- Shenzhen Intermediate People's Court; Guangdong High People's Court
LONG-TERM CONTRACTS - TECHNOLOGY DEVELOPMENT AGREEMENT - BETWEEN TWO CHINESE COMPANIES - GOVERNED BY CHINESE LAW
"COMMENTS" BY CHINESE JUDGES ON THEIR DECISIONS - NOT LEGALLY BINDING - DECISION AWARDING DAMAGES FOR FUNDAMENTAL BREACH - REFERENCE TO ARTICLE 7.3.1 UNIDROIT PRINCIPLES 2004 AND ARTICLE 25 CISG IN A "COMMENT" WRITTEN BY MEMBERS OF THE COURT OF FIRST INSTANCE
Plaintiff, a company incorporated in Shenzhen, concluded a technology development agreement with Defendant, a pharmaceutical company incorporated in Guangzhou. Under the agreement, Defendant undertook to develop a new drug, to put it to clinical testing, and to apply from the State Food and Drug Administration for approval to produce it, against payment by Plaintiff. Despite Plaintiff’s payment of the agreed sum for the first stage of development, Defendant considerably delayed the performance of its obligations to conduct a pilot-scale experiment on the drug, and to apply for the approval to produce the drug. Plaintiff then terminated the contract and brought an action against Defendant before the Shenzhen Intermediate People's Court, claiming reimbursement of the payment it had made as well as damages arising from Defendant's delay. The Court held that Defendant's conducting the pilot experiment was a substantial part of its obligations so that its delay constituted a fundamental breach of the contract. Accordingly, it decided that according to Chinese law Plaintiff was entitled to terminate the contract as well as to damages. In its decision the Court among others referred to Article 94(4) of the 1999 Contract Law of the P.R. China which provides that a party is entitled to terminate the contract if the delay of performance by the other party frustrates the purpose of the contract. On appeal, the decision was affirmed by the Guangdong High People's Court.
This case was later selected for a "Case Comment" written by the judges of the Court of First Instance. In their "Comment", the judges referred to Article 7.3.1 (right to terminate the contract) of the UNIDROIT Principles 2004 and Article 25 (fundamental breach) of the CISG to support their ruling that the Defendant's delay of performance constituted a fundamental breach of the agreement. Neither of these provisions were mentioned in the Court's decision and it is not clear whether they had actually been taken into account by the Court in making its decision, or had been referred to only in the "Comment" in order to strengthen its persuasive value (as well as that of the decision). Nevertheless, the reference to the UNIDROIT Principles in the "Comment" indicates that the Principles have attracted the judges' attention and are considered to have persuasive value. Finally, although "Case Comments" of this kind are circulated among the courts and often published to serve as guidelines for judges (particularly those of lower courts) when they are in charge of similar cases, it should be noted that they are not legally binding under current Chinese law.