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Before engaging in commercial exchanges, a formal Sales Contract laying out the rights and obligations of both buyer and seller should be your first step. Sales Contracts are made up of many standardized clauses and some highly specific ones. For the seller, the most important clauses are those that prevent your buyer or distributor from breaking the contract.
Here are four considerations when drafting a Contract that will help protect your interests and achieve commercial success in China:
A detailed, enforceable dispute resolution clause.
1. Preventing Contract Breach
This is your main concern. Bottom line: word your contract so that the cost to the buyer of breaching it is higher than the cost of fulfilling it. Ways to achieve this include:
- Payment terms that specify upfront payment or a deposit.
- A punitive or damages clause that requires additional late payments should the buyer not fulfill their obligations.
- A detailed, enforceable dispute resolution clause.
When selling to China, the contract should be in Chinese to maximize enforceability within China and to ensure your buyer understands their obligations. Dispute resolutions should also be done in the local language. This should all be clarified in a language clause within the contract to remove any ambiguity.
3. Definition of Responsibility
Clearly define the work agreement between parties. The statements should avoid any ambiguity or potential litigation in the future.
4. Signing Authority
Sellers sometimes neglect to verify if the person with whom they are negotiating is legally authorized to represent the company. Even if they are a company representative or employee, they may not have the authority to bind the company (permission to sign contracts). In such a case, your contract will NOT be enforceable. Ensure you have a clause specifying who has signing authority. Gaining a complete picture of your counterparty is part of the Due Diligence process that should be completed before signing anything.
It is always cheaper to devote resources to a well-written contract than it is to deal with future problems caused by clauses that are not clear nor enforceable. An experienced lawyer can help with this.
Trustiics offers fast and affordable legal due diligence services in China, allowing you to check a company in three business days.