Drafting sales contracts in China

Overview

A sales contract is the most common kind of contract in commercial exchanges. It is a formal agreement between the seller of goods and the buyer who pays for them.

Parties to sales contracts

In a sales contract, the party selling the goods or services is “the seller”. The party buying is the “buyer”. Both the seller and the buyer are “parties to the contract”.

Contract Law in China does not require the parties to have any specific qualifications. Any natural person, legal entity or organization may qualify.

Chinese laws and regulations do restrict some parties from buying or selling certain goods. For example:

• medicine
• tobacco
• dangerous chemical products

Contents of the sales contracts

Sales contracts mainly focus on the rights and obligations of the buyer and the seller.

The seller’s basic obligation is to transfer ownership of the goods to the buyer. The seller’s basic right is to receive payment from the buyer in exchange.  

The buyer’s basic right is to receive ownership of the goods. The buyer’s basic obligation is to pay the  seller in return.

Other collateral obligations, regulated by law or agreed by parties, shall apply. For example:

• packaging
• transportation
• tax withholding

Subject goods

Goods or materials sold by the seller are “subject goods”. Broadly speaking, subject goods include:

• material objects (such as goods)
• certain proprietary rights (creditor’s rights, intellectual property rights, etc.)

However, the Contract Law of the People’s Republic of China (PRC) adopts a narrower standard on subject goods, which only includes material subjects—property rights are directly excluded.

China regards the following items as legitimate subject goods (unless they are restricted by Chinese laws or regulations):

• movable goods (e.g. automobile)
• immovable goods (e.g. house),
• interchangeable or fungible goods (e.g. agricultural products)
• non-fungible goods (e.g. artwork created by great master)
• consumable goods (e.g. food)
• non-consumable goods (machinery equipment)

Under Chinese law, certain goods such as mineral reserves, rivers and oceans are state-owned properties. They cannot be regulated as subject goods under a sales contract between civil parties.

General clauses

• Details of seller and buyer
• such as name, address, legal representative
• Details of subject goods
• such as name, specification, model, manufacturer, place of origin, quantity, price
• Quality standards of the subject goods
• Package standards of the subject goods
• The time limit for performance
• Place of performance
• Method of performance
• Delivery time
• Delivery place
• Delivery method
• Inspection standard
• Inspection time
• Inspection method
• Method of settlement
• Responsibility for breaching of contract
• Dispute resolutions

Liquidated damages

According to contract laws in China, parties may agree that if one party breaches the sales contract, they must pay damages. The amount specified for these “liquidated damages” and the method to calculate the damages may depend on the nature of the breach.

Both the injured party and the breaching party may request arbitration from the People’s Court if:

• the agreed liquidated damages are less than the actual losses suffered by the injured party
• the agreed liquidated damages are excessively high compared to the losses suffered by the injured party

If the parties reach an agreement on the liquidated damages for late performance of a contractual obligation under a sales contract, the breaching party must still perform its contractual obligation after it has paid the liquidated damages.

Legal proceedings

• China’s Civil Code restricts the time within which legal proceedings may be brought, arising from the breach of a sales contract, to 3 years. The time starts from the day when the injured party is aware of the breach.
• For contracts of international sales of goods and technology import and export contracts, the time is increased to4 years.

Disclaimer:

The Canadian Trade Commissioner Service in China recommends that readers seek professional advice regarding their particular circumstances. This publication should not be relied on as a substitute for such professional advice. The Government of Canada does not guarantee the accuracy of any of the information contained on this page. Readers should independently verify the accuracy and reliability of the information. 

Content on this page is provided in part by Dezan Shira & Associates a pan-Asia, multi-disciplinary professional services firm, providing legal, tax, and operational advisory to international corporate investors.