Why Good China Contracts are Still a Good Thing

With all the bad blood being spilled between China and the rest of the world these last few months (and even before that) our China lawyers are often hearing again what we had not heard so often for years: Why bother with a Chinese contract when “everyone knows” China will “never” enforce it?
I usually respond with something like the following.

There are three reasons why it makes sense to have a good contract with your Chinese counter-party even if what you say is true.

1. Clarity. The first reason is to achieve clarity. Having a well-written contract in Chinese will ensure that the Chinese company with which you are doing business truly understands what you want of it. In other words, it will help make sure that the two of you are on the same page. For example, if you ask your Chinese supplier if it can get you your product to your US facility in 20 days, it will almost invariably say that it can. But if you put a contract in front of it that states that you get a 2% reduction in your future purchases for every day it is late or, alternatively, that it is required to pay you 1% of the value of your order as a liquidated damage for each day it is late, it likely (yes likely), will then tell you that it will need 30 days, not 20. You just achieved clarity and realism on shipment dates and that is always a good thing , especially in a cross-cultural context. Now add in all of the other provisions where something similar will happen and you can see how getting clear upfront with your Chinese counter-party can be so important.

2. Threat. The second reason for having a well-written Chinese language contract with your Chinese counter-party is to convince it that it will be better off complying with your contract than violating it. Having a well-written contract — even if your chances of enforcing it in a Chinese court are not great — means the Chinese company knows exactly what it must do to comply and knows that its failure to comply could subject it to a lawsuit that will cost it money to defend against and that it might lose. Let’s use the 20-day shipment time as the example again. If your Chinese manufacturer makes widgets for twenty foreign companies and five of those have very clear time deadlines with very clear contract damages provision, and the Chinese company starts falling behind on production, which of its foreign buyers will get production priority? The five companies with a good contract, of course. There is no reason why it would be otherwise. You need to make sure your company is one of those five. For more on the importance of putting a contract damage provision in your China contract, check out On the Importance of Contract Damages in China Contracts.

3. Enforceability. Enforceability is the third reason for having a good China contract. My firm has written hundreds of China contracts, and yet we have never once been called on to litigate any of them, nor am I aware of any of them having been litigated. This is largely because of reasons #1 and #2 set forth above. This means I cannot tell you that having a really good contract tailored specifically for China will get you a court victory in China. And, yes, I will concede that your chances of such a court victory today are likely less than they were two years ago. But this does mean I have a lot of evidence to argue that having a good contract is great for preventing problems. And isn’t it better to prevent problems and thereby avoid litigation than to have a problem that requires large outlays of time and money to litigate and then you prevail, or not?

Bottom Line: If your Chinese counter-party believes your contract will be enforced, or even if it just believes it may be enforced, it is likely to act according to the contract. Conversely, without an enforceable contract, your Chinese counter-party knows it can almost certainly act with impunity.