Cross-Border Goods Quality Disputes: Applicable Law and Liability in China
As Chinese enterprises deepen their integration into global supply chains, cross-border commercial disputes have become increasingly common. In international sale of goods transactions, disputes over the quality of goods upon arrival at the port of destination are not unusual. For foreign businesses, understanding the legal effect of the quality objection period and determining the applicable law in the event of a dispute are critical to protecting their legitimate rights and interests.
This article examines a representative foreign-related sale of goods dispute, analyzes the court's reasoning in adjudicating such cases, and provides practical guidance for businesses engaged in cross-border trade.
1. Case Background
In April 2022, a Chinese company (Company A, the seller) and an overseas company (the buyer) reached an agreement for the sale of a batch of 304L stainless steel coils. Company A issued a Commercial Invoice to the overseas buyer specifying the model, quantity, unit price, and total price of the goods, with a total contract value exceeding EUR 270,000. The buyer had paid EUR 90,000, leaving an outstanding balance in excess of EUR 180,000.
The Commercial Invoice contained the following express provision: "If, after the goods arrive at the port of destination, the buyer discovers that the quality of the goods does not conform to the agreed specifications, the buyer may, within 30 days after the arrival of the goods at the port of destination, submit a claim to the seller supported by an inspection certificate issued by an inspection agency approved by the seller. The seller shall compensate the buyer for the losses suffered, or refuse to compensate, based on the facts underlying the claim. The parties agree that the seller shall not bear any liability for losses caused by natural wear and tear or losses falling within the scope of the shipowner's or insurance company's liability."
In June 2022, Company A engaged SGS-CSTC Standards Technical Services Co., Ltd. (SGS) to inspect the goods in question. The scope of inspection included quantity verification, marking and packaging inspection, and dimensional inspection. The inspection report indicated that the goods substantially conformed to the chemical composition standards for 304-grade steel. Upon receipt of the SGS inspection report, the buyer proceeded to pay the outstanding balance.
The goods arrived at the port of destination in September 2022. In November 2022, the buyer even issued a letter of recommendation for Company A.
However, in June 2023 — approximately nine months after the goods had arrived at the destination port — the buyer sent an email to Company A asserting that the steel coils were not made of 304L 2B stainless steel as contracted. Company A replied by email, firmly maintaining that the goods supplied met the required standards. Subsequently, the buyer unilaterally commissioned a testing company to conduct a chemical analysis of the steel coil samples. The test report, issued in June 2023, concluded that the samples did not qualify as 304L stainless steel. The buyer demanded compensation from Company A. After negotiations failed, the buyer filed a lawsuit before a Chinese court, seeking a declaration that the sale and purchase contract was partially invalid, a refund of part of the purchase price, and compensation for its losses.
2. Key Findings of the Court
The court, after hearing the case, dismissed all of the buyer's claims. The principal grounds for the decision were as follows:
(1) Governing Law
The court determined that both China and the buyer's home country are Contracting States to the United Nations Convention on Contracts for the International Sale of Goods (CISG), and that the Commercial Invoice and other relevant documents did not expressly exclude the application of the CISG. Accordingly, the CISG should be applied as the governing law in this case.
(2) The Quality Objection Period
Article 39 of the CISG provides:
- The buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it.
- In any event, the buyer loses the right to rely on a lack of conformity of the goods if he does not give the seller notice thereof at the latest within a period of two years from the date on which the goods were actually handed over to the buyer, unless this time limit is inconsistent with a contractual period of guarantee.
In this case, the 30-day quality objection period stipulated in the Commercial Invoice was deemed to constitute the parties' specific agreement on the "reasonable time" under Article 39 of the CISG. The goods in question arrived at the port of destination in September 2022, yet the buyer first raised the issue of material non-conformity only in June 2023 — far exceeding the contractually agreed quality objection period. Consequently, pursuant to Article 39 of the CISG, the buyer had lost the right to rely on the lack of conformity of the goods.
(3) Evidentiary Assessment
The court conducted a comprehensive review of the inspection reports submitted by both parties. The inspection report unilaterally commissioned by the buyer from a testing company was found to lack evidentiary superiority over the pre-shipment inspection report issued by SGS, an internationally recognized third-party inspection agency. In terms of the standardization of the testing process, the credibility of the testing institution, and the reasonableness of the test conclusions, the buyer's report did not carry sufficient weight to establish that the steel coils supplied by Company A failed to meet the 304L stainless steel standard.
3. Practical Insights for Cross-Border Traders
This case offers several important lessons for foreign businesses engaged in the international sale of goods:
First, pay close attention to the quality objection period clause in the contract. Article 39 of the CISG merely requires the buyer to give notice of non-conformity within a "reasonable time" and permits the contracting parties to agree on a specific period. In this case, the 30-day objection period agreed upon by the parties was upheld by the court as valid. When entering into contracts, businesses should carefully negotiate a reasonable objection period based on factors such as the nature of the goods and the difficulty of inspection.
Second, inspect goods promptly upon receipt and provide written notice. The buyer should arrange for inspection as soon as possible after receiving the goods and notify the seller in writing of any non-conformity within the agreed period, clearly specifying the nature of the lack of conformity. A delay in raising objections may result in the loss of the right to claim under the law.
Third, be mindful of governing law issues. The CISG applies automatically to contracts for the sale of goods between parties whose places of business are in different Contracting States, unless the parties expressly exclude its application. Businesses should familiarize themselves with the core rules of the CISG and clearly stipulate the governing law clause in their contracts.
Fourth, prioritize the standardization and credibility of evidence. In the event of a quality dispute, an inspection report issued by an independent, internationally recognized third-party inspection agency generally carries greater evidentiary weight. It is advisable to agree in advance on the criteria for selecting the inspection agency, or even on a specific list of acceptable agencies, to minimize subsequent disputes.
Fifth, contractual provisions prevail over the default rules of the CISG. The CISG fully respects party autonomy and permits parties to exclude or modify certain provisions of the Convention through contractual agreement. Businesses should leverage this mechanism to expressly incorporate terms favorable to their interests in the contract.
4. Conclusion
Quality disputes in international sale of goods transactions affect not only the property rights and interests of the transacting parties but also the foundation of trust and transactional efficiency in cross-border trade. Foreign businesses engaged in trade with China should attach great importance to the meticulous drafting of contractual terms, particularly those relating to the quality objection period, inspection standards, and governing law, and should strictly adhere to the procedures and time limits stipulated in the contract during contract performance to effectively manage legal risks.
This article is general information only, not legal advice for your matter. For professional assistance, consult a PRC-licensed lawyer at Zhang&Partners.