a limited scope. As for the choice-of-law rules for contracts, the doctrine of character-
istic performance has been introduced to provide more certainty for the application
of the principle of the closest connection,18 which in turn has deeply influenced
the Chinese judicial practice. As the primary judicial interpretation by the Supreme
People’s Court of PRC (hereinafter referred to as “the SPC”), both the Response
of the Supreme People’s Court to Certain Questions Concerning the Application of
the Foreign Economic Contract Law 1987 (the Response 1987) and the Rules of
the Supreme People’s Court on the Relevant Issues concerning the Application of
Law in Hearing Foreign-Related Contractual Dispute Cases in Civil and Commer-
cial Matters 2007 (the Rules 2007) stipulated that, for certain types of contracts, the
doctrine of characteristic performance is used to determine the place of the closest
connection.19 As for the Law of the People’s Republic of China on Choice of Law
for Foreign-related Civil Relationships 2010 (the Law of Choice of law 2010), both
the principle of the closest connection and the doctrine of characteristic performance
are used to determine the applicable law for contracts in the absence of a choice of
law by parties.20
For the present case, the trial court did not provide any analysis of their method
to determine the state which had the closest connection with the dispute, while the
court of appeal made a simple reasoning that “as the place of the seller’s business
and the place of performance were both in China (Zhuhai City), the Chinese law is
most closely connected with the case”. It is worth noting that, when the case was
appealed, there were no effective statutes or judicial interpretations on the method
of the closest connection, but the conclusion of the court of appeal was in line with
the constant judicial practice of the Chinese courts.21 However, the reasoning of
the judgments was far from convincing. In fact, considering that the doctrine of
characteristic performance may not be employed to determine the place of closest
connection for all cases,22 the choice of law of the EU provides escape clauses

18 See the Rome Convention 1980, Art. 4(2); the Rome Regulation I 2008, art. 4(1) & (2).
19 See, respectively, the Response 1987, II(6); the Rules 2007, rule 5.
20 See the Law of Choice of law 2010, Art. 41.
21 As to the sales contracts, the sellers were usually presumed to be the parties of characteristic

performance, so the laws of the place of seller’s residence or of the seller’s business should be
applied. See, respectively, the Response 1987, II (6)(1); the Rules 2007, rule 5(1).
22 For example, in the case of “Definitely Maybe (Touring) Ltd. vs. Marek Liebererg Konzertagentur

GmbH, ([2001] 1 WLR 1745.)” decided by the High Court of England and Wales, the United
Kingdom is the place of the characteristic performance, but the judge concluded that “compared to
the United Kingdom, Germany is obviously more closely related to the case”, with the reasoning
that “Germany was the place of actual performance for the designated service. The contract payment
will be calculated in Deutsche Mark and taxed at the German tax rate. However, the United Kingdom
had no more contacts to the contract, except for the place of plaintiff’s residence and the place of
payment”.
314 Q. Xu and X. Li

(the principle of closest connection) for judges to achieve individual justice,23 which
deserves the attention of the Chinese courts. If the judges, on the basis of determining
the place of characteristic performance, could have properly analysed the legal policy
and contacts involved in the case to confirm the conclusion of choice of law, the
reasoning would be more convincing.
Issue: 3 The application of CISG and the choice of law: conflicts method or
substantive method?
The present case reflects that the conflicts method, that is, selecting the applicable
law in accordance with choice-of-law rules, was commonly employed by the Chinese
courts in hearing cases with foreign elements. However, since the birth of the conflict
of laws, the conflicts method has always been accompanied by the substantive method
which is to establish the uniform substantive rules for the foreign-related cases. The
slowly developed substantive method is dedicated to eliminating the conflict of laws
thoroughly. The choice of law has yielded an astonishingly rich accumulation of
theories and approaches in the past; however, the uniform substantive rules are quite
limited in quantity, scope of coverage, and universal effectiveness.24 However, the
CISG is a representative of the successful international uniform substantive rules.
Nevertheless, the relationship between the substantive method and the conflicts
method in foreign-related cases is worthy of reflection. The past Chinese judicial
practices involving CISG were mainly used to determine the applicable law (the
substantive law of a certain domestic country or region) through the choice-of-law
rules, and the courts may apply the relevant provisions of CISG, based on Article 142
of GPCL 1986. In other words, the substantive method may not replace the conflicts
method directly, but may play a supplementary role in the decision. Moreover, Article
142 of GPCL 1986 stipulated that an international treaty should apply with priority
on the condition that any of its provisions, except for the reservations by China,
differed from those in the Chinese civil laws. Therefore, the Chinese courts, such as
the court for the case discussed, did not actually apply CISG, as no conflicts exist
with respect to certain issues, although the courts believed that CISG should have
applied.
The recent decisions by the SPC have also implied a change to the new judicial
method that the CISG is being applied directly in the cases involving the contracts
for the international sale of goods. A typical case heard by SPC is the Thyssen
Krupp Metallurgical Products GmbH v Sinochem International (Overseas) Pte. Ltd.
(hereinafter referred as to the “Thyssen Krupp”),25 in which only the CISG was
applied although the parties chose the law of the New York State in the contract.
The SPC held that the contract fully fell into the scope of CISG, and the parties

23 See the Rome Convention 1980, Art. 4(5); the Rome Regulation I 2008, art. 4(3).
24 This is mainly because that well unifying or coordinating the rules, policies, and even interests
of different jurisdictions in the civil and commercial affairs is the condition of the establishment
and operation of the uniform substantive rules. However, the gaps in political systems, economic
development, and cultural traditions among the different jurisdictions are difficult to bridge, which
lead the corresponding civil and commercial legal systems to be far from unified.
25 (2013) Min Si Zhong Zi No. 35.
37 The Aterlight Electronic Control & Audio Systems … 315

did not expressly exclude the application of CISG. For the issues that fell out of
the scope of the CISG, the law chosen by the parties should apply. It seems that the
conflicts method was inferior to the direct application of the CISG in this case. It is
worth noting that the Thyssen Krupp case, as a guiding case, has a binding influence
on the lower courts in terms of the application of CISG because of the regime of
guiding cases.26 Assuredly, as Thyssen Krupp emphasised, the application of CISG
will not completely exclude the choice-of-law rules, especially when CISG cannot
fully cover the issues in the individual case. Besides, with respect to certain issues,
if the relevant terms of CISG have been reserved by China, the law chosen by the
choice-of-law rules will be applied undoubtedly.
Issue: 4 The legal basis for the application of CISG in the Chinese courts: is
Article 142 of GPCL 1986 indispensable?
During the period when the present case was tried, Article 142 of GPCL 1986 was
employed as the grounds for the Chinese courts to apply the international treaties.
In fact, the GPCL 1986 had played a significant role in dealing with civil relations
with foreign elements for a long time, and Article 142, focusing on the applica-
tion of international treaties in domestic courts, had drawn much attention from the
Chinese scholars of private international law, and some of them treated Article 142
as the clause of the status of the international treaty.27 Moreover, Article 142 had
also affected the rules on the application of international treaties in several special
laws.28 The Law on Choice of Law 2010 replaced several provisions of GPCL 1986,
while Article 4 of the Interpretations of the Supreme People’s Court on Several
Issues Concerning Application of the Law of the People’s Republic of China on
Choice of Law for Foreign-Related Civil Relationships (I) (hereinafter referred to as
“2012 Interpretations (I)”) absorbed the part of Article 142 regarding the application
of international treaties.29 However, Article 1260 of the Civil Code of the People’s
Republic of China (hereinafter referred to as “Civil Code”) announced the invalida-
tion of GPCL 1986. The major contents of GPCL 1986 had been absorbed by the
Civil Code, except for the provisions on civil relations with foreign elements. Based
on the change, the SPC deleted Article 4 of the 2012 Interpretations (I), which meant
that no rules were provided for the application of international treaties in Chinese
courts after the Civil Code became effective on 1 January 2021.

26 As to the regime of guiding cases, see Notice of the Supreme People’s Court on Issuing the
Provisions on Case Guidance (Fa〔2010〕No.51).
27 Wang [6], p.200.
28 For example, the similar rules were as follows: PRC Provisions on Place of Origin of Export

Goods 1992 (Expired), Art. 11(2); Provisions on the Implementation of the International Copyright
Treaties 1992, Art. 19; Maritime Law of the People’s Republic of China 1993, Art. 268 (1); Civil
Aviation Law of the People’s Republic of China 1995, Art. 184(1).
29 Art. 4: “Where the application of law in foreign-related civil relations involves the application of

international treaties, the people’s court shall follow Sect. 2 of Article 142 of the General Principles
of Civil Law of the People’s Republic of China…..”.
316 Q. Xu and X. Li

Recently, the issue has drawn considerable attention from the Chinese academia,
and the primary academic position is that applying international treaties in foreign-
related cases appropriately has been the consistent and stable judicial practice in
China, which should be maintained in the future. The reasons are as follows: on the
one hand, for the sake of performing the obligations under international law by the
member states, the domestic courts should apply international treaties concluded by
their government. On the other hand, if the parties choose the international treaties
with a reasonable and legitimate basis, courts should apply such treaties for the
sake of the principle of party autonomy.30 Thus, a recent opinion is that such an
issue, which is concerned with the allocation of national legislative authority, shall
be governed by the Constitution.31 After all, the fact that the constitution addresses
the issue of the application of international treaty shows the country’s recognition
of international law, and it is traceable in the Constitutions of many countries.32
However, the constitutional clause may be a reasonable and ideal domestic legal
basis for the application of international treaties, but it is difficult to be amended in
the near future, considering that the procedures for amending the Constitution are
complicated and time-consuming.
Furthermore, a domestic legal basis, such as Article 142 of GPCL 1986, for the
application of CISG may not be necessary. As mentioned above, the domestic courts
should appropriately apply the CISG in certain cases in accordance with the principle
of pacta sunt servanda. Both the preamble of the Charter of the United Nations and
Article 26 of the 1969 Vienna Convention on the Law of Treaties (hereinafter referred
to as the “Vienna Convention 1969”) clearly require the member states to perform
their obligations under international law in good faith. China is one of the founding
members of the United Nations and a member state of the Vienna Convention 1969.
Therefore, the Chinese courts have a clear and sufficient legal and factual basis in
applying international treaties, including the CISG. Besides, both the opinions on
providing judicial services and safeguards for the construction of the “Belt and Road”
issued by SPC emphasised continuously improving the judges’ capacity in applying
the international treaties that are relevant to China. The judges should also respect the
international customs and international commercial terms.33 The mentioned judicial
documents imply a positive attitude of SPC on applying the international treaties
properly. Therefore, even if there is no domestic provision for such an issue in the
near future, the Chinese courts would maintain a firm position of performing the
obligations under international law in good faith and ensure the accuracy, stability,
and consistency of the application of international treaties.

30 Che [7], p.2-3.

31 Wang [6], pp.203, 206-207.
32 See respectively, Art 55 of the French Constitution, Art 93 of the Dutch Constitution, and Art

6(2) of the Federal Constitution of the United States.

33 See respectively, Several Opinions of the Supreme People’s Court on Providing Judicial Services

and Safeguards for the Construction of the “Belt and Road” by People’s Courts (Fa [2015] NO. 9);
Several Opinions of the Supreme People’s Court on Providing Judicial Services and Safeguards for
the Construction of the “Belt and Road” by People’s Courts (Fa [2019] NO. 29).
37 The Aterlight Electronic Control & Audio Systems … 317

References

1. Willmott L, Christensen S, Butler D, Dixon B (2013) Contract law. Oxford University Press
2. Garner BA (2019) The Black Law Dictionary. Thomson Reuters
3. Han DP (2014) Private International Law. Higher Education Press & Peking University Press
4. Currie B (1963 Selected Essays on the Conflict of Laws. Duke University Press
5. Weinberg L (2015) A radically transformed restatement for conflicts. Uni Illin Law Rev L Rev
5:1999–2052
6. Wang ML (2021) legislation form of international treaty status in the Era of civil code. Mod
Law Sci 43(1):199–209
7. Che PZ (2020) The application of the international treaties or international commercial custom
in china after the civil code. China Rev Admin Just 6:1–15

Qingkun Xu Law Professor at International Law School of Shanghai University of Politics and
Law, China; P.h.D.; Council Member of Chinese Society of Private International Law. The author
majors in the private international Law and the American law.

Xintong Li is a postdoctoral fellow in Law School of Dalian Maritime University. She earned her
Ph.D. in Law from Shandong University, China, LL.M. from Chinese University of Hong Kong
and LL.B. from Zhongnan University of Economics and Law. Her areas of research are private
international law and law of the sea.
Chapter 38
China Changzhou Kairui Weaving
and Printing Company v Taiwan Junlong
Machinery Company

Chaolin Zhang, Shu Zhang, and Peng Guo

Case Information
Case name: China Changzhou Kairui Weaving and Printing Company v Taiwan
Junlong Machinery Company
Seller: Junlong Machinery Company
Place of business: Taiwan, China
Buyer 1: Renshun Weaving and Printing Company
Place of Business: Jiangsu, China
Buyer 2: Kangfu Industrial (Hong Kong) Co., Ltd.
Place of Business: Hong Kong, China
Details of Retrial:
Court: Changzhou Intermediate People’s Court, Jiangsu
Case No: (2003) Chang Ming Er Chong Zi No 3

C. Zhang (B)
Nankai University, Tianjin, China
e-mail: [email protected]
S. Zhang
Deakin University, Geelong, Australia
e-mail: [email protected]
P. Guo
RMIT University, Melbourne, Australia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 319

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_38
320 C. Zhang et al.

Details of Appeal:
Court: Jiangsu High People’s Court
Date of Decision: 2 December 2004
Case No: (2004) Su Ming San Zhong Zi No 056
Judges: Xiaofu Tang (Presiding Judge), Meifen Xu (Judge), Dejun Su (Acting Judge)
CISG applied: Yes
Key CISG provisions interpreted and applied: Articles 8(3) and 9(1)
Abstract
The case is an appeal case, and the procedural nature of the original case is a retrial
case. In the original case, the plaintiff, Junlong Machinery Company (hereinafter
Junlong Company), sued Changzhou Kairui Weaving and Printing Company (here-
inafter Kairui Company) and Changzhou Renshun Knitting, Printing and Dyeing
Company (hereinafter Renshun Company) to Changzhou Intermediate People’s
Court of Jiangsu Province. However, Kairui Company appealed against the orig-
inal judgement and Junlong was the appellant. On 19 May 2004, the High People’s
Court of Jiangsu Province accepted the case.
In the present case, there were two sets of contractual relationships between these
parties, and a number of contracts were signed between 1997 and 1998 to buy and
sell various types of knitting machines. Junlong Company, the seller of the knitting
machine contract, had completed the delivery of all goods in accordance with the
contract and the buyer’s instructions. However, the buyer did not pay the full amount.
As a result, the seller filed a lawsuit.
The seller in this case, Junlong Company, is a machinery manufacturer with
their place of business in Taiwan Province, China. The several buyers are different
companies and are located in different jurisdictions in China, including Hong Kong,
Macau, and Mainland China. Although the relationship between these parties is more
complex, there is an important point of contact, that is, all the buyer’s companies in
this case have different degrees of contact with the key figure, Zhang Yi.
First, there are two companies that had contracts with Junlong Company for the
sale of weaving machines. One is Renshun Company, whose place of business was
in Changzhou, China. Zhang Yi was the legal representative of this company. The
sellers of all three contracts are all Junlong Company, and the details of the contracts
between Renshun Company and Junlong Company are as follows:

Signing date Contract No The content of the Buyer Consignee

delivery of the goods
1997/6/5 xxx-061A.DOC Six knitting Renshun Renshun
machines for round
knitting towel
1998/3/5 xxx-0302 10 universal knitting Renshun Yufa Taiwan
machines
(continued)
38 China Changzhou Kairui Weaving and Printing … 321

(continued)
Signing date Contract No The content of the Buyer Consignee
delivery of the goods
N/A Of the above 10, five Yufa Taiwan Kangfu Macau
were purchased by
Yufa Taiwan
Company instead
and were to be
delivered after being
sorted by Junlong
Company, and the
other five were
retrieved from Yufa
Taiwan (with further
disposal)
1998/07/29 1 double-sided Kangfu Hong Kong
knitting machine
1998/2/10 xxx-9802071.DOC 6 cylinders Renshun Renshun

Another company under contract with Junlong Company is Kangfu (Hong Kong)
with its location in Hong Kong, China. The sellers of this batch of contracts are also
Junlong Company, and the specifics of the contracts are as follows:

Signing date Contract No The content of the Buyer Consignee

delivery of the goods
97/11/11 xxx-9710271.DOC 35 universal knitting Kangfu Hong 26 to Renshun;
machines Kong 24 to Kangfu
xxx-9710272.DOC 10 universal knitting Kangfu Hong Macau
machines Kong
xxx-9710273.DOC Five universal Kangfu Hong
knitting machines Kong
98/2/13 xxx-9802131.DOC Two double-side, rib Kangfu Hong Kangfu Macao
knitting machines Kong
98/8/5 xxx-0711 (Phone One double-side Kangfu Hong Kangfu Macao
contracts) universal knitting Kong
machines
Five (retrieved from
Yufa Taiwan)
shipped together

At the time of the conclusion of the contracts, the buyer’s signature, Kangfu
(Hong Kong), was written by Zhang Yi, but was not stamped with the official seal of
Kangfu (Hong Kong). The court found that Mr. Zhang had been a shareholder and
director of Kangfu (Hong Kong) but had completed the share transfer and change
declaration and was no longer a shareholder of the company before signing the
second batch of contracts with Junlong on behalf of the company. Combined with
322 C. Zhang et al.

the special relationship with Renshun Company during the performance of the batch
contract, the retrial court held that the buyer of the contract was Zhang Yi, who
then transferred the rights under the aforementioned contract to Renshun Company.
However, the court of appeal found that this conclusion was inconsistent with the
actual situation in the case and corrected it, concluding that the contract with Junlong
in the name of Kangfu (Hong Kong) should be directedly recognised as a contractual
act between Renshun Company and Junlong Company, and so Renshun Company
should pay the purchase price under the contract signed by Zhang Yi in the name of
the Kangfu (Hong Kong).
In addition to the text of the two contracts, there was another company closely
related to the performance of the contract, Kairui Company, which had the same
place of business as Renshun Company and was located in Jiangsu, China. The legal
representative of Kairui Company was also Zhang Yi. The company was also one of
the two defendants in the original case, and the plaintiff held Kairui Company jointly
and severally liable for Renshun Company’s payment obligations.
The connection of Kairui Company to this case was rooted in its mixing with
Renshun’s property, personnel, and management, resulting in the actual involvement
of Kairui Company in the performance of the contract. Zhang Yi played a major role
in this process; he was the legal representative of both companies and had actual
control, power, and ability. More importantly, in the contract modification, delivery
notice, price collection, and other correspondence, Zhang Yi sometimes signed in
the name of Renshun Company, sometimes stated that Kairui Company was the
new factory of Renshun Company, and then communicated with Junlong Company
in the name of Kairui Company. There is also a mix of the two companies when
the relevant administrative procedures were carried out for filings and approvals.
During the performance of the contract, the parties had a clearer understanding of
the relationship between Kairui Company and Renshun Company. On this basis, the
retrial court held that, with regard to the debts of Renshun Company, Kairui Company
should be liable for repayment within the scope of the assets from Renshun Company.
However, the court in this case disagreed, holding Kairui Company liable for joint
and several liquidations of Renshun’s debts on the basis of all of Kairui’s assets.
In terms of the final decision, the two courts reached a unanimous conclusion on
the distribution of the rights and obligations of the parties and the assumption of
responsibilities, and the court of appeal upheld the court of first instance’s handling
of the substantive content of the dispute. The court of first instance ruled that the
buyer, Renshun Company, was to pay the outstanding price of the goods to the seller,
Junlong Company, of US$944,641.83 within 10 days of the effective date of the
judgement and to pay the late payment of the breach of contract. The court of appeal
rejected the appeal and upheld the judgement.
38 China Changzhou Kairui Weaving and Printing … 323

Commentary to the Key Issues Related to the CISG

Issues

Issue 1: Can the CISG be Applied as the Applicable Law Between Mainland
Parties and Taiwan Parties?
Issue 2: Can the Court Directly Apply the CISG to a Natural Person?
Issue 3: The Accuracy and Matching of the Applicable Law of the Court of
Retrial

Comments

Issue 1: Can the CISG be Applied as the Applicable Law Between Mainland
Parties and Taiwan Parties?
In the present case, the application of applicable law was not the focus of the
dispute between the parties, but for the court, it is the basic trial work that must
be completed. The judgement specifically responds to this question. As mentioned
above, the present case is an appeal, and the nature of the original case is a retrial
case. As one of the important trial systems stipulated in the Civil Procedure Law
of China, there are two kinds of retrial procedures. First, the decision to send back
for a retrial is made during the procedural of the second instance, usually related to
issues such as fact-finding, adequacy of evidence, or trial proceedings.1 Second, the
decision to send it back for a retrial in the trial supervision procedure, and the court
of first instance, the higher court or the procuratorate, and even the parties concerned
may initiate the proceedings ex officio or by application.2 However, due to the lack
of retrial judgements and judgements of previous trial proceedings, it is difficult
to determine exactly which situation, or to know whether there were any different
views on the application of the law by the courts of first instance with regard to the
application of the law and the subsequent proceedings. Thus, reasonable speculation
can only be made on the basis of only the current appeal judgement.
According to the judgement of this appeal, (1) the parties did not agree in the
contract on the applicable law for the dispute; (2) the parties did not object to the
application by the court of first instance of the laws of Mainland China as the appli-
cable law; (3) the parties clearly chose the law of Mainland Chinese as the applicable
law for dealing with the case in the second instance.
It is doubtful, however, that the retrial court, in the legal basis of the judgement, had
clearly listed two specific provisions of the United Nations Convention on Contracts
for the International Sale of Goods (hereinafter the CISG), which apply in parallel
with several Chinese domestic laws, including General Principles of the Civil Law
of the People’s Republic of China (hereinafter 1984 GPCL), the Law of the Peoples
Republic of China on Foreign Economic Contract Law (hereinafter 1985 FECL),

1 Wang and Rong [1], p. 6.

2 Zhao [2], p. 73.
324 C. Zhang et al.

and Rules for the Implementation of the Law of the People’s Republic of China
on Foreign-funded Enterprises (hereinafter 2001 Revision). The judgement revealed
that the court’s decision on the application of the law was based on Article 142
of 1984 GPCL. That is to say, the court held that it was a foreign-related civil
legal relationship between the parties in the case and, in the absence of a choice of
applicable law between the parties, the court applied the international treaty CISG ex
officio. However, the court of appeal in this case held that the laws of Mainland China
should be applied as the basis for dealing with disputes, based on the provisions of
Article 145 of 1984 GPCL. More specifically, the judge in the present case made
a decision on the application of the law on the basis of the principle of the closest
connection, using the Chinese Laws.
In the context of this case, for the court, the determination of applicable law is
closely related to the identification of contract parties. The place of business of the
parties to the contract will directly affect or even determine whether the CISG can be
invoked and applied by the court in a case as an international treaty. The confirmation
of the parties to the first contract is clear and without a doubt. The situation of the
second contract was relatively complicated, and the court of retrial and the court of
appeal had different conclusions on the identification of the buyer of the contract.
The retrial court found that Zhang Yi was originally the shareholder and director of
Kangfu (Hong Kong). But when Zhang Yi signed the contract with Junlong Company
in the name of Kangfu (Hong Kong), his equity had been transferred and the change
declaration had been completed. Meanwhile, when Zhang Yi signed the contract
with Junlong Company, he did not hold the power of attorney of Kangfu (Hong
Kong), nor did he stamp the seal of Kangfu (Hong Kong) on the contract, nor did
he obtain the written ratification of the company afterwards. In addition, Kangfu
(Hong Kong) made it clear in the court defence that Zhang Yi’s behaviour did not
represent the Kangfu (Hong Kong), and there was no contractual relationship between
Kangfu (Hong Kong) and Junlong Company in the sales of the goods. Accordingly,
the retrial court held that the contract signed by Zhang Yi in the name of Kangfu
(Hong Kong) and Junlong Company is the contract between Zhang Yi personally
and Junlong Company. The court of appeal, however, concluded otherwise. On the
basis of the foregoing facts and corresponding evidence, the court of appeal first
concluded that Kangfu (Hong Kong) was not a party to the contract. The court
further pointed out that, in the process of the contract, Zhang Yi, in the name of
Renshun Company, handled matters such as the modification of the contract and
delivery. All the machines and equipment purchased by Zhang Yi in the name of the
Kangfu (Hong Kong) were delivered to Renshun and Macau Company in accordance
with the contract agreement and the instructions of Renshun Company. Additionally,
Zhang Yi himself was the Chairman of Renshun Company. Accordingly, the court
of appeal held that the act of Zhang Yi signing the contract with Junlong Company
in the name of Kangfu (Hong Kong) should be identified as the contract act between
Renshun Company and Junlong Company.
It can be seen that the difficulty in the identification of the buyer in this case lies
in whether Zhang Yi was qualified to sign the contract on behalf of Kangfu (Hong
Kong) and the division between Zhang Yi’s behaviour and Renshun Company’s
38 China Changzhou Kairui Weaving and Printing … 325

behaviour. This involves the specific provisions of China’s company law and is not
the core issue to be discussed in this paper, so it will not be repeated. Both courts
ruled out the connection between Kangfu (Hong Kong) and this case, and both Zhang
Yi and Renshun were located in Mainland China. Therefore, the parties involved in
the dispute can now be identified as a party from Mainland China and a party from
Taiwan.
Further, could the court take the initiative to apply the CISG as the applicable law of
this case for the contract of sale of goods between the Mainland party and the Taiwan
party? Up to the time of writing this article, another three cases had been collected,
all of which were disputes over the contract of goods sale between Taiwan enterprises
and Mainland enterprises. The judges of these three cases, without exception, all first
disproved the international nature of the sales contracts; then the judges, according
to Article 1(1) of the CISG, ruled out the Convention to be applied in these cases.3
The practice of judicial trials was consistent, which all denied the possibility of the
court taking the initiative to apply the CISG under this setting condition. An article
cited the example of a contract between a Scottish and an English party and noted
that: “The Convention does not apply to cases where the parties have their places of
business in different legal units of the same Contracting State”.4 However, this does
not mean that the CISG is absolutely inapplicable to cases between Taiwan parties
or Hong Kong parties. As long as the parties make an active choice, the provisions
of the CISG will be regarded as the content of the contract by the court and then
applied. As the CISG is a fundamental tool in international trade, Hong Kong SAR
must benefit from it as soon as possible.5
Issue 2: Can the Court Directly Apply the CISG to a Natural Person?
There is a possible related issue that needs to be supplemented for discussion. If
the Mainland party was identified as Zhang Yi, as a natural person, is the CISG
applicable? Is the CISG only applicable between businesses? At present, interna-
tional commercial trade is mainly carried out by legal persons or similar profit-
making organisations. However, individuals are not excluded. The most representa-
tive example is the small commodity international trade market in Yiwu, Zhejiang
province. In this market, it is common for natural persons to engage in import and
export trade as individuals.6 In addition, with the rapid development of cross-border
e-commerce and global logistics, the two e-commerce modes, Business to Customer
(B2B) and Customer to Customer (C2C),7 enable consumers to more directly partic-
ipate in transnational goods and services transactions. Therefore, it is an existing

3 Taiwan Semiconductor Co., Ltd. v Shenzhen Sunda Baili Electric Co., Ltd. (2012) Shen Zhong Fa
She Wai Zhong Zi No.186; Hongying Industrial Co., Ltd. v Renshi (Zhuhai) Industrial Co., Ltd.,
(2013) Zhu Zhong Fa Min Si Zhong Zi No.10; Guanghong Jiansheng Co., Ltd. v Best Broadband
Communications (Yantai) Co., Ltd., (2015) Yan Min She Chu Zi No. 26.
4 Jayme [3], p. 30, para. 2.2.
5 Cartoni [4].
6 Han [5], p. 25.
7 E & Huang [6], p. 22. B2C is a business-to-consumer transaction, such as Amazon; C2C is a

transaction between consumers, such as Ebay.

326 C. Zhang et al.

reality that individuals participate in international commercial trade activities, and

their participation may be greater in the future. So, this issue has realistic significance
and should be discussed.
The next question is whether CISG can be applied to individual disputes over
contracts for the international sale of goods. This may occur between a natural person
and a profit-making organisation, or between two natural persons. As far as the
provisions of the CISG are concerned, there is no indication that there is any provision
that attempts to exclude the application of the CISG, in which the subject is a natural
person. Besides, in terms of the trial practice of Chinese courts, 31 cases had been
collected, which were closely related to this topic, and some of them explicitly apply
the CISG to handle disputes over contracts about the international for the sale of
goods related to natural persons.
Four representative cases from different periods are selected here, in all of which
the CISG was clearly applied. Carl Hill v Cixi Used Furniture Trading Co., Ltd. case
was earlier than this case in 2001.8 The plaintiff was Carl Hill, a natural person, who
purchased used furniture from the defendant with the agreement that the defendant
would ship the goods to Illinois, USA, but the defendant mistakenly shipped the
furniture to Los Angeles, USA, resulting in a loss to the plaintiff. In this regard, the
judgement of the court applied Article 32(2) of the CISG to solve the problem that
the seller in this case failed to perform its transportation obligations as agreed in the
contract.
In a case in 2010, Geng Qunying v Elborsh Company (Egypt),9 two parties had no
agreement on the applicable law for the dispute in advance. Considering that Geng
Qunying was a Chinese citizen while Elborsh Company was located in Egypt, and
both countries were Contracting Parties to the CISG, the court, therefore, held that
the Convention should be applied to this case. The case in 2019, Aleksandr Chukarin
v Hangzhou Medical Equipment Co., Ltd.,10 was a similar situation. It was a dispute
over the contract of the international sale of goods between a Russian citizen and a
Chinese enterprise. The court also applied the CISG and settled the interest dispute
between the parties according to Article 78. It is worth highlighting the case of Mr.
Choi v Mr. Xu11 in which two natural persons reached an oral agreement regarding
the purchase of mushroom sticks. The court expressly recognised the parties as
suitable plaintiffs and defendants in their capacity as natural persons. Mr. Choi was a
citizen of South Korea while Mr. Xu was a citizen of China, and both countries were
Contracting States to the CISG. Therefore, Article 14(1), Article 15(1), and Article
23 of the CISG were applied to solve the substantive disputes of this case.
However, it is worth pointing out that the CISG adopted the place of business
standard in its judgement on location, but natural persons obviously do not have a
place of business. In the above cases, these courts had all adopted the nationality
of natural persons as the standard to replace the ‘place of business’ standard for a

8 (2001) Ci Jing Chu Zi No. 560.

9 (2010) Ji Min San Zhong Zi No. 59.
10 (2019) Zhe Min Zhon No. 1707.
11 (2012) Da Min Si Chu Zi No. 111.
38 China Changzhou Kairui Weaving and Printing … 327

company. This may cause a little confusion, because Article 1(3) of CISG states
that the nationality of the parties is not to be taken into consideration in determining
the application of this Convention. Roughly speaking, there are two situations in
which a natural person participates in a contract: one is to participate in the contract
independently in the name of a natural person; the other is to participate in the contract
in the capacity of a company as a legal person without being a direct contracting party
of the contract. As for the role in the contract, the natural person in the former case
is similar to the role of the enterprise in the latter case, rather than the natural person
as a legal person in the latter case.
Therefore, firstly, this article believes that Article 1(3) of the CISG solves the
problem of the legal person in the latter case, that is, it hopes to eliminate the inter-
ference of the nationality of the legal person in the judgement of the country where
the company locates. This clause does not take into account the nationality of natural
persons and is intended to emphasise that when both parties involved in the case
are enterprises, the place of business of the company should be the only criterion
for judging the location of the parties. The irrelevance of nationality avoids diffi-
culties in the case of parties with dual nationality; it also dispenses with the need
to determine the ‘nationality’ of a legal entity such as a corporation.12 Secondly, in
order to determine the applicability of the Convention, it is still necessary to solve
the problem of the recognition of the state of a natural person as a contracting party.
Since there is no direct regulation in the Convention, considering the similar roles
and functions in the contract, the judgement of the location of a natural person needs
to refer to the standard of the ‘place of business’ of the enterprise. The precedent
experience showed that the ‘place of business’ standard is to pursue stability and
should not be the place where contracts are concluded or negotiated.13 Accordingly,
the habitual residence of a natural person is obviously more stable than nationality.
Therefore, using the nationality standard of natural persons, the above-mentioned
court did not deviate from the provisions of the Convention and was more consistent
with the experience of precedents.
In other cases where the CISG was not applied, it was not because the parties
are natural persons that the application of the CISG was excluded. There are two
reasons for consideration. First, the court excluded CISG because both parties were
not located in the Contracting States of the CISG. For example, the court held that
the CISG could not be applied at judges’ discretion between Hong Kong parties and
Mainland enterprises.14 At the time of hearing, the country where the parties were
located had not acceded to the Convention,15 or had signed the Convention but the
Convention had not yet come into force for them.16 Second, the parties’ choice of

12 Schwenzer and Hachem [7], p. 45, para. 46.

13 UNCITRAL [8], p. 5, para. 5.
14 Wuhan Yinfeng Data Network Co., Ltd. et al. v Xu Ming et al. (2002) E Min Si Zhong Zi No. 53.
15 Resource Engineering Co., Ltd. v Li Qing et al. (2002) Hu Yi Zhong Ming Wu (Shang) Chu Zi

No. 127.
16 Tongda Co., Ltd. v Shen Jianfeng (2020) Supreme Court Min Shen No. 1801.
328 C. Zhang et al.

law led to the exclusion of the Convention.17 In several cases listed here, the parties
chose to apply Chinese law as the applicable law in their disputes in the contract
or in the court proceedings, and therefore, the court excluded the application of the
CISG. These courts held at that time that the ‘Chinese Laws’ chosen by the parties
did not include the CISG, that is to say, the international treaties to which China has
acceded were not regarded as part of the ‘China Law’. This approach is controversial
and has been discussed in relevant cases in this book18 and will not be repeated here.
To sum up, when there are natural persons involved, the court can still apply the
CISG ex officio according to its own functions and powers, which has no obstacles
in terms of law and judicial experience.
Issue 3: The Accuracy and Matching of the Applicable Law of the Court of
Retrial
In this case, the contractual rights and obligations of both parties were not compli-
cated, and the claims of the litigants were relatively simple and clear; however, the
case had gone through multiple trial procedures. Judging from the content presented
in the judgement of this case, it may be related to the accuracy and matching degree
of the legal application of the previous several judgements. This case was an appeal
against the decision of the retrial court, so the discussion here takes the retrial court’s
application of laws as an example to evaluate. The application of the laws of this court
raises a lot of questions, and there are obvious flaws and even mistakes. Accordingly,
the appellate court in the present case corrected it.
As mentioned above, the retrial court applied the CISG on its own initiative.
The specific provisions applicable were Article 8(3) and Article 9(1). Article 8 is
a CISG contract-interpretation tool,19 and Article 8(3) requires the trier of fact to
interpret the terms of the contract by taking into account all relevant circumstances
and therefore evidence (‘including negotiations’).20 Article 9 confirms that the parties
to an international sale are bound not only by the express terms of their contract, but
they are also bound by their own prior practices, as well as more widely observed
‘usages’ within the relevant branch of trade.21 From the text of the articles, the
two articles invoked by the court were supposed to address questions relating to
the usages to which they have agreed or any practices which they have established
between themselves, possibly concerning their binding effects on the parties and
possibly concerning the interpretation of the contract.

17 Sun X et al. v Shanghai X group et al. (2010) Hu Gao Min Er (Shang) Zhong Zi No.81; Jin
Tongyuan, Li Yan v Jinjiang Hexing Clothing Weaving Co., Ltd. (2009) Yue Gao Fa Min Si Zhong
Zi No. 372; Yang X v Japan X Commercial Co., Ltd. (2010) Hu Gao Min Er (Shang) Zhong Zi No.
62; Foshan Berlipp Clothing Co., Ltd. & Anson Industrial (Hong Kong) Co., Ltd. v Ajaltouni SAL,
Foshan Operations Trading Co., Ltd. & Li Lihua, (2020) Yue 06 Min Zhong No. 254.
18 For a more detailed discussion, see Tunghang (Asia) Co., Ltd. v Shenzhen Haizhongbao Aquatic

Products Trading Co., Ltd. in this book.

19 Lookofsky [9], p. 43
20 Gillette & Walt [10], p. 150
21 Lookofsky [9], p. 45
38 China Changzhou Kairui Weaving and Printing … 329

However, what caused confusion was that the retrial court only abruptly listed
these two clauses in the legal basis part of the judgement, but in the reasoning
and reasoning part of the judgement, it did not mention the purpose and basis of the
application of these two clauses. So, all that can be done is to speculate as objectively
as possible. The parties to this case did agree in the contract that the trade term CIF
Shanghai is to be applied, but this dispute had nothing to do with it. The issue that
may be relevant to the ‘transaction custom’ invoked was the identification of bonafide
parties to the contract, but this is a corporate law issue in the context of this case. The
CISG is used to solve the rights and obligations of the parties involved in the contract
of sale of goods. Therefore, it is difficult to understand the motive and effect of the
retrial court’s invocation of this clause. The judge in this case should have noticed
this problem and indirectly excluded the application of the CISG by explicitly stating
that Chinese law was applied in this case only, thus correcting this invocation by the
retrial court.
In addition, the invocation of Article 146 of the 1984 GPCL by the retrial judge-
ment was also improper. This article regulates the treatment of damages caused by
torts and provides legal application methods. However, the damages proposed by the
seller in this case were due to the buyer’s breach of contract, and its legal essence was
contractual debt based on the incomplete contract of sale of goods. The original court
invoked the provisions of tort law to solve the problem of damages to the interests
of the parties, which might have confused the scope and boundary of contractual
debt and tort debt. No matter whether in the era of 1984 GPCL or the current era
of the Civil Code of the People’s Republic of China, although there are no unified
general provisions of debt law in China, a very loose debt law system has been estab-
lished, among which, Contract Law and Tort Liability Law had formed a complete
system, respectively,22 supplemented by other relevant provisions. Obviously, the
act of invoking by the retrial court is inappropriate, and the court of this case did not
invoke this article again when making its judgement.

References

1. Wang FR, Rong TM (2007) Examining the remandment of civil appeal cases. Chin J Law
01:3–16
2. Zhao ZJ (2012) Reflection and construction of the system of retrial of civil litigation sent back
to the perspective of the draft amendment to the civil procedure law. Tribune Polit Sci Law
30(04):72–81
3. Jayme E (1987) Article 1. In: Bianca CM, Bonell MJ (eds) Commentary on the international
sales law: the 1980 Vienna sales convention. Giuffrè
4. Cartoni B (2015) Is the CISG applicable to hong kong-related disputes? https://doi.org/10.
2139/ssrn.2648323
5. Han WL (2014) Research on the application of CISG in Chinese courts. East China University
of Political Science and Law, Master’s Theses

22 Li [11], p. 22.
330 C. Zhang et al.

6. Libin E, Huang Y (2014) New ways of international trade: the latest research on cross-border
e-commerce. J Dongbei Univ Finance Econ (02):22–31
7. Schwenzer I, Hachem P (2016) United Nations Convention on Contracts for the International
Sale of Goods (1980)—Full Text, Part I Sphere of Application and General Provisions, Ch.I
Sphere of Application, Article 1. In: Schwenzer I (eds) Schlechtriem & Schwenzer: Commen-
tary on the UN Convention on the International Sale of Goods, 4th edn. Oxford University
Press, pp 28–46
8. United Nations Commission on International Trade Law (2016) UNCITRAL Digest of Case
Law on the United Nations Convention on Contracts for the International Sale of Goods. https://
uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/cisg_digest_2016.pdf
9. Lookofsky J (2017) Understanding the CISG: a compact guide to the 1980 United Nations
Convention on contracts for the international sales of goods, 5th edn. Wolters Kluwer
10. Gillette CP, Walt SD (2016) The UN convention on contracts for the international sale of goods:
theory and practice, 2nd edn. Cambridge University Press
11. Li SG (2016) Coordination several primary relations in the construction of china’s law of
obligations. Chin J Law 5:3–26

Chaolin Zhang is a Ph.D. candidate in international law at the law school of Nankai University,
China. Prior to that, she obtained an LLM in International Economic Law from the School of Law
at the City University of Hong Kong, China. Her research interests lie in international trade law,
data law, and law and technology.

Shu Zhang is a lecturer in commercial law at Deakin Law School, Deakin University (Australia)
and coached Deakin Law School’s Vis Moot team. Prior to joining Deakin Law School, Dr. Zhang
was a post-doctoral fellow in the Chinese International Business and Economic Law Initiative,
Law School, University of New South Wales (Australia). Her research interests include inter-
national commercial law, dispute resolution and international arbitration, as well as compara-
tive contract law. She also completed internships at both the Australian Centre for International
Commercial Arbitration (ACICA) and the Chinese International Economic and Trade Arbitra-
tion Commission (CIETAC). She is also admitted to practice in New South Wales, Australia.
Dr. Zhang obtained her Ph.D. in Law from University of New South Wales (Australia), and her
LLM, LLB and BA in Economics (Double Degree) from Peking University (China). She has
published various manuscripts with leading journals in this area, such as the Journal of Contract
Law, Vindobona Journal of International Commercial Law and Arbitration, China Quarterly.

Peng Guo Lecturer in Law at RMIT University. At RMIT Dr. Guo teaches Contract Law and
Commercial Law to LLB and JD students. He has held visiting positions at different universities,
including Warwick University, University of Amsterdam, and University of Osnabrück. He has
received scholarships awarded by renowned research institutions and international organisations,
including the Max Planck Institute for Comparative and International Private Law, the Interna-
tional Institute for the Unification of Private Law (UNIDROIT), the Swiss Institute of Compara-
tive Law, and the European Union. His research interests lie in international sale of goods, inter-
national commercial arbitration, comparative contract law, and law and technology. He actively
participates in Vis Moot and Alfred Deakin International Commercial Arbitration Moot.
Chapter 39
Qingdao Benefim Trading Co, Ltd v
Sinochem International FZE

Linxuan Li

Case Information
Case name: Qingdao Benefim Trading Co, Ltd v Sinochem International FZE
Seller: Sinochem International FZE
Place of Business: The United Arab Emirates (UAE)
Buyer: Qingdao Benefim Trading Co, Ltd
Place of Business: China
Details of First Instance:
Court: Qingdao Intermediate People’s Court, Shandong
Date of Decision: 13 June 2005
Case No: (2004) Qing Min Si Chu Zi No 225
Judges: Yuanhong Li (Presiding Judge), Chao Cheng (Acting Judge), Xie Lu (Acting
Judge)
CISG applied: No
Key CISG provisions interpreted: Article 1(1)
Abstract
In March 2004, Qingdao Benefim Trading Co, Ltd (Benefim) and Sinochem Inter-
national FZE (Sinochem) reached Contract No 04RU31FZ4343WA0002 for the
purchase of 300 metric tons of styrene-butadiene rubber (SBR) 1502 with the price
of US$1000 per ton. However, Sinochem failed to deliver the goods as agreed.
Benefim brought the claim against Sinochem before the court for monetary remedies,
including the loss of profits.

L. Li (B)
King & Wood Mallesons, Beijing, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 331

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_39
332 L. Li

The court determined that Chinese law should apply, instead of the United Nations
Convention on Contracts for the International Sale of Goods (CISG).1 The court
determined that this dispute arose from a foreign-related commercial contract because
the seller was from the United Arab Emirates (UAE). Because the UAE was not a
member of the CISG, the CISG was not applicable. Thus, the conflict of laws of the
forum, in this case, the conflict rules in Chinese law, should apply when determining
the applicable substantive law. The court then proceeded to the ‘closest connection’
test provided by Article 145 of the General Principles of the Civil Law of the People’s
Republic of China (1986) (GPCL). Because the contract was concluded in China and
was not actually performed, the Chinese law should apply as the law of the place
most closely connected to the contract.
Further, as both parties agreed to the use of letter of credit for payment, the
Uniform Customs and Practice for Documentary Credits (1993 Revision) should
apply to the payment-related issues, as provided by Article 142 (3) of the GPCL.
The court proceeded to deal with the contractual dispute under Chinese law and
rejected the plaintiff’s claims.

Commentary to the Key Issues Related to the CISG

Issue
Issue 1: Applicability of the CISG

Comments

Issue 1: Applicability of the CISG

Article 1 of the CISG deals with the applicability of the CISG. According to Article
1(1)(a) of the CISG, the CISG applies to contracts for the sale of goods between
parties whose places of business are in different Contracting States under the CISG.
In the present case of Qingdao Benefim Trading Co, Ltd v Sinochem International
FZE, the court determined that the two parties were from China and the United Arab
Emirates (UAE), respectively, without further distinguishing the places of business
of the two parties from their places of registration or nationality. Although this
determination was not disputed by the parties, the discussion of the place of business
could be more detailed. The UAE was not a Contracting Party to the CISG at the
time of the conclusion of the contract in this case. The requirement of Article 1(1)(a)
of the CISG was not satisfied. Thus, the CISG could not be applied under Article
1(1)(a) in the present case, which was correctly held by the court.
In Chinese judicial practice, the process of determining the applicable law to the
international contract is simplified since, according to Article 1(1)(a) of the CISG,

1United Nations Convention on Contracts for the International Sale of Goods, opened for signature
11 April 1980, 1489 UNTS 3 (entered into force 1 January 1988) (CISG).
39 Qingdao Benefim Trading Co, Ltd v Sinochem International FZE 333

Chinese judges in most cases only need to consider whether the parties’ places of
business are in different Contracting States to the CISG. Indeed, in the present case,
the judges adopted such an approach to determine whether the CISG should apply.2

Linxuan Li is a lawyer at King&Wood Mallesons, Department of Financial Services. She

holds an LLM degree in International Law from the University of International Business and
Economics.

2Similar reasonings of not applying the CISG are also found in the case of Resource Engineering
Co, Ltd v Qing Li, Ming Sun and Shanghai Donglin International Trade Co, Ltd and Zhuguang
Petroleum Co, Ltd v Wuxi Joyray Import and Export (Group) Co, Ltd; for specific comments to the
present case, refer to the commentary to those cases in this book.
Chapter 40
Norway Royal Supreme Seafoods Versus
Rizhao Jixiang Ocean Food Co., Ltd. &
China Rizhao Shanfu Food Co.,
Ltd.—Dispute Arising from a Sale
of Goods Contract

Peng Wang, Yueshan Liu, and Geng Wang

Case Information
Case name: Norway Royal Supreme Seafoods versus Rizhao Jixiang Ocean Food
Co., Ltd. & China Rizhao Shanfu Food Co., Ltd.—Dispute Arising from a Sale of
Goods Contract
Seller: Rizhao Jixiang Ocean Food Co., Ltd. (hereinafter referred to as “Jixiang
Company”) & China Rizhao Shanfu Food Co., Ltd. (hereinafter referred to as “Shanfu
Company”)
Place of business: China
Buyer: Norway Royal Supreme Seafoods
Place of business: Norway
Details of First Instance:
Court: Rizhao Intermediate People’s Court, Shandong
Date of Decision: N/A
Case No: (2002) Ri Jing Chu Zi No 14
Judges: N/A

P. Wang (B)
Nankai University, Tianjin, China
e-mail: [email protected]
Y. Liu
Nankai University, Tianjin, China
e-mail: [email protected]
G. Wang
University of International Business and Economics, Beijing, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 335

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_40
336 P. Wang et al.

Details of Appeal:
Court: Shandong High People’s Court
Date of Decision: 27 June 2005
Case No: (2004) Lu Min Si Zhong Zi No 44
Judges: Xifu Yu (Presiding Judge), He Wu (Acting Judge), Jie Yang (Acting Judge)
CISG applied: Yes
Key CISG provisions interpreted and applied: Articles 35(1) and 36
Abstract
In 1999, a Norwegian company concluded with Jixiang Company to import three
containers of frozen lobster tail meat at the price of US$4,950 per metric ton, totalling
US$300,000. The contract also stipulated that the buyer should demand compensa-
tion after receiving the goods at the destination in Oslo by providing an inspection
certificate issued by an authorised organisation.
After the conclusion of the contract, the seller, Jixiang Company, entrusted Shanfu
Company to prepare the goods. During the preparation and delivery of the goods,
the buyer sent its professionals to inspect the goods and supervise the loading.
In December 1999, Shandong Import and Export Commodity Inspection Bureau
inspected the goods and issued an inspection certificate and an export permission,
and then the goods were shipped from Rizhao through Qingdao to Goteborg. The
buyer made the payment and received the goods, but it refused to provide the time of
arrival of the goods. According to the shipping record, the ship arrived at Hamburg
on 18 January 2000. The buyer then sold the goods to Polar Seafood Norway A/S
(hereinafter referred to as “Polar Company”), and Polar Company resold the goods
to other companies. On 22 March 2000, Polar Company’s final client found some
goods had quality problems, and then the buyer entrusted SGS Norge Company to
inspect the goods again and found one container of 1,664 cases, totalling 19.968 tons
of goods, was non-conforming.
On 23 March 2000, the buyer informed Jixiang Company and Shanfu Company
of the quality problem and negotiated with Jixiang Company to deal with it. Jixiang
Company faxed the buyer on 23 March and 18 May, promising that if the goods
had a problem with quality that was caused by Jixiang Company, it would take
the responsibility and requesting the buyer seal the goods and provide assistance to
inspect the goods together in Norway. However, without an invitation letter from the
buyer, Jixiang Company was unable to inspect the goods. The buyer insisted that
what Jixiang Company said was a modification of the compensation period in the
contract. On 2 December 2001, the buyer brought a suit against Jixiang Company
and Shanfu Company for compensation.
The court of first instance held that, as the place of contract performance was in
China and the parties to the contract did not choose the applicable law in the contract,
Chinese law should apply on the grounds that China has the closest connection with
the contract pursuant to Article 145(2) of the General Principles of the Civil Law of
the PRC. After the conclusion of the contract, Jixiang Company provided qualified
40 Norway Royal Supreme Seafoods Versus Rizhao Jixiang Ocean … 337

goods and the buyer paid the price, so the performance of the contract was completed.
After that, the buyer did not provide evidence to prove that its claim of a quality
problem was made within seven days after receipt of the goods. Therefore, the buyer
should bear the ensuing adverse consequence. Further, the buyer unilaterally asked
SGS Norge Company to inspect the goods and rejected Jixiang Company’s request
to seal and co-inspect the goods, so it was uncertain that the inspected goods were
from Jixiang Company. Although the buyer alleged that Jixiang’s delayed delivery
constituted a breach of contract, it did not have specific claims, nor did it provide the
time of receipt of the goods. As the contract did not stipulate the responsibility for
contract violation, there is no basis to ask for the contract violation fee. Given these
circumstances, the court of first instance rejected the buyer’s claims.
The buyer appealed against the decision. The court of second instance stated
that, though the parties did not choose the law applicable to the contract, China and
Norway are both contracting states of the CISG, so the CISG should apply. As for
the issue of whether the quality of the goods complies with the requirements of the
contract or not, the court of second instance thought that the buyer, as the consignee,
needed to prove its claim was made within a reasonable period of time as agreed in the
contract and bear the burden of proof for the receipt time. Consequently, the buyer’s
grounds for appeal that the receipt time should be proved by Jixiang Company was
unfounded. Although Jixiang Company promised to be responsible for the losses
if the goods had quality problems, the buyer could not prove the goods were non-
conforming. On the contrary, there was evidence that the buyer did not make a claim
within the agreed contract period. Finally, the court of second instance rejected the
buyer’s claims and upheld the original verdict.

Commentary to the Key Issues Related to the CISG

Issues
Issue 1: The Applicability of the CISG
Issue 2: Determination of the conformity of the goods under the CISG
Comments
Issue 1: The Applicability of the CISG
The court of first instance and the court of second instance held different opinions as
to the applicability of the CISG and Chinese law. The court of first instance found that
the place of contract performance was in China, and as the parties did not stipulate
the applicable law in the contract, the law of the country which had the closest
connection with the contract should apply in accordance with Article 145(2) of the
General Principles of the Civil Law of the PRC. Then the court applied the Chinese
law. Instead, the court of second instance stated that, as the parties did not stipulate
the applicable law in the contract, but China and Norway are contracting states of the
338 P. Wang et al.

CISG, the CISG should apply according to Article 142(2) of the General Principles
of the Civil Law of the PRC.
These two courts invoked different provisions of the General Principles of the
Civil Law of the PRC. Article 142(2) provides that:
If any international treaty concluded or acceded to by the People’s Republic of China contains
provisions differing from those in the civil Laws of the People’s Republic of China, the
provisions of the international treaty shall apply, unless the provisions are ones on which the
People’s Republic of China has announced reservations.
Article 145(2) provides that:
If the parties to a Contract involving foreign interests have not made a choice, the Law of
the country to which the Contract is most closely connected shall be applied.

Further, according to Article 1(1)(a) of the CISG, when parties whose places of
business are in different contracting states, the CISG is directly applicable, which
is called “direct applicability of the CISG”. This provision also implies that if the
above requirements are met, the courts in contracting states can apply the CISG to
resolve international commercial disputes without the guidance of the rules of private
international law or the express consent of parties to a contract. Thus, one argued
that the CISG can apply in China without the citation of domestic conflict of law.1
However, this view is not consistent with the current Chinese legal reality. In China,
laws, such as the Constitution of the PRC, Legislation Law of the PRC, or Law of
the PRC on Choice of Law for Foreign-related Civil Relationships do not stipulate
rules about sources of law and do not specify an international treaty’s status as a
source of law in Chinese legal system. Accordingly, Article 142(2) of the General
Principles of the Civil Law of the PRC should not be regarded as a rule of conflict of
law, which is a provision stipulating that an international treaty is a source of law in
China. From this perspective, it is reasonable for the court to invoke Article 142(2)
and then apply the CISG; otherwise, the court would not be able to directly apply
international treaties. Furthermore, it has been suggested that Article 142 should be
amended as follows:
International treaties concluded or acceded to by the People’s Republic of China shall apply
directly. If these international treaties contain provisions differing from those in Chinese
domestic laws, the provisions of the international treaty shall apply, unless the provisions
are ones on which the People’s Republic of China has announced reservations.2

However, on 1 January 2021, the General Principles of the Civil Law of the
PRC were invalidated. The newly enacted Civil Code of the PRC does not stipulate
provisions about the relationship between international treaties and domestic laws,
so international treaties must apply in accordance with customs or doctrine.
In Chinese judicial practice, several courts invoked Article 142(2) and then applied
the CISG.3 In Servi Trading v Jiande Dawei Plastic Products Co., Ltd.,4 the court

1 Liu [1], p. 83.

2 Liu [2], p. 201.
3 Liu [2], p. 193.
4 (2004) Zhe Hang Shang Wai Chu Zi No. 41.
40 Norway Royal Supreme Seafoods Versus Rizhao Jixiang Ocean … 339

held that, according to Article 3 of the Law of the PRC on Choice of Law for
Foreign-related Civil Relationships and Article 142(2) of the General Principles of
the Civil Law of the PRC, China and the US were contracting states of the CISG,
so the CISG should apply first. Meanwhile, Chinese law should also apply as the
parties chose Chinese law as the applicable law. In Possehl (HK) Limited v China
Metals & Minerals Import & Export (Shenzhen) Corp.5 and Haifu Aquatic Product
Development Co., Ltd. v Yuequn Aquatic Products Development Co., Ltd. (appeal),6
the courts held the same view.
More courts applied the CISG directly and did not mention Article 142(2).7 In
Laiyang Hongwang Foods Co., Ltd. v Altamar Foods Corp.,8 the court stated that
because both the plaintiff and the defendant chose Chinese law, and China and the US
are contracting states of the CISG, the CISG should apply with priority. If there are
no provisions in the CISG, Chinese law should apply. In Elborsh Co. v Geng Qunying
and others,9 the court of retrial found that the court of second instance had erred in
determining the applicable law because parties to the contract were in contracting
states of the CISG, and the CISG should apply. In Canada Teda Enterprise Co., Ltd.
v Shanxi Weite Food Co., Ltd.,10 the court stated that the CISG should apply as the
parties’ places of business were in Canada and China which are contracting states of
the CISG, and the parties did not exclude the application of the CISG in the contract.
In this case, the court of first instance should not exclude the application of the
CISG and apply the law which has the closest relation with this contract by virtue
of Chinese rules of private international law. Instead, this court should refer to the
reasoning of other courts in similar cases and state that, considering that the parties’
places of business are located in China and Norway which are contracting states of
the CISG and the parties did not exclude the CISG, the CISG should be applicable
to this contract automatically, which takes precedence over the domestic law.11 As
mentioned above, it is proper to invoke Article 142(2) of the General Principles of
Civil Law to indicate that international treaties are sources of Chinese domestic law
and then apply the CISG to resolve disputes arising in foreign-related commercial
cases. The court of second instance is the case. This court held that the parties did not
choose the law applicable to this contract, but China and Norway, where the parties’
places of business were located, are contracting states of the CISG, so the CISG
should apply according to Article 142(2) of the General Principles of Civil Law.
In sum, due to the unclear legislation, the status of international treaties in Chinses
legal system and the application of international treaties have been controversial.
However, there is a consensus that, generally, international treaties can apply directly

5 (2004) Sui Zhong Fa Min San Chu Zi No. 297.

6 (2004) Yue Gao Fa Min Si Zhong Zi No. 84.
7 He [3], p. 183.
8 (2016) Lu 06 Min Chu No. 298.
9 (2012) Min Shen Zi No. 1402.
10 (2006) Jin Gao Min Si Zhong Zi No. 148.
11 See the reasoning of the court in Shaoxing Jinsheng Trading Co., Ltd. v. Niannian Trading Co.,

Ltd., (2013) Shao Shang Wai Chu Zi No. 74.

340 P. Wang et al.

in Chinese courts,12 though this direct application should be premised on the fact that
international treaties are the sources of Chinese law. On this basis, the CISG is not
only a part of the Chinese legal system, but also a part of the legal systems of other
contracting states. As a law abided by the contracting states, the CISG can directly
apply if the conditions for the application of the CISG are met, without considering
the rules of private international law.
Issue 2: Determination of the Conformity of the Goods Under the CISG
As for the issue of whether the quality of the goods in this case complied with the
requirements of the contract, the court invoked Articles 35(1) and 36 of the CISG and
held that the seller provided frozen lobster tail meat after the contract was signed,
and the buyer sent its professionals to inspect the goods and supervise the loading,
which could prove that the goods had no deficiency. Additionally, the buyer paid the
full purchase price, and the contract was fulfilled. After that, the buyer claimed that
the quality of the goods was inferior to what was agreed upon, but the buyer refused
to provide the evidence about the receipt time and could not confirm whether its
claim was raised within seven days of receiving the goods. Although Article 36 of
the CISG stipulates that the seller is also liable for non-conformity which exists at
the time when the risk is transferred to the buyer, the buyer should first prove that
non-conformity is due to a breach of any of the seller’s obligations. In this case, if
the goods provided by the seller do have quality problems, it shall be liable to the
buyer for compensation.
After receiving the quality inspection report issued by SGS Norge Company, the
seller promised that it would be responsible for the losses if the goods had quality
problems which were caused by it, and the seller asked the buyer for an invitation
letter so that they could inspect the goods together in Norway. However, the buyer
did not send the invitation letter. The buyer thought that what the seller said was
a modification of the compensation period in the contract. The requirements of the
seller are reasonable, and these requirements should not be regarded as a modification.
The seller’s aim is to preserve evidence and determine whether the quality problems
were caused by the seller. However, the buyer did not cooperate with the seller, and
available evidence suggested that the buyer did not file a claim during the period
specified in the contract. Thus, the claims of the buyer should not be supported.
Articles 35 to 40 and Article 44 of the CISG are related to the issue of conformity
of the goods, and Article 35 is called the “conformity of goods” clause. The goods
conformity rules are a set of rules in the CISG designed to provide a complementary
solution to the issues of quality of the goods if the parties did not agree upon them. In
the CISG context, the concept of conformity of the goods is limited to conformity in
terms of quality (including quantity) of the goods and does not address the rights of
third parties attached to the goods. These provisions regulate the criteria and the time
for determining whether the goods are in conformity with the contract (Articles 35
and 36), the seller’s right to remedy non-conforming goods (Article 37), the buyer’s
obligation to inspect the goods and give notice of claims of non-conformity (Articles

12 E.g., Chen and Wu [4], p. 109; Zuo [5], p. 88; Wang [6], p. 153; Li [7], p. 107.
40 Norway Royal Supreme Seafoods Versus Rizhao Jixiang Ocean … 341

38, 39, and 44), and the exemption from the buyer’s obligation to inspect and give
notice (Article 40).
The CISG does not regard “conformity to the contract” as a supplementary
bottoming rule but as the primary criterion to determine whether the goods are in
conformity. It is believed that there are two criteria, the subjective criterion and the
object criterion, to determine whether the goods are in conformity with the contract.
Article 35(1) adopts the subjective criterion. That is to say, the content of the contract
between the parties is the criterion, which is the key to apply Article 35(1).
The issue of the burden of proof should be solved according to the general prin-
ciples by virtue of Article 7(2), or the rules of private international law if there is no
general principle. There is a principle called “who advocates, who proves”, but this
principle still has some shortcomings. If the buyer claims that the goods have quality
problems, it bears the burden of proving the essential facts on which it relies and
has the obligation to prove that the goods were not in conformity with the contract
when the risk passed. Similarly, if the seller claims that the buyer should pay for the
goods, the seller has the burden of proving that the goods are in conformity with
the contract. However, if neither party submits sufficient evidence to prove whether
the goods conform to the contract, the fact is unclear. If the buyer files a claim and
fails to prove it, the court should rule against the buyer. On the contrary, if the seller
files a counterclaim and fails to prove it, the court should rule against the seller. The
facts relied upon by the buyer and seller are the same. The court may reach two
incompatible conclusions based on the same principle of burden of proof.
The prevailing approach to the distribution of the burden of proof is to use “delivery
of the goods” as the dividing line. More specifically, if the buyer does not take delivery
of the goods or immediately claims for the quality of the goods upon taking delivery,
the seller should bear the burden of proof. Conversely, if the buyer has taken delivery
of the goods and does not immediately object to the quality, the buyer should bear
the burden of proof and proves that the goods were non-conforming at the time when
the risk passed. Further, it has been suggested that, in different stages, the party who
bears the burden of proof is different. In the first stage, the seller should first prove
that the goods are in conformity with the contract because the seller is obliged to
deliver conforming goods. Then, if the seller provides the prima facie evidence, the
burden of proof is shifted to the buyer, and the buyer should prove that the goods are
non-conforming and the buyer is not responsible for it. Finally, if the buyer proves
it, the burden of proof is shifted to the seller again, and the seller should prove that
it does not have liability. This method is called the “three-stages transfer method”.13
Actually, this method allocates the burden of proof to the seller first and at the same
time lowers the proof standard. As long as the prima facie evidence shows that the
goods are in conformity with the contract, the seller can be found to have fully
fulfilled its obligation and need not bear the adverse consequence according to the
rules of burden of proof. At this time, the buyer who claims that the goods are in
conformity with the contract should bear the burden of proof. By this method, the
court can avoid getting into a contradictory situation if the facts are unclear.

13 Linne [8], p, 43.

342 P. Wang et al.

References

1. Liu Y (2009) On the direct application of the United Nations convention on contracts for the
international sale of goods in Chinese courts. Law Rev 27(05):83–88
2. Liu Y (2019) On the application of the United Nations convention on contracts for the
international sale of goods in Chinese courts. Sci Law 111:191–201
3. He H (2019) Problems, causes and improvements of the application of CISG in Chinese courts.
Law Sci 4:181–192
4. Chen ZD, Wu JH (2007) On the application of United Nations convention on contracts for the
international sales of goods in China—a comment on Article 142 of general principles of civil
law. Law Sci 10:107–118
5. Zuo HC (2008) Research on the direct application of treaties. Chin J Law 3:88–97
6. Wang Y (2014) On the insufficiency and improvement of the application of the United Nations
convention on contracts for the international sale of goods by Chinese courts. Gansu Soc Sci
2:153–156
7. Li W (2017) On the application of international civil and commercial treaties—from the perspec-
tive of the relationship between international civil and commercial treaties and international
private law. The Jurist 4:107–115+178
8. Linne AL (2008) Burden of proof under Article 35 CISG. Pace Int Law Rev 20:31–44

Peng Wang the associate professor of Nankai University Law School. He graduated from Peking
University with a doctor of Law degree in 2003. His main areas of research include Public
International Law, International Economic Law and Legal Professional Ethics. Professor Wang
has published one monograph On the Nature of International Mixed Arbitration in 2007. He
participated in the National Social Science Foundation’s project, Research on the Development
of Human Rights with Chinese Characteristics in 2012. He is a director of Tianjin Sports Law
Society and a director of Tianjin International Economic Law Society.

Yueshan Liu is a master candidate in international law at the law school of Nankai University,
China. Prior to that, she graduated from Nankai University with a bachelor of Law degree in
2021, double-majoring in Business Management in Tianjin University. Her research interests lie
in Public International Law and International Economic Law.

Geng Wang is a Ph.D. candidate in law at University of International Business and Economics.
Prior to that, she earned her LL.M. in International Law from Nankai University and LL.B.
from Shandong University, respectively. Her areas of research are international trade law and
international treaty law.
Chapter 41
WS China Import GmbH v Longkou
Guanyuan Food Company

Wenjing An

Case Information
Case Name: WS China Import GmbH v Longkou Guanyuan Food Company
Seller: Longkou Guanyuan Food Company
Place of Business: China
Buyer: WS China Import GmbH
Place of Business: Germany
Details of First Instance:
Court: Qingdao Intermediate People’s Court, Shandong
Date of Decision: N/A
Case No: (2002) Qing Min Chu Zi No 35
Judges: N/A
Details of Appeal:
Court: Shandong High People’s Court
Date of Decision: 10 September 2004
Case No: (2004) Lu Min Si Zhong Zi No 50
Judges: Zhao Tong (Presiding Judge), Cheng Weihua (Acting Judge), Yang Jie
(Acting Judge)
CISG Applied: Yes
Key CISG provisions interpreted and applied: Articles 40, 74, 77, and 78

W. An (B)
North China Electric Power University, Baoding, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 343

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_41
344 W. An

Abstract
On 11 October, 8 November, and 27 December 2001, WS China Import GmbH (WS
Company) and Longkou Guanyuan Food Company (Guanyuan Company) signed
four preserved fruit sales contracts. Guanyuan Company obtained all the payments
according to the letter of credit opened by WS Company, but WS Company found
that the arrived goods were inconsistent with the contract, and all the goods were
raw fruits and were in a rotten state. After inspection, WS Company found that the
goods could not be sold on the market and did not meet the description on the bill
of lading and invoice, so WS Company destroyed all the goods. WS Company sued
Guanyuan Company in Qingdao Intermediate People’s Court for termination of the
contract and requested Guanyuan Company compensate for the loss of US$172,125
and interest, as well as bank handling fees, freight, inspection fees, cleaning fees,
storage fees, destruction fees, and other expenses and interest.
Guanyuan Company believed that the goods were qualified goods inspected by
the Chinese inspection and quarantine institutions. After receiving the goods, WS
Company did not notify Guanyuan Company of the non-conformity of the goods
within a reasonable period of time, nor did it choose a reasonable way to deliver
substitutes to avoid the expansion of losses, but unilaterally destroyed the goods,
resulting in undue losses. In addition, on 25 June 2001, WS Company signed an agree-
ment with Guanyuan Company, which agreed that WS Company would voluntarily
undertake to repay the total payment of US$176,050.25 owed by Warnke & Stelter
Import GmbH (Warnke Company) to Guanyuan Company, but WS Company did not
pay as agreed. Guanyuan Company counterclaimed and requested WS Company to
pay the loan and interest.
The court of first instance held that the dispute between the two parties was a
foreign-related sales contract. During the court trial, both parties reached an agree-
ment on the application of law and chose to apply the law of the People’s Republic of
China. Therefore, the law of the People’s Republic of China is the applicable law for
handling the dispute in this case. At the same time, both parties agreed to apply CISG
for the international sale of goods, so the Convention is also the basis for handling
the dispute in the WS case.
The court of first instance found that, after the preserved fruit passed the inspection
by the Chinese inspection and quarantine institutions, Guanyuan Company replaced
the preserved fruits with raw fruits and transported them to Germany, and the goods
were all rotten and could not be sold when they arrived at the port. According to
Article 94 of the Contract Law of the People’s Republic of China, if one party
fails to achieve the purpose of the contract due to a delay in performance or other
breaches of the contract, the other party may terminate the contract. The court held
that WS Company was unable to achieve the purpose of the contract due to Guanyuan
Company’s breach of contract, so it ordered to terminate the contract and Guanyuan
Company returned WS Company’s purchase price of US$172,125 and interest (calcu-
lated from the date of payment of each purchase price according to the loan interest
rate for the same period stipulated by the People’s Bank of China to the date of effec-
tiveness of this judgment). Guanyuan Company shall compensate WS Company for
41 WS China Import GmbH v Longkou Guanyuan Food Company 345

the bank handling fee of e735.84, freight of e13,982.85, wharf fee of e805.56,
inspection fee of e2,668, container cleaning fee of e679, cargo storage and destruc-
tion fee of e25,438.80, container overdue fee of e797.68, as well as the interest on
the above fees (from the date of payment of each fee, it shall be calculated according
to the loan interest rate for the same period stipulated by the People’s Bank of China
to the date of effectiveness of this judgment).
Guanyuan Company argued that WS Company failed to notify Guanyuan
Company of the non-compliance of the goods with the contract within a reason-
able period after receiving the goods and did not take appropriate remedial measures
to avoid the expansion of losses, so the expanded losses should be borne by them.
In this regard, the court held that, although Article 39(1) of CISG stipulates that the
buyer’s goods are not in conformity with the contract, he must notify the seller stating
the nature of the non-conformity within a reasonable time after he has discovered
or ought to have discovered the non-conformity; otherwise, he will lose the right to
claim that the goods are not in conformity with the contract. At the same time, Article
40 of CISG stipulates that if the non-conformity of the goods relates to facts of which
the seller knew or could not have been unaware of and has not informed the buyer, the
seller has no right to rely on the provisions of Articles 38 and 39. The court held that
Guanyuan Company exchanged the goods and did not comply with the provisions
of the contract, which should belong to the fact that Guanyuan Company “knew or
could not have been unaware of and did not disclose to the buyer”. According to the
provisions of the Convention, Guanyuan Company shall not invoke the provisions
of Article 39 as a defence. After the arrival of the goods at the port, WS Company
found that the goods could not be sold, and the goods were rotten. At this time, it
is completely reasonable and necessary to take immediate destruction measures to
avoid further expansion of losses. Therefore, the court did not support Guanyuan
Company’s defence.
With regard to the counterclaim of Guanyuan Company, according to the Contract
Law of China, the court held that both parties had reached an agreement, and
WS Company’s failure to repay the repayment amount as agreed constituted a
breach of contract. The court ordered WS Company to repay its purchase price
of US$176,050.25 and the interest calculated from the date of expiration of the
repayment period. WS Company appealed against the judgment of first instance.
The Higher People’s Court of Shandong Province, the court of second instance,
held that the facts determined by the court of first instance were clear and the
application of the law was correct and upheld the judgment of first instance.
346 W. An

Commentary to the Key Issues Related to the CISG

Issues
Issue 1: The Applicability of the CISG
Issue 2 Exceptions to the Notice of Quality Objection Issued by the Buyer in the
CISG
Issue 3 Determination of the Damages for Breach of Contract Under the CISG
Issue 4 Determination of the Rate of Interest Under the CISG

Comments
Issue 1 The Applicability of the CISG
I. Introduction
In 2002, Qingdao Intermediate People’s Court heard the case of contract dispute
between WS Company and Guanyuan Company (the WS case), and in 2004, Shan-
dong Higher People’s Court held the second instance.1 The court of first instance
and the court of appeal have the same views on the application of CISG. In this case,
both parties reached an agreement on the application of law in the court trial, chose
to apply Chinese law, and also agreed to apply CISG. This case is a typical case in
which the parties choose the laws of CISG Contracting States and CISG at the same
time, which is representative to a certain extent.
II. The application of CISG when the parties choose the law of CISG
Contracting State
According to Article 6 of CISG, the parties can exclude the application of the Conven-
tion by agreement, which reflects the arbitrariness of the Convention. The Article
specifies as follows:
The parties may exclude the application of the Convention or, subject to Article 12, derogate
from or vary the effect of any of its provisions.

Scholars believe that the ways of excluding the application of the Convention in
this Article are generally divided into express and implied exclusion. If the parties
express that the Convention does not apply to the contract, the application of the
Convention may be excluded. However, if the parties do not expressly exclude the
application of the Convention, but only choose to apply the laws of the Contracting
States of the Convention by implied means, there are different views in academic
circles and judicial practice.
From the analysis of the legislative history of the Convention, it can be seen
that at the Vienna diplomatic conference, the representatives rejected the proposal
put forward by Canada and Belgium that the choice of a state’s law means the

1WS China Import GmbH v. Longkou Guanyuan Food Company—Dispute of Contracts for Inter-
national Sale of Goods—Appeal, (2004) Lu Min Si Zhong Zi No. 50, Shandong Higher People’s
Court, 10 September 2004.
41 WS China Import GmbH v Longkou Guanyuan Food Company 347

application of a state’s domestic sales law.2 In the view of the representative of

Italy, if the parties were to opt for the national law of a Contracting State, that
would not be considered as implicitly excluding the Contract.3 Some scholars believe
that, among the Contracting States of the Convention, the Convention is the law
of the country to adjust its international trade. Therefore, choosing the law of a
Contracting State may also mean that they agree to choose to apply the Convention.4
In judicial practice, most judges agree with this view that the application of the
Convention will not be excluded when the parties only choose to apply the laws of
the Contracting States of the Convention. Only a few judges believe that such an
approach constitutes an indirect exclusion of the Convention; otherwise, this choice
has no practical significance.5
In addition, if the parties choose to apply the laws of a Contracting State and
CISG at the same time, the Convention is bound to be applicable. If the parties do
not specify which parts of the Convention are applicable, the Convention shall prevail
on issues related to the Convention, and the domestic law of the Contracting State
selected by the parties shall apply to issues not provided for in the Convention.
III. Application of the CISG in the WS Case
In the present case, both parties reached an agreement on the application of law in the
court trial and chose to apply Chinese law and the Convention. The business places of
both parties were located in China and Germany, both of which are the Contracting
States to the Convention. The author believes that, in this case, although the parties
chose Chinese law, they also chose the Convention; at this time, compared with
Chinese law, the Convention should be applied preferentially. The issues stipulated
in the Convention shall be judged by applying the Convention, and the issues not
stipulated in the Convention shall be adjudicated by applying Chinese law.
However, when the court specifically analysed the issues related to the Convention,
it did not fully give priority to the application of the Convention. When analysing the
problem that Guanyuan Company constituted a breach of contract and WS Company
had the right to terminate the contract, the court of first instance applied the Contract
Law of China as the basis for judgment, but the Convention clearly stipulates this
problem. Articles 25 and 49 of CISG stipulate that the seller’s fundamental breach
of contract leads to the termination of the contract. Therefore, this issue should
be judged according to the Convention. Although Article 94 of the Contract Law of
China and Article 49 of the Convention have the same function in this case, and there
should be no difference in the judgment results, the specific rules are not completely
consistent. Therefore, the Convention should be preferentially applied for judgment
without the application of the Contract Law of China. The court of second instance
did not correct this, and there were also omissions.

2 Liu [1], p. 193.

3 United Nations. United Nations Conference on Contracts for the International Sale of Goods
Official Records. Part Two. Summary Records of the Plenary Meeting—6th plenary meeting, 8
April 1980. A/CONF. 97/SR.6.
4 Gao [2], p. 41.
5 CLOUT case No. 92; CLOUT case No. 326.
348 W. An

In addition, the calculation of cost loss and interest caused by Guanyuan

Company’s breach of contract is stipulated in Articles 74, 77, and 78 of the Conven-
tion. However, the court made a judgment in accordance with Article 97 of the
Contract Law of China. Like the above issues, this issue should also be judged by
the Convention in priority without applying Chinese Contract Law.
When the court analysed the third problem, that is, WS Company did not notify
Guanyuan Company of the non-conformity of the goods within a reasonable period
of time, it correctly applied the provisions of Articles 39 and 40 of the Convention
and ruled directly in accordance with the Convention, which is appropriate.
When analysing the repayment contract dispute between WS Company and
Guanyuan Company, it is appropriate to apply the Contract Law of China to judge
because the dispute is not a sales contract dispute regulated by the Convention.
Issue 2: Exceptions to the Notice of Quality Objection Issued by the Buyer in
the CISG
I. Introduction
In this case, the seller replaced the preserved fruits that had passed the inspection
with raw fruits and shipped them to the buyer. The seller did not deliver the goods in
accordance with the contract on purpose. Therefore, even if the buyer did not send
the notice of quality objection in time, the seller had no right to invoke Article 39 of
the Convention to defend. This case is a typical case of the exception of the buyer’s
objection notification obligation under Article 40 of the Convention.
II. Application of Article 39 and Article 40 in the WS Case
In this case, Guanyuan Company held that WS Company did not put forward the
non-conformity of the goods within a reasonable time and did not take appro-
priate measures to prevent the expansion of the loss. According to Article 39 of
the Convention, the resulting loss shall be borne by WS Company. According to the
existing evidence, the court found that Guanyuan Company deliberately replaced the
preserved fruit with raw fruit and sent them to Germany after they passed the inspec-
tion of the inspection and quarantine agency of China. The practice of Guanyuan
Company was against good faith. The court held that the non-compliance of the
goods provided by Guanyuan Company with the provisions of the contract should
belong to the fact that the seller knew or could not have been unaware and failed to
inform the buyer as stipulated in Article 40 of the Convention. Therefore, the seller,
Guanyuan Company, has no right to believe that the buyer WS Company has not
informed the quality defect within a reasonable time according to Article 39.
The author agrees with the court’s view, and this situation is a typical case of
the application of Article 40 of the Convention. It belongs to the case that the seller
delivered the goods to the buyer knowing that the goods were defective. The seller
“knew” but failed to inform the buyer that the goods were defective. The fault lies
with the seller, and the law should not protect the seller who violates good faith. In
this case, the court correctly applied Article 40 of the Convention and heard the case.
41 WS China Import GmbH v Longkou Guanyuan Food Company 349

Issue 3: Determination of the Damages for Breach of Contract Under the CISG
I. Introduction
In this case, the buyer proposed that the seller should compensate for the losses
caused by the seller’s breach of contract. Article 74 of the Convention is a provision
on this issue. Although the court determined the loss in accordance with the Contract
Law of China and did not mention Article 74 of CISG in the judgment, it involved
the issue stipulated in Article 74 when determining the loss. Therefore, the author
analyses this issue.
II. Analysis of the application of Article 74 in the WS Case
In this case, the court held that WS Company had the right to claim compensation
from Guanyuan Company according to Article 97 of the Contract Law of China.
WS Company proposed that Guanyuan Company returns the payment made by WS
Company and compensates it for the bank handling charges and freight and wharf
expenses paid for the performance of the contract, which was supported by the court.
The inspection fee, container cleaning fee, goods storage and destruction fee, and
container overdue fee paid by WS Company are the cost losses caused by Guanyuan
Company’s breach of contract, which was also supported by the court.
From the court’s findings, it is not inappropriate for the above expenses to be
recognised as losses for compensation. However, the court should judge according
to Article 74 of the Convention, not according to the Contract Law of China. The court
has defects in the application of law. According to Article 74 of the Convention, the
bank charges and freight and wharf expenses paid by the buyer for the performance
of the contract are incidental losses. If the seller Guanyuan Company does not breach
the contract, these expenses will be normally included in the cost. The inspection fee
paid by WS Company, the container cleaning fee caused by the rotten fruit polluting
the container, the goods storage and destruction fee, and the container overdue fee also
belong to incidental losses. If the seller did not breach the contract, these expenses
would not have been incurred at all. The above expenses belong to the losses contained
in Article 74 of the Convention, so the seller Guanyuan Company shall be liable for
compensation. In terms of reasoning, the court was slightly simple, only listing the
above expenses, which were supported by the court, and did not further explain what
kind of loss the above expenses belonged to. This issue can be further clarified when
hearing similar cases in the future.
Issue 4: Determination of the Rate of Interest Under the CISG
I. Introduction
In this case, the buyer, WS Company, paid the full payment for the goods and found
that the seller had breached the contract and needed to terminate the contract. WS
Company required Guanyuan Company to return the payment for the goods and pay
interest. In addition, WS Company also required Guanyuan Company to pay interest
for incidental losses. The court supported the WS Company’s request and stipulated
the interest calculation method. This case involves the provisions of Article 78 of the
Convention.
350 W. An

II. Analysis of the Application of Article 78 in the WS Case

In this case, the seller’s fundamental breach of contract led to the termination of the
contract, and the buyer WS Company has paid all the payments, so it can require
the seller to return all the payments and pay interest. The court found that the
seller Guanyuan Company returned the payment of US$172,125 and interest to WS
Company (calculated from the date of each payment according to the loan interest
rate for the same period stipulated by the People’s Bank of China to the effective
date of this judgment). As for the incidental losses, the court also held that Guanyuan
Company shall compensate WS Company for the interest on the amount listed in the
incidental loss (calculated from the date of payment of each expense according to
the loan interest rate for the same period stipulated by the People’s Bank of China to
the effective date of this judgment).
The author believes that the court has the following problems in the determination
of interest: firstly, the court did not specify what legal provisions it judged the interest
issue. Article 78 of the Convention stipulates the right of the aggrieved party to collect
interest. Although the specific calculation provisions of the Convention are vague
and need to be judged in combination with domestic law, in this case, the court did
not mention the application of law, which is flawed. The court should clearly point
out that the right to collect interest is a right granted to WS Company in accordance
with Article 78 of the Convention, and the court can specify this when hearing similar
disputes in the future.
Secondly, the determination of interest rate in this case does not involve the anal-
ysis of the rules of private international law from the expression of the judgment,
but directly stipulates that it shall be calculated according to the loan interest rate
for the same period stipulated by the People’s Bank of China. The judgment clearly
stipulated the specific interest rate, but did not explain why the loan interest rate
stipulated by the People’s Bank of China was used. The reasoning of the judgment
here is not sufficient, and there is still room for improvement in the future.

References

1. Liu Y (2019) Application of CISG by domestic courts of contracting states. Sci Law (J Northwest
Univ Polit Sci Law) 3:191–201
2. Gao XJ (2017) Comments on CISG. China Renmin University Press

Wenjing An female, graduated from the Law School of Nankai University in 2017, the research
direction is international economic law. The title of graduation thesis is “Study on the Deter-
mination of Fundamental Breach in the International Commercial Contracts”. Since 2008, she
has served as a Lecturer in Law in the Department of Law and Political Science of North
China Electric Power University, teaching International Economic Law and International Law
courses for undergraduates and postgraduates. She published the following papers: “The Anal-
ysis of Decision-Making Mechanism of Multilateral Development Banks and the Inspiration for
41 WS China Import GmbH v Longkou Guanyuan Food Company 351

the Asian Infrastructure Investment Banks”, Social Sciences in Chinese Higher Education Insti-
tutions, Issue 4, 2015; “Theoretical and Empirical Study on the Foreseeability Standard of CISG
Fundamental Breach”, Hebei Law Science, Issue 1, 2019.
Chapter 42
Yiwu Majiali Import & Export Co., Ltd.
v Y & Q International Trade (Group), Inc

Charles Caishun Guo and Charlie Xiao-chuan Weng

Case Information
Case name: Yiwu Majiali Import & Export Co., Ltd. v Y & Q International Trade
(Group), Inc.1
Seller: Yiwu Majiali Import & Export Co., Ltd
Place of business: China
Buyer: Y & Q International Trade (Group), Inc
Place of Business: US
Details of First Instance
Court: The First Intermediate People’s Court of Shanghai
Date of Decision: 29 June 2005
Case No: (2005) Hu Yi Zhong Min Wu (Shang) Chu Zi No 22
Judges: Yuzhen Li (Presiding Judge), Yongqing Hu (Judge), Linmin Liu (Acting
Judge)

1 Judge Assistant LIN Wenjing from Shishi Primary People’s Court of Fujian contributed to this

case analysis.

C. C. Guo (B)
Quanzhou Intermediate People’s Court, Quanzhou, China
e-mail: [email protected]
C. X. Weng
University of New South Wales, Sydney, Australia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 353

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_42
354 C. C. Guo and C. X-C. Weng

Details of Second Instance

Court: Shanghai High People’s Court
Date of Decision: 31 December 2005
Case No: (2005) Hu Gao Min Si (Shang) Zhong Zi No 60
Judges: Junhua Liu (Presiding Judge), Chenmin Sun (Judge), Qian Fan (Judge)
CISG applied: Yes
Key CISG provisions interpreted and applied: Articles 53 and 78
Abstract
On 1 April 2004, Yiwu Majiali Import & Export Co., Ltd. (hereinafter “Majiali”)
entered a sales contract with Y & Q International Trade (Group), Inc. (hereinafter
“Y & Q”). The two parties signed four Sales Confirmation Letters, agreeing that
Y & Q would purchase blouses from Majiali for a total of US$148,871.60, with
payment being on L/C at sight. On 2 April 2004, the two parties signed an Agree-
ment, agreeing that the unit price of the blouse Style No 1451 was changed to
US$2.50, increasing the total amount payable by US$4,018.40. The new total price
was, therefore, US$152,890.
After signing the contracts (Sales Confirmation Letters), Majiali shipped the goods
as agreed. However, Y & Q failed to provide the documents and bills of lading that
were required for the Negotiation L/C, resulting in the refusal of the bank concerned
to make payment under the L/C. Y & Q admitted it was Y & Q’s fault that resulted
in the discrepancies in Majiali’s documents and issued four Letters of Guarantee
to Majiali guaranteeing to accept delivery and make payment. In addition, as per a
request by Y & Q, Majiali paid RMB¥18,270 for clothes hangers on behalf of Y &
Q. On 3 September 2004, Y & Q issued a Letter of Guarantee to Majiali, confirming
the arrears amount of US$148,871.60 and RMB¥18,270 and setting the repayment
period. However, Y & Q failed to pay the due amount when the repayment period
expired. Majiali sued for payment of US$152,890 and RMB¥18,270 plus interest
from 1 June 2004 to the effective date of the judgment. During the trial at First
Instance, Majiali confirmed its waiver of the right to claim the additional payment
of goods US$4,018.40 under the Agreement dated 2 April 2004.
In order to prove the plaintiff’s claim, Majiali submitted the following evidence
to the court:
1. Copies of the Sales Confirmation Letters, commercial invoices, bills of lading,
Letters of Guarantee, and receipts for L/C notices, proving that the plaintiff
delivered the goods as agreed but payment had not been made.
2. A copy of the Agreement certifying that both parties changed the unit price of
the goods in dispute.
3. A Statement of Account, certifying that the plaintiff paid RMB¥18,270 for the
clothes hangers on behalf of the defendant.
4. A Letter of Guarantee, certifying that the defendant confirmed its indebtedness
and agreed on the repayment period.
42 Yiwu Majiali Import & Export … 355

The defendant, Y & Q, argued that Majiali only partly delivered and, therefore,
the partial performance was inconsistent with the goods stated in the L/C, which
violated the principle of “Documents must conform to terms and conditions set out
in the L/C”. As a consequence of Majiali’s breach of performance, Y & Q’s customers
in the United States did not pay for the goods, and Y & Q was, therefore, unable to
pay Majiali. In addition, Majiali failed to fulfil its delivery obligation as the last batch
of 25,000 pieces of Style No 1914 blouses was considered defective. Therefore, Y &
Q requested the court to dismiss Majiali’s claims.
In order to prove the defendant’s claim, Y & Q submitted the following evidence
to the court:
1. Copies of the Sales Confirmation Letters, certifying that the transaction between
the two parties involved six orders of sales of goods.
2. Copies of the L/C, certifying that the amount of the L/C included six orders of
sales of goods.
3. Copies of Inspection Forms and correspondence, certifying that the plaintiff
failed to fully perform the contract.
The Court of First Instance found the following:
1. On 1 April 2004, Majiali and Y & Q signed four Sales Confirmation Letters,
agreeing that Y & Q would purchase blouses from Majiali, for a total of
US$148,871.60, with payment being on L/C at sight.
2. After signing the contracts,2 Majiali shipped the goods as agreed, but Y &
Q failed to provide the documents and bills of lading that were required for
the Negotiation L/C, resulting in the refusal of the bank concerned to pay the
payment under the L/C. In addition, as per a request by Y & Q, Majiali paid
RMB¥18,270 for clothes hangers on behalf of Y & Q.
3. On 3 September 2004, Y & Q issued a Letter of Guarantee to Majiali, confirming
the arrears amount of US$148,871.60 and RMB¥18,270 and setting the repay-
ment period. However, Y & Q failed to repay the due amount when the repayment
period expired.
4. It was also found that on 11 May and 21 May 2004, when Y & Q inspected
25,000 blouses of Style No 1914 of Order No 3511 provided by Majiali, the
craftmanship was considered too poor and Y & Q refused to take delivery.
Pursuant to provisions of Article 533 and Article 784 of the CISG, the Court of
First Instance held the following:
1. The defendant, Y & Q, shall make a payment of US$148,871.60 for the goods
plus interest to the plaintiff, Majiali, within ten days from the effective date of
this judgment.

2 Sales Confirmation Letters.

3 https://www.jus.uio.no/lm/un.contracts.international.sale.of.goods.convention.1980/53.html#:~:
text=Article%2053%20198%20The%20buyer%20must%20pay%20the,as%20required%20by%
20the%20contract%20and%20this%20Convention Access on 16 Sept 2021.
4 https://www.jus.uio.no/lm/un.contracts.international.sale.of.goods.convention.1980/78.html

Accessed on 17 Sept 2021.

356 C. C. Guo and C. X-C. Weng

2. The defendant, Y & Q, shall make a payment of RMB¥18,270 for the clothes
hangers plus interest to the plaintiff, Majiali, within ten days from the effective
date of this judgment.
3. The rest of the claims of the plaintiff, Majiali, were dismissed.
The case acceptance fee of RMB¥16,747 shall be borne by the plaintiff Majiali
(RMB¥413) and by the defendant Y & Q (RMB¥16,334).

Commentary to the Key Issues Related to the CISG

Issues
Issue 1: Whether the CISG is applied
Issue 2: Whether Majiali is entitled to claim payment for goods directly from
Y&Q
Issue 3: Whether Y & Q’s argument that Majiali’s failure to fulfil the require-
ments of the additional two contracts, other than the alleged four contracts in
dispute that had been delivered on, constituted a legally valid right of refusal to
make payment on the four contracts
Issue 4: Whether Majiali’s claim that Y & Q should pay interest on overdue
payments can be supported

Comments
Issue 1: Whether the CISG is applied
I. Background to UNCITRAL, CISG
The United Nations Commission on International Trade Law (UNCITRAL) was
established by the United Nations General Assembly5 and is the core legal body
of the United Nations specialising in international trade law. It plays a vital role in
pursuing harmonisation and modernisation of international trade law by preparing
and promoting the adoption and use of legislative and non-legislative instruments in
significant areas of commercial law.6
UNCITRAL was instrumental in establishing a uniform framework for interna-
tional sales law, referred to as the Contracts for the International Sale of Goods
(CISG). Its impact has been profound.7 The goal of the CISG is to “contribute to

5 UNCTIRAL [1], p. 1.
6 ibid.
7 Walt, [2], p. 37; Bonell [3], p. 26; Eörsi [4], p. 333; Zeller [5], p. 466; Zimmermann [6], pp. 455

+ 457.
42 Yiwu Majiali Import & Export … 357

the removal of legal barriers in international trade and promote the development of
international trade”.8 The CISG has been ratified by 94 States.9
II. Whether CISG is applied in the case concerned
The Court of First Instance held that this case was a dispute over an international
goods sales contract, and the business places of the seller and the buyer are the
People’s Republic of China and the United States of America, respectively. As both
countries are contracting states of the CISG and the two parties had not reached
an agreement on the applicable law, pursuant to Article 1(1)(a), the substantive law
governing the settlement of the dispute in this case should be the CISG.
Issue 2: Whether Majiali is entitled to claim payment for goods directly from Y &
Q
Pursuant to Article 5310 of the CISG, the buyer must pay the price for the goods as
required by the contract and this Convention. In this case, the contract for the sale of
goods, signed by both parties, was legal and valid and should, therefore, be enforced.
Both parties agreed in the Sales Confirmation Letter to pay the price for the goods by
L/C at sight. Majiali had fulfilled the delivery obligations stipulated in the contracts,
but the documents submitted by Majiali to the bank were not conforming to the terms
of the L/C. For the reasons given by Y & Q, payment was not made. Majiali was
entitled to claim the payment for the goods from Y & Q when it had fulfilled its
delivery obligations in accordance with the contracts.
Issue 3: Whether Y & Q’s argument that Majiali’s failure to fulfil the require-
ments of the additional two contracts, other than the alleged four contracts in
dispute that had been delivered on, constituted a legally valid right of refusal to
make payment on the four contracts
The four contracts, signed by both parties, constituted four independent legal rela-
tionships, and parties were bound by the terms of each contract independently from
the others. It is the contractual obligation of the buyer to pay the price for the goods as
per Article 5311 of the CISG. Y & Q’s refusal to pay for the goods on the grounds that
Majiali had failed to fulfil the delivery obligations under other contracts had no basis
in law. In addition, Y & Q had not proved its claim that there were two additional
contractual legal relationships. Therefore, the Court of First Instance rejected Y &
Q’s counterargument.

8 Preamble of the CISG.

9 https://uncitral.un.org/en/texts/salegoods/conventions/sale_of_goods/cisg/status Access on 17
Sept 2021.
10 ibid 4.
11 ibid.
358 C. C. Guo and C. X-C. Weng

Issue 4: Whether Majiali’s claim that Y & Q should pay interest on overdue
payments can be supported
Pursuant to Article 7812 of the CISG, if one party fails to pay the price, the other party
has the right to claim interest on these payments. The Letter of Guarantee issued by
Y & Q to Majiali on 3 September 2004 confirmed that Y & Q owed the arrears for the
goods and agreed on the repayment period. As Y & Q had failed to fulfil its payment
obligations, the loss13 claimed by Majiali had a factual and legal basis, and the Court
of First Instance supported its claim.
Follow-up Progress
Y & Q appealed to the Shanghai High People’s Court (hereafter “Court of Second
Instance”). The appellant, Y & Q, requested that the original judgment be revoked
and the appellee’s, Majiali’s, claim be dismissed. Y & Q contended that it was entitled
to refuse to pay for the goods in accordance with the law because Majiali had not
fully fulfilled its obligation of delivery. The appellee, Majiali, argued that the facts
found in the original judgment were clear and the application of the law was correct
and applied to the Court of Second Instance to reject the appellant’s, Y & Q’s, appeal
and maintain the original judgment.
During the trial and subsequent mediation by the Court of Second Instance,
the appellant, Y & Q, and the appellee, Majiali, reached the following mediation
agreement:
1. The appellant, Y & Q, confirmed that a payment of US$120,000 was still owing
to the appellee, Majiali.
2. The appellant, Y & Q, shall pay US$10,000 to the appellee, Majiali, on 15
January 2006, with the balance of US$110,000 being paid before 31 March
2006.
3. The First Instance case acceptance fee of RMB¥16,747 was to be borne by the
appellee, Majiali, and the Second Instance case acceptance fee of RMB¥16,747
was to be borne by the appellant, Y & Q.
4. The two parties had no other disputes.
The Court of Second Instance issued the (2005) Hu Gao Min Si (Shang) Zhong
Zi No 60 Civil Mediation Letter to confirm the mediation agreement. The mediation
agreement came into effect after being signed and sealed by both parties.
Closing Remarks
In disputes over contracts for the sale of goods, attention should be paid to distin-
guishing the relationship between multiple contracts (independent or partial delivery
under one contract), which may affect the rights and obligations of the parties. Each
order in this case was an independent contract; therefore, breach of the payment-
for-goods obligation, of any of the orders, was a fundamental breach of contract.

12 ibid 5.
13 Interest loss.
42 Yiwu Majiali Import & Export … 359

The fulfilment defect of the supplementary orders, which are subsequential and not
partial, does not affect the rights and obligations of the parties under the existing
orders. As non-payment constitutes a breach of contract, remedies are available,
including, but not limited to, interest.
The purpose of the CISG is to provide a modern, uniform, and fair regime for
contracts for the international sale of goods. Thus, the CISG contributes signifi-
cantly to introducing certainty in commercial exchanges and decreasing transaction
costs.14 This aids in the further promotion of the Belt and Road Initiative. There
are three ways in which the CISG can resolve trade disputes between the Belt and
Road countries. The first way is direct application. China has been amicable to the
application of the Convention. Article 142 of the General Principles of the Civil Law
of China stipulates that, if any international treaty concluded or acceded to by the
People’s Republic of China contains provisions differing from those in the civil laws
of the People’s Republic of China, the provisions of the international treaty shall
apply, unless the provisions are ones on which the People’s Republic of China has
announced reservations. The second way is through the choice of the parties. Many
of the Belt and Road countries have not ratified the CISG, yet the CISG may apply
by virtue of the choice of the contractual parties, regardless of whether their places
of business are located in a Contracting State.15 The third way arises as the CISG
provides a blueprint and foundation for the formulation of a unified new international
commercial law in the future. The Convention itself is a crystallisation of wisdom
that combines the world’s major legal systems and major countries and offers an
effective model for formulating future international law.

References

1. UNCTIRAL (2013) A Guide to UNCITRAL: Basic facts about the United Nations Commission
on International Trade Law. https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/
uncitral/en/12-57491-guide-to-uncitral-e.pdf
2. Walt SD (2015) The modest role of good faith in uniform sales law. Boston Uni Int Law J
33:37–73
3. Bonell MJ (1996) The UNIDROIT principles of international commercial contracts and CISG—
alternatives or complementary instruments? Uniform Law Rev 1:26–39
4. Eörsi G (1983) A propos the 1980 vienna convention on contracts for the international sale of
goods. Am J Comp Law 31:333–356
5. Zeller B (2006) The significance of the Vienna convention on the international sale of goods for
the Harmonisation and transplantation of international commercial law. Stellenbosch Law Rev
17(3):466–481
6. Zimmermann R (2007) European contract law: general report. Europäische Zeitschrift für
Wirtschaftsrecht, 15

14 https://uncitral.un.org/en/texts/salegoods/conventions/sale_of_goods/cisg access 17 Sept 2021.

15 ibid 11.
360 C. C. Guo and C. X-C. Weng

Charles Caishun Guo is an Assistant Judge at the Quanzhou Intermediate People’s Court
(currently on a secondment to the Supreme People’s Court of China). He is also a Ph.D. candi-
date at University of Cologne. He was a Visiting Scholar at Emory University School of Law
in 2019 while he was pursuing his second LL.M. in Common Law at City University of Hong
Kong (Chinese Judges Programme). Prior to that, he earned his first LL.M. in International Busi-
ness Law from National University of Singapore in 2010. He obtained his LL.B. from Fujian
Agriculture and Forestry University, China in 2008.

Charlie Xiao-chuan Weng joined the UNSW Law faculty in 2015 as an Associate Professor.
Previously, he was Eastern Scholar Chair Professor of Law and Assistant Dean at the KoGuan Law
School of Shanghai Jiao Tong University (SJTU, China) . He also taught at Nagoya University
Graduate School of Law (Japan) as Designated Associate Professor. He studied law at East China
University of Political Science and Law (ECUPL) before completing his LLM at the National
University of Singapore (NUS). After working for ECUPL for five years, he went to the Univer-
sity of Pennsylvania School of Law for his LLM and SJD in corporate law, followed by an
appointment as a Robert S. McNamara Fellow at the Yale Law School Center for the Study
of Corporate Law. In 2012, he was recruited by SJTU as a Research Professor. He also held
fellow/visiting professor positions in many leading research institutions, such as Stanford Law
School and Cambridge University.
Chapter 43
Vishaybc Components Beyschlag Gmbh
versus Shanghai Y.Hsu Trading Co.,
Ltd.—Dispute Arising from a Sale
of Goods Contract

Peng Wang, Yueshan Liu, and Chaolin Zhang

Case Information
Case name: Vishaybc Components Beyschlag Gmbh versus Shanghai Y.Hsu Trading
Co., Ltd. – Dispute Arising from a Sale of Goods Contract
Seller: Vishaybc Components Beyschlag Gmbh
Place of business: Germany
Buyer: Shanghai Y.HSU Trading Co., Ltd
Place of business: China
Details of First Instance:
Court: The First Intermediate People’s Court of Shanghai
Date of Decision: 28 November 2005
Case No: (2005) Hu Yi Zhong Min Wu (Shang) Chu Zi No 139
Judges: Ying Huang (Presiding Judge), Dongmei Zhang (Acting Judge), Weiming
Cao (Acting Judge)
CISG applied: Yes
Key CISG provisions interpreted and applied: Article 53
Abstract

P. Wang (B) · Y. Liu · C. Zhang

Nankai University, Tianjin, China
e-mail: [email protected]
Y. Liu
e-mail: [email protected]
C. Zhang
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 361

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_43
362 P. Wang et al.

The seller, the plaintiff, is a German company, and the buyer, the defendant, is a
Chinese company. In 2003, based on the previous trade relationship between the two
parties, the seller issued an unconditional letter of intent to the buyer, agreeing that
the buyer would deal in China for the listed series of products. A consensus was
reached that the buyer would first issue the order and then the seller would deliver
the goods by air in part according to the order.
The defendant successively issued three batches of order forms to the plaintiff.
All three listed the required part number, number of pieces and amount of goods,
price method and payment method. The payment method was a wire transfer within
60 days. Afterwards, the plaintiff respectively issued six, twelve and four bills of
lading for the purchase order. On 31 December 2004, the plaintiff issued three state-
ments to the defendant. Under the three statements, the defendant owed the plaintiff
a total of US$22,276.79 and e170,456.73 but these were not paid. The plaintiff sued
to claim the amount due and interests.
The court of first instance held that the case was a dispute over a foreign-related
sale and purchase contract, and the plaintiff and the defendant did not agree on the
law applicable to the settlement of the dispute in the purchase order. Since both China
and Germany are member states of the United Nations Convention on Contracts for
the International Sale of Goods (the CISG), and the defendants received their goods
in China; the relevant provisions of CISG and Chinese law apply to the settlement
of the dispute in this case.
According to the relevant provisions of Chinese law and Article 53 of the CISG,
the court of first instance held that the plaintiff and the defendant had established a
long-term trading relationship through the form of order. The plaintiff delivered the
goods according to the defendant’s order, so the defendant should have paid the order
price after receiving the goods. However, the defendant failed to pay for the goods
on time after receiving the goods. As a result, the defendant should also compensate
for the interest on the overdue payment in addition to the owed principal of the
goods. In the first instance, the defendant, Shanghai Yongxu Electronics Co., Ltd
(Yongxu), paid the plaintiff, Vishay Zhongshi Electronic Busra Co., Ltd (Vishay),
the principal, RMB¥1,888,941.15, and compensated the interest of overdue payment,
RMB¥193,178.07.
43 Vishaybc Components Beyschlag Gmbh versus Shanghai … 363

Commentary on the Key Issues Related to the CISG

Issues
Issue 1: The Applicability of the CISG
Issue 2: Failure to Pay and the Buyer’s Responsibility Under the CISG
Comments
Issue 1: The Applicability of the CISG
In the judgment of this case, the court decided to apply the CISG as follows: first,
this case is a dispute over a foreign-related sale and purchase contract; second, the
plaintiff and the defendant did not agree on the law applicable to the settlement of the
dispute in their purchase order; third, both China and Germany are member states of
the CISG; and fourth, the defendant received the goods in China. In addition, when
applying the CISG Convention, the court did not exclude the application of Chinese
law, but applied the relevant provisions of CISG and Chinese law simultaneously.
On the basis of Articles 1 and 6 of the CISG, it can be found that the scope of
application of the Convention mainly includes two aspects: one is that the sale of
goods must have an international character; the other is that there must be certain
connection request by the CISG between the contract and one (or more) contracting
states of this Convention. Among them, “internationality” means that only the place
of business of the parties to the contract is considered, that is, the nationality of
the parties, the place of conduct and the place of performance of the contract are
ignored.1 And “a certain connection” refers to the fact that the places of business of
both parties are in different contracting states, or the applicable law determined by
the rules of private international law is the law of a certain contracting state.2
The application of the CISG in China is generally considered to meet the following
three conditions. First, the business places of the two parties are located in different
countries, both of which are contracting states, and the parties did not specify in the
contract Agreement to exclude the application of CISG. Second, if the party chooses
the applicable law, such choice shall be followed; if the party chooses the law of
a non-contracting state, it shall be deemed to be excluded from the application of
the CISG Convention. Third, if the party does not choose the applicable law, there
is no other explicit way to exclude the application of the Convention. The CISG
Convention has priority to be directly applied.
In the Sinochem International (Overseas) Pty Ltd v ThyssenKrupp Metallurgical
Products Gmbh Case,3 the Supreme People’s Court held that the CISG Convention
should be applied to this case; but the disputes regarding other issues in this case,

1 Among them, Article 1 of the CISG also set the rule: “(3) Neither the nationality of the parties nor
the civil or commercial character of the parties or of the contract is to be taken into consideration
in determining the application of this Convention.”.
2 China has made a reservation about the latter situation. However, if the parties expressly choose

the convention as the applicable law according to Chinese law, the convention can still be applied.
3 (2013) Min Si Zhong Zi No. 35.
364 P. Wang et al.

not regulated by the provisions of the Convention, should be regulated by the New
York State law chosen by both parties. According to Article 4 of the CISG, the
Convention does not set any rules on the validity of contracts, therefore, the relevant
issues concerning the validity of the contract in this case should be governed by
the US Law chosen by the parties. It can also be seen from the judgment in this
case that the Chinese court held that, when the parties did not expressly exclude the
application of the CISG Convention, the CISG Convention still applied first even if
the parties chose the US Law as their governing law. In the process of applying the
CISG Convention, the application of the CISG will not preclude the application of
other laws, but the CISG Convention has priority over others. Under the premise that
the CISG Convention does not provide specific rules for certain issues, the applicable
law selected by the parties can be applied to disputes as a supplement.
In the Royal Norwegian Premium Aquatic Products Company v Rizhao Jixiang
Marine Food Co., Ltd Case,4 the first and second instance courts had divergence on
the application of CISG and Chinese law. The court of first instance held that the
place of performance of the sales contract was in China, and the buyer and the seller
had no choice in applicable law in the contract, so the law of the country with the
closest connection to the contract, that is, the law of the People’s Republic of China,
should be applied. However, the court of second instance held that the buyer and the
seller did not agree on the applicable law in the contract, but China and Norway are
both parties to the CISG, therefore, in this case, this Convention should be applied
as the law governing this case.
In addition, in the process of applying the CISG in China, if the provisions of the
Convention conflict with the conflicting rules, the effectiveness of the Convention is
prior to that of the conflicting rules. Even if the conflicting rules lead to the laws of
the country or a third country, the Convention should still be applicable.
In this case, the business places of both parties are located in different countries,
one in China and the other in Germany, both of which are parties to the CISG. The
plaintiff and the defendant did not agree on the law applicable to the settlement of
disputes in the purchase order, and the parties did not expressly agree to exclude
the application of the CISG in the contract. Under such circumstances, the relevant
laws of the CISG should be applied first, and the relevant regulation in Chinese laws
can be supplemented. The court demonstrated, “the relevant provisions of CISG and
Chinese law should apply to the settlement of disputes in this case”, and it cited and
applied Article 53 of the CISG as well as the Contract Law of the People’s Republic
of China, which was effective then.
Issue 2: Failure to Pay and the Buyer’s Responsibility Under the CISG
In this case, the seller delivered the goods according to the buyer’s order, and the
buyer should pay the order price after receiving the goods. However, after receiving
the goods, the buyer failed to pay the purchase price. So, the seller requested the
court to order the defendant to pay the purchase price and compensate the overdue
payment with interest calculated to the payment date. Relying on Article 53 of the

4 (2004) Lu Min Si Zhong Zi No. 44.

43 Vishaybc Components Beyschlag Gmbh versus Shanghai … 365

CISG and Articles 109 and 112 of the Chinese Contract Law, the court held that the
seller should pay off the principal of the goods owed and compensate the interest on
the overdue payment.
In addition, in response to the buyer’s liability for breach of contract for failing
to pay the price on time in the sales contract, Article 78 of the CISG Convention
stipulates:
If a party fails to pay the price or any other sum that is in arrears, the other party is entitled
to interest on it, without prejudice to any claim for damages recoverable under Article 74.

Therefore, according to the above-mentioned law, in the relevant provisions of the

CISG Convention, if the buyer of the sales contract does not pay the price on time, the
responsibility it should bear is mainly divided into three aspects: paying the price of
the goods in accordance with the contract and the Convention; paying interest on the
payment that is not paid on time; and addressing damages due to breach of contract.
In addressing damages, the party in breach of contract may perform its obligations
or take remedial measures; alternatively, the premise for compensation for damages
is that there is indeed an objective existence of additional losses.
Regarding the issue of interest on the compensation payment, the parties in this
case also did not state a clear agreement in the contract. However, regardless of
whether the contract is agreed upon or not, in accordance with the CISG, the seller’s
claim should be supported. If the contract clearly stipulates it, then the buyer should
pay overdue interest for the unpaid goods in accordance with the contract, and its
legal basis is Article 53 of the CISG. If the parties did not expressly agree to the
contract but the seller directly filed a claim to the court for overdue interest, it should
also be supported by the court, and the legal basis then is Article 78 of the CISG
Convention.
In this case, the seller asked the buyer to pay the interest on the overdue payment,
which was supported by the court. However, the court did not invoke the relevant
clauses of CISG on interest. Instead, Chinese Contract Law was used. The CISG
Convention does not make corresponding provisions on the interest on arrears, but
Chinese Contract Law does, so the court invoked the damages clause, Article 112
of the Chinese Contract Law. In fact, even according to Chinese law, such overdue
interest should not be regarded as a kind of damage compensation, hence, the court
does not need to quote Article 112 of the Chinese Contract Law. The obligation of
the buyer should have been fulfilled in the form of payment of money, and the seller
required the buyer to pay the interest of the overdue payment, which is similar to the
problem of overdue interest caused by overdue and unreturned private loans. If the
buyer has not made the payment late, the seller can also deposit the above-mentioned
payment in the bank or use it for other investments to generate corresponding income.
The Chinese Contract Law does not set rules for unpaid interest, but the relevant
judicial interpretation5 provides

5Article 24(4) of the Interpretation of the Supreme People’s Court on Issues Concerning the
Application of Law for the Trial of Cases of Disputes over Sales Contracts (2012).
366 P. Wang et al.

Where there are no contractual provisions on liquidated damages for late payment or calcula-
tion methods therefor, if the seller claims compensation for losses caused by late payment on
the ground that the buyer breached the contract, the People’s Court may calculate the losses
on the basis of the benchmark interest rate for loans of the same type in the same period
prescribed by the People’s Bank of China and by reference to the standards for interest rates
on late payment penalties.

The court’s application of the above-mentioned laws is obviously improper. Since

the parties did not exclude the application of the CISG, when both Chinese law and
the CISG are applied and both have relative regulations, the CISG has priority to
be applied. Therefore, on the issue of interest, the court should preferentially apply
the relevant provisions of the CISG, without the need to apply the Chinese Contract
Law and its judicial interpretation. Therefore, in the court’s judgment, the applicable
law, Article 112 of the Chinese Contract Law, should be amended to Article 78 of
the CISG. Such application will make judgment in a more rigorous and appropriate
way.
It can be seen that in cases where both the CISG and a country’s domestic law are
applied, the court must correctly and reasonably interpret the relevant rules before
it can judge how to invoke the legal basis. If there are provisions in the CISG and a
country’s domestic law for a certain matter, the CISG shall be applied first, and the
domestic law can be supplemented for matters that are not provided in the Convention.
The significance of this judgment is that, for the same case, invoking and applying
different rules causes different conclusions to be drawn. The difficulty of this judg-
ment is that the CISG and a country’s domestic laws are often not clear about whether
certain matters are stipulated. It requires certain explanations and reasoning to be
able to judge. Additionally, uncertainty arises depending on how the relevant rules
are explained.
In practice, Chinese courts often encounter this problem of erroneously bypassing
the provisions of the Convention and directly applying Chinese law.6 On the one
hand, Chinese judges are not sufficiently familiar with the provisions of international
conventions and their interpretation and application, and lack confidence in doing
so.7 On the other hand, Chinese judges believe that the application of Chinese law
can achieve the same legal effect without harming the legitimate rights and interests
of the parties, and that this will not harm fairness and justice. In addition, Chinese
courts and judges are faced with an overload of cases and work pressure, leaving
little time to analyse and study the interpretation and application of the provisions
of international conventions in detail. Therefore, they often apply the more familiar
regulations, Chinese law, as an alternative. These problems of incorrect application
of international conventions are often not taken seriously and corrected by the parties
and higher courts, so the courts and judges have no incentive to change their wrong
working habits. These are no longer problems of the law itself, and can only be solved
by improving the level of judicial administration and the improvement of the social
judicial environment.

6 He [1], pp. 184–186.

7 He [1], pp. 189–190.
43 Vishaybc Components Beyschlag Gmbh versus Shanghai … 367

Reference

1. He H (2019) Problem of CISG application by Chinese courts, its causes and how to improve.
Law Sci 4:181–192

Peng Wang the associate professor of Nankai University Law School. He graduated from Peking
University with a doctor of Law degree in 2003. His main areas of research include Public
International Law, International Economic Law and Legal Professional Ethics. Professor Wang
has published one monograph On the Nature of International Mixed Arbitration in 2007. He
participated in the National Social Science Foundation’s project, Research on the Development
of Human Rights with Chinese Characteristics in 2012. He is a director of Tianjin Sports Law
Society and a director of Tianjin International Economic Law Society.

Yueshan Liu is a master candidate in international law at the law school of Nankai Univer-
sity, China. Prior to that, she graduated from Nankai University with a bachelor of Law degree
in 2021, double-majoring in Business Management in Tianjin University. Her research interests
lie in Public International Law and International Economic Law.

Ms. Chaolin Zhang is a Ph.D. candidate in international law at the law school of Nankai Univer-
sity, China. Prior to that, she obtained an LLM in International Economic Law from the School of
Law at the City University of Hong Kong, China. Her research interests lie in international trade
law, data law, and law and technology.
Chapter 44
Skalli Corporation v Shanghai Tongya
Liquor Co., Ltd—dispute arising
from a sale of goods contract

Jonathan Kolieb

Case Information
Case Name: Skalli Corporation v. Shanghai Tongya Liquor Co Ltd – Dispute Arising
from a Sale of Goods Contract
Seller: Skalli Corporation
Place of business: The US
Buyer: Shanghai Tongya Liquor Co Ltd
Place of business: China
Details of First Instance:
Court: The First Intermediate People’s Court of Shanghai
Date of Decision: 15 December 2006
Case No.: (2005) Hu Yi Zhong Min Wu (Shang) Chu Zi No.204
Judges: Yuzhen Li (Presiding Judge), Linmin Liu (Judge), Fengyu Lu (Acting Judge)
CISG Applied: Yes
Key CISG provisions interpreted and applied: Articles 1 and 7
Abstract
The plaintiff, Skalli Corporation (‘Skalli’) submitted the following facts:
– The defendant, Shanghai Tongya Liquor Co., Ltd. (‘Tongya’), sent them a series of
purchase orders. In particular, Purchase Order No.SS0402 was sent and received
by the plaintiff in July 2004.

J. Kolieb (B)
RMIT University, Melbourne, Australia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 369

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_44
370 J. Kolieb

– The plaintiff accepted the order and handed over the goods subject to this order
to the carrier on 9 August 2004, for which a bill of lading No.USS039226 was
issued to the plaintiff.
– Further, the plaintiff handed over all documents necessary for customs to the
Defendant.
– While the plaintiff fulfilled all its duty under the sale of goods contract, the
defendant failed to pay the amount (USD$17,160) under this contract.
On the basis of the above facts, the plaintiff sought for the payment of the
amount, interests and litigation costs. The plaintiff submitted evidence such as email
exchanges, receipts, orders, custom documents and bill of lading.
The defendant denied the contract between the two parties and argued that the
evidence submitted by the plaintiff failed to prove a contract, and its performance
existed between the plaintiff and the defendant, rather than other parties.
The court determined that the disputed issue is whether there was a transaction
between the plaintiff and the defendant.
The court held that the CISG should apply because the nature of the contract
was an international sale of goods contract, and the parties were from two different
Contracting States. The court, however, held that the disputed issue was not expressly
governed by the provisions of the CISG, and thus, the applicable law should be deter-
mined under Article 7(2) of the CISG. The court held that the applicable law should
be the law having the closest connection with the dispute. Because the defendant was
a Chinese company, Chinese law should apply. Further, the procedural and evidence
law matters should be governed by the law of the jurisdiction, therefore the Chinese
law is also applied.
(Note: In the judgement, the Chinese court did not explain why the CISG had no
sufficient provisions to cover this issue. It was not explained why Article 7(2) was
applied, nor where ‘the closest connection test’ was from.)
The court proceeded with the Chinese law, including the Chinese General Provi-
sions of the Civil Law and the Supreme People’s Court’s Regulations on Evidence
in Civil Proceedings. The court found that evidence submitted by the plaintiff failed
to prove there neither were dealings between the plaintiff and the defendant, nor
that the defendant had taken the goods subject to this particular contract. The court
rejected the plaintiff’s claims accordingly.
44 Skalli Corporation v Shanghai Tongya … 371

Commentary on the Key Issues Related to the CISG

Issues
Issue 1: Invoking CISG Article 7(2) to nationalise the resolution of the dispute
Issue 2: A case of mistaken identity?
Issue 3: Weight of evidence insufficient to prove existence of contractual
relationship

Comments
The 2006 case of Skalli Corporation versus Tongya Liquor was heard by the 2nd
Intermediate People’s Court, Shanghai, China, by a three-judge panel. Prima facie,
this dispute reads like a ‘classic’ international sales transaction gone awry, with the
purported buyer of the goods (Tongya Liquor) denying they had entered into any
contractual relationship with the seller of the goods (Skalli Corporation) at all.
While the court acknowledged CISG’s general applicability to international sales
contracts involving Chinese companies, the Court proceeded to minimise its import
in this particular case. It deemed CISG’s substantive provisions were not relevant in
the determination of the dispute, and instead cited one of CISG’s general interpre-
tation provisions—Article 7(2)—to invoke private international law rules to base its
judgement on domestic Chinese civil procedure laws. Indeed, the decision is made
on evidentiary (or the lack thereof) grounds, rather than substantive contract law
grounds.
Despite documentary evidence provided to the court by the plaintiff—including
email exchanges, receipts, purchase orders, customs documents and bills of lading—
that sought to establish that goods were indeed ordered and delivered by Skalli to
Tongya—the court agreed with the defendant and failed to find the existence of a
contract between the parties. On that basis, the court dismissed Skalli’s case against
Tongya.
It is inappropriate for this author, and rather besides the point of the present
volume, to evaluate a Chinese court’s analysis and application of Chinese civil law.
The significance of this case, as it relates to the CISG, is (1) its recognition of
the prima facie applicability of the CISG to international sales contracts and (2)
its invocation and application of CISG, Article 7(2) to essentially nationalise an
international commercial dispute.
(To be sure, the case raises other curious questions, such as: did the defendants’
actions induce the plaintiff to mistakenly identify the Chinese buyer of their goods?
Based on the summary of the judgement provided, it certainly seems that the seller
did indeed ship the goods and make efforts to deliver them to the buyer in Shanghai,
all with a clear understanding that a contract was indeed in place.)
Issue 1: Invoking CISG Article 7(2) to nationalise the resolution of the dispute
The court recognised the relevance of the CISG in prima facie governing the conclu-
sion of the contract between the parties. This is a correct application of Article 1,
372 J. Kolieb

CISG. The two parties to the purported contract had places of business in Contracting
States1 ; the purported contract was for the sale/purchase of goods and not otherwise
excluded by the provisions of the CISG.2
However, the Court—without providing reasons—found that the CISG did not
expressly provide for the means to resolve the dispute between the parties. Instead,
the Court cited Article 7(2) of the CISG to justify its invocation of domestic Chinese
law to adjudicate the dispute.
At this juncture, it is worthwhile to remind the reader of the text of Article 7 of
the CISG:
Article 7
(1) In the interpretation of this Convention, regard is to be had to its international character
and to the need to promote uniformity in its application and the observance of good faith in
international trade.
(2) Questions concerning matters governed by this Convention which are not expressly
settled in it are to be settled in conformity with the general principles on which it is based
or, in the absence of such principles, in conformity with the law applicable by virtue of the
rules of private international law.

The Court has seemingly relied on the final element of Article 7(2) to justify its
turn to domestic Chinese law. This seemingly overlooks not only the first element of
Paragraph 2 of Article 7 but also Paragraph 1.
Before turning to Article 7(2) to resort to the application of national Chinese
law to determine this dispute, judicial attention could have been placed on Article
7(1)—and an examination of the ‘general principles [of international contract law]
on which the [CISG] is based.’3 The precise contours of these ‘general principles’
upon which the CISG is based are not defined in the convention itself, nor does an
authoritative, universally-accepted statement of where to find such principles exist.4
Nevertheless, it is widely accepted that the UNIDROIT Principles of International
Commercial Contract Law is a useful reflection of these general principles—and are
commonly referred to by arbitral bodies and courts when Article 7(2) of the CISG
is invoked and the general principles of international contract law are being sought.5
This is true too with Chinese courts and arbitral bodies. Chinese legislative bodies
even consulted the UNIDROIT Principles when reforming Chinese contract law in
recent decades.6
While the UNIDROIT Principles have undergone further revisions and expan-
sions, at the time of hearing this case the UNIDROIT Principles were into their
second revision. In 2004, the original 1994 set of 120 articles had been expanded
into 185 articles. (The principles have undergone two further revisions since then

1 CISG Article 1(1).

2 CISG, Article 2; Article 3(2).
3 Article 7(1), CISG.
4 Jannsen, Olaf [1].
5 Kronke [2].
6 Manjiao [3], p. 13.
44 Skalli Corporation v Shanghai Tongya … 373

in 2013 and 2016.7 ) It is worthwhile to note that China has been a member of the
International Institute for the Unification of Private Law (UNIDROIT) since 1986.8
The significance of the Court’s decision to overlook this element of Article 7(2)
is to, in effect, overlook the ever-growing body of international commercial dispute
resolution decisions (made by courts and arbitral panels) based on these globalised
principles.9 Instead, the practical impact was to effectively ‘nationalise’ the dispute
resolution process—in this case, by looking for the law with the closest connection to
the contract and finding that to be Chinese law. Even when doing so, the UNIDROIT
Principles could have been employed to help interpret and apply the relevant domestic
law to the specific situation at hand—as encouraged by the Principles themselves—
however, there is no evidence that the court did so in this instance.
This nationalisation approach to resolving an international commercial dispute
is precisely what the CISG, the UNIDROIT Principles and other international
law-making in this domain seek to avoid.10 For example, the preamble of the
CISGexplains one of the rationales for its creation as
adoption of uniform rules which govern contracts for the international sale of goods and
take into account the different social, economic and legal systems would contribute to the
removal of legal barriers in international trade and promote the development of international
trade…11

Bypassing the CISG and UNIDROIT provisions related to the formation of the
contract (see below), the court examined and applied relevant Chinese laws, including
those related to evidentiary matters in civil procedure, and concluded that no contrac-
tual relationship existed between the parties. While the court’s analysis began with an
acknowledgement of prima facie applicability of the CISG to what was purportedly
an international sales contract, it dispensed with any material examination of the
provisions of the CISG related to the formation of the contract (CISG, Arts 14–24),
breach of contract (CISG, Article 25) and the buyer’s responsibilities, including to
take delivery of the goods and pay the price of those goods (CISG, Article 53).
Issue 2: A case of mistaken identity?
Ultimately, the court found that there was no contractual relationship between the
plaintiff and defendant. There was no sales contract formed between them, and
there was no international sale of goods concluded between them. Thus, the CISG’s
substantive provisions related to the formation of a contract, the buyer’s obligations

7 See UNIDROIT Principles 2016, https://www.unidroit.org/instruments/commercial-contracts/uni

droit-principles-2016/ (last accessed 16 January 2022).
8 UNIDROIT, ‘Membership’, https://www.unidroit.org/about-unidroit/membership/ (last accessed

15 January 2022).
9 Kroll [4].
10 Ibid.
11 CISG, Preamble. See also: UNIDROIT Statute, Article 1, The purposes of the International

Institute for the Unification of Private Law are to examine ways of harmonising and coordinating
the private law of States and of groups of States, and to prepare gradually for the adoption by the
various States of uniform rules of private law.
374 J. Kolieb

and the seller’s remedies were not enlivened in this case. In the wake of the court’s
determination that Skalli had, in fact, contracted for the sale of their goods, with an
entirely distinct legal entity, one wonders what the judicial response may have been if
Skalli subsequently launched legal action against them to recover the purchase price.
Bruno Zeller observed that cases of mistaken identity in international contracting
are very rare.12 According to the Shanghai 2nd Intermediate People’s Court, Skalli
versus Shanghai Tongya Liquor is one such case.
In the Chinese language summary of the decision, the Court notes that the defen-
dant (Tongya Liquor) submitted that the provider of the goods was not Skalli—i.e.
that the plaintiff in this case was also mistaken as to its own identity, but rather
St. Supery Vineyards and Winery. (While the documentary evidence has not been
sighted by the author, it is notable that St. Supery Vineyards and Winery is a wine
company located in Napa Valley, California, USA—established and owned (at the
time) by Robert Skalli of Skalli Corporation.13 )
Issue 3: Weight of evidence insufficient to prove existence of contractual
relationship
Consequential to the court’s decision was that they had not been satisfied by the
evidence presented by the plaintiff of the contractual relationship between the plain-
tiff and defendant. They noted it did not prove a business relationship between the
companies. In particular, the court noted that the bill of lading submitted by the
plaintiff referred to Shanghai Fumao Import and Export Company as the consignee
of the goods, and they had no proven commercial link between this company and the
defendant.
The court rejected the plaintiff’s claims on the most preliminary—and funda-
mental elements: the existence (or lack thereof) of a contractual relationship between
the parties for the international sale of goods (or for any other purpose). While the
court acknowledged the prima facie applicability of the CISG if a contractual rela-
tionship between plaintiff and defendant had been proven—the court dismissed the
case on evidentiary grounds—the plaintiff had not established that any such relation-
ship existed. To do so, they relied on CISG Article 7(2) to apply relevant Chinese
civil procedure laws.
Curiously, the case summary provided to this author does not mention any refer-
ence by the court to any other provisions of the CISG in making its determination.
Article 4 CISG specifically states that the CISG governs ‘the formation of the contract
of sale and the rights and obligations of the seller and buyer arising from such a
contract.’14 The existence or lack thereof of a contract between the parties seems, on
a plain reading, of this provision to be within the scope of the CISG.
It seems the Court understood its task in the case—and the scope of the CISG
narrowly—and pointedly noted that the CISG does not govern the means and methods

12 Zeller [5].
13 St. Supery Vineyards and Wines, Timeline, https://stsupery.com/inside/#timeline (last accessed
15 January 2022).
14 Article 4 CISG.
44 Skalli Corporation v Shanghai Tongya … 375

of resolving disputes between contracting parties. On this point, the Court’s decision
makes a contribution to the enduring uncertainty as to whether the CISG regulates
dispute resolution agreements contained within contracts and associated arrange-
ments. It is unclear whether the plaintiff presented evidence to the court of a dispute
resolution agreement between them and the defendants, although given the resort
by a US-domiciled company to a court in Shanghai it is reasonable that no written
dispute resolution arrangements were agreed to or presented to the court.
Furthermore, Article 7(2)—the sole CISG provision of the CISG referred to in the
case-summary provided—is in Chapter II: General Provisions of the treaty, whose
provisions are understood to offer general rules and principles to help guide the
interpretation of the CISG in any given circumstance. The court may have wished to
engage with these too. From afar, one wonders if it would have made a difference
to the court’s conclusion. For instance, Article 7(1) CISG notes the need for the
‘observance of good faith in international trade’ and Article 8(2) CISG notes that
statements made by the parties ‘are to be interpreted according to the understanding
that a reasonable person of the same kind as the other party would have had in the
same circumstances.’ One is left to ponder the counterfactual if these prominent CISG
provisions enlivened the court’s assessment of the various documents, including
emails, bills of lading and invoices provided by the plaintiff as evidence with which
they purported to show the existence of the contractual relationship between the
parties. Without copies of the documents tendered into evidence, the full court opinion
is difficult to say.

References

1. Jannsen A, Olaf M (2009) The CISG and its general principles. In: Janssen A, Meyer O (eds)
CISG methodology. Sellier, European Law Publishers
2. Kronke H (2005–2006) The UN sales convention, the UNIDROIT contract principles and the
way beyond. J Law Commer 25:451–465
3. Manjiao C (2010) Application of the UNIDROIT principles in China: successes, shortcomings
and implications. Unif Law Rev 15:5–36
4. Kroll S (2005–2006) Selected problems concerned the CISG’s scope of application. J Law
Commer 25:39–57
5. Zeller B (2007) The CISG and unification of international trade law. Routledge-Cavendish

Dr. Jonathan Kolieb is Senior Lecturer in Law at RMIT University, where he also serves as
the Peace and Conflict Theme Lead at RMIT’s Business and Human Rights Centre. Jonathan’s
research interests focus on global governance issues, including achieving responsible business
conduct in conflict-affected areas. He teaches international commercial law and has been a proud
coach and judge in the Vis Moot since 2017. Jonathan has served as legal consultant to the Special
Representative of the United Nations’ Secretary-General for Children and Armed Conflict, held
positions at the Embassy of Australia in Washington DC and with various international affairs
NGOs. Jonathan’s written work appears in academic journals and mainstream outlets. He holds
degrees from the University of Melbourne (PhD; B.A./LL.B.), Monash University (B.A.-Hons.)
376 J. Kolieb

and the University of California-Berkeley (LL.M; M.A.). He was a Rotary World Peace Fellow,
and a Visiting Researcher at the Australian National University, Hebrew University, Jerusalem and
George Washington University.
Chapter 45
Shanghai Shanshan Ruiyuan Import
and Export Trade Co., Ltd v Lanificio
Ing Loro Piana & C S P A Italy

Charles Caishun Guo and Charlie Xiao-chuan Weng

Case Information
Case name: Shanghai Shanshan Ruiyuan Import and Export Trade Co., Ltd v
Lanificio Ing Loro Piana & C S P A Italy
Seller: Lanificio Ing Loro Piana & C S P A Italy
Place of business: Italy
Buyer: Shanghai Shanshan Ruiyuan Import and Export Trade Co., Ltd
Place of Business: China
Details of First Instance:
Court: The Second Intermediate People’s Court of Shanghai
Date of Decision: 10 June 2006
Case No: (2005) Hu Er Zhong Min Wu (Shang) Chu Zi No 49
Judges: Jiang Nan (Presiding Judge), Xuejie Cui (Acting Judge), Yimin Wang
(Acting Judge)
CISG applied: Yes
Key CISG provisions interpreted and applied: Articles 1(1)(a), 53 and 58(2)

C. C. Guo (B)
Quanzhou Intermediate People’s Court, Quanzhou, China
e-mail: [email protected]
C. X. Weng
University of New South Wales, Sydney, NSW 2052, Australia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 377

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_45
378 C. C. Guo and C. X. Weng

Abstract
Shanghai Shanshan Ruiyuan Import and Export Trade Co., Ltd (hereinafter “Shan-
shan”) entered a sales contract with Lanificio Ing Loro Piana & C S P A Italy
(hereinafter “Piana”).
On 28 July 2004, the two parties signed a “Sales Confirmation Letter”. In this
letter, it was agreed that Piana will provide Shanshan with 1,500 m of lining fabric.
It was further agreed that the total contract price was US$43,300 with 30% payable
before delivery and the remaining 70% at the time of delivery. The payment was to
be remitted to the bank account of the Italian head office designated by Piana. On
receipt, Piana agreed to provide Shanshan’s customer, Shanghai Free & Freedom
Fashion Co., Ltd, a remittance notice. The shipping method was to be by air with the
buyer providing the air freight booking information. The delivery date was subject to
the date the goods left the factory. In the appendix to the “Sales Confirmation Letter”,
Piana promised that the deadline for delivery was 30 November 2004. Accordingly,
relevant customers of Shanshan signed orders for tailor-made Italian fabric suits.
On 5 August 2004, Shanshan remitted US$12,990 being 30% of the purchase
price, to the bank account designated by Piana. However, Piana breached the agree-
ment and did not fax the remittance notice to Shanshan’s customer (Shanghai Free &
Freedom Fashion Co., Ltd) in the name of Piana’s Shanghai representative office until
3 December 2004, resulting in Shanshan’s relevant customers failing to complete the
processing tasks on time and therefore declining to fulfil their order obligations.
On the same date, Piana requested the balance of payment from Shanghai Free &
Freedom Fashion Co., Ltd. On 6 December 2004, Shanshan requested, in writing, the
termination of the “Sales Confirmation” and a refund of the 30% prepayment within
7 days. Due to unsuccessful negotiations, Shanshan sued for a refund of US$12,990.
In support of its claim, Shanshan submitted the following evidence to the Shanghai
No 2 Intermediate People’s Court (hereafter “the Court”):
1. The signed “Sales Confirmation Letter” evidencing that the two parties had
signed a contract and agreed on specific terms.
2. The “Remittance Application” and related payment certificates, proof that
Shanshan had paid US$12,990 to Piana.
3. The fax Piana sent to Shanghai Free & Freedom Fashion Co., Ltd requesting
the final 70% payment. Shanghai Free & Freedom Fashion Co., Ltd was not a
party to these proceedings. The fax aims to prove not only that Piana had not
delivered the goods by the agreed delivery date, which constitutes a breach of
contract, but also that Piana had received the 30% prepayment.
4. A copy of the “Production Notice”, “Production Confirmation Sheet” and
“Notice”, which prove that Shanshan’s customers had arranged production, its
subsequent cancellation and the resulting losses due to Piana’s failure to supply
in time.
5. The “Letter” Shanshan issued to the Shanghai representative office of Piana on
6 December 2004, proving that Shanshan had requested the termination of the
agreement and requesting the refund of the 30% prepayment of US$12,990.
45 Shanghai Shanshan Ruiyuan Import and Export … 379

The defendant, Piana, argued that, pursuant to the “Sales Confirmation Letter”,
Shanshan should have made full payment prior to delivery of the goods and, in addi-
tion, notify Piana in writing of the specific cargo flight number and shipping space.
Shanshan was expected to have got this information from the air freight company.
Piana claimed Shanshan failed on both accounts and, as a result, delivery was not
made. Consequently, Piana did not agree with Shanshan’s request to terminate the
“Sales Confirmation” and refund the advance payment. Piana declared that provided
Shanshan paid the balance and provided the shipping information, delivery could be
effected immediately. Piana requested the continuation of the “Sales Confirmation”
and did not submit any evidence to the Court.
The Court found that, on 28 July 2004, Shanshan and Piana signed a “Sales
Confirmation Letter”, agreeing to the terms as stated above. During the proceedings,
Piana confirmed that it had only received the initial 30% payment, and Shanshan
confirmed that it had not provided the shipping information to Piana.
The Court ruled to dismiss the plaintiff’s claim in accordance with Articles 1(1)(a),
53 and 58(2) of the “United Nations Convention on Contracts for the International
Sale of Goods” (CISG), and Articles 64(1) and 237 of the “Civil Procedure Law of
the People’s Republic of China”. The case acceptance fee was to be borne by the
plaintiff.

Commentary on the Key Issues Related to the CISG

Issues

Issue 1: Whether the CISG is applied

Issue 2: Whether Piana’s failure to deliver goods constitutes a breach of contract
Issue 3: Whether Shanshan’s argument is valid for claiming that Piana may not
perform the obligations stipulated in the “Sales Confirmation Letter” because
it may actually change the quantity of deliverable goods

Comments

Issue 1: Whether the CISG is applied

I. Background to UNCITRAL, CISG

The United Nations Commission on International Trade Law (UNCITRAL) was
established by the United Nations General Assembly1 and is the core legal body
of the United Nations specialising in international trade law. It plays a vital role in
pursuing harmonisation and modernisation of international trade law by preparing

1 UNCTIRAL [1], p. 1.
380 C. C. Guo and C. X. Weng

and promoting the adoption and use of legislative and non-legislative instruments in
significant areas of commercial law.2
UNCITRAL was instrumental in establishing a uniform framework for interna-
tional sales law, referred to as the Contracts for the International Sale of Goods
(CISG). Its impact has been profound.3 The goal of the CISG is to “contribute to
the removal of legal barriers in international trade and promote the development of
international trade”.4 The CISG has been ratified by 94 States.5
II. Whether CISG is applied in the case concerned
In this case, the Court held that the case was a dispute over a sales contract, and the
two parties did not choose the applicable law in the disputed “Sales Confirmation
Letter”. The domicile of the buyer, the People’s Republic of China, and seller, the
Republic of Italy, as contracting states of the CISG under Article 1(1)(a), mean the
substantive law governing the settlement of the dispute in this case should be the
CISG.
Issue 2: Whether Piana’s failure to deliver goods constitutes a breach of contract
The core issue is whether Piana’s failure to deliver the goods constitutes a breach of
contract. Also relevant to this is whether Shanshan’s failure to pay the balance owing
and failure in providing the shipping information constitute a valid reason for Piana’s
refusal to deliver the goods. Pursuant to the provision of Article 53, the buyer must
pay the price of the goods in accordance with the provisions of the contract and the
Convention. Under Article 58(2), where the contract of sale involves the carriage of
goods, the seller can require the buyer to pay the price (as a condition of shipping the
goods) before handing over the goods, or the documents of controlling the disposal
of the goods to the buyer. As Shanshan failed in both respects, its claim for the refund
of the initial payment of US$12,990 lacked a factual and legal basis. Consequently,
the Court did not support it.
Issue 3: Whether Shanshan’s argument is valid for claiming that Piana may not
perform the obligations stipulated in the “Sales Confirmation Letter” because
it may actually change the quantity of deliverable goods
The “Sales Confirmation Letter” stipulated that Shanshan would pay for the goods
and arrange for their shipping by contacting the cargo company to book the flight and
shipping space. Shanshan claims not receiving the notification of the actual change
of the delivery quantity from Piana. However, Shanshan’s counter-argument that it
failed to perform its obligations on the grounds that Piana may change the quality of
delivery had no legal basis. In other words, Shanshan cannot rely on hypothetical facts

2 Ibid.
3 Walt [2], p. 37; Bonell [3], p. 26; Eörsi [4], p. 333; Zeller [5], p. 466; Zimmermann [6], pp. 455+457.
4 Preamble of the CISG.
5 https://uncitral.un.org/en/texts/salegoods/conventions/sale_of_goods/cisg/status last visited on

12/11/2021.
45 Shanghai Shanshan Ruiyuan Import and Export … 381

to support its reasons for failing to comply with its obligations under the agreement.
Therefore, the Court rejected the argument.
Closing Remarks
The uniform application of the CISG and the establishment of a consistent jurispru-
dence in practice are crucial not only for the promotion of stable international
economic and legal order in general, but also to the creation of the legal infras-
tructure for the Belt and Road Initiative. The case concerned may be one of the
guiding examples of the correct application of the CISG.

References

1. UNCTIRAL (2013) A guide to UNCITRAL: basic facts about the United Nations Commission
on International Trade Law. https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/
uncitral/en/12-57491-guide-to-uncitral-e.pdf
2. Walt SD (2015) The modest role of good faith in uniform sales law. Boston Univ Int Law J
33:37–73
3. Bonell MJ (1996) The UNIDROIT principles of international commercial contracts and CISG –
alternatives or complementary instruments? Uniform Law Rev 1:26–39
4. Eörsi G (1983) A propos the 1980 Vienna convention on contracts for the international sale of
goods. Am J Comp Law 31:333–356
5. Zeller B (2006) The significance of the Vienna convention on the international sale of goods for
the harmonisation and transplantation of international commercial law. Stellenbosch Law Rev
17(3):466–481
6. Zimmermann R (2007) European contract law: general report. Europäische Zeitschrift für
Wirtschaftsrecht 15

Charles Caishun GUO is an Assistant Judge at the Quanzhou Intermediate People’s Court
(currently on a secondment to the Supreme People’s Court of China). He is also a Ph.D. candi-
date at University of Cologne. He was a Visiting Scholar at Emory University School of Law
in 2019 while he was pursuing his second LL.M. in Common Law at City University of Hong
Kong (Chinese Judges Programme). Prior to that, he earned his first LL.M. in International Busi-
ness Law from National University of Singapore in 2010. He obtained his LL.B. from Fujian
Agriculture and Forestry University, China in 2008.

Charlie Xiao-chuan Weng joined the UNSW Law faculty in 2015 as an Associate Professor.
Previously, he was Eastern Scholar Chair Professor of Law and Assistant Dean at the KoGuan Law
School of Shanghai Jiao Tong University (SJTU, China) . He also taught at Nagoya University
Graduate School of Law (Japan) as Designated Associate Professor. He studied law at East China
University of Political Science and Law (ECUPL) before completing his LLM at the National
University of Singapore (NUS). After working for ECUPL for five years, he went to the Univer-
sity of Pennsylvania School of Law for his LLM and SJD in corporate law, followed by an
appointment as a Robert S. McNamara Fellow at the Yale Law School Center for the Study
of Corporate Law. In 2012, he was recruited by SJTU as a Research Professor. He also held
fellow/visiting professor positions in many leading research institutions, such as Stanford Law
School and Cambridge University.
Chapter 46
CITIC International Business & Trading
Co., Ltd v Hokusan Co., Ltd

Xiaojun Chen

Case Information
Case name: CITIC International Business & Trading Co., Ltd v Hokusan Co., Ltd
Seller: Hokusan Co., Ltd
Place of business: Japan
Buyer: CITIC International Business & Trading Co., Ltd
Place of Business: China
Details of First Instance:
Court: The Second Intermediate People’s Court of Shanghai
Date of decision: 30 May 2006
Case No: (2005) Hu Er Zhong Min Wu (Shang) Chu Zi No 102
Judges: Nan Jiang (Presiding Judge), Yumin Tang (Judge), Yimin Wang (Acting
Judge)
CISG applied: yes
Key CISG provisions interpreted and applied: Articles 1(1)(b), 95 and 96
Abstract
On 19 January 2004, a Chinese buyer and a Japanese seller entered into a sale contract.
The buyer purchased 2,000 tons of chemical products produced by an Indian company
from the seller. The contract agreed that the unit price was US$590/ton, the price
clause was CIF Shanghai, and the total payment was US$1.18 million. The contract
stipulates: “Payment terms: the buyer must issue an irrevocable and transferable
90-day forward L/C (Letter of Credit) within 7 days after the contract is signed,

X. Chen (B)
Wincon Law Firm, Qingdao, Shandong, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 383

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_46
384 X. Chen

otherwise the seller has the right to cancel this contract without notice, or accept
that the buyer has not executed all of this contract, or claim for losses suffered as a
result”.
On 19 January 2004, the buyer issued an irrevocable L/C, but it was not a trans-
ferable L/C. On 2 February 2004, the buyer revised the L/C into an irrevocable
and transferable L/C as the contract required. In April 2004, the buyer notified the
seller that the contract could no longer be performed and requested that the L/C be
cancelled. In May 2004, the price of similar goods in the East China market rose to
US$725/ton.
The buyer filed a lawsuit with the court and claimed that the seller shall compen-
sate the buyer for losses of RMB¥2,243,772.62 (including the loss of available
profits of RMB¥2,232,900 and the payment of RMB¥10,872.62 for the issuance
and modification of the L/C).
The seller argued that it had terminated the above-mentioned contract, and
according to the contract, the seller did not need to notify the buyer to terminate the
contract. At the same time, the seller argued that the CISG should be the applicable
law in this case.
The Second Intermediate People’s Court of Shanghai (“the court”) held that the
buyer was a company registered in Japan, which was not a member of CISG, so
CISG could not be applied in this case. Based on the fact that the contract was signed
in Shanghai and as the “most closely connected principle”, the law of the People’s
Republic of China should be applied in this case.
On this basis, the court held that because the buyer’s L/C issued on 19 January
2004 was a non-transferable one, it did not comply with the contract. The seller
changed the L/C to a “transferable” L/C on 2 February 2004, but it was more than
7 days since the date of signing the contract. Therefore, the seller has the right to
terminate this contract without notice in accordance with the contract. In the end, the
court rejected all the seller’s claims.

Commentary on the Key Issues Related to the CISG

Issues

Issue 1: Why does the CISG not apply in this case?

Issue 2: Under what circumstances can the CISG not be applied in China?

Comments

Issue 1: Why does the CISG not apply in this case?

The United Nations Commission on International Trade Law’s (UNCITRAL) work
on uniform sales law resulted in the conclusion of the CISG (Vienna, 1980), which
entered into force in China on 1 January 1988.
46 CITIC International Business & Trading Co., Ltd … 385

Before 1988, China did not have comprehensive contract laws and regulations.
The “Economic Contract Law”1 that was implemented in 1982 is relatively simple,
which had only 57 clauses in the full text. The content of contracts in the “General
Principles of the Civil Law”2 which came into effect in 1987 in China was even less.
In the 1980s, China was in a stage of all-round economic development, especially
the rapid development of foreign trade. The “Economic Contract Law” was a simple
law that could not be adapted to the social and economic activities of the time.
Therefore, China urgently needed to formulate more detailed laws applicable to
economic activities such as contracts with other countries. The CISG passed in 1980
was favoured by China because of its wide applicability. Therefore, China joined the
treaty and the first group of countries where the CISG came into force.
However, when China joined CISG, it made two declarations.
1. China does not agree to expand the scope of application of the CISG, and only
agrees that the CISG applies to contracts signed between parties in the contracting
countries (CISG, Articles 95).
2. China does not agree to conclude, modify and terminate the contract in any
other form than written form (CISG, Articles 96).
China withdrew its declaration in “written form” in 2013. However, China has still
not withdrawn the other declaration, so the CISG in China only applies to contracts
signed between parties both registered in contracting states of the CISG.
According to China’s reservation to Article 1(1)(b) when joining the CISG, the
CISG does not apply to cases where one or both parties are not a contracting state
of the CISG. In 2004, Japan had not yet joined the CISG. Judging from the contract
disclosed in the judgement, the CISG was not selected as the applicable law of the
contract in written form. Therefore, according to China’s statement regarding Article
95 of the CISG, the contract involved in this case will not be applicable to CISG.
That is the reason the court rejected the application of the CISG in this case.
It is worth mentioning that, in 2004, Japan was not yet a signatory of CISG.
However, on 1 August 2009, the CISG became effective in Japan.3 Therefore, if
this case occurred after August 2009, the court would not be able to rule out the
application of CISG in this case on the basis of China’s above declaration.
Issue 2: Under what circumstances can the CISG not be applied in China?

I. Chinese law on how CISG applies in China

Since 1988, China has applied for the CISG. Chinese law has many regulations on
the standards and conditions for the application of the CISG, but these regulations
are very scattered and there is no unified system.

1 Economic Contract Law of the People’s Republic of China, Decree of the Chairman of the Standing
Committee of the National People’s Congress No.12, on 1 July 1982.
2 General Principles of the Civil Law of the People’s Republic of China, Order of the President of

the People’s Republic of China No.37, on 1 January 1987.

3 https://uncitral.un.org/en/texts/salegoods/conventions/sale_of_goods/cisg/status.
386 X. Chen

When China joined the CISG in 1988, the “General Principles of Civil Law”
had been promulgated and implemented. Article 142 of the “General Principles of
Civil Law” stipulates: “Where the international treaties concluded or acceded by
the People’s Republic of China have different provisions from the civil laws of the
People’s Republic of China, the provisions of the international treaties shall apply,
except for the provisions of the People’s Republic of China declared reservations.”
The clause provides a domestic legal basis for the CISG’s entry into force in China.
The “Law of the People’s Republic of China on Choice of Law for Foreign-
related Civil Relationships”,4 which came into effect on 1 April 2011, is China’s
first independent private international law. However, there is no provision in this
law regarding the application of international conventions such as the CISG. Subse-
quently, the Supreme People’s Court (SPC) made a judicial interpretation of this
law, “Interpretations of the Supreme People’s Court on Several Issues Concerning
Application of the Law of the People’s Republic of China on Choice of Law for
Foreign-Related Civil Relationships (I)”,5 which was implemented on 7 January
2013. Article 4 of the Judicial Interpretation stipulates: “Where the application of
law in foreign-related civil relations involves the application of international treaties,
the People’s Court shall comply with Article 142 Paragraph 2 of the ‘General Princi-
ples of Civil Law of the People’s Republic of China’ and the ‘Negotiable Instruments
Law of the People’s Republic of China’”. The first paragraph of Article 95, the first
paragraph of Article 268 of the Maritime Law of the People’s Republic of China, and
the first paragraph of Article 184 of the Civil Aviation Law of the People’s Republic
of China shall apply. Except where international treaties in the field of intellectual
property have been transformed or need to be transformed into domestic laws. This
judicial interpretation further clarifies the basis for the application of the CISG in
Chinese courts. It can be seen that the judicial interpretation in 2013 is actually a
reaffirmation of Article 142 of the 1987 General Principles of Civil Law.
The Civil Code of the People’s Republic of China was implemented on 1 January
20216 and replaced the “General Principles of Civil Law”. As a comprehensive civil
law, for the first time, the “Civil Code” unified many issues that were originally
scattered throughout separate civil laws into a comprehensive civil law. What is
confusing is that Article 142 of the “General Principles of Civil Law” has been
repealed, but the “Civil Code” does not set any similar provisions. In other words,
there is currently no domestic law or regulation in China that clearly stipulates when
international treaties like the CISG are to be directly applied by the courts without
the choice of the parties.
However, we can find the basis in the separate documents issued by the SPC, such
as “Circular of the Supreme People’s Court on Transmitting Certain Issues of the

4 Law of the People’s Republic of China on Choice of Law for Foreign-related Civil Relationships,
Order of the President of the People’s Republic of China No.36, on 1 April 2011.
5 Interpretations of the Supreme People’s Court on Several Issues Concerning Application of the

Law of the People’s Republic of China on Choice of Law for Foreign-Related Civil Relationships
(I), Fa Shi [2012] No.24, on 1 July 2013.
6 Civil Code of the People’s Republic of China, Order of the President of the People’s Republic of

China No.45, on 1 January 2021.

46 CITIC International Business & Trading Co., Ltd … 387

MOFTEC in Connection with the Implementation of United Nations Convention on

Contracts for the International Sale of Goods”.7 This document was prepared by the
Ministry of Foreign Economic Relations and Trade (now the Ministry of Commerce)
and forwarded by the SPC to all courts in China.
Another document of note is the “Opinions of the Supreme People’s Court
Regarding Further Providing Judicial Services and Guarantees by the People’s Courts
for the Belt and Road Initiative” issued by SPC in 2019.8 Article 18 of the document
stipulates that “The People’s Courts shall actively apply international conventions
applicable to China, respect international practices and international commercial
rules, and strive to form and improve regional and international commercial and
legal rules”. The above two documents are still a valid legal basis for the application
of international conventions in Chinese courts.
From a practical perspective, we have not seen any new litigation cases related to
the application of the CISG that occurred after the Civil Code came into effect in 2021.
However, SPC made a decision in 2021 on the case of Imacuscinettis R L v Ningbo
Tongli Bearing Co., Ltd, confirming that the CISG should be applied to the case.9
The disputes related to this case occurred before the “Civil Code” came into effect.
Therefore, it is not yet possible to confirm whether the application of CISG or other
international treaties by the Chinese courts will change based on the results of this
case. However, based on the two regulatory documents of the aforementioned SPC
and the consistent attitude of the Chinese courts towards such cases, it is reasonable
to believe that the Chinese courts will still apply the CISG as the application law in
trial. However, it is not enough to rely on two normative documents (one of which
was formulated more than 30 years ago) as the domestic law basis for the CISG and
other international treaties in Chinese courts. After all, normative documents are far
less effective than law in China. It is expected that, in the future, the SPC may also
continue to issue special judicial interpretations on this matter, re-establishing the
legal basis for the application of international treaties such as the CISG.
II. Under what circumstances the CISG cannot apply in China

A. One or both parties are not a contracting state to the CISG

As pointed out in the judgement made by the Chinese court in the CITIC Case,
because of China’s reservation to Article 1(1)(b) of the CISG, China has ruled out
the application of the CISG due to private international law. Therefore, if one or
neither of the parties came from a country which is not a contracting state of the

7 Circular of the Supreme People’s Court on Transmitting Certain Issues of the MOFTEC in Connec-
tion with the Implementation of United Nations Convention on Contracts for the International Sale
of Goods, Fa[Jing]Fa[1987]No.34, on 10 December 1987.
8 Opinions of the Supreme People’s Court Regarding Further Providing Judicial Services and Guar-

antees by the People’s Courts for the Belt and Road Initiative, Fa Fa[2019]No.29, on 9 December
2019.
9 IMACUSCINETTIS.R.L v Ningbo Tongli Bearing Co., Ltd.-Dispute of Contracts for International

Sale of Goods – Rehear (2020)Zui Gao Fa Min Shen No.5041, Supreme People’s Court, 5 February
2021.
388 X. Chen

CISG, and both parties have not explicitly selected the CISG as the applicable law,
then the Chinese courts will not apply the CISG.
B. The parties explicitly exclude the application of the CISG
If the parties explicitly exclude the application of the CISG, then the CISG will of
course not be applied in the case. It is worth noting that when Chinese judges hear
cases with international factors, they usually ask both parties which law is applicable
as the applicable law in the case. Chinese lawyers (including Chinese lawyers hired
by foreign parties) are often unfamiliar with the CISG, so in most cases they will
clearly choose Chinese law as the applicable law, and courts often use this as an
excuse and decide that the client has excluded the application of the CISG.
C. The application of the CISG is excluded because China has signed bilateral
agreements with other contracting states
In the “Circular of the Supreme People’s Court on Transmitting Certain Issues of
the Ministry of Foreign Trade and Economic Cooperation in Connection with the
Implementation of United Nations Convention on Contracts for the International
Sale of Goods” published by SPC, the CISG has been clearly excluded in cases with
Hungarian parties. This is because China and Hungary had already signed a bilateral
agreement at that time. According to Article 90 of the CISG, this bilateral agreement
is more effective than that of the CISG.
D. The application of CISG is excluded due to the mandatory provisions of
Chinese law
Article 467 of the Civil Code, which came into effect on 1 January 2021, stipu-
lates: “The law of the People’s Republic of China shall apply to a contract for a
Chinese-foreign equity joint venture, a contract for a Chinese-foreign contractual
joint venture, or a contract for Chinese-foreign cooperative exploration and exploita-
tion of natural resources performed in the People’s Republic of China”. According
to the regulations, if the contract falls into the above three types of contracts, then
Chinese law must be applied.
Although this article does not involve the content of the sales contract, if a contract
includes both the content of the sales contract and the three types of contract content
stipulated by the above-mentioned laws, then the Chinese court may not apply the
CISG to the relevant contract in the contract.
E. Excluding the application of CISG due to violation of public interest
Article 5 of the “Law of the People’s Republic of China on Choice of Law for
Foreign-related Civil Relationships” stipulates: “If the application of foreign laws
will damage the social public interests of the People’s Republic of China, the laws
of the People’s Republic of China shall apply”. Therefore, if the application of the
CISG may harm China’s public interests, then the CISG will not apply. For example,
the sale of cannabis is legal in some countries, but it is illegal in China. Therefore,
if there is an international sales contract related to the sale of cannabis, the Chinese
46 CITIC International Business & Trading Co., Ltd … 389

court will not apply the CISG, and will directly determine that the contract is invalid
based on the provisions of Chinese law.

Mr. Xiaojun Chen is a partner of SHANDONG WINCON LAW FIRM. He is mainly engaged
in legal services in the fields of maritime commerce, maritime affairs, international trade, cross-
border investment, and corporate governance.
Mr. Chen has been engaged in commercial litigation for many years, especially transnational
commercial litigation and arbitration. He has represented Chinese or foreign clients for many
times in transnational commercial litigation or arbitration cases in Mainland China, Hong Kong,
Singapore, London, Paris and other places. He has rich practical experience in legal services such
as contract disputes, corporate disputes, and maritime disputes.
Chapter 47
Shanghai Lianfu Food Co. Ltd v CSM
N. V.—Dispute Arising from a Sale
of Goods Contract

Edgardo Muñoz

Case Information
Case Name: Shanghai Lianfu Food Co. Ltd. v. CSM N. V.
Seller: Shanghai Lianfu Food Co. Ltd.
Place of business: China
Buyer: CSM N.V.
Place of business: Netherland
Details of First Instance:
Court: The Second Intermediate People’s Court of Shanghai
Date of Decision: 23 March 2011
Case No: (2005) Hu Er Zhong Min Wu (Shang) Chu Zi No.113
Judges: Xuejie Cui (Presiding Judge), Yimin Wang (Acting Judge), Wei Zhu (Acting
Judge)
Details of Appeal:
Court: Shanghai High People’s Court
Date of Decision: 19 March 2012
Case No: (2011) Hu Gao Min Er (Shang) Zhong Zi NO.37
Judges: Chuan Xu (Presiding Judge), Qian Fan (Judge), Xujun Shen (Acting Judge)
CISG Applied: Yes
Key CISG provisions interpreted and applied: Articles 4, 25, 49, 72 and 74

E. Muñoz (B)
School of Law, Universidad Panamericana, Calzada Alvaro del Portillo 49, 45010 Guadalajara,
Jalisco, Mexico
e-mail: [email protected]; [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 391

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_47
392 E. Muñoz

Abstract
The Plaintiff, Shanghai Lianfu Food Co. Ltd., signed the Mynthon Toll Manufac-
turing Agreement (“the Agreement”) with CSM N.V., the Defendant, on 7 Jan 2002.
The Agreement provided that the Plaintiff should supply candies to fulfil the contract
between Leaf East Asia Pte. Ltd. (Leaf East, a subsidiary of Defendant) and Dandy
Distribution (“Dandy”). The Agreement further provided that, in case the orders
from Dandy provided by Defendant were less than 135 tons in 2002, or less than
150 in the upcoming years, the Defendant was entitled to require the Plaintiff to
supply goods to buyers other than Dandy to match the difference between the actual
amount and target amount. If the gap could not be filled, then the Defendant should
compensate the Plaintiff the difference between the net selling price and the direct
cost of production for the goods not ordered (packaging, raw materials and direct
labour costs).
Regarding the right to terminate the Agreement, the Agreements also provided
– Clause 1: The Defendant was entitled to terminate the supply of goods by the Plain-
tiff if the supplied goods or Plaintiff’s performance failed to meet the specified
standard;
– Clause 5:
The Defendant could modify the Agreement without prior notice to the Plaintiff
during its ordinary business; the Plaintiff was entitled to terminate the Agreement
when it was noticed of such modifications made by the Defendant. If the Plaintiff
proceeds to perform its contractual obligations under this Agreement after 30 days
of being noticed, it would be seen as an acceptance of the modifications.
Both parties were entitled to terminate the Agreement with 30 days prior notice
without a justifiable reason being provided; however, none of the parties could
terminate the contract without a justifiable reason before 1 January 2005.
The defendant was entitled to terminate the Agreement based on the reasons listed
in Clause 1.
The Agreement was listed as an appendix of the Property Transfer Agreement
among the Plaintiff, Leaf Shanghai (another subsidy of Defendant) and Huang (a
member of the management of Leaf Shanghai). Huang acted as the purchaser of the
whole business of Leaf Shanghai, and Huang’s In the Property transfer transaction,
the Plaintiff failed to perform its duty to pay Leaf Shanghai a significant sum.
Further, on 2 April 2002, Promoze (the Plaintiff’s related company) signed a
separate purchase agreement with Dandy.
On 9 April 2002, the Defendant passed orders for 7.65 tons of candies by Dandy
to the Plaintiff. On 10 May 2002, the Plaintiff handed over the 7.65 tons of candies
to the carrier for its delivery to Dandy.
In the subsequent email communications, the Defendant and Leaf Finland (another
subsidy of the Defendant) informed the Plaintiff that they had difficulties in meeting
the target amount in 2002.
On 3 August 2002, Dandy made another set of orders for candies to be delivered by
the Plaintiff. The order information was sent to both the Plaintiff and the Defendant.
47 Shanghai Lianfu Food Co. Ltd v CSM … 393

On 9 August 2002, the Defendant informed the Plaintiff by fax and mail that
they would terminate the performance of the Agreement in accordance with the
Agreement and the CISG, which would be effective on 14 August 2002.
On 30 September 2002, the Plaintiff handed over the candies subject to the orders
passed to them on 3 August to the carrier for its delivery to Dandy. Both sets of orders
were properly paid by Dandy to the recipient nominated by the Plaintiff.
The Plaintiff brought the claims for damages before the Chinese court on the
basis of a breach of the Agreement, and the breaches of Articles 49 and 72 of the
CISG. They also claimed that such a breach amounted to a fundamental breach under
Article 25 of the CISG. The Defendant argued that the Agreement was attached to,
and operated as a part of the preconditions of, the Property Transfer Agreement; thus,
the Plaintiff’s failure to fulfil its duty under the latter gave rise to the Defendant’s
right to terminate the former. It also disputed that the Agreement had been replaced
by the contract between Promoze and Dandy signed on 2 April, and that the amount
of the damages claimed by the Plaintiff were excessive.
The Court held that
– The CISG should apply because both parties had their places of business in
different Contracting States of the CISG; further, the Chinese law should apply
because the seller is from China.
– The validity of the Agreement was not governed by the CISG (Article 4) so
the Chinese law should apply to the issues in relation to its validity. The court
examined the intention and conducts of the parties and upheld the validity of the
Agreement.
– The Agreement was properly performed by the Plaintiff and there were no
breaches by the Plaintiff during the performance.
– The Agreement was not replaced by the agreement between Promoze and Dandy
on the basis of the involvement of theDefendant in the making/passing of both
sets of orders, the Defendant’s knowledge of the existence of both contracts, and
that the Defendant never disputed on the non-performance of the Agreement but
communicated with the Plaintiff the shortage of orders.
– The Agreement was not a precondition of the Property Transfer Agreement, but
an independent sale of goods contract. The Plaintiff’s conduct under the Property
Transfer Agreement did not give rise to the Defendant’s right to terminate under
the Agreement under Articles 49 and 72 of the CISG. Thus, the Defendant’s
termination of the Agreement on 9 August 2002 amounted to a breach, and in
particular, a fundamental breach of the contract, under Articles 25 of the CISG.
– The Defendant should pay for damages under Article 74 of the CISG, which
included the losses of the benefits the aggrieved party expected to receive. The
Chinese Court proceeded to refer to Articles 113 and 114 of the Chinese Contract
Law, which provided that the damages should include the benefits the parties
expected to receive should the contract be properly performed, and that the parties
should be entitled to agree on the method for the calculation of the damages. On
the basis of factual analysis, the Court upheld the Plaintiff’s interpretation of the
394 E. Muñoz

calculation method provided in the Agreement, holding it more reasonable than

the interpretation submitted by the Defendant.
In the Appeal, the Shanghai High People’s Court upheld all findings and decisions
of the Shanghai 2nd Intermediate People’s Court.

Commentary on the Key Issues Related to the CISG

The Abstract of the Shanghai Intermediate People’s Court’s decision in Shanghai

Lianfu Food Co. Ltd. versus CSM N. V. reflects, in general, a proper understanding
and application of the CISG.
According to Article 1(1)(a) CISG, the CISG applies if the parties have their
places of business in different states and both states are Contracting States, i.e. if at
the time of the conclusion of the contract the CISG was in force in both States. This
kind of application of the CISG is called direct application because no recourse to
any rules of private international law is necessary.
In the case at hand, the Seller Shanghai Lianfu Food Co. Ltd. has its place of
business in one Contracting State, i.e. China, while the Buyer CSM N.V. has its
place of business in a different Contracting State, i.e. The Netherlands. With more
and more States acceding to the CISG, application via Article 1(1)(a) CISG becomes
more and more regular.
The Court also held that the Chinese domestic law should apply because the seller
is from China. Although there is no specific reference in the above abstract, the Court
may have selected Chinese law to deal with issues that are not covered by the CISG.
The reference to the Seller’s place of business as a connecting factor to determine
the application of Chinse law may result from the Court’s conflict of laws rules,
which consider the place of contract performance, i.e. the delivery of the goods, as
a relevant factor for such determination.
The Court also decided that the validity of the Agreement was not governed by
the CISG so the Chinese law should apply to the issues in relation to its validity.
This decision is correct pursuant to the two-step mechanism proposed by Article
7 CISG. The first step calls for determining whether the issue at stake is governed
by the CISG. If the answer is positive: i.e. the instrument deals impliedly with that
matter, the second step requires identifying the “general principles upon which the
[legal text] is based” and applying them to the case at hand. If the answer is negative,
because the legal text does not deal with that matter expressly or impliedly, then the
solution should be found outside the CISG (in the case at hand in Chinese domestic
law) as stated by the second part of Article 7(2) CISG.
Article 4(1) CISG outlines the matters that are governed by it: “the formation
of the contract of sale and the rights and obligations of the seller and the buyer
arising from such a contract”. Article 4(2) CISG, on the other hand, enumerates the
questions that are not dealt with by the Convention, unless expressly provided: (a)
the validity of the contract or of any of its provisions or of any usage; (b) the effect
47 Shanghai Lianfu Food Co. Ltd v CSM … 395

which the contract may have on the property in the goods sold. Therefore, Article 4
CISG facilitates the first task of assessing whether one matter constitutes an internal
gap or, rather, an external one.
That being said, it is worth noting that the abstract above states that “the court
examined the intention and conducts of the parties and upheld the validity of the
Agreement”. The examination of the Parties’ intention and conduct is a matter
governed by Article 8 CISG. Accordingly, it is unclear whether the ground of inva-
lidity examined by the Court, for instance, mistake, could overlap with a party’s
conduct that should in principle be analysed by the rules of interpretation of Article
8 CISG rather than by Chinese domestic law. For instance, under this provision the
understanding of a reasonable person on the addressee’s position with regard to the
formation of the contract would prevail over any mistaken subjective understanding
under the rules and remedies of Chinese law.
The Court also decided that the Agreement was properly performed by the Plaintiff
and that there were no breaches by the Plaintiff during the performance. Pursuant
to Articles 45 and 61 CISG, a party’s failure to perform any of its obligations will
entitle the other party to claim the legal remedies available under the CISG. A breach
will ensue regardless of whether the obligation at stake is the main obligation or an
ancillary one, whether it arises under the CISG provisions or the sales contract. For
example, a seller’s failure to hand over to the buyer the agreed assembling instructions
constitutes a breach of contract, so as the total non-delivery of the goods is. The
buyer in such a case will be able to access at least the remedy of damages and under
some circumstances also the remedies of specific performance and avoidance of the
contract.
The question of whether the Agreement was not replaced by the agreement
between Promoze and Dandy (on the basis of the involvement of the Defendant
in the making/passing of both sets of orders) is answered by the party autonomy
principle under Article 6 CISG and the rules on contract formation pursuant to Arti-
cles 14–27 CISG. The CISG follows the classic offer and acceptance mechanism
for the formation of contracts.1 Broadly speaking, a contract is concluded when the
offeror’s offer is accepted by the offeree. This traditional mechanism might not be
the most proper solution for the present-day realities of trading. As the case abstract
hereby commented shows, the content and number of communications leading to
a final agreement, or its replacement, make it difficult to identify them as offers,
counter-offers or acceptances. The problems resulting from identifying the character
of statements, i.e. as an offer, acceptance or counter-offer, or the incorporation of stan-
dard terms are solved by systematic interpretation under Article 8 CISG. According
to Article 8(1), interpretation shall seek to unveil the true intention of the parties
according to their shared subjective understanding. On the other hand, Article 8(2)
CISG provides that if Article 8(1) CISG does not apply, which will be most likely
the case if a dispute over the interpretation of a term arises, statements made by and
other conduct of a party are to be interpreted according to the understanding of a
reasonable person of the same kind as the other party would have had in the same

1 See Part II, Articles 14 to 27 CISG.

396 E. Muñoz

circumstances. In this regard, the CISG strikes a balance between the two starting
points we find in the civil law and common law traditions. The subjective intent of
one of the parties is only relevant if there is evidence that the other party could not
have been unaware of that intent. If this is not applicable, which will be the case in
practice given the difficulty of proving that that one party knew the exact meaning
attached to a declaration by the other party, the understanding of a reasonable person
is relevant.
The Court correctly subject the right to avoid the contract to the occurrence of a
fundamental breach. Pursuant to Article 49 CISG, resort to the remedy of contract
avoidance is limited to the occurrence of a breach that is fundamental in nature.
The CISG stipulates that a breach is fundamental if it results in a detriment to the
suffering party as to substantially deprive it of what it was entitled to expect under
the contract, and such result was, or ought to be, foreseeable for the breaching party.2
The CISG has attempted to provide a rule suitable for international trade that takes
into account the existing approaches in domestic laws. A right to avoid the contract
under the CISG may arise with respect to a wide variety of contractual obligations.
It is irrelevant whether they constitute a condition, warranty or intermediate terms
under the common law or a principal or ancillary obligation under the civil law. The
CISG takes into account the economic cost of unwinding an international contract
and therefore, considers the avoidance of the contract a remedy of last resort.
With regard to the award of damages, the Court’s reasoning in determining the
application of Article 74 CISG is correct. In accordance with the CISG, liability for
damages arises when a party breaches any of its obligations under the sales contract
or the CISG. The breach does not have to be a “fundamental” one under Article
25 CISG. However, the Court did not need to rely upon Chinese domestic law for
the award of lost profits. The principle of full compensation followed by all legal
systems is reflected by the CISG where damages shall be equal to the financial loss
suffered by the other party because of the breach. Therefore, damages may include
performance losses, incidental losses, consequential losses and lost profits, which
award is required to place the aggrieved party in the position he/she would have been
had the contract been fulfilled correctly.

Dr. Edgardo Muñoz is Professor of Law at Universidad Panamericana. He is a Member of the

CISG Advisory Council since 2020. After completing his law studies in Mexico and France, Dr.
Muñoz obtained a Master of Laws (LL.M.) degree from the University of Liverpool, in the United
Kingdom, a second Master of Laws (LL.M.) degree from the University of California Berkeley,
in the United States, and a Doctor of Laws (Ph.D.) degree, summa cum laude, from Basel Univer-
sity, in Switzerland. He has been Visiting Scholar at Columbia University Law School, New York,
McGill University School of Law and Montreal University School of Law, in Canada.

2 Article 25 CISG.
Chapter 48
Possehl (HK) Ltd v China Metals
and Minerals Import and Export
(Shenzhen) Corporation

Xiaojun Chen

Case Information
Case name: Possehl(HK)Ltd v China Metals and Minerals Import and Export
(Shenzhen) Corporation
Seller: Possehl (HK) Ltd
Place of business: Hong Kong, China
Buyer: China Metals and Minerals Import and Export (Shenzhen) Corporation
Place of Business: Guangdong, China
Details of First Instance:
Court: Shenzhen Intermediate People’s Court, Guangdong
Date of decision: N/A
Case No: (2005) Shen Zhong Fa Min Si Chu Zi No 88
Judges: N/A
Details of Second Instance:
Court: Guangdong High People’s Court
Date of decision: N/A
Case No: (2005) Yue Gao Fa Min Si Zhong Zi No 293
Judges: N/A
CISG applied: No
Key CISG provisions interpreted and applied: N/A

X. Chen (B)
Wincon Law Firm, Qingdao, Shandong, China
e-mail: [email protected]

© The Author(s), under exclusive license to Springer-Verlag GmbH, DE, 397

part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3_48
398 X. Chen

Abstract
On 17 November 2003, a buyer registered in Hong Kong signed three contracts for
the sale of international goods to a seller registered in Mainland China. The contents
of the three contracts were basically the same, and the contracts stipulated that the
buyer should open an L/C before 10 December 2003. The contract stipulated that
arbitration should be conducted by the arbitration institution of the country where
the defendant was located in case there was any dispute between the parties, but there
was nothing about which law should be applied to the dispute.
The buyer claimed that it had requested the seller to provide information which
was necessary for the issuance of the L/C in November and December 2003, but the
seller never provided it. On 2 January 2004, the seller notified the buyer by fax that,
because the buyer failed to open the L/C on schedule, the seller decided to terminate
the three contracts.
The buyer believed that the seller’s failure to provide the information required to
open the L/C in a timely manner was the reason why the buyer failed to open the
L/C in time, and that it was unreasonable for the seller to request the termination of
the contracts. Therefore, the buyer filed a lawsuit with the Shenzhen Intermediate
People’s Court of China (Shenzhen Court), demanding that the seller compensate
the buyer for the losses suffered.
During the trial, the seller agreed to respond to the lawsuit in court instead of
resolving the dispute in this case through arbitration. At the same time, the buyer
argued that the CISG and Mainland China’s Contract Law1 should apply to this case.
The Shenzhen Court held that the buyer in this case was registered in Hong Kong,
and the seller was registered in Mainland China. Article 1 of the CISG stipulates that
“This Convention applies to contracts of sale of goods between parties whose places
of business are in different States”. Mainland China and Hong Kong both belong to
the People’s Republic of China, so this case did not meet the applicable conditions
of the CISG, and therefore the application of the CISG was excluded. In the end, the
Shenzhen Court decided that the buyer had failed to issue the L/C in a timely manner
in accordance with the contract and therefore rejected the buyer’s request ((2005)
Shen Zhong Fa Min Si Chu Zi No. 88).
The buyer was dissatisfied with the judgement and appealed to the Higher People’s
Court of Guangdong (Higher Court). The Higher Court held that the Shenzhen
Court’s determination was completely correct and upheld the Shenzhen Court’s
decision.

1Contract Law of the People’s Republic of China, Order of the President of the People’s Republic
of China No.15, on 1 October 1999.
48 Possehl (HK) Ltd v China Metals … 399

Commentary on the Key Issues Related to the CISG

Issues

Issue 1: Why does the CISG not apply in this case?

Issue 2: Whether the CISG applies in Hong Kong
Issue 3: Whether the CISG applies in the case between a party outside of China
and a Hong Kong party

Comments

Issue 1: Why does CISG not apply in this case?

In this case, the court excluded the application of the CISG because the mainland of
China and Hong Kong are both territories of the same country, and the CISG is only
applicable to sales contracts between different countries. Therefore, the court ruled
out the application of the CISG in this case.
Article19 of “The Interpretations of the Supreme People’s Court on Several Issues
Concerning Application of Law of the People’s Republic of China on Choice of Law
for Foreign-Related Civil Relationships (I)” issued by the Supreme People’s Court
(SPC) stipulates: “Issues concerning application of law in connection with civil
relationships involving the Hong Kong Special Administration Region and the Macau
Special Administration Region are subject to these Interpretations by analogy”. It
seems that foreign laws can be applied in Chinese courts, which is also the basis for
many Hong Kong companies to claim the application of the CISG in litigation.
However, the attitude of the Chinese courts on this issue is consistent and clear. In
the case of Lianzhong Enterprise (Resources) Co., Ltd versus Xiamen International
Trade Group Co., Ltd ((2016) Zui Gao Fa Min Zai No 373) on the sale and purchase
contract, SPC held that “the CISG only applies to parties whose places of business
are in different countries. Even if we consider the factors that occurred before the
return of the Hong Kong Special Administrative Region, the United Kingdom is not
a contracting state to the CISG. Therefore, this case should not apply to the CISG.
If the parties agree to apply the above-mentioned conventions, the provisions of the
conventions constitute one of the parties”. It is obvious, before or after the return
of Hong Kong, the SPC has a negative attitude towards the application of the CISG
between the Mainland and Hong Kong, unless the parties in dispute clearly agree
that the CISG shall be applied to the trial of the case.
The Department of Justice of Hong Kong launched a public consultation in 2020
on whether Hong Kong should apply the CISG. In the “Consultation Paper” issued by
the Department of Justice, it is also clearly mentioned that even if CISG is applied to
Hong Kong in the future, the CISG cannot be applied to disputes over sales contracts
between Hong Kong and Mainland China.2

2 https://www.doj.gov.hk/sc/featured/consultation_paper.html.
400 X. Chen

Issue 2: Whether the CISG applies in Hong Kong

The CISG entered into force in China on 1 January 1988, but Hong Kong returned
to China on 1 July 1997. Before that, Hong Kong was under the jurisdiction of the
United Kingdom. Even after the handover of Hong Kong, the legal system of Hong
Kong was not the same as that of Mainland China.
According to Article 93 of the CISG, if there are multiple territorial units that
apply different legal systems in a country, the country can declare that the CISG is
applicable to specific territorial units when joining CISG. If no declaration is made,
it is deemed that the CISG applies to all territorial units of the country.
On 20 June 1997, the Chinese government issued a note to the Secretary-General
of the United Nations, declaring which international treaties apply to Hong Kong
after the return. The list of international treaties applicable to Hong Kong attached
to the note does not include CISG. Therefore, according to Article 93 of the CISG,
the CISG is not applicable in Hong Kong. This may be related to the fact that Hong
Kong has been under the jurisdiction of the United Kingdom for a long time, and the
United Kingdom has not yet joined the CISG.3
In March 2020, the Department of Justice of Hong Kong launched a public consul-
tation on whether Hong Kong should apply the CISG.4 At the time of writing, Hong
Kong had not yet decided whether CISG should apply to Hong Kong. Therefore,
Hong Kong courts cannot apply the CISG as the applicable law of the case.
The above discussion is limited to cases where the parties did not explicitly choose
the CISG as the applicable law for the case.
Issue 3: Whether the CISG applies in the case between a party outside of China
and a Hong Kong party
The Chinese courts are not clear about whether the CISG can be applied to disputes
between Hong Kong parties and parties outside China. In the case of Dahua Yang
Umbrella (Hong Kong) Co., Ltd versus Leeinhwan handled by the People’s Court
of Quanzhou City, Fujian Province,5 the Quanzhou Court held that China and South
Korea are both Contracting States of the CISG. Therefore, the CISG should be applied
to this case. However, since such cases are rare, it is not yet possible to determine
whether the Chinese courts can apply the CISG to such cases.
When Chinese courts handle cases involving foreign factors, judges usually ask
the parties to confirm the applicable law in this case. If both parties confirm the
application of Chinese Law, the judge will often rule out the application of the
CISG. In the case of Hong Kong Zhenghongli Co., Ltd versus Swiss Gilbert Finance
Co., Ltd in the SPC trial, the SPC believed that the two parties had clearly selected
Chinese Law as the applicable law in this case at the first instance, which ruled out

3 https://uncitral.un.org/en/texts/salegoods/conventions/sale_of_goods/cisg/status.
4 https://www.doj.gov.hk/sc/community_engagement/press/20200302_pr1.html.
5 Dahua Yang Umbrella (Hong Kong) Co., Ltd. v. LEEINHWAN- Dispute of Contracts for Inter-

national Sale of Goods—First instance (2010) Quan Min Chu Zi No. 269, Quanzhou Intermediate
People’s Court in Fujian Province, 19 October 2010.
48 Possehl (HK) Ltd v China Metals … 401

the application of the CISG.6 Chinese judges often require both parties to clarify the
applicable law during the trial. In most cases, Chinese lawyers will choose Chinese
Law. In this way, Chinese judges do not need to decide whether to apply the CISG
and other non-domestic laws.
However, in cases of other countries, the courts of different countries hold different
views on whether the CISG can be applied to the disputes between parties outside
China and Hong Kong in sale and purchase contracts. In the Logicom versus CCT
Marketing Ltd,7 the Supreme Court of France held that, in the note submitted to the
Secretary-General of the United Nations on 20 June 1997, China did not include
the CISG as one of the international conventions that would be applicable to Hong
Kong, therefore the CISG should not be applied.8
In the Electrocraft Arkansas, Inc., Super Electric Motors, the US Arkansas court
held that as China is a signatory to the CISG and Hong Kong belongs to Chinese
territory, and that the parties did not rule out the application of the CISG to the
contract involved in the case, therefore, CISG should apply.9
Judging from the above two cases, different courts have different opinions on
whether the CISG is applicable to Hong Kong. The French Supreme Court held that
since the list of international treaties attached to the note submitted by the Chinese
government to the Secretary-General of the United Nations does not include the
CISG, it can be determined that China has made a statement excluding the application
of the CISG to Hong Kong, but the US Arkansas court does not agree according to
the case above mentioned.
According to the note issued by the Chinese government to the Secretary-General
of the United Nations, Hong Kong, as a territorial unit, should not be applicable to the
CISG. In this case, whether a country’s courts should apply the CISG or not depends
on the country’s private international law and whether it has made a reservation to
the CISG Article 1(1)(b). If the country’s private international law itself does not
allow the application of CISG or the country has also made a reservation to Article
1(1)(b) of the CISG, then the CISG cannot be applied. Otherwise, the CISG may be
applicable in accordance with Article 1(1)(b) of the CISG.
When evaluating whether the CISG should be applied to a case in a particular
country, it is necessary to consider all procedural laws including private international
law, otherwise an accurate conclusion cannot be drawn.

6 Hong Kong Zhenghongli Co., Ltd. v Swiss Gilbert Finance Co., Ltd.- Dispute of Contracts for
International Sale of Goods—Appeal (1998) Jing Zhong Zi No. 208, Supreme People’s Court, 20
July 1999.
7 Logicom v. CCT Marketing Ltd, Cour de Cassation, Chambre civile 1, 2 April 2008, No. 04–17,726,

available at https://cisg-online.org/search-for-cases?caseId=7570.
8 Logicom v. CCT Marketing Ltd, Cour de Cassation, Chambre civile 1, 2 April 2008, No. 04–17,726,

available at available at https://cisg-online.org/search-for-cases?caseId=7570.

9 United States District Court, Eastern District of Arkansas, Western Division, Electrocraft

Arkansas, Inc. v. Super Electric Motors, Ltd et al., 23 December 2009, No. 4:09 CV 00,318 SWW,
available at https://cisg-online.org/search-for-cases?caseId=7962.
402 X. Chen

Mr. Xiaojun Chen is a partner of SHANDONG WINCON LAW FIRM. He is mainly engaged
in legal services in the fields of maritime commerce, maritime affairs, international trade, cross-
border investment, and corporate governance.
Mr. Chen has been engaged in commercial litigation for many years, especially transnational
commercial litigation and arbitration. He has represented Chinese or foreign clients for many
times in transnational commercial litigation or arbitration cases in Mainland China, Hong Kong,
Singapore, London, Paris and other places. He has rich practical experience in legal services such
as contract disputes, corporate disputes, and maritime disputes.
Index

A Contract Law, 119, 217, 231, 347, 365

Acceptance fee, 358 Custom, 122, 329
Acceptance of offer [Art. 18], 31, 122
Agency, 242, 271
Arbitration, 38, 129, 168, 187, 258
Autonomy of will, see Party autonomy
D
Damage [Art. 74]
B compensation for damages, 21, 128, 365
Burden of proof, 23, 32, 63, 167, 282, 300, determination of the damages, 166, 195,
341 275, 349
foreseeability of damages, 152
Declare the contract
C Buyer [Art. 49], 150, 347, 393, 396
Carriage of goods, 20, 289, 380 Seller [Art. 64], 100
Choice of law, 16, 51, 98, 105, 174, 252,
Delivery of goods by installments [Article
264, 308–315, 328, 338, 339, 386,
73], 30
388
Civil Code, 149, 151, 152, 386–388 Delivery of the goods, 30, 56, 100, 142,
Civil Procedure Law of the People’s 257, 379, 394
Republic of China, 283 Derogation obligations, see Mitigation of
Civil Procedure Law of the People’s damages
Republic of China (For Trial Duty to mitigate, see Mitigation of damages
Implementation), 32, 51
Claim of a third party, see Right of a third
party
Conclusion of Contract, 31, 122
E
Conflict of laws, 16, 116, 244, 310–312,
Economic Contracts Law the People’s
394
Republic of China, 85
Conformity of the goods
[Art. 35], 44, 61, 107, 287, 340 Ensure the quality, 61, 380
[Art. 36], 166, 340 Examine of goods, 108, 149
[Art. 40], 340, 348 Exemption [Art. 79], 108, 283
Notice period [Art. 39], 108, 304, 348 Existence of contractual relationship, 374
Consequential damages, 21 Ex officio, 243, 282, 310, 323, 324, 328
© The Editor(s) (if applicable) and The Author(s), under exclusive license 403
to Springer-Verlag GmbH, DE,
part of Springer Nature 2022
P. Guo et al. (eds.), Selected Chinese Cases on the UN Sales Convention (CISG) Vol. 1,
Selected Chinese Cases on the CISG, https://doi.org/10.1007/978-3-662-65250-3
404 Index

F Choice of Law for Foreign-Related

Foreign-related Economic Contract Law of Civil Relationships (I), 315, 386,
the People’s Republic of China, 7, 399
15, 45, 81, 84, 92
Foreign Trade Law of the People’s
Republic of China, 271, 272 L
Fundamental breach [Art. 25], 99, 148, 177, Law of the People’s Republic of China on
256, 393 Chinese-foreign Equity Joint
Ventures, 218
Law of the People’s Republic of China on
G Choice of Law for Foreign-related
General principles [Art. 7(2)], 6, 18, 46, 92, Civil Relationships, 98, 158, 219,
204, 245, 284, 341, 372, 394 252
General Principles of the Civil Law of the Letter of credit, 7, 136
People’s Republic of China, 6, 19, Lex causae, 16, 252
51, 84, 90, 98, 119, 141, 195, 215, Lex fori, 16, 70, 90, 158, 165, 252, 265,
242, 265, 295, 311, 323, 337, 359, 284, 296
386 Losses of Benefits, 152
Good faith, 119, 143, 316, 348
Goods replacement, 61
M
Maritime Law, 157
Market price, 168
H
Mitigation of damages [Art. 77], 31, 85,
Hand over documents, 21, 136, 267
143, 167
Hong Kong, 3, 43, 73–76, 82, 83, 85, 159,
Modification of Contract, 177, 179
229, 398–401

N
I Nationalise the resolution, 371
Identification, 251 Natural person, 325
Incoterms, 114–116, 166, 173, 175, 289 Notice of the Supreme People’s Court on
Inspection of Goods, see Examine of good Issuing the Opinions on Several
Integral part of domestic legal system, 70, Issues concerning the
297 Implementation of the General
Interest [Art. 78] Principles of the Civil Law of the
calculation, 9, 54, 127, 191, 201, 275, People’s Republic of China (For
349 Trial Implementation), 90
claim payment, 357 Notify Defects, 304, 348
Interpretation of the CISG
[Art. 7(1)], 45, 55, 62
[Art. 8], 122, 328, 395 O
Interpretation of the Supreme People’s Objection notification, see Notify defects
Court on Issues Concerning the Opinions of the Supreme People’s Court
Application of Law for the Trial of Regarding Further Providing
Cases of Disputes over Sales Judicial Services and Guarantees by
Contracts, 366 the People’s Courts for the Belt and
Interpretation of the Supreme People’s Road Initiative, 387
Court on the Application of the Civil Opt in, 5, 18
Procedure Law of the People’s Opt out, 17
Republic of China, 32 Oral agreement/contract/presentation, 7,
Interpretations of the Supreme People’s 251
Court on Several Issues Concerning Overdue payments, 358
Application of the Law of the Ownership, 114–116, 158–160, 241, 248,
People’s Republic of China on 251
Index 405

P Shipment, 21, 53, 100, 166, 179, 287

Package the goods, 107 Some Provisions of the Supreme People’s
Party autonomy [Art. 6], 7, 17, 64, 82, 105, Court on Evidence in Civil
135, 174, 213, 256, 266, 289, 316, Procedures, 32
395 Storage costs, 84
Passing of risk [Art. 66], 47, 179, 289
Pay for goods, 9, 21, 91, 148, 188, 241,
274, 286, 354, 357, 358, 365 T
Performance order, 21 Taiwan, 325
Preservation of the goods [Art. 85, 86], 47, Take reasonable measures to mitigate the
85 loss, 85, 109, 143, 365
Price reduction, 168, 258 Time Period
Principle of the closest connection, 54, 84, additional period for buyer to perform
92, 119, 141, 159, 312, 314, 337, obligations [Art. 63], 149
364, 373 rescission of contract, 150
Private international law, see Conflict of law Tort, 283, 329
Property in goods [Art. 4(b)], 159, 241

U
Q United Nations Commission on
Quality objection, 166, 168, 275, 348 International Trade Law
Quantity of goods, 99, 158, 188, 380 (UNCITRAL), 63, 74, 82–84, 99,
105–107, 128, 129, 143, 149, 150,
152, 160, 166, 168, 170, 185, 187,
R 188, 190, 191, 202–204, 218, 219,
Receive the goods, 99, 179 237, 238, 256–262, 275, 276, 282,
Remedies, 64, 92, 148, 196, 374, 395 284, 288, 327, 356, 379, 380, 384
Response of the Supreme People’s Court to Usage [Art. 9], 173, 204, 328
Certain Questions Concerning the
Application of the Foreign
Economic Contract Law, 45, 93 V
Right of a third party [Art. 41], 98, 159 Validity [Art. 4(a)], 30, 64, 98, 116, 364,
Right to rescind contract, 148, 150 393
Risk allocation [Art. 67], 289 Vienna Convention on the Law of Treaties
Risk transfer, see Passing of risk (VCLT), 62, 316

S W
Sample of goods, 261, 287 Weight of evidence, 374