Many believe it is not worth having contracts with Chinese companies because Chinese companies can and regularly do breach their contracts with impunity. However, this belief is both wrong and counterproductive. First off, The World Bank ranks China fifth among the 186 countries it ranks for “enforcing contracts.” But even beyond enforceability, there are several good reasons to have contracts with Chinese companies.
Clarity. Having a well-written contract in Chinese will ensure that your Chinese counterparty understands what you expect from it. If you ask a Chinese supplier if it can deliver your product in 30 days, it will invariably say, “yes,” but what it means is simply that it may occasionally be able to deliver in that timeframe when everything is perfectly aligned for your order. But if the Chinese supplier signs a contract mandating that its failure to ship your product within 30 days will require it to pay you 1 percent of the value of your order for each day it is late, you will know the supplier is serious about the 30-day shipping terms. When crossing borders and cultures on a deal, clarity is essential.
Compliance. Having a contract with the Chinese counterparty also serves to convince the company that it will be better off complying with your contract than violating it. By creating a contract that is at least potentially enforceable in China, you make clear to your Chinese counterparty that its failure to comply with your contract could subject it to a lawsuit it might lose. If your Chinese supplier makes widgets for 25 foreign companies, but only three of those foreign companies have written contracts with clear time deadlines and clear contract damages provisions for delays, which companies will the Chinese manufacturer prioritize if it begins falling behind on production? The three companies with good contracts, of course. If your Chinese counterparty believes there is even a chance your contract may be enforced, it is likely to act accordingly.
Getting paid. When paying overseas companies, Chinese companies must first have their RMB converted to U.S. dollars or some other convertible currency. This conversion is subject to strict rules issued by China’s State Administration of Foreign Exchange to prevent capital from illegally leaving China. To comply with these rules, Chinese companies must provide documentation proving there is a legitimate underlying transaction for which payment is being sought. The basic documentation for proving this is a formal written contract (preferably in Chinese), executed, dated by both parties and sealed by the Chinese party.
U.S. courts. When your company is sued for late or defective product, would you prefer your lawyer be left defenseless trying to explain to the jury why you had nothing in writing making clear your product needed to be delivered on time and free of defects? Or, would you prefer your lawyer give the jury a contract showing that you did what you could to ensure a timely and safe product?
Enforceability. When my firm has sued, threatened to sue, arbitrated or threatened to arbitrate on good Chinese contracts, it has seen that China does indeed enforce contracts. We hear similar stories from other law firms. However, just about every week, one of my firm’s China lawyers advises an American company that it is not worth paying us to sue a Chinese company with which the American company does not have a written, China-specific contract.
Dan Harris is a founding member of Harris Bricken, an international law firm with offices in the United States, China and Spain. He is also a co-editor of the China Law Blog. Dan will be taking questions during the International Law and IP Roundtable at the Wisconsin International Trade Conference.