Defective goods do not automatically let a buyer cancel the contract and recover the price. In Guiding Case No. 107, China's Supreme People's Court held that petroleum coke delivered below the contract specification was not a fundamental breach under the CISG, because the buyer could still use or resell it, and replaced a full refund with damages for the actual loss.
- Where both parties' countries are parties to the UN Convention on Contracts for the International Sale of Goods (CISG), the Convention applies first unless the contract expressly excludes it.
- Defects are not a fundamental breach if the buyer, with reasonable effort, can use or resell the goods, even at a discount.
- The first-instance award of the full price was replaced on appeal by USD 1,610,581.74 in losses plus interest and USD 98,442.79 in storage costs.
- China, the United States and most EU member states are CISG parties. The United Kingdom is not.
What happened
Under a contract dated 11 April 2008, Chinachem International (Singapore) Pte Ltd agreed to buy petroleum coke from ThyssenKrupp Metallurgical Products GmbH of Germany, and paid the full price. The contract gave a typical HGI index of 36 to 46 for the coke. The coke delivered had an HGI index of 32.
The buyer asked the court to declare the contract avoided, order the return of the price and pay its losses.
What the courts decided
At first instance, on 19 December 2012, the court declared the contract avoided and ordered the seller to repay USD 2,684,302.90 plus interest and to pay USD 520,339.77 in losses.
On appeal, by judgment of 30 June 2014, the Supreme People's Court reversed the avoidance. It held that the seller's breach was not fundamental and ordered it to pay USD 1,610,581.74 in losses on the price plus interest, and USD 98,442.79 in storage costs. The court reasoned that the coke still had a use and could be resold at a reasonable price; if a buyer can use or resell goods with reasonable effort, even at a discount, non-conformity is not a fundamental breach.
The Supreme People's Court published the case as Guiding Case No. 107 on 25 February 2019. Courts across China are required to refer to guiding cases when deciding similar cases.
The two rules in the guiding case
- Where the countries of all parties to an international sale of goods contract are CISG contracting states, the Convention applies first; matters the Convention does not cover are governed by the law the contract chooses. If the parties expressly exclude the CISG, it does not apply.
- Even if the goods delivered are defective, there is no fundamental breach under the CISG as long as the buyer, through reasonable efforts, can use or resell them.
What it means for a foreign buyer of Chinese goods
Most cross-border purchase contracts between a Chinese supplier and a buyer in the United States or the European Union fall within the CISG unless it is excluded, whatever law the contract names for other matters. A buyer who rejects a shipment and demands a full refund can end up with damages only, measured by the loss it can prove.
When goods arrive below specification
- Record the defect immediately, ideally through an independent inspection, and keep the goods or resell them in a documented way. The damages in this case depended on proving the actual loss.
- Decide early which remedy you are pursuing. Avoidance and a refund require a fundamental breach; damages do not. Quantify both.
- Fix the next contract. Write objective specifications, an inspection procedure and a price-reduction formula for defined defects, and decide deliberately whether to exclude the CISG.
If a Chinese supplier's goods are the problem, the forum clause in your contract decides where the claim is heard and how any award reaches the supplier's assets; see the China arbitration clause and dispute resolution in China.
Frequently asked questions
Where both parties' countries are CISG contracting states, Chinese courts apply the Convention first unless the contract expressly excludes it, as Guiding Case No. 107 confirms. China, the United States and most EU member states are parties; the United Kingdom is not.
Only if the defect amounts to a fundamental breach. In Guiding Case No. 107 the Supreme People's Court held that defects are not a fundamental breach where the buyer, with reasonable effort, can still use or resell the goods, even at a discount.
Instead of a full refund, the buyer was awarded USD 1,610,581.74 in losses on the price plus interest, and USD 98,442.79 in storage costs.
Sources
- Supreme People's Court: Guiding Case No. 107 (official text in Chinese; facts, holdings, and first-instance and appeal outcomes).
- China Judicial Process Information Online: Guiding Case No. 107 (official repost).
- Internal: the China arbitration clause · what it costs to sue in China · dispute resolution.
This article is general information for foreign companies, not legal advice on any specific matter. Rules and practice change; please take advice on your facts.