Case Fact:

On July 16, 2003, the plaintiff and the defendant concluded a sale contract. The plaintiff agreed to buy 4000 boxes of canned peach from the defendant, LC at sight, FOB Qingdao. On July 23, 2003, the plaintiff opened an LC and indicated on it of the defendant’s tender of letter of guarantee at the time of payment. On September 3, 2003, the defendant issued a letter of guarantee to the plaintiff with the wording of “hereby we promise that price of goods and all relevant fee will be refunded in case that goods are refused by Inspection Authorities of Canada.” Subsequently, all canned peach were loaded on board in port of Qingdao and shipped to Port of Montréal.

On October 31 and November 4, 2003, the plaintiff received Detention Notice and Inspection Report from the Food Inspection Bureau of Canada (FIB) and was informed that all 4 containers of his canned peach did not comply with the quality terms of Law of Agriculture Product of Canada and were detained. FIB required the plaintiff to destroy all the goods or ship them out of the territory of Canada. Then the plaintiff forwarded the Detention Notice to the defendant, asked for his opinion on destruction of goods or shipping them back, and required the defendant to bear fee thus incurred. However, the defendant did not reply. Finally, on August 24, 2004, the canned peaches were destroyed in Canada under the supervision of FIB. Due to the non-conforming goods, the plaintiff paid fee for destruction and compensation for the loss of his sub-buyer, and he himself also suffered from some profit loss. Failure of negotiation, the plaintiff filed a lawsuit with the court claiming for refund of price of the goods and damage and loss thus incurred.

Legal Analysis:

The applicable law of international trade dispute, as foreign related dispute, shall be decided first before the court examining the substance of the case. In consideration of China as the place of production, shipment, LC issuance and negotiation after the dispute arose, China should be the most-connected place of the dispute and Chinese law shall be the application law, according to the legal practice of Chinese court’s choosing the law of the most-connected place as the applicable law of a foreign related case. As per this case, the relevant laws are mainly the Contract Law of PRC and UCP 500 (not come into effect at the time when the dispute arose) etc.

According to UCP 500, the negotiation of an LC is independent from the sale contract (the basic transaction). Only if the beneficiary presents conforming documents as required in the LC, is the negotiating bank obliged to pay even though the goods shipped are defective. The negotiating bank is not justified in refusal of payment unless it is proved that the beneficiary is in fraud. The applicant can only claim for damage against the seller on the ground of breach of contract thereafter. However, the seller shall be responsible for the authenticity of the documents presented under the LC. Any promise included in the LC documents tendered by the seller has binding force on him.

In FOB term, it is the buyer who takes the risk of damage and loss of goods after shipment. However, in this case, inconsistence with the quality law of Canada is obviously not risk of loss after shipment that shall be taken by the plaintiff. Though the two parties of the contract did not make quality term in the sale contract, however, the defendant promised in the letter of guarantee with the wording of “hereby we promise that price of goods and all relevant fee will be refunded in case that goods are refused by Inspection Authorities of Canada.” Therefore, the defendant is bound to do what he promised in the LC document. Now, the goods have been detained and destroyed in Canada, so the defendant shall bear all legal consequence caused, refund the price of goods to the buyer and compensate the buyer for its loss. But the compensation paid to the sub-buyer by the plaintiff can not be reimbursed from the defendant in case that no sufficient evidence such as payment receipt of compensation, or document proving the causation of the compensation, is submitted by the plaintiff. As per the profit loss of the plaintiff, it is not recoverable in the judicial practice of China unless otherwise agreed in the sale contract.