Drafting a supply contract with China

In recent years, there has been a noticeable trend where many foreign companies, including Russian ones, are eager to enter into supply contracts with Chinese partners. China continues to be one of the largest manufacturers in the world, and the rapid development of the Chinese economy along with improvements in logistics infrastructure make this country and its companies attractive for collaboration.

However, entering into a supply contract is a complex process that requires careful consideration of all details. A poorly drafted contract can lead to serious miscalculations that negatively impact business operations. Therefore, the importance of quality legal support in this area cannot be overstated.

Our lawyers are ready to share their experience in successfully concluding a beneficial supply contract based on one of our clients’ examples. We will detail all the nuances that need to be considered when drafting such a contract in order to avoid potential risks and ensure transaction reliability.

If you have any questions or need professional assistance in concluding a supply contract with Chinese companies, do not hesitate to contact our lawyers. We are ready to assist you at every stage of this important process.

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What is a supply contract?

In simple terms, a supply contract is a legally binding agreement between parties, in which one party (the supplier) commits to deliver goods to the other party (the buyer) within a specified timeframe and at a pre-agreed price.

This type of contract is a crucial tool in international trade and plays a key role in organizing mutually beneficial economic relationships between companies from different countries.

Structure of a supply contract

We propose to examine a real example of a supply contract that was concluded between our client, a Chinese company, and a Russian entrepreneur. Our specialists handled the drafting of the contract. We are ready to demonstrate the correct structure of the document that takes into account the interests of both parties. Next, we will detail key elements such as a clear definition of the subject matter of the contract, delivery conditions, payment procedures, and guarantees.

1. Subject matter of the contract

The subject matter of a supply contract is a key element that defines the essence of the agreement between the parties. According to civil legislation, the subject matter of a supply contract consists of goods that one party (the supplier) commits to deliver to the other party (the buyer) within a specified timeframe and at a pre-agreed price.

When formulating the subject matter of a supply contract, it is important to consider several aspects:

1. first, it is essential to clearly and unambiguously describe the name of the goods, their quantity, quality, and other characteristics that may affect compliance with the buyer’s requirements to avoid misunderstandings and disputes in the future
2. if desired, you can stipulate that the goods under the contract must be manufactured entirely by the seller’s means and in strict accordance with sample prototypes approved by both parties to the contract.

The subject matter of our client’s contract was a demolition robot used in manufacturing for demolition work. Since this is a complex technical device, our lawyers specified its completeness in the contract, meaning all necessary elements for full utilization of the robot: control panel, bucket, and other spare parts.

If your supply contract involves the delivery of several goods or even several hundred similar items, you can include a provision in the contract stating that the goods will be delivered in stages (i.e., in batches) according to the buyer’s order. In this case, it is necessary to specify that the terms of the contract apply in full to each delivery of goods.

An important condition is to indicate that when the goods are transferred to the buyer, the seller must transfer all rights to the goods (ownership rights and others).

To protect the buyer’s interests, we recommend including a clause in the agreement stating that the seller guarantees the quality of the goods for a certain period (for example, 60 days from the date of delivery to the buyer’s warehouse).

Our lawyers also recommend including a warranty from the seller that the goods do not infringe on the rights of third parties. These may include copyright, lien rights, and any other encumbrances from third parties that could hinder your ability to use the goods for their intended purpose in the future.

2. Price and payment terms

The price of the goods should be specified in a particular currency – as a rule, supply contracts with Chinese companies specify yuan.

Be sure to indicate the method of payment – in international contracts, this is usually cashless bank settlements. Specify which party is responsible for paying the bank fees.

You can pay for the goods in various ways:

1. full prepayment (this is the riskiest method for the buyer)
2. full post payment (not recommended for suppliers)
3. partial payment (this is the most optimal option, as 50% of the cost is paid upon signing the contract, and the remaining 50% is paid after the goods are ready)

3. Packaging and labeling

The provision on packaging and labeling in an international contract is an important element that affects the safety, preservation, and compliance of products with the legal requirements of the countries involved in the transaction.

Remember that packaging protects goods from damage, contamination, and environmental impact during transportation and storage. Moreover, proper packaging can reduce transportation costs by optimizing space and decreasing cargo weight.

Regarding labeling, most countries have strict rules concerning product labeling for customs clearance, and incorrect or insufficient labeling can lead to delays or fines. Furthermore, in some cases, labeling provisions are mandatory and cannot be omitted from the contract text. For example, under a supply contract for a private label, the supplier is obliged to deliver goods under their own brand in packaging with labeling that must comply with mandatory requirements set by local consumer protection laws.

In our contract, we carefully considered the client’s wishes and included provisions stating that the packaging of the goods should be carried out by the buyer, and its quality must ensure the preservation of the cargo during transportation. Regarding labeling, it is sufficient to indicate on the packaging information about the destination, supplier’s address, and some other details.

4. Rights and obligations of the parties

What is the supplier obligated to do? Generally, under an international supply contract, the supplier is primarily required to deliver the goods along with all the documents related to them as specified in the contract (for example, with instructions). In addition, they are obligated to establish a warranty period for the goods during which they must rectify any defects or defective components at their own expense.

In our contract, we prudently decided to include a provision stating that the supplier must provide the buyer with the documents necessary for exporting the robot from the People’s Republic of China and importing it into Russia. This provision helps avoid complications, including during customs clearance.

What is the buyer obligated to do? Obviously, they must accept the goods and pay for them at the price agreed upon in the contract. Depending on the delivery terms chosen, additional obligations may be imposed on the buyer—such as insuring the goods at their own expense.

Special attention should be paid to the buyer’s rights in case the seller deviates from the terms of the contract and deteriorates the quality of the goods. Typically, in such situations, contracts stipulate that the buyer has the right to choose either to rectify the defects independently and claim reimbursement from the seller for expenses incurred, or to unilaterally refuse to perform the contract, or to keep the goods of inadequate quality and settle accounts for future deliveries.

5. Liability of the parties

An extremely important section of any contract, including international ones, is the liability provisions.

It is crucial to specify the amount that the seller will be obliged to pay as a penalty for each day of delay and what currency this penalty will be in. For example, in our contract, the penalty for delaying the delivery of the robot is 0.1% of the value of the goods per day.

The main condition for liability is that the party that has not fulfilled or has improperly fulfilled its obligations under the contract must compensate the other party for losses in full.

How can a buyer protect themselves if the supplier delays delivery of the goods for too long? You can include a provision stating that if the delay exceeds a certain period (for example, 1 month), you may refuse to perform the contract. In this case, the supplier will be obliged to refund you the full cost of the goods.

You can also specify conditions regarding liability for failing to respond to claims within a set timeframe, for not sending customs documents, and so on.

Liability provisions in a contract play a key role as they determine what consequences will arise in case of a breach of obligations. Clearly defined terms help avoid unjustified financial losses and disputes. This not only affects the number of potential losses but also your financial stability; therefore, it is extremely important to approach this section of your contract thoughtfully.

6. Dispute resolution procedure

When entering into international contracts, the parties have the option to choose the body that will resolve any disputes that may arise. This right provides flexibility and allows for consideration of the interests of all participants in the transaction.

The most common practice is to turn to commercial arbitration, which offers a neutral platform for resolving conflicts. Commercial arbitration typically provides faster and more confidential procedures compared to court litigation.

The parties can choose arbitration institutions in different countries, which allows them to take into account the legal systems and cultural nuances involved.

We have several articles in which we discuss the advantages of international commercial arbitration. There are reputable arbitration bodies in China as well, which we have also covered extensively and where we have successfully represented clients. If you have any doubts, we recommend reading these articles to make an informed choice or consulting our specialists.

Don’t forget to choose the applicable law. Applicable law is the legislation that the parties to an international contract choose to regulate their relationship.

The choice of applicable law allows the parties not only to define the rules governing their obligations but also to minimize legal risks. The ability to choose applicable law provides flexibility and enables the parties to tailor the contract conditions to their specific needs and expectations.

In our contract, we advised our client to choose the legislation of the People’s Republic of China as the applicable law. We made this choice based on our client’s preferences. If you have any doubts, we recommend consulting our specialists, who will assess your situation, evaluate all risks, and advise you on the most suitable applicable law.

What delivery terms should be considered?

At this stage of drafting the contract, you may encounter the somewhat obscure term INCOTERMS.

INCOTERMS, established by the International Chamber of Commerce, is a list of widely recognized definitions for the most commonly used terms in international sales or supply contracts. In other words, these are contractual provisions that are universally applied by companies from different countries. Remember that INCOTERMS rules consist of three Latin letters.

In the context of global trade, foreign parties face the necessity of clearly defining delivery terms and risk allocation. In this regard, including INCOTERMS provisions in the contract is an important step towards ensuring transparency and legal certainty in your commercial relationships.

If you are entering into a large international contract, we recommend using INCOTERMS rules rather than creating conditions on your own. Why? The fact is that standardized INCOTERMS conditions are widely recognized and used in international practice; they detail who is responsible for transportation, insurance, and risks associated with the goods at various stages of their movement.

Currently, the latest edition of INCOTERMS is the 2020 version, which is the most modern and corresponds to the realities of economic conditions. Therefore, we recommend referring to this version. INCOTERMS 2020 contains 11 rules applicable to all modes of transport (including maritime and inland waterway transport).

We advised our client to include the INCOTERMS condition called EXW in the contract. Under this condition, the seller is obligated to provide the goods ready for shipment, while the buyer is responsible for carrying out export and import customs clearance and delivering the goods independently.

How to include the INCOTERMS rule in your contract? It’s simple; just state that the parties have agreed on the delivery term EXW according to INCOTERMS 2020. If desired, you can use any earlier version of INCOTERMS, such as the 2010 version. However, in that case, be sure to specify it in the contract.

Thus, INCOTERMS rules help protect the interests of both parties, as they provide clear regulations governing responsibilities and obligations. This is especially important in unstable economic conditions, where any uncertainties can lead to financial losses.

Force majeure clause

It is essential not to forget that the force majeure clause is a vital element of international contracts—it plays a key role in managing risks associated with unforeseen circumstances.

Force majeure, or irresistible force, includes events that cannot be anticipated or prevented, such as natural disasters, wars, terrorist acts, epidemics, and other circumstances beyond the control of the parties.

Why is it important to include a force majeure clause?

1. it allows parties to be exempt from liability for non-performance or improper performance of obligations if it becomes impossible due to force majeure circumstances
2. it helps establish clear rules of conduct for the parties during a crisis, defines the notification procedure regarding the occurrence of force majeure, as well as the timelines and conditions for resuming obligations after its resolution.

We recommended that our client include in the contract text a clause stating that the parties are exempt from liability for non-performance or improper performance of their obligations if this is caused by force majeure circumstances.

How to prove that a force majeure event occurred? Confirmation will be provided by an official document issued by a governmental authority in the location of the party invoking force majeure. For example, a decision to impose quarantine in case of an epidemic may be confirmed by a resolution from the Government or its territorial authority.

How can we help you draft a supply contract?

In this article, we have thoroughly examined the key aspects of drafting a contract, including essential elements, legal nuances, and recommendations for formatting. However, despite the material presented, it is important to emphasize that the process of developing a legally significant document requires not only theoretical knowledge but also practical experience.

Turning to qualified legal professionals can help avoid potential mistakes and oversights that may arise when drafting a contract independently. Professionals possess the necessary skills and tools to ensure a high degree of protection for your interests and are capable of taking into account all the nuances of a specific situation.

When companies from different countries approach us for assistance in drafting an international contract, we strive to fully consider their interests and wishes. How do we do this? It’s simple – we send a special questionnaire where you need to answer a few questions about the future contract.

All you need to do is specify what goods you want to purchase or sell, in what quantity, what the price is, the payment method, and some other crucial terms of the contract. After that, our lawyers will review your preferences and draft a contract tailored specifically for you and your business relationship with the counterparty.

Our team of professional lawyers has extensive experience in drafting supply contracts with Chinese companies, which allows us to effectively protect our clients’ interests. A striking example of our competence is the successful conclusion of a contract for the supply of a dismantling robot. This project serves as a vivid illustration of how proper legal formalization can contribute to achieving strategic business goals. Don’t miss the opportunity to leverage our expertise – contact us for a consultation and discuss the details of your future contract.