What does it mean to have an agent in China?

One of the most common methods for Australian businesses seeking to sell and distribute products within China after selling directly from Australia, is to use agents or distributors located in-market. A key step for businesses looking to expand to China is therefore to establish the availability of a reliable and competent agent.

Agents act as representatives of the supplier, and rather than taking ownership of the supplier’s goods (as is the case with a distributor), generally receive a commissions based on sales value. The supplier receives orders from the buying agents and then fulfils the orders themselves.

An agent is different from a distributor in that a distributor takes ownership of the goods by buying them and reselling them in China, either to local retailers or consumers directly. In some cases, the distributor may sell to other wholesalers who then sell to local retailers or end users.

Choosing an agent

There are several competing factors for businesses deciding whether to choose an agent or distributor. Agents are generally a cheaper option and allow a greater degree of control over sales. However, there are often attached tax implications and no guarantee that the agent is not selling a competitor’s products as well.

Agents tend to be based in China and often represent numerous services or product lines. They may operate on an exclusive basis as the sole agent of a company’s goods or services in that market, or as one of a number of agents. It is important to make sure you have the role of your Chinese agent clearly defined and confirmed in the individual agreement (contract) you have with them. It cannot be assumed that they will take on all activities that an agent will generally perform in Australia.

An important practical step when doing a fact-finding mission to China is to meet with any prospective agents to determine their competency and reliability. In-country assistants can be engaged to connect you with the right agents. Establish close working business relationships, with a high degree of trust and regular communication. Pay particular attention to the nuances of Chinese business culture. One of the best ways of determining an agent’s reliability is by meeting them in their own market and observing their knowledge and presence in the market. Ask them for trade references and consider using a professional credit-checking agency to confirm their financial stability. 

Some key considerations to make before choosing an agent include:

• Do they have good networks and contacts? Do they have guanxi (relationships) with the right people?
• With is their experience in that sector? Do they have good knowledge and have they represented a similar product previously? Can they help with marketing?
• A well-established company with a good network of contacts may not be flexible or open to your ways of business.
• A young, energetic company will tend to be flexible, innovative and trying to prove its worth. The downside is it may have limited experience or contacts.

Many Chinese agents work for trading companies that are authorised to deal in a wide range of products. Some of the larger companies have offices in other countries, along with a network of offices and affiliates in China. However, large agents and distributors sometimes manage so many products that yours may not get enough attention. China’s size and regional diversity may also mean you need to engage several agents to cover different areas. For more on establishing contracts with agents, click here.

Prospective agents will likewise be looking to evaluate you as a business partner. It is thus important to ensure that your website and other primary marketing collateral is informative and attractive – not overloaded with information but cleanly laid out with interesting graphics. If applicable and possible, use customer or client endorsements and photographs to show your products or services. Make sure that contact details are easy to find and use – preferably a direct email with a photo of the staff member and have your website also accessible in Mandarin. Be aware of the national firewall in China and make sure your website is appropriate for it, ensuring that you don't rely on links to sites such as Facebook, Twitter or Youtube as these are not accessible in China. Some web domains and some email accounts are not permitted. 

Want to learn more? Explore our other China information categories or download the China Country Starter Pack.

Agency Law in China

Unlike the law in the United Kingdom, in the People’s Republic of China there is no specific statute dedicated to the rights and protections of commercial agents. However there are statutory provisions for agency in general.

Agent law in China is governed by Section 2 of Chapter 4 of the Civil Juristic Acts and Agency of the General Principles of the Civil Law of the People’s Republic of China (the “Legislation”) which came into effect on 1 January 1987. The Legislation is mandatory and both agents and principals are not allowed to contract out of it.

Definitions

Under the Legislation, agents include:

• Entrusted agents, whose power is derived from the principal;
• Statutory agents, whose power is prescribed by law; and
• Appointed agents, whose power is designated by a people’s court or the appointed unit.

Under Chinese law there is no statutory or common law definition of “commercial agent” or “principal”. Unlike English law, the Legislation does not make any distinction between agents whose actions are primary or secondary.

Termination

Under Chinese law, there is no statutory requirements in terms of notice period to be given or the form the notice of termination should take. On termination of the agency contract, an agent will not have any right to statutory damages or unpaid commission following the termination of the agency. Equally the agent will not have any non-contractual entitlements specifically relating to the agency agreement.

The ability of an agent to assign rights and duties to another person under the contract is governed by the Legislation. The agent needs to agree the assignment with his principal. Article 68 of the Legislation provides:

“if in the principal’s interests an entrusted agent needs to transfer the agency to another person, he shall first obtain the principal’s consent. If the principal’s consent is not obtained in advance, the matter shall be reported to him promptly after the transfer, and if the principal objects, the agent shall bear civil liability for acts of the transferee; however, an entrusted agency transferred in emergency circumstances in order to safeguard the principal’s interest shall be accepted”.

The Legislation allows an agent and principal to make a claim for breach of contract, without providing a remedy. However Chinese contract law will apply, and similar to English contract law, damages will be available to the injured party, subject to the duty to mitigate.

Both agent and principal can be held liable for their actions as follows:

• If the principal accepts the agent’s act which was performed with no authority, or beyond the scope of the authority given under the agency agreement, or after the agreement has expired then the principal will be held liable for the agents acts.
• If a principal is aware that an agent is carrying out an act under the agreement but fails to repudiate it, the principal’s consent shall be deemed to have been given.
• If the agent fails to perform its duties, and causes damage to the principal, the agent shall be held liable.
• If an agent colludes with a third party and harms the principal, both the agent and the third party shall be held jointly liable.
• If the agent carries out an activity which is known to be illegal, or if the principal is aware that the agent’s acts are illegal but fails to object to them, both the agent and principal shall be held jointly liable.

Choice of Law and Jurisdiction

Regardless of the parties agreeing that another jurisdiction is the proper law and forum of the contract, if the agency contract is carried out in China, Chinese law and jurisdiction will prevail, to govern the contract.

agentlaw.co.uk would like to thank Fairbairn Catley Low & Kong in Hong Kong for its contribution to this page.