Supply contract country questions: China

China-specific information concerning the key legal and commercial issues to be considered when drafting a supply contract.

This Q&A provides country-specific commentary on Supply contracts: international overview, and forms part of the Sales and Marketing International Transaction Guide.

Yue Liu, Jie Sun, Zhengyi Liu and Chunyu Gong, Jia Yuan Law Offices

General contract law framework

1. What are the requirements under national law for a valid contract to exist?

Under the Contract Law of the People’s Republic of China, effective as of 1 October 1999 (Contract Law), mutual assent is required for a contract to be formed. Normally, mutual assent is expressed in terms of offer and acceptance. An offer is an indication of intent to enter into a contract. The content of the offer must be concrete and definite, and the offeror must intend to be bound by the offer once it is accepted. An acceptance is an indication of assent by the offeree to an offer.

However, an existing contract may be invalid in any of the following circumstances (Contract Law):

  • Either party enters into the contract by means of fraud or coercion, impairing the state's interests.

  • There is a malicious conspiracy causing damage to the interests of others.

  • There is an attempt to conceal illegal goals by use of a legitimate form.

  • Social and public interests are harmed.

  • Mandatory provisions of law and/or administrative regulation are violated.

If a contract contains either of the following clauses exempting liability, it is invalid:

  • A clause that exempts a party from liability for causing physical injury to the other party.

  • A clause that excludes a party's liability for causing property damage to the other party intentionally or through gross negligence.

If a contract is determined to be invalid, then it is treated as invalid as at the moment it was formed.

In addition, under the following circumstances, the validity of a contract is dependent on certain conditions being fulfilled:

  • First, a contract made by a person with limited civil capacity becomes valid only after ratification by his legal agent. As a result, the validity of this type of contract depends on whether the legal agent ratifies it. The other party to the contract can request that the legal agent ratify it within one month. If the agent does not respond in time, he is considered to have refused to ratify. Before ratification, a bona fide party to the contract can rescind the contract.

    However, such a contract does not need to be ratified by a legal agent if the party with limited civil capacity can only profit from it, or the contract is compatible with the age, intelligence and mental health of the person concerned.

  • Second, a contract entered into by an agent on behalf of a principal is not binding on the principal if the agent does not have the necessary authorisation, acts beyond its authorisation or has had its authorisation terminated. The contract is only binding if the principal ratifies it. The other party to the contract can request that the principal ratify it within a month. If the principal does not respond in time, he is considered to have refused to ratify. Pending ratification, a bona fide party can rescind the contract. If the principal refuses to ratify, the person who made the contract bears the responsibility of performing the contract.

  • Third, if a contract allows for the disposal of assets by a party that does not have the right to dispose of such assets, the contract is not valid until the obligee (the rightful owner of the assets) ratifies it, or until the relevant party obtains the right of disposal.

 
2. Are there any limitations on the legal capacity of a company to enter into a supply of goods contract?

Generally, there are no such limitations. If a party enters into a contract beyond its scope of business (scope of business is defined as the categories and types of commodities and the services that the state allows an enterprise to produce or provide), then the contract does not become invalid unless the contract breaches laws and regulations on state-restricted businesses, franchise businesses or concerning the prohibition of certain businesses.

 
3. Is it necessary for a contract for the sale of goods to be in writing for it to be valid? Are any formalities necessary?

In general, there are no requirements that supply contracts must be in writing to be valid (Contract Law). Parties can enter into a contract orally, in writing, or in other ways. "Writing" means any form that makes the contract capable of being reproduced in tangible form, such as a written agreement, a letter or electronic text (including telegram, telex, facsimile, electronic data interchange and e-mail).

However, a supply contract must be in writing if a law or a regulation (other than the Contract Law) specifically requires this, or if the parties agree to it. If the parties fail to enter into a contract in writing as required, the contract is still formed if one party has already substantially performed it, and the other party has accepted the performance.

 
4. How can a seller or buyer incorporate its standard terms of business in its contracts?

"Standard clauses" are clauses that a party formulates in anticipation of a contract, which are to be used repeatedly and are not a result of bargain (Contract Law).

However, if a party chooses to use a standard clause in its contract, that clause is subject to greater restrictions and higher standards. In addition to the general circumstances that may lead to a contract being invalid, standard clauses are invalid if the party that provides the standard clauses excludes itself from liability, imposes heavier liabilities on the other party, or precludes the other party from exercising its important rights.

In addition, to protect the party not providing the standard clause, a three-part analysis has been adopted for the interpretation of such clauses (Contract Law):

  • A standard clause must be interpreted in accordance with its common understanding.

  • If a standard clause has more than one interpretation, the clause must be interpreted in a manner unfavourable to the party providing the clause.

  • If a standard clause is inconsistent with a non-standard clause, the non-standard clause must be adopted.

 
5. Does national law require that special notice be given of any contract terms for them to be incorporated in a contract?

There are generally no such provisions under the Contract Law, except in relation to standard clauses (see Question 4). A party intending to incorporate a standard clause must, in a reasonable manner, inform the other party of any standard clause that exempts or restricts its liability, and provide explanations of such clauses at the request of the other party.

 

Incorporation of standard terms of business

6. How does national law treat acceptance of an offer which attempts to impose new terms?

If a new term substantially modifies an offer, it constitutes a new offer. Substantial modifications include changes relating to:

  • Subject matter.

  • Quantity of goods or services.

  • Quality of goods or services.

  • Price or remuneration.

  • Time, place or method of performance.

  • Liability for breach of contract.

  • Method of dispute settlement.

The other party can accept or reject the new offer at its discretion.

If a new term does not substantially modify the offer, then acceptance takes place unless:

  • The offeror objects to the new term in a timely manner.

  • The original offer expressly states that it cannot be modified.

In this situation, the terms of the contract must be in line with the terms of the acceptance.

Pre-contractual representations

7. Can a seller be held liable for pre-contractual misrepresentation?

Yes. A party can be held liable if, during the process of negotiating a contract, it intentionally conceals key facts related to the conclusion of the contract or provides false information. The party at fault must compensate the other party for any damage caused.

 
8. Can statements made by sales staff or in promotional literature be construed as terms of a contract for which a seller may be held liable?

Statements made by sales staff or in promotional literature are usually construed as an invitation to treat. Whether or not such statements can be construed to be terms of a contract depends on whether or not there is a valid offer and a valid acceptance in the later stages of negotiation.

 
9. Are parties entering into a contract under any legal obligation of disclosure? Can silence constitute misrepresentation?

Yes, a party can be held liable if, during the process of negotiating a contract, it intentionally conceals key facts related to the conclusion of the contract or provides false information (see Question 7).

In addition, if a contract is entered into by deceit, the injured party can apply to a court or arbitral institution to rescind or alter the contract, unless either:

  • It has not exercised the right to rescind within a year from the date on which it was aware or ought to have been aware of the matter giving rise to the right of rescission.

  • It waives its right explicitly or through its conduct.

 

Main terms of a supply contract

10. Does national law imply any terms into business-to-business contracts for the supply of goods?

First, unless the law provides otherwise, the seller must ensure that no third party will claim any rights against the buyer over the goods delivered.

Second, if there are no relevant provisions in the contract, the following terms are implied into business-to-business contracts for the supply of goods (Contract Law):

  • Quality standards. State standards or industrial standards apply. If such standards do not exist, common standards or specific standards (in conformity with the purposes of the contract) apply.

  • Contract price or remuneration. The market price in the place of performance at the time the contract is executed.

  • Place of performance. For instance:

    • if the subject matter of the contract is a cash payment, the place of performance is where the party who receives the payment is located;

    • if the subject matter of the contract is real property, the place of performance is where the real property is located;

    • in all other cases, the place of performance is where the party who performs the contract is located.

  • Time of performance. Performance can occur at any time, and the creditor can demand performance at any time (as long as the creditor gives the debtor enough time to perform the contract).

  • Method of performance. The contract must be performed in a manner that helps to realise the purposes of the contract.

  • Cost and expenses of performance. Cost and expenses of performance are borne by the party who performs the contract.

 
11. What liability exists for breach of an express term of a contract?

The general rule is that, if one party does not perform its obligations, or the performance does not meet requirements, then its liabilities could include:

  • Performing the remaining obligations. If the party breaches the contract by failing to make a payment, then it can be required to pay the contract price or remuneration. However, if the party breaches the contract by failing to perform a non-pecuniary obligation, it cannot be required to perform the remaining obligation if:

    • performance is impossible legally or practically;

    • the subject matter of the obligation is unsuitable for compulsory performance or the cost of performance is extremely high; or

    • the non-breaching party does not demand performance within a reasonable period of time.

  • Taking remedial measures.

  • Paying compensation for damages. The amount of compensation must be equivalent to the loss caused by the breach of contract. It must include the profit obtainable had the contract not been breached, but cannot exceed the amount that the parties anticipated or should have anticipated when making the contract.

  • Paying liquidated damages as provided for by the contract.

The parties can agree that one party pay a deposit to the other party as a guarantee of the creditor's rights (Security Law of the People's Republic of China). After the debtor has performed its part of the contract, the deposit either forms part of the sale price or is refunded. If the party paying the deposit fails to perform its duties under the contract, it is not entitled to the refund of the deposit. If the party receiving the deposit fails to perform, it must refund twice the deposit amount.

If the contract provides for liquidated damages and payment of a deposit, when either party breaches the contract, the other party can choose one of these remedies (not both).

 
12. What liability exists for breach of an implied term of a contract?

Liability for breach of an implied term is no different to breach of an express term (see Question 11).

 

Performance obligations

13. Does national law allow a seller to provide tolerance limits, permitting him to deliver less (or more) than the contract quantity?

The seller can deliver more than the contract quantity. However, if the seller delivers more goods than stipulated, the buyer can either accept or refuse to accept the additional goods. If the buyer accepts the additional goods, it must pay for them at the contract price. If the buyer refuses to accept, it must promptly notify the seller.

If the seller delivers less than the contract quantity, he is generally liable for breach of contract.

 
14. Does national law imply any terms into a contract in relation to price? Can a seller increase the price after the contract has been made?

If the contract does not set a price, or the relevant provisions are ambiguous, then the contract price or remuneration is the market price of the place of performance at the time the contract is executed.

Generally, the seller cannot increase the price after the contract has been entered into.

 
15. Does national law permit a seller to charge interest on late payment?

Yes. If the seller claims damages for late payment, and the liquidated damages for late payment or the method of calculating such liquidated damages are not stipulated in the contract, the court can calculate compensation based on the benchmark interest rate of the People's Bank of China for RMB loans of the same type and term, and with reference to the standard penalty interest rate for late payment.

 
16. Does national law imply into contracts any obligations as to time and place for contract performance?

Generally, time and place for performance are stipulated in the contract. However, the Contract Law provides that:

  • If the contract does not provide for the place of delivery, or the relevant provisions are ambiguous, then:

    • if the goods need to be transported, the seller must deliver the goods to the first carrier for delivery to the buyer;

    • if the goods do not need to be transported, and if both the seller and the buyer know the location of the goods when entering into the contract, the seller must deliver the goods at that location. If the location of the goods is unknown, the seller must deliver the goods at the seller's place of business at the time when the contract is executed.

  • If the contract is silent on place to pay:

    • if the subject matter of the contract is a cash payment, the place of performance is where the party who receives the payment is located;

    • in other cases, the place of performance is where the party who performs is located;

    • if the place of payment still cannot be determined, the buyer should pay at the place of business of the seller. Alternatively, if the payment is conditional on delivery of the goods, then the buyer should pay at the place of delivery.

  • If the contract does not stipulate time to pay:

    • the party can perform at any time, and the creditor can demand performance at any time (as long as the creditor leaves the debtor enough time to perform);

    • if the time for payment still cannot be determined, the buyer should pay at the same time as delivery of the goods.

 
17. Is time for performance of contractual obligations normally considered to be fundamental to the contract, allowing a party to terminate the contract for failure to perform within the specified time? What remedies may be taken against a seller for any delay in delivery?

The following types of conduct are generally considered to be a fundamental breach of a contract:

  • Before the performance period expires, either party clearly indicates by word or by act that it will not discharge the principal debts.

  • Either party delays the discharge of the principal debts, and still fails to discharge them within a reasonable period of time after being asked to do so.

  • Either party delays the discharge of debts, or is engaged in other illegal activities that make it impossible to realise the purposes of the contract.

  • Any other circumstances as provided for by law.

A party can terminate the contract in any of the above situations.

The parties can also stipulate the conditions upon which the contract may be terminated by either party. As a result, the parties can provide in the contract that the contract may be terminated if the seller does not deliver the goods on time (or if the buyer does not pay on time).

In addition, one of the seller's statutory obligations under a supply contract is that it must deliver the goods within the stipulated time limit (Contract Law). One of the buyer’s obligations is that it must pay at the stipulated time.

If the seller delays delivery, see Question 11 for the remedies available to the buyer. There are no specific remedies available to buyers under the Contract Law.

 
18. What remedies are available to a seller where the buyer fails to accept delivery?

If the seller delivers the goods at the required location, and the buyer does not accept the goods as agreed, the risks of damage and loss are borne by the buyer from the day on which the buyer breaches the contract. As the Contract Law does not provide any specific remedies for the seller in this situation, the general remedies set out in Question 11 are available.

 
19. Does national law allow a seller to exclude his liability for delivering damaged goods or for failure to deliver?

An exculpatory clause is only prohibited if (Contract Law):

  • The clause exempts a party from liability for causing physical injury to the other party.

  • The clause exempts a party from liability for property damage caused as a result of wilful conduct or gross negligence.

This means that the seller is able to exclude his liability for delivering damaged goods or for failure to deliver, as long as this was not caused by wilful conduct or gross negligence.

 
20. Under what circumstances does national law permit a buyer to reject goods? Can the right to reject be lost?

Unless otherwise agreed by the parties, if the goods delivered do not comply with quality requirements and the purpose of the contract is defeated because of the failure to comply with these requirements, the buyer can either:

  • Reject the goods and dissolve the contract.

  • Ask the seller to repair, replace or remake the goods. The buyer can also ask for a price discount. 

 
21. When does national law provide that title to and risk in goods will pass?

The title of goods passes to the buyer on delivery of the goods, unless otherwise agreed by the parties or provided by law.

Generally, the risks of damage and loss of the goods are borne by the seller prior to the delivery, and by the buyer after the delivery, unless otherwise agreed by the parties or provided by law.

If the goods are delivered by a carrier, the risks of damage and loss of the goods on the way are borne by the buyer from the time when the contract is made, unless otherwise stipulated by the parties.

If the parties do not stipulate the place of delivery, and the goods need to be transported, the buyer bears the risks of damage and loss when the seller delivers the goods to the first carrier.

If the seller delivers the goods at the required location, and the buyer does not accept the goods as agreed, the risks of damage and loss are borne by the buyer from the day on which the buyer breaches the contract.

If the goods are not delivered within the required time period because of the buyer's fault, the buyer bears the risks of damage and loss of the goods from the date of breaching the agreement.

 
22. To what extent is a retention of title clause providing protection to the seller for the price of the goods valid under national law?

The parties can stipulate in a supply contract that the seller retains title to the goods if the buyer fails to pay the set price or to perform other obligations. Typically, the seller can retain the title to goods in the following situations:

  • The buyer fails to pay the price set by the contract.

  • The buyer fails to fulfil the conditions stipulated in the contract.

  • The buyer sells, pledges or otherwise improperly disposes of the goods.

However, if the buyer has already paid more than 75% of the total price, the seller's claim to take back the goods will not succeed.

 

 Excluding liability

23. To what extent does national law permit the use of terms which limit or exclude the liabilities of a party to a business-to-business contract for the sale of goods?
Consider, in particular, clauses:
  • Excluding or limiting liability with respect to a breach of an express contract term.

  • Excluding or limiting liability with respect to a breach of an implied contract term.

  • Excluding or limiting liability for a particular type of loss.

  • Setting out an overall cap on liability.

  • Restricting remedies or imposing procedural and evidential restrictions.

  • Excluding or limiting liability for misrepresentation (if applicable).

  • Excluding or limiting liability to third parties.

Exculpatory clauses are permitted except in the following two situations (Contract Law):

  • If the clause exempts a party from liability for causing physical injury to the other party.

  • If the clause exempts a party from liability for property damage caused due to wilful conduct or gross negligence.

 

Warranties and indemnities

24. Does national law draw a distinction between protection by warranty and protection by indemnity? How does national law control the use of indemnities in supply contracts?

The Contract Law does not draw a distinction between protection by warranty and protection by indemnity.

The Contract Law does not specifically restrict the use of indemnities in supply contracts.

 

Force Majeure

25. Are there any legal controls on the use of force majeure clause in a supply contract?

Force majeure events are those situations that cannot be foreseen, avoided or overcome (Contract Law).

If a contract cannot be fulfilled due to force majeure, unless the law provides otherwise, a party can be excused from performing its obligations in whole or in part depending on the impact of the force majeure event.

However, if the force majeure occurs after delayed performance, the party that delays its performance is not excused from performance despite the force majeure event.

In addition, either party that is unable to perform a contract due to an event of force majeure must notify the other party in time to let the other party mitigate losses, and must provide evidence of this event within a reasonable period of time.

 

Entire Agreement

26. Is it common to have an 'entire agreement' clause (under which, typically, a seller excludes liability for any representations or warranties made during the course of negotiations that are not included in the agreement)? Are there any circumstances in which an entire agreement clause may be unenforceable?

It is common to have an "entire agreement" clause. Generally, such clauses are enforceable.

 

 Competition law

27. Do supply contracts give rise to any competition law issues?

Supply contracts generally do not give rise to any competition law issues.

However, competing operators are prohibited from entering into the following monopoly agreements:

  • Fixing or changing the price of the commodities they sell.

  • Restricting the amount of production or the amount of sales of the commodities they sell.

  • Splitting the sales market or the raw material procurement market.

  • Restricting the procurement of new technology or new equipment, or restricting the development of new technology or new products.

  • Boycotting trade jointly.

  • Other monopoly agreements confirmed as such by government authorities.

 

Contributor details

Yue Liu, Partner

Jia Yuan Law Offices

T +86 10 6641 3377
F +86 10 6641 2855
E liuyue@jiayuan-law.com
W www.jiayuan-law.com

Areas of practice: Foreign direct investment, project financing, infrastructure concessions, outbound investment, M&A and general corporate work.

Jie Sun, Partner

Jia Yuan Law Offices

T +86 10 6641 3377
F +86 10 6641 2855
E sunjie@jiayuan-law.com
W www.jiayuan-law.com

Areas of practice: Foreign direct investment, outbound investment, M&A and general corporate work.

Zhengyi Liu, Associate

Jia Yuan Law Offices

T +86 10 6641 3377
F +86 10 6641 2855
E liuzhengyi@jiayuan-law.com
W www.jiayuan-law.com

Areas of practice: Foreign direct investment, outbound investment, M&A and general corporate work.

Chunyu Gong, Paralegal

Jia Yuan Law Offices

T +86 10 6641 3377
F +86 10 6641 2855
E gongchunyu@jiayuan-law.com
W www.jiayuan-law.com

Areas of practice: Foreign direct investment, outbound investment, M&A and general corporate work.


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