International Trade Dispute Case: Liability Entities for Shipping Delays and Shippers' Obligation to Mitigate Losses in Case of Freight Forwarder Breach

[Basic Case Details]

In December 2010, Pinxin Company from China entrusted Qingyao Freight Forwarding Company from China to handle the air transportation of a batch of fabrics from Shanghai, China to Managua. After accepting the entrustment, Qingyao Company from China booked space with American Airlines. The customs export declaration form for the goods in question indicated that both the operating unit and the consignor were Pinxin Company from China. On December 13, 2010, Qingyao Company from China issued a special invoice for international freight forwarding services to Pinxin Company from China. The total cost of air freight and insurance premiums was 60,535 RMB. After the goods were actually shipped on December 13, 2010, the transportation was delayed, and the goods arrived at the port of destination in early January 2011. Pinxin Company from China had not paid the service fees, so Qingyao Company from China retained the verification and write - off documents. Subsequently, Qingyao Freight Forwarding Company from China (the plaintiff) filed a lawsuit in court, demanding that Pinxin Company from China (the defendant) pay the service fees. Pinxin Company from China counter - sued Qingyao Freight Forwarding Company from China, claiming compensation for tax refund losses caused by the retention of the verification and write - off documents and losses caused by the transportation delay.

International Trade Dispute Case

[Key Points of the Dispute]

In international trade disputes involving shipping delays, does the freight forwarder need to bear liability? And when the freight forwarder breaches the contract, does the shipper have an obligation to mitigate losses?

[Court Judgments]

• First - instance judgment by the Chinese court: The first - instance Chinese court held that a freight forwarding contract relationship was established between the plaintiff and the defendant. The plaintiff fulfilled the space - booking obligation as agreed. After the goods were shipped, the defendant should pay the freight to the plaintiff as agreed. The defendant argued that it refused to pay the freight due to the transportation delay, but the transportation delay was not the plaintiff's responsibility as a freight forwarder. Therefore, the Chinese court did not accept this defense. The court also did not support the defendant's counter - claim for losses caused by the transportation delay. Moreover, the defendant failed to provide sufficient and conclusive evidence to prove these losses. As a freight forwarder, the plaintiff should return the property obtained from handling freight forwarding affairs and should not refuse to do so on the grounds that the principal had not paid the freight. The plaintiff confirmed during the court session that it had not delivered the original verification and write - off documents to the defendant, and this act constituted a breach of contract. However, during the performance of the contract, the parties should abide by the principle of good faith. After one party breaches the contract, the other party should take measures to prevent the expansion of losses. In this case, although the plaintiff retained the verification and write - off documents, the defendant could still apply for tax refund declaration to the tax authorities with a copy of the verification and write - off documents provided by the plaintiff within the specified time limit. The defendant was negligent in making the application, resulting in the inability to process the tax refund even if the plaintiff had delivered the original verification and write - off documents in a timely manner. Therefore, the defendant was also at fault for the occurrence of the tax refund loss. The Chinese court determined that the plaintiff and the defendant should each bear half of the loss of inability to obtain a tax refund.

  
  

• Second - instance judgment by the Chinese court: The second - instance Chinese court held that the international freight forwarding relationship in dispute was established in accordance with the law. The defendant claimed that the plaintiff had a breach of contract in terms of delayed transportation and filed a compensation lawsuit accordingly. However, the defendant did not submit corresponding evidence during the first - and second - instance trials to prove the actual occurrence of the losses it claimed. Therefore, the Chinese court found it difficult to support the defendant's appeal for compensation for losses due to delayed transportation and upheld the original judgment in accordance with the law.

[Suggestions from Chinese Foreign Trade Lawyers]

1. In disputes arising from shipping delays in international trade, it is necessary to strictly distinguish between the freight forwarding contract and the transportation contract, as well as their different legal relationships, rights, and obligations, in order to correctly determine the liability entities and the scope of liability. After the freight forwarding company has completed the obligations of booking space on behalf of the client and delivering the master waybill, its contractual obligations under the entrusted agency contract are considered fulfilled, and the shipper should correspondingly complete its obligation to pay the freight, miscellaneous fees, and related expenses to the freight forwarder. If the shipper suffers losses due to the airline's transportation delay, the airline has the obligation to arrive on time, and the shipper should claim liability for breach of contract and loss compensation from the airline based on the transportation contract.

   
   

2. The determination of the amount of damages involves the rule of mitigation of losses, that is,

   Article 591, Paragraph 1 of the "Civil Code of the People's Republic of China": "After one party breaches the contract, the other party shall take appropriate measures to prevent the expansion of losses; if it fails to take appropriate measures and causes the losses to expand, it may not claim compensation for the expanded losses." This is also an embodiment of the principle of good faith in the determination of liability for breach of contract. The principle of good faith requires not only that both parties act in the utmost good faith when concluding and performing the contract but also that they actively take appropriate measures to prevent the expansion of losses when obstacles occur during contract performance.

[Case Source]

（2006）浦民二（商）初字第17号、（2006）沪一中民四（商）终字第1052号