I wrote last week on China contract templates in Template China Contracts: The Cons and the Cons. That post essentially stated that China template contracts range from worthless to dangerous. I put that post on Linkedin where it has received the following comments:
- I could not agree more with your article. I suppose you should have also thrown in the often bragged about claim from business folks, that “hey, they signed our standard contract with no problems!” Great news! Maybe it is unenforceable against the Chinese party so of course they signed it!
- Templates are easy to come by. They can cost you big, though, in the long run. I have seen a few such cases. Professional guidance is worth the investment!
- Highlight: Going in-house as a ‘cost saving’ technique rather than because a team has any real China expertise can end up costing firms big time. It’s still surprising how many Western companies recognize China is a big step, but then figure they’ll learn as they go along without any major screw ups.
- Been doing business in China for a very long-time. You are one of the few people I follow. This is because you consistently provide realistic quality advice. Everything you say about Liquidated Damages is 100% correct. Can’t emphasize this enough. However, it is very tough to get the Chinese side to sign and you must not capitulate on this term. This is coming from experience. I have been talked out of it a couple of times for various reasons and have been burned. Also, agree about diligence. If you are doing any long-term transaction requiring a significant amount of investment, you’d better make sure you know your Chinese partner. Figuring out the true ownership, power structure and financial condition of a Chinese entity can be very difficult. Thanks for the Great Read.
I also received an email from a lawyer friend who chided me for failing to provide specific real world examples of templates used to a company’s detriment. Great point. In Forum Selection Clauses in International Contracts, I talked about how my law firm had “made well over $100,000 the last couple of years fighting over badly written forum selection clauses in international contracts” and in all those cases, the clients had drafted their own contracts using template provisions on forum selection. And as I stated in that post, “our clients (who consulted us for the first time only after they had signed these agreements and right before they were ready to sue on them) could easily have avoided the entire expense had they only done things right with their forum selection clauses in the first place.”
One international contract had a provision calling for international arbitration before the Geneva Chamber of Commerce. Problem was the Geneva Chamber of Commerce did not do international arbitration. Our client used a template that listed the Stockholm Chamber of Commerce as the forum and simply changed “Stockholm” to “Geneva.”
It is not just in arbitration provisions where disasters happen. Many years ago, I had a very large client that made vehicles and it at one point needed to engage in a large vehicle recall due to a defective part. The part had been provided to them by a small local supplier. The client sent our law firm its contract with its supplier and it was incredibly unfavorable to my client. It essentially said that the small local supplier could not be held liable no matter how bad the product and my client would have to fund every bit of any recall. I asked my client why it had agreed to such a contract and they told me that had used it because they thought it was very well written and it came straight from their largest and best and most professional part supplier. The contract was well written, but it was written to favor the part supplier and since my client was the part buyer, this should have been the last contract it should have ever used as a template for other suppliers. The recall cost my client millions of dollars.
I could go on and on. . . .