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China Solutions Inc-

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

+86 (21) 6471 0499 www.chinasolutionsllc.com+1 (917) 591 1265 (f)

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 subsequentnegotiations 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.

October 2012

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 isnormally 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 identifyassets 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 closelyreview 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 outlineprecise 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 counterpartslegal 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.

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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.

http://www.chinasolutionsllc.com/