When goods from a Chinese supplier arrive defective, act on three things quickly: inspect and record the defects, notify the supplier in writing with specifics within the time allowed, and keep the goods and limit your losses. You can usually claim repair, replacement, a price reduction or damages. Rejecting the goods and recovering the full price needs a more serious defect — under the CISG, a fundamental breach.
- The CISG often applies to contracts between a Chinese supplier and a buyer in another Convention state, unless the contract excludes it. The UK and India are not parties.
- Notice is a deadline, not a courtesy. Under the CISG you must give notice specifying the defect within a reasonable time, and at the latest two years after the goods were handed over (Art. 39). Chinese law has a similar rule (Civil Code Art. 621).
- Not every defect lets you reject the goods. In Guiding Case No. 107, China's Supreme People's Court held that goods the buyer could still use or resell with reasonable effort were not a fundamental breach.
- Price reduction and damages are available for lesser defects (CISG Arts. 50 and 74; Civil Code Arts. 582 and 584).
- You must limit your losses. Losses you could reasonably have avoided are not recoverable (CISG Art. 77; Civil Code Art. 591).
1. Which law applies
China has been a party to the UN Convention on Contracts for the International Sale of Goods (CISG) since 1 January 1988. Where the supplier and the buyer have their places of business in different Convention states, Chinese courts apply the CISG first unless the contract excludes it, as Guiding Case No. 107 confirms. Matters the Convention does not cover are governed by the law the contract chooses.
| Buyer's country | CISG party? |
|---|---|
| United States | Yes (from 1 January 1988) |
| Germany | Yes (from 1 January 1991) |
| Australia | Yes (from 1 April 1989) |
| Canada | Yes (from 1 May 1992) |
| Japan | Yes (from 1 August 2009) |
| United Kingdom | No |
| India | No |
If the CISG does not apply, the PRC Civil Code usually governs a contract with a Chinese supplier that chooses Chinese law or has no choice of law. The practical steps below are much the same under either.
2. The first days after delivery
- Inspect promptly. The CISG requires the buyer to examine the goods within as short a period as is practicable; where the contract involves carriage, examination may wait until the goods arrive (Art. 38).
- Record the defects properly. Photographs and video with dates, samples, measurements against the specification and, for larger shipments, an independent inspection report. Damages depend on the loss you can prove.
- Give written notice that specifies the defect. Under CISG Art. 39 the buyer loses the right to rely on a defect if it does not give notice specifying its nature within a reasonable time after discovering it, or ought to have discovered it, and in any event within two years of delivery unless a contractual guarantee provides otherwise.
- Keep the goods and limit the loss. Do not destroy or dump them. Store them, or resell them in a documented way if they would otherwise perish or lose value.
- Stop further payments until the position is clear.
Under Chinese law, the buyer must notify the seller within the agreed inspection period. If none was agreed, notice is due within a reasonable period after the buyer discovered or should have discovered the defect, and in any event within two years of receiving the goods, unless a quality warranty period applies instead (Civil Code Art. 621). A seller that knew or should have known of the defect cannot rely on these time limits.
3. Your remedies
| Remedy | When it is available | Basis |
|---|---|---|
| Repair or replacement | Replacement under the CISG only if the defect is a fundamental breach and requested with or soon after the notice | CISG Art. 46; Civil Code Art. 582 |
| Price reduction | In proportion to the lower value of the goods delivered | CISG Art. 50; Civil Code Art. 582 |
| Damages | Losses caused by the breach, including lost profit, up to what the supplier foresaw or should have foreseen | CISG Art. 74; Civil Code Art. 584 |
| Reject the goods and recover the price | Fundamental breach under the CISG; under Chinese law, where the defect defeats the purpose of the contract | CISG Arts. 25, 49; Civil Code Arts. 563, 566 |
You can usually combine a price reduction or repair with damages for other losses, such as re-inspection costs or extra transport. Interest on sums owed is available under CISG Art. 78, although the Convention does not fix the rate.
4. When can you reject the goods?
A breach is fundamental under CISG Art. 25 if it substantially deprives the buyer of what it was entitled to expect under the contract. Chinese courts read that narrowly. In Guiding Case No. 107, petroleum coke delivered below the contract specification was held not to be a fundamental breach because the buyer could still use or resell it. The Supreme People's Court replaced a full refund with damages for the proven loss.
So before announcing that you reject a shipment, ask whether the goods can be used, reworked or sold at a discount. If they can, plan on a claim for a price reduction and damages, and document the value of the goods as delivered. Rejection is more realistic where the goods are unusable for their purpose, unsafe, or cannot lawfully be sold.
5. Proving the defect
- The specification. The contract, drawings, approved samples or technical standards the goods had to meet.
- The gap. An inspection or test report measuring the goods against that specification, ideally from an independent inspection company.
- The link to the supplier. Evidence that the defect existed on delivery rather than arising in transit or storage.
- The loss. Invoices for rework, replacement purchases, storage and lost sales.
Where the parties disagree on technical questions, a court or tribunal may order an expert appraisal, which adds time and cost.
6. Negotiating with the supplier
Many quality disputes end with a replacement shipment, a credit note or a price reduction. Whatever you agree, put it in writing with amounts, dates and the supplier's company seal. If the supplier offers a token discount, compare it with your documented loss before you accept.
7. If the supplier will not settle
The route is arbitration or court under your contract; see how to sue a Chinese supplier from overseas and what it costs. Where the supplier's assets may move, consider asset preservation. The limitation period for disputes over an international sale of goods contract is four years (Civil Code Art. 594), but the notice deadlines above come much sooner.
When to bring in a China lawyer
Take advice before you reject a shipment, before your notice deadline passes, and before you accept a settlement that is far below your documented loss. Our China supplier disputes page explains how we act for foreign buyers.
Frequently asked questions
Inspect and document the defects, give the supplier written notice specifying them within the time allowed, keep the goods and limit your losses. You can then claim repair or replacement, a price reduction or damages, and in serious cases reject the goods and recover the price.
Under the CISG, notice specifying the defect must be given within a reasonable time after you discovered it or ought to have discovered it, and at the latest two years after the goods were handed over (Art. 39). Under the PRC Civil Code, notice is due within the agreed inspection period or, if none, within a reasonable period and at the latest two years after receipt, unless a quality warranty period applies (Art. 621).
Only for a serious defect. Under the CISG you need a fundamental breach, and in Guiding Case No. 107 China's Supreme People's Court held that goods the buyer could still use or resell with reasonable effort did not meet that test. For lesser defects the usual remedies are a price reduction and damages.
Usually, if your business is in another CISG state, such as the United States, Germany, Canada, Australia or Japan, and the contract does not exclude it. The United Kingdom and India are not parties, so contracts with buyers there are governed by the law the contract chooses or otherwise applies.
The specification the goods had to meet, an inspection or test report showing the gap, evidence that the defect existed on delivery, and records of your loss such as rework, replacement and storage costs. Dated photographs and complete correspondence also help.
Sources
- UNCITRAL — CISG official text, Arts. 6, 25, 38, 39, 46, 49, 50, 74, 77 and 78.
- UNCITRAL — CISG status — contracting states and dates of entry into force.
- National Database of Laws and Regulations — PRC Civil Code, Arts. 563, 566, 582, 584, 591, 594 and 621 (Chinese text).
- Supreme People's Court, Guiding Case No. 107 — analysed in our case note.
- Internal: how to sue a Chinese supplier · what it costs to sue · China supplier disputes
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.