Our China business lawyers each probably see 5-10 China contracts a month written by others. We often are sent these from a potential or actual client who wants us to review and revise their contract or determine how it might fare were they to pursue a breach of contract claim. Other times, we get them simply because our law firm is on one side of a deal reviewing a contract drafted by the other side.
The first thing I do when given a contract to review is spend a couple minutes skimming it to get a sense of whether it is workable or not. By workable, I mean whether it can be revised to work or whether it is so flawed or so bad that it would be faster, cheaper, easier to just scrap it and start over. Lately, our quick contract skims are finding an increasing number of contracts that are not only horribly written, but scream fraud. See Is This a Real China Deal or a Fraud: How to Tell.
About half the time, the contracts we see will — with changes — work. The below is an amalgamation of emails we typically write to clients that want us to “China-fy” a well written international distribution contract:
When I am quickly reviewing a China contract — or what is being put forward as a China contract — I typically look first (and often only) at the following three ultra-basic and nearly universally required terms, because if these terms are not included or are not written in a way that reveals international sophistication, I can almost instantly evaluate whether the contract will work for China or not.
1. Payment. For obvious reasons, payment terms are critical and many (most) disputes stem from this. Does the contract address how payments are to be determined? Does it address how payments are to be made? Does it address when payments must be made? Does it state the currency in which payment must be made. I am big on checking on this one because during the Asia crisis about a decade ago, our international litigation team handled cases where due to plunging currencies, the currency the court would ascribe to the contract could swing the value of the contract by millions of dollars.
2. Termination. I’ve seen contracts that mandate a one year termination and with the termination the Chinese company is free to use the foreign companies IP and even sell the foreign company’s product to the foreign company’s clients. Not a good idea. I’ve also seen a number of contracts with no termination date and no provisions even for allowing termination. Do you really want XYZ China company to be your exclusive China distributor forever no matter how terrible it is in selling your products or services? What happens at termination? Who pays for what?
3. Dispute Resolution: Jurisdiction, Choice of Law, Official Language. It takes us all of 30 seconds to determine whether these provisions make sense or not. A provision that calls for British law to be applied to an arbitration in Geneva that is to be conducted in Chinese (yes we have seen this) is an example of one that makes no sense at all.
These provisions can mean the difference between a China contract that works and one that does not. See China Contracts: Make Them Enforceable Or Don’t Bother.
How do your China contracts stack up?