Header graphic for print
China Law Blog China Law for Business

China Contracts. Email Not Usually Included.

By Dan Harris on Posted in Legal News

My law firm is frequently contacted by American companies seeking our help in pursuing Chinese companies for providing “bad product.” We turn down at least 95% of these cases because we do not want to pursue them.

We typically do not want to pursue these claims because the American company’s contract with the Chinese company does not clearly specify the quality of product the Chinese company must provide. There are usually other problems with the contract (including, oftentimes, the lack of any contract at all), but this is usually the most glaring. I often explain the following to the American company:

I know you expected the ______ you ordered from ______ [Chinese factory] to work for more than a week, but you have to understand that China has levels of quality many tiers below anything that would be acceptable in the United States. Have you been there? Good, because then you have seen t-shirt people selling t-shirts in the street for 25 cents. Those shirts are of such poor quality that they are ruined after one wash. But nobody complains because they paid 25 cents for them and so they got what they paid for. I hate to say this here, but that is the exact argument your Chinese factory will make against you. That had you wanted your product to work for more than a week, they would have been happy to have provided you with such a product, but then you would have had to pay 50 cents more for it.  

Their response to that is oftentimes to insist that they have an email they sent at some point in the process “making clear” they wanted the product only if it is of “good quality.” I typically then point out to them that the term “good quality” in China is pretty much devoid of legal meaning and that even if it were deemed to have meaning, what constitutes “good quality” there is very different from what constitutes good quality here. 

I then sometimes lecture them as well on another difference between US/Canada/Britain contract law and China contract law, which is that Chinese courts rarely, if ever, look outside the four corners of a contract to determine how to rule on a contract dispute. Co-blogger Steve Dickinson recently explained this to a client:

If you think this may be an issue, we can include “complete agreement” language that makes clear that the Agreement documents control and that nothing outside the agreement has any legal effect. Normally, however, this is not done in China. This is because the Chinese look entirely at the written and sealed contract. They routinely ignore everything else (like emails) and they certainly do not include terms that come from a pre-contract writing from either of the parties. 

This is another of the many differences between Chinese (civil) law and U.S./Canadian common law. 

  • http://www.sanfernandocriminalattorneys.com Joe

    I would say that you have to specify things in the contract, but from other posts you’ve had, it doesn’t seem like Chinese courts are even all that careful about honoring contracts between Chinese companies and Western companies.

  • Twofish

    Joe – I would say that you have to specify things in the contract, but from other posts you’ve had, it doesn’t seem like Chinese courts are even all that careful about honoring contracts between Chinese companies and Western companies.
    They actually are. Now once you have a court judgement, collecting is another issue.
    There are some reasons that Chinese law is the way that it is. One reason is that people just don’t want the judge to “reread” the contract. If you give the judge the power to consider things that weren’t in the contract, then there is all sorts of room for “funny business.” If the only role of the judge is to enforce the contract, then it’s easy to tell when there is “funny business”, whereas if the judge has to look for things outside the contract, then there is all sorts of room for the judge do weird things.
    Also the way the the Chinese court system works is very different from the US. In the US judges are people with years if not decades of legal experience as working lawyers before being appointed judges.
    In China, judges go to judge school in much the same way that lawyers go to law school, so you could have a judge “fresh out of school” hearing a case that has very little or no practical legal experience. Because the judge has no practical experience, if it is a difficult case, he or she will consult more experienced judges during a case and take orders from higher level judges, so there is something of a judicial bureaucracy.
    There’s also history. In England, the judges sided against the king so when the king lost his head, the judges ended up with a lot of power. In France (whose legal system then influenced Germany which then influenced China), the judges sided with the king so when the king lost his head, the judges ended up very little power.
    Also, I don’t think that things are likely to change in China. The US way of doing things isn’t the only way of doing things, and France and Germany have perfectly good judicial systems even though judges there have roughly the same standards is China does.

  • Dan

    @ Joe,
    In fact, we are always saying that if one has a good contract and if one understands what the Chinese courts look at in breach of contract actions and if one should win the case under the facts and the law, Western companies do typically prevail against Chinese companies in China’s courts. Particularly before those courts in the more business-oriented cities. Twofish is right to say the bigger problem is collection.
    Twofish is also right to talk about how China’s legal system is much more like France’s and Germany’s than the United States’. This is why U.S. companies seem to have so many more legal problems in China than do European companies.
    I really have no position on which system is better in terms of how they look at contracts. For me to have such an opinion, I would need to be much better versed in comparison studies and in legal philosophy than I am or would ever care to be.

  • Fanch

    Well, the post and the comments below show understanding of civil law systems in a folkloric kind of way. Of course, in Germany, France and other civil law countries, the judge may have to interpret the mutual intent of the parties regarding some provisions of the contract, and therefore take into account pre-contracts, mail exchanges and any document issued between the parties during the formation or the life of the contract. Actually, there is not much difference between common law and civil law regarding interpretation of contracts, interpretation guidelines for judges and parties are basically the same.
    This means an evolution of the judges’ practice in China is likely to occur to meet the standards expected in the business community worldwide, but this may take time.
    If European companies are likely to have an easier understanding of the Chinese system, it might be in other fields, Employment law for example, where the Chinese legal rules are indeed much closer to those of various European systems than to the American ones.
    Besides, one could argue that Americans may have a better understanding of Chinese Judge since in their judicial history that had personalities like Judge Roy Bean who seems to be the impersonation of the rule of law in China today (er… yes, maybe this last paragraph suffers from some kind of exaggeration :-) )

  • Twofish

    To give an accurate descriptions of the differences between contract law in the US and in Germany would require writing a book. The reason lawyers exist is that wild generalizations don’t work very well in specific situations.
    Fanch: Actually, there is not much difference between common law and civil law regarding interpretation of contracts, interpretation guidelines for judges and parties are basically the same.
    I wouldn’t say that’s true at all. If this were true you could take a US contract and have it work just as well in a French or German court under French or German law with minor changes and vice versa, and you can’t.
    Fanch: This means an evolution of the judges’ practice in China is likely to occur to meet the standards expected in the business community worldwide, but this may take time.
    More likely the contracts will be rewritten so to meet Chinese practice. That happens in common law countries where the contracts are written specifically to exclude outside agreements.

  • Twofish

    Also I’ve attached the relevant sections of the Contract Law.
    If the contract doesn’t specify the quality of the product, then under Article 12, it is a defective contract under Chinese law. Article 61 allows the parties to reach an agreement to determine the meaning of the contract, but the law clearly says that any supplemental agreements have to be made *after* the contract comes into affect. Any agreements that were made before the contract was signed are non-binding. Without an agreement, we go to Article 62, which basically says that the judge can use any standard consistent with the purpose of the contract.
    Chinese courts do require “good faith” which means that you can void the contract if you can show that the person on the other end was trying to cheat you, but that’s something different.
    Also here is a cool paper
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1756750
    Article 12 Terms of Contract
    The terms of a contract shall be prescribed by the parties, and generally include the following:
    (i) names of the parties and the domiciles thereof;
    (ii) subject matter;
    (iii) quantity;
    (iv) quality;
    (v) price or remuneration;
    (vi) time, place and method of performance;
    (vii) liabilities for breach of contract;
    (viii) method of dispute resolution.
    The parties may enter into a contract by referencing a model contract for the relevant contract category.
    Article 61 Indeterminate Terms; Supplementary Agreement
    If a term such as quality, price or remuneration, or place of performance etc. was not prescribed or clearly prescribed, after the contract has taken effect, the parties may supplement it through agreement; if the parties fail to reach a supplementary agreement, such term shall be determined in accordance with the relevant provisions of the contract or in accordance with the relevant usage.
    Article 62 Gap Filling
    Where a relevant term of the contract was not clearly prescribed, and cannot be determined in accordance with Article 61 hereof, one of the following provisions applies:
    (i) If quality requirement was not clearly prescribed, performance shall be in accordance with the state standard or industry standard; absent any state or industry standard, performance shall be in accordance with the customary standard or any particular standard consistent with the purpose of the contract;

  • Fanch

    @ Two fish
    I think we are talking about two different issues. Everyone agrees there is differences in contract law between United States and Germany, but there is a wild generalization that I assume can work : if an US typical business contract is subject to a dispute in Germany and is presented to a German court, it will be taken in consideration as it will be presumed to be binding for the parties. Will it work as well as a typical German contract would have ? that I can not tell, we would have indeed to be a little bit more specific about what kind of contract we are talking about.
    But I understand that the issue in the post is about outside agreements, and on if the judge will take them into consideration or not. Well, the answer is yes for Germany and France, despite the fact that they are Civil Law countries. In other Civil Law countries, I must admit that I don’t know except that the answer for Chinese courts is ” very probably not “.
    Now, if you specifically add a clause in the contract main agreement excluding outside agreements to be binding for the parties, then of course this is another question, in Civil Law contracts as well as in Common Law contracts.