Are contracts in China ineffective?

Here are some frequently asked questions that I have received and answered about contracts in China, particularly in dealing with factories. These have been edited for clarity and privacy.

Q: I have heard from colleagues in China and Hong Kong that contracts with factories are generally not worth the paper they are written on. Is that true?

Unless those colleagues are PRC-licensed lawyers experienced in dealing with such matters, I’d recommend against letting them have too much influence on your business decisions. For local legal matters, you’d be far better served by consulting local legal experts who work on such cases day in and day out.

Even if you engage a PRC-licensed lawyer, you need to make sure he or she is sufficiently experienced in handling foreign-related legal matters. For instance, your Chinese lawyer should be able to clearly communicate with you on how to apply PRC law to meet you business goals in a contract.

Q: Is a contract with a factory complex to draft? What should be taken into consideration when drafting?

What frequently causes needless complexity is a client’s or their foreign lawyers’ insistence on preparing a contract the way they’d do it in their home country. Foreign laws and local laws are not the same, and what works well in another country may not work here. Moreover, as one of my biggest clients likes to say, the China reality can seem upside-down, and there are things that you simply wouldn’t know without local expertise. For example, certain types of contracts, such as joint venture shareholders agreements, are only legally recognizable upon approval by the local governing authority.

Another factor that often contributes to the complexity of writing a foolproof contract is that clients sometimes can’t provide us with sufficient commercial details, such as product quality standards, payment terms, etc.

Q: Are contracts enforceable against a bullish supplier? Do courts favor the Chinese party?

Properly prepared contracts are of course enforceable. The contract should be well drafted by a local legal professional who actually practices law, not just know the law. A China watcher or foreigner lawyer who claims to know Chinese law is not enough.

Also, prior to writing the contract, it is imperative that the lawyer perform a solid background check on the Chinese party or you could be dealing with a fake company trying to scam you. Many contracts between a foreign party and Chinese party are unenforceable due to inadequate (or complete lack of) background checks on the Chinese party. In lawyer-speak, “due diligence” was not exercised.

When it comes to contracts signed between a foreign party and a Chinese party (most of which are international sales contracts), terms and conditions must comply with PRC law. If a dispute arises on a matter where PRC law does not specifically stipulate for or against it, the judge hearing the case may exercise discretionary power to support or invalidate the relevant agreement terms.

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