Be vigilant about irrelevant costs in contracts and documentation

Investors should pay close attention to contracts and documents when doing business in China to avoid spending on irrelevant costs, say counsel.

In a draft regulation released on August 2, the government made clear its intent to regulate and cap prices in monopolised industries. The Legislative Affairs Office of the State Council of China issued the circular because vagaries remained during the cost examination process.

“The Act would affect the pricing of the enterprises, mostly the State-owned monopolistic enterprises, in respect of public utilities and natural resources,” said Shanghai-based MWE Law Offices partner, Henry Chen. 

He recommended that “investors need to be more careful during the contracting process, and keep documents and evidence that can justify the reasonability and relevance of pricing costs.”

The government's aim is to remove “unreasonable costs” by preventing business operations from “puffing the government-set price by inserting different kinds of irrelevant costs”, said Chen. For example, expenditures relating to donations, sponsorships, fines or damages arising from a breach of a contract will be “kicked out from pricing costs”.