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LEGAL: How to Protect Your Interest When Entering into Commercial Contracts with Chinese Partners (Part I)
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How to Protect Your Interest

When Entering into Commercial Contracts with Chinese Partners

(Part I)

By Manuel Torres (Managing Partner of Garrigues China) & Xuezhou Chen (Corporate Associate)

BT 201604 130 01 Legal

This article and the articles of the following two months intend to introduce the key points to protect your interests when entering into commercial contracts with companies of the People's Republic of China ("PRC"). For the purpose of these articles, the commercial contracts will refer to the international goods sale and purchase agreements ("SPA"), which are entered into between a foreign company and its PRC partner. In general, these articles will cover eight sections, and for this part, we are going to address the following three sections:

1. Identify Your Partner

Before entering into commercial contracts, you need to know how to identify your Chinese partner. In this regard, the following three ways can provide some useful information.

1.1 Business License

In China, the Business License is the incorporation certificate of a company, which is issued by the State Administration for Industry and Commerce ("SAIC") and its local counterpart upon the company's establishment. The Business License usually contains the company name, company type, legal representative, domicile, registered capital, date of incorporation, terms of operation and business scope of a company. Therefore, you may identify your Chinese partner by asking for its Business License.

1.2 Online Publicity Systems

In the meantime, the following three online public systems could provide more information on a company:

- National Enterprise Credit Information Publicity System (http://gsxt.saic.gov.cn/): The system is launched by SAIC, and can provide not only information included in the Business License, but also information such as shareholders, key changes, capital contribution status, directors, supervisors and general managers of a company.

- Foreign Exchange Administrative Penalty Information Search System (http://www.safe.gov.cn/): The system is launched by the State Administration of Foreign Exchange, and can provide administrative penalty information related to foreign exchange on which the company has been imposed.

- National Court Information Search System for Person Subject to Enforcement (http://zhixing.court.gov.cn/search/): The system is launched by the PRC Supreme People's Court, and can provide court enforcement information of individuals and enterprises.

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1.3 Licenses for Operation

For the business operations in certain industries in China, corresponding licenses are required. For example, for companies engaged in the sale of food, the Food Operation License is required. Also, for companies conducting import and export businesses, foreign trade operator filing is required before the competent bureau of commerce. Therefore, you could also identify your Chinese partner by asking for the relevant licenses.

1.4 Financial Documents & Operation Information

For deals of large scale, you could require Chinese companies to provide their latest financial statements, audit reports or information regarding their major clients. These documents and information can show the financial status and operation conditions of a company.

1.5 Other Practical Methods

Some other practical methods for identifying and selecting your Chinese partners are:

- When doing business with manufacturing companies in China, you could arrange onsite visits to Chinese companies. Visiting onsite could offer you a great opportunity to check the conditions relating to human resources, machineries, equipment and raw materials. Also, by interviewing staff, you could look into the companies' operations.

- You could find your Chinese partner through other official channels, such as the China Import and Export Fair.

BT 201604 130 02 Legal2. Make Clear Object

After identifying and choosing your partner, you will need to prepare or identify a sales contract for execution. To avoid any future disputes, the parties should set the object clear in the SPA. Specifically speaking, the parties should make the name, specifications, quality, quantity and package of the goods clear in the SPA. In particular, we will further discuss the following two provisions:

2.1 Quality Control - Sale by Sample

Sale by sample is widely used to determine the quality of goods in a contract. To adopt this approach, the parties should state explicitly in the SPA that the sale is a "sale by sample", or "quality of the goods will be determined according to the sample".

To avoid any future dispute, the parties could require a third party or a commodity inspection institution to seal the sample. And the third party or the commodity inspection institution will keep a sample as well.

No matter if you are selling or buying, you should take the chance to provide the samples. In case the samples are provided by your Chinese partner, to get control of the quality, you could duplicate the samples or provide products similar to the samples and ask your Chinese partner to confirm the quality of the sample you provided.

If you are the buyer, and the goods delivered contain concealed defects that you could not discover, provided the contract is governed by the PRC laws and regulations, the remedy provided by the PRC Contract Law is that the quality of the goods delivered should still comply with the general quality standards of goods of the same kind.

2.2 Packing

The parties could set specific requirements on the materials, methods, specifications, marks, fee bearing, shape, color, protective technique for the packing of the goods. And the parties should avoid using general terms such as "packing suitable for maritime transportation", "seller's usual packing" and "export packing".

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3. Payment Methods

The three payment methods most widely used in the international goods trade are:

3.1 Remittance

This payment method is based on the "business credit" of the buyer. Basically, you could adopt the "payment in advance" or "deferred payment" mode, depending on whether you are the seller or the buyer.

3.2 Collection

This payment method is also based on the "business credit" of the buyer. Under this method, the seller will issue the bill of exchange and entrust the bank at the place of export to collect payment from the buyer through its correspondent bank. For documentary collection, the shipping documents will also be attached to the bill of exchange, which will be released to the buyer according to the specific approach adopted by the parties, i.e. D/A (document against acceptance) or D/P (document against payment).

However, collection might not be beneficial to the seller, as the goods will be shipped first before the seller can receive the money. If the buyer refuses to pay and retires the documents, as under the D/P approach, or the buyer refuses to pay after it accepts the bill, as under the D/A approach, the seller is likely to suffer great loss.

In general, this method could be considered if the buyer has a good reputation, and the seller has an office at the destination.

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3.3 L/C

This payment method is based on the "bank's credit". Therefore L/C could be more reliable than the other two methods. On the other hand, L/C is also more expensive and complex.

In practice, if you are the beneficiaries on the L/C, you need to pay special attention to the soft clauses on the L/C, such as "the opening bank will pay only if the goods inspection certificate or cargo receipt is issued or signed by the opener or the person authorized by the opener, and whose specimens are verified by the opening bank", "whether this credit is operative depends on the fact that the importer could obtain import license" or "the shipment can only be effected upon receipt of an amendment of this credit advising name of carrying vessel and shipment date". If the opener or the person authorized by the opener does not duly perform their obligations under these clauses, it will be difficult for the beneficiaries to receive payment.

No matter which payment method is adopted by the parties, if a down payment is required by the Chinese seller, you could require the seller to provide a performance guarantee, with an adequate guaranteed amount, to be issued by a renowned bank in the PRC to secure the performance of the contract by the seller.

In the next part, we are going to address on the (i) price, currency and payment terms, and (ii) labeling, inspection and product liability to be stipulated in the SPA.


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