How To Minimise Risk When

Concluding Contracts in China

Sofia, May 16, 2016

1 A project funded by the European Union

 Agenda

 What EU SME Centre does

 What to know before you conclude a contract
 What to do when things go wrong

2
What the EU SME Centre does
 The EU SME Centre

• The EU SME Centre in Beijing is a project implemented with the financial

support of the European Union and managed by a consortium of six
chambers
• To assist European SMEs to export to China and establish, develop and
maintain commercial activities in the Chinese market
• Confidential information and advice, and practical support services
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 Advice
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 Advice
Centre

First-line advice to get you prepared

for entering the Chinese market.
Frequently-asked questions from European
SMEs include:

• Is there a market in China for our

product?
• How to find a distributor ?
• What issues should I look out for before
signing a contract?
• How do I avoid business scams?
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products to China?
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 Training
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Plugging the knowledge and

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 Training
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What to know before concluding a contract
 Why to Have a Contract?

 Clarity
 both parties know what is the content of the deal

 Prevention
 discourage parties from breaching it

 Protection
 guide for when things go wrong
 Concluding contract with

Agent

Joint venture Service

partner providers /
intermediaries

Distributor /
potential
EU Landlord
buyer
SMEs

Manufacturer Employee

Others
 Who is Who?

 中文名字 Chinese name written in Chinese characters

 北京市，朝阳区, 麦子店西街5号，盛福大厦910， 邮编
100012 Complete address in Chinese characters

 王兰 Legal representative’s name

 Authorised representative’s name, ID number
 Business licence number
 Fixed line phone number

Always ask for a duplicate business licence with affixed company

stamp
“Small”/”Duplicate”
Business Licence

30/11/10
 Why Business Licence?

 Without a business licence

 you have no idea whom you are dealing with and
you cannot verify anything

 With a business licence

 Either it is an authentic one or it is fake\stolen one
 In both cases it is a piece of “information” and
you can verify it against
 official online register of companies or
 call and investigate directly with company itself or with
third parties
22
Online AIC Database

• Contains Chinese
companies
registered with AIC

• Website only in
Chinese

• You need the

Chinese name of
your partner
 What Can Be Checked Online?

Establishment Business
Registered
Company Name Date / Term of License No. /
Address
Operation Business Scope

Registered / Officers
Company Type Paid-up capital Shareholders
• Legal Rep
• Board of Directors
(careful if registered • Supervisors
after Mach 14) • General Manager

Status Punishments /
Mortgages Abnormal list /
• Active illegal acts
• Deregistered (not always complete) blacklist
• Suspended (self reporting)
 Tips

• How and where did you meet the

partner?
• Ask for business licence, special
permits
• Compare information
• Personal contact
• Read our “Knowing Your
Partners in China” report

http://www.eusmecentre.org.cn/content/knowing-your-partners-china
Validity of the Contract
 Only Valid Contract Can Help

 Is signed by Parties having capacity to conclude

contract

 Contract has required form (eg. notarized)

 Valid upon approval of authorities (e.g. technology

transfer contracts)

27
 Form

 Written
 Hardcopy - “Paper” contract, Purchase order,
others
 Emails, Scan, Fax – problem with authenticity
 Electronic systems

 Verbal - ???

 Performance of major obligations

28
 Signed by Authorised Person

 Get to know who is the legal representative of the company

 Chinese name on business licence and in the online register

 Ask for position of authorised person within the company

 Meet the person or at least suggest a video call

 Ask for written authorisation letter signed by legal

representative with affixed company stamp

 Verify with a third person

 Ask for ID copy

 Company Stamp(s)

 Equals to signature

 Chinese name on the stamp must be SAME as

on
 business licence

 contract/purchase order

 account
Get the Official Company Chop

The official Company

Chop is:
• Circular (or oval)
• Red ink
• Name in Chinese
Characters (sometimes
also in Chinese and
English)
• Completely legible
 Example

Mainland China company

Hong Kong stamps examples
stamps

32
These Are Not Official
Chinese Chops
 How To Handle Chops

 Official Chops
 Next to the official Company Chop, for example chops for Finance, HR,
Contracts and Customs

 Binds the company – also in case of unauthorized use

 Forged chop non-binding
 Compare with: chop on official docs (AIC) / chop registered with PSB

 Signature of Legal Representative also binding

 Legal Rep may also use his / her personal chop
 We recommend: ask for both company chop and Legal Rep
signature
 Question

 What can you say about following business partner:

Mei Ying Ye Co. Ltd

Fuhua Yi Lu, 149
Guangzhou, China
Contact: Snow Wang snow@163.com

1. Chinese company with authorized person called Wang

2. Hong Kong company with authorised person Wang
3. Chinese company with seat in Guangzhou

35
Payment conditions – how to be paid
 Payment Terms

 In all regular payment methods contract is an important

document which has to be submitted to the bank
 What currency you want to be paid in
 What is included in the price (import tax, consumption
tax, customs tariff, transportation…)
 Optimal money transfer
 Importer has to have foreign trade license. This license
entitles him to do foreign exchange transactions based
on real commercial deals.
 Payment Terms - Currency

 Chinese importer/buyer can pay in foreign currency.

 In practice he is buying the currency from the designated

bank and has to submit to the bank documents such as
contracts, purchase order to prove authenticity of the
transaction

 Generally Chinese buyer wants to set price in RMB/CNY

 Payment Terms - Currency

 For offshore companies it is possible to have RMB account

opened in a offshore bank, but it is more useful for traders
(buying and selling from/to China)
 It is also possible for offshore companies to open RMB
onshore bank account in China
 Cross border trade in RMB is also monitored by Chinese
authorities.
 Chinese trading company can also pay from its offshore
account
 In all cases it is important that account is well identified.
 Payment Terms - Price

 It is advisable to clearly define what the agreed price

includes. In particular
 taxes and customs duties, in order to avoid surprise of being
paid less
 As for the INCOTERMS most often used are FOB or CIF

 Retention-of-ownership clause. Chinese law establishes

that ownership of goods I transferred upon deliver,
unless otherwise agreed between the parties. And so
the parties can agree that ownership passes only upon
payment of goods.
 Payment Terms - Mode

 Upon delivery
 Chinese buyer will naturally insist on this mode. Chinese companies are relatively
slow in making payments. Foreign sellers will generally spend a lot of time
negotiating a solution to keep the buyer and avoid a long battle in litigation or in
arbitration. Better avoid such situations

 Advance payment
 Usually paid through progress payments and/or upon shipment, eg. against bill of
lading.
 Buyer may/will insist on delaying part of the payment until the goods have been
received and inspected or
 The goods are inspected by the buyer or its representative before they are
shipped
 In some cases the good needs to be installed and then it is common to link
payment to the installation.
 Payment Terms - Mode

 Letter of Credit
 Tends to be a preferred method of payment for larger transactions.

 Many smaller Chinese companies are not familiar with letters of

credit and/or will have to make considerable expenses to convince
their bank to support them, which is why they are mainly used in
larger transactions only.

 In any case the foreign seller will best insist on letters of credit from
well-established banks in China (Bank of China, Industrial and
Commercial Bank of China, Bank of Communication, China
Merchants Bank…)
 Situations

 Ship the goods to Hong Kong. Since there is no customs

Declaration Form issued by China Customs Office to support the
physical inflow of goods, the Chinese buyers will not be able to pay
the money from China, but could only pay to EU exporters from an
offshore bank account (often the company having such account
might not have sufficient assets – typically offshore shell
companies)
 Ship the goods to mainland China and pay from their Hong
Kong account. The foreign exchange compliance risk (mismatch of
goods flow and money flow) will remain to the Chinese buyers.
 Ship the goods to one city in mainland China and pay from
another city in Mainland China. As long as the bank account in
another city belongs to the Chinese buyers, upon examination of
relevant transaction documents (e.g. import contract, invoice, etc.)
by the bank, the payment for importation could still be valid.
Terms of delivery
 Packaging and labelling

 Time and place of delivery does not make problems.

 What is often missed is
 Packing and labelling specification,
 Means of and conditions for shipment,
 Procedure for acceptance and inspection
 The more detailed terms agreed upon the less likely this will
lead to disputes
 In addition (apart from the contract) it is advised to send
pictures of the product with labels (in Chinese) to the importer
who also deals with customs procedures (practice varies port
by port)
Liability and penalty
 Liabilities and Warranties

 It is a good idea to clarify specifically what warranties

are given with a product and for how long, and what
liabilities may arise if one of the parties fails in its
performance.
 For example does the seller have the obligation to
replace unqualified products and within what period?

 What kind of damages should the purchaser be able

to claim if the seller breaches the contract?
 Liabilities and Warranties

 Chinese law allows penalties only in the form of liquidated

damages. This means that the parties can agree to a fixed
amount of damages in case of breach, on the other hand a
Chinese court or arbitrational tribunal may adjust the final
amount based on the actual damages suffered by the non
breaching party.
 With this in mind it is important to be strategic on determining
the amount of liquidated damages in a contract.
 If too low this can impact the ability to obtain compensation for
losses but
 if too high it may be more easily challenged by a court or tribunal
Term and termination
 Termination

 One transaction contract no problem

 Many contracts are signed as framework contracts with
issuing new purchase orders.
 Contract is valid then for a certain period
 In such case it is important to set up rules for early termination
which may cause problems in case for example the price is fixed.
 Termination clauses could be connected also to
 market development (e.g. the price of raw materials) or
 even be fully discretionary (i.e. each of the parties may initiate
termination without any reason, usually with some advance notice).
Governing law and language
 Governing Law

Chinese law Choice of law

 Both parties are registered in “Foreign related contracts”

China and
 Where either both parties or
one party is registered abroad
 Contract does not contain  Subject matter is within the
foreign element territory of a foreign country

52
 Language

 Ideally bilingual
 Translated\drafted by lawyer

 When both versions are equally binding

 Chinese court will look at Chinese version primarily

 When English version prevails

 Chinese court will engage official translator

53
Other important provisions
 Other Provisions
Nobody Pays Attention To

 Relation to previous contracts, MoU, correspondence, if

any

 Confidentiality and intellectual property rights

 Make Appendices (business licence, technical

specifications) part of the contract

When things go wrong
 Fraud or Commercial Dispute

 Both Parties intend/intended to fulfil the contract

 regular contract and regular commercial dispute

 One Party planned fraud

 Contract is not valid from the very beginning since
good faith is missing
 Liability exists
 Unjustified enrichment
 Criminal liability
 Fraud or Commercial Dispute

 Fraud
 Swindlers know from the outset you will try to come after them
 They cover their tracks and are two steps ahead of you

 Fraud can be reported to the Public Security Bureau (PSB)

 Location of counterparty or (if non existent) location of bank account
 Do not expect any active / sophisticated investigation
 Embassies / consulates can sometimes help to apply pressure

 Genuine business dispute is different

 Probably no intention to default from the outset, so recourse possible
 Act swift and determined
 Apply pressure if possible (e.g. stop delivery, freeze bank accounts)
 Where Dispute Will Be Settled?

 Depends on what you said in your contract

 If nothing said then the court of

 place of defendant residence or
 place where the contract was\should be performed
are usually competent

 It is always helpful to include dispute settlement clause

into your contract

59
 Litigation – Going to Court

 Less flexible and may take longer

 Appeal is possible

 Opt for litigation in China

 Majority foreign court awards are not enforceable in China

 If defendant is a Chinese person\company it is more likely

they have assets in China – important for enforcement
 Arbitration

 Arbitration awards are enforceable in China

 Arbitrators are used to decide commercial cases with

foreign element
 Can choose international (Hong Kong, Singapore, any
other country which is party to NY Convention) – might
be a bit more complicated or

 Chinese arbitration (e.g., CIETAC in Beijing) commission

 Arbitration Clause in Contract

Stipulate clearly in the contract

 Arbitration body

 Matters for arbitration

 Language

 Place

 Set up of the arbitration tribunal

Common myths
 Some of the Myths

 Why papers? I have guanxi – good personal relationship

 It is “China”, it is different, you have to accept local rules

 Go via Hong Kong

 If you do not give exclusivity, partner will not cooperate

with you

64
 Some of the Myths

 You do not need a contract, it will be breached anyhow

 You cannot win at Chinese court

 If you can choose, opt for your national law

 ………and your national court

 Do not need to spend money for local advice

65
 Get Ready for China

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