Electronic Contracts in China Can Improve Efficiency with Strong Controls

By Dezan Shira & Associates

Posted: 4th September 2017 08:15

The concept of a paperless office is trending in Chinese workplaces. For companies that want to cut costs, and make operations more efficient, electronic contracts seem to be an attractive alternative for traditional paper contracts that can be difficult to organize and store.
 
However, contract disputes over the validity of electronic contracts have become more frequent. Although some cases upheld the legal validity of electronic contracts, there has not been a consensus on the legal status of electronic contracts in practice.
 
The use of electronic contracts, albeit convenient, can give rise to nuanced legal implications.
For any companies that want to use electronic contracts in China, it is crucial to understand their legal technicalities. Firms should make sure that they create valid electronic contracts to avoid legal hurdles. A strong understanding of how electronic contracts function in China can help businesses mitigate the potential for disputes.
 
Electronic contracts in China
An electronic contract is a contract comprised of a data message. Some examples of data messages are telegram, fax, electronic data exchange (EDI), and email. China’s Contract Lawrecognizes data messages as a written form of contract.
 
A standard electronic contract should comprise terms and conditions as well as electronic signatures. An electronic signature — something unique to electronic contracts — serves to verify the identity of the signatory and shows the signatory’s acknowledgement of the data contract message. Normally, an electronic signature consists of three elements: digital certificate, credible time stamps, and other information.
 
China’s upgraded Electronic Signature Law, which came into effect in 2005 and was modified in 2015, regulates creation and use of electronic signatures. The law stipulates that if both parties agree to use data message and electronic signature in a contract, it cannot be denied legal validity solely because of its electronic nature.
 
Generally, the electronic form can apply to most contractual relationships. However, companies should keep in mind that China’s Electronic Signature Law bans the use of electronic contracts in four circumstances:
 
In these circumstances, companies should use a physically signed or sealed contract.
Even though Chinese laws acknowledge the legitimacy of electronic message as a form of contract, many companies struggle to establish the legal validity of an electronic contract when disputes arise. Businesses can manage this risk by ensuring their electronic contracts are consistent with best practices.
 
Essentials for a valid electronic contract
A valid electronic contract must follow the Electronic Signature Law in addition to fulfilling legal requirements for traditional paper contracts.
 
Employers can use these approaches to help strengthen the validity of electronic contracts:
An authentic and viable electronic signature is key to the legal validity of any electronic contract. The four criteria below specify what a reliable electronic signature should contain:
Companies should also remember to keep evidence related to creation of electronic contracts. Records on how both parties communicate are important if disputes ever arise.
 
Key considerations for electronic contracts
As the use of electronic contracts grows, the government is likely to issue clearer guidelines or rules of implementation. Presently, companies should understand both benefits and problems of electronic contracts before making any transition.
 
Signing contracts by hand can be an inconvenience, as companies would have to invest a lot of time and money in communicating and meeting with the other signatories, managing vast amounts of paperwork, and shipping paper contracts to different places.
 
Electronic contracts come in handy for companies that:
 
Allan Xu, Manager of Business Advisory Services at Dezan Shira & Associates, notes, “Without professional assistance, it is difficult to confirm the authenticity and effectiveness of electronic data, as they are prone to be lost, manipulated, or tampered. In circumstances where using electronic contracts is risky, such as high-stake transactions, paper contracts are preferable.”
 
In order to make the most of electronic contracts’ benefits, without increasing the risk of legal disputes, companies must guarantee that their electronic signatures are valid. Although not required by law, companies should always find a third party Certificate Authority (CA) to authenticate the digital certificate, as well as a third party Time Stamp Authority (TSA) to validate the time stamps.
 
Companies should use reliable third-party electronic contract providers to sign their contracts if applicable. Credible third-party electronic contract platforms use a number of methods to ensure that the electronic signatures are valid and the contracts are free from disclosure or tampering.
For instance, reliable third-party providers often ask for IDs, verified bankcards, and confirmation via text message for the purpose of confirming the identity of the signatory. Some of them also incorporate block chain and encryption technology to safeguard the confidentiality of the contract.
 
In contrast, unreliable online electronic contract platforms use informal and unstandardized contract templates. Many of them do not possess the technology to support creation of valid contract. What is more problematic is that these providers might intentionally tamper the contracts.
 
Electronic contracts can be a convenient tool to cut costs and speed up repeated business operations for foreign companies that are looking to establish or expand in China. However, legal practices in China pertaining to the use of electronic contracts are not mature at this stage. As Xuhighlights, “Grey areas that do not have specific legal guidance can be companies’ sore points. Legal requirements for electronic contracts also differ from region to region in China. Without carefully planning out and keeping track of every procedure in the creation of electronic contract, companies might get embroiled in contract disputes.” Companies should seek legal advice if they are unsure about how to create electronic contracts properly.
 
This article was first published on China Briefing.

Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll, and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India, and ASEAN, we are your reliable partner for business expansion in this region and beyond.

For inquiries, please email us at info@dezshira.com. Further information about our firm can be found at: www.dezshira.com.

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