Lehman Lee & Xu Preparation And Review Of Commercial Agreements Presented By Richard L. Wageman Lehman Lee & Xu Chinese Licensed Law Firm Beijing China

Lehman Lee & Xu

Preparation And Review Of Commercial Agreements

Presented

By

Richard L. Wageman

Lehman Lee & Xu

Chinese Licensed Law Firm

Beijing

China

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A Licensed Chinese Law Partnership

Beijing – Shanghai – Shenzhen – Hong Kong

Macau – Mongolia – Washington

Richard L. Wageman

– Email: [email protected]– Tel no: (8610) 8532-1919 / Fax no: (8610) 8532-

1999– Website: www.lehmanlaw.com

Lehman Lee & Xu

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Lehman, Lee & Xu

Established in 1992 Has extensive experience in Foreign Direct

Investment, Mergers and Acquisitions, Commercial Transactions, Intellectual Property, Litigation, Franchising, Advertising, Licensing, Software Registration, Counseling Services.

Responsible for over US $5 billion in FDI since 1992 Granted the 8th private law license in China Nominated in 2005 as one of the best law firms in

China in IP, Real Estate and voted the Best Tax and Trust Firm in China for 2005

Has a fully licensed Patent and Trademark office as an adjunct to the law firm

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Presenter-Richard L. Wageman

Canadian Licensed Lawyer Member of the British Columbia, Canada, Law

Society and Canadian Bar Association Senior foreign lawyer and head of Commercial Law

Section of Lehman Lee & Xu Expertise in foreign direct investment, mergers and

acquisitions, franchising, advertising and commercial transactions

Presentations to business groups and professional groups around the world on China legal issues

Published articles on foreign direct investment and franchising in China

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What Is A Lawyer?

A person who knows the law and understands how the law should be applied in a transaction

A professional who is ethical and honest in carry out his/her professional activities

An advocate for his/her client’s position within the boundaries of the law

A member of a profession that is sworn to up hold the law of the land but also “test” the legal limits of the law as an advocate for clients rights

Should also be an advocate for those citizens who cannot afford legal services-pro bono legal work.

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Lawyers Role In A Commercial Transaction

Counsel the client concerning relevant legal issues and options related to the transaction

Be an advocate for the client during negotiations with the opposite party

Provide the client with on going legal advice during a transaction that clearly outlines the benefits and and the risks

Preparation of agreements that reflect the commercial transaction

Analysis of agreements prepared by the opposite party to the transaction

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Importance of Good Document Preparation/Review

Forms the basis for nearly all legal and commercial transactions

Establishes the clients legal rights in a transactions The document may be the subject of 3th party review

by courts and arbitration panels Reflects the lawyers competence and understanding

of legal and commercial issues or lack thereof Poorly drafted documents could result in negligence

claims against the Lawyer who prepared the document

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What Are Good Qualities For A Commercial Lawyer

Good understanding of commercial/business practices in many business sectors

Understanding of financial statements Has good “people skills” that facilitate good relations

with client/opposing counsel Understands what is the clients goal and business

approach Good negotiating skills-”deal maker not deal breaker”

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What Are Good Qualities For A Commercial Lawyer

Is “pro-active” rather then “re-active” when possible Thinks “outside of the box” and is not offended by

criticism of his/her ideas Open to new ideas and approaches Good writer with logical approach to his/her writing Last but “most important”, a good communicator

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Agreement Preparation-What You Must Know

Comprehensive understanding of the transaction/business sector

Ask questions of your client-do not rely upon the client’s overview or understanding

Understand the client’s objective and limitations Educate yourself concerning the opposite party and

its professional advisors Define legal and commercial issues in the transaction Re-educate yourself on all applicable

laws/regulations Assess your qualifications and limitations for the

transaction-get help if needed.

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Commercial Agreement Preparation-Overview

Commercial Agreements must:– comply with the requirements of the law– embody the provisions of the negotiated

transaction – protect the client’s interest

Outline the transaction in a logical manner Clearly and accurately describe the agreement

provisions whereby any 3th party would understand the arrangement from reading just the agreement

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Contain enough detail whereby the agreement provisions are certain

Prepare agreement to withstand scrutiny in a court of law or in an arbitration hearing

Seek assistance if you do not understand an issue or are having difficulty drafting a provision.

Review good precedent agreements but use only as a guide/resource

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Establish a time line for document preparation that gives you time to prepare/consider several drafts of the agreement

Review draft agreement with client to insure client understanding and accuracy of terms

Have an associate in your office review agreement and offer suggestions

Be “open minded” to criticism of document by client and opposite party/opposite party’s legal counsel

Learn from each transaction

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Commercial Agreement Structure-General

Agreement title and date Index of document sections Legal name and address of parties Preamble: Briefly describes in several short

paragraphs the nature of the transaction to be covered by agreement

Consideration section Definition section

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Grant/acceptance section Financial arrangement section Term of agreement section Conditions section Representations, Warranties and Covenants section Default section Enforcement section Termination section

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Notice section Governing law-jurisdiction section Dispute resolution section Registration of agreement section Force Majeure section Assignment/assumption section Encumbrance section Postponement and subordination section

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Best efforts section Indemnification section Compliance with laws section Interpretation of agreement section Waiver section Extension of time section Counterpart signing section Whole agreement section

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Miscellaneous provisions section Successors and assigns section Schedules reference section Execution of agreement section Schedules attached-referenced

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General Form of Commercial Document Review

Review Example Of Form

Of Commercial Agreement

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THIS AGREEMENT is made as of this __ day of ____ in ____, China, by and between:

Transferee: (the name of the Transferee)(hereinafter referred to as

"Transferee") Legal Address: ______________________________________ Postal Code: ____ Transferor: (the name of the Transferor)(hereinafter referred to as

“Transferor”) Legal Address: _______________________________________ Postal Code: _____

The Transferor and the Transferee are hereinafter referred to as the "Parties" collectively, and as "Party" singularly.

Etc.

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WHEREAS,

A. The Transferee is a Chinese-foreign joint venture which produces and sells high-quality, high-efficiency ______ and related products ("Products") and intends to acquire the Transferor’s (business and) assets.

B. The Transferor is mainly engaged in ____ and related service and is willing to transfer all of its major assets required for conducting its business to the Transferee.

Now, therefore, the Parties, after consultation and on the basis of equality and willingness, agree to the following in connection with transfer of the assets from the Transferor to the Transferee at the following terms and conditions:

Etc.

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1. Transfer of the Assets

1.1 In accordance with the terms and conditions of this Agreement ownership and title to the assets (“Assets”) as listed in Annex A shall be legally transferred to the Transferee or a party nominated by the Transferee upon its first written notice. The Assets comprise all assets owned by the Transferor for carrying out its production and operation activities including but not limited to equipment and machinery, vehicles, office furniture and equipment, tools, fixtures and facilities.

1.2 The Assets shall also include all technical documents in relation to the Assets including but not limited to operation manuals, records for operation, maintenance and repair.

Etc.

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2. Value of the Assets

2.1 The Parties acknowledge that the book value of the Assets at the date of signing this Agreement shall total RMB _________ (in words ____________).

2.2 The Parties assume that no taxes, fees or other charges are or will become due on the transfer of the Assets. If, however, such taxes, fees or other charges are or will become due they will be borne by the Transferor. If the Transferee or its nominated party is required to pay such taxes, fees or charges up front, the Transferor shall refund such taxes, fees or charges actually paid by the Transferee against presentation of an original invoice.

Etc.

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3. Take over and Lease of Assets

The Transferor shall hand over the possession of the Assets to the Transferee or its nominated party on the date specified in Transferee’s written notice unless the Parties agree otherwise. Representatives of both parties shall sign a take-over protocol.

Etc.

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4. Warranty

The Transferor warrants and represents toward the Transferee the following on the date of signing this Agreement:

4.1 The Transferor owns the good and marketable title of the Assets completely and legally and is entitled to transfer the Assets to the Transferee at the terms and conditions hereunder.

4.2 The Assets are free and clear of any encumbrance, mortgage, pledge and/or third party’s rights.

Etc.

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5. Representations and Warranties of the Vendor and the Principal

The obligations of the Principal are joint and several with the Vendor. Alternatively, the Principal’s obligations could be contained in a guarantee agreement to be delivered at Closing. In such case, representations of the Guarantor should be included therein including its due incorporation and corporate power and authority to deliver the Guarantee Agreement and any other representations and warranties deemed to be appropriate.

If acting for the Vendor, many of these representations and warranties should be qualified by “materiability” and “best-of-knowledge” qualifications. If the Vendor’s counsel insists on a materiability qualification, that qualification should be restricted to relate to specific factual representations, as opposed to having the Vendor responsible for only material liabilities. Also consider adding “after due inquiry” on certain representations if acting for the Vendor.

Etc.

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6. Obligations of the Transferor

6.1 After signing of this Agreement the Transferor undertakes to possess, manage, use and maintain the Assets in an adequate and proper manner at its own costs. The value of the Assets as of the date of signing of this Agreement shall be maintained except for normal tear and wear. The Transferor shall be responsible for any and all losses, damages, costs and claims caused by any improper use, maintenance and management of the Assets.

6.2 The Transferor shall not lease, mortgage, pledge, transfer or otherwise dispose of the Assets to any third party

Etc.

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7. Liability for Breach of Contract

In the case that the Transferor fails to fulfil any of its obligations hereunder or any of its undertaking is found to be false, the Transferor shall be fully liable for any and all damages and economic losses suffered by the Transferee due to such breach.

Etc.

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8. Force Majeure

If one of the Parties is prevented from performing any of its obligations under this Agreement due to an event of force majeure, the time for performing the obligations under this Agreement specifically prevented from performance by such event of force majeure shall be extended by a period equal to the period of delay caused by such event of force majeure. The party claiming inability to perform the obligations due to the event of force majeure shall take appropriate measures to minimize or remove the effects of the event of force majeure and, within the shortest possible time, do its best to resume performance of the obligations affected by the event of force majeure. If an event of force majeure occurs, neither party shall be liable for any damage, increased cost or loss which the other Party may sustain by reason of such failure or delay of performance, and such failure or delay shall not be deemed a breach of this Agreement. All other obligations under this Agreement and the time for performance thereof shall not be affected thereby.

Etc.

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9. Assignment

At any time of the term of this Agreement, neither party shall assign any of its rights and obligations under this Agreement to any third party without the prior written consent of the other Party

Etc.

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10. Governing Law

This Agreement shall be governed by, and construed in accordance with, the laws of the People's Republic of China.

Etc.

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11. Settlement of Disputes 11.1 Any dispute arising from or in connection with the implementation of this

Agreement shall be settled by the Parties through friendly consultation. Such consultation shall begin immediately after one party has sent a written request for such consultation to the other Party. If the dispute can not be settled within ninety (90) days after the delivery of such notice, then Paragraph 2 of this Article shall apply.

11.2 If the Parties cannot settle the dispute through consultation as mentioned above, either Party may submit the dispute to ______ Arbitration Committee for arbitration in accordance with its rules and regulations. The arbitration proceedings shall be conducted in the Chinese language. The arbitration award shall be final and binding on both Parties. The arbitration cost, including reasonable legal counsel fees, shall be borne by the losing party.

11.3 During the period when a dispute is being resolved, the Parties shall in all other respects continue their implementation of this Agreement other than the matter(s) in dispute.

Etc.

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12. Notices

Notices or other communications required to be given by one of the Parties pursuant to this Agreement shall be written in Chinese and may be delivered personally, sent by registered airmail (postage prepaid), by a recognized courier service or by facsimile transmission to the address of the other Party set forth below. The dates on which such notices shall be deemed to have been effectively given shall be determined as follows:

Notices given by personal delivery shall be deemed effectively given on the date of personal delivery;

Etc.

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13. Waiver of Rights

Unless otherwise provided for, failure or delay on the part of any party to exercise any right, power or privilege under this Agreement shall not operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude further exercise thereof or exercise of any other right, power or privilege. Any waiver by one of the Parties at any time of a breach of any term or provision of this Agreement by the other Party shall not be construed as a waiver by such party of any subsequent breach, its rights under such provision, or any of its other rights hereunder.

Etc.

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14. Entire Agreement

All the appendices to this Agreement shall be an integral part of this Agreement. This Agreement and all its appendices shall constitute the entire agreement with respect to the subject matter set forth herein and supersede any and all previous oral and written discussions, negotiations, notices, memoranda, documents, agreements, contracts and communications relating to such subject matter. The headings to the articles are for ease of reference only and shall have no legal effect.

Etc.

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15. Severability of the Agreement

If any one or more of the provisions contained in this Agreement or any document executed in connection herewith shall be invalid, illegal, or unenforceable in any respect under any applicable law, (i) the validity, legality and enforceability of the remaining provisions contained herein or therein shall not in any way be affected or impaired and shall remain in full force and effect; and (ii) the invalid, illegal or unenforceable provision shall be replaced by a valid, legal and enforceable provision that comes closest to expressing the true intent of such invalid, illegal or unenforceable provision.

Etc.

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16. Counterparts

This Agreement is executed in Chinese in four (4) counterparts, and each party shall hold two (2) copies. This Agreement may be translated into other languages. If there is any conflict between a version in any other language and the Chinese version, the Chinese version shall prevail.

Etc.

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17. Effectiveness

This Agreement shall take effect from the date of the execution by the authorized representatives of the Parties.

Etc.

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IN WITNESS WHEREOF, The Parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first above written.

Name of the Transferee Authorized Representative:__________________

Signature: _______________________________

Name of the Transferor

Authorized Representative:__________________

Signature:________________________________

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Commercial Agreement Drafting Practice Points

Encourage your client to first negotiate a non-binding “letter of intent” that defines basic provisions

Prepare an outline of the agreement you will draft before you commence preparation of the agreement

Use plain language rather then “legalize” terms if possible

Provide enough detail to avoid misunderstandings but keep the sentence structure as simple as possible

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Commercial Agreement Drafting Practice Points

Double/triple check the grammatical structure and the spelling of the drafted provisions

Prepare agreement in draft form-consider, then prepare a section draft to submit to client for review to ensure accuracy of commercial terms

Explain agreement provisions to client/consider client comments then prepare a 3th draft that will be sent to the opposite party

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Types Of Commercial Agreements

Agency and Distribution Computer and Software Domestic investment Engineering/Architectural/Procurement/Construction Mergers/Acquisitions Real Property and Leases Trade and Manufacture Credit and Finance

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Types Of Commercial Agreements

Employment Foreign Direct Investment Intellectual Property Outsourcing and Services Sale of Goods

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Document Review and Analysis Overview

Start from the premise that every document can be improved no matter who prepared the document

Review the agreement for the following:– Provisions reflect the agreed upon arrangement– The agreement provisions are in compliance with

the law of China– The commercial terms are accurate– Does the drafted provisions enhance your clients

position or do they “hurt” your clients position

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Do not presume that the provision as drafted is in your clients best interests-analyze each provision

Do not presume that your client will understand the legal provisions and even the commercial terms as drafted by the opposite party’s counsel

Clearly set out in writing to your client your opinions/comments concerning the agreement submitted to you by the opposite party/its counsel

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Do not be intimidated by the reputation of the opposing party or its legal counsel

Never presume that the opposite party’s legal counsel’s position is correct concerning the legal or commercial interpretation of a provision in the agreement

Make sure the client understands the risk of either accepting an opposite parties proposed provisions or rejecting such provisions

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Do not just tell the client what it wants to hear but tell the client what it needs to hear

You normally only get one opportunity to deal with a draft provision so you need to address all concerns in your first review to the client

Define what are core terms that should not be changed and those terms that are subject to negotiation

Do not be afraid to advise the client that the proposed agreement as drafted is not in its best interest.

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Insist that the opposite party have legal counsel. If the opposite party will not engage its own counsel

you must do the following:– Have the opposite party acknowledge in writing

that you do not act for it, that you have not provided any legal advice to it concerning the agreement and that you recommended it obtain independent legal advice prior to finalizing/signing the agreement

– The opposite party must not sign the agreement in your office or in the presence of your client/you

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Commercial Agreement Analysis-Example

Review Example Of Commercial Agreement Analysis

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Closing Thought

A Business Lawyer Must Always Strive To Be Better When He/She Prepares and Analyzes Documents As

Such Documents Are A Reflection Of Your Competency And Reputation

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