Contracts Matter, but Don't Skip These Due Diligence Steps
In November 2022, our expert team received several enquiries from European SMEs and business organisations. Some of the questions were asked through our Ask-the-Expert platform; others were asked live during the training we organised on "How to Draft Sales Contracts When Exporting to China" (links to the platform and guidelines on this topic are included at the end of the article).?
We have compiled here a Q&A selection on contractual issues often encountered by European companies doing business in China.
Q1: Our company generally works with electronic contracts from Chinese partners. Is that equal to the original version on paper? Can we have contracts signed electronically?
Reply from our expert:?For any transaction, original contracts – chopped and on paper – are required. Chinese courts or arbitrators will not recognise copies of contracts signed digitally.?
It is true that many companies may choose to proceed with digital contracts only, as shipping fees between the EU and China might be costly. But in the event of a dispute, digital contracts will not be enough: your company will need to prepare and obtain an original, chopped version on paper in order to initiate legal action; the Chinese partner might not be willing to do so at a later stage, especially if they perceive it as being to their disadvantage.
Q2: What happens if the company chop used by the Chinese partner is not the official one and your company realises it only after a dispute has arisen?
Your contract will not be recognised by Chinese courts, as without the official company chop there is no formal evidence of the involvement of the company in question. Your company may provide additional evidence, such as emails or other documentation; but there is the risk that such additional evidence will not be enough to be recognised by Chinese courts, with the consequence that you will be unable to initiate legal action and solve the dispute.
It is therefore vital that you make sure that the chop used by the Chinese company has legal value, by recognising the standardised elements present on Chinese company chops.
Q3: What are the typical elements of a Chinese chop?
Chinese company stamps have standardised elements that are clearly identifiable:
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Company stamps in any other shapes, sizes, colours or languages have no legal value in China. One may argue that other chops – especially those in English – are used to facilitate the foreign partner’s understanding of the stamp; in practice, these are often a strong indicator that the?company does not want to disclose its legal information and thus may have something to hide.
Q4: Several companies may have the same name, making it difficult to link a company to the relevant website. How to know for sure?
The only official name of the company is the one in Chinese: there cannot be companies with the same name. You can verify the official name of the company by asking a copy of their business license, and verifying it through public or private credit platforms. It may be possible that companies share the same name in English, or at least have very similar English names. However, company names in English are not official and have absolutely no legal value in China.?You should always ask for the official company name in Chinese: without this, you may not be in a position to enforce your rights in case of commercial disputes (see question 2).
For this reason, when working with a potential Chinese partner,?you should always ensure that their official website includes information in Chinese language about its name, registered address and contact. If these elements in Chinese are not included on the website, it means that the company has something to hide: this is a?red flag?for potential scam.
Q5: In Chinese business culture, "signing a contract often means the beginning of the real negotiation." Do the results of further negotiations need to appear as an update to the existing contract? Through amendments or?
Yes, definitely. Updating the contract based on the progress of the negotiation/cooperation is essential to protect yourself from any potential issues in the future, including disputes. Thus any changes to the original terms of the contract must be stated in writing, and confirmed by both parties; making an amendment to the contract (using company chops) is the best way to do so, as in this way it will become crystal-clear what terms are changed and what the new obligations are. This will also constitute evidence to be presented eventually as part of dispute resolutions.
Do you have a question to ask to our experts? Through email, face-to-face or online meetings with its in-house or external experts, the EU SME Centre offers tailored and confidential technical assistance to any EU SMEs or business organisation in need,?entirely for free. Send us your query here: https://eusmecentre.org.cn/expert
You may also be interested in our guidelines on how to draft sales contracts when exporting to China, available for download on our website. Read more on this topic in our previous article.