International Sale Contract Dispute: CISG Application in China — An Italian Company Case Study
This case represents a classic application of the United Nations Convention on Contracts for the International Sale of Goods (CISG) in a Chinese court. The plaintiff was an Italian company (Company S), and the defendants were a Fujian-based company (Company J) and an individual (Mr. Zhang).
After proceedings at both first instance and appellate levels, the court ultimately ruled in favor of Company S, ordering the return of its deposit, and the judgment has been successfully enforced. The entire matter, from client engagement to enforcement, spanned nearly two years. Below is a summary of the key facts and legal analysis.
1. Factual Background
In March 2020, the Italian buyer (Company S) entered into four mask sale contracts with Mr. Zhang, with Company J named as the contractual seller:
| Contract | Product | Quantity | Amount (USD) |
|---|---|---|---|
| 1st | KN95 masks | 21,000 pcs | 35,700 |
| 2nd | KN95 masks | 270,000 pcs | 459,000 |
| 3rd | Disposable masks | 500,000 pcs | 132,500 |
| 4th | KN95 masks | 315,000 pcs | 535,500 |
Total contract value: USD 1,162,700. Unit price was USD 1.70 per KN95 mask and USD 0.265 per disposable mask. The contracts specified Ex-Works (EXW) as the trade term, with payment terms of 30% deposit upon signing and the remaining 70% against the air waybill. Transportation was by air.
After the contracts were signed, Company S paid the full purchase price for the first three contracts into Company J's account. The first three shipments were declared to Chinese Customs by Company J under FOB Xiamen and arrived in Rome on March 27, 2020. Because the masks lacked CE certification, they were detained by Italian customs. Company S notified Mr. Zhang not to proceed with production of the fourth contract masks and negotiated a reduction of the fourth contract deposit to 15% (USD 80,325), which was paid on March 29.
Mr. Zhang subsequently arranged CE certificates to facilitate customs clearance. Upon receipt, Company S discovered serious quality defects (ear loops too short and prone to breakage, material causing facial abrasions) and requested a full return. However, due to the severe pandemic situation in Italy and prohibitive return shipping costs, Company S ultimately distributed the masks free of charge. Regarding the fourth contract, Company S specified that ear loops must be 2 cm longer. Mr. Zhang claimed the fourth batch had already been produced. After re-made samples were detained by Xiamen Customs for one month due to tightened export quality controls, it became clear that performance was infeasible. Company S demanded a refund of the fourth contract deposit. Mr. Zhang initially promised to refund but subsequently delayed, leading Company S to retain counsel and file suit in Fujian.
2. Claims of the Parties
Plaintiff (Company S): Sought joint and several return by Company J (Defendant 1) and Mr. Zhang (Defendant 2) of the USD 80,325 deposit plus interest, and costs.
Company J: Argued it was merely an export agent for Mr. Zhang and bore no refund obligation, submitting an "Export Cooperation Agreement" between itself and Mr. Zhang as evidence.
Mr. Zhang (counterclaim): Asserting an EXW basis, sought payment of the remaining USD 455,175 for the fourth contract, taking delivery of the goods, and costs.
3. Issues in Dispute
The dispute centered on four issues:
- Who was the seller — Company J or Mr. Zhang?
- Was the actual trade term EXW or FOB Xiamen?
- Had the fourth contract been terminated?
- Was the deposit refundable?
4. Applicable Law
Company S is incorporated in Italy, and Company J is located in China. Both Italy and China are original contracting states to the CISG. Accordingly, except for provisions to which China has declared reservations, the CISG governs this dispute. Matters not covered by the CISG are governed by Chinese law as the governing law, pursuant to Article 3 of the Law of the PRC on the Application of Laws to Foreign-Related Civil Relations.
5. Court Decisions
First Instance Judgment
After two public hearings, the Fujian court rendered the following findings:
- Seller identity: Although all transactional documents — including the sale contract, customs declaration, commercial invoice, packing list, and air waybill — identified Company J as the seller, the Export Cooperation Agreement between Company J and Mr. Zhang revealed profit-sharing, settlement, and default provisions that indicated a joint business arrangement. The court found that Company J and Mr. Zhang shared common interests and their conduct was interrelated in a manner giving rise to joint and several civil liability.
- Trade term: While the pro forma invoices specified EXW, the commercial invoices, packing lists, and air waybills all recorded FOB Xiamen, and Company J, as the shipper, had claimed export tax rebates from the tax authorities. Under EXW, the seller bears no customs declaration obligation — that duty rests with the buyer. In practice, Company J handled customs clearance and served as the declarant. The court therefore determined that the actual trade term was FOB Xiamen, not EXW. The court further noted that, according to ICC expert commentary, EXW is appropriate only for domestic trade.
- Contract termination: Based on email correspondence showing that Mr. Zhang acknowledged quality defects on April 9 and April 10, 2020, and twice promised to refund the deposit, the court found the fourth contract to have been terminated on April 10, 2020. Upon termination, the seller was legally obligated to return the deposit. Mr. Zhang's counterclaim based on EXW was dismissed.
The first-instance court, applying the CISG, the Contract Law, and the Civil Code, ordered Company J and Mr. Zhang to jointly refund the USD 80,325 deposit with interest, and to bear the costs. Mr. Zhang was ordered to bear the counterclaim costs.
Second Instance Judgment
Both Company J and Mr. Zhang appealed. The appellate court modified the judgment, ordering Mr. Zhang alone to refund the USD 80,325 deposit with interest and bear all costs at both instances, including counterclaim costs.
6. Legal Commentary
Application of the CISG
This case is a notable example of a Chinese court directly applying the CISG. The first-instance court cited CISG Articles 1 (scope of application), 29 (modification or termination of contract), 78 (interest), and 84(1) (interest accrual). Under CISG Article 84(1), when a seller is obliged to refund the price, interest must be paid from the date the price was paid. Here, Company S paid the deposit on March 19, 2020, and the contract was terminated on April 10, 2020. Company S had a factual basis to claim interest from April 10, 2020. However, the first-instance court exercised its discretion to calculate interest from September 22, 2020 (the date of acceptance of the case), effectively disallowing six months of interest. The appellate court sidestepped the CISG provisions on interest altogether and shifted liability solely to Mr. Zhang. While the change in the liable party may have practical enforcement implications, it did not prejudice Company S's substantive litigation objectives.
Procedural Considerations in Foreign-Related Litigation
For a foreign company to bring suit in a Chinese court, its corporate registration documents, articles of association, and the power of attorney for its legal representative must be notarized in the country of incorporation and authenticated by the Chinese embassy or consulate in that country. In this case, all such documents required notarization by the Italian Public Prosecutor's Office and subsequent authentication by the Chinese Consulate in Florence. The power of attorney required translation into Chinese, English, and Italian. English-language emails between the parties also required translation and certification by a translation company. It is worth noting that some courts (such as those in Shanghai) permit the handling attorney to translate documents themselves if the judge and opposing counsel accept, which can reduce litigation costs for the parties.
This article is general information only, not legal advice for your matter. For professional assistance, consult a PRC-licensed lawyer at Zhang&Partners.