Litigation risk in small-scale international trades

By Blake Yang, MHP Law Firm
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Small-scale international trades of goods are usually between small and medium enterprises from different countries. Due to the special features of such trades, the parties will be confronted with some unique risks in litigation.

杨奕 BLAKE YANG 君悦律师事务所资深律师 Senior Associate MHP Law Firm
BLAKE YANG
Senior Associate
MHP Law Firm

Jurisdiction and enforcement: In small-scale trades, the agreement template provided by the seller usually specifies that the litigation shall be brought to the court in the country where the seller is located, but this practice does not always benefit the seller.

For example, in the most common dispute over payment for goods, if the seller brings a lawsuit as the plaintiff, but there is no effective bilateral judicial assistance treaty or international convention between seller’s country and China, the judgment made by the court will not be enforced in China.

If both parties do not know whether there are any treaties between the countries, they may choose to settle the dispute through arbitration. They usually apply for cross-border enforcement of the arbitral awards in accordance with the New York Convention, which most major countries in the world have joined.

Counterparty: In small-scale trades without written contracts, the identification of the counterparty is evidenced by the contents of the trading documents. Therefore, whether the name of the counterparty is consistent among all trading documents may be the key point of judicial review.

For example, if the employee of the counterparty uses the signature block of an affiliate of the counterparty, or the company name in the signature block is apparently different from the company name on the trading documents, it may be impossible to prove the relevance between the email and the trade in question.

Another example is if the buyer gives an oral instruction to the seller that it designates a third party to receive the goods on its behalf, and the third party is recorded as the receiving party on the transport documents, the seller may not be able to prove that the goods have been delivered to the buyer as there is no written evidence of the buyer’s instruction.

The parties should cultivate good trading habits and keep written evidence of any conduct deviating from usual practice of the parties. It is also advisable to keep or retain the business cards of key personnel, and news and information on websites about the counterparty.

Standards of quality: In small-scale trades, usually quality deficiencies can only be found after the buyers receive the goods or after receiving feedback from consumers after sales. Before that, the goods have experienced transportation, storage, processing, maintenance and so on. Therefore, it is difficult for buyers to prove where the problem occurred. If there is also no common quality standard, the buyers often ask the sellers to produce the goods in accordance with the samples. However, when any dispute occurs, the buyers cannot prove the quality standards agreed by the parties because the samples are in the possession of the sellers.

Sellers also are usually not willing to refund or accept the returned goods in quality disputes, but they sometimes propose to compensate by giving additional parts of goods. Buyers should be cautious because there may be the same common quality deficiency in the additional goods, as they are produced by the fixed suppliers.

The additional goods are also often shipped with the next batch of goods, costing time. If the buyers are still unsatisfied with the following trade, and rake up the past that the value of the additional goods are lower than the actual losses, the sellers may claim that the buyer’s acceptance of the additional goods demonstrates that the parties have reached compromise in respect of the dispute over quality, which is a strong defence.

If there is no common quality standard, the parties should at least confirm in writing the key indicators for judging the quality. For trading where the quality of the samples applies, the buyer shall also keep the samples preserved upon both parties’ confirmation to reduce the difficulty in producing evidence. The buyer shall also immediately check the quality upon receiving the goods, and report any defective products to the seller in a timely manner.

Payment and ownership: For enterprises that conduct reconciliation on a yearly basis, once any dispute occurs, the sellers usually need to trace the last reconciliation when they tease out the amount requested in the litigation, which means verifying dozens, even hundreds, of trades settled in a rolling manner.

Such practice brings a huge workload and burden of proof. Therefore, when the trading relationship between the parties is stable, the seller should actively conduct regular reconciliation. It is important to note that there are still discrepancies to the determination of the validity of the statement among courts in different regions of China. Therefore, it is advisable to keep the original documents after the reconciliation.

Additionally, the clauses specifying that ownership of the goods shall transfer to the buyer upon making certain payments are very helpful for protecting overseas buyers. After the buyer pays for goods, if the seller refuses to ship them, the buyer usually may only claim for breach or unjust enrichment, regardless of the contract.

If the contract specifies any circumstance, such as the jurisdiction of overseas courts, this may make it impossible to be enforced, and the buyer will be confronted with great difficulties. If there are clauses regarding the transfer of ownership in the contract between the parties, the buyer may still try to lodge litigation on real rights based on the ownership to avoid technical problems regarding jurisdiction.

Litigation costs: Compared with domestic trade, the foreign party of small-scale trade faces a large amount of additional legal costs when it lodges litigation in China. For example, the formalities for appointing lawyers, and the evidence of communication, such as key emails, are required to be notarized and authenticated.

The trading documents, emails and other evidence in foreign languages are required to be translated. In quality disputes, foreign buyers may also need to apply for appraisal of quality and losses. However, the appraisal will suffer additional costs and difficulties because the goods in question have been shipped abroad. If the parties agree that any foreign laws shall apply, costs of proof of foreign laws will be incurred.

Given that the amount of such dispute claims is small, disputing parties often give up protecting their rights in the face of high costs and long processing time. It is important to keep good trading habits and engage lawyers at an early stage to avoid material losses down the road.

Blake Yang is a senior associate at MHP Law Firm

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