GAL PITFALLS OF CROSS-BORDER SUPPLY CONTRACTS WITH ASIAN PARTNERS:

Business opportunities in dynamic Asian markets such as China, India, and Vietnam represent enormous potential for Czech companies. However, this potential is inextricably linked to significant legal risks that can turn a promising business opportunity into a costly failure. Enforceable contracts, payment problems, and intellectual property theft are threats that cannot be underestimated. 

Do you need advice on this topic? Contact ARROWS Law Firm at office@arws.cz or call +420 245 007 740. Your question will be answered by "Mgr. Vojtěch Sucharda," an expert on this topic.

 

The building blocks of every cross-border contract: Are you sure you have a solid foundation?

An international commercial contract is not just a formality, but a strategic tool for managing and distributing risk. The correct setting of its basic elements determines whether you will come out on top or bottom in a potential dispute. Underestimating these clauses, often hidden at the end of the document, is one of the most common and costly mistakes companies make.

The Vienna Convention (CISG) – A silent partner in your contract

Did you know that many of your international contracts are governed by a legal framework that you may not have consciously chosen? This silent partner is the United Nations Convention on Contracts for the International Sale of Goods (CISG), also known as the Vienna Convention. It is a set of uniform rules that automatically apply to most contracts for the sale of goods between parties based in different contracting states.

The Czech Republic, China, and Vietnam are signatories to this convention. This means that if your contract with a partner from one of these countries does not expressly choose another law, it will most likely be governed by the CISG. Its main advantage is its neutrality; it provides a balanced and internationally understandable standard that eliminates uncertainty and disputes about whether Czech or, for example, Chinese law should apply.

However, there is a fundamental difference when it comes to trade with India. India, like the United Kingdom, has not acceded to the Vienna Convention. This creates a fundamental legal difference. While a contract with a supplier in Shanghai falls under the predictable CISG regime, a contract with a partner in Mumbai is automatically governed by the complex rules of private international law, which will determine the applicable law. For companies with a diversified supply chain in Asia, this represents a hidden risk and inconsistency.

At ARROWS, we analyze whether it is more advantageous in your specific case to retain the application of the CISG or to exclude it by contract and choose a more suitable legal regime. This strategic choice, made at the very beginning, can determine the outcome of a future dispute.

Incoterms® 2020 – Who pays and who bears the risk?

Incoterms® are a set of eleven internationally recognized rules issued by the International Chamber of Commerce that precisely define the moment at which the costs and risks associated with the delivery of goods pass from the seller to the buyer. It is important to note that Incoterms® do not address the transfer of ownership or payment terms, but are essential for logistical and financial planning.

The following clauses are particularly important for trade with Asia:

• FOB (Free on Board): This clause is typical for maritime transport. The risk passes from the seller to the buyer when the goods are loaded onto the ship designated by the buyer at the port of shipment, for example in Shanghai or Haiphong.
• CIF (Cost, Insurance, and Freight): Similar to FOB, the risk passes at the port of shipment. However, the seller is also obliged to arrange and pay for insurance covering the buyer's risks during transport to the port of destination.
• DDP (Delivered Duty Paid): This clause represents the maximum obligation for the seller. The seller bears all costs and risks until the goods reach the destination in the buyer's country, including import customs clearance and payment of customs duties and taxes.8 This is the most convenient option for the buyer, but often also the most expensive, as the seller passes on all costs and risks to the price.

Choosing the right clause is a strategic financial decision. The EXW (Ex Works) clause may seem cost-effective at first glance, but it transfers all risks and costs associated with export from the country of origin to the buyer, which can be a logistical and administrative nightmare in Asia.

Our lawyers at ARROWS will not only help you choose the optimal Incoterms® 2020 clause, but will also ensure that it is correctly reflected in the rest of the contract, in particular in the payment terms and insurance, in order to avoid costly discrepancies.

Choice of law and arbitration clause – your first and most important line of defense

Two clauses, often overlooked as mere legal formalities at the end of a contract, are in fact your most important line of defense. These are the choice of law clause and the arbitration clause.

The choice of law clause allows the parties to choose the law of which country will govern their contract. This ensures legal certainty and predictability. Without this clause, in the event of a dispute, the court (or arbitrator) would have to go through a complex and costly process of determining the applicable law according to conflict of law rules, which in itself could be the subject of a protracted dispute.

An arbitration clause is a contractual agreement whereby the parties agree that any disputes will not be resolved before the state courts, but in private proceedings before arbitrators. As we will show below, in international trade with Asian partners, this clause is absolutely crucial for ensuring the enforceability of your rights.

These two clauses form the strategic basis of the entire contractual relationship. The wrong choice, such as agreeing on the jurisdiction of Czech courts in a contract with a Chinese company, may result in your winning judgment being virtually unenforceable in China, as Chinese courts, with few exceptions, do not recognize or enforce the decisions of foreign courts. The choice of international arbitration is therefore often not just an alternative, but the only realistic path to justice.

At ARROWS, we specialize in drafting bulletproof arbitration clauses that refer to reputable international arbitration institutions. We ensure that your rights are enforceable not only on paper but also in practice, anywhere in the world, thanks to our ARROWS International network.

Specifics of Asian markets: What do you need to know before signing in Beijing, Delhi, or Hanoi?

A universal "one-size-fits-all" approach does not work in Asia. Each market has its own specific characteristics – cultural, administrative and legal. Knowledge of these differences is essential to minimize risks and successfully close a deal.

China – The power of the stamp, the art of guanxi, and the threat of brand theft

Business in China is governed by three unwritten but all the more important rules, ignorance of which can be fatal.

The first is the power of the company stamp. In the Chinese legal and business environment, the imprint of an official round red stamp ("chop") has greater legal weight than the signature of a statutory body. A document bearing this stamp is binding on the company, even if it is used by an unauthorized person. Whoever physically controls the stamp effectively controls the company's legal obligations.

The second pillar is the concept of guanxi – a network of personal relationships, connections, and mutual obligations. Building good relationships is essential for smooth business operations. However, relying solely on good guanxi and underestimating the importance of high-quality contractual documentation is one of the most common mistakes foreign companies make in China.

The third and most dangerous specific feature is intellectual property protection. China has a strict "first-to-file" principle. If you do not register your trademark (including its phonetic transcription into Chinese characters), patents, and industrial designs before entering the market, someone else will do it. This so-called "trademark squatting" can legally block the import of your own products or force you to buy back the rights to your own brand at a high cost.

The danger lies in the interconnection of these three factors. Even a trustworthy partner with good guanxi can get into financial trouble and misuse the company stamp to sign over your newly registered trademarks to a third party. By the time you discover the problem, it may be too late. 

ARROWS not only prepares bilingual contracts for its clients, but also provides preventive registration of intellectual property in China. We also help draft internal guidelines for the use of company seals so that you can be sure that this powerful tool is under your full control.

India and Vietnam – Different legal worlds and the role of bilateral agreements

India differs significantly from China. Its legal system is based on British common law, and intellectual property protection requires separate registration for patents, trademarks, and industrial designs. Establishing a commercial presence is also complex, with forms such as joint ventures and liaison offices subject to strict rules and restrictions.

Vietnam is another unique environment. Although its legal system is constantly evolving and approaching international standards, specific challenges remain. However, there is a hidden advantage for Czech companies. A bilateral agreement on legal assistance in civil, family, and criminal matters (Decree No. 98/1984 Coll.) was concluded between the former Czechoslovakia and Vietnam, which is still valid for the Czech Republic.

In certain cases, this agreement may offer an alternative or supplementary route for resolving legal issues, such as the service of court documents or the recognition of certain types of decisions. Although the New York Convention is the primary instrument for the enforcement of arbitral awards, knowledge and ability to use these specific bilateral agreements is a sign of true expertise and can provide a tactical advantage.

Thanks to our in-depth knowledge of international treaties, including specific agreements concluded by the Czech Republic, ARROWS is able to identify and utilize the most effective legal routes in a given country for our clients. Our international network, ARROWS International, allows us to handle cases with an international element on a daily basis and apply this knowledge in practice.

Legal and commercial risks when negotiating contracts with Asian partners

Risks to be addressed and potential problems and sanctions	How ARROWS can help
"Trademark Squatting" in China: Loss of rights to your own brand, the need for costly rebranding, import bans, and litigation over the invalidity of registration.	Preparation and filing of trademark and patent applications in China prior to market entry (first-to-file principle).
Misunderstanding of the cultural context: Signing of unfavorable contracts due to indirect communication, damage to business relationships due to ignorance of guanxi and the principle of "saving face".	Legal consultations and specialized training for management on the cultural and business specifics of the given market.
Negotiating with an unauthorized person: Signing a contract with a person who does not have the authority to act on behalf of the company, resulting in the contract being invalid and potential fraud.	Performing due diligence on partners, verifying data in commercial registers, and checking authorizations to act on behalf of the company. Unfavorable Incoterms® clause: Assumption of unexpected costs (e.g., for export formalities) and liability for damage to goods at an inopportune moment.
Unfavorable Incoterms® clause: Assumption of unexpected costs (e.g., for export formalities) and liability for damage to goods at an inopportune moment.	Analysis of the business case and recommendation of the optimal Incoterms® 2020 clause that best suits your needs.
Absence of a clear choice of law: Legal uncertainty, costly and lengthy disputes over which legal system should govern the dispute, procedural disadvantages.	Preparation and enforcement of a clause on the choice of law and jurisdiction of the arbitral tribunal, which provides certainty and predictability.
Weak intellectual property protection: Misuse of production methods for manufacturing for third parties, product copying, loss of competitive advantage and market share.	Drafting contracts with robust IP protection, including provisions on ownership of tools and know-how and penalties for infringement.

Securing payments: How to get paid on time and securely?

A key issue for every exporter is how to ensure that they actually get paid for the goods they deliver. Relying on payment after delivery is extremely risky in international trade with new partners. The most effective tool for minimizing payment risk is a documentary letter of credit.

Documentary letter of credit (L/C) – Your financial shield

A documentary letter of credit (L/C) is an irrevocable written commitment by a bank to pay the seller (exporter) the agreed amount if they submit the precisely defined documents proving that the contractual conditions have been met in a timely manner.

The main advantage is that the risk of non-payment is transferred from an unknown business partner to a reputable banking institution.

The process works as follows:

1. The buyer (importer) asks their bank to open a letter of credit in favor of the seller.
2. The buyer's bank (issuing bank) sends the letter of credit to the seller's bank (advising bank).
3. The seller ships the goods and completes the documents required in the letter of credit (e.g., commercial invoice, transport document – bill of lading, insurance policy, certificate of origin).
4. The seller submits these documents to their bank.
5. The bank checks whether the documents comply with the terms of the letter of credit. If so, it pays the seller.

There are two basic types of letters of credit, the difference between which is crucial for exporters:

• Unconfirmed (unconfirmed) letter of credit: The seller's bank only notifies ("advises") of the existence of the letter of credit, but does not add its own payment commitment. Payment therefore still depends on the buyer's bank and the political and economic stability of their country.
• Confirmed letter of credit: The seller's bank (confirming bank) adds its own irrevocable commitment to pay to the issuing bank's commitment. This is the gold standard for the seller, as it protects them from the risk of the buyer's bank defaulting and from risks associated with the importer's country.

However, a cleverly designed letter of credit is not only used to secure payment. It can also be a powerful tool for quality assurance. If you include a quality certificate issued by an independent inspection agency at the port of loading as a mandatory document in the terms of the letter of credit, you are forcing the supplier to meet quality standards before the goods are shipped. Without this certificate, the bank will not pay the supplier. 

Payment of 30% in advance and 70% against a copy of the bill of lading is common but risky. At ARROWS, we help clients structure the terms of documentary letters of credit to protect not only their money but also the quality of the goods delivered. We advise on when to insist on a confirmed letter of credit and what documents to require for maximum security.

Risks associated with payment transactions and delivery quality

Risks to be addressed and potential problems and penalties	How ARROWS can help
Non-payment for delivered goods: Significant financial losses, negative impact on cash flow, costs of debt collection abroad.	Preparation of contracts with payment terms in the form of a confirmed documentary letter of credit, which minimizes the risk of non-payment.
Payment for poor-quality goods: Costs of complaints, returns or disposal of goods, damage to reputation with your own customers, loss of business partners.	Legal consultation and setting of letter of credit terms requiring the submission of a quality certificate from an independent inspector.
Delayed delivery after advance payment: Disruption of production plans, need to find alternative solutions, contractual penalties from your own customers, capital tied up in advance payments.	Drafting of contracts with clearly defined delivery dates and significant contractual penalties for delays.
Disputes over documents blocking payment from L/C: Blocking of payment due to formal errors in documents, costly and lengthy negotiations with banks, legal uncertainty.	Review and preparation of letter of credit terms to minimize formal discrepancies and professional training for employees.
Fraudulent supplier (fictitious company): Loss of entire payment (advance payment) without delivery of any goods, inability to recover damages.	Comprehensive due diligence of the supplier prior to signing the contract and setting up secure payment mechanisms.
Currency risk: Losses from unfavorable exchange rate developments between the conclusion of the contract and the date of payment, reduction in profit margin.	Legal advice on negotiating currency clauses in the contract and connecting with financial experts to secure the exchange rate.

When things go wrong: How to effectively enforce your rights in Asia?

Even the best-prepared contract can be breached. At such a moment, it is crucial to have an effective dispute resolution mechanism in place. The choice between state courts and international arbitration is absolutely crucial here.

Foreign court vs. international arbitration – Why is arbitration the smarter choice?

Litigation in your Asian partner's country is a path fraught with pitfalls. It is often lengthy, costly, conducted in the local language, and governed by unfamiliar procedural rules. In addition, there is a risk of a lack of neutrality. An even worse option is to litigate in the Czech Republic. Even if you obtain a final judgment from a Czech court, its enforcement in China or Vietnam is almost impossible.

International arbitration is clearly the smarter choice for international trade. Its main advantages include:

• Neutrality: The parties can choose a neutral venue for the proceedings (e.g., Hong Kong, Singapore, Vienna) and participate in the selection of arbitrators.
• Expertise: Arbitrators are often leading experts in their field (e.g., international trade, construction), which guarantees higher quality decisions.
• Speed and flexibility: Proceedings are usually single-instance, faster and less formal than court proceedings.
• Confidentiality: The proceedings are confidential, protecting your trade secrets and reputation.
• Enforceability: This is a key point. Thanks to an international convention, arbitral awards are easily enforceable in more than 160 countries around the world.

The fundamental difference between court and arbitration in an international context is the so-called "enforcement gap." A victory in a Czech court against a Chinese company is often only a Pyrrhic victory—you get a piece of paper that is worthless in China.

On the other hand, winning in international arbitration gives you an arbitral award that Chinese courts are obliged to enforce. Representation in foreign courts is uncertain and costly. At ARROWS, we therefore specialize in international arbitration, which gives our clients a real chance of enforcing their claims. We have successfully resolved a number of cross-border disputes for our clients, which include more than 150 joint-stock companies and 250 limited liability companies.

The New York Convention and leading arbitration centers in Asia

The legal basis for the global enforceability of arbitral awards is the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958. This convention has been ratified by the Czech Republic, China, and Vietnam, and obliges their courts to recognize and enforce awards issued in other contracting states with a minimum of formalities.

When resolving disputes with Asian partners, it is strategic to choose one of the renowned Asian arbitration centers in the arbitration clause. Among the absolute leaders are the Hong Kong International Arbitration Center (HKIAC) and the Singapore International Arbitration Center (SIAC). Both institutions offer neutral, efficient, and highly professional dispute management.

However, HKIAC offers one unique strategic advantage that you will not find elsewhere. This is the "Interim Measures Arrangement," an agreement on the mutual provision of interim measures with mainland China. In practice, this means that if you are conducting arbitration at HKIAC, you can ask a court in mainland China to freeze your Chinese partner's assets (e.g., bank accounts, real estate) before the arbitration is completed. 

This ensures that, if you win, there will be something to satisfy your claim. It is an extremely powerful tool that can force the other party to resolve the dispute quickly and amicably. Our experts at ARROWS will not only draft the optimal arbitration clause, but also advise you on how to strategically use tools such as the HKIAC's "Interim Measures Arrangement." 

Thanks to our ARROWS International network and practical experience with cross-border disputes, we can effectively secure the debtor's assets even before the final arbitration award is issued.

Risks in dispute resolution and debt collection

Risks to be addressed and potential problems and sanctions	How ARROWS can help
Enforceability of judgments in Asia: Pyrrhic victory – a valid but worthless judgment of a Czech court, loss of all court costs.	Preparation of an arbitration clause in a contract that ensures automatic enforcement of the award in China, Vietnam, and other countries under the New York Convention.
Loss of control over the proceedings: Necessity to hire expensive local lawyers, proceedings in a foreign language and according to unfamiliar procedural rules, risk of bias on the part of local courts.	Representation in international arbitration conducted in English before neutral and professionally competent arbitrators.
Disappearance of the debtor's assets: The debtor transfers all its assets before the end of the dispute, so that even a winning judgment is unenforceable due to lack of assets.	Use of the unique "Interim Measures Arrangement" at HKIAC to secure (freeze) the debtor's assets in China even before the end of the proceedings.
High costs of litigation: The costs of foreign court proceedings, including translations, interpreters, and local attorneys, can easily exceed the value of the dispute.	Preparation and review of contracts to prevent disputes and, if they arise, to conduct them effectively in arbitration.
Breach of confidentiality regarding the dispute: Public court proceedings can damage a company's reputation and reveal sensitive business data and secrets.	Conducting disputes in private and confidential arbitration proceedings that protect your business interests.
Lengthy proceedings and appeals: Years of litigation, including multiple appeals, lead to legal uncertainty and block cash flow.	Use single-instance and expedited proceedings under the rules of renowned arbitration centers for quick dispute resolution.

With ARROWS, you are stronger in the international arena

Success in Asian markets requires a dual strategy: a deep understanding of the local business culture and uncompromising legal protection. Underestimating either of these pillars is a recipe for failure. From the initial draft of a contract to the eventual enforcement of a claim, every step is an opportunity to gain an advantage or fall into a costly trap.

At ARROWS, we understand the complexity of international trade. Our experience from providing long-term legal services to more than 150 joint-stock companies, 250 limited liability companies, and dozens of public administration entities gives us unique insight into our clients' needs. Whether you need to draft internal guidelines for handling stamps in China, prepare a watertight contract that will protect you from fines, or represent you in international arbitration, our team is at your disposal.

We provide professional training for management and employees to help you avoid risks and take care of all the paperwork to get the licenses and permits you need. Thanks to our extensive network of clients and partners within ARROWS International, we can not only protect your rights, but also connect you with interesting business and investment opportunities. We'd love to hear about your business idea.