How to Mitigate Legal Risk in International Trade with China

1.Conduct Necessary Due Diligence Before Transactions

It is common for overseas sellers to face issues of non-payment after shipping goods to Chinese manufacturers. From practical experience, pursuing criminal charges for nonpayment or civil liability often results in lost time and high costs. How can these situations be avoided?

We believe that conducting necessary due diligence on the manufacturer before the transaction is an effective way to reduce risk. Sellers can appoint Chinese lawyers to examine the buyer’s public information to learn about the company’s registered address (for example is it a legitimate office space or an individual residential address), registered capital (is it fully contributed, has there been any capital reduction), credit status, ongoing lawsuits, major judicial risks, and more. This allows sellers to gain a preliminary overview of whether the enterprise is operating normally. Current lawsuits are an especially important standard for credit checks because if an enterprise has unresolved cases, winning a judgment in the future may still not result in actual compensation. Therefore, before trading with a Chinese enterprise or considering litigation after a dispute, we believe that conducting necessary due diligence before the transaction can greatly reduce the risk of fraud.

2.Agree on Dispute Resolution Methods in Contracts

In one of our cases, an overseas seller specified an overseas arbitration institution for dispute resolution in the contract, but the specified institution did not exist. After a contract dispute occurred, the seller sought our help, and after reviewing the materials we initiated litigation. We recommend that when a defendant is a domestic enterprise, agreeing on a domestic international arbitration institution for jurisdiction is more convenient for trial procedure and enforcement. Our goal in resolving disputes is not just to obtain a favorable ruling but to help the seller recover payment or compensation. Thus, we focus on the enforceability of the ruling.

Additionally, even though it is a domestic arbitration institution, it can be agreed in the contract to use English as the arbitration language, simplifying evidence production for the seller and enabling easier understanding of court documents . Furthermore, despite the progress in international judicial assistance in recent years, , there is uncertainty and complexity in recognizing and enforcing overseas arbitration awards in domestic courts. . According to published data very few cases of overseas litigation and arbitration awards have been recognized in mainland China in recent years. Therefore, we strongly advise our foreign clients to choose Chinese arbitration institutions, such as the China International Economic and Trade Arbitration Commission (CIETAC) in Shanghai or Beijing, for dispute resolution in contracts with domestic buyers. This provides a more practical guarantee for resolving potential disputes.

3.Retain Relevant Communication Records and Preserve Valid Evidence During Transactions

in civil disputes, buyers, sellers, and courts often present three different versions of the stories. Why is this so? After a dispute occurs, both buyers and sellers will make statements in their favor, and the court or arbitration tribunal will ultimately judge based on the specific evidence provided by both parties. Therefore, we believe retaining valid documented evidence to support the claim is crucial during business transactions. When meeting or communicating with your business partners, we advise keeping business cards of both parties’ contacts, and set out their contact information (such as WhatsApp, email, cellphone) in the contract or other related documents such as BOL, invoice, etc. This way, in case of a dispute, full and complete records can recreate the entire transaction process, serving as important factual evidence in the ruling.

Additionally, it is also necessary to keep courier stubs, delivery notes, online signatures, etc for important document transmissions to prevent the other party from claiming non-receipt. Sometimes, when the other party does not appear in court, the judge or arbitrator will scrutinize the transaction details more closely, rendering the final ruling irrefutable. However, this increases the burden of proof on the plaintiff, so sellers should pay special attention to retaining transaction-related evidence in advance.

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