Contracts are important, and though they require time and resources to complete, they are worthwhile. Written commercial agreements are increasingly commonplace in China and are routinely prepared in both parties' languages. However, foreign companies should have their own legal representation and not rely solely on the Chinese party’s lawyer.
The contract should be commensurate with the importance/size of the deal. There is no point in having dozens of pages of complex terms and conditions when it is a straightforward purchase.
The Chinese side may want to avoid complex contracts for fear of having to understand detailed legal language in English or other foreign tongue. An over-the-top and uncompromising refusal to negotiate a written agreement could be a warning sign about your Chinese partner's intentions or commitment to the transaction.
Chinese companies may suggest sharing the same local Chinese lawyer to save everyone money and to move things along faster. Though it may seem a sensible recommendation, all foreign entities interested in signing a contract in China should seek legal advice from a separate lawyer familiar with Chinese laws and regulations.
In the case of multiple contracts, it is important to clarify whether one contract was to supersede the rest or whether the multiple contracts all remain valid.
In some instances, where there are contracts written in English and Chinese, the English language contract may say that both would have the same force, however, more often than not, the Chinese contracts state that the Chinese language contracts would control.
Under Chinese law, this would mean that the Chinese language contracts would control.
A foreign company cannot assume that the other party’s Chinese lawyer will equally represent the two sides and that the Chinese translation either doesn’t matter and/or is fairly transcribed/translated into English.
Ideally, a bilingual lawyer should prepare the documents to ensure that the content is identical. If not, be sure to have the translation reviewed by a qualified translator.
Translation errors in written agreements in China can be the result of negligence but can also be deliberate. In any case, it is not uncommon for disputes to result from bad translations.
For this reason, to have an effective agreement, a foreign company should adapt the agreement terms to the specific transaction and have their own bilingual Chinese lawyer draft, or review, the contract prior to signing.
Pitfalls to watch out for when negotiating a contract
Make sure you truly understand who the other contracting party is. Be wary if your agreement is signed by a company other than the one that negotiated the agreement, as it may mean the Chinese side is looking to shift its legal liabilities.
Ensure that you are signing an agreement with a legally registered company. You can only find this out by conducting due diligence that includes reviewing the Chinese company's business license to confirm its validity, the official Chinese name, address, and legal representative. Your research may lead to useful information such as the company's ownership and business scope.
Ensure that the Chinese representative signing the agreement actually has the authorization to sign the contract. Commercial agreements should be signed under the authorization of the Chinese company's legal representative. If someone other than the legal representative is signing, written authorization should be obtained to verify the signer's authority.
Having the Chinese side use its official chop (stamp) to stamp the agreement is an important way to ensure the Chinese party is consenting to the terms of the deal. The Chinese company's official chop is registered with the Public Security Bureau (PSB). You can also request that the Chinese company's chop be used to stamp/initial each page of the agreement separately to avoid the possibility of pages being replaced later.
Chinese Law
Agreements can be considered invalid if they do not comply with Chinese laws or regulations. One area where invalidation becomes a possibility is when a deal falls outside the business scope of your Chinese partner.
Business scope is a relatively rigid concept in China, with each Chinese company having an approved and registered business scope. This determines what activities the Chinese party can and cannot engage in. Having your Chinese partner engage in activities that are not permitted under its business scope can be grounds for invalidating the agreement.
You can validate business scope through a company's business license or its file with the State Administration for Industry and Commerce (SAIC).
Damages for breaches to contract
If a breach of contract results in damages, you can claim compensation. The method for calculating compensation is based on the losses suffered, but it is also possible for parties to include clauses that clarify specific damages or ways to calculate specific damages. Such clauses need to be fair and reasonable/proportionate but have the added benefit of giving you recourse where it is difficult to prove how much damage you have suffered.
For a variety of reasons, contracts may no longer be suitable for you or your Chinese partner. Without a well thought out exit clause in the agreement, ending a business contract can become complicated and costly. Inserting an exit clause allows clarity on how a non-breaching party can terminate the contract.
Arbitration
Under Chinese law, the parties are free to choose binding arbitration as dispute resolution mechanism. Arbitration can be quicker and less expensive than litigation. However, access to arbitration is only possible if your commercial agreement expressly provides for it.
At a minimum, a clause would state that both sides agree to arbitration, what will be subject to arbitration and the specific arbitration commission that will do the arbitrating.
For arbitration within China, the CIETAC (China International Economic and Trade Arbitration Commission) is the most frequently selected arbitration forum. Foreign arbitration forums are also possible and should be negotiated at the outset and included in the contract’s arbitration clause.
China is a party to the New York Convention on the Recognition and Enforcement of Arbitral Awards (New York Convention), meaning that most foreign awards obtained in arbitration can be enforced in China as long as the arbitration clause is compliant with Chinese legal requirements.
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