Focus on types and features of long-term supply contract disputes

In recent years, with the Chinese economy entering a relatively weaker phase after super rapid growth, disputes arising from long-term supply contracts have become a focus of attention in the legal service market. From what we have seen, with the shock of long-term supply contracts, hardly any industry has escaped unharmed, and in certain industries the “disaster” has been particularly severe.

For example, since the entire iron and steel industry fell into the red in 2012, the production chain, including production and trade, has seen a huge number of disputes arise. Being unable to realise their raw material procurement obligations, upstream iron and steel enterprises have seen a sharp rise in disputes with their suppliers; and a great many downstream steel product trading enterprises, simultaneously battered by a sharp drop in steel prices and flagging steel demand, have fallen into economic difficulty, resulting in continuous friction with banks and other financial institutions. Statistics show that at the end of the first half of 2013, in Shanghai alone, non-performing bank loans arising due to the steel trade stood at approximately RMB150 billion (US$24.5 billion), and statistics on the non-performing loans of such private financial enterprises as private fund and small loan companies have yet to be compiled.

As a further example, supply disputes between supermarket suppliers and supermarkets have rapidly spread nationwide, causing supermarket enterprise operations to flounder. Following Tesco’s sale of a large portion of its China business to China Resources in the first half of 2013, there have been rumours that Walmart will close a number of its China stores or even pull out of the market altogether.

Vincent Mu is a senior associate at Martin Hu & Partners