TRADE RELATED CONTRACTS

Some foreign companies and individuals trading with China, particularly those from Western countries, are of the opinion that signing contracts with Chinese companies and trusting that they will be honored or, should a dispute arise, enforced by the Chinese legal system, is wishful thinking. This is because, they say, China does not place the same level of value on contracts as do many Western countries, such as the United States. There may have been some element of truth to this in the early years of China’s economic reforms and opening up to foreign trade and investment. However, these days contracts are just as important in China as anywhere else.

One reason that Westerners are skeptical towards the use of contracts in China is the misconception that the Chinese are culturally opposed to the very idea of contracts. It is more correct to say, however, that it is the length and complexity of some contracts that they have a dislike for, rather than the idea of actually signing a written agreement. Another reason is the tendency and practice amongst the Chinese of trying to renegotiate contracts after they have been signed. This practice can be explained by the notion that many Chinese consider the signing of a contract to be the start of negotiations and a long-term, mutually beneficial business relationship, which is more important than a piece of paper.

Despite the Western distrust of contracts in China and the differing attitudes towards contracts between China and Western countries, contracts are still extremely important when trading with China. In fact, these factors make contracts even more important to decrease the likelihood that misunderstandings may arise. These days foreign companies trading with China often sign various types of contracts with Chinese companies before executing business transactions. The specifics of the transaction as well as the commercial laws and regulations in China will determine the type and content of the contract(s). Having these contracts properly drafted, reviewed and/or negotiated by a law firm, ideally in bilingual form (English and Chinese), before signing them is critical for protecting and enforcing one’s rights should a dispute arise over a particular transaction.

Our team of lawyers and legal consultants have many years of experience in preparing and negotiating all types of contracts (in both English and Chinese), but some of the most common trading-related contracts we often prepare include, but are not limited to, the following:  

• Sales Contract / Purchase Agreement. Used for the business to business (B2B) sale, purchase and delivery of goods, and includes provisions related to the type of goods, price, quality, quantity, payment, delivery, inspection, intellectual property (IP), and warranties etc. A foreign company buying products from a company located in China as part of a single transaction or multiple transactions over a short period of time, and importing those products to their home country or elsewhere, typically uses this type of contract.

• Supply Contract. Similar to a sales contract / purchase agreement, but is used when there is a longer-term arrangement (i.e., more than one year) between one company (e.g., foreign buyer) and another company (e.g., Chinese supplier, typically a manufacturing company) to supply goods at fixed, predetermined prices on a regular basis (e.g., every month or every quarter).

• Manufacturing Contract. Also known as Original Equipment Manufacturer (OEM) or Original Design Manufacturer (ODM) Manufacturing Contract, is used when one company (e.g., international company) subcontracts the manufacturing of their products to another company (e.g., manufacturer in China) according to precise instructions provided by the former company regarding product specifications, designs, models and materials to be used which are necessary for the manufacturing process, whilst ensuring protection of IP rights and confidential information. The difference between a manufacturing contract and a supply contract is that former is used when there is a high degree of value added to the products, whilst the latter is generally used for the manufacturing of standard products.

• Distribution Contract. Used when one company (e.g., foreign supplier) sells its products to another company (e.g., Chinese distributor) with the intention of the latter marketing and re-selling the products under its own name to manufacturing companies (for machinery or industrial supplies) or retailers (for consumer products) located within a defined territory, usually a country. Includes many of the standard provisions contained within a standard sales, supply and manufacturing contract, but also includes terms related to exclusivity, resale prices, sales outside territory, minimum sales targets, delivery of minimum amount, minimum stock, promotional activities, non-competition etc.

• Confidentiality Agreement. Also known as a Non-Disclosure Agreement or NDA, is used between at least two parties who plan to share confidential information (especially trade secrets) with one another for certain purposes, usually in the initial negotiations before signing supply, manufacturing or distribution contracts, but want to prevent the disclosure of such information to others without permission from the other party.

• Licensing Contract. Used when two parties, the Licensor and Licensee, establish a relationship in which the Licensor grants the Licensee the right to property that it owns, typically IP such as trademarks, patents and copyrights, required to produce, manufacture, use, and/or sell products within a defined geographical region, usually a country. In exchange, the Licensee normally agrees to adhere to a range of conditions concerning the use of the Licensor’s IP and agrees to compensate the Licensor by making royalty payments.

• Franchise Contract. Used when two parties, the Franchisor and Franchisee, establish a relationship in which the Franchisor grants the Franchisee the right not only to its IP, but also to its business systems, operating procedures and supply sources etc., as well as to establish and operate a franchised outlet, which is usually uniformly equipped and furnished, to market and sell the Franchisor’s products and/or services. The Franchisor usually agrees to provide initial and on-going commercial and technical support necessary for running a successful operation. In return, the Franchisee agrees to follow the instructions of the Franchisor regarding branding, presentation, corporate image, dress code, systems and procedures, operating territory etc., and to pay certain initial and on-going fees.