A good written contract beats a handshake deal every time.Drawing by 7414 at http://bit.ly/1dxKDKD
A good written contract beats a handshake deal. Drawing by 7414 at http://bit.ly/1dxKDKD

I spoke last week at the USPTO road show in Irvine, CA. It was an excellent event (they always are). All good speakers. Good breakfast and lunch. And all for the low low price of $55. You should not miss these events when they come to your city!

During a break, the owner of one of the businesses attending asked me whether his contracts were “enforceable in China.” My response was that I would need to look at the contract to know but that there are actually three powerful reasons for having an enforceable contract with a Chinese company and enforceability is only one of them. I explained the following to him:

There are three reasons why it makes sense to have a contract with your Chinese counter-party, and only one of those reasons is enforceability in court.

1. The first reason is to achieve clarity. Having a well-written contract in Chinese will assure you that the Chinese company with which you are doing business truly understands what you want of it. Put simply, it will put the two of you on the same page. For example, if you ask your Chinese supplier if it can get you your product in thirty days, it will answer with a “yes” pretty much every time. But if your Chinese supplier signs a contract mandating that its failure to ship your product within thirty days will require it pay you 1% of the value of the order for each day late, you will know that the Chinese company is serious about the thirty day shipment terms.

2. The second reason for having a well-written Chinese language (usually) 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 that is at least potentially enforceable means that 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 it might lose.Let’s use the thirty day shipment time as the example again. If your Chinese manufacturer makes widgets for 25 foreign companies and five of those have very clear time deadlines with a very clear contract damages provision, and the Chinese company starts falling behind on production, to which companies will the Chinese manufacturer give production priority? Of course it will put the five companies with a good contract at the front of the line. You need to make sure that you are one of the five. For more on the importance of putting a contract damage provision in your China contract, check out China Commercial Contracts: Writing the Contract Damage Provision.

3. Enforceability is the third reason for having a good China contract. Here’s the funny thing. My firm has written hundreds of China contracts and we have never once been called on to litigate any of them nor am I aware of any of them having been litigated. I attribute this to reasons #1 and #2 above, but I have to admit that this also means I cannot stand up and scream that Chinese courts enforce well written contracts. Even better though, I can stand up and scream that they do certainly seem to prevent problems. Even though I cannot speak regarding the enforcement of my firm’s contracts, I can say that where my firm has sued or threatened to sue or arbitrated or threatened to arbitrate on good China contracts written by others, we have felt that China does enforce contracts. More importantly, however, the World Bank feels the same way, ranking China 35th among 189 countries in terms of enforcing contracts.

And that is a lot of the point. 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 accordingly.

  • DGH

    “well written contract in Chinese” indicates the controlling language of the contract would be Mandarin (Hanzi). Is it correct that a purely English contract wont be enforced in China since English is not recognized as an official language and Chinese firms know this? Dual Hanzi and English?