Recently, the Supreme People’s Court of China issued the Interpretation on the Application of the Law in the Trial of Sales Contract Dispute Cases (hereinafter the “Interpretation”), which came into force on July 1, 2012. 

 

As sales contracts could be the most widely used contract in economic activities, there is a large number of cases regarding disputes over sales contracts before the Chinese courts. Though China amended its Contract Law in 1999, and has promulgated two judicial interpretations respectively in 1999 and 2009 with respect to the application of the Contract Law, Chinese courts may still have different understandings and implementations of the Contract Law during trial of disputes over sales contracts. With such background, the Interpretation was issued particularly to regulate the application of law for trial of disputes over sales contracts. It is expected that the Interpretation could unify the judicial practices.

 

In this article we will outline the key points of this Interpretation which may deserve the attention of the companies operating in China, especially those engaged in trading activities.

 

 

• Contractual relationship without written contract

 

The Interpretation clearly stipulates that, in case there is no written contract, other documents, such as delivery note, receiving note, settlement note, invoice, etc. shall also be taken into account to determine the existence of contractual relationship based on the transaction form and trade custom between the parties.

 

In this regard, it is advisable for the companies to have good custody of all trade related documents in their daily operation, which may be used as evidence before the court especially when there is no written contract signed.

 

• Effectiveness of contract when selling goods without ownership 

 

The Interpretation clarifies that lack of ownership over the goods will not be the ground for denying the effectiveness of the sales contract. In case that the ownership cannot be transferred to the buyer due to the seller’s lack of ownership over the goods, the seller shall bear default liability according to the sales contract and the Contract Law.    

 

• Pre-contracts

 

For pre-contract, such as letter of intent, memorandum, etc, under which the parties agree to conclude the sales contract within an agreed period, one party may claim for breach of such pre-contract and request compensation in case the other party fails to perform its obligation to conclude the sales contract. 

 

As it is often necessary for companies to sign letter of intent or memorandum before or during the contract negotiation stage, the relevant parties shall consider seriously before stipulating the period to sign the contract and the responsibilities for not signing it, as they will be binding according to the Interpretation.

 

 

• Function of invoice as evidence

 

According to the Interpretation, where the seller intends to prove the delivery of the goods only with the VAT special invoice and/or the VAT deduction document, it may not be supported by the court in case the buyer does not accept such proof. 

 

On the contrary, where the buyer tries to prove the payment of goods price with a regular invoice, in case the contract regulates or the custom between the parties shows that the regular invoice can be the evidence of payment, the court shall support the buyer unless there is evidence to the contrary.   

 

• Single movable property sold to different buyers

 

In case the seller signs multiple sales contracts for one single movable property with different buyers, the Interpretation deprives the seller of his right to choose one buyer among them to deliver the property:

 

If it is an ordinary movable property, the buyer who first takes the delivery of the property shall obtain the ownership. In case no buyer has taken the delivery, the buyer who first pays the price has the priority to request the delivery; if there is neither delivery nor payment, the buyer who first concludes the contract with the seller shall have the priority to receive the delivered property. 

 

If it is a special movable property such as vessel, aircraft, vehicle, etc., the buyer who first takes the delivery of the property has the priority to obtain the ownership, even if the special movable property has been registered under another buyer’s name. In case no buyer has received the property, the buyer who first conducts registration of ownership of the special movable property has the priority to request the delivery; if there is neither delivery nor registration, the buyer who first concludes the sales contract shall have the priority to request the delivery and ownership registration.

 

Therefore, when buying movable properties, according to the Interpretation it is very important for the buyer to take the delivery of the property in order to ensure the ownership of it.

 

 

• Clarification of phrase in Contract Law

 

According to Article 142 of the Contract Law, usually the buyer shall bear the risk of the goods after delivery while the seller shall bear the risk before delivery. Article 145 of the same law further regulates that, in case the delivery place is not clear and the goods transportation is needed, the buyer shall bear the risk when seller delivers the goods to the first carrier.

 

The Interpretation clarifies the definition of ‘if the goods transportation is needed’ in Article 145 of the Contract Law that this term refers to the circumstance where the seller is responsible for consignment of the goods and the carrier is an independent third party engaged for transportation. Therefore, if the carrier is a department of the seller, such Article 145 of the Contract Law will not be applicable and the risk will be transferred to the buyer upon delivery to the buyer. 

 

• Effectiveness of signature

 

If the parties do no have specific agreement on the inspection period, once the buyer has signed the delivery note or the confirmation note which indicates the quantity, model and specification of the goods, it will be deemed that the buyer has checked the quantity and appearance of the goods unless there is other evidence in contrary.

 

• Short inspection period

 

The Interpretation specifies that, if the agreed inspection period is too short, so that it is impossible for the buyer to finish the complete inspection according to the nature of the goods and the trade custom, such agreed period shall only be applicable to the appearance check, while the court shall determine the reasonable period for the buyer to lodge claims for hidden defects.

 

In addition, in order to protect the best interest of the buyer, the Interpretation provides that if the inspection period or the quality warranty period, agreed by the parities, is shorter than those set up by laws or regulations, the laws or regulations shall prevail.

 

 

• Penalty for overdue payment

 

The Interpretation clarifies that, where the sales contract has stipulated the penalty for overdue payment, in case the reconciliation statement or the repayment agreement does not mention the liability for overdue payment, the court shall support the seller’s claim for penalty as stipulated in the sales contract.

 

However, the above rule is not applicable in the circumstance whereby the reconciliation statement or the repayment agreement has explicitly addressed the amount of the principal and penalty for the overdue payment.

 

In this regard, the parties shall be more careful when preparing any reconciliation statement or repayment agreement, etc. to make sure the liabilities that the defaulting party shall assume. 

 

• Rules for determining default compensation

 

The Interpretation expressly provides that, the compensation for default can be correspondingly reduced in case the damage is also partially attributable to the non-defaulting party, or if the non-defaulting party also receives benefit due to the default. 

 

 

In addition to the key points introduced above, the Interpretation also covers the following rules, mainly include: 

 

- Title retention under sales contracts, with the purpose to improve the feasibility of this rule in practice, such as whether this rule is applicable to immovable properties or not;

 

- Sales contract with payment in installments, to clarify the definition of this type of contract;

 

- Sales contract based on trial-use, to clarify the definition of this type of contract, payment of the trial-use fee, etc.

 

 

The issuances of the Interpretation represents the efforts of the Chinese Supreme People’s Court to unify the judicial practice in respect to trial of disputes arising from sales contracts, which may have important impact to the companies with large volume of sales in daily operation, especially the trading companies. It would be necessary for these companies to pay attention to the provisions expressly provided by the Interpretation in order to better protect their interest in the daily business.