China: Legal Issues in Contracts for Sale of Large-sized Complete Set Equipment (Part I of II)

Last Updated: 16 October 2011
Article by Zhang Shouzhi, Zhang Mei and Liu Xiang

As the third-largest trading nation in the world, China's import and export volume increases significantly year by year, among which, certain percentage of transactions relates to import and export of large-sized complete set equipment. Compared with common commodity trading, large-sized complete set equipment trading are much more complicated, involving commercial, technical, legal and financial issues relating to not only commodity trade but also intellectual property protection and services. In addition, large-sized complete set equipment are normally expensive amounting to tens and even hundreds of millions of dollars and such equipment can be crucial for the production and business operation of an enterprise. Thus, any disputes if not resolved successfully may lead serious consequences.

I. Contract Structure

The sale of large-sized complete set equipment is a hybrid category of trade covering transactions in goods, technology and services. The transactions include not only combining many types of complicated machinery, but also tracking patents, other forms of intellectual property, materials, and labor. Therefore, the transaction generally cannot be covered by a single contract. Instead, the documents that can cover the whole transaction usually consist of a principal contract, several accessory contracts, and numerous appendixes.

A. Principal Contract

The principal contract stipulates the major terms and conditions of the transaction and the main rights and obligations of both parties. Generally, it includes clauses regarding equipment model, performance, price, payment methods, transportation, packing, delivery and acceptance, quality guarantees, liability for breach of contract, force majeure, dispute resolution, and governing law. In contrast with a contract for a sale of goods, almost all such clauses must be interpreted in line with the accessory contracts and the appendixes.

B. Technical Appendixes

Similar to common contracts for the sale of equipment, the primary appendixes usually set out the performance, specifications and technical indices of the concerned equipment. Such technical appendixes are essentially an elaboration of the seller's obligations of quality guarantee. The technical standards or indices stipulated in such appendixes are the crucial criteria to determine whether the quality of the delivered equipment complies with the requirements stated in the contract and whether the seller's performance is in breach of contract.

However, at the drafting stage, parties often attach great importance to the main terms of the principal contract such as payment, delivery, and acceptance, and fail to give enough attention to the technical appendixes. Especially when the equipment comprises a number of individual parts and the technical indices of the individual parts are massive and complicated, the parties may not carefully examine the technical indices one by one. Such omissions may lead to vague contract terms or conflicting terms among the appendixes and the principal contract are used. If the parties fail to carefully examine and define the terms in the technical appendixes when concluding the contract, it may potentially cause complications at the stage of post-delivery inspection. For example, if the specifications for equipment components in the technical appendixes are unclear, a seller might set a high price in the contract based on expensive large-size accessories but deliver the cheapest small-size accessories which are more suitable for the buyer's purpose. The buyer, although having paid excessively, cannot raise any objections during the inspection due to the absence of a criterion for such specifications. In such case the seller does not bear any liability for breach of the promise or guarantee about the equipment performance.

C. Equipment Design

Usually large-sized complete set equipment are tailored and customized to the buyer's specific requirements. The seller sometimes manufactures the equipment based on the blueprint and technical indices provided by the buyer. At times the seller may also be engaged in designing and manufacturing the equipment. At other times the seller may manufacture the equipment based on the designs of a third party appointed by the buyer. Under these circumstances, the technical appendixes will contain the blueprint and the design methods provided or confirmed by the buyer, or list the buyer's production scale, the final product specifications and the productivity requirements. If the equipment manufactured through the above process fails to function, fails to produce acceptable products, or fails to satisfy the productivity required by the buyer, such failures might be the result of design defects.

The explicit agreement in the contract and its appendixes and the interpretations of the relevant clauses form the primary basis to determine whether there are design defects, whether the equipment manufacturing complies with the design, and which party shall be responsible for the equipment's malfunction. If the parties fail to agree upon the design defects and the consequent liabilities for breach of contract or such agreements are unclear, it will be complicated and difficult to allocate liability between the parties.

D. Foundation Project

A complete set of large-size equipment is usually an independent system and requires a foundation project to provide space, power, and raw materials for the operation. Therefore, the construction requirements for the foundation project are often covered by one of the technical appendixes.

Because the equipment operation takes place at the buyer's plant, in most cases, the foundation project is constructed by the buyer or an entrusted third party, while the seller is responsible for providing the relevant parameters, such as the size of a platform where the equipment is positioned, the connection for water and electricity, and pressure level requirements. In practice, if the equipment malfunctions or fails to meet the performance criteria agreed in the contract, which often leads to disputes, one of the seller's common defenses is that the foundation project fails to meet the stipulated standards, such as unstable electric pressure, impurity of water, etc. If the Indices of the foundation project are not expressly agreed in the contract, it is more difficult to determine whether there are defects in the equipment and which party shall assume liability for such defects.

In addition, the construction progress of the foundation project directly affects both parties' essential rights and obligations such as the delivery and acceptance of the equipment and the starting date of the warranty period or claim period. If the foundation project is not completed on schedule, the buyer will incur significant losses. In such case, if the foundation project is entrusted to a third party and the consequent losses incurred by the buyer exceed the reasonable amount the third party is expected to foresee during the construction, the third party shall not bear liability for the excessive amount. However, it is obviously unfair to demand the non-defaulting buyer to bear the excessive amount. Therefore, in these circumstances, if the parties have not agreed on the liabilities, the dispute focuses on the extent to which the third party shall indemnify the buyer against the losses resulting from the construction delay.

E. Financial Instruments

Since the transactions involve huge amount of funds, numerous delivery batches, and long periods of delivery time, payment is usually made in installments instead of one-off payment. To minimize risk, the sellers therefore often require the buyer to provide proof of credit, bank demand guarantees or other forms of security, which can align with the installment payments and also ensure the payments will be made on schedule. On the other hand, to ensure the seller's performance of the contract obligations, the buyer may also require the seller to provide necessary security in the form of a standby letter of credit or bank demand guarantee. If the parties provide a performance guarantee, the relevant credit documents and security contracts will become part of the appendixes or part of the principal contract. When the principal contract is signed, in most cases, the format of a standby letter of credit and/or bank demand guarantee will be listed in an appendix to the principal contract.

Although international rules such as the ISP981and URDG2 have been widely adopted, due to different financial systems, legal rules and practices among various countries, one party's security format may not be accepted by the other party's bank. In some cases, the security will not take effect before being approved or registered. Absent the parties' rigorous review of the contract, during the performance of the contract, the parties' security interests may become difficult to realize, and losses may be incurred by the secured party. As to the party providing security, it will be deemed a default if the party providing security fails to provide a valid bank demand guarantee in the format listed in the contract appendix. As to the secured party, if the demand guarantee provided by the other party is rejected in the secured party's home country because of the non-conforming format, the secured party will have to pay extra costs and overcome more obstacles in order to enforce its security interest. Therefore, in finalizing a contract, in order to avoid future disputes, the parties should consult their local banks and relevant authorities, request approval of the format and validity of demand guarantees, and discuss with each other and agree upon a final format mutually acceptable to either party.

F. Technology License, Labor Output, and Training

The operation of large-sized complete set equipment typically requires specific technical personnel. Therefore, contracts for service (i.e. labor output) and for the training of technical personnel are usually attached as appendixes to the sale contracts. Moreover, the equipment may involve patent, trademark, Know-How and other valuable intellectual property rights, so intellectual property licensing contracts and confidentiality agreements are also usually attached as appendixes.

Such appendixes are directly related to the daily use and operation of the equipment and dictate whether the transaction can be successfully consummated. Therefore, the parties shall carefully review such appendixes to determine whether they are clear and adequate enough to allow performance.

(This article was originally written in Chinese, and the English version is a translation.)

Editor's Note: Part II of Legal Issues in Contracts for Sale of Large-sized Complete Set Equipment will be published in the next issue of China Bulletin.


1 The International Standby Practices , No.590 publication by the International Chamber of Commerce, took into effect on January 1, 1999.
2The Uniform Rules for Demand Guarantees , is No.458 publication by the International Chamber of Commerce.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.