How to negotiate a purchase contract with Chinese supplier properly? Part 1
By Steven Chow
I was approached frequently by buyers ripped off by Chinese suppliers. Oftentimes when I ask them to send me the purchase contract they signed with the suppliers, some of them will send me proforma invoice (PI), and some will say, no I don’t have a contract or PI, I keep the receipt that I sending them money or do you want to see the emails and/or instant messenger conversation record?
Practically, PI is deemed as a contract, but PI is too simple to protect your rights, you need to write down the following terms and conditions on a paperwork – Contract. As per Contract law of People’s Republic of China, a contract shall contain the following clauses:
(1) title or name and domicile of the parties;
(2) contract object;
(3) quantity;
(4) quality;
(5) price or remuneration;
(6) time limit, place and method of performance;
(7) liability for breach of contract; and
(8) methods to settle disputes.
The following are bonus tips to sign a sales contract with Chinese supplier (tips will be given in the order of contract clauses):
(1) title or name and domicile of the parties;
Make sure the company name, domicile, contact information mentioned on contract are correct. It will be safe if you use the company name, domicile disclosed on their business license and registration form of foreign trade dealers (对外贸易经营者登记表). Only Chinese name and address are listed on the business license, but both English and Chinese name and address will be listed on the registration form of foreign trade dealers.
(2) contract object, quantity and quality clauses
This clause is the definition of what you bought from the suppliers. A certain quantity of product with the quality specification as blah blah. My advices are: a) use full product description so the supplier won’t be confused and could not make any excuses in case of wrong delivery; b) It is important to add a Quality Clause, use the detailed specification to define the product clearly. I was surprised many fellow companies only put a brief products description and no quality clause or standard on the contract, especially those who use PI as a contract.
Steven Chow, Managing Director for the China Inspection Company Chinawhy.net
This is the first part of “How to negotiate a purchase contract with Chinese supplier properly?”, here you can find part 2 and part 3.
July 16th, 2008 at 2:22 am
Dear Mr. Chow
Thank you for an informative article. It gave me some feedback that is very useful even after 5 years in China.
I do however have one concern and experiences with the legal side of this. Most companies will have a purchase contract most of the time of an amount too small for legal action to be feasible. Or even worse, the supplier is an a rural town in China with poor legal support. The dilemma here is: Do you state in the contract that you should have arbitration in Shanghai, HK or Stockholm? In which case, contracts of less than around US300,000 are too small to go to arbitration for, or do you use the local legal system. If you use the local legal system, then chances are that you will come short as local courts almost always err on the side or local businesses. This gets more likely as the company you are purchasing from is further away from a big city.
As such, in my experience, the best insurance for a bad lot of products has been to keep a good relationship with the factory, spend enough time to clearly, I mean fed spoon by spoon, explain your quality requirements and procedures to check the quality. Then follow up new suppliers closely even during production. I almost lost a contract with a big customer because the factory argued over how to weight a product! Off course this was only their excuse, but it goes to show how trouble can arise out of the blue once you have problems.
Another item that quickly can become a point of argument is the payment term. This is one point I find it pays off to be very detailed. I have learned the hard way that it pays dividend to specify that the payment day is the day you pay the bank, and that when you have issued instructions to your bank for payment, the goods shall be released. If not, and the factory wants to argue, they will insist that the money is in their bank account before they release the goods, and oops, you need to tell your customer you are a week late.
Conclusion, from my experiences, practical follow up is a better insurance than a good contract with many suppliers.
July 26th, 2008 at 5:17 am
I agree that good follow-up and communication is extremely important in China.
Lawsuit is always the last option. But it never harm if you sign a contract properly, which first is a threat to those suppliers so they won’t push the limit too much, secondly, many buyers don’t have office/personnel here in china to follow up/communicate closely, timely and effectively. also what if the follow-up failed if you don’t have a contract.
Regards,
Steven Chow
July 30th, 2008 at 1:50 pm
With the difficulties and costs associated with a lawsuit in China, I completely agree that this should be the option of last resort. Nonetheless, it is important to remember that:
(1) With a contract, it is more likely that the commercial transaction will go as you expect. One of the key reasons for a transaction to go wrong is that the parties have different expectations - better to get that out of the way at the very beginning.
(2) Without a proper contract, you won’t even have the option of filing a lawsuit.
Finally, I certainly do not agree with Thomas that claims must be at least USD 300,000 to be worthwhile pursuing. Especially if the arbitration is in Shanghai, it is cost-efficient to pursue even smaller claims - as long as there is a contract to base the claim on!
mjroos@wjnco.com