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CISG CASE PRESENTATION

China 10 September 2004 High People's Court [Appellate Court] of Shandong Province (WS China Import GmbH v. Longkou Guangyuan Food Company) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/040910c1.html]

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

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Case identification

DATE OF DECISION: 20040910 (10 September 2004)

JURISDICTION: People's Republic of China

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

JUDGE(S): Zhao, Tong (Chief judge); Cheng, Weihua and Yang, Jie (Agent judges)

CASE NUMBER/DOCKET NUMBER: Unavailable

CASE NAME: WS China Import GmbH v. Longkou Guanyuan Food Company

CASE HISTORY: 1st instance Civil Decision of the Intermediate People's Court of Qingdao City, Shandong Province (affirmed)

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

BUYER'S COUNTRY: Germany (plaintiff)

GOODS INVOLVED: Preserved apples, pears and peaches


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 40 ; 74 ; 77 , 78 [Also cited: Article 39 ]

Classification of issues using UNCITRAL classification code numbers:

40B [Seller fails to disclose known non-conformity: seller loses right to rely on articles 38 and 39];

74A [General rules for measuring damages: loss suffered as consequence of breach];

77A [Obligation to take reasonable measures to mitigate damages];

78A [Interest on delay in receiving price or any other sum in arrears]

Descriptors: Lack of conformity known to seller ; Damages ; Mitigation of loss ; Interest

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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/19]: <http://aff.whu.edu.cn/cisgchina/en/news_view.asp?newsid=82>

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

High People's Court of Shandong Province [10 September 2004]
(WS China Import GmbH v. Longkou Guangyuan Food Company)

Translation [*] by Xu Meihua [**]

Edited by John Zhu [***]

[PROCEEDINGS]

PARTIES AND COUNSEL. Appellant (Plaintiff in first trial and defendant of counterclaim): WS China Import GmbH (hereafter, [Buyer]) ; Address: D-20099 55 Steindamm Hamburg, Germany; Legal Representative: General Manager, ___ Stelter; Attorney: Guo, Hongqing, Lawyer of Fujian Xingshitong Law Firm; Appellee (Defendant in first instance trial and plaintiff of counterclaim): Longkou Guangyuan Food Company (hereafter, [Seller]); Address: Dongjiang County, Longkou City, Shandong Province; Legal Representative: General Manager, Qi, Daguang; Attorney: Diao, Yongguo, Lawyer of Shandong Laizhi Shunfa Law Firm.

TRIAL PARTICULARS. [Buyer] appealed to this court because it took objection to the (2002) Qing Min Si Chu Zi No.35 Civil Decision of the Intermediate People's Court of Qingdao City, Shandong Province, on the international sales contract it entered into with the [Seller]. The High People's Court established the tribunal and held an open hearing. Attorney, Guo, Hongqing for the [Buyer] and Attorney, Diao, Yongguo, for the [Seller] attended the court session. The case has been concluded.

POSITION OF THE PARTIES

[Buyer]'s position

[Buyer] alleged at the first instance trial that:

      On 11 October, 8 November, and 27 December 2001, the [Buyer] and the [Seller] signed four sales contracts. After the conclusion of the contracts, the [Seller] received the entire price of the goods according to the L/C issued by the [Buyer]. The [Seller] delivered the goods to the destination port by sea transportation; however, the [Buyer] discovered that the goods delivered were not in conformity with the provisions of the contract and in the L/C; [Buyer] discovered that the goods were rotten entirely. The [Buyer] entrusted China Import and Export Commodity Inspection Bureau Bremen Branch (hereafter, "CCIB Bremen Branch") to inspect the goods. CCIB Bremen Branch concluded that the goods "do not conform to the descriptions on the B/L and the invoice" and that "the goods are unable to be sold at market." According to the regulations on import and export and on inspection and quarantine in Germany, the goods were destroyed. Therefore, the [Buyer] filed this lawsuit with the court, and asked the court to order that:

   1.    The four contracts entered into by the two parties be rescinded;
   2.    [Seller] compensate [Buyer]'s loss of price of the goods of US $172,125 and the interest thereon;
   3.    [Seller] compensate [Buyer]'s losses of bank procedure fee, transportation fee, inspection fee, cleaning fee, storage fee, and destroying fee, plus interest thereon;
   4.    [Seller] bear the entire court cost.

[Seller]'s position

[Seller] defended that the goods it delivered were inspected by an authorized organization in China and that, after receiving the goods, the [Buyer] did not inform the [Seller] of the lack of conformity of the goods, nor did [Buyer] mitigate the loss by obtaining substitute goods. The [Buyer] destroyed the goods unilaterally, which caused unnecessary losses. Therefore, the [Buyer]'s claims should be dismissed.

The [Seller] simultaneously counterclaimed that:

      On 25 June 2001, the [Buyer] and the [Seller] signed an agreement, by which the [Buyer] would voluntarily reimburse the entire purchase price owed to the [Seller] by Warnke & Stelter Import GmbH (hereafter, "Warnke Company"); the payment period was within 18 months after signing the agreement. However, the [Buyer] failed to make payment on time; therefore, the [Seller] counterclaimed that:

   -    [Buyer] be directed to pay the purchase price of the goods of US $176,050.25 and the interest thereon; and that
   -    [Buyer] bear the court cost.

[Buyer]'s defense

In defense to the [Seller]'s counterclaim, [Buyer] stated that:

      It was true that the [Buyer] and the [Seller] signed an agreement on 25 June 2001; however, it was a "substitute performance made by a third party" under Article 64 of the Contract Law of China. The [Buyer] acted on behalf of Warnke Company and the [Buyer] is only the subject of performance, but not obligated. If the [Buyer] did not make or failed to make payment in accordance with the contract, Warnke Company is the one that would be liable for contract violation. The [Buyer] should not be the object of the seller's counterclaim. This counterclaim should be dismissed.

FACTS ASCERTAINED BY THE COURT OF FIRST INSTANCE

On 11 October 2001, 8 November, and 27 December 2001, the [Buyer] and the [Seller] signed four sales contracts, Contracts GY2001-D-101, GY2001-D-1107-A, GY2001-D-1107-B, and GY2001-D-1221 by which, respectively, the [Buyer] was to purchase:

   -    25 tons of preserved pears at a unit price of US $850/ton;
   -    170 tons of preserved pears at a unit price of US $800~850/ton;
   -    70 tons of preserved apples at a unit price of US $1,150/ton; and
   -    34 tons of preserved peach at a unit price of US $1,200/ton.

After the conclusion of the four contracts, the [Buyer] issued irrevocable transferable L/Cs No. BG26A10200109, BG26A10200012, BG26A10200011, and BG26A10200031 with the [Seller] as the beneficiary, and the [Seller] delivered thirteen containers of goods to Hamburg, Germany by sea transportation on 22 January, 29 January, and 5 February 2002 as stipulated in the contract. After the expiration of the payment deadlines under the four L/Cs, the L/C issuing bank transferred US $172,125 and deducted the bank procedure fee of 735.84 EUR from Warnke Company's bank account. The [Seller] received the entire payment from the noticing bank, Bank of China Yantai Branch.

After the thirteen containers arrived in Germany, the [Buyer] discovered that the goods were not preserved fruits as stipulated in the contracts and the L/Cs, but rotten fruits. The [Buyer] then asked CCIB Bremen Branch to inspect the goods, which issued inspection reports on 21 February, and 13 March 2002, respectively. CCIB Bremen Branch concluded that "the goods do not conform with the descriptions in the B/Ls and invoices" and "the entire goods cannot be sold at market". According to the relevant regulations on import and export and on inspection and quarantine, the thirteen containers of goods were destroyed locally. Meanwhile, the [Buyer] contacted Longkou Inspection and Quarantine Bureau, which replied to the [Buyer] on 11 March 2002 that:

"The fact that the [Seller] changed and mixed other goods with the contract goods is almost clear. The [Seller] did not pack the goods that were inspected and confirmed by our Bureau into the containers delivered to the [Buyer], which was a violation of the Commodity Inspection Law. According to the related laws regarding inspection and quarantine, our Bureau is prosecuting this case based on Methods of Administrative Penalty on Import and Export Inspection and Quarantine."

It was ascertained that the [Buyer] paid 13,982.85 EUR to the carrier. After the goods arrived at the destination port, the [Buyer] paid a total of 805.56 EUR for port costs. During the inspection process, the [Buyer] paid a checking fee at the site, a photo fee, and an inspection fee, totaling 2,668 EUR. The containers were contaminated by the rotten fruits, which caused the [Buyer] to pay a 679 EUR cleaning fee. The [Buyer] also paid 25,438.8 EUR for storage and destroying fees, and 797.68 EUR for a container demurrage charge due to the rotten goods.

It was also found that on 25 June 2001, the [Buyer] and the [Seller] reached an agreement on the payment of US $176,050.25, which Warnke Company owed to the [Seller] in 2000, by which:

   -    The [Buyer] would voluntarily reimburse the entire purchase price owed by Warnke Company to the [Seller] with a payment period of within eighteen months after signing the agreement;
   -    The [Seller] will give preference to the [Buyer] to support the [Buyer]'s future business;
   -    If the [Buyer] does not make or does not make the entire payment within the stipulated time, the [Seller] reserves the right to ask payment from Warnke Company.

The [Buyer] failed to make this payment afterwards.

The Court of First Instance noted that:

      Since one party of this case was a foreign corporation, provisions applicable to the civil procedures involving foreign interest shall be applied. The [Buyer] was located in Longkou City Shandong Province, according to Civil Procedure Law of the PRC and the Provisions of the Supreme People's Court on Several Issues Concerning Jurisdiction in Foreign Related Civil and Commercial Cases, this court had jurisdiction on this case. During the court session, the two parties reached an agreement on applying Chinese law to the dispute in this case; therefore, Chinese law shall be the applicable law. In the meantime, the two parties agreed to apply the United Nations Convention on Contracts for the International Sales of Goods (hereafter, the "CISG"), thus, the CISG is also applicable.

The four contracts signed by the two parties reflect their true minds. They are legally effective, based on which both parties shall perform. The [Buyer] issued the requisite irrevocable L/Cs, paid the price of the goods before the deadline, and paid the transportation fee in accordance with the contract. The [Seller] should have performed its obligation to deliver the goods. The [Buyer] provided the inspection report issued by CCIB Bremen Branch and the fax sent by Longkou Import and Export Commodity Inspection and Quarantine Bureau, which support one another; therefore, they could be used as evidence for making judgment. This evidence indicated that the [Seller] delivered non-conforming goods to the [Buyer], which were rotten fruits. The [Seller] has violated the contract. Article 94 of the Contract Law of the PRC (hereafter, the "Contract Law") is relevant. It stipulates that:

"If one party to a contract delays in performing the obligations thereof or commits other acts in breach of the contract so that the purpose of the contract cannot be realized, the other party is entitled to terminate the contract."

In the instant case, seller's violation of the contracts caused the [Buyer] to be unable to realize the purpose of the contracts. Therefore, [Buyer]'s claim to terminate the contracts it entered into with the [Seller] has legal basis, which the court shall support.

Article 97 of the Contract Law stipulates that:

"After the termination of the contract, for the unperformed part of the contract, the performance should be terminated, and for the performed part, the performing party may ask to recover, take other remedies and claim compensation based on the contract performance and the nature of the contract".

Therefore, [Buyer]'s claims that the [Seller] shall return the contract price paid by the [Buyer], and compensate the losses of bank procedure fee, transportation fee, and port cost can be established, which were supported by the court. The inspection fee, container cleaning fee, storage fee and destroying fee, and containers demurrage charge were all caused by the [Seller]'s contract violation. The [Buyer] had provided sufficient evidence to support these losses, and its compensation claim had legal and factual basis, which were accepted by the court. The [Seller] shall also pay the interest on the aforesaid sums. Responsibility to pay interest was also incurred due to the [Seller]'s breach of contract (based on the loan interest rate set by the People's Bank of China at the same time).

With regard to the [Seller]'s assertion that the [Buyer] failed to inform the [Seller] of the lack of conformity of the goods within a reasonable time after the receipt of the goods, and to take reasonable measures to mitigate the loss; therefore, it was [Seller]'s position that the [Buyer] should bear the losses by itself.

The court took cognizance of Article 39(1) of the CISG, which stipulates that:

"The buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered or ought to have discovered it."

The court also took cognizance of Article 40 of the CISG, which states that:

"The seller is not entitled to rely on the provisions of article 38 and 39 if the lack of conformity relates to facts of which he knew or could not have been unaware and which he did not disclose to the buyer".

In the instant case, the fax sent to the [Buyer] by Longkou Inspection Bureau indicated that the [Seller] did not pack the goods that were inspected and confirmed by the Longkou Inspection Bureau, but changed and mixed other goods with them, for reasons of which Longkou Inspection Bureau has started an investigation. Therefore, the [Seller] knew or could not have been unaware the lack of conformity of the goods. After inspection, the goods delivered by the [Seller] "could not be sold at market;" the entire goods were rotten and smelled badly. Moreover, in this situation, it was reasonable and necessary that the [Buyer] destroy the goods immediately to mitigate the loss. Therefore, the [Seller]'s counter arguments could not be established.

The agreement signed by the [Buyer] and the [Seller] on 25 June 2001 reflected the true minds of the two parties. The agreement did not violate the law and had legal effect. According to the agreement, the [Buyer] voluntarily bears responsibility for repaying US $176,050.25 that Warnke Company owes to the seller, which means that the [Buyer] promised to make payment of this amount to the [Seller] on behalf of Warnke Company. This agreement had legal effect on the [Buyer] once it was signed, and the [Buyer] violated the contract by failing to make payment within the time stipulated in the contract.

In accordance with Article 107 of the Contract Law of China, the [Seller] had the right to ask the [Buyer] to make payment and to bear the responsibility for contract violation. Even though the agreement stipulates that the [Seller] reserves the right to ask for payment from Warnke Company if the [Buyer] fails to pay or fails to pay the entire price of the goods, it does not exclude [Seller]'s right to seek to recover from the [Buyer]. Under this circumstance, the [Seller] may claim against either of the two parties. Therefore, the [Seller]'s counterclaim that the [Buyer] shall pay US $176,050.25 and the interest on it can be established and is acceptable by this court.

As to the [Buyer]'s assertion that the aforesaid agreement was a "substitute performance made by a third party", according to Article 65 of the Contract Law, this law states that:

"If the parties agree to have a third party pay the debt, debtor shall be liable to the creditor, provided the third party did not perform or failed to perform the debt in accordance with the contract."

This means that once the debtor promises that a third party is to perform the debt on behalf of itself, since it is the debtor who makes this statement, the debtor shall be liable for contract violation if the debt is not paid. In the instant case, the [Buyer], as a third party, indicated that it was to perform the debt on behalf of Warnke Company, which meant that the [Buyer] was party to the agreement; therefore, the [Buyer] should accept being bound by the agreement and should take the responsibility for contract violation. Thus, Article 65 of the Contract Law is not applicable to this case, and the [Buyer]'s claim of "substitute performance made by a third party" is not acceptable.

Above all, the [Buyer]'s claim and the seller's counterclaim have legal and factual basis, which are acceptable to this court. According to Articles 94(4), 97, 107 of the Contract Law of the PRC, Article 40 of the CISG, Article 128 of the Civil Procedure Law of the PRC, and Article 156 of the Opinions on Several Issues Regarding the Application of the Civil Procedure Law of the PRC, the court ruled that:

1.  Contracts GY2001-D-101, GY2001-D-1107-A, GY2001-D-1107-B, and GY2001-D-1221 signed by the [Buyer] and the [Seller] shall be terminated;

2.  [Seller] shall return US $172,125 for the price of the goods and the interest thereon (from the day of the payment to the day of this judgment at the bank loan interest rate set by the People's Bank of China at that time);

3.  [Seller] shall pay the [Buyer] the bank procedure fee of 735.84 EUR, transportation fee of 13,982.85 EUR, port cost of 805.56 EUR, inspection fee of 2,668 EUR, container cleaning fee of 679EUR, storage fee and destroying fee of 25,438.8 EUR, and container demurrage charge of 797.68 EUR;

4.  [Seller] shall pay the interest on the aforesaid sum (from the payment date to the day of this judgment following the loan interest rate set by the People's Bank of China at that time);

5.  [Buyer] shall pay to the [Seller] US $176,050.25 and the interest thereon (calculated from 26 December 2002 to the day of this judgment based on the bank loan interest rate set by the People's Bank of China at that time).

The aforesaid 1~5 items shall be paid within 10 days after the day of this award, otherwise, interest will be added based on the bank loan interest rate set by the People's Bank of China at that time. [Seller] shall bear the court cost of renminbi [RMB] 19,746.28; [Buyer] shall bear the counterclaim fee of RMB17,516.

The [Buyer] objected to the aforesaid judgment, and appealed that:

      The [Buyer] signed the payment agreement with the [Seller] on 25 June 2001 only to voluntarily bear the debt of Warnke Company, by which the [Buyer] could not be party to the debtor and creditor relationship between the [Buyer] and Warnke Company. The [Buyer] was the performer but not the subject of the obligation. If the [Buyer] fails to pay the debt, Warnke Company but not the [Buyer] shall be the subject of the debt. The agreement falls in the scope of Article 65 of the Contract Law of the PRC, which is a substitute performance made by a third party. Warnke Company shall be the one liable for the [Buyer]'s non-performance.

At the court session, the [Buyer] added supplementary reasons for appeal, which stated that the nature of the claim and the counterclaim in this case are different, so are the reasons of the claims. It violated the law for the Court of the First Instance to have processed the original claim and the counterclaim together. The [Buyer] asks the Court of Appeals to reverse No. 5 of the award of the first trial, dismiss the seller's counterclaim or return the case to the Court of First Instance for re-judgment, and have the [Seller] pay the costs for the first trial and for the appeal.

The [Seller] counter argues that Article 65 of the Contract Law of the PRC does not apply to this case. It is [Seller]'s position that the Court of First Instance clearly confirmed the facts of the case, and applied the law properly; therefore, its judgment should be affirmed and the [Buyer]'s appeal should be dismissed.

During the appeal, the two parties had no objections to the facts that were ascertained by the Court of First Instance, and this Court confirms those facts. And the two parties agree that this is a civil and commercial case involving foreign interest. The two parties agreed at the first trial that this case should apply Chinese law, which was lawful and this court confirms that the law of the PRC should be the applicable law, and that the CISG should be the legal basis for the dispute in this case.

According to the [Buyer]'s claim and the [Seller]'s defense, the dispute in this case focuses on two issues: 1. whether the counterclaim filed by the [Seller] can be considered; and 2. whether the [Seller]'s counterclaim is acceptable.

As to whether the [Seller]'s counterclaim can be considered, this court deems that there are no clear stipulations in the Civil Procedure Law of the PRC regarding requirements for filing a counterclaim. A counterclaim means a defendant of the original claim files an independent counterclaim during the process of the original claim, which is to dismiss or combine the original claim. In the instant case, the [Buyer] field a lawsuit, asking the [Seller] to pay the debt connected with a sales contract, and the [Seller] filed a counterclaim, asking the [Buyer] to perform the obligation of making payment as stipulated in an agreement they entered into which related to the original claim. The [Seller] filed the counterclaim to dismiss the [Buyer]'s original claim. In addition, combining the original claim and the counterclaim will not delay the whole process. Therefore, the seller's counterclaim will be considered.

As to whether the [Seller]'s counterclaim is acceptable: On 25 June 2001, the [Buyer] and the [Seller] reached an agreement, by which the [Buyer] was to take the responsibility for paying US $176,050.25 that Warnke Company owned to the [Seller]. By signing this agreement, a new civil legal relationship was established between the [Buyer] and the [Seller], therefore, the [Seller] may claim based on the [Buyer]'s liability if it fails to perform its obligations. Article 65 of the Contract Law of the PRC stipulates that

"If the parties agree to have a third party pay the debt, the debtor shall be liable to the creditor, provided the third party did not perform or failed to perform the debt in accordance with the contract."

This article specifies that the parties to the contract agree to have a third party perform contractual obligations. Because of privity of contract and the fact that the third party did not express its willingness to perform the obligation, therefore, when the third party fails to perform, the creditor can only ask the debtor to perform or accuse the liability of the debtor, but not the third party.

The aforesaid agreement in this case was signed by the third party, the [Buyer], and the [Seller] without the seal of Warnke Company, nor was there any evidence showing that Warnke Company expressly stated or implied that the [Buyer] was to pay its debt. Therefore, it is not in compliance with Article 65 of the Contract Law of the PRC, and this Court does not apply the aforesaid rule. Thus, [Buyer]'s assertion that Warnke Company should be the party to the litigation, and that the [Buyer] is not liable cannot be established and is not accepted.

Above all, the Court of the First Instance discovered the facts of this case clearly and properly applied the law, and the [Buyer]'s claim cannot be established. In accordance with Article 153 Section 1(1) of the Civil Procedure Law of the PRC, the court makes the following award:

   -    Dismiss the appeal, affirms the original judgment;
   -    [Buyer] shall bear RMB37,262.28 for the cost of appeal.

This is the final decision.

Chief Judge: Zhao, Tong
Agent Judge: Cheng, Weihua
Agent Judge: Yang, Jie

10 September 2004

Clerk: Lan, Xiaowei


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Appellant of Germany 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 United States (dollars) are indicated as [US $]; amounts in the currency of the European Union (Euro) are indicated as [EUR]; 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.

*** John Zhu, LL.M. China University of Political Science and Law on a national graduate scholarship. He received his Bachelor of Law degree from Southwest University of Political Science and Law and Double Degree of English Literature from Sichuan International Studies University in Chongqing, China. His focus is on International Economic Law.

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