Third Party Contracts

This is a post by my friend Matt Kowalak, on a topic that just about everyone exporting from China has questions about--What is a Third Party Supplier/Service Provider actually responsible for?This a question that comes up in many of the New Buyer Seminars that I teach for Global Sources.  The contracts and disclaimers from sourcing agents, 3PQA or Testing Labs are so explicit in what they exclude that you can question if you're actually paying for anything at all.  I'll let Matt explain what options you may have.____________________Third Party ContractsThird party contracts cover a side variety of topics that concern people doing business in China. These types of contracts involve;•    Contracts of carriage, a contract where you (A) have a shipping company (B) deliver goods to a client (C).•    Some types of insurance contracts where you (A) purchase insurance from a company (B) payable to another company (C).•    Third party inspection contracts where you (A) hire a company to inspect goods (B) from a supplier (C).What are the obligations of a third party? These contracts are specifically different from contracts in which a task is delegated (subcontracting). These types of contracts are those in which a third party is added to a contract to perform a responsibility or a part of a contract. Under Chinese Law, you are still responsible to uphold your obligation.So, who is to blame when things go wrong? What happens when a shipping company refuses to deliver goods to your client? When an insurance company refuses to pay a claim? When a line of products that were inspected results in a massive recall? In situations where the third party refuses an obligation or performs their obligation in an unsatisfactory manner, what course of action can you take?Unlike the Common Law system in Hong Kong, in which consideration, compensation, must be made before a contractual promise becomes legally binding. In the Chinese legal system, even an orally made promise can be legally binding, as long as the three conditions for making a legally enforceable contract are met. Those three conditions are,1. The person must have capacity (mentally sound and of age)2. The person must have intention (no duress or forced conditions)3. The promise must be legal (no refunds for your illegal drug mules)As long as these conditions are met, any promise that you make can be considered legally binding.So what are the implications for third party contracts? If the intention of the two parties is to place a legal, contractual obligation on a third party and this intention is accepted by all three parties, then the wronged party has a legal claim against the third party. This means that you have a claim against your insurance company for not paying, against the inspection company for failing to inspect properly and against the shipping company for failing to deliver the goods as agreed to.The next time you are finalizing a deal make sure that your intentions are clearly expressed. What are each of the parties’ individually responsible for? What are their obligations? What are the remedies in case anyone should fail to perform in a satisfactory manner? It is better for you to decide ahead of time about the solution to a problem rather than rely on a judge here to take a guess.Performance of ContractWhat are your contractual obligations? How do you know your obligations and what they mean? When you sign your name on the dotted line, it is very important to know what you expect of the other party, but it is also very important to know what your obligations are as well.Besides writing about the specifics of your product, when putting a contract together it is important to remember to note the specific time that something is supposed to happen, the place in which it should happen and the specific price. If you fail to make sure that this is clearly expressed in your contract, Chinese contract law states that you must use the state or industry standard or the market price.So if a supplier ever tries to intentionally keep the exact specifics of a contract fuzzy in the slightest, beware. These “industry standards” become terms of your contract and you may be held liable for failing to uphold them. And they will probably not be the standards that you expect them to be!Negotiating in Good FaithGood Faith, this may seem like alien concept to anyone who has spent a long time in China. Many experienced businessmen go into every negotiation expecting the other party to promise you the moon, stars and the sun packaged just the way you want. Those of us who have been here for a while tend to distrust anything that we can’t see, touch or any promise that “the check’s in the mail”. Believe it or not, when negotiating in China, both parties have a legal responsibility to do so “in good faith”.Good faith is a bit of a bailout clause in Chinese Contract Law. If anything is ever unclear in a contract in China, Article 60 of China’s Contract Law the principle of good faith provides for implied terms, including “giving notice, providing assistance and maintaining confidentiality in accordance with the nature and purpose of the contract”Again, the point here is that you must be sure that these terms are expressed clearly in the contract, so that these implied terms, which are probably about as clear as mud, do not become obligations that you need to fulfill. For the most part, Chinese courts have decided that expressed terms will usually trump implied terms._________________Matt Kowalak has worked in manufacturing related positions in Shenzhen for the last 5 years.  He studied Chinese at Shenzhen University and is currently an LLM student at The Chinese University of Hong Kong. For further business questions or consulting you can reach Matt at sasinopaths@gmail.com.