Interpretation on Issues Relevant to the Application of the Law in Trials of Disputes over Sales and Purchase Contracts

If correspondence or documentation, such as a confirmation of account reconciliation, confirmation of claim, etc., does not record the creditor's name and one of the parties to a sales and purchase contract substantiates the existence of the sales and purchase contract relationship on the basis thereof, the people's court shall uphold such claim, unless there is counter evidence sufficient to overturn such claim.

Article 2: If the parties have executed a subscription document, order for purchase, advance booking document, letter of intent, memorandum or other such agreement to contract specifying that within a certain period in future they will enter into a sales and purchase contract and one of the parties fails to perform its obligation of entering into a sales and purchase contract, whereupon the other party requests that it bear liability for breach of the agreement to contract or requests termination of the agreement to contract and claims damages, the people's court shall uphold such request.

Article 3: If a party claims that a contract is invalid on the grounds that the seller did not own or have the right of disposal of the subject matter at the time that they entered into the contract, the people's court shall not uphold such claim.

If transfer of the ownership of the subject matter cannot be accomplished due to the seller not having secured ownership or the right to dispose of the same, and the buyer requests that the seller bear liability for breach of contract or requests termination of the contract and claims damages, the people's court shall uphold such request.

Article 4: When determining the formation and validity of an electronic transaction contract in accordance with the Contract Law, a people's court shall additionally apply relevant provisions of the Electronic Signature Law.

II. Delivery of the subject matter and transfer of ownership

Article 5: If the subject matter is an electronic information product that does not need to be delivered on tangible media and the parties did not clearly provide for the method of delivery, and it remains impossible to determine the same when relying on Article 61 of the Contract Law, the receipt of the specified electronic information product or the proof of rights by the buyer shall be deemed delivery.

Article 6: If, pursuant to Article 162 of the Contract Law, the buyer refuses to take delivery of an excess quantity of the subject matter, it may keep custody of the same for the seller. If the buyer claims that the seller ought to bear the reasonable expenses for the period of time that it kept custody of the excess quantity of the subject matter for the seller, the people's court shall uphold such claim.

If the buyer claims that the seller ought to bear the losses arising during the time that the excess quantity of the subject matter was in its custody which are not attributable to a deliberate act by it or gross negligence on its part, the people's court shall uphold such claim.

Article 7: The provision “in addition to the documents for taking delivery of the subject matter … relevant documents and information…” of Article 136 of the Contract Law shall principally include insurance policies, warranties, general invoices, value-added tax invoices, product quality certificates, quality guarantees, quality assessment certificates, quality inspection certificates, product import-export quarantine certificates, proofs of origin, instruction manuals, packing lists, etc.

Article 8: If the seller substantiates the performance of its obligation of delivering the subject matter solely based on a value-added tax invoice and tax deduction documents and the buyer does not accept the same, the seller shall provide other evidence substantiating the fact of its delivery of the subject matter.

If the contract specifies or it is the practice of the parties that a general invoice serve as proof of payment and the buyer substantiates performance of its payment obligation on the basis of a general invoice, the people's court shall uphold such claim, unless there is counter evidence sufficient to overturn such claim.

Article 9: If a seller enters into multiple sales and purchase contracts in respect of the same ordinary movable and all the buyers request actual performance of the contracts, the matter shall, depending on the circumstances, be handled as set forth below, provided that all of the sales and purchase contracts are valid:

(1) if the buyer that first took delivery requests confirmation that ownership has been transferred, the people's court shall uphold such request;

(2) where none of the buyers has taken delivery, if the buyer that first effected payment requests that the seller perform its contractual obligation of delivering the subject matter and other such contractual obligation, the people's court shall uphold such request; or

(3) where none of the buyers has taken delivery or effected payment, if the buyer under the contract that was formed first in accordance with the law requests that the seller perform its contractual obligation of delivering the subject matter and other such contractual obligation, the people's court shall uphold such request.

Article 10: If a seller enters into multiple sales and purchase contracts in respect of a special movable such as a vessel, aircraft or motor vehicle, and all the buyers request actual performance of the contracts, the matter shall, depending on the circumstances, be handled as set forth below, provided that all of the sales and purchase contracts are valid:

(1) if the buyer that first took delivery requests that the seller perform its contractual obligation of carrying out the procedures for registration of the transfer of ownership and other such contractual obligation, the people's court shall uphold such request;

(2) where none of the buyers has taken delivery, if the buyer that first carried out the procedures for registration of the transfer of ownership requests that the seller perform its contractual obligation of delivering the subject matter and other such contractual obligation, the people's court shall uphold such request;

(3) where none of the buyers has taken delivery or carried out the procedures for registration of the transfer of ownership, if the buyer under the contract that was formed first in accordance with the law requests that the seller perform its contractual obligations of delivering the subject matter and carrying out the procedures for registration of the transfer of ownership and other such contractual obligation, the people's court shall uphold such request; or

(4) where the seller has delivered the subject matter to one of the buyers and carried out the procedures for the transfer of ownership for the other buyers, if the buyer that has taken delivery requests that ownership of the subject matter be registered in its name, the people's court shall uphold such request.

III. Bearing of risks relating to the subject matter

Article 11: The phrase “the subject matter requires carriage” in Item (1) of the second paragraph of Article 141 of the Contract Law refers to the situation where the seller is responsible for arranging shipment of the subject matter and the carrier is a transport operator independent from the parties to the sales and purchase contract. The bearing of the risk of damage to, destruction of, or loss of the subject matter shall be handled in accordance with Article 145 of the Contract Law.

Article 12: Once the seller ships the subject matter to the place designated by the buyer and delivers it to the carrier in accordance with the contract, the risk of damage to, destruction of, or loss of the subject matter shall be borne by the buyer, unless otherwise provided by the parties.

Article 13: If the seller knew or ought to have known that, at the time of formation of the contract, the subject matter in transit that it sold and delivered to the carrier for carriage was damaged, destroyed or lost and failed to inform the buyer, and the buyer claims that the seller ought to bear the risk of damage to, destruction of, or loss of the subject matter, the people's court shall uphold such claim.

Article 14: If the parties did not provide for the bearing of risks and the subject matter is an indefinite thing and the seller failed to clearly make the subject matter specific to the sales and purchase contract by an identifying method, such as the shipping documents, marking or notification to the buyer, and the buyer claims that it does not bear the risk of damage to, destruction of, or loss of the subject matter, the people's court shall uphold such claim.

IV. Inspection of the subject matter

Article 15: If the parties did not provide for the inspection period for the subject matter, and the delivery note, confirmation, etc. signed in acceptance by the buyer states the quantity, model and specifications of the subject matter, the people's court shall find, in accordance with Article 157 of the Contract Law, that the buyer has checked the quantity of, and for surface defects in, the subject matter unless there is counter evidence sufficient to overturn such finding.

Article 16: If the seller delivers the subject matter to a third party as instructed by the buyer and the inspection criteria specified by the seller and the buyer are inconsistent with those specified by the buyer and the third party, the people's court shall find, in accordance with Article 64 of the Contract Law, that the inspection criteria agreed upon by the seller and the buyer are the inspection criteria for the subject matter.

Article 17: When specifically determining the “reasonable period of time” specified in the second paragraph of Article 158 of the Contract Law, the people's court shall comprehensively consider the nature of the transaction between the parties, the objectives of the transaction, the transaction method, their trading practice, the type, quantity and nature of the subject matter and details of its installation and use, the nature of the defect(s), the buyer's reasonable duty of care, the inspection method and degree of difficulty, the specific environment in which the buyer or inspector finds itself, the buyer or inspector's own skills, and other reasonable factors, and make its determination based on the principle of good faith.

The “two years” specified in the second paragraph of Article 158 of the Contract Law is the maximum reasonable period. Such period is an invariable period, and provisions on the tolling, interruption and extension of the limitation of actions shall not apply.

Article 18: If the specified inspection period is overly short and, based on the nature of the subject matter and trading practice, it would be difficult for the buyer to complete a comprehensive inspection during the inspection period, the people's court shall find that the period is the period during which the buyer can raise objections in respect of surface defects and, based on the first paragraph of Article 17 hereof, determine the reasonable period for the buyer to raise objections in respect of hidden defects.

If the specified inspection period or quality guarantee period is shorter than that specified in laws or administrative regulations, the people's court shall take the period specified in laws or administrative regulations as governing.

Article 19: If the buyer raises an objection within a reasonable period of time and the seller claims that the buyer has waived its objection on the grounds that it has paid the price, confirmed the outstanding amount, used the subject matter, etc., the people's court shall not uphold such claim, unless otherwise provided by the parties.

Article 20: Once the inspection period, reasonable period or two-year period specified in Article 158 of the Contract Law has elapsed, if the buyer claims that the quantity or the quality of the subject matter does not conform with what was agreed upon, the people's court shall not uphold such claim.

If the seller bears liability for breach of contract of its own free will and then reneges on the basis that the aforementioned period has elapsed, the people's court shall not uphold the seller's position.

V. Liability for breach of contract

Article 21: If, as agreed, the buyer retains part of the price as a quality guarantee and, during the quality guarantee term, the seller fails to resolve quality issues in a timely manner, affecting the value or the effective use of the subject matter, and the seller claims payment of the outstanding portion of the price, the people's court shall not uphold such claim.

Article 22: If the buyer raises a quality objection during the inspection period, quality guarantee term or reasonable period of time and claims that, after the seller fails to effect repairs as requested or after it itself repairs the subject matter or has a third party effect the same due to urgent circumstances, the seller ought to bear the reasonable expenses incurred as a result thereof, the people's court shall uphold such claim.

Article 23: If the quality of the subject matter does not conform with that agreed upon and the buyer requests reduction of the price in accordance with Article 111 of the Contract Law, the people's court shall uphold such request. If the party requests that the price difference be calculated based on the market value of the agreed upon subject matter and the actually delivered subject matter at the time of delivery, the people's court shall uphold such request.

Where the price has already been paid, if the buyer requests a refund of the difference after the price reduction, the people's court shall uphold such request.

Article 24: An amendment made to the payment deadline under a sales and purchase contract shall not affect the provisions of the parties in respect of the payment of liquidated damages for late payment. However, the point in time for commencement of calculation of such liquidated damages shall be amended accordingly.

Where a sales and purchase contract provides for liquidated damages for late payment, if the buyer refuses to pay the liquidated damages on the grounds that at the time the seller accepted the amount it did not claim liquidated damages for late payment, the people's court shall not uphold such refusal.

Where a sales and purchase contract provides for liquidated damages for late payment, but the account statement, repayment agreement, etc. does not mention liability for late payment, and the seller claims, based on the account statement, repayment agreement, etc. that when an amount is outstanding the buyer pay liquidated damages for late payment in accordance with the contract, the people's court shall uphold such claim, unless the account statement, repayment agreement, etc. expressly states the principal and the amount of interest for late payment or the provisions of the sales and purchase contract concerning principal, interest, etc. have been amended.

If a sales and purchase contract is silent on liquidated damages for late payment, or the method of calculating such liquidated damages, and the seller claims, on the grounds of breach by the buyer, compensation for losses arising due to late payment, the people's court may calculate the same based on the benchmark interest rate of the People's Bank of China for renminbi loans of the same type and within the same period while referring to the interest rate for penalty interest for late payment.

Article 25: If the seller fails to perform or defectively performs a secondary payment obligation, resulting in the buyer being unable to realise the objectives of the contract, and the buyer requests termination of the contract, the people's court shall uphold such request pursuant to Item (4) of Article 94 of the Contract Law.

Article 26: If the non-breaching party claims continued applicability of the breach of contract terms after a sales and purchase contract is terminated due to breach of contract, the people's court shall uphold such claim. However, if the specified liquidated damages are excessively greater than the loss incurred, the people's court may handle the matter by referring to the second paragraph of Article 114 of the Contract Law.

Article 27: If a party to a sales and purchase contract claims payment of liquidated damages due to breach of contract by the other party and the other party mounts a defence of release from liability on the grounds that the contract was not formed, did not enter into effect or is invalid or that a breach of contract is not constituted, etc. but does not request adjustment of the overly high liquidated damages, the people's court shall give clarification as to whether the party needs to request an adjustment of the liquidated damages in the event that the court does not uphold its defence of release from liability.

If the court at first instance holds that the defence of release from liability is tenable but does not give clarification and the court of appeal holds that liquidated damages are payable, it may directly give clarification and alter the judgment.

Article 28: If the deposit specified in a sales and purchase contract is insufficient to cover the losses incurred due to a breach of contract by one of the parties and the other party requests compensation for the portion of the losses that exceeds the deposit, the people's court may impose both provided that the total amount of the deposit and compensation for the losses is not greater than the losses incurred as a result of the breach.

Article 29: If a breach of contract by a party to a sales and purchase contract causes the other party to incur a loss and the other party claims compensation for loss of anticipated benefits, the people's court shall render its determination based on the claim of the party and pursuant to Articles 113 and 119 of the Contract Law and Articles 30 and 31 hereof.

Article 30: If a breach of contract by a party to a sales and purchase contract causes the other party to incur a loss and the other party is also at fault for the loss incurred, and the party in breach claims a corresponding reduction in the compensation for the loss, the people's court shall uphold such claim.

Article 31: If a party to a sales and purchase contract benefits from a breach of contract by the other party and the party in breach requests that the benefit earned be deducted from the compensation for the loss, the people's court shall uphold such request.

Article 32: If the contract provides for reduction or exemption of the seller's guarantee liability for a defect in the subject matter but the seller fails to inform the buyer of the defect in the subject matter deliberately or due to gross negligence and requests that its guarantee liability for the defect be reduced or exempted in accordance with the contract, the people's court shall not uphold such request.

Article 33: If the buyer knew or ought to have known that there was a defect in the quality of the subject matter at the time it entered into the contract and requests that the seller bear guarantee liability in respect of such defect, the people's court shall not uphold such request, unless the buyer did not know, when entering into the contract, that the defect would markedly reduce the basic effectiveness of the subject matter.

VI. Retention of ownership

Article 34: If a party to a sales and purchase contract claims that the provision of Article 134 of the Contract Law on the retention of ownership of the subject matter applies to immovables, the people's court shall not uphold such claim.

Article 35: If the parties agree upon ownership retention and any of the circumstances set forth below applies to the buyer before passing of ownership of the subject matter, thereby causing the seller to incur damage, and the seller claims recovery of the subject matter, the people's court shall uphold such claim:

(1) it failed to pay the price in accordance with the contract;

(2) it failed to satisfy the specific conditions in accordance with the contract; or

(3) it sold, pledged or otherwise improperly disposed of the subject matter.

If the value of the recovered subject matter has markedly decreased in value and the seller requests that the buyer compensate for the loss, the people's court shall uphold such request.

Article 36: If the buyer has paid at least 75% of the total price of the subject matter and the seller requests recovery of the subject matter, the people's court shall not uphold such request.

In the circumstance set forth in Item (3) of the first paragraph of Article 35 hereof, if a third party has secured ownership of or other rights in rem in the subject matter in good faith pursuant to Article 106 of the Property Law and the seller requests recovery of the subject matter, the people's court shall not uphold such request.

Article 37: If, after the seller has recovered the subject matter, the buyer eliminates, during the redemption period specified by the parties or designated by the seller, the reason for which the seller recovered the subject matter and requests redemption of the subject matter, the people's court shall uphold such request.

If the buyer does not redeem the subject matter during the redemption period, the seller may sell the subject matter to another.

If the seller sells the subject matter to another and there is a balance after deducting, in order, from the proceeds of the sale the expenses for recovering and keeping the subject matter, the additional transaction expenses, interest and outstanding amount, it shall refund the same to the original buyer; if there is a shortfall and the seller requests that the original buyer discharge the same, the people's court shall uphold such request, unless the original buyer has evidence showing that the price at which the seller effected the second sale is markedly lower than the market value.

VII. Special sales/purchases

Article 38: The term “payment by instalments” specified in the first paragraph of Article 167 of the Contract Law means that the buyer pays the total amount payable to the seller in at least three instalments during the set period of time.

If the provisions of a payment-by-instalment sales and purchase contract violate the first paragraph of Article 167 of the Contract Law, harming the interests of the buyer, and the buyer claims that such provisions are invalid, the people's court shall uphold such claim.

Article 39: If a payment-by-instalment sales and purchase contract specifies that the seller may, upon termination of the contract, retain the payment it has already received and the amount retained by the seller exceeds the fee for use of the subject matter and the compensation for damage to the subject matter, and the buyer requests that the portion in excess be refunded, the people's court shall uphold such request.

If the parties have not provided for the fee for use of the subject matter, the people's court may determine the same by referring to the local rent rate for similar types of subject matter.

Article 40: If the specimen quality specified in the contract is inconsistent with that in the textual explanation and the parties fail to reach agreement thereon when a dispute arises, the people's court shall take the specimen as prevailing, if there is no change in the appearance or intrinsic quality after the sealing of the specimen; if there is a change in the appearance or intrinsic quality, or if the parties are in disagreement as to whether a change occurred and the same is impossible to ascertain, the people's court shall take the textual explanation as prevailing.

Article 41: If the buyer in a trial sale/purchase has paid a portion of the price during the trial period, the people's court shall hold that the buyer has agreed to the purchase, unless otherwise provided in the contract.

If, during the trial period, the buyer sells, leases out, creates security rights over or otherwise carries out a non-trial use act involving the subject matter, the people's court shall hold that the buyer has agreed to the purchase.

Article 42: If a sales and purchase contract contains any of the provisions set forth below, it shall not be deemed a trial sale/purchase. If the buyer claims that it is a trial sale/purchase, the people's court shall not uphold such claim:

(1) when the specified subject matter has undergone trial use or inspection and been found to comply with certain requirements, the buyer shall purchase the subject matter;

(2) if the specified third party has tested the subject matter and deemed it acceptable, the buyer shall purchase the subject matter;

(3) it is specified that the buyer may exchange the subject matter within a specified period of time; or

(4) it is specified that the buyer may return the subject matter within a specified period of time.

Article 43: If the parties to a trial sale/purchase have not provided for a use fee or the provision therefor is unclear and the seller claims that the buyer ought to pay a use fee, the people's court shall not uphold such claim.

VIII. Other issues

Article 44: If, after it has performed its delivery obligation, the seller claims that the buyer ought to pay the price and the buyer raises an objection on the grounds that the seller committed a breach of contract first, the people's court shall appropriately handle the matter in line with the following circumstances:

(1) if the buyer refuses to pay liquidated damages, refuses to compensate for losses or claims that the seller ought to take remedial measures such as reducing the price, it shall be deemed as mounting a defence; or

(2) if the buyer claims that the seller ought to pay liquidated damages or compensate for losses, or if it requests termination of the contract, it shall institute a countersuit.

Article 45: If a law or a set of administrative regulations provides in respect of a rights transfer contract, such as one for a debt claim transfer or equity transfer, such provisions shall apply; if it is silent thereon, the people's court may, pursuant to Articles 124 and 174 of the Contract Law, refer to the relevant provisions applicable to sales and purchase contracts.

If a people's court refers to the relevant provisions applicable to sales and purchase contracts regarding a rights transfer contract or other contract for consideration, it shall first cite Article 174 of the Contract Law before citing the relevant provisions on sales and purchase contracts.

Article 46: In the event of a conflict between the Interpretation and provisions on contracts for the transfer for consideration of the ownership of a subject matter, such as sales and purchase contracts and sales contracts, issued by this court before the implementation hereof, such provisions shall cease to apply from the date of implementation hereof.

The Interpretation shall apply to disputes over sales and purchase contracts that are pending final resolution after the implementation hereof. The Interpretation shall not apply where a case was final before the implementation hereof and the parties apply for retrial thereof or a retrial of such a case is decided based on the trial supervision procedure.