Agreement between Chinese and Russian Companies: Legal Guide

March 31, 2023

BRACE Law Firm ©

The capacity of Chinese entrepreneurs to meet any trade demand is largely unlimited. China produces almost any product required by modern consumers, allowing for a significant expansion of trade interaction with various countries, including Russia.

However, despite the wide range of goods produced in China, entrepreneurs interacting with Chinese suppliers must carefully approach the conclusion of foreign trade contracts with Chinese counterparts.

Reflecting all fundamental and additional terms in the text of a foreign trade contract minimizes the risks arising from relationships with Chinese entrepreneurs. Often, to ensure safer interaction, parties involve intermediaries who not only speak Chinese and can negotiate with Chinese partners but also understand Chinese law, which differs significantly from Russian law. The participation of specialized intermediaries in concluding a foreign trade contract allows for the detailed development of international agreement terms, the inclusion of all necessary conditions, counterparty due diligence, translation into the required language, and transaction support until full performance.

Pre-contractual Activities in Interacting with Partners from China

Before concluding a foreign trade contract with entrepreneurs from China, it is necessary not only to determine the essential and additional terms of the international transaction but also to verify the reliability of future counterparties. While Chinese entrepreneurs are generally well-versed in international trade rules and their domestic legislation, they may pretend to be unaware of what constituent documents or quality certificates are.

Although Chinese law provides that parties must fully perform their obligations according to reached agreements and be guided by principles of honesty and trust — as well as fulfill obligations regarding timely notification, assistance, and confidentiality [1] — one should not rely solely on the good faith of a future counterparty and must verify the Chinese entrepreneur.

Therefore, before concluding an international agreement, a party should request the following registration documents from the future Chinese partner regarding the legal entity with which interaction is planned:

• Certificate of state registration of a legal entity in China — (the "Business license");
• Certificate of tax registration in the PRC — (the "Tax license");
• Export license issued by the Ministry of Commerce of China — (the "Export license");
• Quality certificate for the purchased goods — (the "Qualified certificate").

In addition to checking the constituent documents provided by the future partner from the PRC, a party must independently verify the Chinese counterparty’s registration in the registry of legal entities. Situations occur where Chinese entrepreneurs simply download constituent documents from the Internet without having an actual registration in the relevant registry; thus, it will be impossible to confirm the counterparty’s reliability.

Furthermore, while many Chinese entrepreneurs have translated their company names into English, it is vital to pay attention to the Chinese spelling of the company. During a registry check, several Chinese organizations might be found under a single English company name. One should not neglect the verification of a Chinese partner, as this could later cost not only financial losses but also the entrepreneur's business reputation.

At the same time, to certify the reliability of a Chinese partner, it may be necessary to visit the factory producing the required goods located in China. In this case, one must note that a specific type of fraud exists where factories allow other entrepreneurs to represent their production as their own, inviting future partners and conducting tours of factories that do not belong to them. This must also be verified before concluding the foreign trade contract.

Concluding a Foreign Trade Contract with Chinese Partners

Further interaction with Chinese partners depends on the competent drafting of the foreign trade contract. Given the different domestic legislation of the Russian Federation and the People’s Republic of China, it is important to study the contract law of the PRC before entering into an agreement. This includes the Contract Law of the People's Republic of China dated March 15, 1999 [2] (the "Contract Law"). This law provides for the possibility of concluding a contract in written, oral, and other forms. [3] Considering this Chinese legal norm, as well as the Russian legal norm stating that a transaction in written form must be made by drawing up a document expressing its content and signed by the person or persons performing the transaction [4], documenting a foreign trade contract in writing will protect counterparties from further disagreements.

According to PRC legislation, a contract must include the following sections:

• The names of the parties or the surname, first name, and place of residence of the counterparty;
• The subject of the supply contract;
• The quantity of products supplied;
• The quality of the goods, including the presence of a product quality certificate;
• The cost of the goods, including the unit price, as well as the currency of future payments and its conversion, if necessary;
• The delivery period, the choice of the Incoterms basis, and the place and method of performance;
• Warranty obligations for the products;
• Liability for non-performance of the foreign trade contract and the applicable law;
• The method for settling disputes, the claims procedure, and court proceedings.

The text of a foreign trade contract should be drafted in Chinese. This is because, when considering a dispute in a Chinese court, a judge or arbitrator may appoint an independent translator who may not always clearly understand trade terms and the nuances of delivery, which can significantly affect the outcome of the dispute.

The names of the partners in the international agreement must be specified according to the state registration of the legal entity. Here, one must pay attention to the name of the Chinese company; if the Chinese organization is a company with 100% Chinese capital, the name in English will not be registered. In the contract, the name of the Chinese partner must be written exactly as it appears in the registration documents.

The subject of the contract, the quality of the goods, and their quantity must be clearly identified in the text of the foreign trade contract to minimize further disagreements. It is also necessary to provide a section on product packaging for transportation to the destination, as the integrity of the transported cargo may depend on it. Additionally, quality certificates for the supplied goods are also important documents when supplying goods from China; many entrepreneurs do not require such a document from partners, yet the possibility of further application may depend on the material from which the product is manufactured.

Given the possibility of delivering goods by various modes of transport, the foreign trade contract must define the Incoterms delivery basis, which is a clear term for both parties to the international transaction. In doing so, it is mandatory to specify the version of the Incoterms rules applied. It is also important to stipulate the delivery or manufacturing periods in the contract. To receive the goods within the agreed timeframe, the contract should also provide for liquidated damages (penalties) for failure to meet shipment or delivery deadlines.

The contract must reflect the law applicable to the relations arising from the performance of the international agreement and the venue for dispute resolution. This is a very important section of the contract; in the event of a dispute, the parties will rely specifically on it. Furthermore, the outcome of the dispute will depend on the chosen applicable law. It is also important that, if a dispute is considered outside of mainland China (Hong Kong, Taiwan, Macau), the decision rendered by a people's court must be recognized in mainland China for enforcement. In China, the functions of arbitration courts are assigned to the people's courts; however, arbitration commissions may also consider disputes. The most famous such commission is the China International Economic and Trade Arbitration Commission, headquartered in Beijing.

When drafting the contract, it is also necessary to regulate the issue of payment, the calculation of the unit price, payment methods, and the currency in which settlements will be made. Additionally, one must specify the bank account to which funds for the goods will be transferred. The bank account must be opened in banks located in mainland China. Special attention should be paid to the location of the bank account because if the account is opened in Hong Kong or the account number starts with OSA (offshore account), it will be almost impossible to prove the legality of the transaction. Such accounts bypass China's currency control, and the transaction and foreign trade contract will not be considered official documents by the relevant control and regulatory authorities of the PRC. Proving a breach of obligations under such a contract is generally quite difficult.

The signing of the foreign trade contract must be carried out by the legal representatives of the partners whose names are reflected in the registration documents to avoid the future invalidity of the transaction. At the same time, another representative of the organization may sign the contract, provided they have a power of attorney for such actions. It is important to note that a Chinese partner signs a contract by writing their surname and first name in Chinese characters; therefore, to verify the legitimacy of the signature, one can request the partner's passport. It should also be noted that under PRC law, when parties conclude a contract in written form, the latter enters into force from the moment the parties apply their signatures or seals. The seal of Chinese partners is a round red stamp with a star in the center.

Execution of a Contract Concluded with Entrepreneurs from China

Trade relations with China are developed in both the import and export of goods of various types, from the simplest to technologically complex items. Mineral fuels, oil and petroleum products, non-ferrous metals, and wood processing products are exported from Russia to China. China exports consumer electronics, excavators, automobiles, microprocessor units, clothing, footwear, and consumer goods to Russia.

Performance of a supply contract is confirmed not only by the delivery and payment of goods in accordance with the terms of the foreign trade contract but also by the preparation of all necessary documents, including customs documents, as well as the payment of customs duties and fees. Despite the wide range of interactions across various trade turnovers and the established structure of working with Chinese partners, contract performance remains a vital component of export-import relations. If all essential and additional sections are reflected in the terms of the foreign trade contract, difficulties in performance generally do not arise. However, disputes do not always end with negotiations; cases are common where partners must resolve issues in court when the terms of delivery under a foreign trade contract are violated.

An example of a legal proceeding regarding the performance of a foreign trade contract is the Resolution of the Arbitration Court of the East Siberian District No. F02-965/2021 dated May 28, 2021, in case No. A19-9352/2019. The plaintiff paid the defendant the amount established by the contract for the supply of goods; for a long time, the defendant failed to fulfill its obligations and could not return the funds, stating that all funds were tied up in the goods. By the time the goods were ready for transfer, the plaintiff had effectively lost interest in the contract and filed a claim in court for the recovery of the principal debt and the penalty under the supply contract. The claim for the recovery of the principal debt and penalty was satisfied. The case reached the cassation instance; however, the defendant's cassation appeal was denied, and the decision of the Arbitration Court of the Irkutsk Region and the resolution of the Fourth Arbitration Appellate Court remained unchanged.

Customs Clearance Under a Contract with a Chinese Legal Entity

Chinese partners are not members of the Eurasian Economic Union; therefore, the simplified customs clearance procedure does not apply to a foreign trade contract with entrepreneurs from China. For the import or export of goods, it will be necessary to prepare customs documents for the products, while customs clearance will be handled by the party to the contract depending on the Incoterms basis chosen.

Foreign goods imported into the territory of the Russian Federation for sale are placed under the release for domestic consumption procedure, subject to, among other things, the payment of customs duties and compliance with prohibitions and restrictions [5].

A large number of disputes arise with customs authorities related to the classification of goods and the amendment of information specified in the goods declaration. For example, a company imported a product (a fire extinguisher trigger device), declaring it under a commodity nomenclature code with a zero percent import duty rate. Based on an expert opinion, the customs authority classified the product under a code with a 9 percent duty rate and amended the declaration. The limited liability company disagreed with the customs authority's decision and filed a lawsuit to cancel the decision and compel the return of excessively paid customs duties. The court denied the claims because it established that the customs authority had classified the product correctly, as the product is part of a fire extinguisher, functionally represents a shut-off valve, and does not contain a spraying or sprinkling device [6].

Warranty Obligations Under a Contract with a Chinese Supplier

Goods supplied under a foreign trade contract generally carry warranty obligations. Given that international Russian-Chinese contracts involve not only raw materials but also equipment, machinery, and vehicles, the terms of the foreign trade contract may include obligations for warranty service, setup, and personnel training. In this case, the supplier must send its specialists to set up the equipment and train the buyer's employees to operate the supplied equipment. This is particularly important if expensive equipment is supplied under the foreign trade contract.

Resolution of Disputes Under a Foreign Trade Contract (Agreement)

The supply of goods does not always proceed smoothly, and disputes with Chinese entrepreneurs are not uncommon. The resolution of claims by participants in international agreements depends on terms reflected in the foreign trade contract, the chosen applicable law, and compliance with the conditions for its application.

Many entrepreneurs, not knowing the nuances of interacting with Chinese counterparts, receive claims from Chinese partners, and such claims do not always end with negotiations; often, the resolution of the dispute moves to judicial authorities. Given that Chinese partners insist on considering such disputes in PRC courts and include these terms in foreign trade contracts, it is important to draft the international agreement in a way that minimizes adverse consequences in the event of disputes.

In interacting with Chinese partners, it is important not only to understand the goods being supplied and to know the Chinese language but also to consider the contract law of the counterparty's country, the mentality, and the possible risks of supplying goods from one country to another. Experience in cooperating with entrepreneurs from China allows for the scrupulous formation of supply contract terms and the minimization of possible adverse consequences that may arise when concluding a foreign trade contract with Chinese partners.

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References

1. Article 60 of the Contract Law of the People's Republic of China.
2. Contract Law of the People's Republic of China, Adopted March 15, 1999, at the Second Session of the Ninth National People’s Congress.
3. Article 10 of the Contract Law of the People's Republic of China.
4. Clause 1 of Article 160 of the Civil Code of the Russian Federation.
5. Clause 1 of Article 135 of the Customs Code of the Eurasian Economic Union.
6. Resolution of the Arbitration Court of the Volga-Vyatka District No. F01-2613/2021 dated June 30, 2021, in case No. A11-3615/2020.