Chinese Contracts Work, but You Can’t Make a Good Deal With a Bad Company

China contract lawyers and due diligence

The title is stolen from the Warren Buffett line, “You can’t make a good deal with a bad guy, regardless of any piece of paper.” And it is so true.

Our China lawyers are always telling our clients the following:

1. Legitimate Chinese companies do not want to get sued. In our experience, legitimate Chinese companies are more concerned about getting sued than American or European companies. They do not want to get sued because getting sued is both expensive and damaging to their reputation.

2. Crooked Chinese companies do not mind getting sued, because they can always just shut down and they have little to no reputation to protect. In fact, the worst of the worst are people who claim to have a company but don’t really.

3. A good contract with a good company can help ensure the legitimate Chinese company with which you are doing business will do what you want it to do and what it has told you it will do.

4. A great contract with a crooked Chinese company has virtually no value at all, because the crooked Chinese company does not much care.

The above means you must be careful about with whom you do business in China (or anywhere for that matter). Do your due diligence on your Chinese counter-party before you contract.

There are three primary reasons for having a good contract with your Chinese counter-party.

 

1. Clarity

The first is to achieve clarity. To make sure you and the Chinese company are on the same page. For example, if you ask your Chinese supplier if it can get you your product in 20 days, it will almost invariably say “mei wenti,” which means not a problem. But if you put in your contract with your Chinese supplier that the product you are buying from it must ship in 20 days AND for every day it is late, the Chinese company must pay you 1% of the value of the order, the Chinese company will almost certainly get honest with you and tell you that 20 days is impossible. At that point, you and the Chinese company can figure out a more realistic time frame that will give you a realistic idea of what you should expect for delivery speeds going forward. Needless to say, we can give countless examples of this sort of thing, but this is yet another reason why our China attorneys advocate putting your contract in Chinese. Clarity before you start the relationship is critical.

2.  Stricture

The second benefit of having a well written Chinese language contract with your Chinese counter-party is that the Chinese company knows exactly what it must do to comply. And, in most cases, it might as well. Let’s use the 20 day example as the example here too. If your Chinese manufacturer makes widgets for 25 foreign companies and five of those foreign companies have very clear contractual time deadlines with a very clear liquidated 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. Why wouldn’t it?

3.  Enforceability

My law firm has written thousands of China contracts and we have never been called on to litigate any of them nor are we aware of any of them having been litigated. We attribute this to reasons #1 and #2 above, and this just reinforces our claim that good contracts help prevent problems. It also bears mentioning that the World Bank ranks China fifth  (yes, that’s right, 5th) among 190 countries at enforcing contracts.

 

If you choose your China partner wisely and enter into a good contract with it, you should be fine. But if you don’t do both of these things . . . .