[Title] Case of Dispute over Sales Contract between A Door Industry Distribution Center and B Door Industry Distribution Department 
[Keywords] Civil Law / Sales Contract / Indirect Agency / Right of Disclosure and Choice 
【Key Points of Judgment】 If one party fails to perform its contractual obligations or performs them in a manner that does not conform to the agreed terms, it shall bear liability for breach of contract, including continuing to perform the contract, taking remedial measures, or compensating for losses. 
If the trustee fails to perform its obligations toward a third party due to reasons attributable to the principal, the trustee shall disclose the identity of the principal to the third party. As a result, the third party may choose either the trustee or the principal as the counterparty against whom to assert its rights; however, the third party may not change its chosen counterparty. Nevertheless, if the trustee enters into a contract with a third party in its own name within the scope of the principal’s authorization, and the third party was aware at the time of entering into the contract of the agency relationship between the trustee and the principal, such contract shall directly bind both the principal and the third party—unless there is conclusive evidence demonstrating that the contract binds only the trustee and the third party. 
【Facts of the Case】 On July 30, 2015, A Door Industry (Party B) entered into a “Purchase and Installation Contract for Entrance Doors and Unit Doors” with B Distribution Department (Party A), agreeing that Party B would supply Party A with three-proof doors (for the entrance lobby) and Class-A doors (for entrances and equipment rooms), with a total contract price of 442,320 yuan. The delivery location was specified as a certain site in Shenyang City. According to the contract, Party A was required to notify Party B in writing at least three days prior to delivery, providing precise details such as the exact shipping date, arrival time, product model specifications, quantity, and delivery address. Party B was obligated to deliver the goods to Party A’s construction site within three days after both parties had confirmed the technical parameters and drawings and received Party A’s written notice. The payment terms stipulated that within three days after the contract took effect, Party A would pay a deposit equal to 30% of the contract price. Upon receipt of the deposit, Party B would commence production. After the goods arrived on-site and passed quality inspection by both Party A and the supervisory party, Party A would pay 70% of the total contract amount within three days. Upon completion of installation, Party A would pay 99% of the total contract amount, with the remaining 1% serving as a quality guarantee deposit, which would be fully refunded without interest one year later. Within ten days, Party A was required to perform acceptance inspection; upon receipt of payment, Party A would receive the keys. Otherwise, Party A would be deemed in breach of contract, and would be subject to a penalty equal to 10% of the total contract price, with any resulting losses borne by Party A. However, prior to signing the contract between A Door Industry and B Distribution Department, A Door Industry had already reached a verbal agreement with the actual buyer in this case, Company Moufeng, regarding the types, prices, and quantities of doors needed for the Mu Xin Jiayuan construction project. B Distribution Department had also supplied fire-rated doors to Company Moufeng. Consequently, Company Moufeng ultimately instructed B Distribution Department to enter into the overall sales contract with A Door Industry. On August 4, 2015, Company Moufeng paid the full deposit to B Distribution Department, which then transferred 133,000 yuan of the deposit to A Door Industry. In September 2015, A Door Industry delivered the wooden doors to the location specified in the contract. Kong Moumou, the warehouse keeper at the Mu Xin Jiayuan construction site, signed the delivery list provided by A Door Industry, confirming receipt of 584 wooden doors. B Distribution Department subsequently confirmed Kong Moumou’s signature and receipt of the doors. 
【Judgment Result】 On September 26, 2018, the People's Court of the Shenyang Economic and Technological Development Zone rendered a first-instance judgment: First, the defendant, B Door Distribution Department, shall pay the plaintiff, A Door Distribution Center, the sum of 309,320 yuan for goods within ten days from the date the judgment becomes effective; Second, the B Door Distribution Department shall pay the plaintiff, A Door Distribution Center, a contractual penalty of 44,232 yuan within ten days from the date the judgment becomes effective. The plaintiff’s other claims were dismissed. After the judgment was announced, the B Distribution Department, dissatisfied with the civil judgment No. (2017) Liao 0191 Min Chu 2662 issued by the People's Court of the Shenyang Economic and Technological Development Zone, filed an appeal, arguing that the original trial had misstated the facts. Specifically, the original judgment held that “the appellant had confirmed the receipt signed by Kong Moumou, the custodian at the Moxin Jiayuan construction site, and that the appellee had already supplied wooden doors to the appellant in accordance with the contract terms” was incorrect. The appellant had never confirmed the receipt signed by Kong Moumou, the custodian at the Moxin Jiayuan construction site. Moreover, according to the contract signed between the B Distribution Department and the A Door Distribution Center, the A Door Distribution Center had also failed to fulfill its obligation to provide timely delivery notices as stipulated in the contract; therefore, the A Door Distribution Center should bear the losses itself. The appellant requests that the first-instance judgment be reversed and the case be retried and decided anew in accordance with the law. 
On March 18, 2019, the Shenyang Intermediate People's Court issued a final judgment: dismissing the appeal filed by B Door Distribution Department and upholding the original judgment. After the final judgment was rendered, B Door Distribution Department filed a request for retrial with the Liaoning Provincial Higher People's Court, arguing that it had entered into the contract in question only as an agent entrusted by a certain Feng Company and was not a party to the contract itself. Furthermore, it contended that A Door Industry should bear sole responsibility for its unauthorized shipment of goods in violation of the contract terms. 
On June 24, 2019, the Liaoning Provincial Higher People's Court issued a retrial ruling dismissing the retrial application filed by B Door Industry Distribution Department. 
【Reasoning of the Ruling】 The key issues in this case are whether the B Door Distribution Department is a party to the contract at issue, whether it has established a principal-agent relationship with Company Moufeng, and whether A Door Distribution Center should bear responsibility on its own for its unauthorized shipment of goods. 
The court of first instance held that the relationship between A Door Distribution Center and B Door Distribution Department was one of a sales contract. The “Contract for Procurement and Installation of Entrance Doors and Unit Doors” signed by the plaintiff, A Door Distribution Center in Tiexi District, Shenyang City, and the defendant, B Door Distribution Department in Yuhong District, Shenyang City, reflected the true intentions of both parties and did not violate any mandatory provisions of laws or administrative regulations, thus being lawful and valid. Both parties should fully perform their respective obligations as stipulated in the contract. Currently, the plaintiff, A Door Distribution Center, has supplied wooden doors to the defendant, B Door Distribution Department, in accordance with the contract’s terms. However, the defendant, B Door Distribution Department in Yuhong District, Shenyang City, has failed to pay the full amount due to the plaintiff, A Door Distribution Center in Tiexi District, Shenyang City, constituting a breach of contract. Therefore, the defendant shall pay the outstanding amount of 309,320 yuan owed to the plaintiff, A Door Distribution Center in Tiexi District, Shenyang City. Regarding the liquidated damages, according to the “Contract for Procurement and Installation of Entrance Doors and Unit Doors” signed by A Door Distribution Center and B Door Distribution Department, the defendant, B Door Distribution Department, was required to inspect and accept the goods within 10 days; otherwise, it would be deemed a breach of contract by Party A, subjecting Party A to a penalty equal to 10% of the total contract price, with any resulting losses borne by Party A. In this case, the plaintiff, A Door Distribution Center, delivered the wooden doors specified in the contract to the agreed-upon location in September 2015, yet the defendant, B Door Distribution Department, has still not carried out the inspection and acceptance, thereby constituting a breach of contract. Consequently, the plaintiff, A Door Distribution Center, is entitled to request the defendant, B Door Distribution Department, to pay liquidated damages equivalent to 10% of the total contract price, i.e., 44,232 yuan. This claim is well-founded and supported by law, and the court of first instance grants it. As for interest, since the court has already upheld the plaintiff’s claim for liquidated damages, the plaintiff’s subsequent request for the defendant, B Door Distribution Department, to pay interest constitutes a double recovery, which the court of first instance does not support. With regard to the defendant, B Door Distribution Department’s defense that the payment conditions have not yet been fulfilled, the court notes that the plaintiff, A Door Distribution Center, delivered the goods in September 2015. According to the contract between the two parties, the defendant, B Door Distribution Department, was required to carry out inspection and acceptance within 10 days. Now, nearly three years have passed since the delivery date, and the defendant, B Door Distribution Department, has persistently delayed the inspection and acceptance. Moreover, the site is currently not ready for installation, and the defendant, B Door Distribution Department, has not raised any issues regarding the quality of the wooden doors. Given that the defendant, B Door Distribution Department, has been negligent in carrying out the inspection and acceptance, the payment conditions should be considered fulfilled. Therefore, the court of first instance does not uphold the defendant’s defense on this point. Concerning the defendant, B Door Distribution Department’s argument that the plaintiff, A Door Distribution Center, should seek payment from Shenyang Moufeng Construction Engineering Co., Ltd., the court points out that Shenyang Moufeng Construction Engineering Co., Ltd. was not a party to the “Contract for Procurement and Installation of Entrance Doors and Unit Doors.” According to the principle of contractual relativity, the defendant, B Door Distribution Department, is obligated to perform the duties set forth in the contract. Even if, as the defendant, B Door Distribution Department claims, it signed the “Contract for Procurement and Installation of Entrance Doors and Unit Doors” on behalf of Shenyang Moufeng Construction Engineering Co., Ltd., in accordance with Article 403, Paragraph 2 of the Contract Law of the People’s Republic of China: “If the trustee fails to perform its obligations to a third party due to reasons attributable to the principal, the trustee shall disclose the principal to the third party. The third party may then choose either the trustee or the principal as the counterparty to assert its rights, but the third party may not change its chosen counterparty.” Since the defendant, B Door Distribution Department, as the trustee, failed to perform its obligations to the plaintiff due to reasons attributable to the principal, Shenyang Moufeng Construction Engineering Co., Ltd., after disclosing the principal, Shenyang Moufeng Construction Engineering Co., Ltd., to the plaintiff, A Door Distribution Center, it was entirely proper for the plaintiff, A Door Distribution Center, to choose to assert its rights against the trustee, i.e., the defendant, B Door Distribution Department. Thus, the court of first instance does not support the defendant’s defense on this point. 
The second-instance court held that the “Contract for the Purchase and Installation of Entrance Doors and Unit Doors” signed by both parties in this case is lawful and valid, and both parties should duly perform their obligations as stipulated in the contract. Regarding the question of whether the counterparty to the contract involved in this case is the B Door Distribution Department, since both parties have already affixed their seals and signatures on the written contract, and A Door Distribution Center explicitly identified the B Door Distribution Department as the counterparty rather than the third party, Shenyang Moufeng Construction Engineering Co., Ltd., the second-instance court legally determined that the buyer under the “Contract for the Purchase and Installation of Entrance Doors and Unit Doors” is the B Door Distribution Department. The B Door Distribution Department claimed that the counterparty to the contract should be Shenyang Moufeng Construction Engineering Co., Ltd.; however, this claim contradicts the existing evidence, and the B Door Distribution Department failed to provide any contrary evidence sufficient to rebut the written contract. Therefore, the second-instance court did not accept this claim. Concerning whether the delivery of the goods in question by A Door Distribution Center to the agreed-upon construction site can be considered as fulfillment of the contractual obligations toward the B Door Distribution Department, the B Door Distribution Department argued that, according to Clause 5.1 of the “Contract for the Purchase and Installation of Entrance Doors and Unit Doors,” the seller was required first to send a “Shipment Confirmation Letter” in writing to the buyer, and the buyer was required to respond within three days of receiving such letter; failure to respond would be deemed as tacit acceptance of the shipment. Now, as the buyer, the B Door Distribution Department claims that it never received the “Shipment Confirmation Letter” stipulated in the contract and never notified A Door Distribution Center to deliver the goods. Thus, the delivery of the goods by A Door Distribution Center to the construction site cannot be regarded as fulfillment of the contractual obligations toward the B Door Distribution Department. In response, the second-instance court held: First, the doors involved in this contract must be installed and used precisely according to the dimensions and specifications determined by the B Door Distribution Department; therefore, it can be concluded that A Door Distribution Center manufactured the goods specifically according to the B Door Distribution Department’s requirements. In other words, these goods could hardly be used for any purpose other than for the B Door Distribution Department’s use. From a fair and reasonable perspective, it cannot be held that the B Door Distribution Department had the right to refuse to accept the goods. Second, considering the context of the contract, the B Door Distribution Department agreed that A Door Distribution Center should deliver the goods to the construction site in question. Indeed, A Door Distribution Center delivered the goods to the construction site, and the site’s custodian signed for receipt. Even if A Door Distribution Center failed to send a letter to the B Door Distribution Department, this can only be considered as a minor fault on the part of A Door Distribution Center, a fault whose severity is insufficient to entitle the B Door Distribution Department to invoke the defense of refusing to pay for the goods. Third, in this case, A Door Distribution Center has not entered into any contract with the third party, whereas the B Door Distribution Department has signed a general supply contract with the third party covering the goods involved in this contract. It is thus more convenient for the B Door Distribution Department to assert its rights against the third party, while it would be extremely difficult for A Door Distribution Center to assert its rights against the third party. Therefore, the second-instance court should uphold A Door Distribution Center’s claim. 
The retrial court held that the B Distribution Department was both the party that signed the contract in question and the actual party responsible for performing the obligations under the contract. Therefore, the original trial’s finding that the B Distribution Department was a counterparty to the contract in question was entirely appropriate. After the A Door Distribution Center delivered the goods to the location specified in the contract, the B Distribution Department took actual possession of them. Consequently, the original trial’s refusal to uphold the B Distribution Department’s defense—that the A Door Distribution Center had failed to send a written “Shipment Confirmation” as stipulated in the contract—was also entirely justified. 
[Relevant Statute] Article 403, Paragraph 2 of the Contract Law of the People's Republic of China provides: If the trustee fails to perform its obligations to a third party due to reasons attributable to the principal, the trustee shall disclose the identity of the principal to the third party. As a result, the third party may choose either the trustee or the principal as the counterparty against whom it asserts its rights; however, the third party may not change its chosen counterparty. 
Article 107 of the Contract Law of the People's Republic of China stipulates: If one party fails to perform its contractual obligations or performs them in a manner that does not conform to the agreement, it shall bear liability for breach of contract, including continuing to perform the contract, taking remedial measures, or compensating for losses. 
[Lawyer’s Perspective] The central issue in this case is whether the B Door Distribution Department and a third party, Company Moufeng, have established a principal-agent relationship. According to Article 402 of the Contract Law, “If a trustee enters into a contract with a third party in its own name within the scope of the principal’s authorization, and the third party knew at the time of entering into the contract that there was an agency relationship between the trustee and the principal, such contract shall directly bind the principal and the third party, unless there is conclusive evidence proving that the contract binds only the trustee and the third party.” Therefore, the question arises: Should the contract involved in this case directly bind A Door Distribution Department and Company Moufeng? However, neither the people’s courts at the two levels nor the court of retrial has pointed out that the contract should directly bind the principal and the third party. During the litigation process, A Door Distribution Department stated in its complaint that it was Company Moufeng, a third party, that approached A Door Distribution Department and requested the purchase of entrance doors for the Moxin Jiayuan construction project. Furthermore, A Door Distribution Department and Company Moufeng had already reached a verbal agreement on the type, price, and quantity of the doors to be purchased. In fact, the two parties had already entered into a verbal sales contract regarding the purchase and sale of these doors, making them the actual parties to the sales contract. By contrast, the B Door Distribution Department merely signed the sales contract with A Door Distribution Department based on the mandate from Company Moufeng. Moreover, the warehouse keeper who received the goods was also an employee of Company Moufeng, not an employee of the B Door Distribution Department. 
In its judgment, the court of first instance applied Article 403, paragraph 2 of the Contract Law, which provides that “If the trustee fails to perform its obligations toward a third party due to reasons attributable to the principal, the trustee shall disclose the identity of the principal to the third party. As a result, the third party may choose either the trustee or the principal as the counterparty to assert its rights; however, the third party may not change its chosen counterparty.” Based on this provision, the court held that A Door Distribution Center could assert its rights against B Door Distribution Department. Yet, the court failed to apply Article 402 of the Contract Law, which states: “If the trustee enters into a contract with a third party in its own name within the scope of the principal’s authorization, and the third party knew at the time of entering into the contract about the agency relationship between the trustee and the principal, such contract shall directly bind both the principal and the third party—unless there is conclusive evidence proving that the contract binds only the trustee and the third party.” However, according to the facts of this case, prior to signing the contract with B Door Distribution Department, A Door Distribution Center had already reached agreement on the key terms of the contract with an unrelated party—the principal, namely, Company Mofeng. The prerequisite for applying Article 403, paragraph 2 of the Contract Law is precisely that the trustee enters into the contract with the third party in its own name, without the third party knowing about the agency relationship between the trustee and the principal, nor being aware of the principal’s identity. Only under such circumstances would the third party have the right to choose between asserting its rights against the principal or the trustee. Therefore, in this case, the prerequisite for applying that provision simply does not exist. Consequently, the court should have relied on the provisions of Article 402 of the Contract Law and directly held Company Mofeng and A Door Distribution Center bound by the contract. For these reasons, this attorney believes that the outcome of the present judgment is open to question.