Case Brief

Corporation D (hereinafter referred to as “D”) is a well-known pharmaceutical corporation in Korea. In 2010, in order to export its drugs to the Chinese market, D cooperated with a Beijing Corporation Q (hereinafter referred to as “Q”) on the sales of D’s drugs in China. Due to complex procedures and conditions for applying for the “Imported Drug License” (hereinafter referred to as “License”), D failed to obtain the “License” by the end of the year. In June 2012, Q assisted D in obtaining the “License” for related drugs. At that time, Q suggested that in order to handle drug import procedures more conveniently, Q should keep the “License”, and D agreed. In October of that year, D exported drugs to Q for the first time. In the following years, D sold drugs to Q many times. In June 2020, D sent Q a Lawyer’s Letter of Contract Termination due to arrears of payment of US$10.6835 million by Q and brought this suit to the Court. D claimed that in addition to paying the arrears, Q should return the “License” immediately. Q argued that it was due to problems with the quality of D’s drugs that it failed to pay, that is, D breached the contract first. Hence, the “License” should not be returned.

Legal Basis and Ruling

Provisions for Drug Registration (effective from October 1, 2007) Article 10 stipulates that an applicant for drug registration (hereinafter referred to as “applicant”) refers to the institution that submits a drug registration application and assumes corresponding legal liability. A domestic applicant shall be an institution legally registered within the territory of People's Republic of China that independently assumes civil liability while an overseas applicant shall be a legal overseas drug manufacturer. Where an overseas applicant applies for import drug registration, it shall be done by its branch or entrusted agency within the territory of People's Republic of China. Provisions for Drug Registration (effective from July 1, 2020) Article 3 Clause 2 stipulates that the applicant is the marketing authorization holder (hereinafter referred to as “holder”) after obtaining the drug registration license. Article 9 provides that the applicant shall be an enterprise or a drug development institution that can assume corresponding legal liability. A foreign applicant shall designate an enterprise business entity in the territory of People's Republic of China to handle relevant drug registration matters. In accordance with regulations above, the Court held that D, as a foreign applicant, is the marketing authorization holder after obtaining the registration license and its obligee.

Contract Law of the People’s Republic of China Article 97 provides that after a contract is rescinded, where the obligations have not yet been performed, the performance shall cease; where the obligations have already been performed, the parties may, taking into account the performance status and the nature of the contract, request restoration to original status or other remedial measures taken and have the right to request for compensation for losses. In the case at hand, D rescinded the contract due to Q’s breach. Consequently, Q should return the “License” to D. As for Q’s argument that D had breached first by selling sub-quality drugs, the Court did not accept it. Finally, the Court decided that Q should return the “License” to Q and pay the damages.

Significance of the Case

China is not only a big manufacturing country, but also the largest market in many fields. As foreign businesses are eager to seize the Chinese market, some of them may lack adequate understanding of relevant business environment as well as laws and regulations in China. They may conclude contracts or agree with their partners’ requests too “easily”, which could lead to problems and disputes in the future. Just like the “Imported Drug License” mentioned in this case, a document that a foreign pharmaceutical corporation must present when exporting drugs to China, it will not be reissued even if it is damaged or lost after it is issued at the time of the initial application. Since D did not know the information from the very start, it underestimated the importance of the “License” and handed over the most essential document for it to legally sell drugs in the Chinese market to others for safekeeping. After that, as Q failed to return the “License”, even though D rescinded the contract with Q, it could not cooperate with other corporations to import drugs, which caused great losses to D.

This case can serve as a clear reminder for foreign businesses that have already carried out business in China or intend to do so, that is, they must keep original documents in their possession. Especially for special sectors such as the pharmaceutical industry, certificates issued by authorities can be critical for conducting business in China.

（Lead Lawyers: Matthew King）