China Contracts: If You Want Legal Protection, You Need One

Even though I’m old enough to have flown on aircraft with smoking sections, I’d be shocked if I boarded a plane and saw passengers lighting up. When it comes to doing business in China, however, there are plenty of companies puffing away as if we we were back in the nineties.

Every week I talk to at least one company that had a China deal go wrong, usually involving the company getting defective product, or no product at all. In most cases, the company has already sent money to China. Too often, there is no written agreement of any kind between the company and their China supplier. None of this is really that surprising. What is really surprising is the fact that these companies are reaching out to a lawyer. This suggests that they expect a legal system, somewhere, to deliver justice – yet they did not take any steps to protect themselves legally.

Over the many years I spent in China (and working on China matters), I have spoken with many businesspersons who entered into handshake deals with China suppliers (or other business partners), not really counting on the other party to live up to their side of the bargain, but feeling that the gamble was worthwhile. Often, they believed that the added value of a written agreement did not justify the delays and political capital that would have to be expended to get the deal in writing. The thing is, today, most Chinese companies want a contract as well because they see them as helping to cement the relationship.

However, what does not make any sense is foregoing a written agreement and expecting that a court, somewhere, will provide relief. As we have pointed out for years, Chinese courts “rarely allow for proving the existence of a contract by putting together pieces evidenced by scattered POs, invoices, emails and desperate phone calls.” It may be that courts in the company’s home country are willing to find that a contract exists based on the clear intention of the parties as stated in, say, WeChat messages. In the vast majority of cases, however, the Chinese party will not have assets overseas (at least not easily identifiable ones), so as a practical matter any lawsuit would need to be brought in China.

The bottom line. If companies want the opportunity to seek legal recourse in case of a China deal gone wrong, they need an contract in place. And not just any contract, but one that a Chinese court will enforce, which among other things means it’s in Chinese and governed by Chinese law. See also China Manufacturing: It’s All About the Contract.

It may be perfectly reasonable for a company to forego a contract, particularly if the amount at stake is relatively small. But they should not expect the legal system in China (or anywhere else) to come to their rescue.