Supply agreement with China
China is one of the first countries in the world in terms of trade turnover and export of goods. In addition, China is a member of many economic trade organizations, including the SCO, World Trade Organization, G20 and so on.
According to the General Administration of Customs of the People’s Republic of China, exports from China in the first two months of 2024 grew by 7.1% year-on-year to $528 billion. These are thousands of deals between business partners from China and other countries.
However, all economic relations in China are accompanied by legal relations, namely a supply contract between an organization from China and a partner from another country.
An international supply contract is a universal document that performs the following functions:
- Explains the rights and obligations of the delivery parties;
- Establishes liability for violation of duties;
- Establishes delivery conditions;
- Establishes a balance between delivery parties;
- Regulates the procedure for resolving disputes.
In this article we will talk about how to correctly draw up a supply agreement with China, what you should pay attention to and indicate in the contract.
Supply contract. Where should partners start?
China has a foreign trade law. According to this law, all organizations that conduct foreign economic activity must draw up a written supply contract.
First of all, you need to talk with the counterparty about the terms of delivery of the Goods and decide what conditions will be in the contract. It is also worth sending an official offer with a proposal to conclude a supply contract.
The parties are free to choose the terms of the supply contract. This is called the principle of freedom of contract. An important condition: the contract must not violate the law.
It is worth remembering the essential terms of the supply contract. Such conditions make it possible to determine the specific type of contract and consider it concluded.
Check your counterparty
To minimize the risks of economic relations, it is important to pay attention to the verification of the counterparty, especially if it is a large deal.
To do this, we recommend doing the following:
- Request a company registration certificate, tax number and other identification data;
- Check information on the company’s registration number on counterparty verification sites (Usually there are risk reports there);
- Check information about the head of the organization authorized to sign the contract.
Let’s move on to drawing up a contract
So, before drawing up a contract, it is important to remember several principles:
- Freedom of contract cannot violate the law;
- There must be a balance between the parties;
- The contract must show all the intentions of the parties;
- The international contract is drawn up in two languages, signed by an authorized person and affixed with the organization’s seal;
- Our contract will be universal, since we will use Incoterms; such conditions are suitable for counterparties from any country.
Subject of contract
The essential condition is the subject of the contract, what exactly the parties agreed on.
Example: Under a Supply Agreement, an Organization from China (Seller) is obliged to deliver the Goods to the warehouse of an Organization from Turkey (Buyer), and the Buyer is obliged to pay for the Goods.
Without a condition on the subject matter, the contract will be considered not concluded.
The goods must be described in detail in the delivery contract. Its characteristics, numbers, country of production, weight, price, and so on must be indicated. The purpose of the Parties in this situation is to identify the specific Goods that will be supplied.
If the product is fragile, then you also need to write this down.
Applicable law
Special attention should be paid to the applicable law. The parties choose according to the law of which country or according to which international rules the delivery will take place and the dispute can be resolved.
Incoterms rules are a universal, simple and convenient law for international partners. Incoterms have several versions, such as 1990, 2000,2010 and 2020.
The parties can choose any version, to do this, they need to write the year and abbreviation in the contract.
The Incoterms rules themselves consist of simple abbreviations that indicate the terms of delivery.
Example: the parties choose the FCA – Free Carrier rule. This means that the Buyer is searching for a carrier, paying for transportation services, unloading in his country, and paying export duties.
The supplier must ship the goods to the carrier, fill out the transfer documents, and pay the duty.
Responsibility passes after the goods are shipped to the carrier’s transport. But after going through all the necessary export procedures.
In the contract it will look like this: When delivering goods, the rules of Incoterms 2020 will be applied…..The procedure for supplying goods is determined by the FCA international rule. The place of delivery is ______. The carrier is ______.
Here you can select the delivery time of the goods. This may be an exact date or deadline. Example: The Supplier is obliged to deliver the Goods within thirty calendar days from the date of payment.
Payment procedure
There are several ways to pay for the Product. The parties choose the most convenient option for them. This may be partial or full prepayment, payment in parts, payment after acceptance of the Goods.
It is also necessary to note the currency of delivery of the Goods. The exchange rate may be on the day of payment for the Goods, or another agreed upon by the Parties
An invoice is a Document in which the seller indicates a list of goods, their quantity and price, delivery conditions, tax payments, information about the sender and recipient. This document can be used when drawing up a supply agreement with a company from China.
Responsibility of the parties
The parties must be held accountable for breach of contract. However, it should not be burdensome, responsibility should discipline.
We recommend using the following types of responsibility:
- Fine (a specific amount or a percentage of the cost of the goods);
- Penalty as a percentage of the cost of the goods;
- Penalty (Also in percentage).
It is also necessary to note situations of force majeure, when partners are unable to fulfill their obligations due to events that do not depend on the will of the parties (war, natural disaster, sanctions, etc.). If such a situation occurs, the party is released from responsibility.
It is worth remembering that obligations will need to be fulfilled in any case if the parties do not terminate the contract.
In the event of force majeure, the party must notify the counterparty that such a situation has occurred.
Dispute resolution
If partners have a dispute regarding a supply contract, they will go to court to resolve the dispute.
First of all, it is necessary to note in the contract that the Parties will take all possible measures to reconcile disputes without going to court through pre-trial claims and negotiations.
However, the court must also be chosen. We’ll tell you about all the advantages and disadvantages.
Commercial Arbitration | Advantages:
Fewer formalities, decisions are recognized in 170 countries, including China, freedom to choose an arbitrator, format, language, etc. The decision cannot be appealed
Disadvantages: More expensive. |
State court | Advantages:
Cheaper than commercial arbitration
Many judges have good experience in this type of dispute Disadvantages: Usually there are more formalities, knowledge of the legislation of that country is required, and it takes longer to process. |
Forwarder and certificate of quality and quantity of goods
A freight forwarder is an organization or other person who assists the Parties in delivering the goods. He chooses a convenient route, deals with documents, searches for transport organizations and is often very useful to contractors.
China has a difficult geographical location, with mountains in the West and ocean in the East, so the freight forwarder can help partners.
To do this, it is necessary to note in the contract that the parties have chosen a forwarder and write his name.
A certificate of quantity and quality of the Goods will allow the Buyer to understand that the partner delivered high-quality goods in the required quantity.
There are organizations that will help you assess the quality of the Goods and count the goods when accepting them. The parties may also specify such an organization in the contract.
Details of the parties
At the end of the contract, the Parties indicate the identification data of the Parties and settlement accounts for the transfer of funds. It is also necessary to note the date and place of conclusion of the contract.
The supply contract with China must be signed by all parties. Only legal representatives of the company can sign the contract. To do this, there must be a power of attorney or a mention of this in the constituent documents of the organization.
To check the power of the counterparty, you can ask the representative of the counterparty for a passport.
Conclusion
A good international supply contract with an organization from China means minimizing the economic and legal risks of a dispute and loss of time and money resources.
Companies always value their time and money, so follow our instructions, draw up a contract responsibly, or seek help from a specialist.