Negotiating a commercial agreement in China
A written agreement is important, even if you believe your business partner to be trustworthy. Trust is a prerequisite for a successful business relationship, but trust alone is not enough – that is where the agreement comes in.
On this page
- What are the benefits of having an agreement?
- What if my Chinese partner says that signing a contract is too complicated and is a sign of mistrust?
- Will my standard contract from Canada do?
- What are some pitfalls to watch out for when negotiating an agreement?
- Can I be awarded damages for breaches to my agreement?
- What happens when the business relationship starts to go sour?
- Should I have foreign law apply in my agreement? Should I specify that disputes be taken up in a foreign court?
- What about arbitration?
What are the benefits of having an agreement?
- Clarity on the business arrangement, including agreed-upon terms and conditions. A large percentage of business disputes arise because of misunderstanding between parties. A written agreement minimizes the risks of misunderstanding.
- Consequences should parties fail to uphold the agreed upon terms. By including specific measures in cases where the terms are breached, both parties will be more inclined to carry out the transaction in a way that is acceptable to both sides.
- An agreed-upon way to resolve disputes. Having formal procedures for dispute resolution can prevent problems from becoming overly value-destroying.
- An important document should legal proceedings be required. Courts will have a detailed understanding of the terms and conditions of the agreement and intentions of the parties.
What if my Chinese partner says that signing a contract is too complicated and is a sign of mistrust?
- Contracts are important, and though they require time and resources to complete, they are worthwhile. That said you should negotiate agreements that are commensurate with the importance/size of the deal you are doing. There is likely no point to having dozens of pages of complex terms and conditions when you are negotiating a straightforward purchase.
- The Chinese side may also be avoiding complex contracts for fear of having to understand detailed legal language in English or French. However, written commercial agreements are increasingly commonplace in China and are routinely prepared in both parties' languages.
- An over-the-top and uncompromising refusal to negotiate a written agreement may be a warning sign about your Chinese partner's intentions or commitment to the transaction.
Will my standard contract from Canada do?
A standard contract used in North America is unlikely to provide much protection should real problems arise. In fact, any off-the-shelf agreement should be avoided. To have an effective agreement, you should adapt the agreement terms to the specific transaction and have a Chinese lawyer draft, or review, the agreement prior to signing.
What are some pitfalls to watch out for when negotiating an agreement?
- 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 investigations may also 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 at a later date.
- Pay attention to the translation of your written agreement. Ideally, you should have a bilingual lawyer preparing the documents to ensure that 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.
- Agreements can be considered invalid if they do not comply with Chinese laws or regulations. Ensure that the terms of your agreement are lawful. 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. The business scope 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).
Can I be awarded damages for breaches to my agreement?
If a breach of your agreement results in damages, you can claim for compensation. The method for calculating compensation is based on the losses suffered, but it is also possible for parties to include clauses that specify 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.
What happens when the business relationship starts to go sour?
For a variety of reasons, your business agreement may no longer be suitable for you or your Chinese partner. Without a well thought out exit clause in your agreement, ending a business agreement can become complicated and costly. Inserting an exit clause allows clarity on how a non-breaching party can terminate the contract. Included in this could be what happens to any IP that was transferred (i.e. it returns all back to you, etc.).
Should I have foreign law apply in my agreement? Should I specify that disputes be taken up in a foreign court?
- Clearly, having an agreement be interpreted by foreign law, Canadian law for example, will be convenient for you, but you have to weigh the benefits with the potential costs. Chinese parties will be reluctant to submit themselves to foreign law, and Chinese courts do not have significant experience applying foreign law, in which case Chinese law may end up prevailing by default.
- Referring disputes to a foreign court also has benefits and advantages that need to be considered carefully. While foreign courts may provide a more familiar environment, perceived fairness and impartiality, you have to consider whether it will be practical to resolve all issues that come up in a foreign court. In addition, the chances of a favourable foreign judgement or award being enforced in China are unlikely, with a small exception for Hong Kong judgements.
- 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, an arbitration 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 forums. Foreign Arbitration forums are also possible and this should be negotiated at the outset and included in your agreement's arbitration clause.
What about arbitration?
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.
If you have any questions or would like to learn more about the services offered by the Trade Commissioner Service in China, please feel free to contact us.
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