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.

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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?

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?

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?

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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