A Bilingual Contract That Nearly Caused 30% "Deposit" to Be Forfeited in Its Entirety — Examining the Applicable Boundaries of the Deposit Penalty Rule Through an International Sale of Goods Dispute

2026/10/14

In an international sale of goods dispute, the seller asserted the right to forfeit the 30% "deposit" already paid by the buyer, while the buyer insisted that the goods suffered from quality defects and refused to pay the balance. The core of the dispute concerned not only the quality of the goods, but more importantly: where the Chinese and English versions of the contract differed in their formulation of the "deposit," which version should prevail? And could the deposit be forfeited in its entirety?

Case Summary

A foreign company and a domestic Chinese company entered into a sales contract for goods, with a total price of over USD 100,000. The contract was written in both Chinese and English. The Chinese version provided that "30% deposit shall be paid within three business days after signing," while the English version stated "30% T/T advance payment." The contract did not specify which text would prevail in the event of any inconsistency between the two versions.

After signing, the domestic company paid the majority of the amount, and the foreign company delivered all the goods. After taking delivery, the domestic company refused to pay the balance on the ground of quality defects and exported all the goods. After unsuccessful demands for payment, the foreign company brought an action seeking confirmation of its right to forfeit the deposit and payment of the remaining purchase price.

Key Points of the Ruling

The court held that since the countries in which both parties had their places of business were contracting states to the United Nations Convention on Contracts for the International Sale of Goods (CISG), and the parties had not excluded its application, the Convention applied with priority; as to the deposit penalty rule, which is not provided for in the Convention, Chinese law applied in accordance with the principle of closest connection.

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As to the nature of the deposit, the court, taking into account such factors as the backgrounds of the legal representatives of both parties and the language used in their day-to-day communications, determined that the Chinese version should serve as the basis for construing the contract terms, namely that the "deposit" agreed upon by the parties was security in nature. However, under the Civil Code, the amount of a deposit may not exceed 20% of the amount of the principal contract, and any excess does not produce the effect of a deposit. Accordingly, only 20% of the 30% "deposit" stipulated in the contract constituted a deposit, while the remainder constituted purchase price.

As to whether the deposit could be forfeited in full, the court noted that the purchase price already paid by the buyer accounted for 60% of the total contract price, and the unpaid proportion was 40%. Pursuant to the relevant judicial interpretation, where one party has partially performed the contract and the other party accepts such performance and asserts that the deposit penalty rule should apply in proportion to the unperformed portion, the people's court shall support such assertion. Ultimately, the court supported the forfeiture of only 40% of the deposit, with the remainder being applied toward the purchase price.

Lawyer's Observations

First, the greatest risk of a bilingual contract is not that one "cannot understand it," but that one "understands both versions yet they differ." In this case, the Chinese version stated "deposit," while the English version stated "advance payment," which are entirely different in legal nature. If the contract does not specify which text prevails, then once a dispute arises, the court can only make a comprehensive determination based on trade usage, the language of communications, the backgrounds of the parties, and other factors, and the outcome is uncertain.

Second, a deposit is not something that can be stipulated in whatever amount one wishes. Any amount exceeding 20% of the amount of the principal contract does not produce the effect of a deposit. Many enterprises mistakenly believe that as long as they write "deposit," they can forfeit it in full, but in reality the law imposes a clear upper limit in this regard.

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Third, partial performance may trigger the "proportional application of the deposit penalty rule." A defaulting party does not necessarily lose the entire deposit. If it has partially performed the contract, and the non-defaulting party accepts such performance and asserts that the deposit penalty rule should apply in proportion to the unperformed portion, the court may support such application on a proportional basis. This reflects fairness and also reminds the non-defaulting party to preserve evidence in a timely manner and to state its claims clearly.

Lawyer's Recommendations

1.In foreign-related contracts, use a single-language text wherever possible. If a bilingual text is indeed necessary, it should be expressly provided that "in the event of any inconsistency between the two texts, one specified text shall prevail."

2.Accurately distinguish between a "deposit" and an "advance payment." A deposit has security and punitive functions, whereas an advance payment generally only has the nature of a prepayment of the price, and the legal consequences differ.

3.Keep the deposit ratio within 20%. Any excess does not produce the effect of a deposit and should be treated as purchase price.

4.After taking delivery of the goods, the buyer should inspect them promptly and raise any objection in writing. If a quality objection is not raised within the agreed time limit and in the agreed manner, and the goods have already been resold or exported, this may be deemed acceptance of the quality of the goods.

5.Once a dispute arises, engage a professional lawyer as early as possible. Foreign-related cases involve multiple issues, including international conventions, domestic law, contract interpretation, and evidence preservation. A lawyer can assist in determining the applicable law, designing litigation strategy, and assessing the proportion in which the deposit penalty rule applies, so as to avoid "appearing to have a strong case yet losing on the details."

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In international sales of goods, every word of a contract term may affect the final outcome. The early involvement of a professional lawyer can often help an enterprise close risk loopholes at the contracting stage and, at the dispute stage, maximize the protection of the enterprise's lawful rights and interests.