Tag Archives: contract review

Contract review: mind the contracting party.

Contract review: mind the contracting party.
This is the second time I compose an article on such subject, because I recognize that it’s of the most important in reviewing a contract, but it’s where the most people, even the legal occupant, ignore.
It is very often in the commercial transactions that some company takes advantage of a big company title or well-known one in the stage of proposal and negotiation, but later when it comes to sign the contract, they use a different company tile usually it’s a subsidiary company or a company of a similar title but independent. I have ever handled many cases like this in which people was caused losses and damages, or even being fraud or scammed, because they sign a contract with a wrong company.
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. Party B signed the contract in the name of its subsidiary, a limited company registered at Hongkong. 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 find new resources and supply companies, 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 arises between Party A and Party B, where Party B claimed for compensation of losses.
An arbitration application 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. In the procedure of enforcing the award, the court revealed that Party B’s HK limited company is an off-shore company who can only operate outside the HK. Furthermore this company don’t have solid assets in mainland China. Thus, it makes it very difficult to fully execute 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 that we should not only put our eyes on the text of contract, but more importantly, we should enter into 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 corresponding capability and competence to perform and bear the liability. In some cases, the counterparty may use the parent company in the negotiation stage or quotation stage, but when signing the contract, they sign it in the name of son company or affiliated company, which may make it complex to claim for the company who has negotiated on the contract. When they claims to the company who signed the contract, such company may don’t have the relevant property to take its responsibility when a legal disputes arise, even though a court decision is made.