Securing Succes in China: How to sign a contract
Followed by our previous article about NNN agreement(“Protecting your confidential information in China: a different ballgame”), we will discuss the importance of signing a contract and the essential articles that should be included in a contract when negotiating with Chinese business partners.
Signing a contract does not seem to be that difficult. However, it is not uncommon to hear complaints from our clients entangled in disputes with their Chinese counterparts and frequently this issue appears to play a crucial role. When seeking our assistance, we often discover that these clients lack even a proper contract between themselves and their business partners. Consequently, it is difficult for them to get a remedy for their losses. We cannot emphasize enough the importance of signing a proper contract, regardless of the individuals or countries involved in your business.
When drafting contracts, it is important to focus on the basics and eliminate unnecessary details. Straightforward contracts are more effective and efficient in China, as they minimize the risk of misinterpretation. Obligations should be clearly stated, including who will do what, when, and for how much. It is also important to include penalties for breaches, as well as the clear deadlines/milestones and termination clauses.
A summary of some other main articles which ideally must be present in your contracts would be as follows. We give an example based on a purchase agreement:
- Contracting parties: Clearly identify the parties entering into the contractual relationship. Include the official Chinese name of Chinese companies, along with other identifiers such as the registered address and legal representative. And do check if the Chinese parties offer recourse and are really the ones who have to perform.
- Product description clause: Provide a detailed description of the product, including any quality requirements. This ensures a clear standard for measuring performance and sets expectations for how obligations will be fulfilled.
- Purchasing process provisions: Include a detailed description of how the products will be ordered, including price, type, and quantity, and specify when an order will be considered accepted by the seller.
- Payment terms: Specify how and when payment should be made. Options include payment upon delivery, advance payments, or letters of credit. Clarify what the agreed price includes, including taxes and customs duties.
- Delivery clause: Describe how the delivery of goods will be carried out, including the process, periods, and liabilities. Consider including a retention-of-ownership clause to protect the foreign seller's assets in case of the Chinese purchaser's bankruptcy.
- Warranties, liabilities, and penalties: Clarify warranties, liabilities, and penalties for non-delivery or a breach. Specify the seller's obligation to replace unqualified products and the purchaser's rights to claim damages.
- Term and termination: Establish the term of the contract, whether it is a one-off transaction or a framework contract. Include conditions for early termination, such as bankruptcy, market developments, or discretionary termination.
- Dispute resolution. Where a dispute arises, you’d better choose either going to court or resolve the dispute by arbitration, not both. We strongly advice to choose an arbitration resolution mechanism when foreign countries involved since it is more neutral, transparent, and international. The verdicts are enforceable. We would suggest the contract should explicitly stipulate, among other things, the parties’ intent to arbitrate and the arbitration committee where they will arbitrate. It is noteworthy that our colleagues: Joost Vrancken Peeters and Pieter van Deurzen are appointed as arbitrators at the Guangzhou Arbitration Commission (GAC).
- At last, signing the contract: Make sure the contract is signed by the person who can really represent or bind the other party. In China this person is called the legal representative. Do check the official documents who is allowed to do this and when in doubt ask for a confirmation of the signing power by an independent lawyer or notary.
To read our article about protecting your confidential information in China, press here.
If you need further information or you need to appoint a foreign arbitrator while having a dispute in China, please do not hesitate to contact Ye Yu.