January 10, 2014

On Cause-of-Action

In our recent weekly staff meeting, Ms. Zhang, our managing partner, stressed the importance of choosing a suitable “cause-of-action” when filing litigation. “Many cases were lost just because the cause-of-action was inaccurately being chosen,” she said.

There are 424 causes-of-action listed in the Notice of Supreme People’s Court on Cause of Action of Civil Lawsuits (revised version 2012). If a plaintiff fails to file a case with an accurate and suitable cause-of-action, they may lose their case right from the start. The details of a recent case, shown below, may provide you with a better perspective on the importance of choosing the correct cause-of-action.

Case Background

On June 28, 2009, the Plaintiff, Company A (a Chinese registered entity, hereinafter referred to as “Party A”) and the Defendant, Company B (a U.S. registered entity, hereinafter referred to as “B”) signed an agreement titled “’XXX brand’ Exclusive Agent and Designated Point-of-sale Maintenance Agreement (hereinafter referred to as the “Agreement”). The agreement stipulated that:

  1. Party B authorizes Party A to be Party B’s
    a) exclusive sales agency of products (attached products list thereto, hereinafter referred to as “Products”) and
    b) appointed after-sales maintenance place for the products in Shanghai, Jiangsu, Zhejiang, and Anhui.
  2. Party A may not undertake any production and agency activities related to the same products that came from other business entities before the termination of the agreement.
  3. Party A’s selling territory of the products is restricted to the above-mentioned areas, and sales of any products outside of those areas is not allowed; in particular cases, sales outside of those areas are allowed only with the express written permission of B.
  4. Party B has the responsibility to assure that no products will be sold within the above-mentioned areas via another agency of Party B and/or through any other channels.
  5. It will be considered as a breach of the agreement if Party A buys such products through other channels without having the express written permission of Party B.
  6. Party B provides the overall marketing strategy and unified market price for the products in the areas mentioned above; Party A and its distributors shall not change the product price arbitrarily.
  7. Once the actual base market price in the local market is set, Party A and its distributors shall not reach any deal on a lower price than the base price.
  8. Party A acknowledges that the total annul purchase amount will be worth 250,000 USD.
  9. Party B requires Party A to hold an amount of stock more than the minimum amount (specified by Party B). Party A shall purchase at least 90% of the total agreed amount before December 31st of every year.
  10. Any grave breach of the agreement, including sales outside of the specified area without permission, annual purchase amounts of less than 60% of the total amount, etc., will lead to the partial or entire loss of dealership rights.
  11. Method of performance. According to the agreement, Party A places an order, and Party B delivers the products on the basis of the order. The two parties then settle up the bill in accordance with cost price of the product. Party A will set the sales price according to guiding price given by Party B, according to any contracted discount rates in connection with different customers. Any profit encountered above the cost price belongs to Party A.

Party B provided Party A with letters-of-attorney in July of 2009, 2010, and 2012. The letters-of-attorney stated: Party B authorizes Party A to be Party B’s:

  • a) exclusive sales agency of products (include parts) and
  • b) appointed after-sales maintenance place for those products in Shanghai, Jiangsu, Zhejiang, and Anhui; Party A is authorized to sell these products to distributors in these areas.

After signing the contract, Party A and Party B performed their rights and duties.

On October 8th, 2012, Party B gave written notice to A in order to rescind the agreement, claiming that Party A bought products from other companies, which caused a failure to meet the agreed-upon sales goal. The notice also demanded that Party A not sell any further products as after receiving said notice.

Claims & Arguments

In November of 2011, Party A lodged a complaint with the People’s Court of Jurisdiction and asked for compensation as detailed below:

  1. Party B takes back the products that Party A has in stock and returns XXX CNY of payment of goods to Party A
  2. Party B pays Party A XXX CNY for the loss of tariff and XXX CNY for the loss of VAT due to the breach of the Agreement by Party B
  3. Party B pays Party A XXX CNY for the loss of freight fee and XXX CNY for the loss of translation fee
  4. Party B pays Party A XXX CNY for the loss of anticipated profit, and
  5. Party B pays for the court costs of the trial

Party A’s claimed facts and reasons were as follows: it is to Party A’s discovery that since May of 2012 Party B had been giving two other companies permission to sell Party B’s products in the areas specified in the Agreement, which directly lead to the sales decline of Party A. After Party B stopped the supply of products in July of 2012, Party A had to buy products from other sales agencies. On October 8th, 2012, Party B informed Party A that the Agreement was terminated, demanding that Party A not sell any further products, which caused an overstocking of products amounting to XXX USD, a XXX CNY loss for the tariff and VAT in order to import the products, and a XXX CNY loss of anticipated profit for Party A.

Party B argues that:

  1. Party B does not agree with the claims of Party A, because the two parties signed a contract-of-sale rather than a contract-of-purchasing-and-consignment; and
  2. Party B terminated the contract only because Party A had violated the contract, and the termination was based on the facts and in accordance with the Agreement.

Court Opinions

The judge of the first-instance court found the focus of the dispute was in the real legal nature of the Agreement: Was the Agreement a contract-of-purchasing-and-consignment or a contract-of-sale?

The first-instance court held that:

  1. The difference between a contract-of-purchasing-and-consignment and a contract-of-sale depends upon whether the consignee sells on behalf of the consigner or themselves, and whether the consignee earns agent fees or sales profits. In terms of what the agreement prescribes, Party A did not sell in the name of Party B. Meanwhile, Party B provided Party A products after receiving orders from Party A. Party A earned profit only after the bills were settled up. The facts mentioned above meet the main features of contract-of-sale.
  2. There is, of course, no denying that the sales contract existed under the restriction of terms listed in the Agreement. The Agreement restricted Party A from selling any products of competing companies. Furthermore, the Agreement did not allow Party A to sell the products below a set upon lowest price or to provide discount rates for different customers. Finally, the Agreement restricted sales areas and purchase channels. As for Party B, Party B had the responsibility to assure that no products would be sold within the above-mentioned areas via any other agency of Party B and/or via other channels.
  3. The purpose of those restriction terms mentioned above was to prevent Party A from engaging in malicious competition and to ensure Party A’s right of exclusive consignment.
  4. Party B believed that Party A breached the agreement, so Party B ceased to provide Party A with products according to the agreement. Therefore, termination of the agreement should be regarded as “unilateral”. If Party A did not agree, or believed that its sales achievement was affected because of Party B authorizing other companies to sell the products in the specified areas, A would need to claim that Party B engaged in unfair competition.

In summary, Party A obtained the ownership of its inventory by implementing the exclusive agency agreement, which is essentially a contract-of-sale. Thus, Party A had no right to ask Party B to recall the products and to return payment for goods. The court also rejected the requests of compensation for loss of tariff.

The court rejected Party A’s claims, but also recognized that it would be difficult and unfair for Party A to deal with the inventory after authorization was canceled. So Party B was asked to provide Party A with a transition period in which to reduce its inventory before the authorization was taken back. Party B was to cooperate with Party A in dealing with the inventory and to give assistance, including communicating with other exclusive sales agents in helping to reducing the inventory, if necessary.

During the hearing of this case, Party B made no objections to Party A for dealing with the inventory and promised not to hold Party A responsible over such matters.

Thus, according to article 134, section 4, PRC Principles of Civil Law, and article 130, 133, PRC Contract Law, the first-instance court dismissed all the claims of the plaintiff.

Neither litigant lodged an appeal after the judgment.

Eva’s Law and its associates provide legal consultancy and relevant assistance on potential litigation and arbitration in China. We offer preliminary Legal Opinion on potential civil/commercial litigation and arbitration free of charge. All information and documents sent to us will be kept confidential. If you are interested in learning about our services, please email us at We will get back to you as soon as possible.

January 10, 2014