If the contents of the purchase order or contract between you and the Chinese supplier are very simple, a Chinese court may refer to China’s Contract Law to interpret your transaction between the Chinese supplier.

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.

Therefore, you should understand the clauses about procurement under Chinese laws.

1. Contracts and Contract Law

You may encounter fraud, outstanding payments, refusal of delivery, substandard or falsified products when doing business with companies in China. If you file a lawsuit with a Chinese court, the first problem you will be faced with is how to prove that there is a transaction between you and the Chinese company.

You have to prove the specific transaction you concluded with the Chinese company, the obligations in the transaction, and your remedies in case of any breach.

These are the matters agreed in the contract, which is the basis for your transaction with the Chinese company.

First things first, we need to understand the relationship between contracts and the Contract Law in China.

A transaction usually involves a number of matters. You should clarify these matters with your Chinese partner.

If you and your Chinese partner have clarified these matters in the contract, the Chinese judge will render judgment based on these matters stated in the contract.

If these matters are not stated in the contract (which refers to the circumstance where “the parties have not agreed on such matters or the agreement is unclear” under Chinese law), Chinese judges will need to “interpret the contract” to determine how you and your Chinese partner have agreed on these matters.

Chinese laws require the judge to infer the agreement between the parties in accordance with the contract or course of dealing where “the parties have not agreed on such matters or the agreement is unclear”.

However, as we mentioned in the post “How Do the Chinese Courts Interpret Commercial Contracts”, Chinese judges usually lack the business knowledge, flexibility, and adequate time to understand the transaction beyond the contract text. As such, they are less willing to infer further by these means.

As an alternative, the judges will refer to “Book III Contract” of the Civil Code of China (hereinafter referred to as the “Contract Law”) as supplementary terms and conditions to interpret the agreement between you and your Chinese partner.

In other words, in China, Contract Law is deemed as implied terms to fill in gaps not covered by express terms in a contract.

Therefore, we recommend that your contract be as specific as possible so that judges do not fill in the contractual gaps with the Contract Law that are against you.

In accordance with Article 470 of the Civil Code of China, matters necessarily specified in the contract include the following:

• name or designation and domicile of each party;
• objects;
• quantity;
• quality;
• price or remuneration;
• time period, place, and manner of performance;
• default liability; and
• dispute resolution.

Then the next question is, what would the ‘implied terms’ be like, once Chinese courts use the Contract Law to fill in gaps not covered by express terms in a contract?

2. What does the Chinese Contract Law say?

If the contract terms are not clear, the judge is likely to adopt the following rules to determine the content of the transaction.

(1) quality requirements

 where the quality requirements are not clearly stipulated, the contract shall be performed in accordance with a mandatory national standard, or a recommendatory national standard in the absence of a mandatory national standard, or the standard of the industry in the absence of a recommendatory national standard. In the absence of any national or industrial standards, the contract shall be performed in accordance with the general standard or a specific standard conforming to the purpose of the contract.

(2) Price

where the price or remuneration is not clearly stipulated, the contract shall be performed in accordance with the market price in the place of performance at the time the contract is concluded. Where the government-set or government-guided price shall be applied as required by law, the contract shall be performed on such a price.

(3) place

where the place of performance is not clearly stipulated, the contract shall be performed at the place of the party receiving money where payment of money is involved, or, where real estate is to be delivered, at the place where the real estate is located. For other subject matters, the contract shall be performed at the place where the party performing the obligation is located.

(4) period of performance

where the period of performance is not clearly stipulated, the debtor may perform his obligations at any time, and the creditor may request the debtor to perform at any time, provided that he shall give the debtor necessary time for preparation;

(5) mode

where the mode of performance is not clearly stipulated, the contract shall be performed in a manner conducive to realizing the purpose of the contract; and

(6) expenses

where the allocation of expenses for performance is not clearly stipulated, the expenses shall be borne by the party performing the obligation; where the expenses for performance are increased owing to the creditor’s reason, the creditor shall bear the increased part of the expenses.

(7) packaging method

A seller shall deliver the subject matter in compliance with the packaging method as agreed in the contract. Where there is no agreement between the parties on the packaging method or the agreement is unclear, if the packing method cannot be determined according to the provisions of Article 510 of this Code, the subject matter shall be packed in a general way, or, in the absence of a general way, in a manner sufficient to protect the subject matter and conducive to saving resources and protecting the ecological environment.

(8) Risk

The risks of destruction, damage, or loss of the subject matter shall be borne by the seller prior to the delivery and by the buyer after the delivery.

A buyer shall bear the risks of destruction, damage, or loss of the subject matter when the seller has transported the subject matter to the place designated by the buyer and delivered it to the carrier in accordance with the agreement.

(8) period for inspection

Where the parties have not agreed on a period for inspection, the buyer shall notify the seller of any inconformity of the subject matter with the agreed quantity or quality within a reasonable period of time after he discovers or should have discovered the inconformity. Where the buyer fails to notify the seller within a reasonable period of time or within two years after he takes delivery of the subject matter, the subject matter shall be deemed to be in conformity with the agreed quantity or quality, except that where there is a warranty period within which the quality of the subject matter is guaranteed, the warranty period shall be applied.

Where the parties have not agreed on an inspection period, and the buyer has signed a delivery note, confirmation slip, or the like document on which the quantity, model, and specifications of the subject matter are stated, the buyer shall be presumed to have inspected the quantity and the patent defects of the subject matter, unless there is sufficient evidence to overturn such a presumption.

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 Schimmeck on Unsplash

Contributors: Meng Yu 余萌

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