China remains a vital global manufacturing hub, supplying a wide array of goods to international buyers. Despite its rapid economic growth, inconsistencies in market regulation have led to varying product quality and increased instances of trade fraud, particularly in industries like steel. This presents heightened risks for small and medium-sized enterprises (SMEs), which often lack the robust mechanisms employed by larger corporations to mitigate these vulnerabilities.
This guide highlights essential measures international buyers, especially SMEs, should adopt when sourcing from China (excluding Hong Kong SAR, Macao SAR, and Taiwan province) to safeguard their interests.
Conduct Thorough Supplier Checks
A company check, akin to corporate due diligence, is crucial to verify the credibility and performance capabilities of Chinese suppliers.
Key Challenges
Chinese law does not require company names to be registered in non-Chinese languages, leading to confusion and misidentification.
Online B2B platforms often provide unreliable information, with some suppliers misrepresenting themselves as manufacturers.
Recommendations
Engage third-party experts or law firms with expertise in Chinese regulations to verify suppliers' credentials, registration details, and litigation history.
Focus on critical aspects like business registration and public records to balance cost and effectiveness.
Scrutinize company stamps on contracts to ensure they match the intended contracting entity, distinguishing between mainland Chinese and Hong Kong-based affiliates.
Ensure Proper Contractual Agreements
International buyers often rely on standard invoices or order forms, which may not provide sufficient legal protection for high-value transactions. To avoid disputes, attention should be paid to four key areas:
Intended Contracting Party
Verify the entity’s legal identity to avoid complications arising from discrepancies between company names and legal entities.
Be cautious of suppliers conducting business through affiliated entities in Hong Kong, as this can lead to jurisdictional challenges and difficulties in enforcing contracts.
Quality Standards
Define product quality expectations explicitly in contracts.
Use detailed descriptions, sample images, or physical samples during negotiations as evidence in case of disputes.
Damages
Incorporate liquidated damages clauses to predefine compensation amounts for breaches, mitigating risks of evidentiary challenges in Chinese courts.
Explicitly state the recoverability of legal costs, including attorney fees and translation expenses, in the contract.
Dispute Resolution
Opt for arbitration in China for expedited and flexible procedures, particularly when dealing with Chinese suppliers.
Avoid selecting foreign governing laws due to complexities in enforcement within China.
Consider the United Nations Convention on Contracts for the International Sale of Goods (CISG) as an alternative legal framework to Chinese law for added predictability.
Address Legal Risks in Dispute Resolution
Effective dispute resolution mechanisms are essential to protect buyers' interests.
Arbitration in China
Arbitration offers advantages such as flexible procedures, foreign language options, and enforceability through interim measures in Hong Kong.
However, arbitration may not cover affiliated entities that are not direct parties to the agreement, requiring separate legal actions.
Chinese Courts
When disputes involve affiliates or assets in China, litigation in Chinese courts may be necessary to ensure enforceability and liability claims.
Tailored Approach
The choice of jurisdiction and governing law should be customized based on the transaction’s specific risks and circumstances.
Concluding Insights
International buyers sourcing from China must proactively implement measures to mitigate risks and protect their investments. From thorough supplier checks to well-drafted contracts and effective dispute resolution mechanisms, these precautions lay the groundwork for secure and efficient transactions.
Future discussions will focus on actionable steps for buyers facing disputes and additional strategies to navigate the complexities of international trade with confidence.
Woodburn Accountants & Advisors is one of China’s most trusted business setup advisory firms.
Woodburn Accountants & Advisors is specialized in inbound investment to China and Hong Kong. We focus on eliminating the complexities of corporate services and compliance administration. We help clients with services ranging from trademark registration and company incorporation to the full outsourcing solution for accounting, tax, and human resource services. Our advisory services can be tailor-made based on the companies’ objectives, goals and needs which vary depending on the stage they are at on their journey.