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 The Shanghai Maritime Court made a judgment applying the new provision of “designated discharge” in the Civil Code 

 

On January 1, 2021, the Civil Code of the People's Republic of China (hereinafter referred to as the Civil Code) was formally enforced. On January 5, the Shanghai Maritime Court applied the new provisions on discharge sequence in the Civil Code for the first time and made a judgment applying "designated discharge" provision in a case of dispute over an import and export agency contract.

 

In the case, the plaintiff and the defendant cooperated in 2012. The plaintiff issued a usance L/C to purchase the chrome ore from foreign suppliers, and the defendant sold them in China. Both parties agreed that after the goods are imported, the defendant shall pay for the goods, taxes, logistics fees and agency fees each time. If the defendant fails to pay the goods on time after the expiry of the L/C, the penalty for delay payment shall be calculated at 15% of the unpaid purchases. Later, due to fluctuations in the chrome ore market, the defendant's business suffered long-term losses. Some of the goods were disposed without clear off debts. Hence, the plaintiff asked the defendant to pay for the goods and penalty calculated at 15% of the unpaid purchases.

 

The defendant had partial payment, and stated in the payment remarks column that the money was for goods. In this regard, the plaintiff argued that the moeny hereto was pay for the all debts, so there was some unclear payment for goods, which equal to the total receivables minus goods paid. And the penalty due to it shall be  calculated at 15% of the unclear payment for goods as the agreement. According to the defendant, the part already paid has been fully offset against the payment for goods, and there is no outstanding loan of the payment for goods. The outstanding amount is the logistics fee, agency fee and other expenses, so there is no basis for claiming the penalty for delay payment.

 

As to whether the money already paid by the defendant should be prioritized as payment for goods, a huge division took place between the plaintiff and the defendant ,and different offset methods would also lead to great different of payment obligations of the defendant.

 

The Court stated that based on article 560 of the Civil Code, there are three types of discharge of obligations. They are discharge by agreement, designated discharge, which is new in the Civil Code, and discharge by law. Designated discharge means that where a debtor owes to a creditor multiple obligations of the same kind, and the debtor’s performance is not sufficient to discharge all of the obligations, upon making performance, the debtor shall designate which obligation is to be discharged, unless otherwise agreed by the parties. Based on it, the Court made the judgment that the defendant shall pay more than 4,000,000 yuan for the logistics fee, agency fee and other expenses.

 

 

Article 560 Where a debtor owes to a creditor multiple obligations of the same kind, and the debtor’s performance is not sufficient to discharge all of the obligations, upon making performance, the debtor shall designate which obligation is to be discharged, unless otherwise agreed by the parties.

Where the debtor fails to make such a designation, the due obligation shall be performed first. Where multiple obligations are all due, the obligation not secured or with the least security shall be performed first. Where none of the obligations are secured or the obligations are equally secured, the obligation with which the debtor assumes the heaviest burden shall be performed first. Where the burdens are the same, the obligations shall be performed in the order of their due dates. Where the due dates are the same, the obligations shall be performed on a pro rata basis.(Translated by Gu ShuangJie)