Contracts Negotiation & Signing

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 their local partner, or their hired management team. For example, if a WFOE wanted to build, develop the China market for brands owned by 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.

Case Study

We received instructions from one of our long-term WFOE clients to review a services agreement. The purpose of signing this agreement was for the WFOE to engage an outside services provider to market and promote its brands in the China market. The draft sent to us stipulated that our client 1) needs to pay a services fee over a million each year; and 2) may assess the quality of the services provided UNTIL the very last month of the year. We noticed there is KPI (“key performance indicators”) mentioned in the agreement 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 the KPI would be more reasonably structured in details.When we reviewed the requested KPI file, we frowned at it and struggled to proceed our revising.

Problem? Neither in the agreement nor in the attached KPI file, could we see our client may exercise the right to terminate the performance of the contract — if ever they found out the provided services to be of unsatisfactory. This was the one big problem 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 draft (she was at loss), I made a call to the WFOE’s CFO, asked if they have any other suitable services providers. She told me that someone from the their marketing department arranged everything and she was being told that’s the only services provider that person could find. She said she would push the worker to find something else. Soon, we received another drafted agreement, presented by a different service provider, yet its content remained pretty much the same to the first one sent to us.

At the suspicion of someone from our client’s marketing department may take advantage of its position (e.g. taking kickback money by collaborating with personally selected outsourced services provider, but we are not in a position to presume), I 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 draft 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 file, for it didn’t include very necessary and important commercial terms or any such information were provided along.

Opinions

Upon the CFO’s request, I personally 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.

Recommendations

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.

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