SALE CONTRACT OR PROFORMA INVOICE

Problem with Proforma Invoice: Many foreign purchasers only sign a proforma invoice with a Chinese Supplier, when they want to start litigation or arbitration in China, they find that the proforma invoice is not considered as a contract, only evidence for litigation in China.

A Proforma invoice just an estimated invoice sent by a seller to a buyer in advance of a shipment or delivery of goods. It contains only the kind and quantity of goods, their value, and other important information such as weight and transportation charges. It is the first draft of the exporter’s bill, provided to the importer prior to shipment of the merchandise. On the basis of this information, the importer will decide whether he wants to confirm an order or not.

Although the proforma invoice can be considered some kind of agreement it does not have the same legal protection as a sales agreement. It is merely a document with objective information on the goods and the delivery, in Chinese law it does not contain an enforceable legal obligation to either party. Proforma invoices are formal offers to sell. When the buyers agree with all the terms and conditions of the proforma invoice the result is a purchase order sent by the buyer, which finally leads to a sales contract that is, if the buyer and the exporter agree to have formal sales contracts. Until there however is a sales contract, both buyer and exporter do not have any legal action in case a discrepancy occurs before, during or after the shipment.

Before China rejoined the WTO, only Chinese enterprises that have export/import rights or have been granted “ foreign trade rights” by MOFTEC may enter into processing contracts with foreign enterprises, therefore they sometimes tend to work with the proforma invoice, which is not bound by restrictions. That is why in China these kinds of proforma invoices are not considered of much importance.

In many countries, such as the United States, cases in which a purchased order, proforma invoice, or order acknowledgment may serve in place of a formal sales contract. A lot of Foreigners, therefore, think a proforma invoice is a legal agreement, but in China, this is not the case. Export/import might not always be possible because these Chinese companies don’t have a license to export/import which results in products not being shipped. Foreigners often think this constitutes a breach of contract, but in China, a proforma invoice is not considered a sales contract and this means foreigners do not have legal grounds for breach of contract in China. In China a written contract (preferably in Chinese) with the Chinese supplier is required in case any dispute occurs, a proforma invoice is not enough to prove there are mutual obligations between both parties which should imply a contract.

The consequences of solely having a proforma invoice and not having a sales agreement in China is that a pro forma invoice will not be considered enough evidence but merely additional evidence for the existence of an (export/import) sales agreement, which means it will not be considered of equal importance as a sales agreement. And this means one will not be reimbursed in case the products are faulty or something goes wrong with the transaction.

By Simon Shang & Partners, China
Law Firm Website: www.pcwoo.sh.cn/EN/index.aspx