I. Basic Facts
On April 17, 2020, a foreign company, as the buyer, and a Shanghai - based textile company, as the seller, jointly signed a Sales Confirmation numbered STE20/08A11020. The contract stipulated the purchase of 3 million disposable protective masks (non - medical) with a total price of $3,642,000, on FOB Shanghai terms, with the destination being Frankfurt, Germany. The foreign company paid $3,642,000 to the Shanghai - based textile company on April 17, 2020. Subsequently, due to issues with the mask manufacturer, a Shandong - based pharmaceutical company, the goods were not actually delivered.
On December 27, 2021, the Shanghai - based textile company sent a Liaison Letter to the third parties, Yang and Zhou, stating that during April 2020, as the export agent of Yang and Zhou, it was in charge of the mask export business for the foreign company. Yang and Zhou selected the Shandong - based pharmaceutical company as the mask manufacturer. To complete the agency export, the Shanghai - based textile company, in accordance with the instructions of Yang and Zhou, signed the Sales Confirmation with the foreign company and the corresponding Purchase Contract (Masks) with the Shandong - based pharmaceutical company.
On April 17, 2020, the Shanghai - based textile company received the contract payment of $3.642 million from the foreign company. On the same day, based on the instructions of the third parties, the Shanghai - based textile company paid RMB 22.8159 million for the masks to the Shandong - based pharmaceutical company. Later, as the Shandong - based pharmaceutical company failed to deliver the goods as agreed, the foreign company demanded the return of the paid purchase price. After the third parties negotiated with the Shandong - based pharmaceutical company and the foreign company regarding contract termination and refund matters, the Shanghai - based textile company received a refund of RMB 3.65 million from the Shandong - based pharmaceutical company between April and May 2020. Between June 2020 and April 2021, the Shanghai - based textile company gradually returned $1.78 million (equivalent to RMB 12,571,606) to the foreign company, among which the Shanghai - based textile company advanced a total of RMB 6,379,355.75.
Subsequently, as the Shanghai - based textile company failed to return the remaining purchase price of $1,156,811.22 to the foreign company within the specified time limit, the foreign company filed a lawsuit in a Chinese court, requesting that the Shanghai - based textile company return the remaining purchase price and the corresponding interest losses.
The Shanghai - based textile company argued that it was merely the export agent in this case and signed the Sales Confirmation involved in the case on behalf of the principals, Zhou and Yang. The foreign company was aware of the Shanghai - based textile company's identity as an export agent before signing the Sales Confirmation. The Sales Confirmation involved in the case should bind the foreign company, as well as the principals Zhou and Yang. The Shanghai - based textile company was not the contracting party of the foreign company, was not a proper subject in this case, and should not bear the repayment liability.
The third parties, Yang and Zhou, stated that they had no principal - agent relationship with the Shanghai - based textile company.
II. Judgement Results
After trial, the People's Court of Pudong New Area held that this case was a dispute over an international goods sales contract. Since the places of business of the foreign company and the Shanghai - based textile company were located in Germany and China respectively, and both countries were Contracting States of the United Nations Convention on Contracts for the International Sale of Goods (hereinafter referred to as the "Convention"), and the two parties had not reached a consensus to exclude the application of the Convention, the Convention should be automatically applied to this case. Issues within the scope of the Convention that were not clearly resolved should be resolved in accordance with the general principles on which the Convention was based. In the absence of general principles, the law of the country with the closest connection to the contract, that is, Chinese law, should be applied. Although the Convention did not clearly stipulate, the principle of privity of contract was a general legal principle of the Convention and applied to any contract governed by the Convention. At the same time, the burden - of - proof principle of "whoever claims, bears the burden of proof" was also a general legal principle reflected in the Convention and was binding accordingly.
In this case, the foreign company had paid the full purchase price to the Shanghai - based textile company, and the sales contract relationship between the two parties was established and began to be actually performed.
The Shanghai - based textile company claimed to be the export agent of the third parties, Yang and Zhou, and that the third parties were the contracting parties of the contract in dispute. However, from the perspective of contract negotiation and signing, the foreign company and the Shanghai - based textile company signed the Sales Confirmation, and the Shanghai - based textile company and the supplier, the Shandong - based pharmaceutical company, signed the Purchase Contract (Masks). The third parties, Yang and Zhou, did not appear in the above - mentioned contracts.
In the WeChat group chat with the representative of the foreign company, Ma, and the staff member M, Zhou participated in the negotiation in the tone of a staff member of the Shanghai - based textile company. The WeChat chat records between Zhou and Yang also showed that the terms of the contract in dispute needed to be confirmed by Hua, an employee of the Shanghai - based textile company. Moreover, on the evening of April 13, 2020, Ma, Hua, Yang, Zhou, etc. met and negotiated at the Shanghai - based textile company.
During the trial, the foreign company and the third parties, Yang and Zhou, stated in court that the Shanghai - based textile company was the contracting party of the contract in dispute. Therefore, the foreign company had reasons to believe that the sales contract was established between the foreign company and the Shanghai - based textile company. The Shanghai - based textile company did not have sufficient evidence to prove that the third parties were the actual contracting parties of the contract.
On the other hand, from the perspective of the actual refund situation, except for RMB 5 million directly refunded by the supplier, the Shandong - based pharmaceutical company, to the Chinese subsidiary of the foreign company, the rest of the refunded amounts were directly returned by the Shanghai - based textile company to the foreign company. At the same time, Hua, an employee of the Shanghai - based textile company in charge of this transaction, issued a Repayment Plan to the foreign company, clearly indicating the refund time and amount, with the signature "Hua from the Shanghai - based textile company". Although the Shanghai - based textile company denied the authenticity of the Repayment Plan, judging from the actual refund amount and time from the Shanghai - based textile company to the foreign company, they were consistent with the Repayment Plan.
Therefore, the people's court determined that the Shanghai - based textile company was the contracting party of the contract in dispute. Due to the reasons of the supplier, the Shandong - based pharmaceutical company, the Shanghai - based textile company was unable to deliver the goods on time, and the Shanghai - based textile company had breached the contract and should bear the corresponding liability for breach of contract.
On April 22, 2020, the Shandong - based pharmaceutical company refunded RMB 5 million to the Chinese subsidiary of the foreign company, which should be regarded as both parties declaring the contract in dispute invalid through their actual actions. During the trial, the foreign company and the Shanghai - based textile company confirmed this, and the people's court recognized it according to law.
According to Article 81 of the Convention, the declaration of invalidity of the contract releases both parties from their obligations under the contract, but any damages for which they are liable shall still be payable. A party who has performed the contract in whole or in part may claim restitution from the other party of whatever the first party has supplied or paid under the contract. Paragraph (1) of Article 84 provides that if the seller is bound to refund the price, he must also pay interest on it, from the date on which the price was paid. Now that the foreign company claimed that the Shanghai - based textile company refund the remaining purchase price and pay the corresponding interest losses from the date of the declaration of invalidity of the contract, the people's court supported this claim according to law.
Based on this, the People's Court of Pudong New Area, Shanghai, China, ruled that the Sales Confirmation signed between the foreign company and the Shanghai - based textile company was declared invalid on April 22, 2020; the Shanghai - based textile company should return the remaining purchase price to the foreign company and the corresponding interest losses. After the judgment was announced, neither party appealed.
III. Typical Significance
The Convention is an important source of international law in the field of international goods sales and has a significant impact on China's Contract Law and the contract section of the Civil Code. Precisely because of its many similarities with domestic laws, it is easy for people's courts to overlook the Convention and directly apply domestic laws to hear cases. In this case, it will lead to errors in the application of the law and is also not conducive to China's international image of abiding by international treaties. In addition, the Convention adopts an all - inclusive legislative model of "general principles" and makes principle - based provisions for matters within the scope of the Convention's jurisdiction but not clearly stipulated. While giving the people's court the discretion to apply the law, the Convention also increases the risk of the people's court misapplying the law.
This case sets a good example for the application of Article 7(2) of the Convention. Based on a systematic understanding of the Convention's provisions and an analysis of international commercial practices, the general principles were determined. And based on the interpretation of the contract terms and the allocation of the burden of proof, the final application results of the general principles were finalized, accumulating valuable practical experience for correctly handling matters not resolved within the Convention.
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