How to Approach Sales Contracts to Export to China

When drafting and signing sales contracts, every company doing business in China wants to ensure that, in the event of a business dispute, its contractual rights can be enforced without a hitch. Travel difficulties caused by pandemic prevention measures have given higher importance to this concern.

At a time when successful partnerships between Europe and China have to be maintained without frequent face-to-face meetings, companies often focus their contract enforcement considerations on dispute resolution mechanisms, which are indeed a critical component of a contract.

However, drafting protective clauses and detailed conflict resolution provisions is not the be-all and end-all. Effective contract enforcement should be viewed as merely one part of the overall arrangement, perhaps the last one.

Many problems can be avoided with a few steps taken before the first line of a contract is drafted. Companies that carry out due diligence when they select partners, and that establish a clear, well-drafted, and legally workable contract from the very start of the business relationship, protect their operations more efficiently than those who rely entirely on dispute resolution provisions. In most cases, these steps are not particularly difficult.

There are three main reasons for having a contract in place when doing business in China: making the obligations of each party clear, preventing disputes, and providing evidence in the event of a dispute. This is true whether the contract is drafted without legal assistance or by external professionals; the latter is the recommended option for European SMEs without in-house lawyers familiar with Chinese law and practice.

Before a contract is signed, SMEs should have answers to these seemingly evident but often overlooked questions:

1. Do I know my business partner well? Does the information in the contract correspond to the reality and official database of Chinese companies?
2. Is the person negotiating and signing the contract authorised to do so? Is the official company chop affixed to the contract an official one?
3. Is the product and other deliverables identified without any doubts in terms of quality, quantity, design, etc.
4. Are payment conditions drafted in such a way that I am safeguarded against potential late payments or no payments?
5. Are the terms of delivery clearly formulated? Who bears liability for damage?
6. In the case of a breach of the contract, what are the mechanisms set to solve the situation as smoothly as possible? Is there a system of penalties or remedies set?
7. If the contract is bilingual, are both versions identical so that there is no misunderstanding between parties?
8. In case of a dispute, what action will take place? Litigation or arbitration? Under what law and in which jurisdiction?
9. In the case of early termination of the contract, what procedures to conduct?

In the EU SME Centre’s new guidelines, lawyer Daniel De Prado Escudero , partner at HFG LAW & IP PRACTICE , helps European SMEs to identify the key terms, tips, and examples that should be considered in a sales contract for the export of goods to China.

Our next article will focus on the early steps of due diligence that should be conducted when forming new partnerships with Chinese buyers and distributors.

We are also organising an online workshop on this topic on 17 November, free and open to all European SMEs: https://www.dhirubhai.net/events/6993506890412408832/comments/