Got an email the other day from a good-sized company the other day asking about the benefit of having manufacturing contracts with companies in countries like Thailand, Taiwan, Indonesia, and Malaysia. The email went something like this (I say “something” because I’ve changed it so nobody will ever be able to identify it):
There are three reasons for having a good contract, regardless of the country:
1. Clarity. The first is to achieve clarity. To make sure you and your Thai or Malaysia or Indonesian company are on the same page. For example, if you ask your Thai supplier if it can get you your product in 25 days, it will pretty much always say “yes.” But if you put in your contract that the product needs to ship in 25 days and for every day your Thai supplier is late it must pay you 10% of the value of your order, there is a really good chance the Thai company will get honest with you and tell you that 25 days is impossible and that when it previously said “yes” to 25 day deliveries, it meant only that 25 day deliveries were possible, not that it could consistently achieve that. At that point, you and the Thai company can figure out what is realistic and then you will know what to realistically expect going forward. I can give countless examples of this sort of thing, but this is yet another reason why we advocate putting your contracts in the language of the country in which you are doing business. Clarity before you start the relationship is key and even those people at your company who are doubting the value of a contract implicitly recognize that when they talk about moving business away from those companies that “go against what we want them to do.” How are those companies going to know exactly what you want them to do and what of those things is super-critical if you do not have something in writing (like a contract) making that clear?
2. Prevention. The second benefit of having a contract with your counter-parties in Thailand, Malaysia and Indonesia is that it will likely bring them company to heel. By this I mean that just having a well written contract that is at least potentially enforceable means that the company will know exactly what it must do to comply and what may happen to it if it does not. And in most cases it might as well comply. Let’s use the 25 day delivery example as the example here as well. If your Malaysian manufacturer makes widgets for 15 foreign companies and 3 of those have very clear time deadlines with a very clear provisions setting out the damages for failing to comply and it starts falling behind on production, to which companies will the Malaysian manufacturer give production priority? The 12 companies without a contract or the 3 companies with a contract? Of course it will put the three companies with a good contract at the front of the line. If your Malaysian, Taiwanese, Thai or Indonesian companies believe your contract might be enforced or simply fear that it might be enforced, your contract gives you leverage and power. And as you can see from the next paragraph, that fear truly ought to be there for all countries, with the possible exception of Indonesia.
3. Enforceability. Here’s the funny thing. My firm has written around a thousand contracts with companies in emerging market countries like Mexico, Thailand, Indonesia, Turkey, Vietnam, etc. and I can count on one hand the number of times one of our clients has called us to report a contract breach. I attribute this to reasons #1 and #2 above. And with respect to the few times one of our international dispute resolution lawyers has been called on to try to resolve a breach of contract situation, there has not been a single time where our client was not better off being able to point to a contract and its damages provisions in trying to settle the matter. I should also note that some of the countries with which you are doing business have quite developed and efficient legal systems. The World Bank ranks 190 countries by their “enforcing contract score” and Taiwan ranks 11th, Malaysia ranks 33rd, Thailand ranks 35th and Indonesia ranks 146th. Just by way of comparison, the United States ranks 16th and the United Kingdom ranks 32nd, presumably because enforcing contracts in these two countries can be so expensive and time consuming.