All You Need to Review When Signing A Contract
Contracts are a ubiquitous part of daily life, providing the framework for parties to fulfil their obligations and settle disputes. However, failing to review a contract thoroughly can lead to trouble. Pay careful attention to the terms and conditions, including any limitations, warranties, or obligations stated. Seek legal advice if necessary to ensure clarity and protect your interests. This article presents key considerations for reviewing a contract. It also shares some useful Chinese websites to help you learn more about your counterparty.
1. Verify the eligibility of the counter party
(1) Identity information
- For a natural person, it is necessary to review his/her original ID card or passport and confirm the information matches that on the contract.
- For a Chinese company, we’d better confirm whether the company has been legally and validly registered through the official website of National Enterprise Credit Information Publicity System: https://www.gsxt.gov.cn/index.html.
(2) Litigation or enforcement status
If the counter party is involved in litigation or enforcement, its capacity to fulfil the contract will be significantly affected. Here we share the following websites to confirm the counter party’s litigation or enforcement status:
- Enforcement Status:
China Enforcement Information Public Website (http://zxgk.court.gov.cn/), an official website operated by the Supreme People’s Court of The People’s Republic of China, in which you can check whether the counter party is executed by the court for failing to perform the judgment.
- Litigation Status:
Qichacha (https://www.qcc.com/) or Tianyancha (https://www.tianyancha.com/), a website operated by the private entities, in which you may check whether the counter party (only for company) has any relevant litigation cases.
2. Ensure the validity of the contract
(1) Confirm the counter party’s qualification
Qualification determines whether the contract is valid, invalid or pending effectiveness. For example, if the contract is signed by the counter party who is under 18 years old, then the contract will take effect when his/her statutory guardian recognizes the contract retroactively. Another example, if the contract involves the sale of medicine and neither party to the contract has a license to sell medicines, thus the contract will be void.
(2) Confirm the deputy’s authorization
Make sure that the deputy of the company who signs the contract on behalf of the company has the authorization to do so. Otherwise, the contract will only take effect upon the company’s retroactive recognition of the contract. However, if there is reason to believe that the deputy had authorization, the contract will remain valid.
(3) Confirm the transaction’s legality
The contract will be deemed invalid if its object is illegal or prohibited for trading. For instance:
- In China, Land ownership, drugs, obscene goods are prohibited for transaction, and cigarettes, tobacco, salt, guns are restricted for transaction (only can be exchanged by the specific entity who has the qualification).
- If the service content involves assisting in the theft of personal information, the service contract is considered invalid as it violates mandatory laws.
3. Confirm the ownership
Before entering into an agreement for the purchase of an asset, it is crucial to review whether the asset is legally and validly owned or registered in the name of the seller. This ensures that the transaction is conducted in a legally sound manner. Here we’ll share several ways to confirm the ownership:
（1）Real estate
Review the title deed of the real estate, and also request the owner to obtain the updated real estate information page of the real estate from the local Real Estate Exchange Center or on its official website (in Shanghai, the official real estate information can be obtained from the website of “一网通办”) .
（2）Cars
Review the ownership certificate of the car, and also ask the owner to obtain the updated property information page of the car at the local Vehicle Management Office.
（3）Shares
Verify the relevant information on the official website of National Enterprise Credit Information Publicity System: https://www.gsxt.gov.cn/index.html
（4）Trademark
Verify the relevant information on the official website of Trademark Office of China National Intellectual Property Administration: https://sbj.cnipa.gov.cn/sbj/sbcx/
（5）Patent
Verify the relevant information on the official website of Patent Office of China National Intellectual Property Administration: https://pss-system.cponline.cnipa.gov.cn/conventionalSearch
（6）Copyright
Verify the relevant information on the official website of Copyright Protection Center of China: https://register.ccopyright.com.cn/query.html
4. Quality Standards
(1) Clarify quality standards
Specify the quality standards as explicitly as possible:
- For a purchase agreement, include the brand, origin, type, texture, color, size, ingredient, package, function, quantity and weight.
- For a service agreement, include the quality standards can be the detailed service results, effect and characteristics of the deliverables, etc.
(2) Set quality guarantee deposit
Quality guarantee deposit is the retention payment set for ensuring the quality standards to be satisfied. Generally, it’s 5-10% of the total price, and is paid after a certain duration, allowing the buyer to refuse payment if the product has any quality issues during this time.
E.g. The buyer shall paid 10% of the total price as quality guarantee deposit within 10 working days after 2 years of delivery.
(3) Acceptance
Typically, both parties will need to inspect the deliverables and confirm whether they satisfy the quality standards after delivery, this process is called “acceptance”. However, there is another scenario where the quality standards have been met but the receiving party fails to confirm the acceptance. In such case, a “deemed acceptance clause” can be helpful.
E.g. Party A shall inspect the Products within 3 working days of delivery. If the Products meet the quality standard, Party A shall sign the acceptance confirmation. If Party A believes that the Products have quality problems after acceptance, it shall notify Party B in due time. If Party A neither signs the acceptance confirmation nor raises any objection to the Product, it shall be deemed that Party A has accepted the Product.
(4) Quality Remedy
Quality remedy is the resolution for quality problems. For instance, when the product has any quality problems, the buyer may require the seller to repair, return or exchange the product according to the contract.
5. Payment Term
(1) Amount
Firstly, the total price and unit price shall be clearly prescribed in the contract, including whether the tax is included or not. Additionally, it is important to specify the currency (e.g. CNY, USD) and corresponding exchange rate. For international trade, it may be necessary to include terms such as CIF or FOB.
(2) Payment Time
As to the payer, we suggest implementing an installment plan with specific payment conditions to reduce the risk of non-performance by the payee.
E.g. Party A shall make a down payment of 20% of total price, followed by a payment of 50% of the total price upon completion of the service by Party B, and finally a payment of 30% of the total price upon Party A’s acceptance.
As to the payee, we suggest setting the liquidated damages for the payer’s delayed payment.
E.g. The payer shall pay the payee 0.05% per day of the outstanding payment to the payer for delayed payment.
6. Ensure Deliverables On Time
Similarly, to ensure timely delivery of the deliverables, we can employ liquidated damages for late delivery in the contract. If delivery is in instalments, we must specify the detailed delivery time for each instalment.
7. Circumstances of Termination
Based on the Civil Code of PRC, both parties may terminate the contract under the following circumstances:
- Both parties agree on termination;
- Force majeure;
- One party expressly states or indicates that it will not perform its principal obligation prior to the expiration of the performance period;
- One party fails to perform its obligation;
- One party violates the contract rendering it impossible to achieve the purpose of the contract. Except that, both parties may also agree on other circumstances of termination in the contract.
In addition to the aforesaid circumstances, both parties may also define further circumstances of termination in the contract.
E.g. In the event that Party B is declared bankrupt, its business license is revoked, liquidated, dissolved, or enters these procedures; or Party B’s major property is seized, or other preservation measures are taken, Party A may terminate the contract.
8. Liquidated Liabilities
Although the Civil Code of the PRC provides that the defaulting party shall continue to perform the contract, remedy the breach or compensate for losses when it breaches the contract, this provision is not explicit enough. Including a specific amount or percentage for liquidated damages (e.g. 20% of the total price) or a specific compensation for losses caused by the breach (e.g. lawyer’s fee, notarization fee, guarantee fee, translation fee, etc) in the contract will help the aggrieved party to obtain greater compensation.
9. Applicable Law and Court
The applicable law and court can only be the one which has the closed connection with the case. This connection can be established by the location of one party or the place where the contract is signed or performed. For instance, if the contract is signed and performed in China, then both parties may choose Chinese law and Chinese court as the applicable law and court.
Additionally, arbitration may be a suitable alternative for dispute resolution due to its confidentiality and flexibility. Shanghai International Economic and Trade Arbitration Commission (SHIAC) and China International Economic And Trade Arbitration Commission (CIETAC) are both commonly selected by the parties.
Saway Wang
Email: sawaywang@billionslawyer.com
Tel/Whatsapp: +86 18017682422
Read More
