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CISG CASE PRESENTATION

China 21 September 2011 Shanghai High People's Court (Electronic equipment case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/110921c1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20110921 (21 September 2011)

JURISDICTION: People's Republic of China

TRIBUNAL: Shanghai High People's Court

JUDGE(S): Unavailable

CASE NUMBER/DOCKET NUMBER: (2011) Hu Gao Min Er (Shang) Zhong Zi No. 18

CASE NAME: Comac SpA v. Shanghai Swift Mechanical & Electronic Equipment Co., Ltd

CASE HISTORY: 1st instance Shanghai First Intermediate People's Court 2011 (affirmed)

SELLER'S COUNTRY: Italy (1st instance: Defendant; 2nd instance: Appellant)

BUYER'S COUNTRY: China (1st instance: Plaintiff; 2nd instance: Appellee)

GOODS INVOLVED: Electronic Equipment


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 7(2) ; 9(1) ; 45(1)(b) ; 74 ; 78

Classification of issues using UNCITRAL classification code numbers:

7 ; 7A3 [Interpretation of Convention; Observance of good faith];

45A [Summary of buyer's remedies for breach by seller];

74 ; 74A1 [Damages - General Rules for Measuring; Includes loss of profit];

78 [Interest]

Descriptors: Damages ; Interpretation of convention ; 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 database <http://aff.whu.edu.cn/cisgchina/en/news_view.asp?newsid=147 >

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation) [second draft]

The CISG Translation Network

The Supreme People's Court of Shanghai

Date of decision: 21 September 2011

Translation [*] by Mina Wang [**]

Translation edited by M. Bob Kao [***]

[BACKGROUND]

Appellant [Seller] appealed the decision of the Shanghai People’s Intermediate Court regarding its sales contract dispute with Appellee [Buyer]. This Court accepted the case on 7 March 2011, constituted the panel of judges, and heard the case on 7 July 2011. The legal counsel of both the appellant and appellee were present, and the case has been resolved.

The court of first instance found that: Between August 2006 and December 2007 [Buyer] purchased Comac products through an import [Agent] that was not a party to the proceedings. [Buyer] made payments for the goods to [Agent]. [Agent] and [Seller] signed a contract for sale of Comac products in Shanghai. The goods were sent from Italy to Shanghai, China. [Agent] paid [Seller] the price of goods. The last batch of products [Buyer] purchased from [Seller] was imported on 4 February 2008.

On 14 August 2006, [Seller] issued a letter of authorization stating that: [Buyer] is designated as an authorized distributor/agent for the sale and after=sales service of scrubbing machines, sweeping machines, single disc machines, and vacuum cleaners; [Seller] promises to provide [Buyer] as its distributor/agent with spare parts and full-scale technical support in order to achieve customer satisfaction; [Seller] will seek to expand its business relationship with [Buyer] and establish strong long-term business cooperation.

On 14 February 2007, [Seller] issued another letter of authorization stating that: [Seller] hereby declare that [Buyer] is designated as an authorized distributor/agent for the sale and after-sales service of scrubbing machines, sweeping machines, single disc machines, and vacuum cleaners; [Seller] promises to provide [Buyer] as its distributor/agent with spare parts and full-scale technical support in order to achieve customer satisfaction; [Seller] will seek to expand its business relationship with [Buyer] and establish strong long-term business cooperation.

On 8 January 2008, [Seller] issued a letter to Comac's Chinese customer stating that: [Seller] hereby declares that it has appointed Beijing Kaibo Cleaning Equipment Ltd [‘Kaibo'], which was not a party to these proceedings, to be its sole distributor of scrubbing machines, sweeping machines, single disc machines, and vacuum cleaners. [Seller] promises to provide Kaibo with spare parts and full-scale technical support in order to achieve customer satisfaction; [Seller] will seek to expand its business relationship with Kaibo and establish strong long-term business cooperation.

On 21 January 2008, [Seller] issued a letter to Shanghai Lotus Supermarket Chain Co, Ltd, not a party to the current proceedings, stating that: As [Seller]'s sole distributor in China, Kaibo will set up subsidiary companies, exhibition halls and after-sales service centres in Beijing, Guangzhou and Shanghai from 1 January 2008. Kaibo will have an adequate supply of Comac products and spare parts at its headquarters and subsidiaries. In 2008, Kaibo will also have a subsidiary company, exhibition hall and after-sales service centre in Chengdu. Jian Li Cleaning Equipment Co Ltd (‘Jianli”) and [Buyer] are no longer designated import agents of Comac. However, Jianli and [Buyer] can still purchase Comac product and spare parts from Kaibo a professional cleaning equipment supplier. Kaibo will distribute through its own network. Kaibo has attempted to include [Buyer] into its distribution network, to which [Buyer] regrettably showed no interest. This means that [Buyer] may start selling other brands.

On 11 March 2008, an ‘Agreement and Memorandum on Ceasing to Distribute Comac Cleaning Equipment and Disposition of Claims and Debts' was entered into between [Buyer] and [Buyer]'s [Customer 1] which is not a party to these proceedings. [Customer1] was allowed to return to [Buyer] Comac products and spare parts that it had purchased in light of the change in Comac distributorship and the adverse impact and loss the change had caused to [Customer1].

On 30 March 2008, an ‘Agreement on Returns’ was entered into between [Buyer] and [Buyer]'s [Customer 2] which is not a party to these proceedings. [Customer 2] was allowed to return to [Buyer] Comac products that it had purchased in light of the end of the cooperation between [Seller] and [Buyer] that has caused adverse impact and loss upon [Customer 2].

On 14 September 2009, [Buyer]'s [Customer 3] brought a proceeding against [Buyer] in local court in Shandong Province for the return of Comac products to [Buyer] and economic compensation. [Customer 3] submitted that it and [Buyer], as the sole distributor of Comac products, entered into an agreement on 11 September 2007 for [Customer 3] to have sole rights to sell Comac products in Shandong Province and neighboring provinces that have no existing dealership. The agreement was valid from 1 September 2007 to 31 August 2010. Because the business relationship between [Seller] and [Buyer] ceased, [Buyer] failed to supply [Customer 3] certain products, which rendered [Customer 3] unable to sell part of its stock.

[Buyer] and [Seller] identified a list of unsold stock items which were entered into a property freezing order issued by Beijing Chaoyang District People's Court. The unsold stock items are valued at RMB 884,500.06 including the purchase price at RMB670,417.98 and import duties and fees at RMB 214,082.08. [Buyer] expected to make a profit of RMB 579,886.94 on these items based on their past resale prices. [Buyer] incurred a storage cost of RMB 81,423.63 for the storage of the above items as of 15 May 2010.

[COURT OF FIRST INSTANCE]

The first issue is whether there was a legal relationship between [Buyer] and [Seller]. [Buyer] brought an action under the contract for sale of goods. [Seller] acknowledged its existent contractual relationship with [Buyer] under the contract for sale of goods and the [Buyer]'s distributorship in CHINA. The transaction process between the parties was that: [Buyer] purchased Comac products under a contract for sale of goods signed by [Agent] and [Seller]; [Buyer] made payments for the goods upon delivery; [Seller] designated [Buyer] as an authorized distributor/agent for the sale and after-sales service of scrubbing machines, sweeping machines, single disc machines, and vacuum cleaners; [Seller] promised to provide [Buyer] as its distributor/agent with spare parts and full-scale technical support in order to achieve customer satisfaction. Under a contract for sale of goods, a seller transfers the title of the subject matter of the contract to a buyer, and the buyer pays the contract price. Based on the way in which the contract was concluded and performed during the transaction process, the legal relationship between the parties was characteristic of a contractual relationship under a contract for sale of goods. The relationship between the two parties should be contractual in nature. The fact that [Seller] authorized [Buyer] as its “distributor/agent,” does not change the nature of their contractual relationship. The subject matter of the contract was professional cleaning products, which inevitably require maintenance and after-service apart from sales. In this sense, they should be distinguished from ordinary commodities. The authorization was necessary to safeguard the brand and quality of the products in Chinese market and make maintenance convenient for customers.

The second issue is the choice applicable law, the parties have not agreed on which laws apply. According to CISG, it is applicable when sale of goods contracts are between parties in different signatory states. Although the parties did not have a choice of law provision in the written contract, CISG applies to this case because the parties reside in China and Italy respectively both of which are Contracting States to the CISG, and the contract for sale of goods in question falls within the scope of the Convention.

The issue is whether [Seller]'s conduct constituted breach of contract. [*Art 7(1)] of CISG provides that 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. Both parties have agreed that any usages established by practice between themselves are binding [*see Article 9 CISG]. [Buyer] submitted that [Seller] promised long-term cooperation in its letters of authorization. The subsequent cancellation of the authorization in January 2008 and the appointment of Kaibo as its sole distributor in China constituted a breach of contract by [Seller]. As such, [Seller] should be responsible for the returns of goods and refunds. The following factors should be considered with emphasis in determining whether the action of appointing Kaibo as the Chines sole distributor constituted breach of contract:

1. The rights and obligations of the contract for sale of goods. During 2006 and 2007, the parties were in a continuous contractual relationship for the sale of goods. [Seller] issued a letter of authorization to [Buyer] annually designating the latter as its agent for sale and after-sale service with promises for full-scale technical support and service of Comac products. Therefore, the parties were in a close commercial relationship. On the one hand, [Buyer] purchased the products from [Seller] through [Agent] without any disputes as to the main contractual obligations for delivery and payment. On the other hand, [Seller]'s issuance of letters of authorization in 2006 and 2007 can be regarded as an established usage between the parties. The content of the letters should be regarded as a part of the parties' rights and obligations under the contract for sale of goods, thus binding on both parties.

2. [Seller]'s issuance of letters of authorization is an established commercial usage. CISG does not require that a contract be formed in writing. The parties did not sign a written agreement on distribution that defines their rights and obligations. Instead, [Seller] issued letters of authorization unilaterally. The two letters issued in August 2006 and February 2007 by [Seller] were similar in content. No validity period was specified in these letters. The issuing date was not an annual fixed date. And [Seller] knew that the intention of [Buyer] was to resell the products in China. Accordingly, the court dismisses [Seller]'s submission that the letters were valid only for a certain period of time because it lacks factual support. [Buyer] submitted that it believed that [Seller] had authorized it as its distributor/agent based on the content of the letters and the commercial usage between them. The court finds [Buyer]'s submission more reasonable. Even if [Seller] wishes to unilaterally retract the authorization, it should have given [Buyer] a reasonable time of notice. Instead, on 8 January 2008 when [Seller] authorized Kaibo, the last shipment of goods [Buyer] purchased from [Seller] had not arrived, and their contract was not yet completely performed.

3. The impact that the cancellation of authorization has on [Buyer]'s stock. Both parties have identified the unsold stock currently held by the [Buyer]. [Buyer] submitted that the cancellation has affected its sale in China. [Seller] submitted that the appointment of Kaibo did not affect [Buyer]'s right to dispose of the stock. However, according to the evidence, the cancellation caused the cessation of cooperation between [Buyer] and several of its distributors, and resulted in their demands for return of goods and compensation. The cancellation has a direct impact on [Buyer]'s ability to sell the remaining stock in China. The impact contradicts the objective that [Buyer] was to resell the products in China following the conclusion of the contract for sale and its appointment as [Seller]'s distributor/agent.

Based on the three preceding factors, the court of first instance found that the letters of authorization constituted part of the parties' rights and obligations under the contract and that the letters had not specified a period of validity. [Seller] unilaterally cancelled the authorization before the contract completed without giving [Buyer] a reasonable period of notice or making arrangement for the stock. In addition, [Seller] issued letters to external parties and caused serious adverse impact on [Buyer]'s ability to resell its stock. The conduct of [Seller] breached the principle of good faith and constituted a breach of contract.

4. [Seller] should be held responsible for its civil liability. Firstly, [Buyer] submitted that [Seller] should accept return of goods, and refund associated payments, customs duties and fees. Art 7(2) of CISG 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. In this case, [Seller] unilaterally cancelled the authorization during the course of the contract and appointed Kaibo as the sole distributor without giving [Buyer] reasonable notice or making suitable arrangements for the stock, so regarding the remaining stock, [Buyer]’s purpose of selling the products as an authorized distributor cannot be fulfilled. Because of [Seller]'s appointment of its new sole distributor in China, it is not possible to remedy [Buyer] by way of replacing goods, repair, deduction in price, or so forth as stipulated in CISG. Therefore, based on the principle of good faith in international sale of goods, the court supports [Buyer]'s submission with regard to remedy.

Secondly, on whether [Seller] is liable for damages. Under CISG, [Buyer] may claim damages suffered from [Seller]'s failure to perform an obligation under the contract or the convention [*Art 45(1)(b)]. 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 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 [*Art 74]. 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 [*Art 78]. In this case, [Seller] knew that [Buyer] intended to resell the products in China, and unilaterally authorized [Buyer] as its distributor/agent. [Seller] was in a position to foresee that subsequent unilateral cancellation in breach of the contract would cause [Buyer] to suffer losses. Therefore, [Seller] should be held responsible for the breach. Presently, [Buyer]'s request for [Seller] to compensate for loss of profit in the amount of RMB 579,886.94 plus interest and storage at RMB 81,423.63 is well supported by the facts and the law. The court supports [Buyer]'s submission on damages.

According to Article 142(2) of General Principles of Civil Law of the People's Republic of China, and Articles 7, 9(1), 45(1)(b), 74, and 78, of CISG, the court of first instance found that:

  1. [Buyer] must return the identified stock items to [Seller], and [Seller] must refund the purchase price plus customs duties and fees in the total amount of RMB 884,500.06 plus interest;

  2. [Seller] must compensate [Buyer] for loss of profit in the amount of RMB 579,886.94 plus interest (with a principal of RMB 884,500.06 and annual interest rate of 7.56% from 22 July 2009 to the date the judgment takes effect); and

  3. [Seller] must compensate [Buyer] for storage fees in the amount of RMB 81,423.63.

[APPEAL]

On appeal of decision by the court of first instance, [Seller] submits that:

  1. [Seller] never restricted [Buyer] from selling its stock and did not breach the contract. [Buyer]'s claim for damages lacks support by facts and law;

  2. The court of first instance erred in its characterization of the parties' legal relationship. The parties had a contractual relationship for sale of goods, and a separate legal relationship in the authorization of distributorship;

  3. The authorization of distributorship was conducted unilaterally and annually. [Seller] communicated with [Buyer] regarding the cancellation of authorization and its appointment of Kaibo. Therefore, it did not breach the contract. [Seller] submits that the court of appeal should overrule the first instance decision and make an award of RMB159,000 for legal, translation and notarization costs for the first and second trials against [Buyer].

[Buyer] submits that:

  1. The letters of authorization had no specified period of validity, and the parties were in a long-term relationship;

  2. The parties have a contractual relationship under the contract for sale of goods. [Seller] cancelled the authorization for distributorship unilaterally knowing that [Buyer] bought the products with the intention to resell them, thus violating [Buyer]’s interests;

  3. [Seller]'s request for the cost award was not part of the first instance decision. As such, it should be dismissed. In summary, [Buyer] submits that the appeal should be dismissed to maintain the original judgment.

The court of appeal agrees with the finding of facts by the court of first instance. The court is of the opinion that the main disputes in this case are the characterization of the parties' legal relationship, whether [Seller]'s unilateral cancellation of authorization constitutes a breach of contract, and whether [Seller] should be held liable to damages suffered by [Buyer].

The characterization of the parties' legal relationship.

Based on the content of the parties' rights and obligations, [Buyer] bought products from [Seller] and made payment as agreed. This was characteristic of the nature of a contract for sale of goods. As the court of first instance pointed out, [Seller] authorized [Buyer] as its distributor/agent in China and promised to provide full-scale technical support and spare parts because [Seller] wished to maintain its brand and quality and provide repairs to Chinese customers. This cannot change the nature of the parties' legal relationship, which arose under the contract for sale. The court of first instance determined the parties' legal relationship as that of a contract of sale of goods based on how the contract was entered into and performed, and did not err in its finding.

Whether [Seller]'s unilateral cancellation of authorization constitutes a breach of contract and should be held liable.

Based on the facts, [Buyer] and [Seller] had a continuous relationship under the contract for sale in 2006 and 2007. Although the letters of authorization did not specify a period of validity, [Seller] issued the letters every year and promised that it would “seek to expand its business relationship with [Buyer] and establish strong long-term business cooperation”. This was sufficient to lead [Buyer] into reasonably believing that the parties would have long-term cooperation. The court is of the opinion that [Seller] has the right to cancel the authorization given that the unilateral letters of authorization did not specify a period of validity. However, based on the principle of good faith, [Buyer] should be given a reasonable time of notice, absent which [Seller] should be held liable for damages caused by the cancellation. [Seller], without sufficient consultation with [Buyer] or making arrangement for the sale of stock, cancelled the authorization and notified its customers in China in January 2008. As a result, [Buyer] was unable to continue selling its large quantities of stock items, and was subject to demands for return of already sold products and lawsuits. [Buyer]'s rights under the letters of authorization was infringed upon.[Seller]'s conduct breached the principle of good faith and should be held liable. We sustain the court of first instance’s judgment that [Seller] must accept product returns, refund the purchase price payments, and reimburse customs duties and fees, loss of profit, interest, and storage fees as it is supported by law.

As to [Seller]'s submission that it never restricted [Buyer] from selling its stock, hence did not breach the contract, the submission is dismissed because [Seller]'s cancellation of authorization in fact made it impossible for [Buyer] to sell the products. The court also dismisses [Seller]'s request for a cost award because it was not within the scope of the first instance decision.

In sum, [Seller]’s appeal cannot be supported by fact or law, and therefore this court cannot agree with it. The decision of the court of first instance was factually clear and applied appropriate laws so should be sustained. Pursuant to People’s Republic of China Civil Procedure Law Articles 153(1) and 158), the appeal is dismissed with cost. This is the final judgment.


FOOTNOTES

* All translations should be verified by cross-checking against the original text.

** Mina Wang is a Master of Laws candidate at the University of Sydney, Researcher and Oralist of the LPAB team at the Ninth Willem C VIS (East) International Commercial Arbitration Moot.

*** M. Bob Kao is Visiting Professor of Law at Henan University in China and a member of the State Bar of California. He can be reached at m.bob.kao@gmail.com.

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Pace Law School Institute of International Commercial Law - Last updated January 14, 2014
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