China, Contracts

China Contracts: Why Even Bother?

If your Chinese counterparty believes your contract will be enforced, or even if it just believes it may be enforced, it is likely to act accordingly.

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I am often told that having a contract with Chinese companies is a waste of time and money because “everyone knows” that China “never” enforces contracts. I usually respond with something like the following.

There are three reasons why it makes sense to have a contract with your Chinese counterparty, and only one of those reasons is enforceability.

The first reason is to achieve clarity. Having a well-written contract in Chinese will ensure that the Chinese company with which you are doing business truly understands what you want of it. Put simply, it will put the two of you on the same page. For example, if you ask your Chinese supplier if it can get you your product in 30 days, it will answer with a “yes” pretty much every time. But if your Chinese supplier signs a contract mandating that its failure to ship your product within 30 days will require it pay you 1% of the value of the order for each day late, you will know that the Chinese company is serious about the 30-day shipment terms. Clarity in any business relationship is a good thing, but it is a necessity when dealing in a cross-cultural context.

The second reason for having a well-written Chinese language contract with your Chinese counterparty is to convince it that it will be better off complying with your contract than violating it. Having a well-written contract that is at least potentially enforceable means that the Chinese company knows exactly what it must do to comply and knows that its failure to comply could subject it to a lawsuit that it might lose. Let’s use the 30-day shipment time as the example again. If your Chinese manufacturer makes widgets for 25 foreign companies and five of those have very clear time deadlines with very clear contract damages provision, and the Chinese company starts falling behind on production, to which companies will the Chinese manufacturer give production priority? Of course it will put the five companies with a good contract at the front of the line. You need to make sure that you are one of the five. For more on the importance of putting a contract damage provision in your China contract, check out China Commercial Contracts: Writing the Contract Damage Provision.

Enforceability is the third reason for having a good China contract. My firm has written hundreds of China contracts, and yet we have never once been called on to litigate any of them, nor am I aware of any of them having been litigated. I attribute this to reasons #1 and #2 above, but I have to admit that this also means I cannot stand up and scream that Chinese courts enforce well-written contracts. Even better though, I can stand up and scream that they do certainly seem to prevent problems. Even though I cannot speak regarding the enforcement of my firm’s contracts, I can say that where my firm has sued or threatened to sue or arbitrated or threatened to arbitrate on good China contracts written by others, we have evidenced that China does indeed enforce contracts. For an example of where our foreign client prevailed against a Chinese company in a CIETAC (China International Economic and Trade Arbitration Commission) case, check out Foreign Company Bias in China: Are You Sure? More importantly, however, the World Bank feels the same way, ranking China 35th among 189 countries in terms of enforcing contracts.

And that is a lot of the point. If your Chinese counterparty believes your contract will be enforced, or even if it just believes it may be enforced, it is likely to act accordingly.

Next week, I will explain why Americans tend to overstate the importance of corruption as a reason not to bother with a contract.

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Dan Harris is a founding member of Harris Moure, an international law firm with lawyers in Seattle, Chicago, Beijing, and Qingdao. He is also a co-editor of the China Law Blog. You can reach him by email at firm@harrismoure.com.

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