Three Essential Clauses in a China Supply Contract
Retention of title, inspection and acceptance, and liquidated damages
Retention of title, inspection and acceptance, and liquidated damages
Key takeaways
- A retention-of-title clause should identify the goods and payment trigger and consider registration where third-party effectiveness matters.
- Inspection and acceptance provisions must distinguish visible defects, latent defects and warranty claims.
- Liquidated damages should be linked to foreseeable loss and drafted with the possibility of judicial or arbitral adjustment in mind.
1. Retention of title
A seller may agree that ownership of goods remains with the seller until the buyer pays the price or satisfies another agreed condition. The clause should identify the goods, the payment trigger, storage and identification duties, restrictions on resale or processing, insurance, access and the procedure for recovery where legally available.
Under the Civil Code, an unregistered retention-of-title arrangement may not be asserted against a good-faith third party. Registration and priority should therefore be considered when the seller relies on the clause as meaningful credit protection. Insolvency and competing-security issues require transaction-specific advice; the clause should not be described as an unconditional right to recover goods in every bankruptcy.
2. Inspection and acceptance
The contract should state when, where and how the buyer inspects; the applicable specifications and sampling standard; who bears testing costs; how notice is given; and what happens after rejection. A short inspection period may be appropriate for quantity, packaging and visible damage but unsuitable for latent defects that appear only after installation or use.
Separate delivery, inspection, acceptance and warranty. Acceptance should not automatically waive fraud, deliberately concealed defects or agreed warranty rights. For technical goods, attach drawings, tolerances, test protocols and an agreed hierarchy of documents.
3. Liquidated damages
Chinese law permits parties to agree liquidated damages for breach. A court or arbitral tribunal may adjust the amount where the legal conditions are met, including where the amount is materially excessive compared with loss. Avoid a single undifferentiated percentage for every breach.
Draft separate remedies for late delivery, short delivery, quality failure, confidentiality breach, IP infringement and non-compliant change of materials. State the calculation base, cap or minimum where appropriate, whether continued performance is required, and how liquidated damages interact with replacement, repair, termination and additional loss.
4. The rest of the contract still matters
These clauses work only within a complete contract. The parties should also address specifications, forecasts and orders, price and tax, Incoterms, packaging, title and risk transfer, quality assurance, change control, tooling, IP, confidentiality, compliance, force majeure, termination, governing law, language and dispute resolution.
5. Avoid copying sample wording without adaptation
A clause written for a seller extending credit may be unsuitable for a buyer paying a deposit. The drafting should reflect the product, payment flow, location of goods, inspection method, bargaining position and enforcement plan. Bilingual documents should include a clear language-precedence provision.
Before you act
- Identify the goods and payment trigger for retention of title.
- Consider registration and competing third-party interests.
- Separate visible-defect inspection from latent-defect and warranty claims.
- Use objective specifications, sampling and notice procedures.
- Tailor liquidated damages to each material breach and foreseeable loss.
How we can help
BizLawyerChina can conduct counterparty due diligence and prepare or review bilingual China-related contracts, including payment security, inspection, IP, governing-law and dispute-resolution provisions.
Principal official sources
- Civil Code of the People's Republic of China
- Unified Registration System for Movable Property Financing
- National Laws and Regulations Database