Chinese Supreme Court rules on an alleged fundamental breach

On 30 June 2014, the Chinese Supreme Court rendered a decision in ThyssenKrupp Metallurgical Prods. GmbH v. Sinochem Overseas Comp. The decision’s full text, originally written in Chinese, has now been translated into English by Patrick Lam, Trainee Solicitor at Clifford Chance in Hong Kong SAR and former Vis Moot Participant/Coach. We are very grateful for his translation that can now be accessed via the case presentation about CISG-online 2847 (below).

The dispute underlying the decision arose from a contract for the sale of 25,000 tons of petroleum coke. The parties agreed in their sales contract that the Hardgrove Grindability Index (hereinafter «HGI») of the petroleum coke should be within the range of 36 to 46. The Singaporean buyer paid the full purchase price. However, it discovered that the petroleum coke delivered only had an HGI of 32. Thus, the buyer initiated legal proceedings demanding that the contract is to be declared avoided and that the German seller must repay the purchase price and pay damages for further losses.

Upfront, the Supreme Court confirmed the CISG’s applicability since both parties were located in a Contracting state and there was no exclusion of the Convention. In reversing the decision of the Court of First Instance, the Supreme Court held that there was no fundamental breach pursuant to Art. 25 CISG in conjunction with Art. 49(1)(b) CISG: Firstly, the petroleum coke was still usable even though its use was limited based on its low HGI of 32. Secondly, the petroleum coke could still be sold at a reasonable price in the Chinese Market. As the goods were still usable and sellable the Court held that there was no fundamental breach under the CISG. Nonetheless, the Court concluded that there was a non-fundamental breach of contract since the goods were indeed non-conforming, namely the HGI-value of the petroleum coke was lower than contractually agreed on. It rejected seller’s argument that the buyer lost its right to rely on the non-conformity of the goods because of a failure to give timely notice. In contrast, the Court held that the buyer gave timely notice about the non-conformity of the goods to the seller (Art. 39 CISG). For these reasons, the Court ordered the seller to bear the difference in price when reselling the goods and to pay damages for the further losses by the buyer.