Both the United States and China have adopted an international treaty called the United Nations Convention on Contracts for the International Sale of Goods (“CISG”). The CISG covers the formation of import/export sales contracts and the obligations of the parties. The CISG does not address issues such as the validity of the contract, third-party rights or property rights in the goods. These issues must be addressed under the law which is chosen to govern the contract (which should be specified in the contract). Furthermore, the CISG does not apply at all to contracts that do not involve the sale of goods, such as distribution and joint venture contracts.
In the US-China trade context, the terms of the CISG automatically apply to the sales contract between the parties unless they explicitly opt-out of the CISG. Courts in both the United States and China have applied the CISG to sales contract disputes.
A party which enters into a US-China sales contract without understanding the implications of the CISG may be in for a very unpleasant surprise down the road. This is what happened in a Texas federal court case captioned China North Chemical Industries Corporation v. Beston Chemical Corporation, 2006 U.S. Dist. LEXIS 35464 (S.D.TX. 2006). The U.S. party, Beston Chemical Corporation (“Beston”), entered into a contract with China North Chemical Corporation (“China North”) for the purchase of explosive boosters (the “Cargo”). The terms of sale were CIF (seller arranges for cost, insurance and freight). After signing the contract, Beston sent a series of faxes and emails to China North with specific instructions for stowing and securing the Cargo and emphasizing that Beston would not pay for any damaged Cargo.
After the Cargo arrived in the United States in a damaged condition, Beston only paid 15% of the contract price. China North sued Beston for the balance. The judge applied the CISG, which in turn incorporates Incoterms (a set of commonly recognized international commerical terms published by the International Chamber of Commerce). The judge reasoned that Beston was responsible for paying for the damaged Cargo because under Incoterms, CIF means that the risk of loss transferred to Beston once the Cargo had been loaded onto the ship in China. Beston’s faxes and emails were deemed irrelevant because the CISG controlled.
The judge entered an award in favor of China North and against Beston in excess of 2 million dollars! A costly mistake indeed. Beston did eventually recoup $140,000 by settling an action brought against the shipping company. However, Beston learned yet another costly lesson when its suit against the insurer in China was thrown out due to the Statute of Limitations.
The moral of this story: talk to a lawyer about your rights and obligations before entering into a US-China sales contract.
Posted by uschinalawjournal 
