Preparation
Parties should understand and assess the elements of a commercial exchange before entering negotiations. Considerations include steps and corresponding risks, intellectual property, enforcement, and due diligence.
Steps in the Commercial Exchange
Clear understanding of primary steps in the commercial exchange will discipline parties to conceptualize respective obligations and risks inherent in each step. Thus, parties will make better decisions about how to allocate and mitigate risk – e.g., when and how an order should be placed, product liability and corresponding inspections, when payments should be made, how evidence should be prepared on an on-going basis, etc. The conceptualization of the commercial exchange as a step-by-step process then builds the framework for subsequent negotiations and drafting.
For instance, a service-based commercial exchange may be prompted by the seemingly simple step of the request for service. However, this initial step alone gives rise to additional questions such as, “when is a request for service considered to be delivered?”, “How much advance notice is required, and how can a party prove that is has provided such notice?” Considering and then accounting for such questions results in a more fully conceptualized contract.
Intellectual Property
A commercial exchange exposes trademarks, trade secrets, and other intellectual property to many other parties. Parties should consider measures to secure relevant intellectual property prior to entering into a China-based exchange, and even prior to engaging in dialogue.
For example, it is highly advisable to register relevant trademarks as early as possible and certainly well before exposing such trademarks to third parties. China follows a “first-to-file” rule for trademark registration; the party that files the trademark application first is normally entitled to the exclusive use rights arising from successful registration.
During the commercial exchange itself, parties should consider how intellectual property may be exposed and what contractual and practical provisions may secure it.
Enforcement
Assessing enforcement at the outset of a commercial exchange may seem premature; nevertheless, a sophisticated party will soberly assess comparative power of the contracting parties, methods to identify assets of the commercial counterpart, distinctions between relevant courts and arbitral bodies, forum shopping, governing law, governing language, documentary evidence, and other related issues. This early focus on enforcement shapes treatment of commercial risks, contractual terms and conditions, and steps of the commercial exchange.
Due Diligence
Parties should conduct due diligence on commercial counterparts before entering into negotiations or drafting. Due diligence in the China context may involve confirming proper registrations, business scope, business license, seals, and the legal representative (i.e. the person whose signature represents the intent of the company, not to be confused with a lawyer); it may also involve confirming ownership of assets that may become relevant to enforcement.
Negotiation
Negotiation and discussion of key contract terms is not only important to develop an effective written document, it can also be an indicator of the tone of the commercial relationship.
A non-Chinese party that demonstrates strong awareness of China’s legal, regulatory and business environment during negotiation lessens the perceived power disparity that may exist between it and a party that has organic knowledge of China.
How a party engages in the substance of the contract will be an important indicator of its intentions. Business-savvy parties welcome negotiation as a method to better understand and add depth to the ongoing commercial dialogue. A good faith party should closely review the contract and provide insight and feedback on the issues it deems critical.
Drafting
Clear drafting enhances the value of any commercial contract; however, the importance of drafting takes on added significance in the China context due to considerations such as bilingual documentation, preferred governing language, and the preferred practice of courts that adhere to literal interpretations of terms and conditions.
The contract should clearly and methodically outline precise steps and obligations comprising the exchange; the more mechanically and linearly the exchange can be outlined, the easier it is to enforce the contract upon breach. There should be no expectation that assumptions made during negotiations will be apparent or enforceable.
Execution
A properly executed contract prevents the commercial counterpart from raising a technical defense of non-formation in the event of a dispute. In China, written contracts are valid when signed by each counterpart’s legal representative or sealed with official company seals. The signature or seal information gathered during the due diligence process must precisely match that in the contract.
Additionally, if the content of the contract is of sufficient importance, parties may consider investing in resource-intensive notarization, which ensures admissibility of the agreement as evidence in court or arbitration.
©2012 All content of this article is the property and copyright of China Solutions Inc and may not be reproduced in any format without prior express written permission. The content of this article is intended to provide a general guide to the subject matter and should not be treated as a substitute for specific advice concerning individual situations. Readers should seek legal advice before taking any action with respect to the matters discussed herein.
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