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Second, under Article 1(a) of the United Nations Convention on Contracts for the International Sale of Goods, the Convention applies contracts of sale of goods between parties whose places of business are in different States (a) when the States are Contracting States. In this case, the counties of both parties are the signatory counties of the Convention, and there was no choice of law made by the parties in their contract. Therefore, in accordance with the Supreme People’s Court’s Notice on April 17, 2000, the court shall apply the provisions of the Convention to the case.
Third, under the provisions of the Convention, in case of a fundamental breach of contract, the damages for which the party in breach is liable shall be those suffered by the aggrieved party as a result of the breach including profits. But the damages shall not exceed the possible amount the party in breach could or ought to foresee based on his knowledge and the situation at the time of contract. It was on this ground that the court granted some of the plaintiff’s claims, and denied some.39
This case was selected by the Shanghai High People’s Court to publish in part because its exemplary effect of application of international treaty. The case becomes a prototype for a number of reasons. First, this is the case where the people’s court directly applied the international treaty to the foreign contractual dispute. Second, in this case the people’s court made the parties subject to the provisions of the treaty without referring to any domestic legislation. Third, the application of the treaty was initiated by the people’s court absent parties’ choice of law.
2. Choice of Forum in International Contracts
Choice of forum occurs when the parties in their contract choose in advance a court before which the disputes arising out of or related to the contract will be brought. Doctrinally, the jurisdiction that a court obtains from the choice of forum clause is defined as consensual jurisdiction, and the jurisdiction by consent is recognized as a jurisdictional basis in many countries. In U.S., the choice of forum by the parties was generally not enforced until 1972 when the U.S. Supreme Court in the Bremen case rejected the traditional view that
39 See id., at p. 170.
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the forum choice clause tends to “oust a court of jurisdiction”.40 By vacating the lower courts’ judgment, the Court held that the forum clause would be enforced unless there was a clear showing that “the enforcement would be unreasonable and unjust”.41 The Conflict of Laws Restatement (Second) also permits that the parties’ agreement as to the place of the action will be given effect unless it is unfair or unreasonable.42
The rationale for allowing the parties to a contract to choose a court to adjudicate the disputes rests with the goal to achieve certainty of dispute settlement and convenience to the parties. The assumption is that the choice of forum clause implicates an attempt of the parties to ensure that the action will be brought in a forum that is convenient to them, and a commitment of the parties to binding themselves as to the place of litigation, whereby the certainty for the dispute settlement will be established. An argument, however, is that the choice of forum clause is not to give the parties the power to alter the rule of jurisdiction, but rather it only provides a ground on which a court may restrain from exercising the jurisdiction.43 Nevertheless, whatever arguments there might be, the choice of forum is in fact an extension of the freedom of contract to the court jurisdiction.44
Like in many other countries, the choice of forum is allowed in China, but on a limited basis. The jurisdiction of Chinese people’s courts in civil cases is prescribed in both the Chinese Constitution (1982, as amended 2004) and the Civil Procedural Law of China (CPL). With respect to foreign civil litigation, the jurisdiction of the people’s courts is governed by both the general and special provisions of the CPL. In addition, the Supreme People’s Court also plays important role in determining the lower courts’ jurisdiction pertaining to particular type of case. As far as the choice of forum is concerned, Articles 244
40Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 92 S. Ct. 1907.
41See id.
42See Restatement (Second) of Conflict of Laws, Section 80 (1971, as amended 1988).
43See Restatement (Second), comment (a).
44Choice of forum by parties is being recognized by many countries and a great deal of international efforts have been made as well. The most recent development in this regard is the 20th Session of the Hague Conference on Private International Law that was held at the Hague in June 2005, at which about 44 countries, including US and China, signed the Convention on Choice of Court Agreements. Under the Convention, subject to certain exceptions, a choice of court agreement which designates the courts of one Contracting State or one or more specific courts in one Contracting State shall be deemed exclusive unless the parties have expressly provided otherwise. Such exclusive choice of forum agreements is limited to civil or commercial matters.
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and 245 of the CPL are the primary legal sources. Of course, the Supreme People’s Court’s explanations and opinions also play a vital role.
According to Article 244 of the CPL, the parties in the disputes concerning foreign contracts or foreign property rights may choose by a written agreement the jurisdiction of the court that has actual connection with the disputes.45 A clear indication of Article 244 of the CPL is that the choice of forum is permissible, but subject to three conditions: (1) the agreement of choice of court must be made in writing, (2) the court so chosen must have “actual connections” with the disputes; and (3) the disputes must involve foreign contracts or foreign property rights. What seems to have a real relevance to our discussion on international contracts here is the requirement of “actual connections”.
Neither the CPL nor the Supreme People’s Court has clarified what the “actual connections” are. But it is generally held that the “connection” refers to certain point” or “locale”. Many believe that pursuant to Article 25 of the CPL, the “point” or “locale” having actual connection with contractual disputes includes “place of a party’s domicile or residence”, “place of contract”, “place of performance”, “place of the object of the contract”, or “place of a party’s principal business office or business operation”.46
By agreement, the parties to a contract may also choose a Chinese people’s court to adjudicate their disputes arising out of or related to the contract. However, Article 244 requires that if a Chinese people’s court is chosen, the parties’ choice shall not violate the provisions of the CPL concerning tier and exclusive jurisdiction.47 The “tier jurisdiction” refers to the jurisdiction of the people’s courts at different levels and it tells at which level of the people’s court a particular case shall be filed with in the first instance of trial. There are four tiers in the system of Chinese people’s courts: the Supreme People’s Court, the provincial high people’s court, intermediate people’s court (prefecture city level), and district people’s court (county level).48 Note that the judicial
45See Civil Procedural Law of the People’s Republic of China (herein after referred as the CPL), art. 224. An English translation is available at http://www.gip.net/chinalaw/lawtranl.htm.
46Under Article 25, the parties to a contract may through an agreement in writing choose the jurisdiction of the court of the place of defendant domicile, contract performance, contract conclusion, plaintiff domicile, or the object of the contract. See id. art. 25. It is true that Article 25 governs domestic litigation, but this provision is said to apply analogically to the determination of the actual connections in foreign contract cases.
47See id.
48At present, the total number of people’s courts in China is 3,568, including the Supreme People’s Court, 32 provincial high people’s courts, 403 intermediate people’s courts and 3132 district people’s courts. Among these courts, 10 are maritime courts, 60 railway courts, and 88 military courts.
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proceedings in China are conducted under a system called “two instance trials” under which in any given case there are one trial and one appeal only.49 The exclusive jurisdiction of Chinese people’s courts consists of two parts. The first part concerns the specific locales that the disputes will involve, and the actions thereof shall be under the exclusive jurisdiction of particular Chinese people’s court. In accordance with Article 34 of the CPL, (a) if a lawsuit brought on the dispute over real estate, the people’s court of the place where the real estate is located shall have the jurisdiction; (b) if a lawsuit involving the dispute over harbor operations, the jurisdiction shall rest with the people’s court of the place where the harbor is situated; and (c) if a lawsuit arising out of the dispute over succession, it shall be within the jurisdiction of the people’s court of the place where the decedent was domiciled upon his death, or where the major estate is located.50 In those cases, the jurisdiction of the court so designated shall not be altered by the choice of forum
clause by the parties to a contract.
The second part of the exclusive jurisdiction of Chinese people’s courts is the exclusion of the jurisdiction of any foreign courts. The CPL expressly denies foreign courts’ exercise of judicial power over the civil actions involving the disputes on the contracts of foreign investment enterprises (FIEs). Article 246 of the CPL provides that the people’s courts of China shall have the jurisdiction over the civil actions brought on disputes concerning the performance within China for contracts of Chinese – foreign equity joint ventures, Chinese – foreign contractual joint ventures, or Chinese – foreign cooperative exploration and development of the natural resources.51 Theoretically, Article 246 itself does not have the effect of extraterritorially prohibiting a foreign court from taking the case that concerns an FIE contract either initiated by foreign plaintiff against Chinese defendant or referred by the consent of the parties. But the practical problem is that the judgment so obtained will not be enforced in China because under Chinese law, a foreign court lacks the subject matter jurisdiction over the cases as such.
49In most cases, the first trial begins with the county level, and the appeal will be made to the intermediate people’s court. However, there are certain cases where the intermediate people’s court or provincial high people’s court will take the first trial. Thus, if a case starts at a court of intermediate level, the appeal will be heard by a provincial high people’s court, and if a higher court takes the case for the trail of first instance, the Supreme People’s Court will have to take the case if an appeal follows. For general information about Chinese courts jurisdiction, see Mo Zhang, International Civil Litigation in China: A Practical Analysis of the Chinese Judicial System, 25 Boston College Int’l & Comp. L. R., 59 (Winter 2002).
50See id. art. 34.
51See id. art. 246.