Wednesday, 4 April 2018

Tips for drafting a formal contract in China

We just received a report from a potential Brazilian client this weekend, complaining that they were cheated by a Chinese company below and lost more than 150000 USD:
Inner Mongolia Topstar Chemical Co., Ltd

We found that the key business proof -- the formal purchase contract signed between the client and the Chinese supplier was a fake one. It is almost impossible for the client to take any legal action against this supplier with such a fake contract in China.

How to identify and sign a formal contract with your Chinese partners ? Here are the tips for your reference:
1. Verification of the contracting parties.
We found that the supplier address on their contract signed was NOT specific and it does not exist in China. It’s very important to verify whom you’re going to deal with in China before the signature of any formal contract. The full company name and address on the contract should be the same from their Business License in China. Here is one of the typical Business License issued by local government authorities in China:
Their registered full name, address, business scope and legal representative etc can be checked out on the Business License in China.
2. Paging seal
All the important formal contracts have paging seals to prevent the change of pages. Here is the example of paging seal:  

Paging seal (cross-page seal), also referring to the seal on the perforation, is an official seal spanning across the contract pages, the purpose of cross-page seal is to prevent the unilateral change of the contract.
3. Verification of the signatory
In China, the right signatory of any legal contract must be the legal representative of the company, if it’s not signed by the legal representative, then the authorization of the signatory must be verified first. The legal representative name can be checked out on their Business License as well.
We noted that lots of clients signed the contract with some ‘none-exist’ guys here in China as some Chinese suppliers normally use ‘fake names’ to sign the contract and then they will have trouble when come to any trade dispute later. For example, over 60% of the small exporters used the created English names to sign a contract in China when they sign a contract with their clients, say, Lucy, Simon, John, Lily, Leo etc, please note that only Chinese names can be regarded as legal in China when come to lawsuit.
4. Verification of Company Seal
In China, all the legal contract must be stamped with a formal Company Seal.
All the legal company seal is in round shape and red, here is the example:

But some professional scammers normally use a created company seal to sign the contract, say, this one:

5. Verification of contract terms
All the terms, covering payment, quality control, order details, lead time, package, shipping terms, after-sale terms etc must be well stipulated before the signature of the contract.
6. Language issue
China is NOT an English speaking country, if you are going to take any legal action against your supplier in China, you’d better consult a local consultant here in China and sign a bi-lingual contract if your order is very big.
If you have any question regarding doing safe and smooth business in China, please feel free to ask us any question related. Our mission is to save you more and reduce the risks in your business in China !