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Non-material change…that can materially impact you

 

Article 31 of Contract Law of the People’s Republic of China in summary states that if someone accepts an offer, but in their acceptance makes a non-material change of the offer, acceptance is still made, save two instances. The first instance is when the offeror make a timely objection to the acceptance, or second, the offer explicitly state acceptance may not contain any changes to the terms of the offer.

 

Now here’s an interesting piece. Article 30 states “A change in the subject matter, quantity, quality, price or remuneration, time, place and method of performance, liabilities for breach of contract or method of dispute resolution is a material change to the terms of the offer.” If you combine Art. 30 and 31, an offeree can theoretically change many pieces of a contract that will cost you money, and still make an acceptance.

Take for example the following scenario. You send your Chinese supplier a detailed offer that includes all the precautionary clauses to protect you from the supplier going directly to your buyer. To protect yourself, you specifically include a territory restriction clause that obligated the Chinese supplier to receive your written permission before marketing similar products in your territory.  This makes perfect sense to you because you don’t want your buyer and your supplier sipping champagne and cutting you out of the picture.

Next, you send the supplier your written offer, and the supplier responds with an email stating, “We accept. See attached.” Of course you’re too busy, and too excited at how much money you can make of this deal, that you don’t actually look at the attached acceptance.

Little do you know, the acceptance you received actually omitted all the third party disclosure clauses, specifically the territory restriction clause.

Next production begins, inspection, payment, and nearly three months later when you try and sign the next phase of the agreement with your buyer, your buyer says we have a new target price.  Curious about the change, you inquire, and your buyer says “We found a Chinese supplier by the name ‘Used to be Yours’ who offered us a really good rate! Incredible! If you can beat his price we’d be happy to give you the business. Otherwise, we have to go with the Chinese suppler.”

You, in a mad fury, head over to your office, pick up the phone and call the supplier accusing him of breaching the contract. Your supplier is confused, and asks us you to show him which clause of the contract he breached. By now you can imagine what happens. The supplier tells you are looking at the wrong contract and it is his acceptance that governs the deal. You never voiced disagreement and therefore, he never breached the contract and was able to successfully cut you out.

Under a plain language reading of article 30, non-disclosure, specifically your territory restriction clause, is not considered a material change. There may be an argument that it falls under the method of performance, but even with that stretch you get into a debate that has no guarantee of victory. By the time it’s all said and done, a judge sitting in a Chinese court can very easily rule there was not breach holding you out to dry.

Here’s the lesson: First it’s good practice to read all documents that are involved in a business transactions. This is why people hire lawyers. If not for the legal advice, at least you can hold your lawyer responsible for reading the documents involved in the transaction. Second, in your offer you should include language limiting the effect of alterations to the offer. If you don’t, make sure to make a timely objection. And don’t forget, what’s timely? What you think is timely, may not be timely, and once again you may have agreed to a deal you worked so hard to avoid.

 


Mike Bellamy is an Advisory Board Member & Featured Blogger at the not-for-profit China Sourcing Information Center. He is also the author of "The Essential Reference Guide to China Sourcing" and founder of PassageMaker Sourcing Solutions.

 

 

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