You’d better not turn your back on your deals with Chinese suppliers. You shall terminate your contract in accordance with reasonable procedures.

This post was first published in CJO GLOBAL, which is committed to providing consulting services in China-related cross-border trade risk management and debt collection.

Hypothetically, after you inspected the goods sent to you by the Chinese supplier, you found that the quality, quantity, or category did not meet your requirement, or the Chinese supplier delayed in delivery. However, you did not wish to settle with such supplier any longer and waived the right to claim compensation from the Chinese supplier.

So, you decided to move on and ignored the deal.

You thought the deal was over. But in fact, it is NOT the way you think.

The contract may not be terminated and you may be the defaulting party.

1. What happens if you ignore the contract?

If the Chinese supplier does not terminate the contract and you do not do anything to terminate the contract, then the contract is still being performed.

If the Chinese supplier had been late in delivery, he/she could have suddenly delivered the goods to you after a long period of time and you may no longer need it.

However, the supplier has already delivered the goods. It is true that the supplier may be held responsible for the late delivery, and you may also have to pay for the goods.

If the goods were delivered but did not meet your requirements, the supplier is still likely to assume that the goods have been delivered and met your requirements on the grounds that you did not raise any objection in a specific manner within a specific time period.

The supplier will then demand payment from you, as well as compensation for your late payment. Moreover, the supplier may also demand that subsequent batches of goods be delivered to you, for which you will need to continue to pay.

Of course, in most cases, Chinese suppliers don’t have the resources to deal with these things.

But in some cases, the Chinese suppliers’ insurance companies may claim against you for their customers or the banks. A good example of these insurance companies is China Export & Credit Insurance Corporation (hereinafter referred to as “SINOSURE”).

SINOSURE has sufficient resources to claim against you in your home country.

Therefore, you’d better not ignore the transaction, but arrange a “dignified funeral” for such transaction, such as terminating the contract.

2. What should you do with the contract?

You are entitled to unilaterally terminate a contract with a Chinese company only if the conditions for rescission as agreed in the contract or under Chinese law mature. Otherwise, you can only terminate the contract with the consent of the other party.

In addition, you must follow specific steps. Otherwise, your notice to terminate the contract will likely be considered a breach of contract by the judge in the later lawsuit in China.

Therefore, you need to treat rescission with caution.

If the contract agrees on steps of rescission, you need to follow the agreed steps to terminate it. If not, you need to complete the rescission in accordance with Chinese law, which stipulates the following steps.

First, you must collect evidence of the other party’s breach of the contract.

You need to lead the other party to make an express repudiation, including statements saying “I will not deliver” or “You must pay more or I will not deliver”.

Where the other party simply delays the performance of his obligation, you need to first notify the other party to deliver the goods as soon as possible and give the other party a reasonable grace period. And you are entitled to terminate the contract upon the expiry of the grace period if no reshipment is made during the period.

Where the quality of the product delivered by the other party is substandard, you need to adopt the following steps.

The first step is to inform the other party of substandard product quality and explain to him that the goods are completely unsaleable or unusable.

The second step is to give the other party a grace period to make another shipment and take back the original goods.

And the last step is to terminate the contract upon the expiry of the grace period if no reshipment is made during the period.

Then, you can notify the other party of your rescission(termination) of the contract.

The contract shall be terminated as of the date of the other party’s receipt of your rescission notice. Therefore, you need to prove that the other party has received the notice.

In addition, you can also file a lawsuit with a court or apply to an arbitral institution for arbitration and ask them to confirm the rescission of the contract.

It should be noted that you must exercise your right to terminate a contract within a certain period of time by giving notice, filing a lawsuit with a court, or other reasonable means. If you fail to exercise such right in due time, you are no longer entitled to terminate the contract.

Well, what is the period length?

You can agree on that period in the contract. If there is no such agreement in the contract, the Chinese law will fill the gap by prescribing a period of one year from the date you know or should have known the occurrence of the rescission cause.

For a detailed discussion on how to terminate a contract, please read our earlier post ‘How Do I Terminate a Contract with a Company in China? ’.

The Cross-border Trade Dispute 101 Series (‘CTD 101 Series’) provides an introduction to China-related cross-border trade dispute, and covers the knowledge essential to cross-border trade dispute resolution and debt collection.

Photo by Alexander Kaunas on Unsplash

Contributors: Meng Yu 余萌

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