Contracts

Chinese and Westerners often approach a deal from opposite ends. To a Westerner, starting with a standard contract, altering it to fit the different circumstances, and signing the revised version, seems straightforward.

Commercial law is ingrained in our thinking. But traditionally, commercial law scarcely existed in China and certainly indicated bad faith. The early appearance of a draft legal contract was seen as inappropriate or, more likely, irrelevant, because it carried no sense of commitment. The business clauses might form a useful agenda. But obligations came from relationships, not pieces of paper.

Nowadays, business contracts are accepted as the norm.  But returning home with a signed piece of paper is not the end of the matter. It is not unknown for the Chinese side to view a contract as a snap shot of an agreement that was made at a particular time, and under particular circumstances. Further concessions may then be requested – a difficult prospect for the Westerner who has shaved his margin down to the bone.

Key Terms and Conditions in an Import Contract

Chinese importers tend to use standard form contracts in their transactions. Foreign contracts are seldom accepted for fear of being trapped by unfamiliar contract stipulations. Adding special provisions to the contract form is normally acceptable. You can expect to see the following key terms and conditions in a Chinese import contract:

Terms of Price and Shipment

Chinese import businesses often conduct transactions at FOB prices in consideration for using Chinese shipping companies. C&F and CIF terms are accepted only if the freight is proved to be cost-effective.

Insurance

Chinese importers generally have “open insurance” for their import cargoes – i.e. importing companies submit notifications of import cargo shipments and other relevant documents which are then acknowledged by the insurance company as insurance orders, and against which the insurance premium will be settled with the insured.

Terms of Payment

This is normally by letter of credit (L/C). See the Getting Paid section for more information.

Inspection

Certificates of quality, quantity or weight issued by manufacturers or public assessors are normally required as part of the process of setting up a letter of credit. However, if the goods are discovered not to be in conformity with the certificates after re-inspection by Chinese inspection authorities, the buyer will either return the goods to the seller or lodge claims against the seller for compensation on losses on the strength of inspection at the port of destination.

In the case of equipment imports, Chinese companies often insert a clause in the contract withholding a portion of the payment – normally five to ten per cent of the total contract value – which will be paid only when the equipment is installed and commissioned. This retention sum tends to become a permanent rebate, so beware of allowing a figure too high.

Dispute Resolution

In cases of dispute, the formal contract has a provision that a solution must be sought through friendly consultation. If this does not work, arbitration is then adopted to settle the dispute. Litigation is only used a last resort.