Investigation on fulfillment ability of other side should be conducted before contract signing

To minimize business risk, reduce bad debt losses and control trade risk while facilitating economic activities; to gain inside credit information for companies all over the world while conducting situation of the other party, such as business transactions; to promote the healthy development of capital markets and reduce investment risks in China; to function as important references for government to supervise corporate undertakings; before making a deal with a first-time customer or a business partner, some necessary approaches and measures should be taken to ensure the healthy and steady development of the market transaction. To sign a contract, especially an international contract, is a legal activity. You should not do business with either a "portfolio company" taking fictitious transactions and unable to fulfill contract or a legal company/businessman not ensured to fulfill contract. Thelegal qualification, capital and credit of the other party at the moment should be investigated and verified. Its ability to sign and fulfill a contract should be examined according to laws of his country. Relative data include the name, business scope of the enterprise and the details of the legal person, such as name, qualification of the legal person, business license, registered country, registered capital, property and liabilities, opening bank and commercial credit, certificate approved by the government. . The due diligence situation of foreign businessmen constitutes the prerequisite and basis of total transaction. The importance of investigation on fulfillment ability of the other party is illustrated by the following claim case brought to the court by a certain materials company against certain foreign construction company.

1. Case

On July 9 1996, a certain materials company (abbreviated to A) signed a construction contract on office building with a certain foreign construction company (abbreviated to B). On November 20, the first stage of construction was completed and A sued B because of their conflicts about construction quality.

It was stated in the indictment that according to the contract, this project included a construction space of 1653 squares meters with a budget of 1.52 million Yuan. Its construction was carried out in conformance with working drawing designed by the city's Engineering Design Institution. According to the blueprint, the construction should have the ability to resist an earthquake of Mw 8. It was planned to start the construction in August 1996 and complete totally for use on August 1, 1997. B started the construction on time and completed the first stage in November of the same year. During the process of checking, A found that all crosses of concrete and beam had a range of 10-15 cm unable to bear shocks from an earthquake. In addition, materials used in base didn't conform to requirement, and a 2 cm deviation appeared in some part of bricks in walls. Therefore, A required B to rebuild the construction according to the quality standards, but B believed the construction conformed to the standards in general. Then there appeared conflicts.

After the court received the petition, A entrusted Steele to undertake a due diligence investigation about B. It turned out that although B was registered in Hong Kong, its registered capital is just HK$ 5000. In fact the company B has no the Design Qualification Certificate as the relevant law regulated. After getting the information , A demanded an immediate termination of the contract, and the information helped the company A succeeded in the lawsuit. Fortunately, A got all of the repayment. Analysis:

What we can learn from this case is the company A signed the contract before having a thorough grasp of the company B. As far as the international contract was concerned, a tough due diligence is indispensable, including the qualification of legal person and behavior ability of foreign companies and other economic organizations. The due diligence can be divided into two steps. The first step is to investigate and get the relevant information about foreign businessmen in order to get the basic information of the other party when two parties have the intent to cooperate with each other. The second step aims to have further understanding if initial contacts show the possibility to reach agreement. It mainly includes such activities as follows:

(1) knowing about its registered capital, real capital, studying its annual report and balance sheet if necessary;

(2) making clear its opening bank and account;

(3) having a command of its management ability, style and commercial credit;

(4) demanding the certificate of entrustment, and the certificate of authorization if the other party is the representative who participate in negotiations and sign the contract in the name of the foreign company, demanding an attestation from the embassy if needed. 

The responsibilities and obligations vary for different types of foreign companies. Generally speaking, companies can be classified into following types:

1. Limited company which is one kind of enterprise organization that collects money by distributing stocks in public through legal procedure. The chief characteristic is that the division of total capital into equal value shares. The responsibility of capital stock is limited within the capital invested. Stocks can be circulated in public and transferred freely.

2. Limitedliability company. It is the most popular type of company organization in western countries. There are relatively few shareholders. Stocks are not distributed in public. The responsibility of shareholders is limited to the registered capital. Its main characteristic is company stocks are usually non-transferable.

3. Unlimitedliability company. It means that two or more shareholders take joint and unlimited liabilities for company's debt. So-called unlimited liability means shareholders should be responsible for company debts with all of their movable and immovable properties. In other words, shareholders must pay the debts with their own properties. All shareholders of an unlimited-liability company take joint liability for company's debt. Compared with limited liability, joint liability implies several people are collectively responsible for one debt. Creditors can demand payment from any of the all shareholders without considering their shares. So any shareholder is responsible for payment. Any of the shareholders has rights of participating directly company's affairs. The ownership and management are completely merged.