Model Cases Involving China (Shanghai) Pilot Free Trade Zone Tried by the People's Court of Pudong New Area, Shanghai Municipality: Praxair (Shanghai) Industrial Gas Co., Ltd. v. Changxing Kaihong New Wall Materials Co., Ltd. (Case about dispute over a sales contract)

--In the sales of industrial gas, the “take-or-pay” contract is a common contract form. However, there is often unequal rights and obligations in such type of contracts. Therefore, from the perspective of fairness and reasonableness, the people's court shall respect the commercial practice, not mechanically apply the “take-or-pay” contract, and balance the rights and obligations of all parties by taking into full account of various factors.

(1) Basic Facts
On January 27, 2011, Praxair (Shanghai) Industrial Gas Co., Ltd. (hereinafter referred to as “Praxair Company”) and Changxing Kaihong New Wall Materials Co., Ltd. (hereinafter referred to as “Changxing Kaihong Company”) concluded an Agreement on Product Supply. Both parties stipulated that Praxair Company sold Changxing Kaihong Company oxygen it demanded. The minimum purchased/paid volume per month was 80 tons at the unit price of CNY726.50 per ton; except for force majeure, Changxing Kaihong Company should ensure the minimum purchased/paid volume per month as stipulated in the purchase agreement. If the volume of product actually used by Changxing Kaihong Company in any month was lower than the minimum purchased/paid volume per month, Changxing Kaihong Company should still pay the price for such month according to the minimum purchased/paid volume per month; the agreement was effective for five years. After the conclusion of the agreement, Praxair Company supplied the product to Changxing Kaihong Company; however, the volume of product ordered by Changxing Kaihong Company from Praxair Company never reached the minimum purchase volume per month. Therefore, in April 2014, Praxair Company took back the gas-supply device in advance, filed a lawsuit with the People's Court of Pudong New Area, and requested the Court to render a judgment that Changxing Kaihong Company should pay the product price in arrears and the corresponding fine for overdue payment and compensate the liquidated damages of CNY1,336,760 incurred from the advance termination of the agreement caused by Changxing Kaihong Company's fundamental breach of contract.

(2) Adjudication
In the view of the Court, according to the agreement involved, although Changxing Kaihong Company did not reach the minimum purchased/paid volume, it should pay Praxair Company the corresponding price by multiplying the minimum purchased/paid volume per month by the unit product price. However, from the perspective of fairness and by taking into full account of such factors as performance of the agreement and the costs and industrial profits of Praxair Company, it was determined that Changxing Kaihong Company should pay Praxair Company the price of CNY419,359 and the corresponding fine for overdue payment depending on the actual circumstances. Besides, after September 2013, Changxing Kaihong Company no longer purchased oxygen from Praxair Company and it did not make the payment in arrears, which was an obvious breach of contract and caused the failure of continuous performance of the agreement. Praxair Company's taking back of the gas-supply device on April 30, 2014 was actually its exercise of the right to terminate the agreement. Therefore, by considering the performance of the agreement, the commercial costs, the industrial profits, and other factors, the Court determined that Changxing Kaihong Company should compensate Praxair Company the liquidated damages of CNY307,455 incurred from the termination of the agreement.

(3) Significance
The Agreement on Product Supply concluded by and between both parties in this case is a typical “take-or-pay” contract. The contract form of “take-or-pay” is widely adopted in contracts on the supply of natural gas and other energy. In nature, it bundles the developer and transmission party of the product with market users to jointly overcome risks in production, transmission and distribution, and usage. However, the payment for goods, the liquidated damages, and other core clauses of such type of contracts are mainly related to the “stipulated volume of gas consumed.” Due to such factors as unequal information of the purchaser and the seller and great disparity in forces, the purchaser's “take-or-pay” obligation is easily highlighted and such circumstances as unequal rights and obligations are caused. Therefore, in the trial of this case, from the perspective of fairness and reasonableness, the Court respected commercial practice and did not mechanically apply the “take-or-pay” contract; instead, it took into full account of such factors as performance of the agreement, commercial costs, and industrial profits, properly balanced the rights and obligations of both parties, and provided a helpful reference sample for the future trial of similar cases. This case has typical significance.