In the latest in our series on importing from China to the UK, Mark Davison and Jonathan Christy from law firm Mills & Reeve discuss how businesses can protect themselves from legal issues when importing from China so they can get the best out of the market relationship
Importing from China provides huge opportunities for UK businesses. As FOCUS readers will no doubt be aware, China replaced Germany as the UK’s largest import partner in 2021, with £62.8 billion worth of goods and services being imported. Done correctly, importing from China can reap huge rewards and benefits such as immediate upscaling and lower input costs. Done badly, it can create huge issues not only to the bottom line, but reputationally.
So what is the best way UK businesses can best protect themselves once they have developed a relationship with a potential supplier? This article sets out common issues UK parties face when importing from China, and offers solutions for what can be done to prevent or limit their impact. The article focuses on what issues may arise when dealing with parties in China rather than domestic issues such as regulatory, sanctions, import restrictions, authorisations, customs and tax issues.
The most common things that can go wrong
The potential problems that importers face are varied and industry-specific; issues life science entities face will differ from those in the construction sector. However, the most common issues include:
- Payment, non-delivery or delayed delivery
- Quality of goods supplied
- Supply chain and transportation shortages (especially in the current global environment and following the Covid-19 restrictions in China)
- Intellectual property infringement where proprietary information has been provided to assist in the manufacture of goods
How can a company protect itself from these common mistakes prior to entering the market?
The potential impact of the issues outlined above can be prevented or limited through clear written agreements. Prevention is better than cure. The best way UK importers can protect themselves is upfront by ensuring that all key requirements are covered in a signed written contract. This helps reduce any misunderstandings between the parties.
At a minimum, contracts should contain:
- Details of the quality and quantity of what you are purchasing
- Agreed price and payment method
- What UK regulatory requirements the products need to conform to
- Delivery terms (including dates), and who has responsibility for each stage of the delivery process
- Provisions for how any intellectual property or proprietary information will be protected (for example, if you need to provide this for a Chinese supplier to manufacture)
- A dispute resolution clause
If the commercial value of what is being imported justifies it, you may wish to instruct a lawyer to help prepare the agreement to ensure that all key issues are covered.
In respect of the dispute resolution clause, think carefully about where your counterparty has assets or receivables or where you would need to enforce any judgment to protect your rights. This will dictate what forum may best suit your needs if something goes wrong.
If your Chinese counterparty has assets and/or receivables in the UK or Europe, an English Courts’ jurisdiction clause should help you be able to enforce any judgment against them. Alternatively, if the counterparty only has assets and/or receivables in China or in a jurisdiction where enforcement of English judgments can be problematic, consider whether another court jurisdiction or dispute resolution process will provide you with the best chance of protecting your rights.
For example, China and Hong Kong now have an arrangement regarding the reciprocal enforcement of arbitration awards between each state. Hong Kong Arbitration before the HKIAC may therefore provide UK parties with a system of law and process they are more familiar with whilst providing them with a mechanism to enforce in Mainland China.
It should be added that at the time of producing this article, there were reports that a Chinese court has enforced an English judgment in China. The decision is currently unreported. But it could demonstrate a significant development if Chinese courts start to routinely enforce English court judgments.
That position may soon arise in any event. China has signed but has not yet ratified the Hague Convention on Choice of Court Agreements 2005. If China ratifies that Convention then there will be a convention between the UK and China which provides for the enforcement of each other’s judgments in the context of exclusive jurisdiction agreements. Reports from China suggest that the Chinese Ministry of Foreign Affairs has indicated they wish for the Hague Convention to become effective in China as soon as possible, but it is not clear when that will be.
If something goes wrong what are the legal steps a company can take?
If a situation that might lead to a dispute arises, it is always best to seek out some preliminary legal advice first. Often, early communications or decisions can worsen the legal position of a party in dispute – for example inadvertent waivers of rights, termination of business relations without proper cause, or statements of fact that harm the legal position. These should be averted by seeking legal advice early on, if possible.
The route to resolution of a dispute will depend on the circumstances. However, if an independent body (such as a court or arbitral body) is required to make a judgment, then as set out above, the agreement should determine which of these forums a case should be pursued in.
If your agreement does not specify the forum, your lawyers will direct you as to which would be the possible and preferred option in the circumstances. Relevant factors will include: the location of parties; the law applicable to the agreement; and where services are performed. In the situation where no forum is specified and a dispute is likely to be referred to a court or similar, it is important to act fast, as leaving the decision could allow the other party to determine where the dispute will be heard.
The legal costs of bringing or defending a claim will depend on the circumstances, however, costs for the likely phases of work can be estimated at the outset.
What government or other bodies can help?
If things do go wrong with your Chinese supplier, consider contacting bodies such as the China British Business Council or the UK Department for International Trade China to see if they can assist.
Whilst they will not be able to judicially resolve a dispute, bodies such as these tend to have longstanding relationships in the regions they operate within to promote UK business and therefore can help seek guidance from local bodies to see if an amicable resolution can be achieved.
Often disputes arise from misunderstandings which can be resolved quickly once the misunderstanding has been understood. However, it is always worth speaking to a lawyer to ascertain what steps you need to take to protect yourself.
This article is part of a series on importing from China. See all the articles in the series below.
Part 1: How to source a manufacturer in China
Part 2: How to source and manage suppliers
Part 3: How to ship products and navigate customs
Click here to read our Exporting to China series