PRC

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Pre-contractual negotiations
  • Is there an implied duty of good faith to continue to negotiate?

    Under PRC contract law:

    • the parties shall observe the principle of good faith when exercising rights and performing obligations, and
    • in the course of entering into a contract, the party that engages in any of the activities below and therefore causes losses to the other party shall indemnify the other party against any loss:
      • negotiating in bad faith in the name of concluding a contract
      • intentionally concealing key facts related to the contract execution or providing false information, or 
      • other activities contrary to the principle of good faith.

    The PRC courts have a broad discretion to determine the scope of the “activities contrary to the principle of good faith” or the scope of “bad faith” on a case by case basis. In practice, the courts tend to only award the damages for direct losses.

    What are the consequences of termination of negotiations by one party unilaterally?

    In the event that the termination is deemed as “after negotiation in bad faith in the name of concluding a contract” or “contrary to the principle of good faith”, and therefore causes losses to the counterparty, the other party may have a claim for damages.

    What is the potential impact on third party rights?

    Generally speaking, the aforesaid statutory pre-contractual obligations only bind the parties that are contemplating the contract negotiation.

Confidentiality agreements
  • Are there implied confidentiality obligations where there are no formal confidentiality agreements entered into by the parties?

    PRC law provides that regardless of whether a contract is concluded or not, a party shall not disclose or unjustifiably use the business secrets of the counterparty that it has acknowledged during the course of entering into a contract.

    What are the consequences of breach?

    The breaching party shall indemnify the counterparty against losses out of the disclosure or unjustifiable use in question.

    Are specific terms/formalities required for a binding confidentiality agreement?

    No specific terms or formalities are generally required.

Exclusivity arrangements
  • Can an obligation to negotiate exclusively be implied where no formal agreements are entered into by the parties?

    The parties may agree in a memorandum of understanding (or heads of agreement or a document of the kind) that it is non binding apart from certain clauses such as confidentiality and exclusivity.

    Are any specific terms/formalities required to make exclusivity arrangements enforceable?

    No specific terms or formalities are generally required.

Heads of agreement
  • Are they legally binding?

    The heads of agreement may or may not be binding, subject to how it is worded. In the absence of a clear provision, a heads of agreement will most likely be deemed by the PRC courts as binding.

    Are any specific terms/formalities required to make them legally binding?

    No specific terms or formalities are generally required.

    What are the consequences of breach?

    These are the same as for breach of contract.

    Can heads of agreement have any tax implications/adverse consequences?

    Generally no.

Break fees
  • Are break fees usually payable?

    Break fees are usually payable so long as there is an agreement that provides for a break fee.

    What are the main legal issues to be considered eg enforceability?

    In practice the PRC courts have the discretion to adjust a break fee in the event that they deem the break fee not to be a genuine estimate of the losses of the non breaching party.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.