I am often asked (usually right after I quote our fee) whether a China contract I am proposing to write “is even enforceable in China.” I always give the same answer, which is more or less the following.

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.  Clarity. The first is to achieve clarity. To make sure you and the Chinese company are on the same page. For example, if you ask your Chinese supplier if it can get you your product in 20 days, it will say “yes” pretty much every time. But if you put in your contract that the product needs to ship in 20 days AND for every day it is late, the Chinese company must pay you 10% of the value of the order, there is a great chance the Chinese company will get honest with you and tell you that 20 days is impossible. At that point, you and the Chinese company can figure out what is realistic and then you know what to expect, realistically, going forward. Needless to say, I can give countless examples of this sort of thing, but this is yet another reason why we advocate putting your contract in Chinese. Clarity before you start the relationship. It is more important than you think.

2.  Stricture The second benefit of having a contract with your Chinese counter-party is that it will likely bring that company to heel. By this I mean that just 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, in most cases, it might as well. Let’s use the 20 day example as the example here as well. If your Chinese manufacturer makes widgets for 25 foreign companies and 5 of those have very clear time deadlines with a very clear liquidated 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.

3.  Enforceability.  Here’s the funny thing. My firm has written hundreds and 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 contracts written by others, we have felt that China does enforce contracts. More importantly, however, the World Bank feels the same way, ranking China 16th among 183  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.

China contracts worth doing? If done right, you’d better believe it.

What do you think?

  • W. Somega

    Great article!

  • Very clear and concise points. Should be mandatory reading for those doing business in China. Know personally the delivery issue.

  • andre

    100% agree – draft a contract and see discussions become serious, buying or selling doesnt matter. Sure Chinese will try to re-negotiate any contract during the process of the project, but the outcomes depend on you.

  • Dan, I agree. I will only add that in any business dispute in China, the threshold question posed by a judge or an arbitrator, in general seems to be: “where is the core contract (for this deal, relationship, whatever), and what does it say?” They will then determine whether the contract is enforceable, and if so, if whether a breach under that contract has occurred (note how that implies that the contract should be detailed!) and if so, what the contract specifies as to damages (which, as always, is a topic that you have covered clearly and well in your materials)
    The Western concept of “there’s a contract by implication, from various communications and acts by the parties over time” (course of dealing) is not usually much help in these situations–in my experience, the concept is rarely, if ever, going to help in China to establish (dispositively) that there is some sort of enforceable contractual relationship between the parties. So the very existence of a proper written “master contract” that is enforceable, complete and contains liquidated or similar express damage determinations, and the production thereof, is often needed as a precondition in order for an aggrieved party ever to get before a suitable tribunal (perhaps that’s a 4th consideration for you, or at least is a subpart of one of your 3?).

  • James T. Kenny

    A cogent and well-written statement and it certainly makes sense. I would add that compliance with an agreement should be predicated on the mutual assent of the contracting parties, with benefits accruing to both in a predictable and reasonable manner. A change in the material conditions that give rise to an agreement may change dramatically and agreements always face that possibility, but where joint assent and good will exist, common benefits are reaped and agreements tend to endure even in an uncertain climate of enforcement.

  • Charles M.

    Though I am not a lawyer, I have been doing business in China long enough to know that what you are saying is 100% correct. The fact that Chinese companies are always trying to convince us otherwise of this is only further proof.