The China contract
Use a specific China contract for China deals! A useful definition of a contract is an agreement enforceable at law. If it is not enforceable, it may be an agreement, a memorandum, a note, or a minute, but it is not a contract.
At least 30% of the foreign created China contracts I see in China are technically defective to the point that they are legally or practically unenforceable. Think about that for a moment. “Contracts” are being created and signed that are not contracts at all!
How does it happen?
Usually it is because a document that was created for one purpose has been used for a different purpose. Sometimes it is an attorney lacking in international experience taking on work that he/she should pass on to someone more experienced. Both of these are not China specific so presumably defective contracts are found whenever there are international transactions. China’s legal system imposes its own requirements and these cannot just be ignored in a contract.
Why does it happen?
Many reasons – here are a few:
- Inappropriate use of precedents or templates by law firms;
- Large companies and their in-house legal departments want to have “standard” documents for use throughout the world. Unfortunately there are no “standard” legal systems;
- companies or individuals want to save on legal costs so they take a contract that was originally created for a transaction in one country and use it as a China contract; and
- counsel that would otherwise be quite competent, take on a China contract without the China specific background and experience to do so.
The unfortunate aspect of all of this is that the parties involved believe that they have contract and usually find out the truth only when they are facing a loss and want to rely on the “contract”.
Take away points
- “Standard” documents are likely create more problems than they solve when they are applied to China transactions. There is only one sure path to contract certainty for China – documents competently drafted for use in China. Recycling legal documents for a China transaction without taking China specific advice is just an accident waiting to happen.
- The cost of having a China contract reviewed by competent counsel is very reasonable, even more so when compared with the costs that can result from a defective contract. Taking a chance on enforceability and effectiveness in China makes no sense at all.
GB
© 2014 Graham Brown all rights reserved.
Tags: China Business 101, Contracts