H Trading Company v. Tesco Supermarket and Others—Dispute over a Sales Contract

Keywords: Civil disputes, contract of sale disputes, retailers, suppliers, nature of invoices

Key points for the referee: Retailers must not abuse their dominant position to engage in unfair trading practices. They shall adhere to the principles of fairness, honesty, and good faith and comply with the order of market transactions. Retailers are prohibited from collecting—either directly or indirectly—barcode fees or charges for services not actually provided. Retailers must record any promotional service fees they collect in their accounting books, issue invoices to suppliers, and pay taxes as required by law. If a retailer deducts funds from a supplier’s account, it must notify and deliver written notice of such deduction to the supplier; otherwise, the retailer’s claim for deduction will not be valid.

Basic Facts of the Case H Trading Company, as a supplier, provides alcoholic beverage products to a certain supermarket and its 20 affiliated branches and subsidiaries. The Hunnan branch of the supermarket and H Trading Company signed a sales contract as Party A and Party B, respectively. Meanwhile, the other 20 branches and subsidiaries under the same company affixed their seals as Party C in the contract. All parties conduct notifications and accounting for transactions such as shipment, receipt of goods, and payment through the supermarket’s supplier software system. Starting from August 2014, the supermarket ceased making payments to H Trading Company. After numerous unsuccessful attempts by H Trading Company to collect the outstanding payments, the supermarket subsequently disabled the login access to the electronic reconciliation platform for H Trading Company’s suppliers. Left with no other choice, H Trading Company filed a lawsuit in court. In the lawsuit, H Trading Company seeks that the supermarket and a total of 21 defendants jointly pay H Trading Company more than 1.8 million yuan in outstanding payments, together with corresponding interest. Entrusted by H Trading Company, I, as counsel, am representing H Trading Company in both the first- and second-instance litigation proceedings.

Due to the closure of the electronic reconciliation platform login account for H Trading Company by a certain supermarket, H Trading Company’s evidence consists solely of the first-year contract signed by both parties, payment invoices issued to 21 defendants including the said supermarket, promotional fee invoices issued by the supermarket, and bank transfer records.

During the litigation, a certain supermarket raised two defenses: First, the supermarket and its various defendants are separate legal entities with independent accounting; therefore, H Trading Company should split the claimed amount and file separate lawsuits against each defendant. Second, the unpaid amounts consist of discounts, logistics fees, promotional expenses, and the like, and according to the contract provisions, the defendants are entitled to directly deduct these amounts.

The main points of contention in this case are: First, whether the plaintiff in this case should have filed separate lawsuits; second, the specific amount of the payment that the defendant owes; and third, whether the defendant’s claim for deductions is valid.

During the trial, H Trading Company submitted the contract, invoices for goods payments, deduction invoices, and bank transfer records to prove that the total amount of goods supplied by H Trading Company to the defendant reached over 8.6 million yuan, of which more than 6 million yuan had been received, over 780,000 yuan had been deducted by the defendant, and the outstanding payment for goods amounted to over 1.8 million yuan. H Trading Company confirmed that it had received a deduction notice for the amount of over 780,000 yuan, corresponding to an invoice for promotional fees totaling over 780,000 yuan. H Trading Company argued that certain supermarkets and other defendants, without issuing invoices or providing prior notification, were not entitled—on the basis solely of their contractual right to make deductions—to directly deduct H Trading Company’s payment for goods as promotional fees, logistics charges, or other expenses. Furthermore, after accounting, the parties confirmed that there had been returns later on, with a return amount exceeding 300,000 yuan. H Trading Company agreed that this return amount should be deducted from the outstanding payment. As for the other invoices and bank transfer records submitted by H Trading Company, certain supermarkets and other defendants refused to admit them into evidence on the grounds that the number of documents was excessively large, while persisting in their claim that the contract explicitly granted the defendants the right to make deductions, and that all amounts claimed by H Trading Company represented precisely the deducted amounts.

Referee's decision: In the first-instance judgment, the court ordered the supermarket and nine other defendants to pay H Trading Company a lump-sum amount of over 1.5 million yuan in outstanding goods payments—after deducting the return amounts mutually confirmed by both parties—and to pay interest thereon. The defendants were also ordered to bear the court filing fees. Dissatisfied with the first-instance judgment, the supermarket and other defendants filed an appeal; however, the second-instance court dismissed the appeal and upheld the original judgment.

Reason for the ruling: Some of the defendants in this case are branch offices that cannot independently bear civil liability; therefore, their civil liability is borne by the parent company and other independent legal entities.

Regarding the defendant’s claim that the lawsuit should be split, the court held as follows: H Trading Company delivered the goods uniformly to the defendant’s centralized warehousing company, which then distributed the goods to individual stores. Moreover, the defendant has established an electronic reconciliation platform that is centrally managed and operated by the defendant itself. The defendant’s management department ultimately conducts the final accounting and notifies both other defendants and H Trading Company accordingly. Therefore, the court does not support the defendant’s claim that the lawsuit should be split.

With regard to the defendant’s claim that the deduction was made precisely because of the outstanding debt, the court held as follows: The contract among the parties explicitly stipulates that the defendant shall issue a deduction notice to the plaintiff, and the form of such notice may include, but is not limited to, electronic or written statements, online reconciliation platforms, messages, and invoices for service fees. The plaintiff confirmed having received certain invoices for promotional fees from the defendant, which it regards as constituting receipt of the corresponding deduction notices. Since the defendant failed to provide evidence demonstrating that it had delivered any other deduction notices to the plaintiff, the court does not uphold the defendant’s claim.

Relevant statutory provisions: Article 12 of the “Administrative Measures for Fair Trading between Retailers and Suppliers” stipulates: “Retailers shall record the promotional service fees they collect in their accounting books, issue invoices to suppliers, and pay taxes as required.” Article 13 further provides: “Retailers shall not collect or indirectly collect any of the following fees: … (5) Fees collected under the pretext of festivals, store anniversaries, grand openings of new stores, re-openings, corporate IPOs, mergers, or other similar events when no promotional services have been provided.” In addition, this is in compliance with relevant laws and regulations including the “Company Law of the People’s Republic of China,” the “Contract Law of the People’s Republic of China,” and the “Civil Procedure Law of the People’s Republic of China.”

Lawyer’s Perspective: This case is a typical dispute over a sales contract, in which the supplier—a party represented by counsel—is at a disadvantage in the contract. Factors posing risks in the litigation include insufficient evidence and unfavorable contract terms that tilt the balance against the supplier. In the supplier industry serving large supermarkets, there often exists an imbalance of bargaining power: retailers unilaterally draft contracts containing standardized clauses without allowing any modifications; retailers delay payment, arbitrarily deduct amounts from due payments under various pretexts, or impose additional fees on suppliers—all while making it difficult to obtain evidence of outstanding debts. To address these widespread irregularities, the Ministry of Commerce, the National Development and Reform Commission, the Ministry of Public Security, the State Administration of Taxation, and the State Administration for Industry and Commerce have issued corresponding regulatory measures. By making reasonable use of legal provisions and industry regulations that impose standards on retailers, the attorney representing the supplier can turn the tables and achieve a favorable outcome even when initially at a disadvantage in the litigation. Moreover, since larger-scale retailers typically provide standard-form contracts, the attorney can also apply relevant legal provisions governing standardized clauses, tailored to the specifics of each case, to help minimize losses for the supplier.

In this case, the supermarket—as the retailer—relied on the unilateral right to deduct funds as stipulated in the contract between the two parties, and when a dispute arose, it treated all outstanding debts as amounts subject to deduction. However, the law imposes certain restrictions on retailers’ deduction practices: retailers must record any promotional service fees they collect in their accounting books, issue invoices to suppliers, and pay taxes in accordance with applicable regulations. In this case, the invoice played a crucial role—not only did it verify the amounts of goods payments and service fees, but it also served as a formal notice of the deduction. In this instance, the retailer exercised its right to deduct funds arbitrarily without providing the corresponding invoice or deduction notice. By doing so, it not only violated legal provisions but also breached the contractual agreement. Consequently, its claim was not upheld.

In this case, H Trading Company was able to confirm the amount owed by the other party because it promptly issued the corresponding invoice in accordance with the supermarket’s system settlement procedures. However, in other similar cases, it is common for evidence such as settlement certificates to remain solely in the retailer’s possession, while the supplier lacks access to such documents—and the retailer often fails to settle payments in a timely manner. Due to their weaker contractual position, suppliers not only lack confirmation of unit prices stamped by the other party but also often lack proof of receipt of goods. Once a dispute arises, they may even be unable to prove the basic amount owed or the exact quantity of goods delivered. In such situations, suppliers need to pay close attention to collecting evidence independently throughout the transaction process, rather than waiting until the legal proceedings begin and finding themselves unable to remedy the situation, thus suffering unnecessary losses.