Make Sure the Contract is With the Right Party

One of the most important parts of a contract is to include penalties for a breach of contract from one party or another. However, what happens when the company you are forming the contract with does not have enough assets to pay for this penalty? Essentially, the contract doesn’t have nearly the same amount of bite that was expected. So one of the first steps in forming a contract with a Chinese corporation is to make sure you are forming the contract with the party that can actually pay restitutions if something goes wrong.

A very common tactic is to have a shell company or a sourcing agent that handles all of the sales contracts. This means that the foreign company has a contractual relationship with that sourcing company or agent, but not the actual manufacturer that has all of the assets. This prevents the foreign company from recovering from the manufacturer itself because they did not have any direct contractual relationship. So if the contract is violated, and the foreign company tries to recover, they find that the agent they had a contract with only has a small office, a chair, and an old computer that he does his work on. This is not useful in order to recover from any sort of large contract that could be worth hundreds of thousands of dollars.

In order to prevent this kind of situation from developing, it is important for any company seeking to form a contract to first perform a due diligence check. This due diligence check will verify whether or not the company that you are trying to form a contract with actually exists, has any assets, and the nature of the relationship, if any, with the actual manufacturer. This can help prevent a foreign company from being tricked into contracting with an agent that has no resources to pay up in case an issue arises.

If a foreign company does learn that the purported company is actually just a sourcing agent, they should try to contract the manufacturer directly instead. If this does not work, another idea would be to ask the manufacturer to be a co-signer. This would still allow the agent to get his cut, but also hold the manufacturer liable if there are any delays or other issues that arise out of the contract. If neither of these plans works, then the foreign company should be extremely careful in moving forward with contract negotiations.

Published by Burke Barnett on June 20th, 2016 tagged Uncategorized

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