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CISG CASE PRESENTATION

China 25 December 2002 High People's Court [Appellate Court] of Jiangsu Province (Zhuguang Oil Company v. Wuxi Zhongrui Group Corporation) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/021225c1.html]

Primary source(s) of information for case presentation: Case text

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Case identification

DATE OF DECISION: 20021225 (25 December 2002)

JURISDICTION: People's Republic of China

TRIBUNAL: High People's Court [Appellate Court] of Jiangsu Province

JUDGE(S): Tang, Xiaofu (Chief Judge); Zhu, Chunyan (Judge); Xu Meifen (Agent Judge)

CASE NUMBER/DOCKET NUMBER: Unavailable

CASE NAME: Zhuguang Oil Company v. Wuxi Zhongrui Group Corporation

CASE HISTORY: 1st instance Intermediate People's Court of Wuxi City, Jiangsu Province

SELLER'S COUNTRY: People's Republic of China (defendant)

BUYER'S COUNTRY: Republic of Korea (plaintiff)

GOODS INVOLVED: Acrylic yarn


Classification of issues present

APPLICATION OF CISG: No [Article 1(1)(b)]

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Article 1(1)(b)

Classification of issues using UNCITRAL classification code numbers:

Unavailable

Descriptors: Unavailable

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Editorial remarks

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): CISG-China Case [HPC/14]: <http://aff.whu.edu.cn/cisgchina/en/news_view.asp?newsid=87>

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation) [second draft]

Queen Mary Case Translation Programme

High People's Court of Jiangsu Province [25 December 2002]

(Zhuguang Oil Company v. Wuxi Zhongrui Group Corporation)

Translation [*] by Xu Meihua [**]

[PROCEEDINGS]

PARTIES AND COUNSEL. Appellant (Plaintiff): Zhuguang Oil Corporation (hereafter, [Buyer]) ; Address: 152-51 Xiannong Building, Sancheng Blvd, Jiangnan District, Seoul, Korea; Legal Representative: Piao, Zhongxiong; Attorney: Mao, Chenglin, Lawyer of Beijing Dayang Law Firm; Attorney: Li, Wanzong, Lawyer of Beijing Dayang Law Firm. Appellee (Defendant): Wuxi Zhongrui Group Corporation (hereafter, [Seller]); Address: 4 Jiangkang Road, the City of Wuxi, Jiangsu Province, China; Legal Representative: Ding, Kaiguo, President of Zhongrui Corporation; Attorney: Zhu, Jianguo, Lawyer of Jiangsu Wuxi Yingte Donghua Law Firm; Entrusted Agent: Fei, Wei, Employee of [Seller].

TRIAL PARTICULARS. [Buyer] appealed to this court because it took objection to the (2001) Xi Jing Chu Zi No.15 Civil Decision handed down by the Intermediate People's Court of Wuxi City Jiangsu Province on the international sales contract [Buyer entered with [Seller]. This court established the tribunal and held an open hearing. Attorneys Mao, Chenglin and Li, Wanzong for the [Buyer] and Attorney, Zhu, Jianguo and agent of the [Seller], Fei, Wei, attended the court session. The trial is now completed.

[Facts discovered during the first trial]

1.  In December 1997, [Buyer] contacted Mr. Piao, a Korean business man, who does business in China, stating that it needed to purchase 28S/2100% acrylic acid bulk yarn, and asking Mr. Piao to find a supplier. Through Mr. Piao, [Buyer] entered into a sales contract with Huaiyin International Trade Company (hereafter "Huaiyin Company"), by which the [Buyer] was to purchase 38,000kg 28S/2100% acrylic acid bulk yarn at a unit price of US $3.28/kg FOB Shanghai, totaling US $124,640.00. The loading port and the destination port were Shanghai and Santos, Brazil. After the conclusion of the contract, the [Buyer] issued an irrevocable L/C worth US $124,640.00 with Huaiyin International Trade Company as the beneficiary (No. M3954712SS00018).

2.  Because Huaiyin International Trade Company was unable to perform the contract, Mr. Piao contacted Jiang, Yuan, a former employee of [Seller], who gave the aforesaid information to Fei, Wei (an employee of [Seller]). [Seller] indicated that it could provide the goods that were needed, and the [Buyer] modified the beneficiary of the L/C to [Seller] through the bank. Except for the terms indicated in the L/C, the two parties did not stipulate other terms by written document.

Jiang, Yuan was supposed to find the manufacturer, and Mr. Piao (of the [Buyer]'s organization) was supposed to supervise the manufacturing process. On 9 January 1998, and 20 January 1998, [Seller] delivered the goods in two installments. The first delivery was made using one 1 40' container, and the second delivery was made using three containers 3 40'. The goods were delivered from Shanghai, and the destination port was Santos, Brazil. Mr. Piao (of the [Buyer]'s organization), Jiang, Yuan, and an employee of [Seller] were present at the site of the first delivery. They inspected the goods and finding that the goods were damp, asked the manufacturer to dry the goods until no quality problems were found before delivery. Mr. Piao was in Korea when the second delivery was made, and he asked Jiang, Yuan and the employees of [Seller] to confirm the quality of the goods at site before delivery.

3.  [Seller] received the L/C of US $124,640 after delivering the goods.

4.  On 25 February 1998, [Seller] paid a commission of US $2,950 to Mr. Piao.

5.  On 27 February 1998 and 28 March 1998, the two deliveries of goods arrived at Santos port in Brazil. The final client of the goods in Brazil alleged that the goods were severely damp and could not be used.

6.  In October 1998 and March 1999, through Mr. Piao, [Buyer] asked compensation from [Seller]l however, [Seller] denied that there were any quality problems, and the two parties did not reach any agreement.

The Court of First Instance held that in this case, the applicable law should be determined first. [Buyer] alleged that the United Nations Convention on Contracts for the International Sales of Goods (hereafter, the "CISG") shall be applied. However, Article 1(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: (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 States." China is a Contracting State of the CISG, however, China has made a reservation on the aforesaid (b), which indicates that China agrees to apply the CISG only when both parties' places of business are in Contracting States of the CISG. The business places of the [Buyer] and the [Seller] are in Korea and China, and Korea is not a Contracting State of the CISG, therefore, the CISG is not applicable to this case.

Because the two parties failed to stipulate the applicable law, according to Article 145(2) of Civil Code of the People's Republic of China, the law of the country which has the closest connection to the contract shall be applied. The place of contract performance and the address of the defendant are in China, therefore, China is the country which has the closest connection with the contract, and Chinese law shall be applied.

Based on the claims of the two parties, the Court of the First Instance concluded that the disputes in this case focus on two points: 1. whether the oral contract is effective; 2. whether there is quality problem on the contract goods.

Whether the oral contract is effective

The international sales in this case were in 1997, and the two parties did not have a written contract. According to the Foreign Economic Contract Law effective at that time, contracts involving foreign interest must be concluded in written form, and the "Answers on Questions Regarding the Application of Foreign Economic Contract Law" clearly confirmed that a contract involving foreign interest which is not concluded in written form is void. However, Article 10 of the Contract Law of the People's Republic of China, which became effective on 1 October 1999, determines that "parties may conclude contract by oral, written forms or by other means", which confirms the effectiveness of oral contracts.

According to Article 3 of the Explanations on Questions Regarding the Application of Contract Law of the People's Republic of China (1), "When People's Courts decide the effectiveness of a contract for a contract concluded before the Contract Law became effective, if it was void under the law at that time, but valid under the Contract Law, then the Contract Law shall be applied." Therefore, the effectiveness of the contract in this case shall be determined in accordance with the Contract Law of the PRC. There was no other issue which may turn this contract into a void contract; therefore, the oral contract in this case is valid.

The [Buyer]'s claim that the contract was not concluded in written form, which violated the law, thus the contract shall be deemed void, lacks legal basis also conflicts with [Buyer]'s assertion that the [Seller] is liable for quality problems This claim is not accepted. In addition, the [Buyer] claimed that the [Seller]'s manufacturing and delivering defective goods without a reliable supply of goods constituted fraud, and asserted that the contract was therefore void. However, this accusation against the [Seller] could not be the basis for determining the contract void. There was no evidence showing that the [Seller] concluded the contract by fraud; therefore, the [Buyer]'s aforesaid assertion is not accepted.

Whether there was a quality problem

(1) Mr. Piao's position in this contract. The [Buyer] contacted and signed a contract with Huaiyin Company. After knowing that Huaiyin Company could not perform the contract, the [Buyer] contacted Mr. Piao, who introduced this business to the [Seller]. After successfully introducing this business, Mr. Piao was supervising the manufacture process. He inspected the quality of the goods before delivery, and claimed damages from the [Seller] on behalf of the [Buyer] after dispute arose. Even though the [Buyer ] did not issue an entrustment letter to Mr. Piao, however, during the whole sales process, the [Buyer] was contacting Mr. Piao, and sent requests to the contract through Mr. Piao, which gave sufficient reason for the [Seller] to believe that Mr. Piao was an agent of the [Buyer] who represented the [Buyer]'s rights. Mr. Piao's aforesaid performance was beyond the scope of a middle man, and he was executing the rights and performing the contract obligations on behalf of the [Buyer]. According to Article 36(1) and (2) of the Civil Code of the PRC, the [Buyer] shall take civil responsibility for Mr. Piao's performance as an agent. The [Seller]'s paying a commission to Mr. Piao was in accordance with international trade practices, which did not conflict with Mr. Piao's position as an agent of the [Buyer].

(2) Mr. Piao inspected or asked his employee to inspect the goods before the two deliveries, and permitted deliveries after confirming the quality of the goods, which could be considered that the [Buyer] had confirmed the quality of the goods. Even though the final client in Brazil discovered that the goods were damp, the fact that the goods were inspected before delivery could be confirmed, and if the aforesaid problem existed, it could be discovered with normal attention, but could not be ignored; therefore, it should be concluded that there is no aforesaid problem with the goods when they were delivered. According to the FOB term, risks pass to the [Buyer] when the goods passed the rail of the ship. The goods were damp after being loaded onto the ship, and there is no evidence showing that this was caused by the [Seller]; thus, the [Seller] shall not be liable for this;

(3) The [Buyer] provided two inspection reports. One was issued in Brazil, which was obtained outside of China; therefore, without being notarized and certified, it could not be considered as evidence. The sample goods used in the inspection report issued by the Beijing inspection agency were not confirmed by the [Seller], and they were not inspected following legal process; therefore, this court cannot accept the conclusion in this report. The [Buyer] was trying to prove that the manufacturer in this case was capable of manufacturing conforming goods. After investigation, the court found that the manufacturer mentioned by the [Buyer], Xishan City Dongjiang Meihua Toys and Clothes Factory, was not the manufacturer in this case; therefore, the [Buyer]'s this allegation conflicted with the fact which is not acceptable.

Above all, the Court of the First Instance concluded that the oral contract entered by the [Buyer] and the [Seller] reflected true minds of the two parties, and it is a lawful and effective contract under related Chinese laws. As an agent of the [Buyer], Mr. Piao confirmed the quality of the goods, and the [Buyer] failed to provide sufficient evidence to prove that the problem that occurred after the goods arrived at the destination port was caused by the [Seller]'s improper performance. The dispute in this case involves an international sales contract, and under the FOB term, after the [Buyer]'s confirmation of the quality of the goods, the [Seller] shall not be held liable for quality problems that occur during transportation. Therefore, the court does not accept the [Buyer]'s allegation that the contract was void and that the [Seller] is liable for contract violation. In accordance with Article 1(1) of the Explanations on Questions Regarding Application of Contract Law of the PRC issued by the Supreme Court of the PRC, Article 10 of the Contract Law of the PRC, Articles 63(1), 63(2), and 145(2) of the Civil Code of the PRC, and Article 128 of the Civil Procedure Law, the Court of First Instance concluded that: [Buyer]'s claims should be dismissed, and that [Buyer] shall bear the court cost of renminbi [RMB] 19,890.

POSITION OF THE PARTIES

[Buyer]'s position

Reasons for the [Buyer]'s appeal

1.  As to Mr. Piao's position in this case. There is no evidence showing that Mr. Piao was an agent of the [Buyer] who signed and performed the contract. The opinion of the Court of First Instance was conjecture and imaginative. As a trade practice, a commission is paid to the middle man. The [Seller] paid a commission to Mr. Piao, which confirmed his position as a middleman, in the mean time; it also indicated that Mr. Piao was the [Seller]'s agent. As a witness of this case, Mr., Piao's testimony shall be the basis of judgment;

2.  As to the quality of the goods in this case. The sample provided by the [Seller] had quality problems, to which the [Buyer] has raised objection, and informed the [Seller] to stop making delivery of the goods. After receiving the first delivery, the client in Brazil discovered that the goods were damp and could not be used. However, in order to negotiate the payment within the time stipulated in the L/C, the [Seller] insisted on loading the goods notwithstanding the quality problems with the goods, which was a contract performance not in "bad faith". Witnesses Mr., Piao and Jiang, Yuan testified that the goods had been damp before delivery, and the client in Brazil testified that the goods had mold due to moisture, and could not be used; the inspection agency in China also confirmed that the goods had congenital quality problem;

3.  Mr. Piao, the [Seller]'s, witness Jiang, Yuan, and the manufacturer had negotiated the [Buyer]'s compensation issue together, and decided the compensation amount in advance. This negotiation stopped since the [Seller] asked to make compensation on loss of profit. The [Buyer] therefore asks the Court of Appeal to dismiss the decision of the first trial, reverse or remake judgment on this case based on law.

[Seller]'s defense

The [Seller] did not submit written a defense, but made oral arguments at the second trial that:

(1) From the beginning of this case, the [Buyer] had never contacted the [Seller], and all [Buyer]s' requests were sent to the [Seller] through Mr. Piao, therefore, Mr. Piao was the [Buyer]'s agent; (2) Before the deliveries, Mr. Piao or the staff entrusted by him inspected the goods at site. The goods were delivered after inspection, therefore, the goods delivered by the [Seller] had no quality problems; (3) [Seller] has never admitted that there were quality problems with the goods, and has never reached any agreement on the compensation issue with the [Buyer]. The Court of First Instance clearly discovered the facts in this case, and applied the proper laws; therefore, the [Seller] asks to affirm the decision of the first trail.

OPINION OF THE APPELLATE COURT

The two parties have no dispute on the main facts discovered at the first trial including the formation and performance of the contract, and this court confirms these facts.

During the second trial, the disputes focus on: 1. Mr. Piao's position in this case; 2. Whether the goods delivered by the [Seller] conform to the quality stipulation in the contract and whether the [Buyer] is entitled to claim damages against the [Seller].

1.  Mr. Piao's position in this case

In order to prove Mr. Piao's position as a middle man, the [Buyer] provided three items of evidence: (1) A written record made by Xu, Yanqing, attorney of Wuxi Inter Law Firm, when making investigation on Jiang, Yuan on 6 September 2000; (2) The Commission Agreement between the [Seller] and Mr. Piao; (3) Mr. Piao's statement made on 2 July 1999 (which was provided at the first trial). The [Seller] has no objections on the admissibility of the three items of evidence, but argues that they cannot support the [Buyer]'s assertion. This court confirms the liabilities of these items of evidence. The [Seller] did not provide any evidence at the second trail.

This court deems that according to the facts in this case, Mr. Piao shall be considered the agent of the [Buyer] because (1) After successfully introducing this transaction, Mr. Piao sent all business directions to the [Seller] during the performance of the contract (such as: modifying the beneficiary of the L/C, informing to send the sample goods, informing to take back the first delivery of the goods for drying, delivering the goods, and claiming damages). The [Seller] performed the contract as directed by Mr. Piao; (2) No other member of the [Buyer] had contacted the [Seller] during the whole transaction, and the [Buyer] had never indicated that Mr. Piao was not its agent but a middle man; (3) [Seller]'s paying commission to Mr. Piao was in accordance with the trade practices; it should not be the basis for denying his agent position, therefore, even though there is no written entrustment letter issued by the [Buyer], according to trade usages and Mr. Piao's performance in this case, the [Seller] had reason to believe that Mr. Piao was an agent of the [Buyer]. The [Seller] acted in goods faith without any omission, therefore, even though Mr. Piao was a middle man at the conclusion of the contract, he executed the [Buyer]'s rights during the performance of the contract, to which the [Buyer] raised no objection, therefore, Mr. Piao's position as an agent can be established, and the [Buyer] shall be liable for any result of his action.

2.  Whether the goods delivered by the [Seller] conform to the quality stipulation in the contract and whether the [Buyer] is entitled to claim damages against the [Seller].

The [Buyer] provided five items of evidence at the second trial: (1) Evidence provided by Jiang, Yuan on 14 May 1999; (2) Mr. Piao's statement made on 2 July 1999 (same as the third item of evidence provided by the [Buyer] mentioned in the first focus point); (3) Statement made by the attorney in Brazil; (4) Statement made by the client in Brazil (notaries were issued on translations of the third and the forth evidence without notarizing the signature and the liability of the seal); (5) The result issued by Beijing Import and Export Commodity Inspection Bureau. These five items of evidence were provided at the first trial, based on which the [Buyer] tried to prove that the goods were damp before delivery and that there were quality problems with the goods delivered by the [Seller].

The [Seller] made no objections on the liabilities of the first and the second items of evidence, but argues that they cannot prove that the goods had defects before delivery. As to the third and the forth items of evidence, the [Seller] argues that their forms are not lawful and cannot be used as evidence; as to the fifth evidence, the [Seller] alleges that the inspection was requested by the [Buyer] unilaterally, which cannot be used as evidence.

This court accept the first and the second items of evidence; as to the third and the forth items evidence, since they were not issued lawfully, the court does not accept them as evidence; as to the fifth evidence, since it was requested by the [Buyer] unilaterally, the court does not accept it.

Based on the evidence provided by the parties at the first and the second trial, it can be found that at the end of December 1997, the [Seller] sent samples to the [Buyer]. On 9 January 1998, the [Seller] made the first delivery of the goods. Mr. Piao, Jiang, Yuan, and the [Seller]'s employees were present at the delivery site. On 20 January 1998, the second delivery was made. Mr. Piao was not present, but asked Xu, Ting, his employee, to go to the loading site. Jiang, Yuan and the employees of the [Seller] were also present at the site. On 23 January 1998, the [Buyer] sent a fax to Mr. Piao with the names of the [Seller] and the manufacturer, indicating that it had received the sample sent by the [Seller] on 21 January 1998, and asking the [Seller] to stop loading. At that time, the goods had been delivered. According to the L/C stipulations, the [Seller] provided the entire clean B/L. Later, the [Seller] received the payment under the contract.

The court notes that this case involves dividing responsibilities for quality of the goods and for risks of the goods. Responsibility for quality of the goods means the [Seller]'s responsibility for delivering non-conforming goods, but the responsibility for risks of the goods means the loss or damage to the goods occurred during the transaction which were not caused by the [Buyer] or the [Seller]. Responsibility for quality problem can only occur before delivery, and can only be borne by the [Seller]. The responsibility for risks of the goods can occur either before or after delivery of the goods, it can be borne by the [Buyer], the [Seller], the carrier, or the insurer. In the instant case, the two parties failed to stipulate the quality standard, the method of conducting inspection, or inspection before export or re-inspection by the [Buyer]. This should focus on whether the goods conformed to the contract stipulation upon delivery. Mr. Piao and his representatives were present at the site of the deliveries, and they did not raise objections to the quality of the goods delivered by the [Seller], which indicated that the [Buyer] confirmed the quality of the goods, and that the goods delivered by the [Seller] conformed to the quality stipulations in the contract. The [Seller]'s negotiating payment by a providing clean B/L also evidenced this.

Based on the FOB term set forth in the contract, the [Buyer] takes the risks for loss, damage, or quality problems after the goods are loaded; therefore, the [Buyer]'s claiming damages for quality problems against the [Seller] lacks legal and factual basis.

Above all, this court holds that the reasons for the [Buyer]'s appeal cannot be established, and are not accepted. The decision of the first trial is correct, and should be affirmed. The decision of the first trial that when the parties did not stipulate the applicable law in the contract, Chinese law shall be applied according to the proximate connection principle is correct. The court makes the following decision based on Article 153 section 1(1) of the Civil Procedure Law of the PRC:

1.  Appeal denied, and the judgment of the first trial affirmed.

2.  [Buyer] shall bear the court cost of the second trial of RMB 19,890.

This is the final decision.

Chief Judge: Tang, Xiaofu
Judge: Zhu, Chunyan
Agent Judge: Xu, Meifen

25 December 2002

Clerk: Chen, Fanghua


FOOTNOTES

* All translations should be verified by cross-checking against the original text. Forr purposes of this translation, Appellant of Korea is referred to as [Buyer] and Appellee of the People's Republic of China is referred to as [Seller]. Amounts in the currency of the People's Republic of China (renminbi) are indicated as [RMB].

** Meihua Xu, LL.M. University of Pittsburgh School of Law on an Alcoa Scholarship. She received her Bachelor of Law degree, with the receipt of Scholarship granted by the Ministry of Education, Japan, from Waseda University, Tokyo, Japan. Her focus is on International Business Law and International Business related case study.

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