A contract is a legally enforceable agreement between two or more parties. A well drafted contract that clearly sets out the details of the agreement will help clarify each side’s obligations, and reduce the risk around a business transaction.
The World Bank Doing Business report for 2019 ranks China the 6th best economy to enforce a contract, based on the time, cost, and quality of judicial processes (Australia is ranked 5th).
However, contract enforcement depends on first having a well-drafted and properly executed contract. Australian companies doing business in China often use poor contracts that fail to protect their interests. The following information is intended to help you understand how to use contracts effectively in China.
Before investing in any business transaction, it is important to do due diligence to check the other party is a legitimate company, and analyse and evaluate the risks of the business transaction. Starting due diligence at an early stage can help avoid wasting time, effort and money on business transactions that are ultimately unsuccessful.
A good place to start due diligence is to review the Chinese company’s business licence.
Every company operating in China must obtain a business licence by registering its business with local government authorities. A business licence contains key details of the company’s registration, including their business registration number, official company name, registered address, business scope, and the company’s legal representative.
A Chinese company is only permitted to conduct business within its registered business scope. It is important to check their business scope is appropriate for your business agreement, and that they hold relevant sector-specific permits or licences.
Business licenses can be searched and viewed through public Chinese government webpages, however this information is in Chinese only and the webpage can be difficult to access outside of China.
An understanding of the other party’s commercial reputation can be very useful, including if they have a history of IP infringement, if they have been involved in litigation, and whether they have been issued administrative penalties.
Most information relevant for due diligence is only available in Chinese, and can be difficult to access outside of China. A professional service provider is well placed to help you perform due diligence.
A bilingual contract can be a useful way to ensure all parties clearly understand the agreement they are entering into. If a contract is bilingual, it should specify which language will take precedence in the event of a dispute. We strongly encourage you to have your contract reviewed by a bilingual lawyer to ensure both texts are identical.
A contract should specify how and where any disputes will be resolved. Australians often make costly mistakes in this part of their contracts.
With few exceptions, China does not enforce foreign court judgements. If a contract provides for exclusive dispute resolution in an Australian court, the Australian party would not be able to enforce that Australian court judgement in mainland China.
In order for a contract to be enforceable in China, the contract should generally either provide for dispute resolution before a Chinese court, or by arbitration.
Arbitration is a private, alternative form of dispute resolution. In contrast to foreign court judgements, Chinese courts will enforce foreign arbitration awards. China, Australia, and most major economies are signatory to the New York Convention on the recognition and enforcement of foreign arbitral awards.
Arbitration centres in Hong Kong or Singapore are popular options for arbitration of China-related disputes, as they are capable of handling both English and Chinese language documents. Unlike a court decision, arbitration is generally final, with no opportunity to appeal.
A lawyer with experience and expertise in contracts for China can advise you on suitable dispute resolution provisions for your China-related contracts.
An effective confidentiality agreement for China will often contain not only non-disclosure clauses, but also non-competition and non-circumvention clauses, which are intended to prevent the other party from competing with you or selling directly to your customers. These are sometimes called NNN agreements.
Even with a well-drafted confidentiality agreement, commercially valuable information needs to be managed carefully. A confidentiality agreement does not necessarily prevent the mishandling of information.
When contracting manufacturing in China, it is important to use a manufacturing agreement to prevent your manufacturer from appropriating your product or design.
A manufacturing agreement is a legal agreement between you and your manufacturer. It should set out all the details of your agreement, such as quality and timeliness requirements, inspection of goods, IP ownership, mould and tooling ownership, non-competition and non-circumvention. A purchase order is not a manufacturing agreement.
When manufacturing in China, it is important to also register any key IP around your product. If you are applying trade marks to your product or packaging, these trade marks need to be registered in China. If you have a new and innovative product or design, we encourage you to also consider whether to apply for an invention patent, utility model patent, or design patent. Any patent applications must be filed before you disclose the product to the public, as you generally cannot obtain a patent after the product has been publicly disclosed.
The individual signing on behalf of the Chinese company should be the listed legal representative, or another person who is authorised to act on behalf of the company. In addition, the Chinese company should stamp the contract with their official company seal. Having both signature and seal is the safest way to execute the contract.
The contract should unambiguously identify the Chinese party by using their official company name (in Chinese), registered address, and their 18-digit business registration number. This information, and the company’s legal representative, are listed on the company’s business licence.
There are many differences between the Chinese and Australian legal systems. For example, China has a civil law system, while Australia has a common law system. A contract that is suitable for Australia may not work well in China.
For this reason, it’s important seek advice from experienced Chinese legal advisors on all contracts and other legal matters for China. Your Australian legal counsel can work with Chinese lawyers, or you can get advice directly from a Chinese or international law firm.
Engaging a lawyer early in the contract negotiation process can help avoid wasted time and effort compared with bringing in a lawyer towards the end.