Business law

[Basic Facts]

On February 9, 2017, Exportextil Countertrade SA (Spain) (hereinafter referred to as "EC SA") and Nantong Mcknight Medical Products Co., Ltd. (hereinafter referred to as "Mcknight Company") entered into a sales contract, pursuant to which EC SA purchased bleached gauze from Mcknight Company. EC SA afterwards alleged that the goods delivered by Mcknight Company failed to comply with the contractual stipulations, resulting in failure to realize the contract purpose. It claimed that the sales contract should be rescinded, the payment for goods should be refunded, and the loss to anticipated profit should be compensated. EC SA chose to apply theUnited Nations Convention on Contracts for the International Sale of Goods in the trial of this case.

[Judgment]

In the trial, the Intermediate People's Court of Nantong City, Jiangsu Province held that the places of business of the parties involved were China and Spain and both countries were contracting states of the United Nations Convention on Contracts for the International Sale of Goods (hereinafter referred to as the "CISG"). The parties did not expressly exclude the application of the CISG in the contract. Therefore, the CISG should apply in this case to settle the dispute. The quality problem of the gauze involved was not a major quality defect and this batch of gauze still had use value and could be used or resold. The acts of Mcknight Company did not constitute a fundamental breach of contract, for which EC SA was not entitled to declare the entire contract avoided. In addition, EC SA knew that the goods did not comply with the contractual stipulations on October 18, 2017, but it failed to issue a declaration of avoidance of the contract to Mcknight Company. EC SA did not raise such claim until the filing of a lawsuit on June 18, 2019, which exceeded the reasonable time limit, and it has lost the right to declare the entire contract avoided. As Mcknight Company only delivered 85% of the goods and the parties filed a lawsuit due to dispute over quality of the goods, the remaining 15% of the contract failed to be performed. Therefore, the unperformed 15% of the contract should be declared avoided within the scope of EC SA's claims. The amount of compensation claimed by EC SA should be a result of adequate evaluation of its direct losses and prospect interest. However, as EC SA was at fault to some extent in the performance of the contract, which indirectly caused expansion of losses, it was decided that Mcknight Company should compensate EC SA USD 30,000 by referring to the amount of compensation claimed, the faults of both parties, the utilizable value of the goods involved, and other factors. On those grounds, the Intermediate People's Court of Nantong City determined that Mcknight Company should compensate EC SA USD 30,000 for economic losses and other claims of EC SA should not be supported. After the judgment of first instance was pronounced, neither party appealed and the judgment has been satisfied.

[Significance]

The system of declaration of contract avoidance under the CISG is essentially equivalent to the system of contract rescission under laws of China. In the trial of this case of dispute over a contract for the international sale of goods between a Chinese enterprise and an enterprise from a partner of the BRI, the people's court accurately comprehended and applied the system of declaration of contract avoidance under the CISG. On the one hand, it accurately determined the circumstances of fundamental breach of contract and the reasonable time limit for exercising the right to rescind the contract and did not allow declaration of avoidance of the entire contract, which reflected the restrictive provisions on the right of rescission provided in Article 49 (2) of the CISG based on good faith. On the other hand, according to the characteristic of the contract that goods were delivered in batches, it allowed declaration of avoidance of partial contract, that is, rescission of partial contract and the breaching party's compensation for economic losses of the observant party, which reflected the functions and roles of the people's court in maintaining the order of international sale of goods and equally protecting the legitimate rights and interests of both Chinese and foreign parties.