Commercial Agency Contracts in China

Practical Guide

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How are agency agreements regulated in China?

Unlike most western countries, the People's Republic of China provides no organic body of rules governing the commercial agency contract. Therefore the agreement is mainly regulated by the General Provisions of the Civil Law of the People's Republic of China, which are in force since October 1st, 2017, and by certain general rules under the Contract Law of China, which are in force since October 1st, 1999, although further specific regulations may be contained in other regulations (e.g.: Unfair Competition and Anti-Monopoly Law).

What are the differences from other intermediaries?

Chinese law lacks a clear definition of 'commercial agent'.

As in other jurisdictions, the definition of commercial agency includes any individual or entity acting on behalf and under the instructions of a principal to promote the conclusion of contracts on its behalf on a territory, receiving a commission on the sales generated, a fixed salary, or a combination of both as consideration. The principal, usually, sells the products directly to end client and is responsible for any costs incurred by the agent.

Since the agency is an atypical contract, under Chinese law there is no definite distinction between: primary and secondary agents; commercial agent and other intermediaries (e.g. occasional intermediaries); commercial agent and employee. Concerning the latter case, though, risk of confusion is rather low, as the mandatory requirements for an employment relationship are very strict and require a high degree of subordination, which is almost impossible to find in a commercial agency relationship. The main requirements imposed by law, in fact, are: (i) a written labour contract with the employer; (ii), a fixed working time imposed by the employer; (iii) a fixed salary; and (iv) the performance of work activities at the employer's premises.

In general, therefore, total freedom in determining the terms and conditions of an agency agreement is given to the Parties, which emphasises the importance of having an impeccable contract with a clear definition of the main rights and obligations of the Parties.

How to appoint an agent in China

Since there is no organic body of rules providing any formalities needed to appoint an agent, those have to be deduced from other provisions.

The agent is only allowed to act under the Principal’s instructions, so a written agreement is strongly recommended if the agent is required to conclude contracts on behalf of the principal.
When negotiating the agency contract, a foreign Principal should consider the following checklist:

Who is the Agent?

Chinese companies often show up with a company denomination in Latin characters, but that has no official value: the only one valid is the one in Chinese characters, which generally can be found on the flip side of a business card.

It is highly recommended to run a background check regarding the information available on the database of the State Administration of Industry and Commerce (SAIC), by means of this public database it is possible to have the business licence of the Company confirmed and verify the most important information, such as the name of the legal representative, the scope of activity, the registered capital, and so on. Besides, it is recommended to check if the agent owns any licenses that may be required by Chinese law for the promotion of certain goods.

Get ready to negotiate

An important difference between Chinese culture and western countries is a peculiar approach to contract negotiation, which can be very lengthy and problematic if it is carried out without a certain degree of flexibility. Patience, written memos, plenty of meeting minutes and a good translator are essential in assuring that the Parties are on the same page and lead to a successful negotiation. See this post on Legalmondo to read more on the topic.

Draw up the contract in English and Chinese

An English only contract is perfectly valid, yet it is advisable to use a bilingual agreement, to make sure the Parties are on the same page and likewise in case the contract needs to be used by the Agent to credit himself before clients or in Court: Mandarin is the only official language and it is safe to know that the translation is correct from the start avoids unnecessary misunderstandings.

Clearly define the main terms of the agreement

Exclusivity, Territory, Duration, Renewal, Commissions, Reimbursement of expenses, are all elements not governed by Chinese law, so the Parties must be very precise in regulating all such elements in the contract.

Grant exclusivity only at certain conditions

China is a market of continental dimensions: exclusivity in favour of the agent should be considered carefully and limited to certain geographic areas or channels, in which the agent guarantees to obtain a certain minimum turnover (and in case of failure to reach the targets foresee the right of the Principal to cancel the exclusivity).

Applicable law to an agency contract in China

An agreement between a Chinese agent and a foreign principal may be governed by either Chinese or foreign law.

Article 145 of the General Principles of Law and Article 126 of the Contract Law establish that, in the absence of choice, the contract shall be governed by the law of the State with the closest connection to the contract. In the case of agency contracts, therefore, as in many other legal systems, the law of the place where the agent carries out his activity will apply, hence Chinese law.

In the absence of an explicit contractual choice, the Chinese courts will have jurisdiction to settle matters relating to any agency contract performed in China.

In general, it is recommended to establish expressly what law applies to the contract, what the dispute resolution mechanism will be and to ascertain that the applicable law is consistent with the jurisdiction (e.g. Italian law + Italian jurisdiction vs. PRC Law + Chinese jurisdiction).

Don't fight for your home court and law: it is often a bad idea. 

Firstly, as far as applicable law is concerned, one should consider that under PRC law no goodwill indemnity is due in favour of the agent, so the application of a foreign law might award a right to the Chinese agent which he would not enjoy under local rules (for more on this see point 6).
Secondly, regarding the dispute resolution mechanism, at least in first-tier cities, which have been subject to international investments for a long period, efficiency of State courts has improved considerably, costs are low and time for a judgment in first instance fast (around 6 months).

One should, therefore, consider carefully the application of Chinese law and Chinese jurisdiction, especially if it is foreseeable that execution of the judgement in China may be needed, as in case of unfair competition or violation of non-compete agreements.

Dispute resolution clauses in agency agreements in China

A foreign jurisdiction may be validly chosen by the parties of a Sino-foreign agreement only if this Court has an “actual connection” with the contractual dispute.

If the foreign judgment was issued in a country with which China has concluded an international or bilateral treaty for the mutual recognition and enforcement, the rules laid down in that treaty shall apply, otherwise, recognition and enforcement will be particularly complicated, as they will be subject to the principle of reciprocity. In either case, the recognition and enforcement of a foreign court decision is a lengthy process with a lot of red tape, so the decision to settle disputes before a foreign state court should be considered carefully.

Arbitration can be a valid alternative, especially for contracts which may lead to high-value disputes: also, in this case, one should carefully consider the actual case before insisting for arbitration outside China, which today offers independent and trustworthy arbitral institutions (see for instance CIETAC).

Since the PRC is a member of the New York Convention of 1958, enforcement of a foreign arbitral award is in most cases easier and faster than the process of recognition of a foreign court decision. For more on this topic, please refer to this article on Legalmondo.

How to terminate an Agency contract in China

According to the general principles of Chinese law, agency agreements may be entered into for a fixed term or be open-ended.

If a fixed term is agreed, the agreement will expire and the relationship will naturally end on the expiration date as originally agreed on. Automatic renewal for further periods may apply only if explicitly provided.
In case of open-end agreements, Chinese law does not provide for a minimum notice period for termination, but it is however advisable to grant a reasonable period of notice, with due consideration of the ongoing circumstances (to be on the safe side, reference can be made to the minimum notice period provided by EC Directive 653/86) and to foresee that the notice of termination shall be made in writing and with proof of receipt by the receiving Party.

Termination for breach is available only in limited cases, i.e.:

  • significant breaches. One party commits significant breaches of contract, affecting the possibility of realizing the scope of the contract;
  • party's unwillingness to perform the contract. One party - explicitly or implicitly – indicates it will not perform the contract;
  • delay in performance of a certain obligation following a formal demand by the other party;
  • explicit termination circumstances. The parties are free to include termination clauses setting forth specific breaches legitimating the non-breaching party to terminate the contract;
  • force majeure. The occurrence of an event which makes the performance of the contract impossible.

Termination indemnity for agency agreements in China

Chinese law does not provide for any goodwill compensation in favour of the agent.

That said, it is still advisable to expressly rule out that any indemnity, for any reason, will be due upon the termination of the contract and – unless the Principal wants to grant such right to the agent – to avoid the application of a foreign law which does recognize the right to an indemnity.

Post contractual non compete agreements for agents in China

Chinese law does not limit the autonomy of the parties to include a post-contractual non-compete clause in an agency contract, so a similar clause is generally valid and must have a maximum duration of 24 months.

In China, post-contract non-compete clauses are generally not very frequent, because they are rather difficult to enforce, especially if the Principal is a foreigner and therefore has little control over the huge Chinese territory.

Nevertheless, in certain cases – i.e.: niche markets, with competition restricted to a few key operators – the inclusion of a post-contractual non-compete clause may be important, and should, therefore, be taken into account.

In case a post-contractual non-compete agreement is included in the contract, it is advisable to fix a reasonable indemnity to compensate the agent. A reasonable quantification of the indemnity can be inferred from employment contracts, where fair compensation is generally equivalent to 30% of the employee’s average monthly salary in the twelve months before termination.

In conclusion: a post-contractual non-compete covenant should be considered case by case and is worth only if (i) such clause is fundamental to protect the goodwill of the Principal and (ii) if the Principal can effectively monitor the compliance to the obligation by the agent and, if needed, enforce the clause (e.g. requesting payment of a certain contractual penalty based on the indemnity paid to the agent).

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