Steel, as one of the most important basic materials in the global industrial manufacturing system, has a huge volume of international trade. China, as the world's largest steel producer, exports a large amount of steel. However, there are also many disputes due to quality problems in the goods delivered by Chinese exporters. In such cases, foreign importers, as plaintiffs, usually bear a high burden of proof. And due to reasons such as time, geography, language, and cost, foreign companies find it difficult to handle such disputes on their own.
The author of this article recently achieved a full victory in representing a company from the UAE in a dispute over an international goods sales contract against a company in Jiangsu, China. The court recognized the defendant's material breach of contract and finally ruled to support our side in terminating the contract. The defendant was ordered to return the payment for goods to our side and compensate for losses totaling more than $200,000. Combining the author's experience in handling such cases, this article will provide tips on the key points and difficulties of international steel trade sales contract disputes from four aspects: jurisdiction, applicable law, filing requirements, and case difficulties.
Jurisdiction
According to the "Provisions of the Supreme People's Court of China on Several Issues Concerning the Jurisdiction over Foreign - related Civil and Commercial Cases" implemented on January 1, 2023, basic - level Chinese courts have jurisdiction over first - instance foreign - related civil and commercial cases, unless otherwise provided by laws and judicial interpretations. In this case, the defendant's domicile is located in Xinwu District, Wuxi City, Jiangsu Province. After prior telephone communication by the legal team, it was confirmed that this case is under the jurisdiction of the People's Court of Xinwu District, Wuxi City, Jiangsu Province.
It should also be noted that on June 30, 2023, the Higher People's Court of Jiangsu Province issued the "Notice of the Higher People's Court of Jiangsu Province on the Jurisdiction over First - instance Foreign - related Civil and Commercial Cases in the Courts of the Province", which further clarified the jurisdiction of Jiangsu courts over first - instance foreign - related civil and commercial cases. According to the latest regulations of the Higher People's Court of Jiangsu Province, this case should be under the jurisdiction of the Intermediate People's Court of Wuxi City.
Applicable Law
According to Article 41 of the "Law of the People's Republic of China on the Application of Laws to Foreign - related Civil Relations", "Parties may choose by agreement the law applicable to the contract. If the parties have not made a choice, the law of the habitual residence of the party who performs the obligations that best reflect the characteristics of the contract or the law of another place that has the closest connection with the contract shall apply."
In this case, the purchase order signed by the plaintiff and the defendant did not stipulate the applicable law. Since this case is a sales contract dispute, the habitual residence of the supplier is within the territory of the People's Republic of China, and the processing and delivery of the steel involved in the contract are both within the territory of the People's Republic of China. China is the main place of performance of the contract. At the same time, both the plaintiff and the defendant unanimously agreed to apply the law of the People's Republic of China. Therefore, the law of the People's Republic of China applies to this case.
It should also be noted that the UAE is not a contracting state of the "United Nations Convention on Contracts for the International Sale of Goods" (CISG). China only agrees to apply the CISG to sales contracts concluded between parties whose places of business are in contracting states and does not accept the indirect application of the CISG. Therefore, the CISG does not apply to this case.
Filing Requirements
The original "Provisions of the Supreme People's Court of China on Several Issues Concerning Evidence in Civil Litigation (2001)" stipulated that "if the evidence provided by a party to the People's Court of China is formed outside the territory of the People's Republic of China, the evidence shall be certified by the notary office of the country where it is formed and authenticated by the embassy or consulate of the People's Republic of China in that country, or go through the certification procedures specified in the relevant treaties concluded between the People's Republic of China and the country where it is formed." After the promulgation of the "Provisions of the Supreme People's Court of China on Several Issues Concerning Evidence in Civil Litigation" amended on October 14, 2019, it is no longer required to authenticate all evidence materials. Instead, only "evidence of identity - related matters formed outside the territory of the People's Republic of China" needs to be certified by the notary office of the country where it is formed and authenticated by the embassy or consulate of the People's Republic of China in that country.
The filing materials related to extraterritorial identity relations submitted to the People's Court of Xinwu District, Wuxi City, Jiangsu Province in this case mainly include:
Certificate of Incorporation / Registration
Certificate of Incumbency
Certificate of Good Standing
Memorandum & Articles of Association
Board Resolution
Power of Attorney
The above materials were notarized in Dubai and authenticated by the Consulate - General of the People's Republic of China in Dubai. All notarized and authenticated documents also need to be translated into Chinese by a Chinese translation agency with corresponding qualifications and stamped with the translation company's seal.
It should be noted that since different local Chinese courts have some differences in the requirements for documents, notarization, and authentication of each country, our Chinese lawyers will first find out about the relevant documents and notarization and authentication procedures of the relevant country and confirm with the court's case - filing tribunal. Then, we will ask the client to prepare according to the confirmed list to avoid delays in the case - filing process due to non - compliant materials.
Case Difficulties
1. How to Prove "Goods Identity"?
In judicial practice, Chinese courts usually place the burden of proof of goods identity entirely on foreign importers (plaintiffs). And as a generic product, steel plates are difficult to prove their identity. In this case, the steel plates had gone through processes such as cutting, loading, delivery, and unpacking. The form of the goods had changed, and the outer packaging had been partially damaged. In addition, the markings on the outer packaging of the goods were relatively simple, and the steel plates themselves had no identifiable labels. In the defense, the defendant denied the fact that the batch of steel was provided by it, based on reasons such as the fact that the steel plates in question were not directly received by the plaintiff but were received on behalf of the plaintiff by the logistics company entrusted by our client, and the identity of the goods could not be confirmed.
Regarding the identity of this batch of goods, our Chinese lawyers submitted evidence materials such as the purchase order, inspection reports, electronic bills of lading, customs declarations, markings related to the goods packaging, and on - site photos to form a complete and effective chain of evidence, restoring and detailing the entire process of the transaction. By comparing the multiple inspections of the goods by a third - party agency entrusted by the plaintiff at the defendant - designated location and the photos of the goods with the inspection reports and photos of the problematic goods at the plaintiff's client's place, as well as the content of the correspondence between the two parties after the plaintiff raised the quality issue with the defendant, it was proved that the problematic goods were indeed provided by the defendant.
Finally, the Chinese court determined that the evidence materials submitted by our Chinese lawyers met the standard of preponderant evidence. The process from the foreign client's receipt of the goods to raising the quality objection was in line with the characteristics of commercial behavior. Some of the markings on the steel plates stored abroad were also consistent with those in the inspection report before shipment. The defendant did not provide evidence to prove that the plaintiff or its client had purchased steel plates of the same model and specification as those in this case from a third party, nor did the plaintiff have the motive to purchase unqualified steel plates from others and pretend that they were provided by the defendant. Eventually, it was confirmed that the steel plates stored at the plaintiff's client's place were provided by the defendant.
It should be reminded to relevant enterprises that for transactions of generic products such as steel, not only should the size, model, code, heat number, etc. of the goods be clearly agreed upon, but also sealed packaging should be used as much as possible and distinguished with customized numbers. In addition, corresponding markings can also be added to the goods themselves to avoid disputes.
2. How to Prove "The Fundamental Impossibility of Achieving the Contract Purpose"?
In this case, the goods ordered by the plaintiff were stainless - steel plates. However, after inspection, it was found that among the 18 packages of steel plates, only 1 steel plate in each package was a rolled stainless - steel plate that met the contract agreement, and the rest were rolled low - carbon steel plates. Our Chinese lawyers argued that there were huge differences in composition, performance, and price between low - carbon steel plates and stainless - steel plates. The contract purpose of our client's order of this batch of steel plates was to use them for paving the workshop floor, which required stainless - steel plates with high hardness and impact resistance. While low - carbon steel plates, with carbon as the main component, were characterized by good ductility but were easy to damage and thus could not be used for the purpose of this contract.
Finally, the Chinese court determined that the steel plates delivered by the defendant did not meet the agreement of the purchase order, resulting in the inability to achieve the order purpose. Our client had the right to terminate the purchase order and demand compensation from the defendant for losses.
3. Does the Buyer Have an Obligation to Conduct Component Testing Before Shipment? Does the Buyer's Pre - Shipment Inspection Constitute Approval of the Goods?
One of the difficulties in this case was that our client entrusted a third - party to conduct four inspections of the goods successively before the defendant shipped the goods. The defendant claimed that the plaintiff had inspected and approved the goods, so it did not recognize the quality liability.
The author of this article put forward professional opinions on this issue from the following three aspects:
(1) Buyers Have No Obligation to Conduct Component Testing in International Steel Trade Practices
After extensive inquiries with insiders in the international steel trade, if there is no special agreement between the buyer and the seller, the buyer usually does not conduct component testing before the goods are shipped. Instead, the buyer mostly conducts a preliminary check of the goods based on quality inspection certificates, size, weight, heat number, etc.
The author also conducted a case search on this issue. For example, in the dispute over an international goods sales contract between Cangzhou Ruitian Pipe Fittings Manufacturing Co., Ltd. and UGRINEKS Domestic and Foreign Trade Co., Ltd. ((2015) Jin Gao Min Si Zhong Zi No. 2), the buyer did not conduct component testing on the goods before shipment. However, after receiving the goods, it found that the goods might not conform to the agreement, so it sent the goods to the SGS company for testing and determined that the goods did not conform to the contract agreement.
It is worth noting that in this case, the goods agreed in the contract were seamless steel pipes, but the actually delivered ones were welded steel pipes. Compared with the stainless - steel plates and low - carbon steel plates in this case (no difference in appearance, only in composition), seamless steel pipes and welded steel pipes are more easily distinguishable from the appearance. However, the court in this case did not deny the seller's breach of contract on the grounds that the buyer failed to fulfill the inspection obligation or component - testing obligation. Eventually, the court ruled that both parties should return the goods and the payment for goods.
(2) The Buyer's Inspection Obligation Should Be Limited to the Standard of an Ordinary Rational Person in Commercial Transactions
In export trade, foreign buyers cannot visit the seller's site to inspect the goods like Chinese buyers. Therefore, they usually need to entrust a domestic third - party agency to inspect the goods on their behalf and supervise the delivery. The responsibility of the third - party agency should be limited to the buyer's obligation, that is, the standard of an ordinary rational person in commercial transactions. Its responsibility for inspecting the goods is only to supervise the seller's delivery obligation on behalf of the buyer and is not equivalent to the identification responsibility of a quality appraisal agency relying on professional testing equipment.
In this case, the third - party company checked the heat number, quantity, specifications, and weight of the traded goods according to the requirements of the purchase order and the MTC, visually inspected the status of the steel plates, and supervised the seller's obligation to ship the goods, which was in line with the standard of an ordinary rational person in commercial transactions. An overly high standard (such as the necessity of conducting component testing) should not be imposed on the buyer or its agent. Otherwise, the buyer would not only unfairly share more commercial risks but also incur additional transaction costs.
(3) The Buyer's Formal Inspection Does Not Preclude the Defendant's Substantive Liability for Breach of Contract
Finally, the supplier should bear the responsibility for ensuring the quality of the goods it provides according to law. Even if the plaintiff was negligent in the process of inspecting the goods, this does not reduce the defendant's obligation to supply goods as agreed and its legal liability for product quality problems.
It should also be noted that 304 stainless steel and low - carbon steel look almost the same when new, both being silver - white metals. The weights of the two types of steel are also basically the same, and it is impossible to find the difference by weighing.
According to the characteristics of the products in this case, without professional institutions conducting component testing and only relying on visual inspection, the plaintiff could not discover the hidden quality problem that the defendant replaced stainless steel with low - carbon steel. After the goods underwent long - distance sea transportation and came into contact with a humid environment, the low - carbon steel would rust, while the stainless steel would not. Moreover, in this case, the defendant deliberately placed the goods that met the contract agreement on the top - most piece of each package of steel plates, and placed the non - compliant goods in the lower layers of the package that were not easy to be found, which was clearly an act of knowingly selling fake goods.
Under any circumstances, the law should not support the breaching party to benefit from its own fault. If in normal commercial transactions, as long as the buyer is slightly negligent, the seller can obtain unjust benefits through fraud and opportunism, this will lead to a serious imbalance in the rights and obligations of the two parties to the transaction and is not conducive to maintaining a fair and healthy business order.
If you encounter trade disputes or trade frauds when purchasing steel and other metal products from Chinese suppliers, please contact me and my team. We have a large number of winning cases and rich experience in handling cases. We believe we can bring you some inspiration to solve problems and reduce your losses.
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