Sellers beware of your contractual obligations

Sellers beware of your contractual obligations, 国际贸易中卖方未按约投保的法律责任

The claimant (a Chinese company) and the respondent (an English company) entered into a purchase order on 20 March 2018, agreeing that the claimant would purchase 42 tons of methyl methacrylate from the respondent for US$88,200 (21 tons of 86-88% purity and 21 tons of 96-98.5% purity). The parties also agreed in the purchase order that:

(1) the price was CIF Shanghai (the sum of cost, insurance and freight destined for a port in Shanghai);

(2) the cargo was shipped from India;

(3) the buyer paid 30% of the purchase price in advance and the remaining amount was paid upon seeing the bill of lading;

(4) the seller was insured at 110% of the invoice price; and

(5) the governing law was Chinese law.

After the purchase order was signed, the claimant made an advance payment of 30% of the purchase price (USD 26,460) on 27 March 2018. The respondent then ordered the shipper, an Indian company, to ship the goods by two shipments, and the claimant paid US$30,097 on 12 April 2018 and US$28,880 on 17 April 2018, after receiving the bill of lading.

However, the claimant did not receive the cargo with 96-98.5% purity. It was told by the shipper that the cargo had leaked during shipment to Shanghai, and was unloaded in Hong Kong. The claimant then requested compensation from the insurance company in accordance with the terms of the purchase order, but the insurance company refused to make any compensation as it found that the risk of leakage of the goods was not covered by the insurance policy.

Since the respondent declined to replace the goods, and the parties reached no subsequent agreement, the claimant filed a request for arbitration to Shanghai International Arbitration Centre (SHIAC), requesting the respondent to pay 110% of the value of the goods for its damages.

Reasoning of the tribunal

The Tribunal held that the issues – as to whether the cargo damage belonged to the scope of coverage, the cause of the cargo damage, and the liability of the insurance – should be decided by the insurance company, rather than the tribunal, as these issues were not within the scope of the arbitration clause under the purchase order. On the contrary, the tribunal had the jurisdiction, according to the arbitration clause, to decide whether the insurance policy made by the respondent is in violation of the purchase order or not.

In accordance with article 8(3) of the purchase order, the respondent shall insure with the insurance company, in the name of the claimant as the beneficiary, and the insurance coverage shall include: Institute cargo clauses (A); institute war clause (cargo); institute strike clause (cargo); and transhipment risks that may occur.

Under the institute cargo clauses (A), loss damage caused by general external causes, including moisture and heat, leakage, etc., are covered risks, while exclusions include: General exclusions (ordinary leakage, ordinary loss in weight or quality, or ordinary loss of the subject matter of the insurance); unseaworthiness and unfitness exclusion; war exclusion; and strike exclusion.

However, the coverage on the respondent’s insurance policy claimed other exclusions, such as cargo damage and leakage caused by temperature changes, which are outside the scope of exclusions under the institute cargo clauses (A). After concerning the CIF terms of the purchase order, the tribunal held that the respondent’s obligation as seller, under the CIF terms, is not only to deliver cargo but also to deliver the trade documents, including insurance policy, in accordance with the contract. Therefore, the respondent’s failure to take out the insurance policy appropriately constituted a breach of contract.

The tribunal further held that since the purchase order is silent on the liability of breach of contract, the respondent should be liable for breach of contract in accordance with the governing law of the purchase order – that is, Chinese law. According to article 113 of the Contract Law, if one of the parties fails to perform its contractual obligations, or fails to perform its contractual obligations in accordance with the agreement, and causes damage to the other party, the amount of compensation for the damage shall be equal to the damage caused by the breach of contract, including the benefits that can be obtained after the occurrence of the contract, but shall not exceed the amount that the party who breached the contract foresaw, or should have foreseen, at the time of the conclusion of the contract.

From the point view of the tribunal, since the disputed purchase order was a contract for the sale of goods between the parties, which means the purpose of the claimant under the contract was to obtain goods, rather than to obtain insurance money, it was reasonable for the tribunal to conclude that in the absence of further evidence to prove other losses, the claimant’s loss damages in this case was limited to the loss of the value of the goods agreed in the purchase order, rather than the amount of insurance money, when these losses could not be compensated by the insurance company.

Some takeaways

Insurance clauses, as well as trade terms, are common and basic clauses in international trade contracts. As industrial practice rules and trading customs, they are often incorporated into contracts as terms and clauses, defining rights and obligations of the parties.

To this extent, commercial entities engaged in international trade should clearly bear in their minds the content of the provisions of such clauses, and strictly fulfil their respective obligations. In this case, the main issue was what kind of responsibility should the seller bear when the contract of sale and purchase of goods agreed on the type of insurance and specific terms that the seller should purchase, while it failed to purchase insurance in accordance with the contract, resulting in the buyer as the beneficiary, after the loss of the goods, not being able to obtain insurance claims.

In this regard, the tribunal gave a clear judgment, that is, under the specific trade terms, it is the seller’s contractual obligation to purchase insurance in accordance with the contract, and if the breach of this obligation causes the insurance company to refuse to pay, the seller shall be liable for damages for breach of contract up to the value of the goods under the contract.

We can also learn from this case that the effective prevention and resolution of disputes are of great importance due to the co-existence of interests and risks in business activities. It is important for Chinese enterprises and practitioners to be aware of risk prevention, and actively take legal measures to protect their rights and interests in order to reduce losses.

It is the duty of adjudicators to understand and view international business culture, traditions and customs objectively and fairly, accurately identifying and carefully analysing the purpose and business logic behind the transaction arrangements, so that they may accurately apply rules, customs and laws to resolve disputes fairly and reasonably, expressly and efficiently.

Shen Bin is the head of No.2 Case Management Department and Zou Rui is a senior case manager at Shanghai International Arbitration Centre