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Scenario 1

Company A signed a contract with Company B on the following terms:

  1. Company B agreed to deliver 100 tons of wool on or before the specified delivery date.
  2. Company A agreed to pay Company B a deposit of 15% of the purchase price upon signing the contract, and to pay the balance by bank telegraphic transfer upon delivery and presentation of the VAT invoice by Company B.

Ten days before the specified delivery date, Company A sent a letter to Company B saying that it could not pay the balance of the purchase price in full in accordance with the contract, and proposing to pay another 15% of the purchase price upon delivery (which with the deposit would make 30% of the total amount) and then the balance in two instalments within 30 days of delivery.

Company B did not agree with the proposed changes to the payment terms and delivered 30% of the wool before the specified delivery date. Company A refused to accept the partial delivery, but Company B insisted that it would deliver the quantity of wool for which Company A could afford to pay and that Company A would have to present a bank draft before Company B would arrange for the delivery of the rest of the wool. Because of such dispute, Company B took back the delivered wool from Company A.

Ten days after the specified delivery date, Company A sent another letter to Company B stating that they could pay 50% of the purchase price and that Company B should deliver 50% of the wool and present the VAT invoice. Company B replied in writing on the same day that it would agree to deliver 50% of the wool if Company A paid the purchase price on a pro-rata basis in accordance with the payment terms of the contract, and that if Company A failed to take delivery and pay the purchase price in accordance with the said payment terms, then Company B would cancel the contract. Company A presented a guarantee that was issued by the representative office of the intermediary company for the parties. The guarantee stated that the guarantor would give Company B bills for 39.5% of the purchase price that would be negotiable at a bank after 75 days upon presentation of the VAT invoice for 50% of the wool, and that if Company B could not obtain payment from the bank, then the guarantor would pay Company B the stated amount. Company A also stated that if Company B did not present the VAT invoice, then a draft for the amount of 1% of the purchase price would be retained by the guarantor. Company B refused to deliver the wool because Company A did not accept the payment terms of the contract.

Can Company A sue Company B for breach of contract and request Company B to refund the deposit and pay compensation equivalent to the deposit that was paid by Company A in accordance with the PRC Contract Law?

Answer

The contract is valid and legally binding. Because no subsequent agreement to vary the payment terms was agreed, both parties are obliged to fulfil their obligations in accordance with the original terms of the contract. The first letter of Company A constitutes an anticipatory breach (Company A gave notification before the specified payment date that it would not pay), and thus Company B has the right to suspend delivery of the wool.

The last two letters that were exchanged by the parties constitute a variation of the contract regarding the amount of wool to be delivered. In that case, Company B was in breach of the contract (with varied terms) by refusing to deliver the wool after receiving the guarantee that demonstrated the ability of Company A to pay. As both parties are in breach of the contract, Company A is entitled to a refund of the deposit from Company B but not to damages (compensation) for breach of contract.

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