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Nestor Gounaris: ngounaris@chinasolutionsllc.com Lena Skandera: lskandera@chinasolutionsllc.com

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A well-designed and enforceable contract increases the likelihood of a successful commercial exchange in China.

As in any economy, Chinas legal, regulatory, and commercial environment carries unique characteristics that can translate into significant risks for those unaware. A contract can become a platform from which to mitigate risk and establish and maintain a healthy commercial relationship with a Chinese counterpart. If used properly, it can also serve as a tool to conceptualize the commercial exchange, set the tone of a commercial relationship, better understand the counterpart, and enforce rights.

FDI in China Series

Contracting with Chinese Counterparts

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Preparation

Parties should understand and assess the elements of a commercial exchange before entering negotiations. Considerations include steps and corresponding risks, intellectual property, enforcement, and due diligence.

Steps in the Commercial Exchange

Clear understanding of primary steps in the commercial exchange will discipline parties to conceptualize respec-tive obligations and risks inherent in each step. Thus, parties will make better decisions about how to allocate and mitigate risk e.g., when and how an order should be placed, product liability and corresponding inspec-tions, when payments should be made, how evidence should be prepared on an on-going basis, etc. The con-ceptualization of the commercial exchange as a step-by-step process then builds the framework for subsequent negotiations and drafting.

For instance, a service-based commercial exchange may be prompted by the seemingly simple step of the re-quest for service. However, this initial step alone gives rise to additional questions such as, when is a request for service considered to be delivered?, How much advance notice is required, and how can a party prove that is has provided such notice? Considering and then accounting for such questions results in a more fully conceptualized contract.

Intellectual Property

A commercial exchange exposes trademarks, trade se-crets, and other intellectual property to many other parties. Parties should consider measures to secure relevant intellectual property prior to entering into a China-based exchange, and even prior to engaging in dialogue.

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For example, it is highly advisable to register relevant trademarks as early as possible and certainly well be-fore exposing such trademarks to third parties. China follows a first-to-file rule for trademark registration; the party that files the trademark application first is normally entitled to the exclusive use rights arising from successful registration.

During the commercial exchange itself, parties should consider how intellectual property may be exposed and what contractual and practical provisions may secure it.

Enforcement

Assessing enforcement at the outset of a commercial exchange may seem premature; nevertheless, a so-phisticated party will soberly assess comparative power of the contracting parties, methods to identify assets of the commercial counterpart, distinctions be-tween relevant courts and arbitral bodies, forum shop-ping, governing law, governing language, documentary evidence, and other related issues. This early focus on enforcement shapes treatment of commercial risks, contractual terms and conditions, and steps of the commercial exchange.

Due Diligence

Parties should conduct due diligence on commercial counterparts before entering into negotiations or drafting. Due diligence in the China context may in-volve confirming proper registrations, business scope, business license, seals, and the legal representative (i.e. the person whose signature represents the intent of the company, not to be confused with a lawyer); it may also involve confirming ownership of assets that may become relevant to enforcement.

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Negotiation

Negotiation and discussion of key contract terms is not only important to develop an effective written docu-ment, it can also be an indicator of the tone of the commercial relationship.

A non-Chinese party that demonstrates strong aware-ness of Chinas legal, regulatory and business environ-ment during negotiation lessens the perceived power disparity that may exist between it and a party that has organic knowledge of China.

How a party engages in the substance of the contract will be an important indicator of its intentions. Busi-ness-savvy parties welcome negotiation as a method to better understand and add depth to the ongoing commercial dialogue. A good faith party should closely review the contract and provide insight and feedback on the issues it deems critical.

Drafting

Clear drafting enhances the value of any commercial contract; however, the importance of drafting takes on added significance in the China context due to consid-erations such as bilingual documentation, preferred governing language, and the preferred practice of

courts that adhere to literal interpretations of terms and conditions.

The contract should clearly and methodically outline precise steps and obligations comprising the exchange; the more mechanically and linearly the exchange can be outlined, the easier it is to enforce the contract upon breach. There should be no expectation that assumptions made during negotiations will be appar-ent or enforceable.

Execution

A properly executed contract prevents the commercial counterpart from raising a technical defense of non-formation in the event of a dispute. In China, written contracts are valid when signed by each counterparts legal representative or sealed with official company seals. The signature or seal information gathered dur-ing the due diligence process must precisely match that in the contract.

Additionally, if the content of the contract is of suffi-cient importance, parties may consider investing in resource-intensive notarization, which ensures admis-sibility of the agreement as evidence in court or arbi-tration.

All rights reserved by the original copyright holder. The contents of this article are intended to provide a general guide to the subject matter and should not be treated as a substitute for specific advice concerning individual situa-tions. Readers should seek legal advice before taking any action with respect to the matters discussed herein.

www. chinasolutionsllc.com China Solutions is a registered trademark in the U.S. Patent and Trademark Office. China Solutions logo is a registered trademark in China.

Learn more

This article is part of an ongoing series on foreign direct investment in China. To access the series or to learn more on foreign direct investment in China, visit www.chinasolutionsllc.com/cs-alerts or contact Nestor Gounaris at info@chinasolutionsllc.com . China Solutions is a Shanghai-based advisory firm that develops legal and operational solutions for foreign direct investment projects in China and cross-border transactions involving Chinese counterparts.