Why You Should Never Draft Your Own China Contract
China Laws and Business Practices: A World Apart
China laws and business practices are different from the West. On this there should be no dispute. There should also be no dispute on how it rarely (if ever) makes sense for companies to draft their own China contracts.
Your Starting Point: Why DIY China Contracts Fail
And yet, our China lawyers oftentimes get emails from companies telling us they drafted a contract for China and asking us whether we would revise that contract to “make it work for China.” Our response is usually to say yes, but also make clear that our fees for doing so will almost always be the same as our fees for drafting the contract from scratch. The reason for this is because, with very few exceptions, the contract we are given is virtually always so different from what is required for China that its only benefit is that we can use some of its deal (not legal) terms in drafting a new contract.
But guess what, that benefit almost never outweighs the harm. Let me explain.
Negotiating All Your Deal Points
Most draft contracts given to our China lawyers are a result of weeks of negotiations between the Western company and the Chinese company. If our China attorneys then substantially revise the contract and our Western company client then sends the substantially revised contract to the Chinese company, the Chinese company is (rightly) irritated because it believed it had a deal or was on the verge of a deal with the Western company, even though it really wasn’t. (See here for an old but accurate article on Chinese negotiations.)
But most of the time, the draft contracts we are given are so far afield from what is needed that instead of our China lawyers being able to draft a new contract, they instead have to tell our client that we/they need to start back at square one. Most of the time the draft contracts we are given are so internally contradictory and so rife with provisions that do not work at all under China’s laws that the first thing we need to do with our client is figure out exactly what it is trying to accomplish with the transaction. (This is a decent start point for thinking about contracts in simple terms.)
Drafting a Term Sheet
Once we have the transaction scope figured out, our China lawyers next draft a term sheet in English and in Chinese to send to the Chinese company to determine whether drafting a contract will ever be warranted. Oftentimes, there is a critical provision the Western company and the Chinese company never previously discussed and on which they are at clear loggerheads. The term sheet quickly reveals this, and the parties then choose to go their separate ways. Oftentimes, there is a critical provision that simply cannot legally work and without that provision one or both sides do not want to go forward with the transaction and the parties choose to scrap the deal.
Our Approach and Recommendations
We see these sorts of looming problems so often with draft agreements that I drafted the following “template” explanation, which I modify to fit the particular situation:
We reviewed the draft contract you sent us, and we think it premature to begin drafting a full China contract based on it. Some of it is contradictory, some does not make sense, and some is unworkable or illegal. It also fails to address critical deal terms.
We need to work with you to figure out what exactly you are seeking to do and then use that to determine whether the Chinese side will go along with that. Once we are clear on what you are seeking to do, we then draft a term sheet in English and in Chinese and use that to see whether a deal is possible. If a deal is possible, we then move forward on drafting the contract. If it is clear that no deal is possible on your terms, you then determine whether you want to compromise or walk away.
We charge considerably less to develop and draft a term sheet than to draft a full-fledged contract. This means that if it turns out no contract is warranted, you will have saved a lot of money. If it turns out a contract is warranted, much of what we will do to develop the term sheet will apply to what we will need to do to draft the subsequent contract.
The above is our advice, but obviously what you do is up to you.
Please let us know.
Conclusion
Most companies, especially those without experience in China, should not try to draft or use their own China contract. You should focus on ensuring that all of your material deal points are concisely reduced to bullet points that can be easily incorporated into a good term sheet or letter of intent. This is especially true for companies without legal and Chinese language expertise in-house.
Occasionally, some of our clients who are “old China hands” will bring a good China contract to us that they just want us to review for clarity, conciseness, consistency, and a few of their finer deal points. Those projects tend to go much more quickly from negotiation to signatures. But it is telling that even these old China hands will come to us for our review before proceeding with the deal, even if they are very confident in their current China contract template.
But most companies do not fall into that category, and we enjoy helping them understand these nuances about when to draft their own China contract. Lastly, if you are the company that is still relying only on purchase orders with your China partners, you should stop doing that and get a real China contract.
For more information, see:
Our China Manufacturing Agreements: In Chinese and For a Flat Fee
Lost in Translation: Why Bad Translations are Bad for Your Business
Setting Up Your Chinese Distributor for Success: Titles and Authority Matter
