Can I Withhold Payment for Late Delivery from My Chinese Supplier?

You can rescind the contract before delivery by the Chinese supplier.

One of our clients from Italy purchased a set of sportswear from a Chinese clothing supplier for a sports event.

Both parties agreed in the contract that the Italian buyer should make 15% down payment and the balance within 60 days from the date of the bill of lading, and the latest delivery date by the Chinese supplier should be 30 April.

However, the Chinese supplier was not ready to deliver goods to the Italian buyer’s freight forwarder at the port until the end of May under the FBO terms.

The Italian buyer did not want to make the final payment because the sports event was over, without the possibility of using the sportswear for this event.

So can the Italian buyer not make the final payment?

The contract between the parties did not provide for a late delivery solution. In that case, that the United Nations Convention on Contracts for the International Sale of Goods (CISG) and the Contract Part of the China Civil Code (the governing law according to Chinese private international law) should apply.

The Italian buyer could achieve its purpose in two ways:

1. Compensation for loss

According to Article 33 of the CISG, the supplier must deliver the goods on the agreed date. According to Article 74 of the CISG, the supplier shall compensate the Italian buyer’s losses in the event of a breach of contract. If the buyer wishes not to make the final payment, it shall prove that its losses are equivalent to this final payment, which could offset its losses.

China’s Civil Code also contains provisions similar to those of the CISG.

2. Rescission of the contract

In accordance with the Civil Code of China, if a supplier delays in delivery of goods, and fails to deliver the goods within a reasonable period after receiving notice from the buyer, or causes the buyer’s purpose of contract to be frustrated, the buyer may rescind the contract.

Upon rescission of the contract, the status quo ante is restored (or such status is restored by compensation for losses). For example, the buyer will not need to pay, and any payments made will be returned. The supplier will also get all the goods back.

We believe that it would be cumbersome for the Italian buyer to prove losses, so we suggested that the buyer notify the supplier in writing to rescind the contract for the failure to achieve the contract purpose, and request the return of the advance payment.

It is noteworthy, however, that the buyer should rescind the contract before the supplier delivers the goods. Otherwise, due to the high cost of returning the goods, Chinese judges prefer to maintain the contract rather than rescind it.

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