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Strictly follow the United Nations Convention on Contracts for the International Sale of Goods

Basic Case
After negotiation, the Bulgarian company reached a sales contract with a Chinese seller, agreeing that the Bulgarian company would purchase mask machines and accessories from the Chinese seller. The Bulgarian company claims that the goods delivered by the Chinese seller are not brand new equipment and do not comply with the contract agreement. After unsuccessful negotiations, the Bulgarian company filed a lawsuit requesting invalidation of the contract, return of payment, and compensation for expected loss of profits.

[Judgment result]
The Zhejiang Provincial High People’s Court held in the second instance that the parties to this case have their places of business in China and Bulgaria, both are contracting parties to the Convention. The parties did not explicitly exclude the application of the United Nations Convention on Contracts for the International Sale of Goods in the contract. Therefore, this case should apply the Convention to resolve disputes. The mask machine delivered by the Chinese seller has multiple wear, corrosion, scratches, rust, and other issues, which have prevented the Bulgarian company from achieving the contractual purpose of using the equipment to produce scarce masks during the epidemic, constituting a fundamental breach of contract under Article 25 of the Convention. The Bulgarian company has the right to declare the contract invalid and demand that the Chinese seller pay interest on the delivered goods. Chinese sellers should be able to foresee the transportation and insurance losses incurred by Bulgarian companies when entering into the contract, and therefore should be compensated by Chinese sellers at their discretion. Based on this, the Chinese seller refunds the Bulgarian company’s payment of RMB 740117 and interest losses, and compensates for freight and insurance costs of RMB 50000.

Typical significance
International trade of goods plays an important role in regulating the supply and demand relationship in various markets and promoting global economic development. Maintaining the stability of contracts is a guarantee for the smooth progress of international trade in goods. The system of invalidation of contracts stipulated in the United Nations Convention on Contracts for the International Sale of Goods is essentially equivalent to the system of termination of contracts stipulated by Chinese law. It specifically stipulates clauses for fundamental breach, with whether the performance interests of creditors are seriously affected as the criterion for determining fundamental breach, limiting the parties to declare the contract invalid due to minor defects in performance.

The judgment of this case, by analyzing whether the delivered goods meet quality standards and whether substandard quality results in the inability to achieve the fundamental purpose of the contract, determines that the non breaching party can declare the entire contract invalid and claim losses because the breaching party constitutes a fundamental breach. At the same time, it reasonably applies the predictability rule stipulated in Article 74 of the Convention to the breaching party’s liability for freight and liability for insurance premium compensation is limited to the foreseeable scope at the time of contract formation, to avoid unfair consequences to the defaulting party. This case fully demonstrates the functional role of the people’s court in maintaining international order in the sale of goods in accordance with the law and equally protecting the legitimate rights and interests of both domestic and foreign parties.



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