Contract Law and Trade Transactions

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Contract Law and Trade Transactions

• Donald J. Lewis
• Faculty of Law
• The University of Hong Kong

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Discharge and Termination

• Article 91(2), CL
• Contractual rights and obligations are
  discharged when the contract is terminated by a
  party
• Article 94, CL Termination grounds
• Force majeure
• Anticipatory breach
• Non-performance (following delay)
• Delayed performance constituting a fundamental
  breach
• Other Breach constituting a fundamental breach
• Other circumstances as prescribed by law

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Discharge and Termination

• Article 96, CL Termination Procedures
• Notification to other party
• If PRC law requires, approval and/or registration
  by relevant PRC government authority
• Article 97 Legal Effect of Termination
• Executory part of contract is discharged
• Possible Remedies Restitution or other remedies,
  plus Damages

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Liability for Breach

• Grounds for Breach (Article 107 and 108, CL)
• Non-performance
• Improper (non-conforming) performance
• Prospective inability to perform
• Remedies for Breach
• Generally Specific Performance is Primary Remedy
• (See Articles 109-112, CL)

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Liability for Breach

• Remedies for Breach
• Quality Claims (Article 111, CL)
• According to K provisions
• Otherwise Repairs, replacement, reduction of
  price, etc
• Specific Performance is stressed, but Damages
  also available (Article 112, CL)
• Measure of Damages (Article 113, CL)
• Very General Standard
• Expectancy interest recoverable, including loss
  of profit
• Foreseeability requirement

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Liability for Breach

• Remedies for Breach
• Liquidated Damages (Article 114, CL)
• Parties may stipulate in K
• Court or arbitral tribunal may reduce or increase
  amount depending on the actual loss incurred
• Late performance liquidated damages payable and
  breaching party must continue performance

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Force Majeure

• Definition of force majeure
• Objective circumstances which
• (1) cannot be foreseen
• cannot be avoided and
• cannot be overcome
• (See Article 117, CL)
• Objective impossibility of performance is clearly
  covered by this definition
• What about fundamental change of circumstances?

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Force Majeure

• Legal Effect
• Liability for breach after the occurrence of the
  force majeure event is excused or exempted
• Breach occurring before the force majeure event
  is not excused
• Procedural requirements
• Timely notice to other party
• Provision of proof w/in a reasonable time

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Force Majeure

• Observations
• Parties are free to specify force majeure
  events in the contract
• Drafting the Force Majeure Clause Problem Areas
• Supervening Governmental Intervention
• Foreign Sellers Discharge from Further
  Performance in PRC Standard Form Purchase/Import
  Contracts

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Sales Purchase Contracts

• See Part 9, CL
• Applicable law for HK-PRC sale of goods
  transactions, assuming PRC law is the proper law
  of the contract
• Documentary sales transactions recognized CIF,
  FOB contracts (Articles 135-36, CL)
• Documents normally tendered (i.e. delivered) by
  the seller under a CIF K
• Bill of Lading (document of title)
• Commercial Invoice
• Insurance Policy or Certificate

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Sales Purchase Contracts

• Sellers Delivery Obligations
• In CIF contracts, seller completes delivery
  obligation on tender of above shipping documents
  (see Article 135, CL)
• Delivery of the bill of lading (i.e. document of
  title) passes the property in the goods (see
  Articles 133 135, CL)
• CIF and FOB contracts are shipment contracts
  involving sea carriage physical delivery of
  goods is completed on delivery to first carrier
  (see Article 141, CL)

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Sales Purchase Contracts

• Time for Delivery
• If time period for delivery (i.e. shipment) is
  stipulated, seller must deliver goods w/in that
  time period (Article 138, CL)
• Otherwise, Article 62(4), CL applies

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Sales Purchase Contracts

• Risk of Loss
• In international shipment contracts, passing of
  risk of loss is normally separated from passing
  of the property
• Risk of loss passes to the buyer on the sellers
  delivery of the goods to the first carrier
  (Article 145, CL)
• NOTE Reversion of risk of loss to seller if
  fundamental breach under Article 148, CL

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Sales Purchase Contracts

• Liability for Breach Remedies
• Quality defects constituting a fundamental
  breach
• Buyer may
• (1) Refuse to accept goods OR
• (2) Terminate the contract (i.e. Rescission
  on rejection of goods) AND
• (3) Claim according to Article 111, CL
• (See Articles 148 and 155, CL)

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Sales Purchase Contracts

• Inspection of the Goods
• If time for inspection stipulated, then buyer
  must notify seller of quality or quantity claims
  w/in such time
• Otherwise, buyer is deemed to have accepted the
  goods and quality/quantity deemed to be
  conforming
• Caveat Time bars for making claims in PRC
  standard form sales contracts
• If no time stipulated, then a reasonable time to
  discover non-conformities up to 2 years, except
  in case of quality guarantees

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Sales Purchase Contracts

• Buyers Obligation to Pay the Price
• Buyer must pay on physical receipt of the goods
  or on tender of shipping documents (see Article
  161, CL)
• Tender of documents by seller and payment of the
  purchase price by buyer are normally concurrent
  conditions in international shipment contracts
• A role for trade usage?

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Standard Form Contracts

• Sales Contract (Export)
• Shipment CIF or CFR
• Payment L/C Sight, Confirmed, Irrevocable,
  Transferable
• Open 30 Days Before Shipment, Remains Open
  15 Days After Last Day of Shipment
• Inspection CCIB or CCIC Inspection Before
  Shipment
• Certificate Tendered by PRC Seller

• Purchase Contract (Import)
• Shipment FOB or FAS
• Payment BOC L/C Sight, Irrevocable
• Open 15 Days Before Shipment, Remains Open
  15 Days After Shipment
• Inspection CCIB or CCIC Inspection After Arrival
  in PRC
• Certificate Used as Basis for Claims

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Standard Form Contracts

• Guarantee Guarantee of Quality, Quantity Specs
• Certificate Tendered by Foreign Seller
• Claims Quality, Quantity Spec Claims
• Based on CCIB Certificate
• 90 Day Time Bar Foreign Seller Must Reply
  in 30 Days
• Remedies Replacement, Damages, Related
  Expenses

• Guarantee No Guarantee of Quality by PRC Seller
• Claims Quality Quantity Claims
• Need Inspection Certificate
• 30 Day Time Bar
• No Remedies Specified

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Standard Form Contracts

• Penalty No K Right to Rescind or Claim Penalty
  for Late Delivery
• Force Majeure Some Force Majeure Events War,
  Storms, Fire, etc
• Documentary evidence required
• Suspension of Performance, Either Party May
  Avoid K

• Penalty K Right to Rescind or Claim Penalty
• Force Majeure No Specificity Universally
  Acknowledged Force Majeure
• Documentary evidence required
• Suspension of Performance, Only PRC Party May
  Avoid

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Standard Form Contracts

• Dispute Resolution
• Friendly Consultations
• CIETAC Arbitration

• Dispute Resolution
• Friendly Consultations
• CIETAC Arbitration