Alert | China's Supreme People’s Court clarifies judicial interpretation in sale and purchase contractual disputes

20 June 2012

The Supreme People’s Court of the People’s Republic of China's (SPC) recently promulgated Interpretation of the Supreme People's Court on Application of Laws in the Trial of Cases Involving Sale and Purchase Contracts (最高人民法院关于审理买卖合同纠纷案件适用法律问题的解释) (Interpretation), which will take effect from 1 July 2012.

The Interpretation follows more than a decade of consideration, investigation and consultation by the SPC, the final Interpretation being largely based on the November 2011 draft. Widely regarded as a milestone for the SPC, the promulgation of the Interpretation is expected to contribute to the development of jurisprudence and commerce in China.

Why is the Interpretation significant?

Foreign and domestic businesses engaged in trade and commerce in China should carefully consider the contents of the Interpretation and formulate any sale and purchase contracts to take into account this detailed guidance.

A watertight sale and purchase contract will not only ensure that all party's rights are protected under law, but, by setting out each party's rights and obligations specifically and completely, it will also aid in the effective communication between parties before disputes arise.

What does the Interpretation cover?

The Interpretation adopts the practice developed by the SPC in handling sale and purchase contractual disputes over the past decade. Among other things, it clarifies:

  • existence and enforceability of sale and purchase contracts
  • delivery of subject matter and transfer of title
  • risk allocation in respect of the loss and/or damage of the subject matters
  • inspection of the subject matters
  • default liabilities
  • retention of title, and
  • special arrangements involving sale and purchase contracts.

Existence and enforceability of sale and purchase contracts

In the absence of a written contract, the Interpretation allows for a wide range of documents to be regarded as evidence of the existence of a sale and purchase relationship. This may include delivery slips, receipts, settlement records and invoices. Customary business and trading practices between the parties and other relevant circumstances should also be taken into account in determining whether a sale and purchase relationship has been established.

If the parties enter into any pre-contractual arrangements – such as purchase orders, subscription letters, reservation forms, letters of intent and memoranda of understanding – and agree to formulate a formal sale and purchase contract within a specified timeframe, the party that repudiates its obligation may be required to assume default liability, or the non-breaching party may seek termination of the arrangement and claim for damages.

It is also worth noting that in circumstances where the seller does not have legal title or disposal rights over the subject matter, a sale and purchase contract entered into under these conditions will not be legally enforceable; the party in breach may be required to assume default liability, or the non-breaching party may seek termination of the contract and claim for damages.

Delivery of subject matter and transfer of title

China's Contract Law, adopted in 1999, already contains provisions for the physical delivery of subject matters but they are limited to tangible objects only. The Interpretation now provides for a clear definition for the delivery of electronic products. Namely, subject to contrary agreement in the sale and purchase contract, delivery is deemed to be complete when the recipient receives the product electronically or any title document relating thereto electronically is received.

Where a seller enters into multiple contracts for the sale of an ordinary (ie. un-registrable) chattel to different buyers, the disputing buyers' priority over that chattel will supported by the court as follows: first, the buyer who is in receipt of the chattel (and who has made payment) will be supported by the court; secondly, where the chattel has not been delivered to any party, the buyer who made the payment first may request the counterparty to deliver the chattel; and finally, where no buyer has made payment or taken delivery of the chattel, the buyer who entered into the contract first will prevail.

In the sale of special (ie. registrable) chattels such as a vessel, aircraft and motor vehicle, to different buyers, the Interpretation sets out priority as follows: first, the buyer who is in receipt of the chattel (and who has made payment) will be supported by the court and granted priority to register the transfer of title to the chattel; secondly, where the chattel has not been delivered to any buyer, the buyer who has completed the registration formalities will be granted priority; finally, where no buyer has made payment or taken delivery of the chattel, the buyer who entered into the contract first will prevail. The Interpretation further provides that if a seller delivers the chattel to one buyer, but completes the title transfer registration with another, the former will have priority to have the title registered under his/her name.

Risk allocation for loss and/or damage of the subject matters

Further to the Contract Law, the Interpretation clarifies the allocation of risk for loss and/or damage of the subject matter of the contract. In the absence of an intention to the contrary, the purchaser shall be liable for loss and damage of the subject matter after the subject matter is delivered to the carrier at the location designated by the purchaser.

Inspection of subject matters

The Interpretation clarifies several issues concerning the inspection of the subject matter. For instance, under Article 158 of the Contract Law, a buyer has up to two years to notify the seller of any quantity or quality defect of the subject matter. The Interpretation states that the two-year period is the maximum reasonable period for the buyer to identify any defects and cannot be varied by the suspension, interruption or extension of the limitation period.

Retention of title

Retention of title is often a key issue in the sale and purchase relationship. The Interpretation further clarifies the Contract Law, for example, by specifying that the retention of title provisions apply to both real property and chattels. Where the buyer has made partial payment of 75% or more, the Interpretation stipulates that the court will not support the seller retaking possession of the subject matter.

Article 37 of the Interpretation also provides that where the seller retakes possession of the subject matter from the buyer, and thereafter, the reason for the seller retaking possession is remedied by the buyer, the buyer may reclaim possession of the subject matter as long as the remedy occurs within a 'redemption period' agreed by the parties or as designated by the seller.

Special arrangements involving sale and purchase contracts

The Interpretation also clarifies certain special arrangements such as instalment payment, samples and trial periods.

Next steps

Notwithstanding the constant evolution of China's as the Contract Law and as disputes are brought before the court, further interpretations and guidance can be expected from the SPC in due course.

Author(s) Yi Yi Wu