Contract review: mind the contracting party.
Reviewing contract is the second time I have composed this year , because I, as a lawyer, recognize that it is of most importance to verify parties who are literally involved in a contract, whereas most contracting parties tend to ignore it, even for the legal occupant.
It is very often in the commercial transactions that some companies takes advantage of the name of a big company or well-known one in the initial stage of quotation and/or negotiation, but in a later stage when it comes to the time to sign the contract, they may use a different company title which might be a subsidiary company or a company of a similar title but of an independent one. I have ever handled many cases like this in which people were tricked and caused losses / damages, or even being cheated, because they signed a contract with a company which is not the right one.
Case study:
An energy company in US (Party A) entered into a sales contract with a Chinese energy company (Party B) on Nov.30th,2007.The place of signing contract is Tianjin. They negotiated and then mutually consented.However, Party B signed the contract in the name of its subsidiary, a limited company registered at Hongkong, instead of thier own name. Unfortunately Party A didn’t pay attention to it and faild to notice that this will bring them big problems.In the contract, Party B agreed to sell energy components to Party A and set the terms and conditions. The total price of the contract is 15971670RMB, which will be divided into 8 batches, in the first batches, both parties fulfilled their obligations, but in the second purchase order Party A asked for raising the price by 10%. If Party A found new resources and suppliers, it could cause to waste the components already bought and spend additional time. So Party B is compelled to accept it. In the third purchase order, Party B failed to supply the goods as ordered by Party A. Thus, a dispute arose between Party A and Party B, where Party B claimed for compensation of losses.
An compliant was submitted to China International Economic and Trade Arbitration Committee (CIETAC) thereafter. On Feb.1st, 2013,the Arbitration Committee made a conclusion that Party A should compensate Party B for loss of 322281USD and attorney fees 10000USD. This is not bad. But in the procedure of enforcing the award, it’s revealed that Party B’s HK limited company is an off-shore company who can only operate outside the HK, without having any solid asset in mainland China. Thus, it makes it very difficult to fully enforce the arbitration award. By writing this article, I don’t want to analyze the difficulties about how this case would be going in the execution stage. I want to remind people of the lesson we should get from this case. When negotiating or reviewing contracts, we should not only put our eyes on the text of contract, but to be more important, we should make a contract with a trustful company, by using “trustful” I means not only you know this company or it’s legally established, I want to emphasize that the counterpart company shall have the correspondent capability and competence to take its responsibility. In some cases, the opposing party may use its parent company to negotiate and get a deal, but when signing the contract, he may sign it in the name of its son company or affiliated company, which may make it complex to bring legal action against the company who has negotiated on the contract. When they claimed to the company who literally signed the contract, such company may don’t have the relevant asset to take its responsibility in case of a legal dispute arises, even though you may have been awarded a prevailing decision.