2013-01-17 15:22:58
The China Contract Law came into force on October 1 1999 and contains both general provisions on contracts and special provisions on specific types of contracts, including sale and purchase contracts. Chapter 9 of the Contract Law contains 46 special provisions on sale and purchase contracts. Article 130 of The Contract Law states that ¡°sale and purchase contracts are contracts upon which the seller transfers the ownership of the subject matter to the buyer and the buyer makes payment for it¡± .
May 10 2012 China Supreme Court relaesed the Interpretation on Issues Relevant to the Application of the Law in Trials of Disputes over Sale and Purchase Contracts, which took effect on July 1 2012. The China Supreme Court¡¯s intention with judicial interpretations is to provide practical guidance on the general provisions in laws, address any gaps in the provisions and ensure a consistent approach in their application. They have a binding effect on all judges in the courts.
The Interpretation applies to all sale and purchase contracts and, pursuant to Article 45, it also applies to agreements to transfer shares, debts or other rights, except in cases where there is a specific provision in another law or administrative regulation. In this situation, the other law or regulation will take priority over the Interpretation.
The general position under China law, and in particular the China Supreme Court Interpretation on Certain Issues Relevant to the Application of the China Contract Law (2), is that a court will generally recognise the formation of a binding contract, if it can determine the names of the parties, the subject matter and its quantity, unless provided in other laws or separately agreed by the parties. The contract can be concluded in either written or oral form, or by other means.
In practice, when the courts apply the above test, they are more inclined to recognise a contract exists unless evidence to the contrary is presented. This approach is in line with the China Supreme Court¡¯s view that a purpose of the Contract Law was to ¡°encourage contractual transactions and increase social wealth¡± .
China's courts are much more inclined to recognise a sale and purchase contract except in situations of clear and compelling evidence to the contrary. When preparing any transactional documents in relation to sale and purchase contracts, companies should consider whether it is necessary to sign any pre-contractual documentation. In the period before signing any binding agreement, avoid statements, communications or discussions that may be construed as evidence of an agreement to enter into a sale and purchase contract.
The Contract Law considers calculating contractual damages by applying the basic principle of expectation interest. Under this principle, damages are meant to bring the claimant into the same position as they would have been in had the contract been performed. When the court is considering damages, it will seek to establish whether the party alleging the loss had taken steps to mitigate it. This principle is set out in Article 113 of the Contract Law, which states that where a breach of contract by one party causes damages to the other party, the party responsible for the breach is liable to compensate the other party for all losses ¡°including the benefit that could be obtained after the performance of the contract, but not exceeding the losses that may be caused by breach of the contract and that has been foreseen or should have been foreseen by the breaching party when entering into the contract¡±. Article 119 of the Contract Law also sets out the parties¡¯ duty to mitigate their losses: if the party suffering the loss fails to mitigate, and aggravates the loss, it is not entitled to claim for any increased loss.
Article 29 of the Interpretation reinforces that where the non-breaching party claims expectation interest, the following provisions should apply: Articles 113 and 119 of the Contract Law and Article 30 of the Interpretation, providing that where the non-breaching party also contributed to any losses, this should be deducted from the amount of the compensation. In addition, Article 31 of the Interpretation provides that where the party alleging the loss obtained a benefit from the breach, that benefit should be deducted from the amount of any compensation.
Article 158 of the Contract Law addresses the period for inspection of commodities purchased under sale and purchase contracts. The Article provides that, unless the seller is or should be aware of the defects of the commodities, the following rules applies where the parties have agreed on the inspection period, the terms of the agreement should be followed. Also, where the parties have not agreed on an inspection period, the buyer shall notify the seller of any defects within a reasonable period of time. If the buyer does not advise of any concern within such time or two years from the receipt of the commodities, the commodities will be treated as non-defective (unless any warranty period is applicable).
Various courts have applied differing interpretations of a ¡°reasonable period of time¡± and the two-year period. As a result, the China Supreme Court has added a further section to the Interpretation. In addition to clarifying the ¡°reasonable period of time¡±, the Interpretation imposes further restrictions on parties¡¯ agreements of the inspection period.
The position after the Interpretation means parties¡¯ agreements on the inspection period will generally be upheld, if the agreed inspection period is too short for the buyer to complete a comprehensive inspection, then the agreed inspection period should be treated as applying to latent defects only. The buyer will be entitled to notify the seller of any latent defects within a ¡°reasonable period of time¡± (Article 18). It will also be upheld if the agreed inspection period is shorter than the compulsory period provided by any laws, administrative regulations or the warranty period, then the compulsory period or warranty period will apply (Article 18).
Where there is no agreement, the ¡°reasonable period of time¡± principle will apply. The Interpretation has set out a list of factors for the courts to consider when determining the ¡°reasonable period of time¡± (which cannot in any event be longer than two years) (Article 17). Separately, if any delivery receipt or confirmation receipt signed by the buyer sets out the quantity, model and specifications of the commodities, it will be presumed that the buyer has inspected the commodities to confirm both the number and any obvious defects (Article 15).
Some of the provisions discussed in this section represent significant changes from the previous position and may in fact give rise to increased uncertainty. Companies should consider when negotiating an inspection period as a buyer or seller, to bear in mind that the agreed period might not always be recognised by the courts. It would also be sensible to insert a provision that the buyer agrees that the inspection period is a reasonable one, although the courts may not accept this.
As a seller, a short inspection period may not always be favourable and may not be applied by the courts, which may choose to impose a longer reasonable period for latent defects. Buyers should be careful not to sign any documentation when receiving commodities (especially without undertaking a full inspection), as this may be considered a waiver of any rights to claim for latent defects.
The Contract Law does not contain any provisions on priority where the same commodities are sold to multiple purchasers and each contract between the seller and purchasers is valid. Articles 9 and 10 of the Interpretation have addressed this issue. Under these new provisions, where commodities (including vessels, aircraft and vehicles and other goods that must be registered whenever ownership is transferred, but not non-transportable goods) are sold to multiple purchasers under valid contracts, the priority of the contracts is assessed through certain criteria. This includes which purchaser had taken actual possession of the commodities, which purchaser had completed the ownership transfer registration procedure, or which purchaser had made payment under the contract if registration is not required and the timing of the contracts.
If the first criteria exists, there is no need to consider the second and if that does not exist, then the second criteria has to be examined until finally the court is required to determine the third criteria on its own.
These provisions are useful for companies doing business in China, they should be aware of the risks that can arise even where they have a valid contract with a seller.