Reviewing China Contracts

The China lawyers at my law firm regularly get requests from foreign (non-Chinese) companies to “review” a contract provided to them by their Chinese counter-party. Our response to these requests is usually something like the following:

We would be happy to review the contract you have been sent by your Chinese counter-party, but I must warn you in advance of the following:

1. Even just reviewing a China contract invariably requires we do more than just review it. By this I mean that we can either review it and set out in a memo our thoughts about the contract or we can review it and redraft those provisions we see as problematic for you.

2. For us to be able to know what needs to be changed and what does not need to be changed in your contract, we must first get a good sense of what you are tying to accomplish and what your concerns are. For example, are price, quality, quantities, IP protection, and/or a long-term relationship important to you? Our China lawyers need this sort of information to be able to discern what makes sense for you and what does not.

3. Virtually all China contracts we review are terrible, for various reasons. They are often terrible because the Chinese company has pulled a template contract off the Internet with literally no relation to the transaction it is supposed to be documenting. Just by way of a few examples, we have been provided with licensing agreements when a manufacturing agreement makes sense. We have been provided with manufacturing agreements when a product development agreement makes sense.We have been provided with an employment contract when an NNN agreement makes sense. And we have countless times been provided with contracts that are written for foreign countries, not for China.

The Chinese company occasionally will provide a terrible contract because it does not know any better, but most of the time it does so because it does not want to sign an enforceable contract with you. See Drafting China Contracts that Work. The contracts Chinese companies provide to their foreign counter-parties are typically terrible because the Chinese company wants them to be terrible — FOR YOU, but not for them. Sometimes our China lawyers determine that the entire arrangement between the Chinese company and the foreign company is terrible for the foreign company or flat out illegal. Oftentimes, however, the English language portion of the contract is actually perfect for the foreign company, but the Chinese language portion (which is invariably THE ONLY portion that legally matters) is terrible for the foreign company.

When confronted with a terrible contract, our job as lawyers veers from “contract review” to explaining to our client why it should walk away from the deal or have us draft a new contract from scratch that will allow the foreign company to accomplish what it is actually seeking to do and protect them.

The other day our China lawyers reviewed a contract provided to our client and we sent the client the below email (changed so as not to provide any identifiers), which I am providing because it sets forth the sort of contractual issues we so often see in China provided contracts:

This contract is missing all sorts of critical provisions and it is often unclear, particularly with respect to its most important provisions. Note that our review is based on the Chinese language portion.

1. The English translation is wildly and deliberately inaccurate and because it is silent on the controlling language of the contract, the Chinese language portion of this contract is the only portion that legally matters. 

2. We will need to confirm that the Chinese Company mentioned in the contract is actually the owner/operator of the warehouse. This is not clear in the contract and we suspect that the party that has been set up to sign this contract is not even legally authorized to do this deal. 

3. As we have discussed, there are the following steps in the process: a) product enters the warehouse while still in the free trade zone, b) containers are opened and product is stored on pallets c) product is labeled for shipment into China, clears customs and enters into China d) OR product is reloaded into containers and shipped back without ever clearing Chinese customs. These basic procedures are nowhere even mentioned in this contract. Also, your costs for unloading/loading containers are not clearly specified. 

4. Within a free trade zone, shipment from the vessel to the warehouse is strictly controlled. The method for shipment and cost is nowhere specified in the contract.

5. You will want a third party to have access to label shipments to Chinese customers. The contract should provide for that process, but it is completely silent on that. 

6. You have stated that you want the right to have a third party of your choice arrange for customs clearance and delivery for import into China. If you want this right to choose, you will need the warehouse operator to agree and then provide for a specific reference and procedure in the contract, but this contract says nothing about any of this. 

7. The contract requires you to insure the product in the warehouse. Were you aware of this? I ask because this requirement is mentioned in Chinese but not in English. If you will be responsible for insurance, we will need to confirm that you are able to obtain the required insurance at an acceptable price. Local Chinese insurance companies are often reluctant to provide insurance for foreign entities, particularly in the free trade zones.

8. The contract states that the warehouse is not liable for losses due to “force majeure”. Note that force majeure is an easy out for Chinese companies in China so we will need to make this provision clear, including by limiting what qualifies as force majeure under your contract. 

9. The Agreement calls for payment in RMB. Normally, a foreign company that engages a bonded warehouse pays in U.S. dollars or Euros. If you are not able to pay in RMB, you will need to clarify payment currency. 

10. The Chinese language material list does not line up well at all with its English translation. We will need to get clear on what will be stored and in what form. 

11. The Chinese portion of the contract says the contract is for one year with no provision for renewal, whereas the English language portion is silent on this. Is a one year term acceptable? Are you okay with no right to renew?  

12. The contract covers imports into China and shipments back to Europe, but in a very unclear manner. This should be clarified. In particular, the container breakdown and repack procedure and cost should be stated.  

13. The payment date for the warehousing fee is unclear. The chart says “within 90 days”, but the text provides for monthly payment. Since payment of fees is critical, this needs to be clarified. 

14. This entire contract is written on the assumption that warehousing will be done for a short period. If longterm warehousing is contemplated, this should be discussed with the Chinese company. Note, however, that the cost of warehousing may be so high that long term storage is not a viable option.  

This contract is so poorly drafted that we would normally recommend you have us draft a new contract from scratch. However, Chinese warehouse companies normally insist on using their own document and so we suggest trying to work within the framework of their contract, at least initially.

Please review the above and let us know if you have additional questions about this contract.

What are you seeing out there?