• Larry Zhou

Dealing with Chinese Counterparts (2): 6 Tips when Drafting a Contract or Placing an Order

Many of our foreign clients encountered similar situation when dealing with Chinese suppliers recently — after wire transfer the payment for goods, the Chinese suppliers either kept stalling to deliver the goods, or simply could not be reached. If you are planning to deal with a Chinese supplier in the future, or continue dealing with Chinese suppliers, we suggest you should pay extra attention to the following 6 points when placing a order or entering into a contract in order to avoid the above situation.

1. The contract/commercial order that you are about to sign must include at least the following elements, and you should double check their authenticity:

1.1 the party entering the contract;

1.1.1 name of your company.

1.1.2 registered name of the Chinese company, and make sure it is a real Chinese company that is registered and currently running .

1.2 the name, standard and the amount of goods to be delivered.

1.3 the delivery date.

1.4 Contact details

It goes without saying that the above information is essential and vital to your order; you should make sure that the information on the contract/commercial order is correct. You could find some of the information at the National Enterprise Credit Information Publicity System website (http://www.gsxt.gov.cn (http://www.gsxt.gov.cn/)), although this website does not have an English version.

When signing the agreement normally the Chinese counterparts shall sealed the contract and meanwhile their legal representative (for companies), the executive partner (for partnerships) or the person authorized by the entity (always check if the person has get written authorization letter). You can check if the person signing the contract is legal representative or the executive partner at the NECIPS website again.

1.4 dispute resolution clause (we always recommend setting arbitration as the means of dispute resolution for the reasons below).

1.5 liquidated damages clause: this clause has the effect that a payment of a specific sum should be paid by a defaulting party to the other party.

You should consider adding this two clauses above to your contract with the Chinese counterparts, as it not only grants you an advantage in dispute resolution, and also grants you a right to claim damages in the said amount. If you need suggestions drafting the clauses or contracts in general, you could contact us.

2. Get to know your Chinese counterpart. We understand that companies have their own many reasons to conduct business in their specific ways, but please be alert if your Chinese counterpart has any one or more of the following characteristics:

2.1 they use one company to receive order/ enter into contracts, but use an account of another entity (company or personal account) to receive online payment.

2.2 they use a Hong Kong/ offshore entity to sign the contract but the company actually operates in Mainland China.

2.3 during the transactions/correspondences, they use many different entities and account to contact you/sign the contracts.

3. Try to include as many persons in the contract as possible, e.g. you can require your China supplier to add its Hong Hong company, Shenzhen company/factory as well as its beneficiary owner as parties of the contract. In this case, shall they breach the contract, you could go after any party on the contract, and you could enforce the personal asset of its beneficiary owner.

4. Try to get the ID certificate copy (at least ID No.) of its beneficiary owner - this is the minimal requisite to bring a lawsuit against a natural person in China.

5. Make sure your agreements contain a dispute resolution clause that sets down arbitration as the means of dispute resolution.

5.1 Usually court judgements cannot be enforced across the border. Even though Hong Kong and Mainland China now recognize each other's judgements, the courts still need time and procedures to enforce them. However, on account of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards which is applicable in all of its 130 member states (more than 130 countries), it would be much easier to enforce an arbitration award in a cross-bordered transaction.

5.2 Litigation in China could cost more than one and a half year (there could be first trial, appeal and second trial), and there is no time limits set down for cases that have foreign elements. Meanwhile because that the arbitration award is final after one instance of proceeding, and most arbitration institutions in China have set down time limits for arbitration proceedings, arbitration in China could be much faster than litigation.

5.3 Usually arbitration institutions allow parties to agree upon parties to be paying the attorney fees in arbitral proceedings

6. Agree on email as principal means of communication, in that email records are more acceptable as evidence than chat history on social media.

Should you have any questions or need assistance in your dealing with Chinese suppliers, please feel free to contact us.

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