For most foreign-invested enterprises in China, business plans and decisions that need to be carried out are heavily relying on the competency and loyalty of its local partner, or their hired management team. For example, if a WFOE wanted to build, develop the China local market for certain brands owned by its mother-company, they probably need to hire local talents, or engage services of a capable third party (who would still need to use local latents) to do the job.
We received instructions from one of our long-term WFOE clients to review a contract. The purpose of the contract was for the WFOE to engage an outside services provider to market and promote its brands in the China market. The contract sent to us stipulated that the WFOE needs to pay a services fee over a million each year, and the WFOE may assess the quality of the services provided UNTIL the very last month of the year. We noticed the KPI (key performance indicators) were mentioned in the contract as an attachment but we didn’t receive the KPI file in the first place. We requested to have a look at the file, with the hope that it would be more reasonably structured.We then reviewed the KPI file, we frowned at it and struggled to proceed.
Problem? Neither in the contract itself, nor in the attached KPI file, we could see the WFOE may exercise the right to terminate the performance of the contract — if ever they found out the provided services unsatisfactory. This was the one big issue besides a series of other issues we found. As lawyers, we often read contracts where one party enjoys so much rights yet little of its obligations mentioned, but I was still amazed by how the contract above managed to pass our client’s internal preliminary review before having it sent to us.
Suggested by our associate who has her preliminary review of the contract (she was at loss), I made a call to the WFOE’s CFO, asked if they have any other options. She told me someone from the their marketing department arranged everything and she was being told that’s the only services provider that worker could find. She said she would push the worker to find something else. Soon, we received another contract, presented by a different service provider, yet the content of the contract remained pretty much the same to the first one we received.
At the suspicion of someone from the WFOE’s marketing department may take advantage of its post (e.g. taking kickback money by collaborating with personally selected outsourced services provider, but we are not in a position to presume), we called upon an e-conference to address the matter, express our concerns, get instant feedback, and push things forward in a more efficient way after going through the back and forth, time-wasting e-mail correspondences.
At the e-conference, the CFO was getting even more frustrated, and seconded our suspicion. We advised that the WFOE needs to prepare the contract, instead of directly revising the contact sent over by any chosen services provider. She soon sent us the WFOE’s standard services agreement for us to have a review. Yet, we still find it very difficult to review the contract, for it didn’t include very necessary and important commercial terms or any such information were provided along.
Upon the CFO’s request, we wrote the following opinions that could be used as reference to their internal decision-making process. Below is the experts of the opinions we sent:
I write to address the obstacles we encountered in reviewing some contracts sent to this office.
During the contracts reviewing process, we have found a big compliance risk within your company – the type of risk which may not be solved by us revising the contract alone.
Our primary opinion is those contracts lack necessary commercial terms negotiated and agreed upon – if there is any real negotiation took place at all. Specifically, those contracts drafted for your company engage branding and marketing services, which should at least stipulate the services to be provided relates to payments made on schedules…
To precede, you have two options:
Option 1: Requesting the other party provide a standard, reasonable services contract. Based on the contract provided, we help you revise the contract to the extent that all you need to do is to approve its signing. If no contracts provided is acceptable and you still want to use a specific services provider, we highly suggest that you should negotiate and draft your own contract as mentioned below Option 2.
Option 2: Negotiating and drafting your own contract. The services contract sample provided by your company lacks sufficient commercial articles. You need to have your in-house or out-sourced legal counsel to negotiate the deal and organise the content for those commercial articles. If you want us out-sourced legal counsel to get involved, we at least need to be able to communicate directly with the other party.
In the above-mentioned opinion, want we really want to say are: (1) your contract negotiation seem to us never really happened at all; (2) you didn’t have a due process of approving a contract provided by the other party and/or your local management team.
To reduce the risks of entering into an agreement with any third party, we suggest that the following two decisions at least should be taken into consideration:
Step 1: Decide who should provide the contract. E.g. if it’s a services contract, it is best for the services provider to provide their contracts as they familiar with what they offer, and it is also a good opportunity to have a preliminary review about their competency by reviewing if they could provide a reasonable contract to revise.
Step 2: Decide who should be the one that responsible for reviewing and/or revising the contract, and who should be responsible for approving. It could either be the in-house, or the out-sourced legal counsel. The not-to-do is having a worker who “negotiated” the deal do the job. This is to avoid potential commercial bribery and embezzlement. You need to set up a basic workflow of signing contracts. You need to have some forms prepared, where someone could fill out the form to apply for signing a contact and someone who would be authorised to sign the contract shall sustain the liabilities of executing the signed contract.
This is part of our “Setting up Compliance Policies For Your China Business” serial.
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