Commercial Contracts and Outsourcing in China

Commercial contracts in China: the essentials

Commercial contracts in China are governed principally by the Civil Code, which took effect on 1 January 2021 and replaced the former Contract Law. Its contract book is detailed and familiar in structure to readers from civil law systems: formation, validity, performance, modification and assignment, termination and liability for breach, followed by rules for named contract types such as sale, supply of utilities, leasing, financing leases, construction, transport, technology, storage, entrustment and intermediary contracts.

The Supreme People's Court has supplemented these rules with a judicial interpretation on the general provisions of the contract book, effective since December 2023, which courts apply in practice. For international businesses, the essentials are threefold. First, decide early whether the contract is foreign-related, because that determines whether the parties can choose a foreign governing law and foreign arbitration. Second, pay attention to execution: who signs, which chop is used and which language prevails. Third, write remedies that a Chinese court or tribunal will enforce as intended, rather than clauses imported unchanged from another legal system.

Governing law and foreign-related contracts

A contract with a foreign element, for example a party incorporated outside mainland China, may generally choose its governing law under the Law on the Application of Laws to Foreign-Related Civil Relations. Some contracts must be governed by PRC law regardless, including Sino-foreign equity and cooperative joint venture contracts and contracts for the cooperative exploration and development of natural resources performed in China. A contract between two mainland entities, including between a foreign-invested enterprise (FIE) and a local supplier, is normally treated as domestic, which means PRC law applies and the scope for offshore arbitration is limited.

Choosing a foreign law is not always the best choice even where it is permitted. If the counterparty's assets are in China and enforcement will happen there, a PRC court or tribunal applying foreign law must have that law proved, which adds cost and uncertainty. The right answer depends on where the assets are, which forum the parties trust and how the contract is likely to fail.

China is a party to the UN Convention on Contracts for the International Sale of Goods. Where both parties are in contracting states and the contract does not exclude it, the Convention can apply to cross-border sales automatically, which surprises parties who assumed their chosen domestic law applied in full. Decide deliberately whether to exclude it.

Execution, chops and language

In China, a company's official seal, or chop, is the primary evidence of corporate assent. A contract signed only by an individual without a chop may still bind the company if the signatory had authority, but disputes about authority are common. Good practice is to require both the chop and the signature of the legal representative or an authorised signatory, to check the chop against the counterparty's registration where the stakes justify it, and to record board or internal approvals. Electronic signatures are recognised under the Electronic Signature Law if they meet its reliability conditions.

Bilingual contracts should state which language prevails. Even where English prevails, the Chinese text is what a mainland court or tribunal will read first, so inconsistencies should be eliminated, not merely resolved by a precedence clause.

Signing checklist

• Confirm the counterparty's exact registered Chinese name and unified social credit code.
• Check that the business scope and any licences cover the contracted activity.
• Obtain the company chop or a contract chop, plus the signature of an authorised person, with a copy of the authorisation.
• Apply a cross-page seal across multi-page contracts to deter page substitution.
• Keep a signed Chinese version and record the date and place of signing.
• For electronic signing, use a platform that preserves audit trails and identity verification.

Drafting remedies that work

• Liquidated damages. Agreed damages are enforceable but may be adjusted. A party can ask the court or tribunal to reduce damages that are excessively higher than the actual loss; amounts exceeding the loss by more than 30% are generally regarded as excessive, although the court considers all the circumstances.
• Termination rights. Statutory termination rights exist for fundamental breach, but express termination events with clear notice mechanics reduce argument.
• Limitation of liability. Exclusions of liability for personal injury, or for property damage caused intentionally or by gross negligence, are void. Caps on other losses are generally respected if clearly drafted.
• Standard terms. A party supplying standard terms must draw reasonable attention to clauses that exclude or limit its liability and explain them on request; otherwise the counterparty may argue they never became part of the contract.
• Force majeure and change of circumstances. The Civil Code recognises force majeure and, separately, allows renegotiation or court adjustment where a fundamental change of circumstances makes performance obviously unfair. Drafting should say how notice, mitigation and termination work in each case.

Worked example: a supply agreement with a Chinese manufacturer

Consider, as an illustration, a Hong Kong subsidiary of a European brand buying components from a manufacturer in Guangdong. Because the buyer is offshore, the contract is foreign-related, so the parties can choose Hong Kong law and HKIAC arbitration. Since the supplier's assets are in the mainland, the buyer would check that an award can be enforced there under the arrangement between Hong Kong and the mainland on mutual enforcement of arbitral awards.

The buyer would then focus on inspection and notice periods, tooling ownership (moulds paid for by the buyer but held by the supplier), confidentiality of drawings, a ban on subcontracting without consent, and audit rights for quality and labour standards. Liquidated damages for late delivery would be set at a level that can be justified against expected loss. Finally, the contract would address export control and sanctions compliance in both directions, together with a mechanism to suspend or terminate if a party or product becomes restricted.

Distribution, agency and licensing arrangements

Distribution agreements are among the most common commercial contracts in China for foreign brands. The main choices are between a distributor that buys and resells on its own account, a commission agent that sells in the principal's name, and a cross-border e-commerce model in which goods are sold directly to consumers from outside the mainland. Each carries different tax, customs, product liability and consumer protection consequences, and the contract should match the model actually used on the ground.

China does not have a statutory regime of compensation for commercial agents on termination comparable to the EU's, but termination still needs careful handling: stock buy-back, transfer of customer lists, ownership of local social media accounts and marketplace stores, and trademark use all need clear exit provisions. Trademarks should be registered in China in the brand owner's name before distribution begins, because the first-to-file system makes later recovery from a distributor difficult. Technology licences into China must also be checked against the technology import and export rules, which may require registration or, for restricted technologies, a licence.

A lifecycle approach to contract management

The strongest commercial contracts in China are supported by process as much as drafting. A practical lifecycle has five stages: counterparty vetting before negotiation; a template and fallback playbook so that local teams know which clauses can move; controlled signing with chop and authority checks; performance monitoring, including written records of notices, defects and variations; and a renewal or exit review well before expiry. Keeping a central register of contracts, with key dates and responsible owners, makes it far easier to act on termination rights, price adjustments and inspection deadlines on time.

Outsourcing, data and service providers

Outsourcing contracts, from IT and back-office services to contract manufacturing, raise additional issues. Where the provider handles personal information for the customer, the Personal Information Protection Law requires an entrusted processing agreement covering purpose, duration, method, types of data, security measures and the parties' rights and obligations, and the customer must supervise the provider. The Network Data Security Management Regulations, effective 1 January 2025, add detail on the duties of data handlers and service providers.

If data leaves mainland China, the transfer must fit one of the routes under the Provisions on Promoting and Regulating Cross-Border Data Flows (March 2024): an exemption, a standard contract filing, certification or a security assessment. Our cross-border data transfer page explains these routes. Global outsourcing agreements that route Chinese data to service centres in India, the Philippines or Eastern Europe need these rules built into the data schedule, not added afterwards.

Other outsourcing terms that need care include ownership of work product and improvements (coordinated with IP licensing), service levels and service credits, step-in and exit assistance, subcontracting controls, audit rights and transfer of employees on exit. Regulated businesses, such as banks and insurers, face sector rules on outsourcing that set further requirements.

Outsourcing, labour dispatch and employment risk

Business process outsourcing must be distinguished from labour dispatch. Under PRC rules, dispatched workers may only fill temporary, auxiliary or substitute positions and are capped as a share of the host's workforce. An arrangement described as outsourcing but in which the customer directs the provider's staff day to day may be recharacterised as dispatch, or even as direct employment. Contracts should therefore keep management of personnel with the provider, define deliverables rather than headcount, and include provider obligations on wages and social insurance. See employment contracts and policies.

Commercial contracts in China: compliance clauses that now matter

Compliance clauses in commercial contracts in China used to be boilerplate. They now carry real commercial weight, because a supplier or customer may become subject to restrictions in one jurisdiction that conflict with obligations in another.

• Export controls and sanctions. China's Export Control Law and its dual-use items regulations operate alongside US, EU and UK controls. Clauses should address end use, re-export, licensing responsibility and what happens if a licence is refused. See export controls and sanctions.
• Countermeasures. The Anti-Foreign Sanctions Law, its 2025 implementing regulations and the blocking rules mean that terminating a Chinese counterparty solely to comply with foreign sanctions can carry legal risk in China. Termination triggers should be drafted with this in mind.
• Competition. Exclusive territories, resale price controls and online sales restrictions in distribution contracts may engage the Anti-Monopoly Law; the Anti-Unfair Competition Law, revised in 2025, also bears on commercial bribery and misuse of trade secrets.
• Payment terms with SMEs. Rules on payments to small and medium-sized enterprises, revised in 2025, restrict the payment periods that large enterprises and public bodies may impose, and the Private Economy Promotion Law reinforces this policy.
• Anti-bribery. Audit and termination rights should reflect both PRC rules and foreign laws such as the US Foreign Corrupt Practices Act and the UK Bribery Act.

Common mistakes in commercial contracts in China

• Signing with an affiliate whose name differs from the entity that actually performs or holds assets.
• Choosing offshore arbitration for a purely domestic contract, putting enforceability at risk.
• Copying uncapped indemnities from foreign templates that a court may not apply as intended.
• Agreeing price or volume changes informally by messaging app without following the amendment clause.
• Omitting a Chinese version until a dispute arises, leaving translation to the other side.

Dispute resolution clauses

A dispute clause should name an institution, a seat and the number of arbitrators, or a court with clear jurisdiction. China's revised Arbitration Law, adopted in September 2025, took effect on 1 March 2026 and among other things gives firmer recognition to the concept of the seat of arbitration in foreign-related matters. The Civil Procedure Law, as amended with effect from 1 January 2024, broadened the bases on which PRC courts may take jurisdiction over foreign-related disputes. Templates written before these changes should be reviewed.

Hong Kong is a common choice of seat for contracts with mainland counterparties, because of the arrangements on interim measures and enforcement of awards between Hong Kong and the mainland. Singapore and other New York Convention seats are also widely used for ASEAN-linked supply chains. See our pages on commercial and contract disputes and international arbitration.

How TRW & Co helps

We draft and negotiate cross-border supply, distribution, services, licensing and outsourcing agreements for foreign and Chinese businesses. We advise on contracts governed by English, Hong Kong and other non-PRC laws, on international practice and on how commercial contracts in China are likely to operate in the Chinese legal environment.

We build bilingual templates and contract playbooks, and train commercial teams to use them. Where a contract is governed by PRC law or a PRC legal opinion is needed, we work with licensed PRC law firms and coordinate their input so that the final document is consistent. For ongoing support, see our retained legal support model, or contact us to discuss a contract.