Previously in our article Key Considerations for International Buyers to Source from China, we delved into critical aspects that international buyers would be well-advised to consider before entering into contracts for sourcing from Chinese mainland, which, for the purpose of this article, excludes Hong Kong, Macao, and Taiwan. The article offered guidance on essential company checks on suppliers and necessary contractual protections, particularly from the perspective of small and medium-sized enterprises (SMEs).

While the previous article focused on preventive measures to minimize dispute risks, this article addresses the key aspects especially when disputes arise with Chinese suppliers under Chinese jurisdiction. Specifically, we highlight several critical but often overlooked elements in international sales contract disputes involving Chinese parties.

Clear Communication of Contract Purpose and Potential Losses

In a sale transaction, making sure the seller understands the contract’s intended purpose not only helps the seller to manufacture appropriate products but also serves two critical legal functions. First, it strengthens the buyer’s position in establishing claims in the case of a fundamental breach. Second, it demonstrates the foreseeability of damages under Article 74 of the United Nations Convention on Contracts for the International Sale of Goods (“CISG”), and similar provisions under Chinese law.

Article 74 of the CISG sets out that the alleged damages may not exceed the losses which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which it then knew or ought to have known, as a possible consequence of the breach of contract. In international disputes, arguments about the foreseeability of damages arise frequently, particularly given differences in commercial practices and economic contexts of different jurisdictions.

We therefore recommend that buyers clearly communicate the contracts’ specific purposes and potential consequences of breaches to sellers during negotiations of contracts. Where potential losses tend to exceed normal commercial expectations, it is also advisable to explicitly outline the potential range of such losses to the sellers, enabling them to develop a clear understanding of what to expect.

Prompt Examination and Notification of Non-conformity

Article 38 of the CISG establishes that, as a general rule, the buyer must examine the goods, or arrange for their examination, within the shortest practicable period under the circumstances. Furthermore, Article 39 provides that, barring exceptional circumstances stipulated in the CISG, the buyer forfeits the right to invoke non-conformity of the goods unless the seller is duly notified. Such notice must specify the nature of the non-conformity and be given within a reasonable time after such non-conformity is discovered or when it ought to have been discovered. In no case may this notice period exceeds two years from the date of actual delivery of the goods to the buyer, unless this time limit conflicts with a contractual guarantee period.

These articles impose on the buyers two key obligations: timely examination of goods and prompt notification of any non-conformity thus discovered, which are substantially aligned with pertinent provisions under Chinese law, mandating expeditious actions by the buyers. This approach is principally designed to afford the parties involved opportunities to undertake immediate remedial measures and preserve relevant evidence.

In practice, judicial determination of what constitutes the “shortest practicable period” and “reasonable time” remains largely discretionary, with courts evaluating each case on its merits. However, as noted in the UNCITRAL Digest of Case Law on the CISG, judicial practice suggests that notice periods typically range from one or two weeks up to one month, depending on the specific circumstances of a case. Additionally, the notice must clearly articulate the alleged non-conformity. For evidentiary purposes, written notification is strongly advised.

Proper Goods Inspection

A significant jurisdictional divergence lies in the admissibility of unilateral inspection results. The term “inspection” herein includes examination, appraisal, or similar procedures, as they have equivalent functions within the scope of our discussion. Although Chinese judicial interpretation regulations recognize in theory reports produced by one party unilaterally engaging outside counsel, in practice, Chinese courts seldom admit such unilateral inspection results as competent evidence. International buyers tend to overlook this practice and consequently fail to secure legally valid inspection results.

In the absence of explicit contractual provisions authorizing independent buyers to carry out inspections, courts typically mandate seller participation in the inspection process. Judicial practice often involves court-ordered inspections during proceedings, which are known as “judicial inspections”. At the litigation or arbitration stage, however, the goods may have deteriorated due to storage conditions or undergone buyer modifications as buyers attempt to mitigate losses, rendering unattainable any conclusive judicial inspections of them.

To avoid such adversity, buyers normally conduct preliminary inspections for evidentiary purposes early on. Doing so requires them to strictly observe procedural requirements, for example, providing formal notice to the sellers regarding all inspection arrangements, notifying the sellers about the selection of inspection institution, the sampling, and the inspection time, among others. Such requirements are in place to ensure transparency and a seller’s right to participate in a buyer inspection, thus significantly enhancing the evidentiary weight of any resulting reports.

Additionally, buyers must pay special attention to the professional qualifications of inspection institutions they engage, proper proof of the source of the samples, etc. Ultimately, only inspection reports supported by an unbroken chain of evidence stand reasonable chances of judicial acceptance. Therefore, for disputes involving relatively complicated inspections, the early involvement of legal professionals is strongly advised.

Concluding Remarks

This article, together with our previous publications, highlights several critical yet frequently overlooked considerations for international buyers procuring from China. While these discussions provide essential guidance, we emphasize that actual disputes often involve greater complexity and require case-specific evaluation.

Notwithstanding the above discussion, initiating legal proceedings remains crucial for effective losses recovery. Prompt commencement of litigation or arbitration serves multiple strategic purposes: it exerts pressure on the breaching party to encourage settlement and facilitates asset preservation measures that would secure the eventual recovery of the assets. As such, this strategy proves particularly vital when dealing with SMEs or potentially fraudulent trading entities.

We hope this series will offer valuable insights into managing risks in international trade with Chinese suppliers and outline practical approaches to dispute resolution. For optimal protection, it is in the best interest of buyers to always combine these general principles with tailored legal advice addressing their specific transactional circumstances.