Only the Factory Signed Your Non-Circumvention Letter. Is It Binding in China?

You send a Chinese factory a one-page letter that says, in effect, don't deal with my customers behind my back. The factory stamps it and emails back a scan. You file it and get on with the first order. Years later, the factory says the letter was never an agreement, because you never signed it.

A Shanghai trading company that sells Chinese-made goods to large overseas retailers used one such template with its suppliers. Two of those suppliers ended up in court with it, five years apart, and the courts reached different results. I keep both cases in mind when I write non-circumvention terms into a China NNN.

What did the factory sign in the Shanghai case?

On 24 March 2016, at 2:06 pm, the trading company emailed a glass-craft maker in Baoying, Jiangsu, the details of a first purchase order and a blank "agency agreement". The agreement named the trading company's overseas customers and said the trading company would handle all of their business. The factory was to promise that, without the trading company's consent, it would not quote to or trade with those customers, directly or indirectly. If it did, it would pay compensation equal to the value of the orders it obtained.

At 4:47 pm the factory emailed back a scan. It had filled in its name and a start date, 24 March 2016, and stamped the page. The trading company never stamped its side.

Over the next three years, from March 2016 to March 2019, the two signed more than 30 purchase contracts. In 2021 the factory sued for a declaration that the agency agreement had never been formed.

Why wasn't the letter a contract?

The Jing'an court agreed with the factory on that point, for four reasons:

• It had none of the basic terms. There was no subject matter, quantity, quality or price.
• Only one side had obligations. The letter imposed nothing on the trading company.
• There was no offer and acceptance. The blank the trading company sent was not stamped and gave no sign that it would bind the sender once accepted, so it was not an offer. The factory's reply filled in and changed the blank, so it was not an acceptance either.
• It was not an agency. Despite its title, it said nothing about the scope of any agency, authority or fees. What the parties actually had was a series of sales contracts.

Why did it still bind the factory?

The court then asked what else the letter could be, and held that it was a one-sided legal act, which Chinese law calls a unilateral juristic act. A legal act can rest on one party's declaration alone. The stamped letter recorded the factory's own promise, and that promise took effect when it reached the trading company.

The court found nothing that made the promise invalid. It also rejected the argument that a promise binding only the factory was unfair. The factory had signed it to steady a new relationship, and it went on to sign more than 30 contracts over three years. The court said the letter and the business that followed were closely connected.

So the court dismissed the factory's claim. It did not decide whether the factory had ever broken the promise, or what it would owe if it had. Nobody asked it to.

The case was decided under the old Contract Law and General Principles of Civil Law, because the letter dates from 2016. The same rules now sit in the Civil Code. A legal act can be formed by one party's declaration (art. 134). A declaration not made face to face takes effect when it reaches the other party. An email takes effect when it enters the recipient's designated system, or when the recipient knows or should know that it has arrived (art. 137).

How long did the promise last?

The factory had written in a start date and nothing else. The court relied on fairness and on the letter's opening words, "the parties have reached an intention to cooperate". The promise ran until the cooperation ended. Because every order had its own contract, when that happened would depend on how the parties were still contracting and performing.

The Civil Code allows a legal act to carry a start or end date (art. 160), but it does not tell a court what to do when the end date is missing. In 2023, in a Zhongshan non-circumvention case, a court faced a similar gap and read the promise as valid for a reasonable period. Two courts filled the same gap in two different ways. Neither is a rule you would want to rely on.

What happened when the same template reached a Ningbo court?

On 28 April 2015 the same trading company emailed the same blank to an import-export company in Ningbo. On 8 May the Ningbo company sent back a scan. It had filled in its details and a start date of 7 May 2015, stamped the page and had its legal representative sign it. It had also added a line saying the agreement was valid from 7 May 2015 to 6 May 2016. It asked whether the trading company wanted the original by courier.

Twelve minutes later the trading company replied. It said it had received the scan and asked for the original too, then moved on to samples and prices. It never stamped or returned the agreement.

The two companies kept discussing a smoke detector, made by a third factory, until October 2015. On 1 March 2016 the Ningbo company signed directly with the German company of one of the listed customers, for 24,000 sets of the same product at EUR 445,200. The trading company sued for EUR 445,200, the "equal value" that its template promised.

In September 2016 the Ningbo Jiangbei court held that the agreement had never been formed. It told the trading company so at trial. The trading company insisted the agreement was valid and would not change its claim or state any loss it had suffered while the deal was being negotiated, so the court dismissed the claim in full.

The published judgment states that conclusion but not the reasoning behind it. The Shanghai judgment later summarised it. The trading company had not stamped and returned the agreement in time, so there was no acceptance, and the agreement lacked terms such as subject matter, quantity, price, fees and period. The Ningbo company had argued at trial that its added validity period turned its version into a new offer.

The trading company appealed, and the parties settled. According to the Shanghai judgment, on 6 March 2017 the Ningbo company agreed to pay RMB 150,000.

The direct deal was signed on 1 March 2016, inside the validity period the Ningbo company had written in itself. The claim still failed, because the court never reached the question of breach.

The Civil Code now spells out both rules that the Ningbo company relied on. A reply that changes the period of performance is a material change, and it is treated as a new offer (art. 488). A contract in written form is formed when both parties sign or stamp it, or when one party has performed its main obligation and the other has accepted that performance (art. 490).

Why did the two courts reach different results?

They answered different questions. Ningbo asked whether the parties had formed a contract, and the trading company would not let it go further. Shanghai, deciding a claim that the factory brought, asked what else the letter could be.

Two other differences may have mattered. The Ningbo company added its own validity period, which made its version a new offer that the trading company never accepted in writing. And in Shanghai the factory went on to sign more than 30 contracts, which the court used to find the promise fair. I can't tell you which of these points decided the Ningbo case, because its reasoning was not published.

What don't these judgments decide?

• Neither awarded anything for circumvention. Shanghai only refused the factory's request to declare the letter never formed, and Ningbo dismissed the claim.
• Both are local decisions. The Shanghai judgment is a first-instance judgment, and no appeal appears in the published records. The Ningbo case ended in a settlement on appeal, and only its amount is known. Chinese courts are not bound by earlier decisions.
• The compensation term was not tested. A promise to pay the full value of the diverted orders is open to reduction if a party asks the court to cut it (Civil Code art. 585). In the Zhongshan case the court cut an agreed RMB 300,000 to RMB 100,000.
• Both disputes were between Chinese companies. If you are an overseas buyer signing directly with a factory, governing law and forum add questions of their own.

What should your non-circumvention clause say?

1. Both sides sign the final text. Stamp and sign your side too. If the factory changes anything, even a date, reply in writing to accept or reject the change, and sign the version you agree. A reply that says "received" is not an acceptance.
2. Put the promise inside a signed agreement. A clause in your NNN or supply agreement, with obligations on both sides, is a contract. You don't want to depend on a court calling a letter a one-sided promise.
3. Name the customers. List them as specific companies, and cover dealing through affiliates, other companies and individuals. Say it doesn't matter who made the first contact. That is the point the Zhongshan factory argued.
4. Say how long it lasts. For example, while the parties cooperate and for a fixed number of months after the last delivery. Don't leave it to a court to decide when the cooperation ended.
5. Tie the compensation to a loss you can show. The margin you would have earned on the diverted orders is easier to defend than the full order value.
6. Keep the email trail. The timestamps of when the stamped scan was sent and received were part of the evidence in both cases.

Signing and term. This undertaking takes effect when both parties have signed it and affixed their company chops. Any change proposed by either party binds only when both parties have signed the amended text. The undertaking applies while the parties cooperate and for [12] months after the last delivery under any purchase order between them.

I draft and review NNN agreements with Chinese factories, including the non-circumvention terms →