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COMPARISON OF CONTRACT LAW OF THE PEOPLE’S
REPUBLIC OF CHINA WITH THE UNITED STATES
William H. Glover, Jr.Copyright 2002
On Mar. 15, 1999, the Ninth National People's Congress of the People's Republic of
China adopted a revised Contract Law for the People's Republic of China. This contract law
became effective as of Oct. 1, 1999, and replaced the old Contract Law on Economic Contracts
Involving Foreign Interests and Law of the People's Republic of China on Technology Contracts.
This new Contract Law furthers the principle of respect for the will of the contracting parties as
well as many other new features. Introduction
China has made many positive changes in her contract law system in the past two
decades. While her cultural history dates back thousands of years, China's legal history is much
shorter than most of the West. In order to keep pace with international standards, China has
absorbed many legal doctrines from both civil and Anglo-American legal systems. Prior to 1999,
China had enacted several contract laws dealing with different trade domains. To a great extent,
these laws reflected the need for a centralized planned economy. At least three contract law
systems existed, each containing a number of different requirements. For the purpose of
creating a uniform market economy and entering the Word Trade Organization, there was a
strong need to change the contract law. Therefore, the highest legislative body in China, the
National People's Congress of the People's Republic of China ("NPC") enacted the Contract
Law of China ("CLC") on March 15, 1999, which became effective on October 1, 1999.
The CLC differs significantly from former contract laws of China. The Contract Law of the
People's Republic of China (Contract Law) has been called the most important piece of
legislation in China in 1999. Passed by the Chinese national legislative body (the National
People's Congress, “NPC”) on March 15, 1999, the Contract Law took effect on October 1,
1999. After some six years of drafting, the Contract Law became the first uniform legislation
governing contracts in China. Many of its provisions are similar to the common law system that
the USA has adopted. For example, the Contract Law adopts the concept of "anticipatory
repudiation" which practically the same as in American contract law. Article 94 of the Contract
Law provides that a contracting party may rescind the contract if the other party to the contract
expresses explicitly or indicates through its acts, before the performance period expires, that it
will not perform its major contractual obligations." Article 108 further provides that where one
party to a contract expresses explicitly or indicates through its conduct that it will not perform the
contract, the other party may hold it responsible for the breach of contract before the
performance period expires.
Another similar provision is the provision of offer and acceptance. Under Article 13 of the
Contract Law, parties shall enter into a contract in the form of an offer and acceptance. It is also
provided in Article 14 that an offer is a manifestation of intention to contract with others and its
contents must be definite and certain with an indication that the offeror will be bound upon
acceptance. Article 15 states that price quotation forms, auction notices, public notice for bids,
prospectuses, and commercial advertisements are invitations for offer. This is the same as USA
contract law. Acceptance is defined in Article 21 as the manifestation of the offeree's assent to an offer.
The Contract Law also adopts provisions from international treaties or conventions in an
effort to comply with China's treaty obligations and align with internationally accepted practices.
For instance, Articles 17 (Withdrawal of Offer), 18 (Revocation of Offer), and 31 (Acceptance
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with Additional or Modified Terms) of the Contract Law are consistent with Articles 15(b), 16(a),
and 19(a)(b) of 1980 UN Convention on Contracts for the International Sale of Goods (CISG).
The CISG is based, in large part on the Uniform Commercial Code of the USA.
For purposes of the Contract Law, a contract is defined as an agreement that
establishes, modifies, or terminates relations of civil rights and obligations between a natural
person, legal person, or other organization of equal status. The Contract Law expressly grants
contracting parties the right to enter into a contract voluntarily and prohibits any unlawful
interference. A person has the freedom to make a contract in accordance with law. The parties
also have the freedom to determine the contents of the contract. Article 12 of the Contract Law
provides that the parties shall agree upon the contents of a contract. Article 12 also provides a
list of eight items as the general contents of a contract. However, these items are not required
items for a contract to be valid. Therefore, the contents may vary from contract to contract.
Under Article 10 of the Contract Law, a contract may be made in writing, orally, or in other
forms. Unless there is a writing requirement stipulated by law or administrative regulations, the
parties may enter into a contract orally unless the parties agree to otherwise. According to
Article 36, a contract, which should be concluded in writing as required but is not made in
writing, shall exist if one party has performed its principal obligations and the other party has
received the performance. This same principle exists in the contract law of the USA.
The parties have the freedom to modify or terminate a contract. Article 77 of the Contract
Law provides that the parties may modify a contract by consent through negotiation. This same
principle is part of USA contract law. The parties may also terminate a contract the same way in
accordance with Article 93.
The parties have the freedom to choose the methods of settlement for disputes. This is
called alternative dispute resolution in the USA. There are four alternatives available to the
parties for settling contractual disputes under Article 128 of the Contract Law, namely,
conciliation, mediation, arbitration and litigation. These methods of settlement are also
recognized in the USA. The parties are encouraged, but not required, to seek conciliation or
mediation as a first resort to the settlement of disputes. Litigation is available only if there is no
arbitration agreement or the arbitration agreement is invalid. Once the parties agree to have
arbitration, the arbitral award will bind them and no litigation is allowed concerning the same
disputes. This is also true in the USA.
The parties' right to enter into a contract voluntarily under the Contract Law is limited.
This freedom is also limited somewhat in the USA. The freedom of contract is not absolute in
today's world and the parties' right to make a contract is subject to law and public policy. For
example, a contract by the parties for an illegal purpose will not be enforceable. As far as the
public policy is concerned, it generally has a twofold purpose. First, the public policy ground will
serve as a proper means to assure that bargaining between the parties has taken place in a
manner compatible with the public interest in order to prevent unfairness and protect the parties
from overreaching. This concept also exists in the USA. This would require, among others, that
the bargaining process not be abused by misleading or coercive conduct of any party.
In both the USA and China, a contract must comply with law and regulations both
substantively and procedurally. The substantive compliance requires that the contents of a
contract conform to laws and regulations that are mandatory, any violation of which would
render the contract invalid or unenforceable. In forming and performing a contract, the parties
are to abide by the laws and administrative regulations, and shall observe social ethics. As to
observance of social ethics, this term is not defined by the Contract Law. For certain kinds of
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contracts, government approval is required or other special requirements must be met before
the contracts take effect.
The contract entered into by the parties may be deemed void or voidable under certain
circumstances as provided by the Contract Law. Under Article 52 of the Contract Law, a
contract shall be null and void if :
it is concluded by fraud or coercion of one party to harm the State interest;
malicious collusion is employed to damage the State, collective or third party interests;
an illegitimate purpose is concealed under the guise of legitimate means;
public interests are to be damaged; or
the mandatory provisions of laws and administrative regulations are violated.
Article 53 of the Contract Law further provides that the disclaimer clauses in the contract
shall be null and void if they are aimed at voiding liability by causing personal injury to the other
party; or causing property damages to the other party as a result of deliberate intent or gross
fault. This is not unlike the law in the USA. Voidable contracts include those that are concluded
as a result of material misunderstanding or are manifestly unfair at the time of contract
formation. In these situations, a contracting party has the right to request a court or an
arbitration body to modify or revoke the contract. The Contract Law divides contract fraud or
coercion into two different categories: fraud or coercion causing harm to the State interest and
fraud or coercion affecting a contracting party. If part of a contract is null and void without
affecting the validity of the other parts, the rest of the contract shall still be valid. (Same principle in USA). The remedies provided in the Contract Law take three forms: specific performance,
remedial measures, or damages. These are not unlike the remedies in the USA
. Under Article
107 of the Contract Law, where a contracting party fails to perform the contract obligations or
the performance is not in conformity with the contract terms and conditions, the party shall bear
such liabilities for breach of contract as to continue to perform the contract, to take remedial
measures, or to compensate for losses. For purposes of the Contract Law, specific
performance applies to monetary obligations. Article 110 allows the aggrieved party to demand
the other party to continue performing if the latter fails to perform or has performed improperly.
However, under Article 110, specific performance may not be requested in any of the following situations:
if the contract cannot be legally or practically performed;
if the contract subject is not suitable to mandatory performance or the performance cost
is prohibitively high; or
if the aggrieved party (the creditor) does not make such request for performance within a
reasonable period of time.
Remedial measures may be use when quality of performance does not conform to the
standard as agreed upon. According to Article 111, the aggrieved party may seek remedial
measures from the other party when there is no agreement between the parties, on liability for
non-conforming quality or if such agreement is unclear. The remedial measures include repair,
replacement, reworking, returning the goods, or reducing the price or remuneration.
There are four different kinds of damages available under the Contract Law:
compensatory damages, liquidated damage, punitive damages, and earnest money. USA
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contract law recognizes each of these remedies in one form or another. Punitive damages only
apply in the special cases stipulated by laws and regulations.
According to Article 113, the breaching party shall be liable for damages caused to the
aggrieved party by the breaching party's failure to perform its contractual obligations or by its
non-conforming performance. The amount of damages shall be equal to the losses caused by
the breach of contract, including the interest that would be expected to be obtained if the
contract is to be performed. Article 113 sets forth a ceiling that limits the compensatory damage
to the amount not exceeding the probable losses, caused by the breach of contract, that had
been foreseen or should have been foreseen when the contract was made.
Liquidated damages are the damages agreed upon by the contracting parties, and apply
where the breach of the contract occurs. The actual amount paid off may be increased or
reduced by the competent authority upon the request of the interested party. Article 114 of the
Contract Law allows the parties to a contract to decide the liquidated damages through an
agreement in light of the breach. The parties may also agree upon the calculating method of the
damages resulting from the breach of contract. Under Article 114, if the agreed upon amount of
damages turns out to be lower than the losses actually caused, the aggrieved party may request
a court or arbitration body to increase it. On the other hand, the breaching party may ask a court
or arbitration body to appropriately reduce the amount of liquidated damages if the amount is
proved to be excessively higher than the actual losses. Article 114 also provides that if the
liquidated damages are agreed upon with respect to the delay in performance, the breaching
party is still obligated to continue performing its obligations after the liquidated damages are paid.
Punitive damages are provided in Article 113, and deal primarily with the fraudulent
activities committed in business operations. If the business operators are found to have acted
fraudulently in providing goods or services, the damages for losses so caused to consumers
shall be increased according to consumers' request. The increased amount of damages shall be
equal to the double amount of price of the goods purchased or the service received. Under USA
law, there is no limit unless provided by state statute.
Earnest money is provided as a security agreed in writing by the parties to guarantee the
creditor's rights. Under Article 115 of the Contract Law, the parties to a contract may agree that
one party pays earnest money as a guaranty to the other as stipulated by law. The earnest
money that is paid shall be refunded or offset against the contract price after the contract
obligations are performed. The payer of the earnest money shall have no right to reclaim the
earnest money if it fails to perform agreed obligations. However, if the party who receives the
earnest money fails to perform its obligations, it is required to double refund the earnest money.
Article 116 prohibits a party from claiming both liquidated damages and earnest money. Under
this provision, if the parties to a contract have agreed on both liquidated damages and earnest
money, the aggrieved party may only choose to take either liquidated damages or earnest
money if the other party is in breach of the contract.
Related to the remedies is the parties' duty of mitigation. It is required under Article 119
that the non- breaching party takes proper measures to prevent the aggravation of losses. We
have the same principle in the USA. If the non-breaching party fails to take proper measures so
that the losses are increased, it may not claim any compensation as to increased parts of
losses. It is also required that the breaching party be responsible for the reasonable expenses
incurred to the other party for making efforts to prevent the loss increase. Similarly, Article 118
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provides that a party who is unable to perform the contract on the ground of force majeure shall
give the other party a prompt notice in order to reduce the probable losses to the other party,
and provide evidence within a reasonable period of time. Please allow me now to review some
of the concepts I have just discussed and add a few more.
Formation of Contracts
Form of Contract
Parties may enter into either contract written or oral contracts. Where laws or
administrative regulations require that a contract be in written form, the contract must be in
written form. Also, where parties agree that their contract must be in written form, the contract
must be in written form. Written form of contracts include forms which can show visibly the
described contents, such as a formal written agreement, and letters, (including telegram, telex, fax, and e-mails.
Offer and Acceptance
China’s new Contract Law solidifies concepts of offer and acceptance. An offer is a
proposal to enter into a contract with other parties. The contents of an offer must be detailed
and definite and indicate that the offeror is willing to be bound in case of acceptance. The offer
becomes effective when it reaches the offeree. If the contract is concluded by means of telefax,
and the recipient designates the specific system to receive telefax, the time when the telefax
enters the system shall be deemed to be the time of arrival. If no specific system is selected, the
time when the telefax first enters any of recipient's systems shall be regarded as the time of
arrival. Acceptance is a statement made by the offeree indicating assent to the offer. Except
where acceptance is based on transaction practices (called course of dealing
in the USA), or
where the offer indicates that acceptance must be made by performing an act (a unilateral
contract in the USA), acceptance shall be made by means of notice to the other party. The
contract is formed when the acceptance becomes effective. An acceptance becomes effective
when the notice of the acceptance reaches the offeror. If acceptance is not necessary, it
becomes effective when an act of acceptance is performed in accordance with transaction
practices or as required in offer. Where parties enter into a contract in the form of a letter or
telefax, one party may request that the other party sign a letter of confirmation in order to
evidence acceptance. The contract is formed at the time when the letter of confirmation is signed. Standard terms are clauses which are prepared in advance for general and repeated use by
one party and which are not negotiated with other party when concluding contract. Where
standard terms are adopted in the contract the party which supplies the standard terms:
defines the right and obligation between the parties using the principle of fairness,
requests the other party to note an exclusion or restriction of his liabilities in reasonable ways,
and explains standard terms according to the requirements of other party.
This is similar to the USA contract doctrine of good faith and fair dealing which is implied in all
USA contracts. If there is a dispute over the meaning of standard terms, it shall be interpreted
according to its usual meaning. Where there are two or more interpretations, interpretation
unfavorable to party supplying standard terms shall be preferred. This is similar to the USA
concept of interpreting ambiguous terms against the party who drafted the contract.
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Faults in Concluding Contracts
A party shall be liable for damages if it is concluded under one of following
circumstances party caused losses to other party:
when disguising and pretending to conclude the contract, and negotiating in bad faith;
when deliberately concealing important facts relating to the conclusion of the contract or
deliberately providing false information;
when performing other acts which violates the principle of good faith.
Any business secret (trade secrets in the USA) of either party while concluding the contract
shall not be disclosed or unfairly used, regardless of whether the contract is finally formed or
not. The party who causes other party to suffer damages due to disclosure, or unfair use, of a
business secret shall be liable for the damages.
Effectiveness of Contracts
Void Contracts
Contracts shall be null and void under any one of following circumstances:
where contract is concluded through use of fraud or coercion by one party and which
damages the interest of the State;
where there is malicious collusion to damage the interests of the State or a third party;
where an illegitimate purpose is concealed under pretense of legitimate acts;
where the contract damages the public interest; and
where the contract violates compulsory provisions of laws or administrative regulations.
Revocable and Alterable Contracts
A party shall have the right to request a court, or arbitration institution, to modify or
revoke following types of contracts:
those concluded as result of serious misunderstanding; and
those that are obviously unfair at time of conclusion of contract.
If contract is formed by one party against another party's true intent through use of fraud,
coercion or exploitation of other party's unfavorable position, the injured party has the right to
request a court, or arbitration institution, to modify or revoke it. If a party requests modification of
a contract, a court or arbitration institution, may not revoke the contract. This clause shows the
principle of respect for will of the contracting parties. The right to revoke a contract will be lost
under any of following circumstances:
Where the party having the right to revoke the contract fails to exercise the right within
one year from day that he knew or should have known of circumstances allowing
revocation (usually three years in USA); or
Where the party having right to revoke the contract explicitly waives this right after he is
aware of the circumstances allowing revocation.
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Consequences of Void or Revoked Contracts.
lf a contract is null and void, revoked or terminated, it will not affect the validity of a
dispute settlement clause which exists independently in contract. Any property acquired as
result of such a contract shall be returned after the contract is determined to be null and void or
has been revoked (similar to what happens in USA after a contract is rescinded)
. Where
property cannot be returned, or its return is unnecessary, party not at fault shall be reimbursed
with its estimated price. The party at fault shall compensate the other party for losses incurred
as result of the termination of the contract or the determination that the contract is void. If both
parties are at fault, each party will be liable for their respective fault. If parties have maliciously
tried to damage the interest of the State or a third party, property thus acquired shall be turned
over to State or returned to the third party.
Performance of Contracts
Rights of Defense .
The Contract Law of the People’s Republic of China stipulates three kinds of rights of
defense. If both parties have obligations under the contract to each other, and there is no order
of priority in respect to performance of the obligations, the parties shall perform the obligations
simultaneously. One party has the right to reject the other party's request for performance prior
to the other party's performance. One party also has right to reject the other party's
corresponding request for performance if the other party's performance does not meet the
terms of the contract. (An. 66). This is first right of defense. Where both parties have obligations
towards one other and there is an order of priority with respect to performance, and the party
which shall render its performance first has not rendered that performance, then the party which
may render its performance subsequently has the right to reject the other party's request for its
performance. Where the party which renders its performance first violates terms of the contract
while fulfilling its obligations, the party which may render its performance subsequently has the
right to reject the other party's corresponding request for performance. This is second right of
defense. The party required to perform its obligations first may suspend its performance if it
possesses conclusive evidence establishing that other party is in any of following circumstances:
his business has seriously deteriorated;
he has engaged in the transfer of assets or withdrawal of funds for purpose of evading debts;
he has lost his business credibility; and
he is in any other circumstance which will or may cause him to lose his ability to perform his obligations.
However, where a party suspends performance without possessing conclusive evidence,
he shall be liable for breach of contract. This is third right of defense. If party suspends his
performance, he shall notify the other party in a timely fashion. If the other party gives
appropriate assurance with respect to his performance, the party shall resume performance.
After performance is suspended, if the other party fails to regain his ability to perform and fails to
give appropriate assurance within a reasonable period, the suspending party may terminate the
contract. The USA has very similar provisions in Article 2 of its Uniform Commercial Code.
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Subrogation and Limitation
Where the obligor has delayed in exercising his creditor's right against a third person,
thereby causing harm to obligee, obligee may petition People's Court for subrogation, except
where the creditor's right is exclusively personal to the obligor. Subrogation is limited to the
extent of the obligee's right to performance. Necessary expenses for subrogation by the obligee
shall be paid by the obligor.
Right to Cancel Manifestly Unreasonable Act
Where the obligor has waived its creditor's right against a third person or assigned
property without compensation, thus harming the obligee, the obligee may petition the People's
Court for cancellation of the obligor's act. Where the obligor has assigned property at a low
price which is significantly unreasonable, thus harming the obligee, and the assignee is aware
of the situation, the obligee may also petition People's Court for cancellation of the obligor's act.
The scope of this cancellation right is limited to the extent of the obligee's right to
performance. Necessary expenses for the obligee's exercise of its cancellation right shall be
paid by the obligor. This cancellation right must be exercised within one year, commencing on
the date when the obligee became, or should have become, aware of the cause for cancellation.
The cancellation right expires if not exercised within five years; this period commences on the
date of occurrence of the obligor's act.
Modification and Transfer of Contract
An obligee may assign his rights under a contract in whole or in part to a third person,
except where such an assignment is prohibited: in light of nature of contract;
by agreement between the parties; or
by law.
Where an obligee is to assign his rights, he shall notify the obligor. Such an assignment
is not binding upon obligor if notice is not given. (The same principle of law exists in the USA
law of contracts). Notice of the assignment of rights given by the obligee may not be revoked,
except where the consent of the assignee has been obtained. Where an obligor delegates his
obligations under a contract in whole or in part to a third person, such a delegation is subject to
consent of obligee.
Termination of Contracts
Conditions for Discharge of Rights and Obligations Rights and obligations under a contract are discharged if any one of following
circumstances occurs:
the obligations have been performed in accordance with contract;
the contract has been terminated;
the obligations have been set off against each other;
obligor has placed the subject matter of the contract in escrow in accordance with the law;
the obligee has released the obligor from performance;
both the obligee's rights and obligor's obligations have been assumed by one party; or;
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any other circumstance allowing for discharge pursuant to law or prescribed by parties has occurred.
The law of the USA regarding discharge of contract is almost identical.
Right to Terminate Contract
Parties may terminate a contract where:
force majeure has frustrated the purpose of the contract;
before time for performance, the other party has expressly stated or indicated by his
conduct that he will not perform his main obligations. (This is called anticipatory
repudiation in the USA);
the other party has delayed performance of his main obligations, and failed to perform
within a reasonable period after receiving demand for performance;
the other party has delayed his performance or otherwise breached the contract, thus
frustrating the purpose of the contract; or
any other circumstance provided by law has occurred. USA law regarding termination is
very similar.
Where the law provides, or parties prescribe, a period for exercising termination rights,
and these rights are not exercised within this period, then these rights will be extinguished.
Where the law does not provide, and the parties' contract does not prescribe, a period for
exercising a termination right, where either party has failed to exercise it within reasonable
period after the other party has demanded him to do so, such right is extinguished. Escrow
Where any of the following circumstances renders performance difficult, the obligor may
place the subject matter in escrow:
where the obligee has refused to take delivery of subject matter without good cause;
where the obligee cannot be located;
where the obligee is deceased or incapacitated, and an heir or guardian has not been determined; or
where any other circumstance provided by law has occurred.
Where the subject matter is not suitable for escrow, or escrow expenses will be
excessive, the obligor may auction or liquidate the subject matter of the contract and place the
proceeds in escrow. Once the subject matter is in escrow, the obligor is to notify the obligee or
his heir or guardian within a reasonable time, except where obligee cannot be located. The
obligee may take delivery of the subject matter in escrow at any time; however if the obligee is
required to provide performance for the obligor and that performance is due, then prior to
obligee's performance or giving of assurance, the escrow agent, at request of obligor, is to
reject the obligee's demand for delivery of the subject matter in escrow. The right of the obligee
to take delivery of the subject matter in escrow is extinguished if not exercised within five years.
This period commences on the date when the subject matter is placed in escrow.
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Liabilities for Breach of Contracts
Damages
Where a party has failed to perform or rendered nonconforming performance, thus
causing loss to the other party, the amount of damages payable shall be equivalent to the other
party's loss resulting from that breach (called compensatory damages in the USA) , including
any benefit that may have resulted from performance of contract (called consequential
damages in the USA), provided that amount shall not exceed likely damages that were
foreseen or should have been foreseen by the breaching party at time of conclusion of contract.
Parties may prescribe that if one party breaches contract, it will pay a certain sum of liquidated
damages to other party, or prescribe the method of calculating the amount of damages resulting
from the party's breach. (USA contract law has the same principles regarding liquidated
damages ). Where the amount of liquidated damages prescribed is less than the loss resulting
from the breach, the non- breaching party may petition the People's Court or an arbitration
institution to increase amount of damages. (Such a remedy is not available in the USA). Where
the amount of liquidated damages prescribed exceeds the loss resulting from breach, the
breaching party may petition People's Court or an arbitration institution to decrease the amount
of damages as appropriate. Where parties have prescribed liquidated damages for delayed
performance, the breaching party shall, in addition to payment of liquidated damages, perform his obligations.
Choice of Law in Foreign-related Contracts
Parties to foreign related contract my select the applicable law for resolution of
contractual disputes, except where otherwise provided by law. (Same principle in USA). Where
parties to foreign related contract fail to select the applicable law, the contract shall be governed
by the laws of the country with the closest connection to the various aspects of the contract. This is call the center of gravity
test in the USA.
Time Limit for Action (called statute of limitations in USA)
For a dispute arising from an international sale of goods contract or technology
import/export contract, the time limit for bringing suit or applying for arbitration is four years,
commencing from the date when the non- breaching party knew or should have known that his
rights had been harmed. For disputes arising from any other type of contract, the time limit for
bringing suit or applying for arbitration shall be governed by relevant law as to the type ofcontract.
Sales Contracts
A sales contract is contract whereby the seller transfers title of the subject matter to a
buyer, who pays the purchase price. In the USA, a sale of goods is a present transfer of title
to movable personal property for a price. Price may be money, other property, or services. The title to the subject matter passes at the time of its delivery, except where
otherwise provided by law or agreed to by the parties. Parties may prescribe in the sales
contract that title in the subject matter will remain with the seller until the buyer has paid the
purchase price or has performed other obligations. For the sale of any subject matter which
contains intellectual property such as computer software, etc., intellectual property in the subject
matter does not vest in the buyer, except as otherwise provided by law or agreed to by the
parties. The risk of damage to or loss of the subject matter is the seller’s prior to delivery, and
the buyer’s after delivery, except where otherwise provided by law or agreed to by the parties.
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Where the subject matter is not delivered at a prescribed time due to any fault attributable to the
buyer, the buyer shall bear risk of damage to or loss of the subject matter from the date of the
breach. Where the seller sells subject matter, which has been delivered to a carrier for
transportation and the carrier is in transit, unless otherwise agreed to by parties, risk of damage
or loss belongs to the buyer from the time of the formation of the contract. Where a place of
delivery was not prescribed or not clearly prescribed, and the subject matter needs to be
transported, then risk of damage to, or loss of, subject matter is the buyer’s from the time the
seller delivers the subject matter to the first carrier. Where the seller has placed the subject
matter at a place of delivery in accordance with the contract and buyer has failed to take
delivery in breach of the contract, risk of damage to, or loss of, the subject matter is the buyer’s
as from the date of breach. The failure by the seller to deliver documents and materials relating
to the subject matter does not affect passing of risk of loss. Where the purpose of the contract is
frustrated due to failure of subject matter to meet quality requirements, the buyer may reject the
subject matter or terminate the contract. In the event that the buyer rejects the subject matter or
terminates the contract, risk of loss belongs to the seller.
Where an inspection period has been prescribed, the buyer shall notify the seller of any
noncompliance, in quantity or quality, of subject matter within the inspection period. Where the
buyer has not notified the seller within the inspection period, quantity and quality of the subject
matter is deemed to comply with the contract. Where no inspection period is prescribed, the
buyer shall notify the seller of any defects in quantity or quality within a reasonable period,
commencing from the date when the buyer discovered or should have discovered or should
have discovered noncompliance in the quality or quantity of the subject matter. If the buyer fails
to notify the seller within a reasonable period, or fails to notify the seller within two years,
commencing from the date when he received the subject matter, quantity or quality of the
subject matter is deemed to comply with the contract. However, if there is a quality warranty
with respect to the subject matter, the warranty period applies and supersedes the two year period.
Where the seller knew or should have known of the compliance or noncompliance in the
quality or quantity of the subject matter, the buyer is not subject to time limits for notification.
