How to judge the fundamental breach of trade contract

Author of this article: Lawyers of Shandong Win & Win Co. Law Firm

Preface:
The parties to a contract for the international sale of goods are ones to the United Nations Convention on Contracts for the international sale of goods, and the provisions of the Convention shall prevail. If there is no provision in the Convention, the applicable law stipulated in the contract shall apply. If the parties to an international contract for the sale of goods expressly exclude the application of the United Nations Convention on Contracts for the international sale of goods, the Convention shall not apply.
In the contract for the international sale of goods, although the goods delivered by the seller are defective, as long as the buyer can use the goods or resell the goods with reasonable efforts, it shall not be regarded as constituting a fundamental breach of contract under the United Nations Convention on Contracts for the international sale of goods.

Relevant Articles
Article 145 of General Principles Of Civil Law Of The People’s Republic Of China
Articles 1 and 25 of the United Nations Convention on Contracts for the international sale of goods

Basic Case
On April 11, 2008, Sinochem International (Singapore) Co., Ltd. (hereinafter referred to as Sinochem ) and ThyssenKrupp Metallurgical Products Co., Ltd. (hereinafter referred to as ThyssenKrupp) signed a purchase contract for the purchase of petroleum coke, stipulating that this contract shall be concluded, governed and interpreted in accordance with the laws of New York state at that time. Sinochem paid all according to the contract, but the HGI index of petroleum coke delivered by ThyssenKrupp was only 32, which is inconsistent with the typical value of HGI index of 36-46 agreed in the contract. Sinochem considered that ThyssenKrupp constituted a fundamental breach of contract, and requested that the contract be terminated, asked ThyssenKrupp return the payment and compensate for the loss.

Judgment
The first instance of Jiangsu Superior People’s court held, according to the relevant provisions of the United Nations Convention on Contracts for the international sale of goods, the HGI index of petroleum coke provided by ThyssenKrupp was far lower than the standard agreed in the contract, which made it difficult for petroleum coke to be sold in the domestic market, and the expected purpose of signing the sales contract could not be realized, so the behavior of ThyssenKrupp constituted a fundamental breach of contract. On December 19, 2012, Jiangsu Supreme People’s Court issued a civil judgment (2009) Jiangsu Civil First instance No. 0004: 1. It declared that the sales contract signed by ThyssenKrupp and Sinochem on April 11, 2008 was invalid. 2. ThyssenKrupp shall return the payment of USD 2684302.9 to Sinochem within 30 days from the effective date of this judgment and pay the interest from September 25, 2008 to the payment date determined in this judgment. 3. ThyssenKrupp shall compensate Sinochem International (Singapore) Co., Ltd. for the loss of USD 520339.77 within 30 days from the effective date of this judgment.

After the sentencing, ThyssenKrupp refused to accept the first trial decision and appealed to the Supreme People’s court, believing that the first trial decision was wrong in the application of law in this case. The Supreme People’s court held that the facts determined in the first instance judgment were basically clear, but some laws were wrongly applied and the responsibility was improperly determined, which should be corrected. On June 30, 2014, the Supreme People’s Court issued civil judgment (2013) Civil Last Instance No. 35: 1. Revoking the first civil judgment of Jiangsu Superior People’s Court (2009) Jiangsu Civil First instance No. 0004 2. The second term of (2009) Jiangsu Civil First instance No. 0004 of Jiangsu Superior People’s court was changed to be ThyssenKrupp compensating Sinochem for the payment loss of USD 1610581.74 within 30 days from the effective date of this judgment and pay the interest from September 25, 2008 to the payment date determined in this judgment. 3. The third term of the civil judgment (2009) Jiangsu Civil First instance No. 0004 of Jiangsu Superior People’s Court was changed to be ThyssenKrupp compensating Sinochem International (Singapore) Co., Ltd. for the storage cost loss of USD 98442.79 within 30 days from the effective date of this judgment. 4. Reject other claims of Sinochem.

Reasons For Judgment
According to the Supreme People’s court, this case is a dispute over an international contract for the sale of goods. Both parties are foreign companies, and the case has foreign factors. Article 2 of the Interpretation Of The Supreme People’s Court On Several Issues Concerning The Application Of The Law Of The People’s Republic Of China stipulates that the people’s court shall determine the applicable law in accordance with the relevant laws and regulations at the time of the legal provisions, it may be determined by reference to the provisions of the law applicable to civil relations involving foreign elements. “The procurement contract involved in the case was signed on April 11, 2008. Before the implementation of the law of the people’s Republic of China on the application of law in civil relations concerning foreign affairs, Article 145 of the General Principles Of Civil Law Of The People’s Republic Of China when the parties signed the procurement contract stipulates that: “the parties to a foreign-related contract may choose the law applicable to the settlement of contract disputes, unless otherwise stipulated by law. If the parties to a foreign-related contract have no choice, the law of the country most closely related to the contract shall apply. ”

In this case, both parties agreed in the contract that it should be concluded, governed and interpreted in accordance with the laws in force at that time in New York state of the United States. The agreement does not violate the legal provisions, and should be recognized as valid. Since Singapore and Germany are both parties to the United Nations Convention on Contracts for the international sale of goods, and the United States is also a party to the United Nations Convention on Contracts for the international sale of goods, during the trial of the first instance, both parties unanimously choose to apply the United Nations Convention on Contracts for the international sale of goods as the basis for determining their rights and obligations, which does not exclude the United Nations Convention on Contracts for the international sale of goods The application of the United Nations Convention on Contracts for the international sale of goods is correct for Jiangsu Superior People’s court to apply the United Nations Convention on Contracts for the international sale of goods to hear this case.

If the United Nations Convention on Contracts for the international sale of goods does not provide for the issues involved in the trial, the law of New York State chosen by the parties shall apply. The digest of case law of the United Nations Convention on Contracts for the international sale of goods is not an integral part of the United Nations Convention on Contracts for the international sale of goods, and it cannot be used as the legal basis for the trial of this case. However, it can be used as an appropriate reference in how to accurately understand the meaning of the relevant provisions of the United Nations Convention on Contracts for the international sale of goods.

The typical value of HGI index of Petroleum Coke agreed by both parties in the purchase contract is between 36-46, while the actual delivered HGI index of petroleum coke by ThyssenKrupp is 32, which is lower than the minimum value of the typical value of HGI index agreed by both parties, which is not in conformity with the contract. The Superior people’s Court of Jiangsu province holds that ThyssenKrupp constituting a breach of contract is correct.

About the issue of whether the above-mentioned breach by ThyssenKrupp constitutes a fundamental breach. First of all, from the content of the specifications of chemical and physical properties that both parties need to meet in the contract, the contract has made an agreement on the seven aspects of the moisture content, sulfur content, ash content, volatile content, size, calorific value, hardness (HGI value) of petroleum coke. As for the petroleum coke delivered by ThyssenKrupp, Sinochem only thinks that one HGI index is not in line with the contract, while Sinochem has no objection to the other six indexes. Combined with the testimony of the witness submitted by the parties and the statement of the witness in court, HGI index indicates the grinding index of petroleum coke. The lower the index, the greater the hardness of petroleum coke and the greater the grinding difficulty. However, the statement issued by the school of materials science and engineering, Shanghai University, submitted by Sinochem, does not deny that the petroleum coke with HGI index of 32 can be used, but only considers that its use is limited.

Therefore, it can be concluded that although the HGI index of petroleum coke involved in the case is inconsistent with the contract, the batch of petroleum coke still has use value. Secondly, during the first trial of the case, Sinochem made positive efforts to resell the petroleum coke involved in the case in order to reduce the loss, and in its letter to ThyssnKrupp on relevant issues, it clearly stated that the resale price of the petroleum coke was “not lower than the market reasonable price”. This fact shows that the petroleum coke involved in the case can be sold at a reasonable price. Thirdly, considering the understanding of other countries’ judgments on the fundamental breach clause in the United Nations Convention on Contracts for the international sale of goods, as long as the buyer can use the goods or resell the goods with reasonable efforts, or even make some discounts, the quality discrepancy is still not the fundamental breach.

Therefore, it should be considered that the delivery of petroleum coke with HGI index of 32 by ThyssenKrupp does not constitute a fundamental breach of contract. The superior people’s Court of Jiangsu Province judged that ThyssenKrupp constituted a fundamental breach of contract, and decided to declare the procurement contract invalid is an application of legal errors and should be corrected.(Judges of effective judgments: Ren Xuefeng, Cheng Mingzhu, Zhu Ke)