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Once again, the applicable law determined by a people’s court should be the existing substantive law of the country (place) specified, not including the conflict of law rules of the foreign country. However, if within that foreign country different laws are applied in different states, the applicable law shall be the one pointed by the conflict of law rules prevailing in that foreign country. If there is no applicable conflict of law rules, the law of the state to which the contract is most closely related will be applied.28

1.3. Application of International Law

To apply international law in international contracts encounters two basic questions: the first question is whether the parties may choose as the governing law the international law, and the second question is whether a court may apply the international treaty in case of no choice made by the parties. In both situations, an underlying issue is whether the court may directly apply the international law to the controversy brought before it. Closely related to this issue is the question about which shall prevail if there is a conflict or discrepancy between the international law and domestic law.

International law, as specified in the Statute of the International Court of Justice, includes international treaties, international customs, the general principles of law recognized by civilized nations, and judicial decisions and scholarly treatises.29 But the international treaties and customs are generally considered to be the two most authoritative sources of international law. When applying international treaties in the domestic courts, countries differ from each other in terms of how the international treaties should be applied in the domestic courts.

Generally, there are three different approaches in handling the application of international treaties. The first approach is direct application, which means that an international treaty may be directly applied in the courts of the country that is the party to the treaty except for the treaty provisions to which the country has made reservation. The second approach is termed as indirect application. Under this approach, an international treaty may not be applied

28See Supreme People’s Court, Opinions on the Matters of Implementation and Application of the General Principles of Civil Law of China (1988), art. 192.

29Article 38 of the Statute of the International Court of Justice provides: “the Court, whose function is to decide in accordance with international law such disputes as submitted to it, shall apply (a) international conventions, whether in general or particular, establishing rules expressly recognized by the contesting states, (b) international custom, as evidence of a general practice accepted by law, (c) the general principle of law recognized by civilized nations, (d) subject to the provisions of Article 59, judicial decisions and the teachings of the most highly qualified publicists of the various nations, as subsidiary means for the determination of law.” Available at http://www.icj-cij.org

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in the domestic courts without a process of transformation of the treaty into the domestic law. In other words, in order for a domestic court to apply an international treaty, there must be a statute passed by the legislature of the country to implement the treaty.30 The third approach is called an eclectic approach because it basically a combination of the above two approaches. For example, in the United States, the treaties are divided into self-executing and non-self-executing. A treaty becomes enforceable in the courts of the United States only if it is self-executing. If a treaty is non-self-executing, it is enforceable only if it has been implemented through the federal statute.31

In China, it is up-to-now hard to tell which approach is being taken. As we have discussed above, the Model Law has advocated that the parties may choose as governing law the international treaty or customs, but neither the 1986 Civil Code nor the Contract Law has said so. With regard to the application of international treaty, the only relevant provision is Article 142 of the Civil Code. Under Article 142, if any international treaty concluded or acceded to by the People’s Republic of China contains provisions differing from those in the civil laws of China, the provisions of the international treaty shall apply, except for those to which China has made reservations. Article 142

30There are two theories that are intended to define the relationship between domestic law and international law, and they are called the dualism and monism. Under the dualism, domestic law and international law are two different systems regulating different subject matter, and neither legal order has the power to create or alter rules of the other. When domestic law provides for application of international law within the jurisdiction, this is merely an exercise of the authority of the authority of domestic law, an adoption or transformation of the rules of the international law. And therefore, application of international law in domestic courts is indirect. The monism however emphasizes the supremacy of the international law and reduces the domestic law to the status of pensioner of international law. Pursuant to monism, international law will be enforced directly in the domestic courts. See Weston, Falk & Charlesworth, International Law and World Order, A Problem-Oriented Coursebook

(3rd Ed), 229–233 (West, 1997).

31Although there is a general acceptance in the US about the concepts of self-executing and non-self-executing treaties, the criteria used by the courts to distinguish self-executing treaties from non-self-executing treaties vary. One standard is to look at whether the treaty creates a private right of action. Under this standard, a treaty would be called non-self-executing if it does not create a private right of action. Another standard is the test used by the Ninth Circuit Court of Appeals in Islamic Republic of Iran v. Boeing Co., 771 F. 2d 1279, 1283 (9th Cir. 1985). According to this test, to determine whether a treaty is self-executing or not, the following factors need to be considered: (a) the purposes of the treaty and the objectives of its creators, (b) the existence of domestic procedures and institutions appropriate for direct implementation, (c) the availability and feasibility of alternative enforcement methods, and

(d) the immediate and long-range social consequences of self or non-self execution.

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further provides that international customs may be applied absent applicable law or international treaties.

Obviously, Article 142 is ambiguous. First of all, it is uncertain as to whether the authority of treaty over domestic law as implicated in Article 142 would be interpreted to mean that international treaty would be applied directly in the courts. Secondly, it is unclear whether Article 142 actually authorizes the courts, without legislative actions, to apply the international treaties or customs to the cases where the application of the treaties or customs becomes necessary. And thirdly, it is questionable whether a later legislation may supersede the provisions of the treaty. Put differently, the question would be whether the treaty should still prevail if a later legislation appears to be inconsistent with the treaty.

Scholars in China have different views on this matter. Those advocating for direct application argue that the treaty is directly applicable in China once verified by the National People’s Congress (NPC) because under Chinese Constitution, only the verification by the NPC is required for a treaty to become effective in China.32 It is further argued that the NPC verification is just a formality that does not involve the substance of the treaty, and thus the legislative implication of a treaty in domestic law is not a condition for the application of the treaty.33

Others disagree to the direct application by pointing out that application of a treaty involves the exercise of national sovereignty and therefore shall not take place automatically in domestic courts without legislative authorization.34 Some also suggest that the direct application be limited to the treaty of general civil and commercial matters, that is, if the treaty involves more policy matters, such as the WTO, the application should first be authorized by the legislation. What they are concerned about are the complexity of the policybased treaty as well as lack of knowledge and competency of the judges in this regard.35

In practice, the Supreme People’s Court seems to be in favor of the direct application of the international treaties and customs at least for civil and commercial matters.36 On April 17, 2000, in order to guide the lower courts, the

32See Li Shuangyuan, Unification Process of Private International Law (2nd Ed), 365–366 (Wuhan Universty Press, 1998).

33See Id.

34See Liu Hanfu, Matters Concerning Direct Application of the WTO in the People’s Courts, 7 People’s Justice, 49 (2000).

35See Cao Jianming, The WTO and China Judicial Practices, 254–258 (Law Press, 2001).

36See Cao Jianming, id.

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Supreme People’s Court issued the Notice on Several Questions that Deserve Attentions Concerning Trial and Handling of Foreign Civil and Commercial Cases. In the Notice, the Supreme People’s Court explicitly instructed the lower courts to honor the choice of law clause made by the parties except for otherwise provided by the law, and to give priority to the application of international treaties as well as deference to the international customs.37

As a matter of fact, there have been instances in China where the international treaties were directly applied in courts. The following case serves as an example showing how the international treaties are being cited as legal authority by Chinese people’s courts in their trials of foreign cases. The case involves the application of the United Nations Convention on Contracts for the International Sale of Goods, and is selected by Shanghai High People’s Court to publish as a typical case of particular importance.

Shanghai Dong Da Import and Export Co., Inc.

v.

Laubholz-Meyer Company

Shanghai Yangpu District People’s Court

Yang Jing Chu Zi No. 1179 (2001)38

On March 15, 2001, plaintiff Shanghai Gong Da Import and Export Co., Inc. (a Chinese corporation, note added) was entrusted as an agent to enter into an import agent contract with Shanghai Chenchuan Industrial Company, Ltd. (Chenchuan) to import 15 cubic meters (+/–10%) of special timbers (known as Hornbeam) for Chenchuan. On the same day, plaintiff signed a contract with defendant (a German company, note added) under which defendant would provide required timbers according to the quantity, quality, price and payment methods as agreed upon by the parties.

On May 28, 2001, plaintiff received 13.999 cubic meters of the timbers from defendant under the B/L No. HD-MUBMCH10030, for which plaintiff paid to defendant via L/C US $5179.63, or RMB 42,991 Yuan, plus custom duties of RMB 10,434.24 Yuan. However, an initial inspection indicated that the timbers received did not conform to the terms of the contract. Plaintiff then asked the local Entry/Exit Bureau of Examination and Quarantine for further inspection. In the Inspection Certificate issued by the Bureau on June 14, 2001, it stated that among the imported timbers, about 192 pieces were not Hornbeam, amounting to 2.628 cubic meters, and about 52% of the timbers had poor quality. The Inspection Certificate concluded that the specification and the quality of the timbers did no meet the requirements of the contract.

37See Supreme People’s Court, the Notice on Several Questions that Deserve Attentions Concerning Trial and Handling of Foreign Civil and Commercial Cases (2000), a full text of the notice is available at http://www.law-lib.com

38See “The 2003 Selected Cases Tried by People’s Courts in Shanghai”, 166–170 (Shanghai People’s Court Press, 2004).

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Plaintiff brought this action against defendant at the court. According to plaintiff, due to the defendant’s breach of the contract, Chenchuan, plaintiff’s principal, was unable to deliver the digital piano keyboard to a Japanese company, for which Chenchuan had to pay the liquidated damages of RMB 100,000 Yuan. Plaintiff claimed that because of the breach, plaintiff and its principal suffered both economic losses and reputation damages. Plaintiff then asked the court to order defendant to pay to plaintiff (a) the contract price of RMB 42,991 Yuan, (b) custom duties of RMB 10,434.24 Yuan, (c) Chenchuan’s economic damages of RMB 100,000 Yuan and reputation damages of RMB 50,000 Yuan, and (d) RMB 2,653 Yuan as the fees paid by plaintiff to the Shanghai Representative Office of German Industry and Commerce Chamber (German Chamber Fees).

Defendant challenged the legality and relevance of the Inspection Certificate on the ground that the Certificate could not prove the inconformity of the goods to the quality standard set forth in the contract. Defendant argued that plaintiff failed to make inspection according to statutory process upon arrival of the goods, but rather plaintiff made the inspection when plaintiff thought there were quality problems after the timbers were unpacked for use. In addition, defendant argued, the inspected timbers had been sorted by plaintiff and were heavily damaged. For this reason, defendant asked the court to quash the Inspection Certificate because the inspected goods were not necessarily the goods under the B/L No. HD-MUBMCH10030.

Defendant further argued that the United Nations Convention on Contracts for the International Sale of Goods should first be applied to this case. Under the Convention, defendant asserted, its performance basically meet the terms of the contract, and even if defendant was found in breach, its liability for damages should be limited. Defendant then asked the court to dismiss plaintiff’s claim for the reason that the damages claimed by plaintiff were lack of legal grounds.

The court finds that plaintiff did not make the timely inspection of the timbers and had the timbers inspected after the timbers arrived at the working site without presence of defendant’s local representatives. In this regard, plaintiff was at fault to certain extent. But court believes that the evidential effect of the Inspection Certificate shall not be denied only because of plaintiff’s fault. First, based on the evidence provided by plaintiff, the timbers purchased by plaintiff are to be used to produce specially made products, and therefore the required timbers may not be substituted with other type of timbers. The contract between the parties is clear about the specification of the timbers, defendant, however, changed the specification without plaintiff’s knowledge. And it was after being unpackaged that the timbers were found wrong. Therefore there is no evidence that plaintiff committed any fraudulent conduct in inspecting the timbers.

Second, the evidences before the court concerning Chenchuan’s payment to the Japanese company for the liquidated damages further indicates that both plaintiff and Chenchuan did not have any Hornbeam timbers from other sources in stock. Thus, it is reasonable and logical to infer that there is no basis for plaintiff to switch the timbers for the purposes of inspection. On this basis, it should be held that the timbers provided for inspection were imported from defendant and therefore the evidential effect of the Inspection Certificate should be affirmed.

With regard to the application of law, according to Article 2 of the Supreme People’s Court’s “the Notice on Several Questions that Deserve Attentions Concerning Trial and Handling of Foreign Civil and Commercial Cases” on April 17, 2000, except for the provisions of Article 126 (b) of the Contract Law under which Chinese law must be applied, the applicable law to a contract should be determined exactly under the provision of law or the choice of the parties. The priority shall be given to international treaties, excluding

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the provisions to which China has made reservations, and the application of international customs may also be considered. In this case, the parties did not make the choice of law in the contract. But since the counties of which the parties are citizens are both the members of the United Nations Convention on Contracts for the International Sale of Goods, the contract falls within the scope of the application of the Convention, and then the Convention shall first be applied.

Under the provisions of the Convention, defendant shall be held liable because defendant fails to deliver the goods that match the specification and quality provided in the contract and such failure constitutes a “fundamental” breach. But with regard to the liquidated damages Chenchuan paid to the Japanese company and the reputation damages claimed by plaintiff, plaintiff provided no evidence that defendant was in advance informed of Chenchuan and the transactions with the Japanese company, plaintiff’s claims in this regard therefore shall be denied.

The court hereby holds that after the contract is legally concluded, the parties shall fully perform the contract. But due to defendant’s breach, plaintiff did not achieve what it has bargained for, and defendant shall of course be liable for damages. Plaintiff’s claims for the returning the goods delivered for a refund, the payment for the import duties, and other fees in relation to the returning of goods should be supported because they are the consequences of breach that could be foreseen by defendant.

On the grounds stated above, in accordance with Article 142 of the General Principles of Civil Law of China, Article 25, Article 49 (1)(a), (2)(b), Article 51 (2), Article 81 (2), and Article 86 (1) of the United Nations Convention on Contracts for the International Sale of Goods, it is now ordered as follows:

1.Defendant Laubholz-Meyer Company refund plaintiff Shanghai Dong Da Import Co., Inc. RMB 42,991 Yuan within 10 days after this judgment takes effect;

2.Defendant Laubholz-Meyer Company pay plaintiff Shanghai Dong Da Import Co., Inc. RMB 10,434.24 Yuan of the import related costs within 10 days after this judgment takes effect;

3.Defendant Laubholz-Meyer Company pay plaintiff Shanghai Dong Da Import Co., Inc. RMB 2,653 Yuan of German Chamber fees within 10 days after this judgment takes effect;

4.Plaintiff’s other claims be denied;

5.Defendant, within 10 days after Plaintiff Shanghai Dong Da Import Co., Inc. receive the above ordered payments from defendant, shall come to the place designated by plaintiff to pick up the Hornbeam timbers 11.371 cubic meters, and other timbers 2.628 cubic meters at its own cost; if plaintiff is unable to provide the timbers to the amount as specified above, plaintiff shall pay to defendant the difference at US$370 / cubic meter.

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None of the parties made appeal in Shanghai Dong Da. At the time of publication of the case, the head judge who wrote the opinion made several interesting comments. First, this case involves the dispute over the specification and quality of the contracted goods. During the trial the court had a clear focus on evidence by determining first the validity and effect of the Inspection Certificate, and then the matter of “fundamental breach” by defendant.