The Perfect Yet Unworkable Chinese Contract.
My clients know way more about their businesses than I do. My job as lawyer is to tell them how I perceive the legal risks and rewards of whatever they are doing and then work with them to help them decide how to proceed. I contribute on the legal side, they on the business side.
Every so often, my firm gets a client who has the "perfect" agreement that it has been using forever and they want us to make it work for China. Okay, no problem. Most of the time.
Other times though we face a real battle and that battle really rests on how one defines "perfect." Sometimes our clients consider the perfect contract to be one that just really really protects them. In every single way. Late delivery? Chinese company has to pay a massive amount in liquidated damages? One item out of one hundred not quite up to snuff? Again, the Chinese company has to pay liquidated damages well beyond any possible harm to our client. Payment by our client? Payment by our client? Ten percent now, the rest upon delivery and confirmation of quality. Oh, and the Chinese manufacturer must not make any even similar product for any other company.
All of the above is well and good, but the reality is that the only Chinese companies that sign such agreements are doing so for Wal-Mart or are doing so, knowing full well they will never abide by it. So when confronted by clients who absolutely insist on these "perfect" contracts and refuse to listen to our advise regarding the realities of the Chinese market, we go ahead and write the contract per the clients instructions. We then sit back and wait a few months for them to return to us to write a brand new contract that someone will actually sign. Or sometimes, the client comes back to us and tells us they no longer want to try to do business in China because nobody there is reasonable.
The best contracts are not perfect for any one side; the best contracts are those that provide the most protection possible, while actually working in the real world.
What are you seeing out there?
Comments
Leaving it all up to a contract or just business savvy is not enough in a lot of countries.
I think that is why people get burned when they come to China or some-other country they are not familiar with or not culturally apart of. People get stuck when relying on, " what works here, is gonna work there" theory.
A nice blend (ratio varying from country to country) of knowing what is going to be upheld in legal terms AND understand how real business is constructed in that country will bring about positive results.
The reality pace of business does not really foster that idea. GO GO GO and NOW NOW NOW is more like it. Most people do not have the time to learn about both and pursue this Utopian idea. But there are plenty of people/firms out there who can fill those shoes. The long term investment in them and finding them is the key.
Posted by: Jamon | December 29, 2009 9:35 PM
Dan,
In some ways I think you have been fortunate with your clients. I generally have seen the opposite - foreign investors who are aware that Chinese companies prefer simpler, shorter contracts and accordingly in an attempt to make their contracts shorter abandon all important terms and clauses. Resistance is then given at any attempt to re-insert critical clauses back into contract that aims to provide them with some semblance of legal protection.
Posted by: Matthew | December 30, 2009 12:01 AM
Had to laugh upon reading "because nobody there is reasonable".
Happy New Year!
Posted by: handan | December 30, 2009 1:26 AM
Well, everyone wants things their way, but they're just not always going to get what they want. It's really naive to think a potential business partner won't be on guard for the people that might short-change them.
Posted by: Joe | December 30, 2009 12:15 PM