Court Orders Contract Rescission and Refund of RMB 93,600 for Defective Conveyor Belt System
Court Orders Contract Rescission and Refund of RMB 93,600 for Defective Conveyor Belt System
Case Overview
A Chinese court ruled in favor of a buyer seeking contract rescission and refund after a customized conveyor belt system failed to meet basic operational requirements. The court found that the equipment could not achieve its intended purpose, constituting a fundamental breach of contract. The seller was ordered to return the purchase price of RMB 93,600 and pay interest losses of RMB 758.16.
Case Background and Facts
In May 2010, two companies entered into a sales contract for a coating line conveyor belt system priced at RMB 104,000. The buyer, a manufacturer of automotive parts, intended to use the conveyor as an integral component of a larger production line for Dacromet coating products. The contract specified technical conditions and required the seller to guarantee the equipment against defects in design, materials, and workmanship.
The buyer made two payments totaling RMB 93,600, representing 90 percent of the total price. The seller delivered and installed the equipment in September 2010. During preliminary acceptance testing, the buyer identified ten significant quality issues, including belt misalignment during climbing transport, missing side guards causing product falls, mismatched drive components leading to intermittent stoppages, exposed chain drives posing safety hazards, and incomplete electrical installations.
The buyer sent a formal notice demanding corrective action within 15 days. The seller responded but attributed some issues to the buyer’s responsibilities. After further correspondence, including a lawyer’s letter demanding contract rescission, the parties signed a rectification memorandum on October 15, 2010. The seller agreed to complete repairs within one week. However, the seller’s representatives left the buyer’s facility on October 17, 2010, without completing the agreed corrections or obtaining acceptance from the designated inspector.
Court Proceedings and Evidence
The buyer initiated legal proceedings on November 30, 2010. The court classified the dispute as a contract for work rather than a simple sales contract, given the customized nature of the equipment. Both parties appeared at a public hearing on January 7, 2011.
The buyer submitted seven groups of evidence. The court admitted five groups showing the contract terms, payment records, correspondence regarding defects, the lawyer’s demand letter, and the rectification memorandum with attached inspection report. The court rejected two groups of evidence concerning the buyer’s other production equipment purchases, finding them irrelevant to the specific dispute.
The seller did not submit any evidence but argued that it had completed corrective work, that the buyer’s designated inspector had accepted the results, and that the buyer continued using the equipment. The seller requested dismissal of the claim.
Court Findings and Judgment
The court determined that the contract was lawfully formed and binding. The evidence established that the conveyor belt system had fundamental defects preventing it from fulfilling its basic function of transporting products. The rectification memorandum confirmed both parties’ agreement on the existence of quality problems. The seller failed to complete the promised repairs, and the buyer’s inspector never signed off on any corrected equipment.
The court held that these defects prevented the equipment from achieving the contract’s purpose. Under Article 94 of the Contract Law, a party may rescind a contract when the other party’s breach makes contract purpose unattainable. The court ordered contract rescission, requiring the seller to return the full RMB 93,600 payment.
Regarding damages, the buyer claimed interest losses of RMB 17,074.80 based on its total investment of RMB 2,108,000 in the full production line. The court rejected this claim, finding no factual or legal basis for linking the conveyor’s defects to losses from other independently purchased equipment. Instead, the court awarded interest on the RMB 93,600 payment at the benchmark bank rate of 4.86 percent for two months, totaling RMB 758.16.
The court dismissed the seller’s defense, noting the seller provided no evidence to support its claims of successful rectification or ongoing equipment use.
Key Legal Principles
The court applied the principle that a contract may be rescinded when defects are so fundamental that the subject matter cannot achieve its intended purpose. The basic functionality of goods is central to determining whether contract purpose has been frustrated. A seller’s failure to complete promised corrective actions after acknowledging defects constitutes a continuing breach. Damages for breach are limited to losses directly caused by the defective goods, not consequential losses from related but separately purchased equipment.
Practical Insights
This case illustrates the importance of documenting quality issues during acceptance testing and maintaining clear written communications regarding defects and corrective actions. The buyer’s systematic approach, including formal notices, a lawyer’s demand letter, and a signed rectification memorandum, provided strong evidence supporting its claim. The outcome also shows that courts will not automatically award damages for losses from unrelated equipment purchases, even when those purchases were part of the same overall project. Parties should ensure their contracts clearly define acceptance criteria and remedies for defective performance.
Legal References
Contract Law of the Peoples Republic of China, Article 91 (Termination of contractual rights and obligations), Article 94 (Grounds for contract rescission, including where breach frustrates contract purpose), Article 97 (Effects of contract rescission, including restitution and damages).
Disclaimer
This article is for informational purposes only and does not constitute legal advice. Consult a qualified attorney for specific legal matters.