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China Distribution Agreement

As a China contract lawyer, although I enjoy the day-to-day challenges of China litigation, I’m often called upon to structure international business deals, including drafting China distribution agreement. These are fun too, as I get an inside look at the business side of many different kinds of industries.

Lately, I’ve seen a considerable increase in the number of distribution deals being forged. Distribution agreements are simply contracts to distribute a product made by Company X to the dealers and remarketers of the product.

The distributor assures Company X that it has the facilities, personnel, and technical expertise necessary to market the specified product in a given territory.

At minimum, an international distribution agreement should contain the following terms:

1. This clause sets the duration of the agreement and should specify whether it’s automatically renewed after the term expires or whether the parties intend to re-negotiate terms after the term expires. Duration can vary widely depending on your industry.
2. Products: You should specifically describe and identify the product developed or owned by a company along with all options to the products; all future versions of the products; and all enhancements, revisions, or modifications made to the products by company.
3.Territory: Be sure to always indicate the specific geographic areas where the product(s) will be distributed. Also be sure to include terms of exclusivity to keep your channel clear of competitors.
4. End-User: Identify all persons or entities that will obtain the product(s).
5. Intellectual Property Rights: This provision is immensely important. Always identify the intangible legal rights or interests that cover any idea, design, concept, technique, invention, discovery, or improvement. This extends to any work of authorship and any other similar rights. I’ll be covering international intellectual property protection in a future post.
6. Quota: Be sure to specify minimum quantities of the products. The quota will consist of an initial purchase order and a continual minimum monthly volume commitment.
7. Termination: All good things come to an end. Be sure to carefully articulate the terminating conditions of the agreement. The more thorough you make it, the better off you’ll be.


China Lawyer's Role in Domestic Arbitration and International Arbitration

China lawyer’s role in the China arbitration is similar to China lawyer’s role in litigation; that is to say the lawyer is an identifier, selector, and marshaller of the evidence.  In fact, one text describes the role of the litigators as that of historians and litigation largely a process of recreating historical facts.  One needs only to look at the division of time spent on a case.  The majority of time is spent gathering and presenting the evidence as opposed to gathering and arguing the law.

During the process of dispute resolution, the client and their counsel deal with the evaluation of risk taking.  By risk taking I mean assessing a risk – namely, the cost if things go wrong and the probability of that occurring.  If the cost is high, the probability must be minimized.  If the cost is low, the probability may be allowed to increase according to the party’s personal assessment of “acceptable risk.”

Risks are controlled by:
1.  The elimination of the risk.
2.  Eliminating activities that produce undue risk.
3.  Insuring for uncontrolled risk.
4.  The informed consent of the client.
5.  The establishment of standards, controls and regulations.

These factors come into play in any dispute either as a proactive or reactive procedure.


Choice of Arbitration Venue in International Arbitration Agreement

Parties to an international commercial arbitration are generally free to choose for themselves where that arbitration should take place. The failure to make a clear choice of the place of arbitration in the arbitration clause of a contract may lead to unexpected results. A court in the United States ordered an arbitration to proceed in California under the AAA Rules where the arbitration clause did not specify a place of arbitration even though a separate clause in the contract specified that if an arbitration was necessary and was to be held in Peking it was to be subject to the Rules of Procedure of the Foreign Trade Arbitration Commission in Peking. The parties may make the choice of a plaee at any time before the arbitration begins; or they may leave it to be made on their behalf by an arbitral institution (if the arbitration is to be conducted under institutional rules) or by the arbitral tribunal itself.

At some stage, however, a choice will have to be made. The question which then arises is where should an international commercial arbitration be held? Should it, for example, be held in London or Washington, Paris or Geneva, Cairo or Kuala Lumpur? There is no simple or universal answer to this question. The nationalityof the parties to the arbitration will have to be taken into account, since the general practice is to hold an arbitration in a country which is neutral, in the sense that it is not the country of any of the parties to the dispute. The usual residence or place of business of the parties must be taken into account too, because of the need to cut down as far as possible on the expense and inconvenience of travelling. There are political factors, such as the general acceptability of the particular location to the parties and, in particular, the question of whether any restriction is likely to be imposed on the entry of the arbitral tribunal, the Parties, their advisers and witnesses.


A Brief Introduction to China International Arbitration

A business contract, lease or other written contract may contain an arbitration clause. By using such a clause, the parties to the contract agree to arbitrate any future disputes. As with any clause, all parties must agree to it's use in the contract before the contract is signed. Arbitration is an out-of-court proceeding in which a neutral third party called an arbitrator hears evidence and then makes a binding decision. Arbitration is the most commonly used method of alternative dispute resolution (ADR), and you'll find an arbitration clause in the fine print of all kinds of contracts these days. Read on to find out whether you should include an arbitration clause in your agreement.

Binding or Nonbinding Arbitration

Arbitration can be binding (which means the participants must follow the arbitrator's decision and courts will enforce it) or nonbinding (meaning either party is free to reject the arbitrator's decision and take the dispute to court, as if the arbitration had never taken place). Binding arbitration is more common.

Who Can Arbitrate Disputes?

Arbitration can be voluntary (the parties agree to do it) or mandatory (required by law). Most contract arbitration occurs because the parties included an arbitration clause requiring them to arbitrate any disputes "arising under or related to" the contract. If a provision like this isn't included in the contract, the parties can still arbitrate if they both agree to it (although it's tough to reach an agreement to arbitrate once a dispute has arisen).

Advantages and Disadvantages of Arbitration

For simple contract disputes in which the matter can be heard in one day, arbitration is usually a good choice. However, if in doubt, consider the advantages and disadvantages, below.

Advantages. Arbitration is usually faster, simpler, more efficient, and more flexible for scheduling than litigation. Also, it avoids some of the hostility of courtroom disputes, perhaps because it's a private proceeding versus the public drama of the courtroom. And if the subject of the dispute is technical--for example, about a patent--the parties can select an arbitrator who has technical knowledge in that field, rather than a judge who may not be familiar with the issues.

Disadvantages. Unlike a court ruling, a binding arbitration ruling can't be appealed. It can be set aside only if a party can prove that the arbitrator was biased or that the arbitrator's decision violated public policy. Unlike a court case, there is no automatic right to discovery (the process by which the parties have to disclose information about their cases to the other party). (However, you can include a requirement for discovery in your arbitration clause or agree to it under arbitration rules.) The costs of arbitration can be significant; in some cases, they may even exceed the costs of litigation (see below).

Still weighing the good and the bad when it comes to arbitration?

What Does Arbitration Cost?

According to a survey by Public Citizen, a consumer watchdog group, the cost of initiating an arbitration is significantly higher than the cost of filing a lawsuit. On average, it costs about $9,000 to initiate a claim to arbitrate a contract claim worth $80,000 (versus about $250 to file that action in state court). Keep in mind that the people in the dispute pay the arbitrators, and arbitration fees can run to $10,000 or

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I am a licensed China lawyer. Most clients are foreign nationals and companies. China Lawyer Blog have associates in Beijing, Shanghai, Tianjin, Guangzhou, Suzhou, Nanjing, Qingdao, Fuzhou, Hainan, Hefei, Wuhan, Xian, Changsha, Xiamen and Hangzhou. Learn More

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This China Lawyer Blog is aiming at providing better knowledge and understanding of Chinese law for foreigners. Should you have any legal issue in China, do not hesitate to contact China Lawyer Blog for consultation. Preliminary consultation is free. Further legal service, however, will be charged in due rate and in due course.

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China Lawyer BLog AuthorPeter Zhu, an experienced China attorney licensed to practice law for more than ten years, the author of this China Lawyer blog, welcomes any enquiry or consultation related to Chinese law.