The Flanders-China Chamber of Commerce (FCCC), with the support of Flanders Investment & Trade, organized a webinar on China’s reforms to promote the use of digital technology in contracts with Mr. Philippe Snel, Partner, Da Wo Law Firm on October 26, 2021.
Ms Gwenn Sonck, Executive Director, Flanders-China Chamber of Commerce, welcomed the participants to the webinar. Mr Philippe Snel is the Founder and Managing Director of Da Wo Law Firm Shanghai and has been practicing as a foreign lawyer in Shanghai for almost 20 years. He recently has been recognized for his contributions to the development of the city of Shanghai, receiving the Silver Magnolia Award of the Shanghai municipal government, one of the highest honors for foreign nationals in Shanghai. He graduated from Leuven University in 1995 and joined the Brussels bar in 1997. His main practice centers on corporate and commercial law but he is also often involved in IT work and compliance practice.
Mr Philippe Snel, Founder, Da Wo Law Firm, explained that under the current Covid-19 containment measures, traveling to China continues to be subject to very restrictive conditions which are likely to remain applicable for much longer than one might expect. At present a full reopening of the borders does not seem to be in the works before the third quarter of 2022 at the earliest, and more likely in 2023. Mr Snel presented some practical suggestions and basic legal recommendations on how to negotiate, conclude and manage contracts with Chinese companies from afar.
The borders are closed but China remains very much open for business. Nearly 19 months have passed since the border was closed on March 28, 2020. No estimated time of reopening is announced and China's “zero case” strategy remains firmly in place. There is currently an outbreak in Inner Mongolia in the north with millions of people tested every day and strong containment measures for anyone even vaguely related to confirmed cases of Covid. Entry to China remains extremely restricted. Travel to China is only open for Chinese nationals and for holders of a valid resident permit, but subject to stringent additional conditions, including vaccination with a Chinese vaccine. Foreigners without a valid residence permit or green card must receive a Proof of Urgency Letter (P.U. Letter), which is extremely difficult to obtain. Local foreign affairs bureaus, upon request of the local commerce bureau, will only issue a P.U. letter if the project or business for which the person requests authorization to travel to China is identified as a major or key project or business by the authorities. Moreover, entry to China is subject to a very strict two to three week hotel quarantine and flights to China remain limited. For example, international traffic at Pudong international airport is less than 5% of pre-Covid numbers. People coming to participate in the Winter Olympics in February next year will be living in a bubble. We don't expect this situation to end before the end of next year and much will depend on what happens outside China. The country remains open for business and imports and exports continue to grow. Exports are booming and order books are filling up. In November there will be the China International Import Expo (CIIE) in Shanghai. More than 15,600 foreign-invested enterprises registered during the first half of 2021, 60% more than in the same period of 2020. Automotive is again booming in China.
To discuss contracting from a distance we need to go through the contracting cycle of negotiation, concluding the contract and performance. In the negotiation phase you need to set a solid base. You need to properly identify the company you are talking to. This may be obvious, but often this might not be clear. Identify the person you are speaking with and verify his or her authority in the company, and also ask to know his Chinese name. A Chinese company can be identified through the business license. It is not an insult to ask for a copy of the business license, it is completely common. You will have all the information you need, including the unified social credit code, the official name of the company, the name of the legal representative who can legally engage the company, the business scope (trading, manufacturing, etc.), the amount of registered capital, the date of establishment of the company and the registered address. If a company has a low registered capital you probably shouldn't sign multi-dollar deals with it and if it was only established yesterday it might not be very reliable. Avoid or at least limit language problems as much as possible. Set clear terms of engagement or rules of communication from the start and keep verifiable records. Confirm the essential points in clear and explicit language and feel free to record important voice or video communications. You don't need authorization and recordings can be used in court.
When concluding the contract, ensure the essentials. A purchase order (PO) is not a contract and without a contract there is not much a lawyer can do. An email is also not a contract and a scanned copy of a signed contract is not valid proof of a contract. You need an original of a chopped contract. There are now also electronic chops that are being used more and more. An official company chop is round and only has the company's name on it. Make sure you have a duly authorized signatory or eventually ask for a power of attorney from the legal representative. Bilingual contracts are preferred. Have the Chinese version verified independently. The other party needs to have the same understanding as you. Contracting with an intermediary such as a Hong Kong company may be problematic because mainland China and Hong Kong are not the same from a juridicial point of view. Hong Kong still has its own legal system and a contract with a Hong Kong company will have to be enforced in Hong Kong, not in mainland China. Enforcement costs in Hong Kong are much higher.
In the performance stage, hope for the best, but prepare for the worst. Preserve evidence at every stage of the performance, which is particularly important for quality control. Detail each default and confirm in a contradictory manner. Avoid long email chains and make sure you know who is communicating with whom. According to the four-eyes principle, make sure that the person at the origin of the problem is not the only one dealing with the solution. If you come to a mitigation solution, eventually draft an amendment to the contract. Escalate the discussion to higher management or involve the legal department or external lawyers provided they have a basic knowledge of Chinese law and practice. It is better to involve PRC qualified lawyers sooner than later, even during commercial discussions. Seven out of 10 cases are settled after a lawyer's letter. Mr Snel presented a few case studies involving medical supplies.
The four must-have contract clauses are:
1. Dispute resolution clause: chose a Chinese arbitration or court because it is almost impossible to enforce a foreign judicial decision in China;
2. Governing law clause: Chinese law is preferred and exclude the Convention on Contracts for the International Sale of Goods (CISG) because it raises very strict requirements in unilateral termination conditions not favorable to buyers and most judges and lawyers in China are unfamiliar with its practical application;
3. Quality standard clause: specify the applicable standards and agree on the method of contradictory verification;
4. Breach of contract clause: agree on what happens in case of default, include a fixed damage provision and a unilateral termination arrangement.
How does litigation in China work? A lawyer's letter sent by a PRC law firm or lawyer is the first step. It is however a strong act which you might prefer not to do if you have a long-standing friendly relationship. The authorized representative must sign a notarized Power of Attorney. Settlements out of or even in court are very common. Verifiable, precise and accessible evidence is key, no information is assumed. In general, the judicial proceedings are relatively short, and in general courts are more efficient than in European jurisdictions. In most cases you will have a decision six months after the case is accepted. Costs are reasonable and lawyer fees are often contingent on the outcome. Enforceability is still a weak point, but solutions exist. Inevitable and essential is that all types of evidence formed overseas must be notarized by a local notary, legalized by the foreign affairs in the country of origin and certified by the Chinese embassy. PRC legislation authorizes the use of electronic data as “electronic evidence” but it must meet certain conditions before it can be used in judicial proceedings. It is better to use an email address whose server is located in China and not use a Gmail address. WeChat exchanges are widely used for any kind of communication in China. A WeChat account can be registered based on a mobile phone number in over 100 countries and regions, but safeguarding the exchanges as qualified digital evidence is still difficult in practice. Back up your chat history on a computer and notarize the WeChat messages received. WhatsApp cannot be used in mainland China and will not be used as a communication tool when dealing with Chinese companies.
DaWo Checklist for safe contacting (questions):
1. Do you know who you are talking to? Are you sure? Ask for a copy of his or her ID card.
2. Is this person duly authorized to engage with you for the purposes of your trade?
3. Are you clear about what it is you are ordering and are you certain the other side understands the same thing?
4. Do you have verifiable and accessible evidence for all of the above?
5. Is your contract enforceable under PRC law?
6. Does your contract provide essential clauses needed in case something goes wrong?
7. Do you know who to call in China to help out if things do not work out as planned?
DaWo is a PRC registered law firm, authorized to practice and go to court in China, with a multi-cultural team speaking seven languages. DaWo Academy is providing legal training programs for non-legal managers, e.g. on contracting in China.
Email: philippe.snel@dawo-lf.com
