Electronic Contracts in China Can Improve Efficiency with Strong Controls
August 24, 2017
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 Law recognizes 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:
- Documents concerning personal relationships;
- Documents concerning trade of immovable estates;
- Documents concerning termination of public services;
- Documents concerning other inapplicable situations as stipulated by laws or administrative regulations.
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:
- Implement reliable methods for creating, storing, and transferring electronic contracts;
- Carefully review controls designed to ensure the contracts are tamper-proof;
- Clearly delineate the original issuers and receivers of the electronic contracts, as well as the points of time when the contracts are issued and received;
- Ensure all electronic signatures in the contracts are valid.
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:
- The signatory is the sole owner of data that generates electronic signatures used for electronic signatures;
- Data that generates the electronic signature is controlled exclusively by the signatory during the process of signing;
- Any modification of the electronic signature after signing is discernable by the signatory;
- Any modification of the format or content of the electronic data message is discernable by the signer after signing.
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:
- Have to create and store a large number of contracts;
- Make low-value, but high-volume transactions;
- Have employees working in different locations;
- Interact frequently with suppliers or purchasers within a limited timeframe;
- Need to sign contracts for internal activities of the company.
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 Xu highlights, “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.