How Could an US$180 Million Transnational Agreement fail finally?
By Sun Jin(Marlow), Partner, Chinese attorney at law, of Zhejiang Xinmu Law Firm, Nov. 30, 2005
In Sep. of 2005, our lawyers received a consultation from a merchant in India (let’s call him and his company A below), seeking for legal solutions.
In very beginning of 2005, a Chinese Export Company Ltd. located in Wuhan China (let’s call them C Company hereafter) who was seeking to purchase a type of used rail steel from abroad, and later C company's businessman got in business negotiations with A, who can supply this product. After that they signed a international sales agreement with US$180 Million as agreement subject value in May, 2005, while C company had sealed the contract with their company's red company stamp. Payment term: 100% Bank Guarantee. A will deliver the cargos in 12 lots. A said in order to perform such a contract, he established a company in Singapore for the deal.
But after contractual deadline of C's performing their duty of opening their first Bank Guarantee of 12 in total, they failed to open it, and no satisfying explanations were sent to A as feedback.
So A had give C a notice to claim for 2% compensation of total agreement subject value.
After studying the contact, we think the contract is valid over PRC laws without any counter reason being found and it bears C's red company seal, when an agreement has company seals or signatures from both parties, the agreement could be effective formally over PRC laws. However, we find there is no such article to stipulate in words over C's compensation obligation or penalty when they disobeyed the agreement obligations. But this does not surely mean that in this situation C will not be able to claim for their compensations. Because according to PRC Contract Law, when one contract party breaches the agreement, another party of victim can claim for direct loss caused by counter party's action of breach of his duties, and his possible profit to be realized in the agreement as well.
Such direct loss, we can describe it in an example. If A had signed any agreement with other parties who are his suppliers, just at same time when he signed contract with C company, and C's breach of contract will cause him to fail to perform these contracts with other parties, so the other parties could claim for compensation against him, if he make any compensation to the other parties, these compensation could be his direct loss.
However, the very honest Mr. A told us he did not sign such contracts with other parties, and he thought himself does not have a lot of direct losses, and gave it up. As a matter of fact, in such a situation, the cost of the litigation will be a huge sum which makes A feel very hard to make the decision to take any real legal action. The best solution for this is, when draft the agreement, setting-up one arbitration article like the arbitration in CIETAC, while in arbitrations, the winner party will be entitled to request the loser party to pay his all expenses for the arbitration, which including but not limited to arbitration commission’s charge and lawyer’s retaining charge, etc.
But in A’s agreement, we did not find such an arbitration article, so if A would like to take actions, he would have to raise one litigation against C Company in China, in C's location of Wuhan City, which is the capital of Hubei Province in China. The Court who rules the case will be Wuhan Intermediate Court. But for reasons of transnational litigations are always of high cost -- at least it is in some persons' imaginations, and have a complicated evidence system, or just for the reasons that counter parties is too far away from them and it is in another un-familiar culture circumstances, etc. So sometimes these victims whose rights are aggrieved will avoid such lawsuits. Meanwhile, if the mentioned parties have lots of direct losses, and have a very strong evidence system, surely they can push the disputes into a lawsuit in China, if can not put it under arbitration.
Related law articles:
PRC Contract Law
Article 113Where one party fails to perform contractual duties or the performance fails to conform to the agreement and Thereby causes losses to the other party the amount for losses compensated shall be equal to the losses caused by the breach of contract including possible profit realized if contract duly performed but shall not Exceed the possible loss caused by breach of contract which ought be foreseen by the breaching party at the time of contract formation.