The Interpretation of the Supreme People's Court on Issues Concerning the Application of Law for Hearing Cases of Sale and Purchase Contract Related Disputes (the "2012 Interpretation") was promulgated on June 5, 2012, and came into effect on July 1, 2012. The 2012 Interpretation, including eight sections and forty-six articles, explicitly regulates the issues of establishment and validity of sale and purchase contracts, delivery of subject matter and transfer of title, bearing of risk of subject matter, inspection and acceptance of subject matter, default liability, retention of ownership, and special sale and purchase. In addition to clarifying various issues in judicial practice, the 2012 Interpretation also fills certain gaps left by the PRC Contract Law (1)(the "Contract Law"). This article will briefly introduce the primary content of the 2012 Interpretation as follows.

I. Acknowledging the Independent Contractual Validity of a Pre-Contract

In the course of negotiating a contract, the parties in a contract of sale/purchase, especially in the sale/purchase of commodity housing, can sign a subscription agreement or an intention agreement, in which the parties promise to conclude a formal contract within a designated time period. Theoretically, such of subscription/intention agreements can be considered "pre-contracts" compared to formal contracts, namely "the final agreement". Since the Contract Law does not explicitly state the validity of pre-contract and its default liability, judges have issued differing opinions for this issue in judicial practice. Some courts support independent validity of the pre-contract (2); however, some courts opine that there is only culpa in contrahendo prior to the establishment of formal contracts.

In the past, the Interpretation of the Supreme People's Court on Issues concerning the Application of Law to the Hearing of Cases Involving Disputes over Contracts for the Sale and Purchase of Commodity Housing (3) (the "Commodity Housing Interpretation") states that if the pre-contract, such as a subscription agreement for a commodity house, has been performed, this pre-contract could be considered a contract for the sale/purchase of commodity housing directly. However, the Commodity Housing Interpretation does not establish the independent validity of a pre-contract.

Currently, Article 2 of the 2012 Interpretation explicitly acknowledges the independent contractual validity of a pre-contract, such as an order to buy, order to purchase, reservation book, letter of intention, or memorandum. In other words, a pre-contract is independent from a formal contract. Even if a formal contract has not been established, a party has the right to claim against the counterparty to assume liabilities for breach of contract following the pre-contract.

With respect to the liabilities for breach of a pre-contract, since the goal of signing a pre-contract is to conclude a formal contract, the ways ofassuming liabilities for breaching of a pre-contract include compensating for losses, paying liquidated damages, and applying the deposit punishment principle. However, in theory and practice there are disputes in terms of whether the non-breaching party can claim for actual performance of the contract, i.e. forcing the breaching party to sign the formal contract. This issue is not explicitly stipulated by the 2012 Interpretation. According to the opinions of the drafting committee, the 2012 Interpretation provides no definite position regarding this issue and it remains open to further academic analysis and judicial clarification in practice. (4)

II. Confirming the Validity of an Unauthorized Disposition Contract

With respect to the validity of the unauthorized disposition contract, Article 51 of the Contract Law provides that "[w]here a person having no right of disposal of property disposes of properties of another person, and the principal ratifies the act afterwards or the person without power of disposal has obtained the power after concluding a contract, the contract shall be valid." In order to protect the transaction order and the buyers' interests, the 2012 Interpretation further confirms the invalidity of an unauthorized disposition contract, and further reiterates the prevailing judicial holding in practice.

Article 3 of the 2012 Interpretation explicitly stipulates that "[w]here any party claims that a contract is void for the seller has no right to own or dispose of the subject matter upon entering into the contract, the people's court shall not support such request. If the seller causes the title of the subject matter unable to be transferred for not obtaining the ownership of or the right to dispose the subject matter, the buyer has a right to request the seller to bear the default liability or request to terminate the contract and claims for liquidated damages."

III. Specifying the Delivery Methods for Electronic Information Products

Sale/purchase contracts of electronic information products are becoming prevalent with the development of electronic information technology. What distinguishes a sale/purchase contract of an electronic information product from a traditional sale/purchase contract is the subject matter, that is, the electronic information product can be delivered either via a physical carrier, or via no physical carrier at all. For an electronic information product that does not require a physical carrier, the delivery methods have certain particularities.

The 2012 Interpretation specifies special rules regarding delivery methods of electronic information products for the first time. Article 5 of the 2012 Interpretation states that "[i]f the parties define the delivery means expressly, the agreements shall be followed; if there is no agreement regarding the delivery means or the delivery means can not be confirmed, the parties may agree upon supplementary terms on this issue through consultation. In case of failing doing so, the terms shall be determined from the context of relevant clauses of the contract or by transaction practices. If any delivery means cannot be confirmed through the above rules, the delivery shall be deemed to be completed upon the buyer receiving the agreed electronic information product or the document of title."

It should be noted that the draft committee of the 2012 Interpretation believes that two delivery methods for electronic information products are mainly used in trading practice:

  1. Delivery of document of title; and
  2. Accepting or downloading such products through internet transmission. The delivery stages are composed by the vendor's sending of the electronic information product and buyer's acceptance of the electronic information product.

Considering the advantageous position of the vendor in the sale/purchase of electronic information products (especially in the producing and transmitting procedures), the 2012 Interpretation states that delivery is completed when the buyer receives the electronic information products. (5)

IV. Specifying the Rules on Ownership of a Property which Has Been Sold Several Times

It has often happened in practice that a property has been sold several times, and multiple parties' interests are involved in multiple sales/purchases. The Interpretation of the Supreme People's Court on Certain Issues Concerning the Application of Contract Law of the People's Republic of China (Part Two) (6) (the "2009 Interpretation")has established the legal validity of contracts in multiple sales/purchases. (7) However, the Application Interpretation is silent on the issue of how to deal with the situation where several buyers claim for the contractual performance, and it is also a hotly disputed issue in practice. Nowadays, in order to protect the principle of good faith, the 2012 Interpretation sets up rules for deciding the ownership of a property which has been transferred several times.

As for a normal movable property which has been sold several times, Article 9 of the 2012 Interpretation specifies the rules for decidingthe ownership based on the order of delivery, payment and the establishment of contracts:

  1. Regarding the property which has been delivered, the buyer receiving the delivery of such property firstly has a right to request the court to the confirm the transfer of the title;
  2. If no buyer receives the delivery of such property, the seller shall deliver the subject matter or discharge other obligations under the contract to the buyer who paid the price of such property firstly; and
  3. If no buyer receives the delivery of such property nor pays the price, the seller shall deliver the subject matter or discharge other obligations under the contract to the buyer who established legally a sale and purchase contract firstly.

Regarding a special movable property such as vessel, aircraft or automotive vehicle which has been sold several times, considering the rule of registration for special movable properties, Article 10 of the 2012 Interpretation stipulates the rule of ownership based on the order of delivery, registration and the establishment of contracts:

  1. Regarding the property which has been delivered, the seller shall implement the formalities for transfer of the title thereto or other obligations under the contract;
  2. If no buyer receives the delivery of such property, the seller shall implement the delivery thereof or other obligations under the contract to the buyer who completed the registration of the transfer of title firstly;
  3. If no buyer receives the delivery thereof nor goes through the formalities for registration of the transfer of the title thereof, the seller shall implement the delivery of subject matter, the registration of the transfer of title or other obligations under the contract to the buyer who established legally the sale and purchase contract firstly; and
  4. If the seller delivers the subject matter to a buyer and goes through the registration of the transfer of title for other buyers, the buyer receiving the delivery thereof has a right to request the court to order the seller to register the title of the subject matter to the name of such buyer.

V. Improving the Rules on Risk Bearing

To address new issues that have arisen in judicial practice on risk bearing rules, the 2012 Interpretation stipulates explanations and supplementary provisions to theContract Law regarding the risk bearing rules.

  1. Explaining the circumstance "[w]here transportation of the subject matter is required": Article 11 of the 2012 Interpretation explicitly stipulates that "‘[w]here transportation of the subject matter is required' as stipulated in Article 141 (8) of the PRC Contract Law means the circumstance where the seller is responsible for the shipment of the subject matter and the carrier is independent from the parties to the sale and purchase contract." Such interpretation excludes the circumstance where the seller personally handles the shipment or the buyer is responsible for the shipment, and clarifies the ambiguity on the application of Article 141 of theContract Law in practice.
  2. Specifying the rules on risk transfer for delivery to a carrier in designated areas: In an off-site sale, it is common that the seller has to deliver the goods to the carrier in an area designated by the buyer. TheContract Lawdoes not provide risk bearing rules under such a circumstance. Article 12 of the 2012 Interpretation stipulates that "after the seller transports the subject matter to the destination designated by the buyer and delivers the object to the carrier in accordance with the contract, the risks on the damage or loss of the object shall be borne by the buyer, unless otherwise agreed by the parties." Such rule is consistent with the risk transfer rule of Group F and Group C under the international trade terms.
  3. Improving the rules on bearing of risks for sales of en route goods:Article 144 of theContract Law provides that the risks of en route goods "shall be borne by the buyer as of the time of establishment of the contract." However, where the seller knows or should know that the subject matter has been damaged or lost upon the establishment of the contract but does not inform the buyer, it will be obviously unfair for the buyer to bear the risks, yet theContract Lawdoes not provide rules applicable to such circumstance. The 2012 Interpretation supplements the defectiveness of such rules under the Contract Law. Article 13 of the 2012 Interpretation stipulates that "where the seller knows or should know that such subject matter has been damaged or lost upon the establishment of the sale and purchase contract but does not inform the buyer of such damage or loss, the seller shall bear the risk of the damage or loss of the subject matter." Such regulation echoes Article 68 (9) of the United Nations Convention on Contracts for the International Sale of Goods.
  4. Stipulating the rules on bearing of risks for unspecified subject matters: theContract Law does not provide risk bearing rules for unspecified subject matters, and the 2012 Interpretation provides supplementary rules in this respect. According to Article 14 of the 2012 Interpretation, where the parties do not enter into any agreements on risk bearing, the subject matter belongs to a category of things, and the seller does not specify expressly in the sale and purchase contract by recognizable means such as shipping documents, marks or notification to the buyer, the buyer does not bear the risks of any damage or loss of the subject matter.

VI. Clarifying the Rules on Recognition of the Loss for Acquirable Interests

The recognition of the loss for acquirable interests is a difficult issue within the purview of contract law. Although theContract law (10) provides compensations for the loss of acquirable interests, it does not provide detailed standards on the calculation of such loss. Hence, there lacks a uniform standard in judicial practice and some courts even do not support claims for such loss.

Therefore, the 2012 Interpretation provides practical regulations on compensation for the loss for acquirable interests. In light of theContract Law and Article 29, 30 and 31 of the 2012 Interpretation, acquirable interests shall be calculated according to the principles of "foresee ability", "mitigation of damage", "contributory negligence", and "balancing the gains and loss". In particular, the contributory negligence principle and the principle of balancing the gains and loss under the 2012 Interpretation have filled the gaps left by the Contract Law.

To address the burden of proof on the loss of acquirable interests, the Guiding Opinions of the Supreme People's Court on Several Issues Concerning Trial of Cases on Disputes over Civil and Commercial Contracts in the Current Situation (Fa Fa [2009] No. 40) (11)("Guiding Opinions") stipulate that the breaching party should usually assume the burden of proof that the losses are expanded due to the failure of the non-breaching party to take reasonable loss reduction measures, that the non-breaching party obtains benefits due to the breach, and that the non-breaching party is also at fault; the non-breaching party should bear the burden of proof for the total amount of the losses of obtainable benefits suffered by it and for necessary transaction costs. With respect to the predictable losses, the non-breaching party may bear the burden of proof and the people's court may also make judgments in its discretion according to the concrete circumstance.

VII. Detailing the Regulations on Ownership Retention

TheContract Law provides principle regulations on retention of ownership (12). On the basis of balancing the interests between the seller and the buyer, the 2012 Interpretation provides detailed regulations on ownership retention:

  1. Retention of ownership does not apply to real estates: Article 34 of the 2012 Interpretation explicitly stipulates that the retention of ownership does not apply to sales of real estates.
  2. Seller's rights to take back: according to Article 35 of the 2012 Interpretation, the seller has the rights to take back the subject matter when:
    1. The seller is not paying the price of goods as agreed;
    2. The seller is not completing specific conditions as agreed; and
    3. The seller is selling, pledging or making other improper disposal of the subject matter.

The seller's right to take back is also limited:

  1. "Where the buyer has paid 75% of the total price of the subject matter of more," the seller may not take it back; and
  2. The seller's rights to take back is subject to the third party's good faith standard.
  1. Buyer's rights of redemption: according to Article 37 of the 2012 Interpretation, the buyer may redeem the subject matter after the seller has taken it back:

"Where the buyer does not redeem the subject matter within the redemption period, the seller may sell the subject matter separately. Where the seller sells the subject separately, any remainder of the selling price after having deducted sequentially the expenses for taking back and keeping the subject matter, the re-transaction expenses, interests, and the unliquidated price shall be refunded to the original buyer; if the selling price is insufficient for deduction of above mentioned expenses, the seller may request the original buyer to pay any insufficient amount."

The 2012 Interpretation in this case has taken into account interests of both the seller and the buyer.

VIII. Conclusion

The 2012 Interpretation has coordinated the provisions of theContract law and the practical experiences of relevant regulations enhanced the practicability of relevant rules for sale/purchase contracts, and refined relevant rules concerning new circumstances and problems arising in judicial practice. It is of great significance for legal professionals to understand the provisions of the 2012 Interpretation and implement and apply it in his/her legal practice.Informed advice from a legal practitioner can reduce the clients' legal risks in contractual activities and help solve contractual disputes in an efficient and reasonable way.