Compliance breach and loss of contract: Be on guard 

By Song Ruyi, SHIAC
Compliance breach and loss of contract- Be on guard, 企业违反反腐败合规义务导致合同解除

The claimant is a Chinese trade company selling medical devices. The respondent is a medical device provider registered in the Shanghai Pilot Free Trade Zone, and a subsidiary of a group company with headquarters in the US. The parties entered into a distribution agreement in 2018, which provides that the claimant, as a distributor, shall sell the products of the respondent in that specific region, with a two-year licence period.

The distribution agreement provides the compliance obligation of the claimant, mainly including:

(1) to comply with local and other laws, and other anti-corruption laws that may be applicable;

(2) to comply with all applicable laws and regulations governing transparent expenditure; and

(3) to comply with the code of conduct drafted by the respondent, which contains all the applicable anti-corruption laws that shall be complied with, such as the Foreign Corrupt Practices Act of the US, and appropriate interactions with government officials.

According to the distribution agreement, the respondent may terminate the agreement if the claimant breaches the compliance obligations, and the termination of the agreement shall not of itself make the respondent liable to pay any compensation to the claimant.

In August 2019, the respondent sent a compliance officer to the claimant’s place to conduct an on-site compliance investigation, after which the compliance officer concluded that the claimant had committed illegal and non-compliant acts, such as bribery of the employees of hospitals, and financial fraud. Accordingly, the respondent determined this to be a material breach, and sent a notice to the claimant to terminate the distribution agreement on October 2019.

But the claimant contended that the termination had no grounds, and constituted the respondent’s breach of the distribution agreement, resulting in the claimant’s loss of prospective profits that would have been acquired through selling inventory under the distribution agreement. Therefore, the claimant applied for arbitration to the Shanghai International Arbitration Centre (SHIAC), demanding the damages in respect of the respondent’s breach of the distribution agreement.

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Song Ruyi is the head and Zhang Xinzi is a senior case manager of the No.1 Case Management Department at SHIAC. Wei Lin, an intern at SHIAC, also contributed to this article