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Application of the CISG by Chinese Courts

Sun, 09 Oct 2022
Categories: Insights
Contributors: Meng Yu 余萌

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Key takeaways:

  • As China has retained the declaration to be bound by subparagraph (1)(b) of Article 1 of the CISG, there are only two situations where the CISG may be applicable in China. One common situation is where the parties have their places of business in different Contracting States (subparagraph (1) (a) of Article 1 of the CISG), and the other one is where one or both parties has/have their place(s) of business in a non-Contracting State, but the parties choose to apply the CISG.
  • As China’s Supreme People’s Court points out, UNCITRAL Digest of Case Law on the CISG is not regarded as an integral part of the CISG and cannot be used as a legal basis for Chinese courts to hear cases, however, for the purpose of accurate interpretation of the relevant provisions of the CISG, Chinese courts may refer to the Digest as appropriate.
  • For matters not covered by the CISG, like the validity of the contract and the title of goods, they are governed by the applicable law by virtue of the Chinese private international law rules (like the rule of party autonomy). 

In 1988, the United Nations Convention on Contracts for the International Sale of Goods (hereinafter referred to as the “CISG”) became legally binding in China, which is one of the first Contracting States thereto. So, how is the CISG applied by Chinese courts?

The article “Application of the United Nations Convention on Contracts for the International Sale of Goods in Chinese Courts” (联合国国际货物销售合同公约在中国法院的适用) published in “People's Judicature” (人民司法) (No. 31, 2021) by Wang Haifeng (王海峰), a judge of the Supreme People's Court (SPC), and Zhang Silu (张丝路), a scholar of Northwest University of Political Science and Law of China, may provide us with a perspective into this issue.

I. What type of cases do Chinese courts apply the CISG to?

According to a statement made by China, China does not consider itself to be bound by subparagraph (b) of paragraph 1 of article 1.

Accordingly, there are only two situations where the CISG may be applicable in China:

Situation 1: the parties have their places of business in the different Contracting States.

Specifically, Chinese courts will apply the CISG in accordance with subparagraph (1) (a) of Article 1 of the CISG.

In other words, for the application of the CISG by Chinese courts, three conditions shall be met: (1) the parties have their places of business in different states; (2) the parties have their places of business in states that are Contracting States to the CISG; and (3) the parties have not excluded the application of the CISG.

In Guiding Case No. 107, i.e., ThyssenKrupp Metallurgical Products Gmbh v. Sinochem International (Overseas) Pte Ltd. for a dispute over an international sales contract of goods, the SPC determined three more specific rules for the application of the CISG by Chinese courts:

First, where the parties have their places of business in the different Contracting States, the CISG should be applied preferentially;

Second, where the parties exclude the application of the CISG, they shall propose so expressly in the trial procedure;

Third, where the CISG is applied, the governing law agreed by the parties shall only be applicable to the issues not covered by the CISG.

Situation 2: one or both parties has/have their place(s) of business in a non-Contracting State, but the parties choose to apply the CISG.

In fact, this choice should be deemed as that the parties have incorporated the CISG into the contract between them.

II. How do Chinese courts apply the CISG?

1. Will Chinese courts ignore the CISG?

In some cases, in particular, in the first instance, Chinese courts may ignore the application of the CISG because they are not familiar with it.

To their common practices, these first-instance courts may decide to apply Chinese law based on the party autonomy, the characteristic performance method, or the principle of the most significant relationship.

However, most of such wrong practices will be corrected by courts of appeal in the second instance.

In addition, in a few cases, some Chinese courts hold that international manufacturing contracts (such as processing with supplied materials contracts), which are commonly seen in China's import and export trade, do not belong to international sales contracts, and accordingly refuse to apply the CISG. At present, the issue is still controversial in China.

2. How do Chinese courts interpret the CISG?

In Guiding Case No. 107, the SPC expressly points out that the UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods (hereinafter referred to as the “Digest”) is not an integral part of the CISG and cannot be used as a legal basis for Chinese courts to hear cases. However, for the purpose of accurate interpretation of the relevant provisions of the CISG, Chinese courts may refer to the Digest as appropriate.

In the above guiding cases, the SPC referred to the decisions of other States on the fundamental breach provisions of the CISG provided in the Digest.

3. How do Chinese courts deal with matters not covered by the CISG?

(1) Matters not governed by the CISG

The CISG has made it clear that it will not be applicable to some matters, such as the sales of stocks, shares, and investment securities (Art. 2 (d)), the validity of the contract, title/ownership of the goods (Art. 4 (a) (b)).

These matters will be governed by the applicable law by virtue of the Chinese private international law rules (like the rule of party autonomy). For instance, if the parties have chosen the governing law for the contract, then these matters not covered by the CISG will be subject to this governing law.

(2) Matters governed by the CISG but not covered by it

According to paragraph 2 of Article 7 of the CISG, such matters are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.

For example, according to Article 26 of the CISG, a declaration of avoidance of the contract is effective only if made by notice to the other party. However, this Article does not specify the effective time of the declaration of avoidance, that is, be it the time when it is sent or when it is duly served.

In this regard, a Chinese court distinguished, in a case, between the declaration of avoidance of the contract and the seller's non-performance of the notification obligation in paragraph 2 of Article 47 of the CISG according to the provisions on delay in notification in Article 27 of the CISG. On this basis, the court held that the declaration of avoidance of the contract should be subject to the principle of effective upon sending.

For another example, according to Article 78 of the CISG, if a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it. However, the CISG does not provide for the calculation of interest, and neither do the general legal principles on which the CISG is based. Therefore, the Chinese courts will apply the rules on the calculation of interest in the governing law chosen by the parties.

 

Photo by Kaiyu Wu on Unsplash

 

 

Contributors: Meng Yu 余萌

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