how to avoid common mistakes when entering into …...how to avoid common mistakes when entering...

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

6/7/201630/11/10

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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

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