How to conclude a purchase contract with a Chinese manufacturer

China is becoming the biggest “world manufacturer” and there are more and more foreign buyers taking part in all kinds of Chinese trade fairs (e.g. Canton Fair), trying to find good suppliers and purchasing Chinese products. Therefore it is very important for those buyers to conclude purchase contracts and also to perform the contract in the right way, complying with the framework of Chinese law. This article describes some points for foreign buyers in concluding and performing a purchase contract and the main points within the purchase contract. This also can be a reference for Chinese companies in their purchases.

PartⅠ Reminders for concluding and performing the contract

Except for content of the contract, the foreign buyer needs to note some issues before concluding the contract and during performance of the contract, so as to protect the buyer’s contractual security and economic interests.

Carry out a legitimacy review of the manufacturer. Some buyers just simply emphasize cheap prices and conclude a contract with a manufacturer hastily, without knowing the basic background of the manufacturer. Only after a dispute does the buyer find that the manufacturer has not registered lawfully and is doing business illegally. I often suggest that my clients check the opposite party’s business license and go check the relating information at the relevant governmental authority, which is Industrial & Commercial Bureau in China, to print out the basic information page of the manufacturer so as to find whether it is registered lawfully, how much is the registered capital, who are the shareholders and whether the annual renewal has been done. Do not do business with a Chinese company, who has not been properly injected with registered capital or has not passed the annual renewal, otherwise the legal risk is very high.

If the manufacturer is lawfully registered, you still need to investigate its credibility such as whether the manufacturer has pending litigation, especially litigation as a respondent. If the manufacturer has many pending litigations against them, including enforcement procedures, it is suggested that you do not do business with them.

On-site observation of the manufacturer is also very important. On-site you can easily find out whether the manufacturer is an active company in normal operation. You can check the workshop, office, production line, material, and finished goods and even you can observe the mental situation of the staff, to determine the reliability and competence of the manufacturer.

The method of concluding the contract is also very important. Many foreign buyers only use an electronic version of the contract or fax the contract, not signing the original contract. This is not a safe method. In China, the strength of electronic or faxed evidence is weak. In the case that the manufacturer denies the evidence, many contractual rights and obligations shall not be confirmed by Chinese law. Therefore, I normally suggest my clients request the manufacturer send them back the original contract with signature and stamp, even they already have sent the contract electronically or by fax.

Payment is also important. Many Chinese suppliers often request the buyer to wire the payment to his personal bank account, or his family member’s personal bank account, which can easily cause disputes. I often suggest the purchase contract includes the recipient account. When there is another account for the receipt of payment, the supplier needs to provide a certificate of payment.

Part Ⅱ Reminders of contractual clauses

In the event that the parties agree to verify quality as per sample product, we need to stipulate that: Method of sample-sealing shall vary for different products. Sample of small size products can be sealed in an envelope with both parties stamp on the seal, under both parties’ supervision. Samples of big size products can be preserved by Notary. Moreover, both parties can stipulate the quality in the contract or on the sealing bag.

We need to stipulate the standard of inspection. The buyer has the right to cancel the contract if the sampling inspection does not meet their requirements. The sampling inspection shall not be considered as final confirmation on product quality. The seller shall be liable for any later product quality problem.

We need to stipulate the documentation needed for delivery and for foreign buyers, it is very important to make sure the goods can be exported out of China. We can provide that the seller shall, when delivering the goods to the Shenzhen warehouse, provide the necessary documents for the buyer to export them. The seller shall guarantee that there is no any restriction on exportation (if applicable), included but not limited to Customs or commodity inspection.

Quality is the most important concern for a foreign buyer. We can include a solution clause in the event of bad quality. If the payment term is good, we can try to provide that the inspection and acceptance be in the destination port, otherwise we’d better inspect the product during the period of production and shipment, so as to avoid future quality problems. I have seen many cases where bad quality is discovered at the destination port and due to different law systems and lawsuit costs (e.g. Chinese law requests that the origin of all evidence from abroad need to be notarized by a local lawyer and verified by the Chinese embassy or consulate) the buyer has had to give up the claim.

A penalty clause is also very important. It can bind the seller’s activity and punish a breach of contract. For example, we can provide that: In the event of the seller’s late delivery, the seller shall bear a daily penalty at 0.01%. If the delay is more than 7 days, the buyer shall have the right to terminate the contract.

In the event of Force majeure, we need to impose obligations on the seller. For example, we can stipulate in the contract that: The seller shall not be held responsible for the delay in delivery due to Force Majeure. The seller who encounters Force Majeure shall advise the buyer immediately of the occurrence mentioned above and within two days thereafter, shall fax and send by airmail to the buyer for their acceptance a certificate of the accident issued by the Competent Government Authorities where the accident occurs as evidence thereof. Under such circumstances the seller, however, is still under the obligation to take all necessary measures to hasten the delivery of the goods.

In the consideration of future disputes, even lawsuit, copies of business licenses, tax certificates and certificates of the organization code (or Identification Card) shall be stamped, or signed if the party is an individual, by the parties separately and be put as an appendix of the contract.

Finally, if the contract is bilingual, the version of the contract is important. We can stipulate that English version prevails or Chinese version prevails.