Chinese Supplier Negotiations: Chinese Contracts

by Julian Righetti on November 26,2012 in China Trade ,

While we are not lawyers and can not provide legal advice regarding the intricacies of Chinese contracts, we generally do use contracts when we purchase products. Chinese contracts are useful for us for a variety of reasons, but there are also significant differences between how Westerners and Chinese view contracts.

Chinese Contracts: Why are they useful?

Serve as a guideline for the manufacturer and clear up language ambiguities.

Chinese factories want to make sure they get paid. If you wire 30% or 40% deposit, the factory will still have some risk. If there is any customization in your order, usually the factory will insist on contract because they want you to clarify exactly what you want. If there is a problem with the order, the factory can then say, “hey, look, you signed the contract and we built it exactly as specified in the contract.”

Chinese Contracts: Greater transparency and security.

Contracts are useful for the manufacturers because they can clearly see that the importer is a concerned about their product. Because factories have clients all over the world, they are not often familiar with contract law. For all they know, Nigerian contract law is the same as French contract law. This added level of trust will help with negotiations. Suppliers will be more willing to provide attractive terms. If the factory agrees to something in the contract, they will, more likely than not, perform.

I have uploaded an example of a contract and what areas of attention we generally focus on when we purchase products from suppliers (using Chinese contracts). Please note, this is our contract that we use internally. We do not recommend you use any Chinese contract or copy our contracts from the internet without consulting with a Chinese law office.

Notice that we focus on every specific aspect of production, from sub-components in the products to packaging to sub-component suppliers. Often, if an importer fails to specify, manufacturers can take advantage of this situation by providing inferior packaging or sub-components. For electronics, this is a major problem because shoddy wiring or cheap plastic can provide 1 month of use and then a dead product.

Again, contact a local Chinese lawyer for more specifics or learn more at www.chinalawblog.com

Also, notice that we try and write bilingual contracts. While it may seem that your manufacturer understands you, they very well may not. The sales person may be a 24 year old girl or boy who doesn’t actually have much experience with the products. Therefore, the bilingual contract can ensure that the engineer or sales manager who is putting together your order understands 100% what you are ordering. In addition, there are significant legal issues of using an English only version contract in China.

For smaller orders, we often use a simple, 1-page excel, Chinese-only contract. This is essentially a rough guide. In the event that there is a dispute or problem with the contract, the means of settling the dispute are limited. Certainly, it is difficult to press your claims in a Chinese court without proper representation. Moreover, the vast majority of trade disputes do not go to court in China, but are settled out of court.

Chinese Contract

This 1-page contract essentially outlines the same elements that our 30 page contract does, but in far less detail. For larger orders, we usually use a more extensive, bilingual contract, but for smaller orders, it is still important to have a clear outline of what the order is.

I think there are significant differences between the way Westerners and Chinese interpret and use contracts.

I have learned that in business, anytime anyone says, “oh, let’s not worry about contracts, we work on trust”, this person is likely leaving an opening for later negotiation and flexibility. Fair enough, if, initially, the conditions and situation for a business engagement is unclear, it may not make sense to establish a detailed framework yet. However, when importing from Chinese factories, generally I would not advise to “work on trust”. Always use a clear, concise contract that outlines exactly what you will receive for your money. Funnily enough, I always hear Chinese business people emphasize that relationships and importance of trust in business in China. And it is!……But always use a contract (that may seem circular, but both are equally important).

In China, because the rule of law is much different than in Western countries, there is much more emphasis on the relationship and feelings of the contracting parties. Because, very likely, there may be disputes in the future, both parties want to ensure that they can work through these disputes with counter-parties who are reasonable and willing to bend to solve problems. Contracts have less value than in the West because hard penalties will not be enforced or it will take significant resources, time to receive compensation for default/escaping from a contract.

I commonly encounter the following scenario in China as well as several other countries outside of Asia. Business person X walks into meetings about selling telecommunication equipment Y. Next, business man X starts talking about cancer equipment Z or oil drilling equipment F. You mention you have a golden retriever dog. Business person X also knows someone who can provide dog biscuits N. So, it goes, on and on. However, I think there is a very rational reason for why people do this in places like China (I have seen it in South America too). In forming relationships, because the contract will be difficult to enforce in the future, it is much better to start a new relationships with multiple business dealings. If we can strike up a relationship whereby we have different hooks or other relationships uniting our interest, it will be easier to solve any problems we might encounter with our primary objective, telecommunication equipment Y.

Ultimately, Western contracts CAN confine both contracting parties to a limited range of actions, whereas Chinese contracts still provide multiple attack options even if the contract limits those actions. Finding alternative ways to build leverage over each other is one strategy business people use to remove risk from the equation.

Any decent Chinese lawyer can mock up a basic Chinese contract for between $500USD and $2000USD. Don’t go to court.

Trey House is a managing partner of Hammersourcing.com. He lives in

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China and likes discussing entrepreneurship in China. All Chinese contract information in this blog is his opinion only and not meant to be used for any transactions. You can reach him at trey.house@hammersourcing.com

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