This page covers twelve terms that come up in almost every deal with a Chinese factory. For each one we say what it is, where buyers lose out under mainland Chinese law, and what to put in writing. Article numbers refer to the PRC Civil Code unless stated otherwise.
Contents
- PI (proforma invoice)
- PO (purchase order)
- MOQ (minimum order quantity)
- 30/70 payment
- T/T (telegraphic transfer)
- FOB (Free On Board)
- EXW (Ex Works)
- Golden sample (sealed sample, 封样)
- 定金 and 订金 (earnest money and advance payment)
- Business licence and unified social credit code
- Company seal and contract seal (公章, 合同专用章)
- Legal representative (法定代表人)
PI (proforma invoice)
The supplier’s quotation in invoice form: product, unit price, quantity, payment terms and delivery date, usually signed or sealed by the supplier.
Many buyers treat a PI as paperwork that comes before the real contract. Under Chinese law it is very often the contract. Once you accept it, by signing it back or by paying the deposit against it, the terms on it are what a court will look at first. The Civil Code treats a contract as formed when a party has performed its main obligation and the other side accepts that performance, even before anyone signs (art. 490).
Our view: read a PI the way you would read a contract. Check the company name against the business licence, the quality standard it refers to, the delivery date and what the up-front payment is called. Then decide whether you need a contract on top of it.
Read next: Is a Proforma Invoice a Contract in China?
PO (purchase order)
Your document ordering a quantity of goods at a price, on a delivery date.
A PO is your offer. It binds the supplier once accepted, in writing or by starting production. The trouble starts when the PO and the supplier’s PI say different things about price, specification or delivery, and nothing says which one governs.
If you order repeatedly from the same factory, put the standing terms (quality, inspection, molds, confidentiality, breach) in a framework agreement once, and let each PO carry only quantity, price and dates under it. The framework should say that it governs where a PO or PI conflicts with it.
Read next: NNN, Purchase & Manufacturing Agreements
MOQ (minimum order quantity)
The smallest order a factory will accept for a product, often per color, size or material.
MOQ is a commercial term, not a legal one. Its legal side shows up later. A factory that has to buy material by the roll or run a mold for a full shift often produces more than you ordered, and the extra units are the ones that turn up for sale under someone else’s listing.
Write down what happens to production overruns: a small tolerance on quantity, any excess delivered to you or destroyed, and no sale of products made from your designs or molds to anyone else.
Read next: Mold & Design Ownership
30/70 payment
A common payment split: 30% before production starts, 70% before shipment or against shipping documents.
What you call the 30% decides what you can get back. Only a payment the contract calls 定金 (earnest money) can be doubled if the supplier’s breach defeats the purpose of the contract, and only up to 20% of the contract price; anything above that has no effect as earnest money (Civil Code arts. 586 and 587). A payment called 订金, advance or prepayment is simply part of the price.
The 70% is your leverage. Tie it to an inspection report you accept, not to a date, and say in the contract that paying the balance is not acceptance of quality.
Read next: Paid a 30% Deposit to a Chinese Supplier?
T/T (telegraphic transfer)
A bank wire. Most China sourcing is paid this way.
A wire cannot be pulled back once the receiving bank credits it. The legal check is simple and buyers skip it: the beneficiary on the PI must be the company that signs the contract, with the same registered Chinese name as on its business licence.
Two requests should stop you before you pay: a new bank account announced by email, and a request to pay a personal account. Verify the first through a channel you already had; decline the second.
Read next: Your Chinese Supplier Says It Has a New Bank Account; “Pay My Personal Account”: Say No
FOB (Free On Board)
An Incoterms rule: the seller clears the goods for export and loads them on the vessel at the named port of shipment, for example FOB Ningbo.
Under Incoterms 2020, risk passes to you once the goods are on board the vessel. Incoterms are contract terms, so they apply only if your contract says so, for example “FOB Ningbo, Incoterms 2020”.
FOB tells you who carries the goods and the risk. It says nothing about quality. Loading the goods is not acceptance, so the contract still needs an inspection step and a time limit for you to raise defects after arrival.
Read next: When Production Doesn’t Match the Golden Sample
EXW (Ex Works)
An Incoterms rule: the seller makes the goods available at its own premises and does nothing more.
Under EXW the risk is yours from the factory gate, including the truck to the port, and so is export clearance. A foreign buyer cannot normally act as the exporter in China, so in practice the forwarder or the factory does it anyway.
Our view: for a first order with a new supplier, FOB is usually the cleaner choice, because the supplier stays responsible for the goods until they are loaded.
Golden sample (sealed sample, 封样)
The approved sample that both sides sign or seal and each keep, so that production can be measured against it.
The Civil Code says that in a sale by sample the parties should seal the sample, and the goods delivered must match the sample and its description in quality (art. 635). If the sample was never sealed, the first argument in a quality dispute is about which sample you approved.
Seal at least two identical samples, have both sides sign a label across each, write the date into the contract, and keep photos and measurements with the specification sheet.
Read next: When Production Doesn’t Match the Golden Sample
定金 and 订金 (earnest money and advance payment)
Two Chinese words, pronounced the same, with different legal effects.
定金 is earnest money under the Civil Code: it exists once actually paid, it is capped at 20% of the contract price, and the excess has no effect as earnest money (art. 586). If the supplier’s breach defeats the purpose of the contract, it must return double; if you are the one who fails, you lose it (art. 587). If the contract has both earnest money and liquidated damages, you choose one (art. 588).
订金 is not a legal term at all. It is treated as an advance on the price: refundable when the deal fails, never doubled. If you want the doubling, the contract and the remittance note have to say 定金.
Read next: Paid a 30% Deposit to a Chinese Supplier?
Business licence and unified social credit code
The licence issued by the market regulator, showing the company’s registered Chinese name, its 18-character unified social credit code, legal representative, registered capital and business scope.
Only the Chinese name is registered. An English trading name on a website or a PI is not, and a court will look for the party by its Chinese name and code. You can check both on the National Enterprise Credit Information Publicity System (gsxt.gov.cn).
Put the registered Chinese name and the code in the contract, and make sure the same name appears on the seal and as the beneficiary of your payments. A mismatch among the three is the first sign that you may be dealing with a trading company or an intermediary.
Read next: Is Your Chinese Supplier a Real Factory or a Trading Company?; Supplier Background Checks
Company seal and contract seal (公章, 合同专用章)
The physical seals a Chinese company uses to sign documents. The company seal is its general seal; a contract seal is used for contracts.
The Civil Code treats a written contract as formed when the parties have signed, sealed or fingerprinted it (art. 490). In Chinese practice the seal is what most people look for, and a contract signed only by a sales manager in English invites an argument later about whether that person could bind the company.
Ask for the company seal or the contract seal, with the registered Chinese name legible on it, plus the signature of the legal representative or an authorized signatory. For a contract of several pages, a seal across the page edges stops pages from being swapped.
Read next: Signing with a Chinese trading company
Legal representative (法定代表人)
The one person registered to act for a Chinese company, named on its business licence.
Under the Civil Code, the legal representative acts for the company by law, and what the legal representative does in the company’s name binds the company; internal limits on that authority cannot be raised against a counterparty acting in good faith (art. 61).
Anyone else, a sales manager or the owner’s relative, needs written authority. If the legal representative will not sign, ask for a power of attorney sealed by the company, and keep it with the contract.
Read next: Supplier Background Checks
Sources
- Civil Code of the PRC (effective 1 January 2021), articles 61, 490, 586, 587, 588 and 635, full text on the Ministry of Justice site ↗
- National Enterprise Credit Information Publicity System, gsxt.gov.cn ↗
- Translations are mine and unofficial.
Holding a PI and about to pay?
Send us the PI and a line about your product. We reply in writing with the contract you need, the fixed fee and the delivery time.