How to negotiate a purchase contract with Chinese supplier properly? Part 2
By Steven Chow
(3) price or remuneration
Factor in the rapid appreciation of RMB(Chinese Yuan) against USD and other main foreign currencies when you are negotiating the price and contract. The currency exchange rate should be based on the currency exchange rate chart provided by Bank of China(BOC). I am going to write an article on how to negotiate a better price with suppliers recently, please keep checking out.
(4) time limit, place and method of performance
Give a specific time limit, loading port(bad example: China port, the shipping price from Dalian in the north and Guangzhou in the south to a Japanese port are significantly different), destination of delivery on the contract. Indicate whether partial shipment is allowed or permitted.
Carefully jazz up the clauses so that it could not be interpreted differently.
(5) liability for breach of contract
Set a clear liability for breach of contract. Have a close look at the chapter of Liability for Breach of Contracts in contract law of People’s Republic of China, don’t make your clauses null and void by ignoring the provisions on the contract law.
Especially, make sure you have understand and make full use of article 113, 114, 115, 116. For those who haven’t signed a purchase contract but the suppliers have violate the contract materially after you send the deposit and those who have sign a contract but haven’t set up any clause on liability on breach of contract. Look at article 115:
Article 115 The parties may agree that a party pay a deposit to the other party as a guaranty for the obligation in accordance with the Security Law of the People’s Republic of China. Upon the obligor has performed its obligation, the deposit shall be offset against the price or refunded to the obligor. If the party paying the deposit fails to perform its obligations under the contract, such party has no right to demand for the return of the deposit; where the party accepting the deposit fails to perform its obligations under the contract, such party shall refund twice the value of the deposit.
Yes, you are entitled to be compensated for twice the amount of the deposit even though you haven’t sign a contract. Of course, I mean when Chinese law is applied in your case.
Steven Chow, Managing Director for the China Inspection Company Chinawhy.net
This is the second part of “How to negotiate a purchase contract with Chinese supplier properly?”, next week we will publish the third and final part. Here you can find part 1.
July 22nd, 2008 at 7:29 pm
Hi Steven,
Perhaps I am being ignorant of something else you have written (I confess I haven’t read Part I), but Article 115 quoted by you above apparently does include the language “under the contract” (used twice, in fact) in the clause pertaining to the refund of deposit, I wonder how you were able to derive (without any doubt it seems) from that that — I quote — “you are entitled to be compensated for twice the amount of the deposit even though you haven’t sign a contract”?
To me it would seem that if you hadn’t signed a contract, then there would be no contract to speak of (although one might argue that there was the intent — something often considered favorably in Chinese courts :-)
Thanks,
Shawn
July 23rd, 2008 at 4:10 am
Hi Steven
One effective way to enforce contracts is to have a liquidating damages clause in the purchase contract. I believe in China the amount can be set to about USD50,000, but I am not sure on the details of the maximum amount.
How I have argued this with the Chinese supplier is to point out that this applies to both parties and that if any party in the contract substantially violates any of the clauses, then the other party can ask for liquidating damages. It is important to clearly point out in the contract which clauses are considered significant if not met.
There are two reasons for this:
1 - You don’t have to, at least to the same extent, to prove your loss
2 - As it is already agreed upon by the parties, you don’t have to go through courts to cover some of your loss. If the other party refuses to abide by the contract, then it is more likely that you will get some compensation if you end up in a court.
Regards,
Thomas
July 26th, 2008 at 5:11 am
Hi Shawn,
Thanks for the comment. a transaction itself is a contract, be it written in the contract, or be it agreed by oral.
Please check article 10 of China contract law here (http://www.chinaiprlaw.com/english/laws/laws2-2.htm).
So the contract law will both the oral contract and written contract. the tricky issue in oral contract is how to prove, but there is no doubt that whether it exist or whether it is protected.
Regards,
Steven
July 26th, 2008 at 5:13 am
Hi Thomas, good point. I agree.