Agency country questions: China

China-specific information concerning the key legal and commercial issues to be considered when appointing an agent.

This Q&A provides country-specific commentary on Agency: international overview, and forms part of our international sales and marketing transaction guide.

Falk Lichtenstein, CMS, China and Colin Liu, Porsche (China) Motors Limited

Definition and authority

1. How is the relationship between agent and principal defined under national law?

Chinese statute does not contain a definition of an agency contract. However, agency contracts are permitted under Chinese law and common in practice.

In an agency relationship, the agent, acting within the framework of a permanent business relationship with the principal, typically supports the principal in concluding contracts for the sale of goods or provision of services. Either the agent prepares contractual arrangements, which the principal then directly concludes with third parties, or the agent concludes contracts with third parties in the name and on behalf of the principal. In practice, the first alternative is more common in China, as principals rarely agree that the agent possesses power of attorney to conclude contracts in the name and on behalf of the principal.

After contracts between the principal and third parties have been concluded, performance of the contracts, that is, the delivery of goods or the provision of services, is normally conducted directly between the principal and third party. In some cases the agent is involved in the contractual or post-contractual performance of the contracts. For example, the agency contract can stipulate that a Chinese agent is in charge of providing after-sales services to Chinese customers of a foreign principal. Alternatively, an agent may, for example, be entrusted with carrying out quality control and supervision of Chinese suppliers of a foreign principal.

 
2. What authority under national law does an agent have to bind the principal by its acts? How far can an agent bind its principal to third parties, when it does not have express authority from the principal to do so?

The agent's authority to bind the principal by its acts mainly depends on the provisions of the agency contract concluded between the principal and the agent. Under some contractual arrangements, the principal authorises the agent to conclude contracts with third parties in the principal's name. However, this happens rarely in practice. Typically, the agency contract provides that the agent is not authorised to conclude contracts with third parties in the principal's name, but that the agent makes arrangements for the conclusion of contracts between the principal and third parties, which are then entered into by the principal itself. Without an express power of attorney, the agent cannot bind its principal to third parties.

In relation to mandate contracts, provisions exist (Articles 402 and 403 of the Contract Law of the People’s Republic of China (CL)) providing that in certain situations a mandated party can bind the mandating party to third parties. Mandate contracts are contracts where the parties agree that one party (mandatary) will handle a matter of the mandating party against advance payment of the mandatary's expenses (Articles 396 and 398, CL). Agency contracts do not normally constitute mandate contracts as defined by the law.

To ensure that an agency relationship is not regarded as being a relationship of mandate, it is advisable for foreign principals to expressly stipulate in the agency agreement that the agent has no authority to conclude contracts with third parties in the name and on behalf of the principal.

 

Regulation and legal formalities

3. Are agencies specifically regulated by national law? Is any legislation pending, which is likely to affect agency arrangements? Are there any formalities that a principal must comply with when appointing an agent, for example, any registration or disclosure requirements?

There are no legal provisions specifically regulating commercial agency contracts. However, the conclusion and performance of agency contracts are permitted based on the general provisions of the CL. There are also special provisions, some of which can be applied to agency contracts, on:

  • Mandate contracts (Articles 396 and following, CL).

  • Contracts on commissioned goods (Articles 414 and following, CL).

  • Brokerage contracts (Articles 424 and following, CL).

In addition, the provisions on the general civil law effects of agency, that is representation by one for another, are provided in section 2 of the General Rules of the Civil Law of the People’s Republic of China in effect since 1 January 1987. On 5 July 2016, the PRC National People’s Congress released the draft of new General Rules of the Civil Law of the People’s Republic of China (Draft) for public comments. Chapter 8 of the Draft contains several provisions on agency slightly modifying the current rules for:

  • Representation for companies before their incorporation date.

  • Representation without authority.

  • Representation for deceased principals.

Currently it is not yet clear when the Draft will come into effect. The impact on commercial agency contracts will be rather minor if the contracts were drafted in sufficient detail. In any case, the Draft will be only relevant in the (uncommon) situation where the agent possesses power of attorney to conclude contracts in the name and on behalf of the principal.

There are no formalities that a principal must comply with when appointing an agent. No registration or disclosure requirements apply.

 

Competition law

4. Are there any national laws or regulations that would affect the following business practices:
  • Grant of exclusive territory?

  • Tied selling?

  • Territorial restrictions?

  • Customer restrictions?

  • Resale price maintenance?

  • Refusal to deal?

  • Imposition of minimum or maximum prices?

  • Imposition of minimum sales targets?

From a competition law perspective, the business practices mentioned above are subject to the following laws and regulations in China:

  • The PRC Anti-Monopoly Law (AML), published by the Standing Committee of the People's Congress on 30 August 2007 and effective as of 1 August 2008.

  • The Provisions on Anti-Price Monopoly, published by the National Development and Reform Commission (NDRC) on 29 December 2010 and effective as of 1 February 2011.

  • The Provisions on Prohibiting Monopoly Agreements, published by the State Administration for Industry and Commerce (SAIC) on 31 December 2010 and effective as of 1 February 2011.

  • The Provisions on Prohibiting Abuses of Dominant Market Positions, published by the SAIC on 31 December 2010 and effective as of 1 February 2011.

Under the AML, the NDRC and its local counterparts are responsible for investigating price-related monopoly agreements and/or price-related abusive conduct of a dominant business operator. Business practices such as resale price maintenance and imposition of minimum or maximum prices are regulated in accordance with the Provisions on Anti-Price Monopoly.

The SAIC and its local counterparts are responsible for investigating non-price related monopoly agreements and/or non-price related abusive conduct of a dominant business operator. Other business practices such as grant of exclusive territory are regulated by the Provisions on Prohibiting Monopoly Agreements and the Provisions on Prohibiting Abuses of Dominant Market Positions.  

From an international competition law perspective, there is a common view that a sales agent in China is analogous to an employee, because the agent neither bears any risk themselves nor directly shares in any profits or losses of their principal's business. As a result, it is commonly thought that the business restraints applicable to a "genuine" agency agreement do not conflict with the AML.

However, the AML is not clear on this point. Although to date no "genuine" agency agreement has been challenged before any Chinese court on the grounds of the AML, it is advisable to consider the prohibitions set out below under the AML, and the relevant provisions of the NDRC and SAIC, when implementing an agency agreement.

Article 14 of the AML. This provision covers:

  • Resale price maintenance, which is prohibited under the AML. Business operators that operate at different levels of the production or supply chain are expressly prohibited from reaching agreements to:

    • fix resale prices to third parties; or

    • fix minimum resale prices to third parties.

    Similar prohibitions also exist in Article 8 of the Provisions on Anti-Price Monopoly.

  • Imposition of minimum or maximum prices. The imposition of minimum prices is prohibited under Article 14 of the AML and Article 8 of the Provisions on Anti-Price Monopoly. However, neither the AML nor the Provisions on Anti-Price Monopoly prohibit business operators from setting a maximum resale price.

  • Other restrictions. Article 14 of the AML contains a catch-all provision stipulating that anti-monopoly enforcement authorities such as the NDRC and the SAIC can, at their discretion and on a case-by-case basis, determine whether a restrictive condition is caught by Article 14 of the AML. That is, if any of these authorities is of the opinion that the following restrictive practices (Restrictive Practices) may have the effect of eliminating or restricting competition in the relevant market, the authority can challenge them on the basis of the catch-all provision of Article 14:

    • grant of exclusive territory;

    • tied selling;

    • territorial restrictions;

    • customer restrictions;

    • refusal to deal;

    • imposition of minimum sales targets.

However, in practice, the SAIC has not yet invoked the catch-all provision under Article 14 of the AML to challenge any of the above business practices in China. The statutory criteria for applying Article 14's catch-all provision needs to be further clarified in the detailed rules of the AML.

Article 17 of the AML. Article 17 of the AML provides a non-exhaustive list of prohibited abusive conduct by business operators in a dominant position. The list covers:

  • Excessive pricing: a dominant business operator takes advantage of its dominant position by setting an unreasonably high sale price or low purchase price for a product.

  • Predatory pricing: a dominant business operator sells its products at an unprofitable price, without objective justification.

  • Refusal to deal: a dominant business operator refuses to trade with other business operators, without objective justification.

  • Exclusive dealing: a dominant business operator restricts other business operators by requesting them to deal exclusively with it or with parties designated by it, without objective justification.

  • Tie-in and ancillary conditions: a dominant business operator enters into tie-in arrangements or imposes ancillary obligations on trading partners, without objective justification.

  • Discriminatory treatment: a dominant business operator applies differential prices or other transaction terms to different trading partners who provide the same trading conditions.

A dominant business operator cannot engage in any of the above Restrictive Practices without an objective justification. Whether one of these Restrictive Practices has an objective justification is determined by the SAIC. The SAIC and its local counterparts take into consideration the following factors when determining whether an objective justification exists:

  • Whether the relevant restriction is adopted by the dominant business operator for its normal business activities or normal benefit.

  • The impact of the relevant restriction on economic efficiency, the public interest and economic development.

    (Article 8, Provisions on Prohibiting Abuses of Dominant Market Positions.)

 
5. Are there any laws or regulations relating to restrictive covenants or covenants not to compete during the agency agreement? To what extent is it possible to continue the restrictions after the agreement has expired? In particular, to what extent does the geographical extent and or the length of time of the restriction affect its enforceability?

No specific laws or regulations govern restrictive covenants or covenants not to compete during the agency agreement. The general provisions of the AML apply.

In practice, it is not uncommon for the restrictions to continue after the agency agreement has expired. However, the impact of the geographical extent and/or the length of time of the restriction on the agreement's enforceability need to be considered in accordance with the AML on a case-by-case basis.

 

Employment issues

6. Is there a risk that an agent may be treated as an employee of the principal?

 A principal can either entrust a company or an individual to act as agent in China. If the business relationship reaches a certain volume, it is normally advisable and common for foreign principals to appoint Chinese companies as agents rather than individuals. This is because individuals are not permitted by law to hire other persons in China to support them in providing agency services.

If individuals act as agents, they are normally not regarded as employees of the principal as long as they act with a certain degree of independence. An agent will be regarded as an employee of the principal if all of the following apply:

  • The principal and the agent are capable of falling within the definition of an employer and an employee under PRC law.

  • The agent is subject to the internal rules and regulations of the principal and under the management of the principal.

  • The agent conducts work as arranged by the principal and receives remuneration from the principal.

  • The work of the agent forms part of the business of the principal.  

Note that foreign employers cannot hire Chinese nationals as employees who will work in China. This is because, under PRC foreign exchange control regulations, foreign employers cannot remit payments for mandatory Chinese social security contributions. As a result, any Chinese employee must be employed by an entity that has its legal address in China.

 

Tax

7. Will a foreign principal that appoints an agent directly in the national territory be regarded as carrying on business for tax purposes in that territory?

The business activities of an agent in China may result in the foreign principal being taxed in China if a permanent establishment (PE) of the principal in China has been established. Under most of the double taxation treaties (DTTs) concluded between the PRC and other countries, a PE means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

A PE includes, in particular:

  • A place of management.

  • A branch.

  • An office.

  • Provision of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purposes (where such activities last for more than 183 days within any 12-month period).  

However, a PE does not exist if the only activities undertaken are of a preparatory or auxiliary nature.

In addition, despite the general PE requirement of "a fixed place of business", if a person (other than an agent of independent status), acting in China on behalf of a foreign principal has and habitually exercises authority to conclude contracts in the name of the enterprise, that enterprise is deemed to have a PE in China in respect of any activities that person undertakes for the enterprise, unless the activities of the person are limited to those of a preparatory or auxiliary nature. If the agent carries out the agency services in the normal course of its business, the agent can be regarded as an independent agent. However, if the agent solely or almost solely represents the foreign company, independent agent status may be denied.

Under some DTTs concluded by the PRC, if the business terms between the agent and the principal have not been affected by the fact that the agent solely or almost solely acts for the principal, independent agent status can still be secured. 

As a result of the above, an agency contract may result in the foreign principal having a PE in China, that is, the foreign principal may be regarded as carrying on business for tax purposes in China due to the activities of the agent in China, unless that agent has independent status.

 
8. Are any withholding or other taxes levied in the territory on remittance monies? When and by whom are they payable?

Typically in agency contracts under Chinese law, the agent is entitled to receive a commission fee from a principal, depending on the contract volume facilitated by the agent. Since the completion of the Value Added Tax (VAT) reform early in 2016, the commission fee is subject to PRC VAT at:

  • 6%, if the agent is a general VAT payer.

  • 3%, if the agent is a small-scale VAT payer.

In addition, surcharges at around 10% of the actual VAT payable by the agent should also be paid. 

If the annual commission income of the agent reaches RMB5 million, the agent has to be a general VAT payer. If the annual commission income is lower than the threshold above, the agent can also voluntarily apply for the general VAT payer status. Individuals should never become general VAT payers.

If the agent is an individual, individual income tax (IIT) must also be paid on the income received for agency services (after an allowable deduction of 20%) at progressive tax rates ranging from 20% to 40%. If the agent is a company, its profits are subject to corporate income tax (CIT) at 25%.

The agent is subject to the tax, and must pay it on the commission fee to the competent tax authority, unless the contract otherwise provides. This applies regardless of whether the principal is a domestic or foreign entity.

 
9. Will there be any difficulties in a domestic agent making payment to a foreign principal, either in local currency or in the currency of the principal’s country? Are there any exchange controls in operation?

China is governed by a restrictive foreign exchange control regime. Any remittance from China to a foreign country is subject to Chinese foreign exchange control, which is administered by the State Administration of Foreign Exchange (SAFE). Payments by a domestic remitter to a foreign remittee can be made in foreign exchange or, subject to certain conditions, in RMB. The Chinese foreign exchange control regime applies in both circumstances.

For payments under commercial contracts, the domestic remitter must present certain documentation to its Chinese bank proving the contractual basis for the payment, for example, the contract and the commercial invoice. In the case of payments abroad for non-trade items, for example, a service fee, the Chinese remitter must record the payment (if the amount is above US$50,000) with the PRC tax authority so that the latter is aware of the payment and can check whether taxes, if any, have been properly paid for the foreign remittee.

In relation to agency contracts in China, in practice it is rather uncommon for a domestic agent to make payments to a foreign principal. It is more common for an agent to receive a commission fee from a principal, based on a specific contract volume brokered by the agent.

Note that, due to Chinese foreign exchange control, a domestic agent cannot accept payment from a Chinese customer on the foreign principal's behalf, and then forward that payment to the principal. Payments under the contract can only be made between the contracting partners, so the Chinese customer must pay the foreign principal directly. Alternatively, an authorised distribution relationship could be established, where the agent imported the products in its own name and resold them to the customer.

 

Duties of the agent

10. What duties does national law impose upon an agent?

Due to the lack of specific statutory provisions on agency contracts, the agent’s duties are drawn from certain provisions of the CL on other contract types, as well as from general contractual principles and business practice.

An agent must provide accurate reports of contracts it has prepared, brokered, negotiated and/or concluded for the principal (Articles 401 and 425, CL). The agent must handle matters entrusted to it personally and only sub-contract work to third parties if permitted to by the principal (Article 400, CL).

Other obligations are typically imposed on the agent by the provisions of the agency contract, such as:

  • An obligation to actively promote and foster business between the principal and third parties. Performance targets are sometimes set for the agent, for example, to procure minimum contract volumes for the principal.

  • An obligation to provide after sales services to the principal's customers in China. This obligation is often imposed if a foreign principal does not yet have a sufficient service network of its own in China. In this case, the agent may be obliged to keep a sufficient stock of spare parts for the principal's products.

  • Confidentiality obligations and provisions protecting the principal's intellectual property rights. Such provisions should be safeguarded by a penalty clause. In relation to obligations on exclusivity and non-competition, see Questions 4 and 5.

 

Duties of the principal

11. What obligations does national law impose on a principal?

Again, given the lack of specific statutory provisions on agency contracts, the principal's duties arise from certain provision of the CL on other contract types, as well as from general contractual principles and business practice.

After the agent has performed its contractually agreed obligations, the principal must pay the agreed remuneration to the agent (Articles 405 and 426, CL). Normally, the agent receives a commission fee in accordance with the contract volume facilitated by the agent (see Question 12).

In most contractual agency arrangements, any and all expenses of the agent are deemed to be covered by the above commission fee. If the agent is entitled to ask for reimbursement of costs and expenses, it is advisable to include clear provisions on this in the agency contract. From a principal’s perspective, payment of such costs and expenses incurred within China should only be made on the presentation of official tax invoices.

 

Remuneration

12. How does national law regulate the payment of remuneration to the agent? Does national law contain any compulsory provisions concerning the level of remuneration?

PRC national law does not contain any compulsory provisions concerning the level of remuneration of agents. The agent's remuneration is often an essential component of the agency contract and its level can be freely determined by the parties. Normally, the agent receives a certain commission fee based on the number of contracts it has prepared, negotiated and/or concluded for the principal.

 
13. How does local law regulate corrupt gifts and secret commissions?

Corrupt gifts and secret commissions constitute bribery and are prohibited by the PRC Criminal Law, the PRC Anti-Unfair Competition Law and the Interim Rules on the Prohibition of Commercial Bribery.

Bribery is prohibited by the PRC Criminal Law and other administrative regulations. The offering and receipt of bribes can constitute a criminal offence. Any offering or receipt that does not qualify as a criminal offence may still be subject to administrative penalties under the PRC Anti-Unfair Competition Law and the Interim Rules on the Prohibition of Commercial Bribery.

In relation to the offering of bribes, both "responsible persons" and companies can be criminally liable (PRC Criminal Law). The responsible person of a company is normally the chairman of the board of directors, the general manager, the chief executive officer or the president of a company. However, as there is no fixed definition of the responsible person from a legal perspective, the PRC courts can exercise their discretion to determine this on a case-by-case basis, and have at times extended the scope of the term beyond the personnel mentioned above.

If the offering of a bribe is found to constitute a criminal offence, criminal penalties can be imposed on the offending company and individuals who are directly responsible for the company, as well as those individuals directly responsible for committing the offence.

The criminal penalties imposed on companies consist of fines. The relevant responsible person of an offending company can be sentenced to criminal detention or a term of imprisonment of up to ten years. Criminal detention lasts between one and six months, during which the convict is entitled to receive payment for any labour and return to their home for one to two days each month. Imprisonment lasts between six months and 15 years or for a lifetime; in this case the prisoner can be forced to work without any payment.

In a commercial context, the giving of property or money that does not constitute a criminal offence may constitute non-criminal commercial bribery. In contrast to the PRC Criminal Law, under the Interim Rules on Prohibition of Commercial Bribery, in such a case only the company (not individuals such as directors or managers) can be subject to administrative penalties.

In relation to the receipt of bribes, any director or manager of a non-state-owned enterprise, such as a company, who accepts bribes, is criminally or administratively liable (Article 148 in connection with Article 150, PRC Company Law, PRC Criminal Law, PRC Anti-Unfair Competition Law and Interim Rules on Prohibition of Commercial Bribery). In contrast to offering bribes, for receipt of bribes, only the individual receiving the bribe is liable, rather than the company.

The offering or acceptance of promotional gifts with a low value in accordance with normal business practice is not treated as bribery and is therefore permitted. Under the internal rules and criteria of SAIC, which is responsible for punishing non-criminal commercial bribery, the value of such gifts cannot exceed RMB300.

However, gifts of any type to government officials are strongly discouraged. Gifts given at festival times should reflect the festival tradition or have some connection to the festivity, for example, moon cakes for the Chinese mid-autumn festival. In any case, the value of such a gift must not exceed RMB300.

 

Duration

14. What term is commonly agreed for an agency? Does national law regulate the length of notice periods to terminate an agency agreement?

The parties are free to agree the term of any contract unless PRC law provides otherwise (Article 46, CL). This means that, in the absence of specific statutory provisions concerning agency agreements, their term can be freely agreed by the parties. In practice, most parties agree to one-, two- or three-year terms. It is common to include a mechanism in the agreement that extends the term by a year unless either party objects to the extension at least three months before the expiry of the initial term.

No notice period is required in any circumstances of termination provided for by statute, but the contract is terminated once notice of termination reaches the other party (Article 96, CL) (see Question 16). The parties have full discretion to decide whether to set a notice period in their agency agreement. In practice, parties commonly agree to one- or three-month notice periods where an agreement is terminated in accordance with contractual provisions. If the contract is silent on the issue of termination, termination with prior notice is not permitted (see Question 16).

 

Rights of ownership

15. Where the agent holds stock or money or other property belonging to the principal, can the principal assert its rights of ownership against third parties:
  • In the event of insolvency of the agent?

  • In the event that the agent has dishonestly disposed of them to third parties?

  • To what extent do these rights extend to enable the principal to take the proceeds of sale of that property disposed of by the agent:

    • Where the sale was authorised by the principal?

    • Where the sale was not authorised by the principal?

It is rare for Chinese agents to hold stock, money or other property belonging to the principal.

In the event of the agent's insolvency, movable property that is owned by the principal but in the agent's possession does not form part of the insolvent agent's assets (Article 30, PRC Enterprise Bankruptcy Law (EBL)). This also applies to goods delivered under retention of title for which payment has not yet been made. As a result, the agent's insolvency administrator must return any movable property owned by the principal to it (Article 38, EBL) unless a purchase agreement for such goods exists and the insolvency administrator decides to fully purchase and pay for the goods in accordance with the agreement (Article 18, EBL). That is, the principal remains the owner of its goods in the event of the agent's insolvency and can assert its rights of ownership against third parties.

If the agent has dishonestly disposed to a third party movable property that is owned by the principal, that third party can acquire ownership in the property if it has acted in good faith. This is the case if :

  • The third party did neither know nor ought to know the ownership status of the property (bona fide third party).

  • The property was transferred at a reasonable price.

  • The property has been delivered to the third party.

    (Article 106, paragraph 1, PRC Property Law.)

If the above conditions are fulfilled, the principal cannot assert its rights of ownership against the third party. In the Interpretation of Several Issues relating to the Application of the PRC Property Law which took effect on 1 March 2016, the PRC Supreme People's Court defined criteria for the above terms "bona fide third party" and "reasonable price" as follows:

  • A bona fide third party must, at the time of delivery of the property:

    • not be aware that the seller lacks the right to dispose of the property; and

    • not be grossly negligent regarding the seller’s missing right of disposal. In the case of movable property, gross negligence is deemed to be prevalent if the trade object, location or trading time does not correspond with common trade practice.

  • A reasonable price shall be determined on the basis of the nature and quantity of the object, the payment method as well as the market price and the trade practice of the trading place.

If a bona fide third party has obtained the ownership of movable property in accordance with the above conditions as a result of dishonest behaviour by the agent, the principal, as the original owner of that property, can seek compensation of its losses from the agent (Article 106, paragraph 2, PRC Property Law).

The above applies where the sale was not authorised by the principal. Where the sale was authorised by the principal, the third party has obtained ownership in the movable property. In this case, the principal retains its contractual claims for payment of the purchase price, if any, against the agent but cannot assert its rights of ownership against any third party.

 

Termination

16. What events will be regarded in law as justifying termination of the agency agreement? Do any statutory obligations arise on termination? What provision is usually made in the agreement for termination?

Unilateral termination without prior notice by a party is possible if:

  • A force majeure event makes the objective of the contract unachievable.

  • Before expiry of the time limit for performance, the other party expressly states or through its conduct indicates that it will not perform its main obligations.

  • The other party has delayed the performance of its main obligations, and still fails to perform them within a reasonable period of time after having been reminded.

  • The other party has delayed the performance of an obligation or committed another breach of contract which makes the objective of the contract unachievable.

  • Other circumstances stipulated by law occur. One event of such "other circumstances" is provided in the Interpretation on Several Issues Concerning the Application of the Contract Law of the People's Republic of China (Part 2), issued by the PRC Supreme People's Court on 24 April 2009 (CL Interpretation). The People's Court will, based on the principle of fairness and taking into consideration the actual circumstances of the case, determine whether to amend or terminate a contract if, after its formation (Article 26, CL Interpretation) all of the following occur:

    • a party petitions a People's Court for amendment or termination of the contract;

    • a material change in the objective circumstances has occurred that could not have been foreseen by the parties at the time of conclusion of the contract, and this was not caused by force majeure and falls outside the sphere of commercial risk; and

    • continued performance of the contract would be obviously unfair to one of the parties, or the realisation of the objectives of the contract has become impossible.

      (Article 94, CL.)

In the above cases, the terminating party must notify the other party of the termination. The contract is terminated once notice of termination reaches the other party (Article 96, CL). This means no prior notice period is required.

Apart from the above instances, unilateral termination is not permitted unless the contract explicitly states otherwise. In particular, PRC statute does not recognise the concept of ordinary termination with a reasonable prior notice period for agency agreements or other similar types of contract.

No statutory severance payments are required to be made by a principal to the agent where an agency agreement is terminated.

The parties can agree conditions under which a party is entitled to terminate the contract (Article 93, CL). Given the limited options for termination provided by statute (see above), it is advisable and common practice to explicitly stipulate reasons for termination in the contract. From the principal's perspective, the ideal situation might be to include clauses providing for the principal's right to terminate the contract:

  • With a set period of prior notice at any time without a specific reason.

  • Without a prior notice period on the occurrence of certain events, for example, the agent's failure to reach certain performance targets agreed by the parties.

As Chinese courts do not yet always provide an impartial forum for dispute resolution in the event of termination, and judgments of most foreign courts are not acknowledged or enforced in China, it is highly advisable to agree to arbitrate any contractual dispute, including those concerning termination, before a reputable arbitration institution and to include a valid arbitration clause in the agency agreement.

 
17. What rights does the agent have to compensation or indemnity upon termination of the agency agreement? How is compensation or indemnity for termination calculated? Are there any formalities which must be complied with for lodging a claim for compensation or indemnity?

There are no statutory compensation, indemnity or severance payments required to be made by the principal to the agent on termination of the agency agreement if the termination complies with applicable statutory or contractual requirements. If the termination does not comply with such requirements, the terminating party is considered to have breached the contract. The injured party is then entitled to compensation from the terminating party of any and all losses incurred as a result of the breach, including loss of profit. However, such damages cannot exceed the loss that the breaching party foresaw or ought to have foreseen at the time of the conclusion of the contract as a possible consequence of the breach of contract.

If the injured party intends to claim compensation for damages due to the termination, it must object to the termination in time, that is, within three months after receipt of the termination notice. If a party objects to the termination of a contract but only raises the objection by bringing a lawsuit more than three months after receipt of the termination notice, that party's claim will be rejected by the court (Article 24, CL Interpretation).

 

The agency agreement

18. Are any particular formalities required for an agency agreement to be legally valid and enforceable under national law?

There are no formalities required for an agency agreement to be legally valid and enforceable under national law. As with most other types of contract, an agency agreement can be concluded in writing, orally or in another form (Article 10, paragraph 1, CL). Conclusion of a contract "in another form" means that, from the acts of the parties, it is possible to infer that they intended to conclude a contract (Article 2, CL Interpretation).

However, in practice, it is advisable to conclude a written agency agreement for the purposes of evidence and to avoid potential disputes. A written agreement must be signed or sealed by both parties for it to be effective (Article 32, CL). In China, all companies must have a company seal and many individuals have personal seals. A company seal has the same effect as the signature of the company's legal representative. Likewise, a personal seal has the same effect as a person's signature.

In agency agreements between a foreign party and a Chinese party, a foreign law can be selected as the applicable law (Article 126, CL). If only Chinese parties, including foreign-invested enterprises, are parties to the contract, the agency agreement is governed by PRC law. As to the necessity of an arbitration clause, see Question 16.

 
19. Where the agent is required by the principal to enter into a guarantee of the debts to the principal of customers that it finds for the principal (del credere guarantee) or that it concludes contracts with on behalf of the principal, what formalities and documentation are required to ensure that the guarantee is legally binding? Is any special set of words required for such a guarantee?

In agency agreements between Chinese parties, it is not common for the agent to provide a del credere guarantee to the principal. If the agent is a Chinese company and the principal is foreign, the agent cannot guarantee any customer's debts because of PRC foreign exchange control. As a matter of principle, guarantees given by Chinese parties to foreign parties must be registered with the SAFE. An agent's del credere guarantee cannot be registered by the SAFE so the foreign principal would not be able to enforce such a guarantee against the Chinese agent.

 

Contributor details

Dr Falk Lichtenstein, Counsel

CMS, China

T +86 10 8527 0597
F +86 10 8590 0831
E Falk.Lichtenstein@cmslegal.cn
W www.cmslegal.cn

Areas of practice: Chinese corporate law, Chinese and international commercial law, and dispute resolution.

Colin Liu, Vice President Legal and Compliance

Porsche (China) Motors Limited

T +86 21 6156 5808
F +86 21 6168 2911
E colin.liu@porsche.cn
W www.porsche.cn

Areas of practice: Chinese competition law, IP law, foreign direct investment and dispute resolution.


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