Contract compliance and effective enforcement of contract rights concern every company doing business in China. When considering the issue of contractual enforcement, companies often focus on dispute resolution mechanisms, which indeed form a critical component of a contract.
However, effective contract enforcement should be viewed as only one part of the overall contractual arrangement, perhaps the last one. Many problems that foreign companies encounter when doing business in China could be avoided by carrying out due diligence in partner selection, and by establishing a clear, well-drafted, and legally workable contract from the very start of the business relationship. Doing so is not – in most cases – a particularly difficult issue.
There are three general reasons for having a contract in place when doing business in China: clarity of obligations in the business deal, prevention of a dispute, and evidence in case of a dispute. This is regardless of whether the contract is drafted by EU SMEs without legal assistance, or by external professionals (which is the recommended option for EU SMEs without lawyers familiar with Chinese law and practice). In the contract, EU SMEs shall find replies to questions which look obvious, yet many still do not pay sufficient attention to asking and answering them. Some of these questions are:
Do I know my business partner well? Does the information in the contract correspond to the reality and official database of Chinese companies? Is the person negotiating and signing the contract authorised to do so? Is the official company chop affixed to the contract an official one? Is the product and other deliverables identified without any doubts in terms of quality, quantity, design, etc. Are payment conditions drafted in a way that I am safeguarded against potential late payments or no payments? Are the terms of delivery clearly formulated? Who bears liability for damage? In the case of a breach of the contract, what are the mechanisms set to solve the situation as smoothly as possible? Is there a system of penalties or remedies set? If the contract is bilingual, are both versions identical so that there is no misunderstanding between parties? In case of a dispute, what action will take place? Litigation or arbitration? Under what law and in which jurisdiction? In the case of early termination of the contract, what procedures are necessary to conduct?
These guidelines identify the key terms, tips and examples that should be considered in a sales contract for the export of goods to a Chinese buyer. The objective is to provide European SMEs with basic, practical insight into the contractual aspect of Chinese businesses, and to help them evaluate the viability of contract arrangements with their Chinese business partners.
Specifically, the guidelines describe what provisions are important and why, and provide legal and practical background. Particular attention is given to payment provision, sufficient identification of contracting parties, description of product and delivery terms, language and contract validity, dispute resolution mechanisms, and term and termination of the contract.
Finally, the last section of these guidelines provides an overview of new regulatory developments in terms of privacy and data protection, which must be taken into consideration when developing business and negotiating in China.