10 steps to safeguard your purchase deal with Chinese suppliers
Many buyers pay no mind to their contracts with payments to contracted goods usually amounting to even over millions of dollars. In many occasions, a buyer makes his decision on closing a deal and only let a proforma invoice full of ambiguity act as the witness. Before that, it is very likely that this buyer just finished the whole process of negotiation and confirmation relying on several unidentifiable pictures regarding specifications and delivery issues via Wechat or WhatsApp with his Chinese suppliers.
When disputes occur, you will find that it is too bold and unsafe. And it would be extremely hard to protect legal interest based on simple chat records or invoices.
An integral written contract instead of leaving all your requirements lying on scattered chat record will hold your transaction harmless from fraud and make dispute resolution easier when problems occur. Here are some advices on what you should pay closer attention to when drafting or auditing a contract.
1.Mind the name on the contract
First, you have to know whom you are dealing with. You are supposed to confirm if the company’s name specified on the proforma invoice or purchase order is identical with the name of whom you initially negotiate with through website or online chat applications. Disputes occur from time to time where a buyer contacted a salesman who claimed to be the official representative of a manufacturer and then they jointly reached a consensus with regard to a transaction on website, then the buyer received a proforma invoice and found the name of seller stated on it was not in compliance with the above-mentioned manufacturer.
In fact, many Chinese manufacturers are playing the trick of using another HK-located company to receive payment and to issue proforma invoices on its behalf. This condition makes it harder to file a case against the supplier because from the prospective of documentations, you signed a contract with the HK company, not the actual manufacturer operating in Chinese mainland. Therefore, you should be double careful when you find that a HK company appears on your contract or invoice.
2.Detail your specifications
Second, you should describe agreed specifications as specific as possible. Complicated build of machinery encourages buyers to affix the purchase order with a separate technical data sheet. However, this does not mean that buyers of light industry products need no special descriptions. The most convenient and time-saving strategy is to appoint that all goods under the contract shall be conforming to certain international or domestic standards.
For example, China government has set a quality control system for nearly all of industry products from eggs to high-tech device, and an individual standard code has been assigned to each one of products, which refers to a respective technical data sheet and a method of testing.
For example, KN95 (originating from China) importers could require that all goods shall be conforming to Chinese standard GB-2626. If any quality defect occurs, the buyer can thus send samples to authorized testing institute for inspection held according to GB-2626 standard. The test report indicating the non-compliance to GB-2626 can act as a sound evidence if the buyer chooses to go to court. Additionally, adoption of CE standard or FDA certificate is workable as well as they both represent an objective standard (EN and ASTM).
Third, merely appointing a term of delivery is not enough to make sure all goods are sent intact. Many importers complained that the goods are roughly packed and packaging is in bad condition, with boxes broken from outside and a large number of goods missing. Therefore, we recommend that you require in the contract that goods shall be packed in certain methods, for example, sealed with tapes.
4.Introduce inspection rules
Fourth, inspection is indispensable and you should make sure that contract clauses leave you enough time to handle an inspection. Many sales agreement templates stipulated that the buyer shall finish inspecting and report any defect within several days (usually less than 10 days) upon receipt, otherwise the goods shall be deemed complied with agreements.
However, if Contract Law of PRC is applied, this preclusion of buyer’s right of claiming variance is completely legally invalid as the time period is too short for inspection regarding underlying technical defects. Although it is okay for you to apply for the court to dismiss this clause quoting law codes, I recommend that you require that an objection in connection with quality on the basis of lab testing or customer complaint is available for the buyer within a reasonable extended term, such as a year.
Additionally, Chinese court probably rejects to recognize the conclusion of a test report issued by foreign labs, especially when the lab is deemed not authoritative. Therefore, you’d better predefine the status of a third-party testing institute as a judge in connection with quality inspection.
5.Give effect to chat records/emails
Fifth, many importers prefer instant messaging tools such as WhatsApp as communicating platform when looking for a supplier. With business issues decided while chatting, you are very likely to state more specific requirements than those specified on the official contracts. It is thereby of benefit for you to predefine in the contract that agreements reached amid online chatting are binding for the seller.
6.Terms of payment
Please agree on explicit terms of payment. Basically there are two terms of payment: letter of credit(L/C) and telegraphic transfer(T/T). Payment through L/C is much safer as it is endorsed by bank credit and thus can usually be seen in transactions where the buyer and seller may distrust each other. However, high level of security comes with high expenditure and complicated financial processes, for which many market players prefer T/T that takes relatively less money and energies. T/T may be safer when you make payment to the bank account whose beneficiary name is identical with the other party of the contract, compared with transferring to other bank accounts. In short, these two methods both have pros and cons, either L/C or T/T cannot necessarily be considered prevailing in a specific setting.
7.Concerning the delivery
Nominate the responsible person for shipping and receiving the shipment, and define the liability of carriage in accordance with the Incoterms.
Modes and Duration of Transportation: Although it is difficult to determine the international shipping time due to the current epidemic, please negotiate the transportation method (air/sea/rail) and the expected shipping time as much as possible.
8.Liability for Breach of Contract
Where quantity, specifications, the term and method of payment as well as delivery is stipulated, the breach of contract can be clearly defined in accordance with contractual terms, and the next step is to claim damages. Where liquidated damages that can be defined as an exact prescribed amount of compensations for losses is stipulated, parties to a contract can claim this amount once one party violates the contract. Therefore, liquidated damages is a straightforward tool to be drawn upon to claim compensations as it frees you from calculating your losses, although it may be deducted by the court when reasonably deemed excessively higher than actual losses.
When you reckon that the quality is non-compliance with requirements, clause of inspection mentioned in the part 4 comes in handy. What about delay in delivery? Where the subject matter cannot be delivered within the agreed time limit due to any reason attributable to the seller, you could immediately issue an articulate notification to urge the seller which shall involve an extended reasonable time limit for delivery. When the extended time limit expires and the seller still fails to carry such obligation, you are entitled to the right of terminating the contract and ask for a refund and compensations for losses.
Liabilities of disclosure of business secrets: please inform us what level of confidentiality you intend to achieve. For example, the product shall not be realized by the public before it is put on the market, or the commissioned technology shall not be divulged.
Dispute resolution: Sue in the court, or arbitration? Which institution you prefer (we could give you advice if you need).
Above 10 points may help you ensure the integrity of a sales agreement, however, they do not cover all risks. Contact us if you need our assistance.
Larry Zhou, Partner
Landing Law Offices China
Mobile& WhatsApp: +86 13342931852
Linkedin: Larry Zhou