The China Laws series. 2 March 2023
Introduction
A sales contract is a legally enforceable document that sets out the terms and conditions of a sale, such as the buyer's obligation to pay the seller for goods and services. In the signing of a contract, it is imperative the parties agree to certain fundamental clauses that should bind the parties. This is because they offer the best aid in case of disputes and litigation in certain circumstances. It is also advisable to draw the sales contract in both the Chinese language and a secondary language since the main language for the contract should always be in Chinese for it to be enforceable in China.
In Chinese (PRC) contract law, there are several key clauses to include in a sales contract in order to protect both parties. Generally, the rules and regulations governing contracts are contained within the Chinese Civil Code (CCC) and the Contract Law of the People’s Republic of China (CLPRC). Additionally, the Supreme People’s Court of China has issued several judicial interpretations to help clarify specific points of contract law.
The CCC and the CLPRC provide detailed rules and regulations governing contracts in China. All contracts must be in accordance with “good faith” principles, meaning they should be fair to all parties involved. Additionally, any contractual obligations must be performed in accordance with the laws and regulations of China. We will look at the importance of understanding Chinese contract laws in another post but for now, I would introduce some of the clauses you would come across in most Chinese sales contract.
One important clause in a Chinese sales contract is the Price Clause. This sets out the agreed price for the goods and services being sold, and any extra fees or discounts associated with it as well as how and when the seller will receive payment. It should also state whether the buyer will be liable for any additional costs, such as shipping, tax and handling. It also outlines how materials or services that are supplied or engineered in the duration of the contract may engage cost variations.
Another important clause is the Risk Clause, which sets out who is responsible for the goods once they have been shipped from the seller to the buyer. It should also detail what will happen if the goods are damaged, lost or stolen in transit.
The Delivery Clause is also important in a Chinese sales contract. This clause outlines the obligations of both buyer and seller regarding the delivery time of the products or services.It should specify the details of how and when delivery of the goods or services should take place. It should also outline any additional requirements, such as loading, unloading or insurance, if required. It outlines the respective responsibilities in regards to timing and cost of delivery of products and services. In other words, it helps to create a framework for how the transaction as it relates to delivery should go.
The Quality Clause outlines the quality standards that the goods must meet and should include details of any testing or certification that will be required. This clause should also include a mechanism or method for handling any disputes related to the quality of the goods or services.
The Confidentiality Clause can also be found in Chinese sales contracts. This clause falls under the “intellectual property” clause, as it prohibits any unauthorized use, disclosure, or dissemination of trade secrets exchanged between parties during the duration of the contract. If you have been dealing in China, you would have come across the trade secret/confidentiality agreement.
The Termination Clause is customary in Chinese sales contracts. This clause stipulates at what point in time either one of the parties is released from his or her contractual duties under the contract, as well as any other matters related to the contract's termination such as payment and post-termination liabilities.
Finally, the Warranty Clause is one of the most important clauses in a Chinese sales contract and should outline any guarantees or warranties offered by the seller regarding the quality, performance or durability of the goods or services. It should also specify the steps a buyer can take if a problem arises.
Aside from the general clauses outlined above, Chinese sales contracts may contain particular clauses that govern how obligations under the contract would be discharged. An example of such a clause is the “Force Majeure” clause especially during the Covid economy lockdown when multiple suppliers were forced to stave off potential litigation from irate customers by invoking this clause. The force majeure clause specifies and outlines exceptions under which a party is exempted from performance of obligations due to the occurrence of extraordinary events like natural disasters, wars, disease pandemics, etc that are unforeseen, outside the party's control and could not be predicted.
In many respects, a Chinese sales contract follows a similar format to a UK sales contract. Both will typically include the essential terms and conditions, such as payment details and delivery methods, as well as more specific clauses, such as warranty and quality. However, Chinese contract law does differ from UK law in certain respects. For example, a Chinese contract must state the true names of both parties and the identity of their places of residence. It should also include signatures of the parties, or stamps if these have been authorized, along with seals if the parties are companies. There are also specific clauses that are required under Chinese contract law, such as a Force Majeure Clause, which sets out what will happen in the event of “acts of God”.
Generally, Chinese contract laws have many similarities with UK contract laws. The main purpose of both legal systems is to protect the parties in a contract, to ensure the agreement is fulfilled, and to provide legal remedies in case of breach. In other words, both legal systems follow a similar code on how obligations in contracts should be discharged. Also, both systems provide for several remedies in case there is a breach of a contract. Finally, both legal systems provide for the enforcement of contractual clauses and provisions by either court and/or arbitration, depending on how a contract is structured and what the parties have agreed. The differences lie mainly in the way contractual disputes are resolved and the remedies available if breach occurs. The resolution of contract disputes and conflicts in China poses unique challenges to both parties involved. Contract disputes and conflicts can be complex, especially when the parties involved come from different countries and cultures. Furthermore, the Chinese courts are not always the best choice for resolving these disputes due to the slow resolution times and other limitations. Fortunately, there are a number of strategies for resolving contract disputes and conflicts that are specific to China, such as dispute resolution and conflict resolution clauses.
Dispute resolution clauses are typically included as part of a contract or agreement and outline exactly how contract disputes and conflicts will be resolved. These clauses can be written to provide a binding solution that is agreeable for both parties, or to offer an amicable process for resolving disputes through negotiation or arbitration before the case is taken to the Chinese court system. These clauses can also specify which venue the dispute will be heard in, what the appropriate legal jurisdiction is, whether a party has a right to appeal, and any other issues that may arise.
Conflict resolution clauses are often included in Chinese business contracts as well. These clauses are written to provide a mutually agreeable process for resolving conflicts between parties to the contract. Traditionally, these clauses outline what each side is willing to compromise in order to reach an agreement, as well as how any potential deadlock situations will be handled. In addition, these clauses can also specify the roles and responsibilities of the various parties involved in the negotiation process, providing a framework for how the dispute or conflict should be resolved.
Finally, mediation is another method often employed to resolve contract disputes and conflicts in China. Mediation is an informal process that is conducted between the two parties involved in the dispute, and is facilitated by a neutral third-party mediator. This third-party mediator helps facilitate constructive dialogue between the two parties, in hopes of finding a mutually satisfactory resolution for the dispute or conflict. Mediation is often seen as a less expensive and faster alternative to going through the formal Chinese court system.
As you can see, there are several techniques for resolving contract disputes and conflicts in China. By including dispute resolution and conflict resolution clauses in contracts, as well as utilizing mediation services, parties can often quickly and effectively resolve their disputes and conflicts before the case ever reaches the Chinese court system.
All in all, these common contract clauses should be strongly considered and included in a Chinese sales contract. Knowing the similarities in Chinese contract laws with the UK can help both parties comprehend the nature of the contractual relationship and avoid potential disputes.
What you be aware of next is that the Chinese legal system is composed of a variety of laws and regulations that govern international trade and contracts. In 2019, China completed its second-ever Five-Year Plan and ushered in a period of greater economic liberalization. This plan has major implications for the enforcement and recognition of foreign contracts, as well as other commercial agreements, by Chinese courts. Foreign Contract Law Foreign contracts in China are materially the same as domestic contracts. However, they are subject to additional regulations, such as ratification by the Chinese government or the Chinese Ministry of Commerce, in order to be valid. The Chinese government’s objective in this system is mainly to ensure that foreign contracts with Chinese parties are not detrimental to the Chinese economy or its citizens. Additionally, foreign contracts that involve foreign currency payments are subject to restrictions imposed by the Chinese government. Most foreign currency payments must be processed through a Chinese bank and must comply with local laws and regulations. International Commercial Arbitration The Chinese government has introduced a series of laws and regulations that encourage international commercial arbitration. This includes the Arbitration Law of China, which is intended to facilitate the resolution of business disputes and encourages the use of alternative dispute resolution methods. The law outlines the procedures for the recognition and enforcement of foreign arbitral awards, as well as a comprehensive set of rules that must be followed in order to properly conduct arbitration proceedings. Additionally, parties can also agree to resort to special rules and international conventions to arbitrate disputes. Pre-Contractual Agreements Pre-contractual agreements, such as confidentiality agreements, are particularly important in China, as they are a necessary tool for protecting both parties’ interests. Pre-contractual agreements are commonly used to protect both parties’ rights and interests, as well as the legitimate interests of third parties. Pre-contractual agreements should be tailored to the individual parties’ specific needs and should outline how disputes are to be handled and resolved. International Trade China has enacted a set of laws and regulations to facilitate and regulate international trade. These laws and regulations vary depending on the type of goods and services exchanged and cross international borders. Generally, China utilizes both import and export regulations to protect domestic producers and consumers, as well as to ensure fair competition in international trade. All imported goods must meet certain standards before they can be sold and exported, and imports and exports are subject to tariffs. Additionally, taxes may be imposed on imports and exports. The World Trade Organization’s rules and regulations also govern activities related to international trade and apply to China as well. Conclusion The Chinese legal system has a long and complex history. While more and more laws are being implemented to facilitate international trade and protect foreign business interests, it is important for foreign businesses to understand the nuances of Chinese law. Foreign businesses should consult with a qualified legal expert to ensure that their contracts and international trade activities are in compliance with Chinese law in order to avoid costly fines and other penalties.
If you have any inquiries related to the Chinese contract laws, you can email me at brentyap@vikneshyap.com. Our legal associates in China are experienced PRC counsels who can help you in your commercial ventures with the Chinese companies.