A while ago I was interviewed by Laurel Delany for her article, Legal Tips for American Small Business Owners Doing Business in China Laurel wrote the book, Exporting: The Definitive Guide to Selling Abroad Profitably, a truly excellent book on importing and exporting.
LD: What are the top five legal pitfalls for small business owners doing business in China?
- It’s a very different legal system. Little to nothing is implied.
- You generally must register your intellectual property in China to protect it there.
- You absolutely must have written contracts in Chinese with your employees.
- For contracts in general, specificity is critical.
- Foreign companies are under a microscope; you will be treated differently than domestic companies. Know your risks.
LD: What are the three essential elements to crafting an effective supplier contract with a Chinese company?
- Jurisdiction of disputes should generally be in China. If you win a lawsuit in most countries outside of China (like the United States), you cannot enforce your judgment in China.
- Be sure to protect intellectual property. You should make clear in your contract what belongs to you and what your supplier must do to protect your physical and intellectual property. Use an NNN Agreement or an NNN provision for this.
- Be incredibly specific about all requirements. If it isn’t in your contract, the courts generally will not put it there by implication. Also, if it’s not in your contract, your supplier likely won’t do it.
LD: Is there a definitive statement that should be declared in a sourcing contract to ensure the buyer has a good chance of prevailing should there ever be an issue with the seller?
DH: Contract damages provisions are usually the best way both to ensure compliance and to increase the chances of prevailing in litigation. If there is ever litigation, is it better to take place in China or the United States? Almost always it makes sense to have your contract in Chinese with disputes to be resolved in a Chinese court. Winning against a Chinese company in a US court has virtually no value unless that Chinese company has assets outside China, and it usually doesn’t. Know how to sue a Chinese company before you write your contract.
LD: Based on your experience, what’s the single biggest mistake small businesses make when doing business in China? How do you overcome it?
DH: The biggest mistake is believing that China has no laws. American companies that believe China has no laws fail to take the legal steps necessary to protect themselves in China. Those companies end up without protections and they then end up with big problems.
LD: With all its challenges, why should small businesses do business in China at all?
DH: Because year in and year out, something like 90% of Western businesses doing business in China operate profitably in China and because China has 1.3 billion people, most of whom are getting richer every year.