Arthur A. Nitsevych, Interlegal Ukraine
In the framework of our China Desk Service, we have analyzed several times specifications of business with Chinese entities, paid attention to nuances and risks that your company may face during cooperation with Chinese partners.
In this article, we will highlight the latest logistics and trade case studies our law team is working on, as well as will discuss options for mitigating the risks of business with Chinese counteragents.
CASE 1 (Logistics)
Our Client, a forwarding company, has been cooperating with the Chinese forwarder for a long time to organize transportation from China by sea. However, this forwarder did not charter vessels on its own, but engaged a third company cooperating directly with the actual carrier. In fact, it is quite a typical situation in logistics business: every forwarding company is looking for agents in different countries for rendering comprehensive services to its customers.
However, in our case, the Chinese forwarder turned out to be unreliable and unfair. It demanded from the Client payment of unreasonable and illegal fine for allegedly late payment of its services, as well as detained cargo being already transported.
Such disputes are usually settled in the manner of claims handling followed by application to court/arbitration, if the parties have not reached an agreement voluntarily.
However, in this case, we could not apply such a dispute settlement procedure due to several mistakes made by our Client.
What was going wrong:
1. No due diligence of the Chinese counteragent. The forwarder turned out to be registered in Hong Kong and having not enough assets; most likely it is a shell company.
2. The agreement provides no obligations and responsibilities of the Parties, including upon chartering the vessel and cargo delivery.
3. Arbitration clause is invalid and makes it impossible to apply for arbitration.
4. Special terms of transportation were agreed only by means of unofficial correspondence in messengers.
5. Payment for services was partially made not to the company itself but to third parties’ accounts.
CASE 2 (Trade)
In this case, a trader who purchases walnuts from the Chinese supplier, applied to us for legal assistance. Our Client cooperated with this counteragent not so long ago, but the contractual amount was quite large: nearly 3 million USD. The goods were delivered in batches under untypical payment terms. The Buyer undertook to pay one share of the cost after signing the agreement and the other share in installments before each shipment; in fact, the goods were delivered under the terms of full prepayment.
During acceptance of the first batch of goods, the goods turned out not to comply withe quality indicators the Buyer expected while entering into the agreement. The Buyer tried to settle the quality issue with the Supplier, but the latter denied breach of agreement on its part. Moreover, the Supplier demanded payment for the next batch of goods, and in case of non-payment by the Buyer the Supplier would declare the contract in default.
Therefore, our Client became a hostage of the situation: on the one hand, it does not want to pay for a low-quality product but may claim about the Supplier’s improper performance of contractual terms only after receiving the entire product (specifications of the agreement). On the other hand, in case of non-payment, he will be forced to pay fine for disruption of supplies.
What was going wrong:
1. Quality of delivered goods was not properly agreed in the contract (specifications provided by the Seller were not related to the contract from the legal aspect: they did not indicate binding to the contract, were not marked as annexes/supplements thereto, but were issued mainly in the form of advertising booklets);
2. The contract did not provide preliminary inspection of the goods quality;
3. The Parties failed to appoint a surveyor duly authorized to check quality of the goods (provided that Survey Report is deemed as final);
4. Difficult payment terms: the Buyer has to pay a large amount of prepayment, without being able to check quality of the goods, without any mechanism for prepayment refund;
5. The law applicable to relations between the Parties has not been agreed.
How to mitigate risks?
Both cases show that negative experiences with Chinese counteragents could be avoided at the stage of entering into agreement and even earlier.
First of all, you should inspect your counteragent in all possible legal ways, even if you already cooperate with this company.
Due diligence allows you:
· To find out whether the company really exists in China;
· To find out who is legal representative of the company;
· To find out whether the company is entitled to enter into such agreement and whether it will be able to perform them;
· To assess stability of the company’s presence on the market;
· To find out whether there are encumbrances and executive proceedings, in order assess the company’s financial status.
· To find out if the company is bona fide and if it is not in black/gray list. For details about due diligence of Chinese companies and its importance, click here.
Next stage aimed to mitigate risks on cooperation with your counteragent is to fix correctly all essential terms and arrangements in your agreement.
A detailed agreement allows you:
· To understand whop is the party to your agreement (it is important that name of the counteragent should be indicated in the agreement in Chinese);
· To be on the same wavelength with your counteragent;
· To secure fulfillment of your counteragent’s obligations;
· To protect your legal rights;
· To bring to liability unscrupulous party to the agreement. For details about specifications of agreements with Chinese partners, click here.
In any case, our law team will help you: both at the early stage of your cooperation with Chinese partners – in order to mitigate risks, and in case of any misunderstandings with your counteragents – in order to cause minimum damage to your business.