When a letter of intent with a Chinese company binds you

A letter of intent with a Chinese company binds when it agrees to sign a contract within a set period and identifies the parties and the deal. Refusing to sign is then a breach, and a deposit paid to secure signing is lost or returned double. One that only records an intention to trade binds neither side.

A Chinese distributor, licensee or joint venture partner wants to sign a letter of intent before the full contract, and the draft is in your inbox. In England, a document that only agrees to keep negotiating binds nobody.^⁠[1] In China, the same paper can oblige you to sign the main contract, and walking away can cost damages or, if you took a deposit, paying it back twice over. What decides it is what the document says, not what it is called.

Is a letter of intent binding in China?

It depends on what it agrees, and Chinese law sorts it into one of three things. The Civil Code names the preliminary contract (预约合同, yùyuē hétong). It is a subscription, order or reservation document in which the parties agree to conclude a contract within a set future period.^⁠[2] The Supreme People’s Court’s 2023 interpretation of the contract rules then draws the lines that matter for a letter of intent (意向书) or a memorandum (备忘录).^⁠[3]

What the document does	What a court treats it as
Records an intention to trade, with no agreement to sign a contract within a set period	Not a preliminary contract. The court will not support a claim that it is one
Agrees to sign within a set period, but the parties or the subject of the future contract cannot be identified	Not a preliminary contract
Agrees to sign a contract within a set period, and the parties and subject of that contract can be identified	A preliminary contract
A deposit was paid to secure signing within a set period, and the parties and subject can be identified	A preliminary contract
Agrees the subject, quantity and price, and does not clearly provide for a further contract	The main contract itself
Provides for a further contract, but one side has performed and the other accepted	The main contract itself

The title on the first page decides none of this. A document headed “memorandum of understanding” that fixes a signing date and names the goods is a preliminary contract; one headed “agreement” that only says both sides hope to cooperate is not.

What happens if one side refuses to sign the main contract?

It has broken the preliminary contract. The interpretation counts two kinds of conduct as breach: refusing to conclude the main contract, and negotiating it in breach of good faith so that it is never concluded.^⁠[3] The second catches the party that keeps talking but asks for terms it knows the other side cannot accept.

To decide whether a party negotiated in good faith, a court weighs whether the terms it proposed clearly departed from what the preliminary contract said, and whether it made a reasonable effort to reach agreement.^⁠[3] The other side can claim the loss the breach caused. The amount is what the parties agreed, if they agreed one. If not, the court sets it, taking into account how complete the preliminary contract was and how far the conditions for signing the main contract had been met.^⁠[3] Where no sum was agreed, a letter of intent that already settles most terms costs more to walk away from than one that settles few.

We took a deposit with the letter of intent. What does walking away cost?

Twice the deposit, if the deposit was agreed as security for signing the contract. The court applies the ordinary deposit rule: the side that paid and then refuses loses the deposit, and the side that received it and then refuses returns double (Interpretation, Article 67).^⁠[2,3] The Civil Code caps a deposit at 20% of the value of the contract it secures, and the deposit arrangement exists only once the money is actually paid.^⁠[2]

The money must be agreed to be a deposit (定金). A payment called a booking payment (订金), a security payment (保证金) or pledge money (押金), with nothing saying it is a deposit, is not forfeited or repaid double.^⁠[3] The two Chinese words for deposit and booking payment sound the same, so read the characters.

Say a German maker of laboratory equipment and a Hangzhou distributor sign a memorandum on 10 November 2026. It makes the distributor exclusive for Zhejiang for three years, fixes a first-year order of 40 units at EUR 20,000 each, and says the two will sign a distribution agreement by 31 January 2027. The distributor pays EUR 80,000 on signing, agreed as a deposit to secure that agreement.^⁠[3] That is 10% of the EUR 800,000 first-year order.

The memorandum agrees to sign within a set period and identifies the parties and the goods, so it is a preliminary contract. In January the German company receives a better offer from a Shanghai distributor and declines to sign. It must return EUR 160,000: the distributor’s EUR 80,000 and the same again. Had the distributor walked away instead, the German company would have kept the EUR 80,000. How a deposit sits beside a claim for damages is set out in liquidated damages and deposits in a Chinese contract.

When does a memorandum become the contract itself?

When it already agrees what is sold, how much and at what price, and one of two things is true. Either it does not clearly say a further contract will follow, or it does, but one side has started performing and the other has accepted it.^⁠[3] The Civil Code applies the same idea to every written contract: if one side performs its main obligation before both have signed or sealed, and the other accepts, the contract exists.^⁠[2]

The Supreme People’s Court published a case on exactly this alongside the interpretation in December 2023. On 20 September 2006 two companies signed a purchase agreement for a building, which said a formal sale contract would follow. The buyer paid RMB 10 million to the seller’s shareholder, which issued two deposit receipts of RMB 5 million each, and the seller handed the building over on 4 January 2007. The formal contract was never signed, and the two later fell out.^⁠[4]

The court held that by paying and delivering, the parties had concluded the main contract through their conduct, and ordered the seller to complete the registration of the transfer of title.^⁠[4] It was a domestic property case, but the rule it applies is the general one. Shipping the first order, or accepting payment for it, while the “real” contract is still being drafted can settle the deal on the terms of the memorandum.

If the letter only records an intention, can either side still be liable?

Yes, for how it behaved while negotiating, not for failing to sign. A party that negotiates in bad faith under the pretext of contracting, deliberately hides a material fact or gives false information, and causes the other side loss, must compensate it.^⁠[2] Trade secrets and other confidential information learned during the negotiations may not be disclosed or misused, whether or not a contract is ever concluded.^⁠[2]

Writing need not be on paper for any of this. An email that shows its content and can be retrieved counts as written form.^⁠[2] A string of emails agreeing the goods, the quantity and the price can therefore go further than intended. A court will generally find a contract concluded once it can identify the parties, the subject and the quantity, unless the law provides otherwise or the parties agreed otherwise.^⁠[3]

In England an agreement to negotiate does not bind. Is China different?

Yes, and the difference catches people who learned their contract habits under English law. In Walford v Miles the House of Lords held that an agreement to negotiate, like an agreement to agree, is unenforceable because it lacks the necessary certainty.^⁠[1] Lord Ackner called a duty to negotiate in good faith “inherently repugnant to the adversarial position of the parties”. What English law will enforce is narrower: a lock-out, by which one party agrees, for good consideration and for a specified period, not to negotiate with anyone else.^⁠[1]

	England and Wales	China
An agreement to negotiate	Unenforceable for lack of certainty	A preliminary contract if it sets a period to sign and identifies the parties and subject
Walking away from the negotiation	Each party may pursue its own interest and withdraw, if it makes no misrepresentation	Refusing to sign, or negotiating in bad faith so no contract is signed, is a breach
Good faith in negotiation	No enforceable duty to negotiate in good faith	Weighed by whether proposed terms clearly departed from the preliminary contract

If the letter of intent says which law governs it, that choice matters too. When a foreign law can be chosen is set out in whether a contract with a Chinese company can be governed by English law. Trade-fair order forms raise the same question in a narrower setting, covered in whether an order form signed at a stand binds.

What should we look at in a letter of intent before signing it?

Whether each line moves the document from one row of the first table to another. These are the points that decide it, in both language versions.

Point	Why it matters
A date or period to sign the main contract	With identifiable parties and subject, it makes the document a preliminary contract
Goods or services, quantity and price	Agreed together, and with no clear provision for a further contract, they make it the main contract
A deposit(定金)	If it secures signing, refusal costs the deposit or double it. A booking payment (订金) or security payment (保证金) not agreed to be a deposit does not
An agreed sum if the main contract is not signed	Replaces the court’s own assessment of the loss
Anything to be done before the main contract	Performance accepted by the other side can conclude the main contract on these terms
Confidential information	Protected by law whether or not a contract follows
The Chinese version	The tests above apply to the text that governs; if that is the Chinese, the date, the deposit and the price must read the same in it

Where the two language versions differ, which language version of a bilingual contract prevails explains how that is settled. A contract commercial review reads the letter of intent, the Chinese version included, and tells you what it commits you to and what to push back on before you sign. If the terms are still being settled across the table, negotiation support joins the meeting and negotiates the commercial terms on your instructions.

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Holding a letter of intent or MOU from a Chinese company? Contract Commercial Review We read it line by line, including the Chinese version, and set out what each term commits you to, with the points to negotiate before you sign. From US$1,500, 3–7 working days. See the service