Advisory Case on the Structure of an Overseas Equipment Purchase Agreement

1. The Client's Situation

The client intended to purchase equipment substantively from a Chinese company, but under the contract the seller was set as a Hong Kong company. As a result, the contracting party and the entity actually performing the obligations were separated, creating the risk that if the Hong Kong company received only the down payment and failed to perform its obligations, it would be difficult to hold the Chinese company directly liable. There were also concerns about international arbitration procedures and the enforceability of awards in the event of a dispute.

Your Legal Team reviewed the risks inherent in the contract structure and proposed measures to bring the Chinese company in as a contracting party, or at minimum to make it bear a joint guarantee obligation. Specifically, we devised the alternatives of (i) concluding a tripartite contract in which the client, the Hong Kong company, and the Chinese company are all parties, and (ii) where unavoidable, securing a "performance guarantee" from the Chinese company. We also provided concrete example clauses, including adding a provision to the existing purchase agreement stating that "the Chinese company jointly and severally guarantees all obligations of the Hong Kong company," and recording the Chinese company's information at the end of the contract to obtain a three-party signature.

The client was able to minimize the uncertainty inherent in the contract structure and to establish a legal mechanism to directly bind the Chinese company with respect to obligations for equipment modification, delivery, and quality assurance. Through this, the client secured the ability to respond to the loss of the down payment or any failure to perform obligations.