Meaning
Statutory provisions under Chinese civil law govern the direct binding effect of contracts entered into by an agent with a third party in their own name. Under prc civil code article 925, a contract concluded by an intermediary with a domestic manufacturer directly binds the foreign principal if the manufacturer knew of the agency relationship at the time of contracting. This rule creates a direct contractual link between the foreign buyer and the Chinese factory, bypassing the sourcing agent’s corporate structure.
It applies unless there is explicit evidence that the contract binds only the agent and the factory.
Evidentiary Requirement
Clear proof of the manufacturer’s knowledge of the agency relationship must exist at the time the transaction is executed. This knowledge can be demonstrated through email correspondence and purchase orders containing the principal’s brand. If the factory cannot be proven to have known of the principal, the contract remains a bilateral agreement between the agent and the supplier under different rules.
Foreign buyers must therefore ensure that their identity is clearly disclosed in communications.
Transactional Impact
Direct rights of action arise for the foreign principal against the factory for product defects or late deliveries. If the supplier breaches the agreement, the principal can sue them directly in a Chinese court without relying on the intermediary. Conversely, the factory can demand payment directly from the principal if the intermediary defaults on their payment obligations.
This dual liability alters the risk profile of indirect procurement operations.
Risk Allocation
Legal departments must draft sourcing agreements with clear clauses regarding the intended liability of the parties. If the foreign buyer wishes to remain insulated from direct claims by the Chinese factory, the intermediary contract must state that the agent acts solely for itself. This planning prevents the unintended application of the statutory rule.
