What protections should we include in a distribution agreement to ensure performance and compliance?

• First of all, exclusivity in China can be complex. Exclusivity should always be clearly defined. Is it exclusive across all sales channels (online, offline, wholesale, retail)? Are there any existing distributors that the Chinese partner might be working with? The scope of exclusivity should also apply to IP licences.
• Second, detailed product specifications are essential. If future products (both hardware and software) are included, outline a process for adding them to the agreement.
• Price control can also be a complex matter. While it is possible to set initial prices, resale price maintenance may be challenging under Chinese competition law. It is advisable to consider setting guidelines or suggested retail prices rather than fixed prices. Currency fluctuation is a major concern. It is recommended that the currency be specified (likely USD or RMB) and that a mechanism for price adjustments due to exchange rate changes be considered. In many cases, the consumer price index (CPI) is also taken into account by the parties.
• As for governing law and dispute resolution, choosing a foreign law can be difficult to enforce, and it is generally quicker, more confidential, and more expensive, to choose arbitration over litigation.
• There are many other important factors that should be carefully assessed, such as shipping and delivery arrangements, payment terms, warranties, service levels, etc. The points highlighted above are the most recent ones we have seen in ongoing disputes.

How do Chinese laws impact the termination of distribution agreements? What are the grounds for termination, and how can we protect ourselves against breach or non-performance?

• Generally, there are contractual grounds and statutory grounds to terminate a contract.
• The distribution agreement itself should clearly outline the grounds for termination. These can include failure to meet sales targets, non-compliance with marketing guidelines, breach of confidentiality, or any other material breach of the agreement; either party’s insolvency; and expiration of the agreement.
• One party may terminate the agreement unilaterally if the other party breaches material terms of the agreement. Common breaches include failure to perform obligations (e.g., delivery, quality, warranty); non-payment or delayed payment; violation of confidentiality agreements etc. In such cases, the aggrieved party typically must provide notice of breach and may seek damages for losses incurred due to the breach.
• Force majeure serves as both a statutory ground and a contractual ground for termination of contracts in China.

When conducting due diligence on potential suppliers in China, what questions should a Swiss company ask?

There is a comprehensive set of supply chain compliance questions. The key areas are:

These questions should be further tailored to your specific industry and product requirements. The potential supplier may not be legally obliged to answer all your questions or disclose all the information you request, but transparency is key to demonstrate that the potential supplier is a responsible and ethical one.

How can foreign companies ensure the enforceability of their commercial contracts in Chinese courts? Are there any specific strategies or clauses that help ensure enforceability?

• Contracts should ideally be governed by Chinese law. While parties can choose foreign law for “foreign-related” contracts, Chinese courts may apply local laws if the contract is deemed domestic. This approach minimises common complications and aligns with the legal expectations of Chinese courts.
• Drafting contracts in both Chinese and English (or another relevant language) is advisable, again. This practice helps prevent misunderstandings and ensures that all parties clearly comprehend their obligations under Chinese law.
• Contracts should specify the preferred method of dispute resolution, whether it’s negotiation, mediation, arbitration, or litigation, and outline the procedures. Commercial mediation is gaining traction, also supported by the Chinese government at all levels.

Should we include arbitration clauses in our contracts, and if so, where should the arbitration take place? How enforceable are foreign judgments or arbitration awards in China?

• China operates under a civil law system, relying on statutes and regulations. Judicial interpretations from the Supreme Court are binding on lower courts. Litigation and arbitration are the two main dispute resolution mechanisms. Arbitration has its pros and cons. For resolving commercial disputes, it is often preferred over litigation in China for its efficiency, enforceability, and flexibility.
• The enforcement of foreign court judgments in China can be quite challenging. China generally requires a treaty or reciprocity with the foreign country for enforcement. In the absence of a treaty, it can be difficult to prove reciprocity. However, thanks to the New York Convention, foreign arbitral awards are generally easier to enforce in China than foreign court judgments.

If you missed Part 1 of this article find it here.

Article posted on 13 March, 2025.