Archives: Chinese language

I am constantly asked whether it makes sense to bother having a written contract with a Chinese company.  This question is usually followed by the statement that Chinese companies “never follow their contracts” or that “it is impossible to enforce a contract in a Chinese court, anyway.”

I always give the following answer:

It absolutely makes sense to have a contract with Chinese companies, and it makes sense for the following reasons:

1.  Clarity Before the Relationship Starts. A contract is the best way to make sure that you and the Chinese company with which you are contracting are on the same page. For example, if you ask your Chinese supplier if it can get you your product in 30 days, it will say “yes” almost every time. But if you then put in your contract that the Chinese company must pay you a penalty if it fails to ship your product within 30 days, there is a very good chance the Chinese company will tell you that 30 days is impossible. At that point, you and the Chinese company should figure out realistic shipment dates and put that in the contract. You then know what is actually realistic to expect by way of shipment dates and you can act accordingly with your own customers. Spending the time to negotiate a contract with your Chinese counter-party, especially if that contract is in Chinese is the best way I know to achieve clarity before you lock yourself into a relationship.

2.  Stricture Having a well written contract (preferably in Chinese) that is at least arguably enforceable means that the Chinese company knows exactly what it must do to comply. And, in most cases, it might as well comply. Just by way of an example of how this works, assume that your Chinese company makes widgets for thirty foreign companies. Ten of those foreign companies have well crafted Chinese language contracts that set out very clear time deadlines with very clear liquidated damages provisions for failing to meet the time deadlines. Now let’s assume that the Chinese company starts falling behind on production.  To which companies do you think the Chinese company will give production priority? To the ten companies that are best positioned to sue it and win or to the twenty other companies? The Chinese company will of course put the ten companies with a good contract at the front of the line.

3.  Enforceability.  My firm has written hundreds of China contracts and yet I am not aware of even one time where our client has had to sue on one.  I attribute this to reasons one and two above. I use these numbers as proof that thoughtful and appropriate Chinese language contracts can prevent problems. I should note though that the World Bank ranks China 16th among 183  countries in terms of enforcing contracts. So it certainly is not unreasonable to think that if your Chinese counter-party believes a Chinese court or arbitral body will enforce your contract, or even if your Chinese counter-party simply believes enforcement is simply possible, it has real incentives to abide by your contract.

Not surprisingly, I am not the only person with the above views.  I just read a post on the Emerging Markets Insight Blog, entitled, “China’s channel challenge,” that lends strong support to the benefits of having a China contract.  The post is based on a meeting with “eight senior-most China executives from leading technology, healthcare, and industrial companies to discuss best practices for managing the channel and driving growth despite the headwinds.”

When it came to contracts with Chinese companies, all eight agreed that “the best practice is to more heavily invest in the negotiation, preparation, and enforcement of contracts.”  Even though Chinese companies do not view contracts the same way as Western companies, having a strong agreement “pays dividends”:

Local Chinese partners are more likely to view a contract as a roadmap than a strict and binary agreement.  And, every executive in the  room could share his own horror stories of partners violating contracts (or setting up new legal entities to skirt inconvenient agreements).  Although it may seem counter-intuitive to over-invest in contracts when there is little guarantee that partners will strictly adhere to them, a strong argument was made that investing the time and energy to structure a detailed contract can pay dividends, and furthermore, these contracts should be negotiated annually.

Chinese contracts. Well worth it.

What do you think?

A member of our China Law Blog Group on Linkedin left the following comment (modified slightly) regarding Chinese company names, prompting this post:

Recently I happened to meet with a Chinese lawyer in Qingdao who told me about how the Province [Shangdong] registers the Chinese name of a company. The companies are registered only with Chinese names. Let’s say for a contract with an Indian or a US company they do use just the English name. He says it is compulsory to have the contract in English and in Chinese also. Otherwise the Chinese company simply can deny its English name to avoid participating in the arbitration. Is this true? How we can make a contract foolproof without making a Chinese contract?

Great questions.

Let me start out by saying that we are of the view that in most cases it makes sense to have your contract with a Chinese company be in Chinese.  We explain why we take this position in China OEM Agreements. Why Ours Are In Chinese. Flat Out:

Because international contracts are so often between parties from different countries, they commonly are written in two or more languages. Nearly all of the contracts we draft for our Western clients doing business in China are in English and Chinese (though about ten percent of the time, we also translate them into German, Spanish, Korean, or French as well). This duality of language can, if not handled properly, pose big problems.

When we do a contract in both English and Chinese, we always call for the contract to specify ONE official language to control if there is a dispute. We do not advise drafting a contract that is silent on the official language, nor do we advise drafting contracts that call for both English and Chinese to apply. Having two official languages pretty much doubles the chances for ambiguity and pretty much doubles the attorney time (and fees) that will be incurred in fighting over the meaning of the two contracts. It is expensive enough litigating on one contract; there is no benefit litigating on two.

So the question for us comes down to whether English or Chinese should be the official language of the contract and the answer to that question requires we first decide where we would most like to see disputes resolved. If we go for arbitration in English (and if the Chinese manufacturer actually agrees to this, which is quite rare), then we almost certainly will want English as the official language. But if we decide the Chinese courts will be the best place to resolve conflicts, then we want Chinese to be the official language.

But, having said this, it is not true (as many seem to believe) that English language contracts will be deemed invalid by Chinese courts or arbitral bodies.

But what about company names?  The only official company name is the Chinese language version and this is true as well for WFOEs in China and Joint Ventures as well.  If you are going to form a China WFOE, you must come up with a Chinese name for your WFOE and that Chinese name will become your one and only official name.

But must one put the Chinese name on any contract with a Chinese company?  No, this is not required, but it is certainly smart to do so. I have actually never heard of a Chinese company claiming it is not them who signed a particular contract using the English language version of their name, but it absolutely does not surprise me to hear that happens.  Our firm has always used the Chinese language version of a Chinese company’s name, even on the English language version of our contracts and we do so for clarity. We also typically put in the address of the company as well and sometimes its license number as well.

I can certainly imagine a Chinese company seeking to get out of a contract by claiming that it never signed one because the contract at issue does not contain its Chinese language name. But at the same time, I also think that someone facing such a claim ought to — in most instances — be able to prevail against it by marshaling evidence to show that it was indeed the Chinese company that signed the contract. This will be particularly easy if the Chinese company has a well-known and often used English language name or if the English language name is a direct translation of a unique Chinese language name.

I actually think the bigger issue regarding contracts with Chinese companies is whether the contract is sealed or not.  In How To Write A Chinese Contract That Works, we wrote on how Chinese companies were notorious for trying to get out of contracts they had not sealed/chopped:

For written contracts in China to be effective, one of the following must be true:

  1. The company’s legal representative signed it. Chinese law provides that a company’s legal representative has apparent authority to bind the company. This means that even if that representative lacks the actual authority to bind the company (maybe because the board of directors or the shareholders never gave the representative the authority to contract with you), the legal representative’s signature will bind the company. There is, however an exception to this and that is when you know that the legal representative lacks the authority to bind the company.
  2. The contract is appropriately sealed.  An appropriate seal (oftentimes called a chop) is applied to the contract. It does not matter who applies the seal, so long as it is the right seal. This means it must be sealed either with a contract seal that sets forth the name of the company or, as is more commonly done, with the Company Seal. Each Chinese company has only one company seal (no copies).

Chinese companies are notorious for trying to get out of contracts by claiming they never actually signed them or that they were signed without the proper authority and so if your contract is big enough and important enough, you should consider doing all of the following to minimize even further the likelihood of the Chinese company seeking to get out of your contract:

  1. A signature from the company’s legal representative. Of course, you must first confirm from the company’s business license who exactly is the company’s legal representative.
  2. A resolution from the company’s board explicitly approving the contract and authorizing the legal representative to sign it.
  3. The affixation to the contract of the company seal or the company’s contract seal.

In that same post, we set out the basics of what it takes to write a good Chinese contract:

If you want to greatly increase your chances of being able to enforce your contract with your Chinese counter-party, you should do the following (you should do a lot more than this, both within and outside your contract, but I am limiting this post to just those things directly related to being able to enforce the contract and its terms)

  1. Have a written contract (see this, this and this);
  2. Have that written contract be in Chinese;
  3. Have that written contract set out clearly how disputes are to be resolved and, even more importantly, pick the right forum for those disputes;
  4. Have that written contract set out in excruciating detail what the Chinese company must do to be in compliance with the contract;
  5. Set out the liquidated damages the Chinese company must pay if it fails to comply with the contract;
  6. Make sure the Chinese company signs AND seals your contract.

It is impossible to make any contract foolproof in that there will always be risks in any deal, but doing the above will increase your odds.

What do you think?

 

 

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We recently analyzed what we understand to be Baidu’s standard documents for those who wish to market their products or services on Baidu.  Because so many foreign companies are marketing on Baidu, we thought the following report might prove helpful.

Baidu’s advertising contract is composed of the following three basic documents:

  1. The Chinese/English Order (“Order”) Baidu provides to its potential customers.
  2. Baidu’s Marketing Contract (“Contract”) in the Chinese language found at e.baidu.com/accept.html.
  3. Baidu’s marketing services Purchase Order.  We have not seen a copy of this document and we were not able to locate a copy of it on Baidu’s website or elsewhere on the Internet.

The key document is the online Chinese language Contract. The only provision that is unique to the Order is the provision related to payment in foreign currency. This provides that foreign currency will be converted into Chinese RMB at the exchange rate in effect at the receiving bank. If after exchange there is a shortfall in the required payment amount, the customer is required to make an additional payment to cover the full amount. If the exchange results in an excess payment, then the excess is credited to the account. No refund is made to the customer. This is all pretty standard for foreign currency transactions in China.

Our remaining comments will concern the Contract.

In general, the Contract is an even handed and fair document. The provisions are actually far less commercially oppressive than the typical U.S. Internet marketing contract, which are usually far more one-sided and oppressive to the customer than the Baidu contract.

However, it is also true that the Baidu approach is not international. They do not translate their key contracts and they expect that foreign customers will be contained within an entirely Chinese system. Since Baidu is almost entirely a Chinese focused website, this attitude is understandable.

Our specific comments are as follows.

1. The Contract clearly states that the governing law is the law of China. All disputes must be decided in the Chinese courts located in Haidian in Beijing. Haidian is one of the most sophisticated courts in China, so this jurisdiction is not unfavorable to the foreign customer.

As a result, foreign customers will have a remedy against Baidu in China. On the other hand, Baidu must also bring an action against foreign customers in Beijing. This means that Baidu does not have an effective way to bring an action against a United States company with all of its assets in the United States because Chinese court judgments are generally not enforceable in the United States.  So even if Baidu were to sue an American customer and win in China, the judgment would not be enforceable against that American company’s assets.

2. As the Order makes clear, the general structure of payments is that the customer make an annual management fee payment and then make prepayments for advertising fees. In the case where the prepayment is not sufficient to cover fees, Baidu will provide notice and the customer must promptly pay the excess. Failure to pay is a breach resulting in termination of services.

The agreement provides for many cases where the parties may terminate the agreement. The basic approach is as follows:

  • When termination is not for a breach, then Baidu will refund any remaining amounts in the prepayment account. The annual management fee will not be refunded.
  • When termination is due to the breach of the customer, then services terminate and no refund is provided.

This is a crude approach, but is typical in the industry.

  • As you would expect, Baidu reserves the right to screen content. In addition to the normal screening for illegal content, Baidu also screens to ensure that their is no content that violates Chinese law or policy on political content. Baidu will provide notice of any screened content. If the parties cannot agree on alternative content, then the customer has the right to terminate. This is not treated as a termination for breach.
  • If the customer wishes to question Baidu’s advertising statistics, the customer is to provide written notice to Baidu. If Baidu is not able to satisfy the customer, the customer has the right to terminate. This is not treated as termination for breach.
  • If a third party makes any claim about the content of any material posted by a customer, Baidu will immediately remove the content. Baidu will notify the customer of the claim and the customer will deal directly with the claiming party. Content will not be restored until after the dispute is resolved directly between the disputing parties. If no resolution is possible, the customer has the right to terminate the agreement. This is not treated as a termination for breach. Though this procedure no doubt seems unusual, it is pretty much required by Chinese law, since Baidu is directly responsible for infringing content if it does not immediately remove content once notice is received from the aggrieved party. Note also that Baidu provides that the customer is liable for all Baidu costs in dealing with such claims, even if the claims prove to be frivolous.
  • Baidu accepts liability for losses resulting from its intentional acts or negligence. Baidu does not attempt to severely limit its liability in the way that is typical for U.S. Internet companies. A partial reason for this, however, is that Chinese courts do not typically award consequential or punitive damages, so the need for such a disclaimer of liability is not great.

The above are the main issues relating to the Baidu agreement.

Anyone else?

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Cheating a bit here, but since I am on the road, I cannot help it.  I’m cheating because this post is nothing more than the typical email we send to our clients at the commencement of our work for them in forming a China WFOE.  But I don’t feel bad because what better way to convey some of what it takes to get going with a China WFOE than by using a true to life example, freshly received today, no less. Here goes:

Following please find the preliminary information and documents that we will need for the WFOE formation. Depending on the exact nature of your activities in China and the requirements of the local government, we may need additional information at a later date. The below will be sufficient to get us started. Please never hesitate to contact any of us with any questions.

1. Full legal name, legal structure (corporation, LLC, partnership), state of formation, and registered legal address of the shareholder of the WFOE. I assume that your U.S. entity will be the shareholder. If this is not correct, please explain.

2. Most recent registration document (usually called an annual report) from the state of formation showing the name, address and officers and directors of the shareholder. Our office can obtain this document after we receive your response to item 1 above.

3. Proof of existence of the shareholder. For this we will need certified copies of a) a certificate of good standing and b) the most recent annual report for the shareholder. These documents must be authenticated by the secretary of state of the state of formation and also must be authenticated by the applicable Chinese consulate or embassy. This is a complex process. Our office will handle obtaining these documents and processing with the relevant Chinese consulate/embassy.

4. Name of the WFOE in Chinese and English. We can assist in selecting the name if you wish. Chinese company names are complex. For now, what we need is the basic name that you want. We will then work with the local authorities to determine what should be the full legal name. Note that China is really only concerned with the Chinese version of the name. There is no real control on the English name that you use.

5. Lease of office space for the WFOE. The lease must be valid for at least one year beyond the eventual approval date for the WFOE. Since approval may take some time, it is best to have the initial term of the lease be at least one-and-a-half to two years. The lease must be in proper format and must be registered with the local real estate authority. We will also need proof that the landlord owns the property in question and has the authority to enter into the lease. This is usually proved by provision of a land rights certificate and proof of existence of the landlord (National ID for an individual, business license for a company). We will work with you during the leasing phase to ensure the lease is properly executed and that the landlord has proper authority. Prior to your entering into the lease, we will determine whether the proposed use is permitted for the premises and whether the proposed address is acceptable for a WFOE. Leases are often the biggest obstacle for WFOEs, so this is a matter to address right away. Note also that the specific details of the documentation requirements for a WFOE depend on the district where the WFOE will be formed. We therefore need to know the proposed address for the WFOE or at least the proposed district before we can make a final determination of the exact procedures that will be required for WFOE formation. Note also that we cannot even begin the registration process in China until we know the address of the proposed registered office for the WFOE, as well as the proposed use. This highlights the importance of the lease in the registration process.

6. We must specify the scope of business of the WFOE. Please provide a statement of what services the WFOE will perform on a daily basis. We need reasonable detail for this, but no more than one page. The scope of business should address the following questions, among others:

  • How many employees will be working there? Are they full-time or part-time? Will they be working in the leased space or off-site?
  • Will the number of employees vary over time?
  • What is the nationality of these employees?
  • What will each of these employees be doing in this rented space – will they be programming? consulting? buying? selling? manufacturing? providing customer support? managing other employees? something else?
  • Who are the customers of the business? That is, who will be paying for the services provided by the WFOE?
  • What is the projected cash flow of the business? Where will income go (i.e., to the WFOE, to the parent, to an affiliated entity)? How will expenses be paid (i.e., directly by the WFOE, by the parent, by an affiliated entity, etc.)? Where will the WFOE get its money to operate?

The scope of business will also be used in the company name as noted in Question 4. above.

7. We must provide a feasibility study that states the basic business plan of the WFOE. Our staff will draft that document. In order to do this, in addition to the information requested in Question 6 above, we need the following information:

  • Statement of start up expenses in reasonable detail.
  • One year and five year proforma income statement and balance sheet.
  • Statement of what services/product the WFOE will provide (to the extent not addressed in Question 6).
  • Statement of the expected cash flow of the WFOE: what entities will pay and what will they pay for (to the extent not addressed in Question 6)
  • Initial staffing plan for the WFOE with a three year and five year projection. Of particular importance is the nationality of the staff (to the extent not addressed in Question 6).
  • Statement of the business opportunity this WFOE will exploit, the expected market for the service, how you propose to meet the needs of that market and the benefit to China from the project.

8. Registered Capital.

We must state the amount of the registered capital for the WFOE. This amount is the actual amount of capital that will be paid in by the shareholder as start-up capital for the WFOE. Registered capital is not a deposit: it is the actual operating capital used by the WFOE for payment of start up expenses such as rent, remodeling, equipment and salaries. There is no set number, since the amount required for each WFOE is different. As a rule of thumb, most Chinese regulatory authorities expect that registered capital will be equal to at least the first years expenses. Some districts have a minimum amount for registered capital. For example, districts in Shanghai generally require at least US $150,000 in registered capital. Note also that certain businesses will be required to have higher registered capital minimums. The rule is that all registered capital must be paid within two years after approval of formation of the WFOE. Fifteen percent of this amount, or the required minimum, whichever is greater, must be paid within 90 days after formation of the WFOE. The amount of registered capital must be considered carefully. Any amounts paid into the WFOE by the shareholder in excess of registered capital will be treated as income to the WFOE, and taxed as such. Accordingly, it is important not to set the registered capital number so low that you would encounter this problem. We will discuss this in more detail with you as we progress.

9. Management.

The WFOE can be managed through a) a board of directors or b) through a single managing director. For a board of directors, the number of directors is typically three. One director is selected as the representative director who has the right to enter into agreements on behalf of the WFOE. For the managing director, a single person is appointed as the managing director. This person is also the representative director. You will need to determine which management method you will use. For single shareholder WFOEs, the managing director approach is common.

You will need to designate the following directors and officers:

  • Directors.
  • If you will use a board, state how many directors. Provide the full name and address of each director.
  • If you will use a managing director, provide the full name and address of each director.
  • General manager.
  • The daily business of the WFOE will be managed by a general manager. This person can be a member of the board or an independent individual. The person can be a Chinese national or a foreign national. The person can be a resident of China or a non-resident. Typically, for a WFOE the general manager is a Chinese national who does not serve on the board and who is resident in China. However, there is no fixed pattern.
  • Supervisor.
  • The supervisor is responsible for supervising the conduct of the board in order to protect the rights of shareholders. In a one shareholder WFOE, the supervisor position is not necessary. However, Chinese law requires an appointment to this position. The person must be independent and cannot be a director or the general manager.

Documentation. For each person above, provide the following:

  • Name and address.
  • ID: For non-Chinese citizens, we will need four color copies of their passport. For Chinese citizens, we will need four color copies of their national ID card.
  • Resume: one or two page, including birth information and address, signed, four originals.
  • Photos: four 2″ visa size photos.

10. Proof of financial status. Normally, this can be done through a letter from your bank stating the basics of your deposit relation with the bank. We will provide you with an approved form for this letter. In some cases, the Chinese authorities will require an audit of the investor company. We will determine as soon as possible whether such an audit will be required.

Interesting post on the China Business Leadership blog, entitled, “China — The Language Barrier,” regarding how language can play out in China employment situations.

The post talks of a manager who insisted on speaking English to his Chinese staff even though many did not understand him. It then talks of the pros and cons of having “a global [company] culture centered around English”:  

I know some companies want to have a global culture centered around English. I love the idea of having a global culture. Language will help, but do not forget the cost. I know one Research and Design Center in Shanghai where they employ a full time American English teacher. That is a good idea considering their requirement that top managers all speak English. However, it does mean that they are dramatically limiting their pool of workers. And high level R&D workers are not plentiful anyway. So they are more chronically short of workers. I personally would choose a global culture built around certain values as opposed to skills like English in most cases. But I think each company must carefully choose how many and which must haves they want to name.

The post then discusses the importance of using good translators, a point I have often made on this blog. For example, in the post, “How To Choose The Right Chinese Interpreter. Tell Me Who Do You Love,” I note that others will view you as they view your interpreter, so you had better choose wisely. China Business Leadership too stresses the importance of those who are going to convey your message:

Your translators are critical. You need a translator or translators that can do more than a word for word translation of what you are saying or writing. You need someone who can translate the heart of what you are saying in a culturally contextualized way. That is a lot to ask of a translator. We would vet and background check them at least as deep as we do senior managers.

So true. Many years ago, I was interviewed as part of a study on how international law firms use interpreters and translators. I was asked how we chose our interpreters and translators and I said that in almost all cases, we used only our own lawyers and paralegals because we know and trust them. The interviewer then asked me if those requirements have stunted my firm’s growth and I replied that it had, but that it was worth it because it guaranteed quality.

Do you require all of your China employees speak English? Does this reduce the overall quality of your work-force and/or increase the costs? Do you hire in-house translators/interpreters? How do you decide who to use to translate/interpret for you?

This is part II of our series on what are commonly referred to as non disclosure agreements or NDAs. In Part I, “Why Non Disclosures (NDAs) Alone Are Not Enough For China,” we talked about how many companies are using inadequate, off the shelf American NDAs in China. Those agreements are inadequate for three primary reasons. First, they typically fail to cover internal disclosure within a network. Second, they oftentimes fail to prevent the Chinese signing party from manufacturing or using the product or information sought to be protected. To remedy this, non-use provisions are required. Third, they usually fail to prevent the Chinese signing party from circumventing the foreign company by going directly to the foreign party’s customers or clients. To remedy this, non-circumvention provisions are required.

But even if these NDA agreements were to account for the three issues discussed in Part I and more briefly above, most of the ones we see would still not be worth the paper on which they are printed because they are pretty much unenforceable in China. Let’s let co-blogger, Steve Dickinson, explain:

Most NDA agreements I see are just modifications of the standard NDA used in the U.S. The non-disclosure provisions do not deal with the special problems of related parties in China and the non-use/non-circumvention is treated inadequately or not at all. Only a carefully thought out NNN Agreement (non-disclosure, non-use, non-circumvention) that treats all the issues is of any real use in China.

Even the best agreement is of no use if it cannot be enforced. This is the other major defect of the typical NDA agreements I review: the agreement is usually not enforceable. It is absolutely required that an NNN Agreement be enforceable in China. And yet, most of the NDA agreements I read are governed by U.S. or English law with enforcement by litigation in the U.S. or England or by arbitration outside of China. This approach is almost always useless. U.S. courts almost never have jurisdiction over Chinese companies, so a judgment from a U.S. court is of no value. Arbitration outside of China is expensive and slow and proof is difficult or impossible and denies access to injunctive type remedies that would be available for arbitration in China.

To greatly increase your chances of having an NNN Agreement that will actually be enforced, the following nearly always makes sense:

  1.  The Agreement must include an accurate translation into the Chinese language.
  2. The agreement must provide for enforcement through litigation in a Chinese court or through CIETAC arbitration. To further ensure that the NNN Agreement will be enforced, the NNN Agreement should provide for specific monetary damages that will be awarded in the case of a breach. Though U.S. and other common law systems sometimes discourage using this sort of liquidated damage provision, the Chinese system is the opposite. Specific contract damage provisions are encouraged since they ease the court’s work.
  3. Most NDA type agreements rely almost exclusively on injunctive relief as the primary enforcement mechanism. This is a a major mistake in China. The preference for injunctive relief in common law systems (such as the United States or England) is because it is often difficult or impossible to prove the amount of economic damages that result from a breach. This is not really an issue under Chinese law, where parties to a contract are encouraged to set a fixed amount for damages that will result from a breach. If written correctly, the liquidated damage amount sets a floor on damages, but if actual damages exceed that amount, it is permissible to seek damages for the excess. In addition, money damages and injunctive relief are not exclusive. A court or arbitrator is free to order that damages be paid and that the infringing/breaching party terminate the infringing action.

NNN Agreements that set forth a specific damage amount that will result from a breach make the cost of a breach clear to the Chinese manufacturer and if set high enough, will go a long way towards discouraging a breach. Having a properly written liquidated damages provision in your NNN Agreement also makes for quick and effective litigation/arbitration, which is much to the advantage for the damaged party.

Many Chinese manufacturers quickly sign the traditional poorly drafted and unenforceable non disclosure agreement without even thinking about it. Why is that? Because they know that their signing it comes with little to no risk.

When a Chinese manufacturer sees a well drafted NNN Agreement, they will sometimes resist signing. For some manufacturers, the reason is simple. Their whole reason for doing your outsourcing work is to acquire your technology and designs for their own products. So long as your technology is not protected by patent or trade secrecy law, and you have failed to require the Chinese manufacturer sign a strong NNN Agreement, the Chinese manufacturer is free to use your technology for its own purposes. Absent an agreement that prevents them from doing otherwise, it is perfectly legal for a Chinese manufacturer to use your unprotected information for their own products manufactured under their own trademarks. However, if an NNN Agreement makes clear that the Chinese manufacturer cannot appropriate your technology and contacts, then the manufacturer that wanted your OEM manufacturing solely for these reasons is no longer motivated to enter into the arrangement with you.

Sometimes the manufacturer has more complex reasons for refusing to sign a well drafted and enforceable NNN Agreement. A well drafted and enforceable NNN agreement shows the Chinese manufacturer that the foreign party knows its way around China and that it plans to hold the Chinese manufacturer to the terms of their contractual commitments. For this reason, the Chinese manufacturer may reasonably decide it would be better off just manufacturing for those foreign companies that do not manifest an intent to hold the Chinese side to their commitments.

Therefore, using a well drafted and enforceable NNN Agreement does actually increase the risk that the Chinese side will refuse to sign. However, we see this as a good thing. If the Chinese side has a good reason for not signing, they will say so and the agreement can be modified to account for that. If the reason for the Chinese side refusing to sign is not a good one, the Chinese side will be forced to make this clear also. In either case, the foreign company benefits from finding out in advance what is really going on. This “advance notice” function is one of the main advantages of a good NNN Agreement; it forces both sides to face up to the real situation and to engage in a frank discussion of what is really required for a successful and long term relationship. This is a much better situation than ritually executing a meaningless agreement.

The China Speed blog just did a post, entitled, “The Fifty Big Legal Words,” setting forth the English to Chinese (and, therefore, Chinese to English as well) translations of fifty commonly used legal words.  China Speed “would wholeheartedly not recommend using this list to draft the contract for your billion dollar joint venture or your Chinese marriage license.”

The official language of China is Chinese.  If you sign a contract written in Chinese it is a valid contract whether you understand Chinese or not.

Rule Number One for doing business in China: do not sign a contract in Chinese unless you know exactly what it says as you will be bound by that contract.

This recent article in Xinhuanet bears this out.  Seems some Americans (is it just me or does it always seem to be Americans who get themselves into these situations?) are of the view that contracts in China should either be in English or, if they in Chinese, should not apply to them even when signed.

The Xinhua article highlights William Arrington, an American who found out “the hard way” that a Chinese apartment lease contract he signed actually applied to him even though he did not understand it “at all” beyond the numbers:

It was fine at first, because his Chinese roommate explained the contract to him. But when the roommate left, the troubles started.

When the housing management company came to collect maintenance fees, Arrington argued: “Isn’t that included in the monthly rent”

“No, the contract says clearly that the maintenance fees are not included in the rent,” he was told.

The article goes on to talk about “James Baquet, a teacher with Shenzhen Polytechnic, [who] had an experience similar to Arrington’s, although he was luckier because his landlord spoke English:”

“My landlord is a lawyer who speaks good English, and he explains the contract terms to me. I had to rely on him, although I did not know if I should trust him,” said Baquet. So he signed the contract, but added a line below his name: I CANNOT READ CHINESE.

Rule Number Two for doing business in China:  the last person you want to be your translator on a contract is the person with whom you are contracting.  If you do not know Chinese, bring on someone you trust completely to translate for you.  Better yet, hire a China lawyer fluent in both English and Chinese.

Mr. Arrington proposes a fail-safe solution to prevent someone else from falling prey to the legal problems that befell him:

Arrington suggested that the government make it a rule requiring all contracts involving foreigners be bilingual.

I am not aware of any country in the world with such a requirement and until such a law is enacted in China you should just follow the basic rules set forth above.

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One of the things I love about writing this blog is the opportunity it gives me to read China posts by bloggers with completely different perspectives on China than mine.  The other day I came across an excellent post on the Journal Of Intercultural Learning, entitled “Cultural Implications of Google’s New Chinese Name.” The post examines Google’s new Chinese name, pronounced Gu-Ge, and in doing so, makes clear the importance of choosing a brand name for China that suits Chinese culture.  The post’s discussion of Coca-Cola’s initial naming problems in China ought to — standing alone — give anyone pause in choosing a company name for China:

The name Coca-Cola in China was first rendered as Ke-kou-ke-la. Unfortunately, the Coke company did not discover until after thousands of signs had been printed that the phrase means “bite the wax tadpole” or “female horse stuffed with wax,” depending on the dialect. Coke then researched 40,000 Chinese characters and found a close phonetic equivalent, ko-kou-ko-le, which can be loosely translated as “happiness in the mouth” (from Funny Translation Errors)

The article then compliments Google on its new Chinese name:

No matter what people would say about the new name itself, Google seemed to have made the right move in terms of pursuing its long term goals in China. With its new Chinese name, Google wants to be as “culturally-friendly” as its major local competitors like Baidu, whose name was in fact also taken out of an ancient poem. And with this new name, Google manifested its strong hope for further development in the local market by the local ways. At least Google demonstrated its “intercultural” efforts, despite all other controversies. Its new Chinese name would certainly help it to take more roots among millions of the internet users and in the general public where not all are willing to learn English, and some perhaps even dislike it for reasons that it has “corrupted” the Chinese language.

Bottom Line:  Choosing a Chinese name is both extremely important and extremely difficult.  Western companies setting up operations in China should consider how their name plays in the Chinese market.  Sometimes the Western name should remain unchanged, sometimes it should be modified, and sometimes it should be tossed entirely.  Many in China speak other than Mandarin, so in choosing your name, you should also consider how it will play in Cantonese and perhaps other of China’s many languages as well.