Since 2018, trade frictions between China and the United States have been continuously escalating. In early April this year, the two countries even decided to impose an additional 34% tariff on each other's goods. A large number of sales contracts signed under normal tariff conditions are facing the dilemma of non - performance due to the substantial change in tariffs, posing significant legal challenges to both buyers and sellers. Based on relevant regulations such as the United Nations Convention on Contracts for the International Sale of Goods (CISG), the Uniform Commercial Code (UCC) of the United States, and the Civil Code of the People's Republic of China, this lawyer will discuss the liability for breach of contract and defense strategies of both parties to a sales contract against the background of the China-US tariff war. Generally speaking, if the parties to a sales contract do not specifically agree on the applicable law, the sales contract will automatically be governed by the CISG.

 I. Analysis of the Liability for Breach of Contract of the Buyer and the Seller

 (1) Liability for Breach of Contract of the Seller and Its Scope

According to Article 30 of the CISG, Section 2 - 601 of the UCC, and Article 509 of the Civil Code of China, the seller is obligated to deliver the goods as agreed in the contract. If the tariff war leads to restrictions on exports, for example, the United States imposes high tariffs on Chinese goods or China implements export controls, and the seller fails to deliver the goods on time, it may constitute a breach of contract. 

Without a valid excuse, Article 74 of the CISG, Section 2 - 713 of the UCC, and Article 584 of the Civil Code of China all stipulate that the seller shall compensate the buyer for the losses, including direct losses (such as the additional expenses paid by the buyer for substitute purchases) and foreseeable indirect losses (such as loss of profits). 

 (2) Liability for Breach of Contract of the Buyer and Its Scope

Article 53 of the CISG, Section 2 - 511 of the UCC, and Article 617 of the Civil Code of China stipulate that the buyer has the obligation to pay the purchase price and take delivery of the goods. If the import cost increases significantly due to the increase in tariffs, the buyer may refuse to take delivery of the goods or make the payment. For example, a US buyer unilaterally refuses to accept the goods because the 34% tariff makes the import cost exceed the expected amount.

If the buyer breaches the contract, Article 61 of the CISG stipulates that the seller may demand the payment of the contract price, compensation for storage fees, the price difference in resale, etc. In addition, Article 78 of the CISG stipulates that if the buyer refuses to pay for the delivered goods, the seller may also claim for the loss of interest.

II. Defenses of the Buyer and the Seller

The applicable law or the governing law of the contract directly determines the defense of liability for breach of contract. If the CISG is applicable, Article 79 of the CISG provides for exemption from liability due to force majeure; if the Civil Code of China is applicable, Article 533 of the Civil Code of China stipulates that in case of change of circumstances, a party may request to modify or terminate the contract, and Article 590 of the Civil Code of China provides for exemption from liability due to force majeure; if the UCC is applicable, Section 2 - 615 of the UCC provides for exemption from liability on the ground of "commercial impracticability".

 (1) Defenses of the Seller

1. Force Majeure

Article 79 of the CISG stipulates that a party may be exempted from liability if an event beyond its control prevents it from performing the contract. Article 590 of the Civil Code of China also has a similar provision.

To claim force majeure, the seller needs to prove that: (1) the tariff measures were unforeseeable (such as the sudden imposition of a 34% high - tariff); (2) they were unavoidable and insurmountable; (3) the event directly led to the inability to deliver the goods. However, in practice, claiming force majeure still has certain uncertainties. Although the US tariff hikes are sudden, they are not entirely unforeseeable in the context of the development trend of international trade frictions.

2. Change of Circumstances

Article 533 of the Civil Code of China stipulates that after the formation of a contract, if the fundamental conditions of the contract have undergone a major change that is unforeseeable by the parties at the time of contract formation and does not belong to commercial risks, and continued performance of the contract is obviously unfair to one of the parties, the party may request modification or termination of the contract. It should be noted that the court's recognition of change of circumstances is relatively strict, and foreseeability needs to be excluded, which also makes the defense of change of circumstances face great uncertainties.

3. Exemption for "Commercial Impracticability"

If the governing law of the sales contract is the UCC, Section 2 - 615 of the UCC provides that in a contract for the sale of goods, if the occurrence of an unexpected event, the non - occurrence of which was a basic assumption on which the contract was made, makes the seller's performance commercially impracticable, the seller may be excused from non - performance of the contract. 

(2) Defenses of the Buyer

Similar to the seller, if the governing law of the contract is the CISG or Chinese law, the buyer can claim force majeure. The buyer needs to prove that the tariffs directly led to its inability to take delivery of the goods or make the payment. For example, a US buyer whose import cost exceeds its affordability due to the 34% tariff can claim force majeure. However, if the buyer failed to assess the tariff risk at the time of signing the contract, it may be possibly considered to have failed to exercise reasonable care.

If the governing law of the contract is Chinese law, the buyer can also claim change of circumstances likewise; if the governing law of the contract is the UCC, the buyer can claim exemption on the ground of frustration of purpose. 

Overall, when a sales contract cannot be performed due to the Sino-US tariff war, the liability for breach of contract of the seller and the buyer depends on the contract terms, the governing law, and the specific facts. Defenses such as force majeure, change of circumstances, commercial impracticability, and frustration of purpose provide possibilities for exemption for both parties. However, whether the US tariff hikes constitute force majeure or change of circumstances is highly controversial in judicial practice, and different courts may have different determination criteria, which makes the defenses of both parties face great uncertainties.

 III. Lawyer's Advice

For both the buyer and the seller, once a sales contract cannot be performed due to the Sino - US tariff war, they should promptly notify the other party, provide evidence related to the tariff policy, and claim force majeure, change of circumstances, commercial impracticability, or frustration of purpose to terminate or modify the contract.

In addition, in future sales contracts, a "tariff adjustment clause" or a "force majeure clause" should be added to clarify how to handle policy changes.

This article does not constitute legal advice. If you need professional legal services, please feel free to contact us.