How to avoid common mistakes when
entering into sales contracts for China?
Rogier van Bijnen, R&P China Lawyers
7 June 2016
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Speaker Biography
Rogier van Bijnen R&P China Lawyers
• Head of R&P’s Beijing Office
• Works as a lawyer in China since 2009
• Expertise: commercial contracts, joint ventures
and partnerships, M&A, dispute resolution,
employment and IP
Agenda
• Basic Due Diligence
• How to Properly Execute Contracts?
• Smart Contract Design
• Payment Terms
• Jurisdiction and Applicable Law
Basic Due Diligence
The Need For Due Diligence
“We constantly see foreign companies enter into contracts
without doing any investigation and it continues to surprise us.
You say that our form of due diligence is too expensive. We say
that being cheated is far more expensive. Given that the
chance of being cheated in China is extremely high, it makes no
sense to us to take the risk. Our Chinese clients would never
enter into an important contract without a personal investigation
of the other side and we find it very strange that these
foreign clients who know even less about China willingly
take a risk that virtually no Chinese company would take.”
Source: Chinese Lawyer quoted by the China Law Blog
What Are We Looking For?
• Your buyer does not exist
Fake Companies
• Promotes itself as industry leader, but is an imposter
Paper Tigers
• Your buyer has no substantial assets/business
• Buyer proposes to contract with affiliate that has no assets
Shell Companies
Always Check the Basic Facts
Online Search
• General search
• English / Chinese!
• AIC database
• Do they exist?
• Company name
• Business scope
• Registered capital
• Legal rep
• Customs database
• Trademarks
• Website registration
Just Ask!
• Business license
• Import license
• ID Legal Rep
• Certificates
• Property title / lease
• Trademarks
• Call neighbours
• Foreign references
• Customers
• Business partners
• Trade associations
Red Flags
• Too good to be true
• Facilitation fees
• Unsolicited request
• They keep pushing
• No down-payment
• No references
• Website English only
• No corporate email
• Inconsistencies
Do I Need Help?
6/7/201630/11/10
• Help that is generally available:
• Other foreign companies in the same industry
• Embassies / EU SME Centre / Chambers of Commerce
• Market entry consultants / Accountants
• Lawyers
• Investigation companies
• It is always a cost/benefit analysis
• Outside help is definitely cheaper before things go
wrong than afterwards
• If the amount at stake is low, little can be done once scammed
How to Properly Execute Contracts?
Get the Official Company Chop
The official Company
Chop is:
• Circular (or oval)
• Red ink
• Name in Chinese
Characters (sometimes
also in English)
• Completely legible
These Are Not Official Chops
How To Handle Chops
• Official company chop binds the company
• Also binding in case of unauthorized use
• Forged chop non-binding
• Signature of Legal Representative also binding
• Legal Rep may also use his / her personal chop
• For important contracts we recommend: ask for both company chop and
Legal Rep signature
• In court proceedings original documents usually required
• If impossible / not practical: make sure a chopped/signed copy is
received by email and this email is safely stored on a server (such email
can usually be notarized and serve as evidence in court)
Smart Contract Design
One Simple Question
“What can you actually and immediately
control when your counterparty does not
perform?”
Some General Rules
on Smart Contract Design
• Have clear deliverables
• Limit your exposure
• Align interests
• Have an economically viable deal
• No unrealistic risk shifting
• Create leverage (stick / carrot)
• Be careful with exclusivity
• Limit in time / scope / geography (never for the whole of China)
• Always subject to minimum orders / performance
• Try to avoid general terms & conditions in China
• Make sure the agreement is compliant with law
Typical Sales Contract Clauses
• Parties
• Always include Chinese names
• Key contractual obligations
• When delivered / performed?
• Product name / quantity
• Define quality (drawings, samples) /
acceptance procedure
• Packaging / labelling
• Incoterms (e.g. EXW, FOB, CIF, DDP)
• Payment
• Retention of title
• Ownership transfers upon payment
• Term / termination
• Mainly for framework contracts
• Warranties / non-conformity
• Length of warranty period?
• Consequence of non-conformity
• Limitation of liability
• Penalties
• Liquidated damages only
• Court may mitigate
• Force Majeure
• Intellectual Property
• Non-compete
• Confidentiality
• Language
• Governing Law / Jurisdiction
Keep Monitoring the Contract
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• Be disciplined with key contract terms throughout
• Require chops / keep original documents
• Get drawings / samples confirmed
• Collect / keep evidence of your performance
• Stop new shipments immediately on non-payment
• Keep insisting on payment
• If you let it go, the buyer thinks payment is not important to you
• Escalate at the right time – not too early, not too late
• Demand letter often a good start
• Increase pressure proportionally
Payment Terms
Payment Terms
• Payment terms depend on bargaining power and industry
• If possible: avoid payment after delivery
• Otherwise: factor in write-offs / renegotiations / extra discounts
• Also avoid payment that is dependent on unverifiable information
• Security deposits / performance bonds customary in some industries
• Try the following instead:
• Advance payment
• Payment against bill of lading
• Letter of Credit – well established banks only!
• Payment after inspection / upon installation
• Don’t forget!
• Taxes, import duties
• Currency, default interest
• Specify bank account
Jurisdiction and Applicable Law
Think About Enforcement
When Drafting Your Contract
Foreign court judgments
not enforceable in China
Foreign arbitration in
principle enforceable in
China
If you are most likely to
file suit: litigation in
China
• Domestic cases: only allowed if foreign element
• China is party to the New York Convention
• Previously: many public policy/due process exceptions
• Nowadays: report to Supreme Court if rejected
• Work-around: case not accepted or endlessly delayed
• If finally enforced: any assets left?
• Either arbitration or courts in a tier-1 city
• Possibility to immediately freeze assets
• Judgments directly enforceable
• Local courts will assist with enforcement
Only consider foreign courts when:
• it is very unlikely you will be initiating litigation;
• the Chinese side has assets offshore; or
• applicable bilateral treaty (e.g. France, Italy, Spain)
Where Do You Go to Court?
Forum
Choice in Contract
Court
Arbitration
No Choice in Contract
Court
• Connection with dispute required (e.g.
place of: defendant / plaintiff /
performance / execution / subject
matter)
• Always agree in writing
• Only with official institutes • e.g. CIETAC, SHIA
• No ad hoc arbitration allowed
• Have to clearly agree in writing
• Copy model clause from website
• Domestic parties: location
defendant / performance
• Foreign parties: also place of:
execution, subject matter,
seizable property, rep office
Arbitration vs. Chinese Courts
Int. Arbitration Chinese Arbitration Chinese Courts
Speed Slow Relatively fast Usually ok (but foreign
related cases often slow)
Costs Expensive Reasonable Court fees are low
Quality Good Large institutes ok, avoid
unknown ones
Tier-1 cities ok, avoid
smaller cities
Appeal No No Yes
Appoint Forum Yes Yes No
Evidence Most flexible Somewhat flexible Strict rules
Language Flexible (if no choice:
usually English)
Flexible (if no choice:
automatically Chinese)
Chinese
Confidentiality Yes Yes Usually not
Asset
Preservation
No Yes Yes
Which Law Applies?
Applicable Law
Freedom to Choose
Choice in Contract
Contract is Silent
PRC Law Mandatory
• Law stated in the contract applies
• Exclude UN Convention of Goods
explicitly if this should not apply
• UN Convention International Sales of
Goods (if applicable)
• Law most closely connected to
contract or of place of party with
typical contract obligations
• PRC courts may apply foreign law
• No foreign elements: all parties Chinese and subject
matter and execution of contract in China
• WFOEs, JVs are considered Chinese!
• Foreign law violates PRC public policy
• Certain specific contracts