10 Dongfang Import & Export Co (Dongfang Co) and Lidar Steel Company (Steel Co) entered into a cooperation contract.
According to the contract Dongfang Co was responsible for the importation of 10,000 metric ton (M/T) of iron ore and
exportation of pig iron 6,000 M/T, while Steel Co was responsible for the processing of iron ore into pig iron; Steel Co
was also under the obligation to complete the processing within 10 days upon the arrival of iron ore and then carry
the pig iron to Tianjin port for export by Dongfang Co.
On 10 March 2008 the first shipment of 5,000 M/T iron ore arrived at the designated port and was promptly carried
to the premises of Steel Co for processing.
10 days later the second shipment of 5,000 M/T arrived at the Chinese port. However Dongfang Co found that several
bank accounts of Steel Co were frozen by the order of the court in a dispute with a third party. Therefore, it
immediately despatched a written memo to Steel Co, stating that it would detain the second shipment of iron ore until
Steel Co delivered the processed pig iron.
Upon the receipt of the notice, Steel Co sent back a fax to express its sincere regret for its delay to deliver pig iron.
Steel Co emphasised, however, that it suffered from insufficient funds to buy coke for the processing. It promised to
make efforts to deal with this problem, but failed to specify any concrete measures to be taken or give the necessary
security for the performance of the contractual obligation. Steel Co also urged that Dongfang Co deliver the remaining
5,000 M/T of iron ore.
Considering the date for the shipment of pig iron was approaching but Steel Co did not deliver any processed pig iron,
Dongfang Co declared the dissolution of the cooperation contract and sold the remaining 5,000 M/T of iron ore to a
third party. Under such circumstances Steel Co brought an action against Dongfang Co for damages on the ground
that Dongfang refused to deliver the second shipment of 5,000 M/T iron ore for processing.
Required:
Answer the following questions in accordance with the relevant provisions of the Contract Law of China, and give
your reasons for your answer:
(a) State whether Dongfang Co was entitled to detain the remaining 5,000 M/T of iron ore; (6 marks)
(b) State whether Dongfang Co was entitled to dissolve the cooperation contract and sell the remaining iron ore
to a third party; and (3 marks)
(c) State whether Steel Co’s claim should be supported by the court. (1 mark)
(10 marks)

10 This question requires candidates to deal with the legal issue of the demur right of advance performance under the Contract Law
of China.
(a) (i) Based on the facts in the question Dongfang Co was entitled to detain the remaining 5,000 M/T of iron ore. In
accordance with Article 68 of the Contract Law, a party who shall perform first may suspend performance when there
is evidence proving that the other party is under the circumstances as set forth in that Article. According to the
cooperation contract Dongfang Co was to perform its contractual obligation first to deliver the second shipment of
5,000 M/T iron ore to Steel Co. Steel Co, however, did not carry the processed pig iron because it was short of the
necessary funds to buy coke. This fact indicated that Steel Co’s capacity for performance was deteriorating. Under the
provision of the Contract Law, Dongfang Co might suspend its performance.
(ii) In accordance with Article 69 of the Contract Law, the party who suspends performance shall notify the other party in
time and resume performance when the other party provides an appropriate guarantee. Dongfang Co did give a written
memo (a form of written notice) to Steel Co. Therefore, Dongfang Co complied with the statutory procedures to support
its demur right of advance performance.
(b) In accordance with Article 69 of the Contract Law, after the suspension of performance, if the other party neither recovers
capacity for performance nor provides an appropriate guarantee within a reasonable time, the party who suspends
performance may rescind the contract. It was clearly that Steel Co neither resumed the capacity for performing its obligation
to carry the pig iron to Dongfang Co, nor provided an appropriate guarantee within a reasonable time. Therefore, Dongfang
Co was entitled to dissolve the cooperation contract and to sell the remaining iron ore to any third party.
(c) Based on the above-mentioned provisions of law and facts, Steel Co was a party who broke the cooperation contract.
Dongfang Co was entitled to suspend performance and dissolve the contract. Hence Steel Co’s claim against Dongfang Co
should not be supported by the court.

Y

Y

N