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Sale and storage of goods in China: overview, 2018

2018-10-17/ARTICLES/ YANG Chen 杨 晨XU Zheng徐 铮

A Q&A guide to the sale and storage of goods in China.

This Q&A covers key matters relating to sale of goods contracts, including legislative framework, rules on formation, price and payment, delivery, passing of title and risk, enforcement and remedies, exclusion of liability, choice of law and jurisdiction, and arbitration. It also provides an overview of the rules governing storage of goods

Contracts for the sale of goods     

 Legislative framework      

1. What domestic legislation and international rules apply to a sale of goods contract in your jurisdiction? Are standard international contractual terms commonly used?

Domestic legislation

The main domestic laws that apply to a sale of goods contract include the:

  • General Rules of the Civil Law of the People's Republic of China (民法总则). (effective on 1 October, 2017)

  • General Principles of Civil Law of the People's Republic of China (民法通则).

  • Contract Law of the People's Republic of China.

  • Interpretations of the Supreme People's Court on Certain Issues Concerning the Application of the Contract Law of the People's Republic of China.

  • Interpretations of the Supreme People's Court on Issues Concerning the Application of Law for the Trial of Cases Involving Disputes over Sale and Purchase Contracts.

  • Product Quality Law of the People's Republic of China

  • Interpretation of the Supreme People's Court on Issues concerning the Application of Law in the Trial of Cases Involving Disputes over Contracts for the Sale and Purchase of Commodity Housing.

  • Civil Procedure Law of the People's Republic of China.

International rules

China is a party to the:

  • UN Convention on Contracts for the International Sale of Goods 1980.

  • Customs Convention on the International Transport of Goods under Cover of TIR Carnets 1975 (China joined in 2016, and the Convention took effect in China in 2017).

  • Convention for the Unification of Certain Rules for International Carriage by Air 1999.

Standard contractual terms

The following standard contractual terms are commonly used in China:

  • International Chamber of Commerce (ICC) international commercial terms (Incoterms) 2010 (Incoterms 2000 are also commonly used in China).

  • Uniform Customs and Practice for Documentary Credits.

  • Uniform Rules for Demand Guarantees.

      Formation      

2. What are the essential requirements to create a legally enforceable contract for the sale of goods? 

Substantive requirements

Generally, the substantive requirements to create a legally enforceable contract are as follows:

  • The parties must have capacity to enter into a contract.

  • There must be offer and acceptance. A contract is concluded when acceptance becomes effective.

  • The contract must not violate the law or public interest. 

A contract that is concluded in accordance with the law takes effect from the time of conclusion.

Formal requirements

Generally, a contract can be written or oral, subject to certain exceptions. 

A contract must be in writing if the laws or regulations require the contract to be in writing or the parties agree the contract to be in writing. For example, a copyright transfer agreement must be in writing under the Copyright Law. 

Electronic documents (including telegrams, telexes, facsimiles, electronic data interchange and emails) are considered as writings and satisfy the formal requirements. 

In practice, a written contract is highly recommended.

It is not uncommon for international sale of goods contracts to be drafted in both English and Chinese. There is no mandatory language requirement for the validity of a contract. However, the Chinese courts require that contracts drafted in a foreign language be translated into Chinese to be submitted as documentary evidence.

      Price and payment      

3. If price provisions are not agreed by the parties, does local law impose requirements in relation to price (for example, the time, method and place of payment)?

The price terms (including the time, method and place of payment)are determined by reference to the relevant provisions of the contract or in accordance with trade practices for the type of transaction in question.

If pricing cannot be determined by reference to the relevant provisions of the contract or in accordance with trade practices, the following default rules apply:

  • Price. The price must be the market price of the place where the contract is performed, at the time when the contract was concluded. However, the price may be set by the government or may need to comply with government guidelines in certain cases.

  • Time of payment. The buyer must pay the price on receipt of the goods or of the documents for delivery of the goods. 

  • Place of payment. The buyer must pay the price at the seller's place of business. If the parties have agreed that delivery of the goods, or of the documents for delivery of the goods, is a pre-condition for payment, the buyer must pay the price at the place where the goods (or the documents for delivery) are delivered.

  • Method of payment. The payment method must be that which allows the realisation of the purpose of the contract.

      Delivery      

4. If delivery provisions are not agreed by the parties, does local law impose requirements in relation to delivery (for example, the time, method and place of delivery)?

The seller has the following duties:

  • To deliver the goods to the buyer (or a document entitling the buyer to collect the goods). 

  • To transfer ownership of the goods. 

In addition, the seller must deliver any other relevant documents or materials in accordance with the parties' agreement or relevant business practices (for example, invoice, insurance policy, certificate of origin, packing list and so on). 

The buyer has a duty to accept the goods, subject to certain exceptions (for example, where the goods do not comply with quality requirements and, as a result, the objectives of the contract cannot be realised). 

The time, method and place of delivery, as well as packing rules, are determined by reference to the relevant provisions of the contract or by reference to customary business practices for the type of transaction in question.

If the above matters cannot be determined by reference to the relevant provisions of the contract or in accordance with trade practices, the following default rules apply:

  • Time of delivery. The seller can deliver the goods at any time, and the buyer can request delivery at any time, although the buyer must give the seller the time necessary to organise the delivery.

  • Place of delivery. Where the goods need to be transported, the seller must deliver the goods to the first carrier. Where no transport is required, the seller can deliver the goods where the goods are located or at the seller's place of business, depending on whether the parties know that the goods are in a certain location at the time the contract is concluded. 

  • Method of delivery. The method of delivery must be that which allows the realisation of the purpose of the contract.

  • Packing. The seller must use the usual packaging methods. Where there are no usual packaging methods, the packaging method must adequately protect the goods.

      Passing of title and risk      

5. If not agreed by the parties, when does title to the goods pass to the buyer?

Title to the goods passes to the buyer when the goods are delivered, unless otherwise provided by the law or the parties.

6. Are retention of title clauses enforceable in your jurisdiction? If so, what are the requirements to create a legally enforceable retention of title clause?

The parties can agree that the seller will retain ownership of the goods if the buyer does not pay for the goods or does not fulfil other obligation. There are no formal requirements to create a retention of title clause under the Contract Law of the People's Republic of China. 

Retention of title clauses are usually enforceable. However, a court will not enforce a retention of title clause if:

  • The buyer has paid 75% or more of the total price of the goods.

  • The buyer sold the goods to a bona fide third party.

7. If not agreed by the parties, when does risk in relation to the goods pass to the buyer?

If the contract is silent, the general rule is that risk in relation to the goods passes to the buyer on delivery of the goods, except as otherwise provided by law or in the following circumstances:

  • If the seller cannot deliver the goods at the agreed time due to a reason for which the buyer is responsible, the buyer bears the risk of the goods being damaged or lost from the date of the breach.

  • If the seller sold goods that were already in transit at the time of conclusion of the contact, risk passes to the buyer at the date of conclusion of the contract.

      Enforcement and remedies      

8. What are the seller's obligations in relation to the description and quality of the goods?

Quality of the goods

The seller must deliver goods that comply with the quality requirements agreed in the contract.

The state or industry standards will apply if the contract does not contain provisions on the quality of the goods, or the quality cannot be determined by reference to other relevant provisions of the contract or by reference to business practices. Where there are no state or industry standards, the goods must meet the usual quality standards or special standards in accordance with the purpose of the contract.

Description of the goods

There is no specific default rule regarding the description of the goods. The seller must comply with the description included in the contract. 

Buyer's remedies

A seller who fails to provide goods meeting the agreed description or quality will be liable for breach of contract. 

If the seller fails to comply with quality requirements, the buyer can request the seller to assume liability as agreed in the contract. If there is no such agreement, the buyer can request the seller to either:

  • Repair, exchange or re-work the goods.

  • Reduce the price charged for the goods.

The buyer can claim compensatory damages if it still suffers losses after the above measures have been taken.

Where the goods do not satisfy quality requirements, and as a result it is impossible to realise the objectives of the contract, the buyer can reject the goods or dissolve the contract.

Product liability and product safety

In addition to contract law, product liability and product safety are also governed by the Product Quality Law of the People's Republic of China.

Under the Product Quality Law, the seller is responsible for the repair, replacement or return of defective products, and must compensate the losses caused to consumers.

If the seller fails to repair, replace, return or compensate for losses, the product quality supervision departments or administrative departments of industry and commerce must order the seller to take corrective measures.

There are also recall rules applicable to certain categories of defective products. For example, a seller who discovers that the food it sells poses potential safety risk that may cause harm to human health and life must stop selling such products, inform the producer or supplier of the products, and report the case to the competent regulatory authorities.

9. What are the main remedies and rules for losses and damages for breach of a sale of goods contract?

Main remedies

Generally, the following four main remedies are available for breach of a sale of goods contract:

  • Specific performance.

  • Remedial measures.

  • Compensatory damages or contractual penalties.

  • Rescission.

Specific performance. Specific performance is available in relation to:

  • Monetary obligations. When one of the parties does not make a payment, the other party can request the breaching party to make the payment.

  • Non-monetary obligations. When one of the parties does not perform a non-monetary obligation, the other party can request performance of the obligation, except in the following circumstances: 

  • it is impossible, either legally or in practice, to provide performance;

  • compelling performance is inappropriate given the nature of the goods, or the expenses associated with performance are too high; or

  • the innocent party has not requested performance within a reasonable time.

Remedial measures. If the goods do not meet the quality requirements agreed on in the contract, the buyer can request the seller to carry out repairs, exchange or re-work the goods (see Question 8, Buyer's remedies).

Compensatory damages and contractual penalties. The innocent party can request the breaching party to pay compensatory damages for any losses suffered. The parties can also agree on a penalty amount in the contract.

Rescission. If one party has breached the contract so that the purpose of the contract cannot be realised, both parties can seek rescission of the contract. 

If the contract is rescinded, any obligations that have not been performed need not be performed.

Where contractual obligations have already been performed, the innocent party can request:

  • To be restored into the position they were in before the contract was entered into. 

  • Remedial measures.

  • Compensation for any losses sustained.

Judicial practice on specific performance and damages

Generally, the courts have no preference for specific performance or damages. There is no statutory order of preference in relation to remedies. The courts decide on remedies on a case-by-case basis. 

According to the courts' judicial practice, the courts take into account the following factors to decide on whether to order specific performance:

Whether it is possible to continue to perform the contract in view of the nature of the contract.

Whether the innocent party has requested performance of the contract.

Whether it is difficult to account for the damage or loss of the innocent party.

Whether the seller has already started to manufacture the contract goods (and if the buyer does not perform its monetary obligations, whether the seller would suffer tremendous loss). 

In practice, it is unusual for courts to issue orders that prevent a party from breaching a contract.

Rules on loss and damage

The parties can agree on a penalty of a specified amount depending on the nature of the breach. However, a penalty will be subject to the adjustment of the court or the arbitral tribunal under the following rules:

Where the amount of the agreed penalty is less than the losses sustained, the innocent party can request the court or arbitral tribunal to increase the penalty amount.

Where the agreed penalty is excessively high compared with the losses sustained, the party in breach can request the court or arbitral tribunal to decrease the penalty amount.

The parties can also agree on a method for calculating the amount of compensation based on the total losses sustained as a result of the breach.

If the contract does not include a penalty clause or reference to a method for calculating compensation, the parties can claim compensatory damages for any losses sustained. However, compensatory damages are subject to the following restrictions:

The amount of compensatory damages must be equal to the losses sustained, including the benefits that the innocent party would have been able to obtain had the contract been performed.

The amount of compensatory damages must not exceed the total losses caused by the breach that the breaching party, at the time of conclusion of the contract, foresaw or should have foreseen.

The innocent party must take appropriate measures to prevent any increase in the losses sustained. If the innocent party fails to take appropriate measures, and this leads to an increase in the losses sustained, it cannot request compensation for these additional losses.

10. What are the buyer's remedies for breach of a sale of goods contract?

The buyer is entitled to seek the remedies listed in Question 8 and Question 9. 

In particular, the buyer can seek rescission of the contract if:

The seller delays delivery and, after being requested to deliver the goods, the seller fails to do so within a reasonable time. 

The seller fails to deliver the goods or delivers them improperly, resulting in the buyer being unable to realise the purpose of the contract.

If the buyer still suffers losses after the seller has performed its obligations or taken remedial measures, the seller shall compensate for these losses.

11. What are the seller's remedies for non-payment or late payment?

The seller is entitled to seek the remedies listed in Question 9 when the buyer fails to pay the price or delays making payment. In particular:

The seller is entitled to request the buyer to make the payment.

If there is a retention of title clause in the contract, the seller can reclaim the goods if any of the following causes damage to the seller:

  • the buyer failed to make the payment;

  • the buyer failed to satisfy specific conditions; or

  • the buyer sold, pledged or otherwise disposed of the goods.

If after being requested to pay the price, the buyer fails to do so within a reasonable time, or if the buyer's failure makes it impossible for the seller to realise the purpose of the contract, the seller can seek rescission of the contract. The seller can reclaim the goods after the contract has been rescinded.

      Exclusion of liability      

12. Are exclusion clauses enforceable in your jurisdiction? If so, what are the requirements to create a legally enforceable exclusion clause?

Exclusion clauses are generally enforceable, provided that the general requirements for a contract to be valid and enforceable are satisfied (see Question 2). 

However, the following exclusion clauses are not enforceable:

In contracts with standard terms, clauses that:

  • exclude the liabilities of the party imposing the standard clause; 

  • increase the liabilities of the other party or exclude fundamental rights of that party. 

Clauses excluding liability for personal injury.

Clauses excluding liability for property damage caused by deliberate acts or gross negligence.

      Choice of law      

13. Will local courts recognise a choice of foreign law in a sale of goods contract? Are there any mandatory local rules that apply, despite a choice of foreign law?

The local courts will recognise a choice of foreign law in a sale of goods contract if the contract involves a foreign element (for example, when one party is a foreign entity).

Despite a choice of foreign law, Chinese law will apply to a sale of goods contract where either:

The application of the foreign law is contrary to the public interest.

It is not clear whether there is such a foreign law or it is not clear whether the foreign law contains the relevant applicable rules.

14. If the parties do not make a choice of law, what rules determine the law applicable to a sale of goods contract?

In a contract with a foreign element, if the parties do not make a choice of law, the governing law is the law of the country that is most closely connected to the contract. For example, the governing law may be the law of the place of regular residence of the party who performs the main obligation(s) under the contract.

      Choice of jurisdiction      

15. Will local courts recognise a choice of foreign jurisdiction in a sale of goods contract? Are there any mandatory local rules that apply, despite a choice of foreign jurisdiction?

The local courts will recognise a choice of foreign jurisdiction in a sale of goods contract if the contract involves a foreign element (for example, when one party is a foreign entity). 

However, there are mandatory local rules on jurisdiction. For example, despite a choice of foreign jurisdiction, the Chinese courts have exclusive jurisdiction to hear cases involving real estate disputes, disputes relating to port operations, inheritance disputes, and so on. These mandatory rules are not usually relevant in disputes involving sale of goods contracts.

16. If the parties do not make a choice of jurisdiction, what rules determine the jurisdiction applicable to a sale of goods contract?

The parties to a contract with a foreign element can choose to file their disputes with the Chinese courts or with a foreign court if certain requirements are satisfied. 

The Chinese courts will have jurisdiction over contract disputes if any of the following applies:

  • The defendant has its domicile in China.

  • The contract is executed or performed in China.

  • The subject matter of litigation is located in China.

  • The defendant has assets in China which can be seized.

  • The defendant has established a representative organisation in China.

If the claimant submits a contract dispute to a Chinese court, the Chinese court can dismiss the case and notify the claimant to file the lawsuit with a foreign court when all of the following conditions are met:

  • The defendant argues that a foreign court has jurisdiction, or files an objection to the jurisdiction of the Chinese courts.

  • The parties have not agreed on the jurisdiction of the Chinese courts.

  • The lawsuit is not within the exclusive jurisdiction of the Chinese courts (see Question 15).

  • The lawsuit does not involve the interests of China, or those of a Chinese citizen, legal person or organisation.

  • The main facts of the dispute have not occurred in China, Chinese law is not applicable to the lawsuit, and the Chinese courts will have serious difficulties in ascertaining the facts and in applying the governing law.

  • A foreign court has jurisdiction over the dispute and it is a more convenient forum to hear the dispute.

      Arbitration      

17. Are arbitration clauses commonly included in sale of goods contracts in your jurisdiction? 

It is not uncommon to include arbitration clauses in sale of goods contracts. The parties can negotiate and choose the laws applicable to the arbitration. When the parties have not made a choice, the laws of the place where the arbitration authority is located or of the seat of arbitration will apply.

China is a party to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. The parties can apply to the Chinese courts for the recognition and enforcement of arbitral awards issued by both Chinese and foreign arbitration organisations.

Storage of goods  

18. How is title to goods in storage protected and evidenced? Are warehouse receipts recognised as documents of title in your jurisdiction?

Warehouse receipts are recognised as documents of title in China. When a party delivers goods to a custodian for storage, the custodian must provide a warehouse receipt. The warehouse receipt takes effect when the custodian signs or affixes its seal to the receipt and the warehouse receipt satisfies the required formalities(see Question 19). 

The warehouse receipt constitutes evidence of the right to collect the goods in storage. If the holder of the warehouse receipt endorses the receipt and the custodian signs or affixes its seal to the receipt, the right to collect the goods in storage can be transferred to another party by transferring the warehouse receipt.

19. What conditions and formalities must warehouse receipts comply with?

A warehouse receipt takes effect when the custodian signs or affixes its seal to the warehouse receipt and the receipt includes the following information:

  • Depositor's name and domicile.

  • Type, quantity, quality, packaging and labelling of the goods in storage.

  • Standards relating to losses of stored goods.

  • Storage location.

  • Storage period.

  • Storage fees.

  • Insured amount, duration of insurance coverage and name of the insurer (if the goods are insured).

  • Name of the person who issued the receipt and the place and date on which the receipt was issued.

20. Are other interests over goods in storage recognised?

A pledge can be created over a warehouse receipt. To be valid, a pledge must be documented in a written contract. Pledge rights are created on delivery of the pledged warehouse receipt to the pledgee.

Reform

21. Are there impending developments or proposals for reform of national legislation affecting sale of goods contracts and/or storage of goods in your jurisdiction?

The enactment of the Civil Law of the People's Republic of China is scheduled for 2020. The General Rules of the Civil Law of the People's Republic of China and The General Principles of Civil Law of the People's Republic of China. are currently effective. The Civil Law of the People's Republic of China includes general rules and specific provisions, including specific contract provisions. The impending Civil Law may affect sale of goods contracts and storage of goods in China.


Reproduced from Practical Law with the permission of the publishers. For further information, visitwww.practicallaw.com or call+44(0)2075426664


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