The Supreme People's Court of China released a typical case involving international treaties and customary international law in foreign-related civil and commercial matters, strictly adhering to the invalidity regime of contracts under the United Nations Convention on Contracts for the International Sale of Goods (CISG) to maintain a balance of interests between buyers and sellers.

— Dispute over an international sale contract for goods between ARTPLAST Company from Bulgaria and Taizhou Huangyan Smart Machinery Mould Co., Ltd. from Taizhou, China.

【Basic Facts】

In May-June 2020, after negotiations, ARTPLAST Company and Smart Company entered into a sales contract agreeing that ARTPLAST would purchase mask machines and accessories from Smart. ARTPLAST later claimed that the goods delivered by Smart were not brand new equipment and did not conform to the contract. After unsuccessful negotiations, ARTPLAST sued to declare the contract invalid, request a refund of the payment, and seek compensation for loss of expected profits.

【Judgment】

The Zhejiang Provincial Higher People's Court held in the second instance that the places of business of the parties were in China and Bulgaria respectively, both of which are contracting states to the CISG. As the CISG was not explicitly excluded from the contract, it should be applied to resolve the dispute. The mask machines delivered by Smart exhibited various signs of wear, corrosion, scratches, and rust, rendering ARTPLAST unable to achieve the contractual purpose of producing masks during the pandemic due to equipment shortages, constituting fundamental breach under Article 25 of the CISG. ARTPLAST was entitled to declare the contract invalid and demand interest on the payment made. Smart should have foreseen the transportation and insurance costs of ARTPLAST at the time of contract formation, thus Smart was liable to compensate. Therefore, the judgment was revised, declaring the contract void, and Smart was ordered to refund ARTPLAST RMB 740,117 with interest loss and compensate RMB 50,000 for freight and insurance costs.

【Significance】

International trade in goods plays a significant role in regulating market supply and demand among countries and promoting global economic development. Maintaining the stability of contracts is essential for the smooth conduct of international trade in goods. The system of declaring contracts invalid under the CISG is essentially equivalent to the contract rescission system under Chinese law. This case demonstrates the court's function of protecting the order of international sale of goods and safeguarding the legitimate rights and interests of both domestic and foreign parties in an equal manner, by reasonably applying the foreseeability rule stipulated in Article 74 of the CISG to limit the liability of the defaulting party within the foreseeable range at the time of contract formation, thus avoiding unfair results for the defaulting party.

The article is from the Press Office of the Supreme People's Court of China.