Gist of the Ruling

1. In this dispute over the contract of international sale of goods, the places of business of the parties were respectively located in Singapore and Germany, and the parties agreed that the applicable law was American law. Singapore, Germany, and the United States are all contracting states of the United Nations Convention on Contracts for International Sale of Goods (hereinafter referred to as “CISG”), and the parties in this case did not exclude the application of CISG. Hence, in the case at hand, CISG should be applied first. For the issues involved in this case where there were no applicable provisions in the CISG, such as the validity of the contract or the transfer of the property, American law chosen by the parties should be applied herein.

2. In the contract for international sale of goods, even when the goods delivered by the seller are defective, if the buyer can use or resell them with reasonable effort, such act should not be recognized as a “fundamental breach of contract” under CISG.

Basic Information

Guiding Case: No.107

Court: The Supreme People’s Court

Case Number: No. 35[2013], Final, Civil Division IV.

Applicable Law: CISG/American Law

Cause of Action: Contract Dispute over International Sale of Goods

Abstract

On April 11, 2008, a German company signed a “Purchase Contract” with Sinochem Corporation (hereinafter referred to as “Sinochem”), which agreed upon the purchase of 25,000 tons of petroleum coke with the HGI index between 36 and 46. The POL is Pittsburgh, California, and the POD is a certain port in China. The “Purchase Contract”   also stipulated that the applicable law is the law of the state of New York, USA. Sinochem paid in full as agreed. However, upon receiving the goods, Sinochem found that the HGI index of the petroleum coke delivered by the German company was only 32, which was outside the range stipulated in the“Purchase Contract” (36-46). Sinochem believed that the German company constituted a “fundamental breach of contract”. Therefore, Sinochem brought this suit to the court, requesting termination of the contract, refund of the payment, and compensation for losses.

The Decision

First Trial

1. The “Purchase Contract” between the German company and Sinochem signed on April 11, 2018 is null and void.

2. The German company should return the payment for the goods in the amount of USD 2,684,302.9 to Sinochem within 30 days after the effective date of this judgment and pay the interest generated from September 25, 2008 to the date of payment determined by this judgment.

3. The German company should compensate Sinochem for losses in the amount of USD 520,339.77 within 30 days after the effective date of this judgment.

Final Trial

1. Item 1 of the Civil Judgment (No. 0004 [2009], First, Civil Division III, HPC, Jiangsu) entered by the Higher People's Court of Jiangsu Province should be set aside.

2. Item 2 of the Civil Judgment (No. 0004 [2009], First, Civil Division III, HPC, Jiangsu) entered by the Higher People's Court of Jiangsu Province should be altered, and the Germany company should, within 30 days after the effective date of this judgment, pay USD 1,610,581.74 to Sinochem as compensation for losses arising from the payment for goods and pay the interest generated from September 25, 2008 to the date of payment as determined in this judgement (calculated based on the Bank of China’s USD loan interest rate for the same period).

3. Item 3 of the Civil Judgment (No. 0004 [2009], First, Civil Division III, HPC, Jiangsu) entered by the Higher People's Court of Jiangsu Province should be altered, and the German company should, within 30 days after the effective date of this judgment, pay USD 98,442.79 to Sinochem as compensation for losses arising from storage charges.

4. Other claims of Sinochem should be dismissed.

Reasons behind the Court’s Ruling

I. Regarding “Applicable Law”

In the case at hand, both parties stipulated in the “Purchase Contract” that the contract would be concluded and interpreted under the jurisdiction of and in accordance with the effective laws of the state of New York State, USA. As this stipulation did not violate any legal provisions, it should be determined as valid. Since Singapore and Germany, the countries where the places of business of both parties were located, were contracting parties to the CISG as well as the USA, and both parties chose the CISG as the legal basis for determining their rights and obligations and did not exclude the application of the CISG in the trial of first instance, it was accurate for the Higher People's Court of Jiangsu Province to try this case by applying the CISG.

For issues involved in the trial of this case where there were no applicable provisions in the CISG, the law of the state of New York, USA chosen by the parties should apply. The Digest of Case Law on the CISG was not a part of the CISG and therefore could not serve as the legal basis for trying this case. However, it may serve as an appropriate reference material for accurately comprehending definitions of the relevant clauses of the CISG.

II. Regarding “Fundamental Breach”

1. The “Purchase Contract” stipulated 7 indicators while the HGI index was only one of them. Sinochem only raised an objection to the HGI index.

2. Combined with evidence, statements, and so forth, petroleum coke with the HGI index of 32 could still be used and therefore had use value even though the usage of such petroleum coke would be limited.

3. During the first trial, Sinochem resold the goods in order to reduce losses. The resale price was not lower than reasonable market price. This can indicate that the petroleum coke involved in the case could be sold at a reasonable price.

4. By taking into full account of the comprehension of the “fundamental breach of contract” clauses in the CISG in the judgments of other countries, non-conformity of quality should not be considered a “fundamental breach of contract” as long as the buyer could use or resell the goods or even sell such goods at a discount after making reasonable efforts. Therefore, the act of the Germany company (delivering petroleum coke with the HGI index of 32) did not constitute a “fundamental breach of contract”. The determination of the Higher People's Court of Jiangsu Province that such act constituted a “fundamental breach of contract” and that the “Purchase Contract” was therefore invalid was erroneous in the application of law and should be corrected.