Recently, I have handled several foreign-related cases where foreign freight forwarding companies failed to pay freight charges for extended periods. In response, Chinese freight forwarders exercised their right of lien, detained the goods, and, when negotiations failed, sold them. This led to significant losses for the buyers (the consignees in the transportation contracts). In such cases, the overseas buyer can either sue the foreign agent based on the contract or sue the actual infringer for tort. It is reasonable for the overseas buyer to sue the foreign agent under their own national law. However, depending on the ability of the foreign agent to pay, the buyer might instead file a tort lawsuit against the party holding the goods.
If the overseas buyer pursues a tort claim, two key issues must be resolved: 1) The buyer must establish ownership of the goods; and 2) The Chinese freight forwarder’s lien rights must not be valid. This article briefly discusses how ownership transfer should be addressed in international sale of goods contracts.
As is widely known, INCOTERMS only specifies when risks transfer from the seller to the buyer, but it doesn’t define the transfer of ownership. There are currently no widely recognized international treaties or conventions that govern this. Therefore, determining the point of ownership transfer relies heavily on the parties’ contract and the applicable domestic law. Based on our experience, ownership transfer clauses in international sale contracts typically fall into four categories:
- The contract does not specify when ownership transfers and does not designate applicable law.
- The contract does not specify ownership transfer but designates applicable law.
- The contract specifies ownership transfer but does not designate applicable law.
- The contract specifies ownership transfer and designates applicable law.
Let’s analyze these scenarios one by one:
Scenario 1: If the overseas buyer sues in China and the goods are retained in China, the court will likely apply Chinese law based on the principle of “the closest connection,” which both parties typically agree upon. According to Article 242 of China’s Civil Code, the goods have not yet been delivered to the overseas buyer. Even if the overseas buyer has incurred a loss, they have not acquired ownership of the goods. As a result, it would be difficult for the buyer to succeed in a tort lawsuit.
Scenario 2: If the governing law is Chinese law, the result is the same as in the first case. If the governing law is foreign law, the court will need to investigate the applicable foreign law to determine the contract’s validity. Once the contract is confirmed valid, the court will then establish the point at which the overseas buyer acquires ownership.
Scenario 3: Like Scenario 1, if the court applies Chinese law, the contract typically stipulates that ownership transfers to the buyer once the full payment is made and the seller ships the goods. However, Chinese law combines the intention-based system with the requirement of delivery for ownership transfer of movable property. In other words, ownership transfer requires both the agreement of the parties and actual delivery of the goods. Therefore, if the contract specifies ownership transfer in a manner inconsistent with the law, the legal provisions take precedence. Until the goods are delivered to the overseas buyer, they will not have ownership, and the foundation for a tort claim is lost.
Scenario 4: Combining scenarios 1 and 2, if Chinese law governs, the contract will be valid, and ownership transfer will be determined according to the parties’ agreement. However, in order to protect the safety of movable property transactions and third-party interests, China follows the principle of public notice for property rights. According to this principle, delivery is necessary for the transfer of ownership. If the contract stipulates something different from the law, the legal provisions will apply.
In summary, the issue of ownership transfer plays a critical role in determining whether an overseas buyer can successfully file a tort claim in China following the detention and sale of goods by a Chinese freight forwarder. Since Chinese law requires both the agreement of the parties and the actual delivery of goods for ownership transfer, the buyer must ensure they have obtained ownership before pursuing legal action. Without ownership, the foundation for a tort claim is weak. Additionally, the governing law stipulated in the international sale contract significantly impacts the outcome of such disputes. In cases where goods have not yet been delivered to the overseas buyer, filing a tort lawsuit in China is unlikely to yield favorable results based on the provisions of the Civil Code. Therefore, careful consideration of ownership transfer clauses and applicable law in international contracts is essential for both parties to avoid costly legal disputes.
