China Credit Insight 10: You Need a Chinese Contract

There is abundant perception about Chinese businesspeople not abiding by the contract. How true is it? Is there independent evidence to prove it?

In June 2016, in the Enforcing Contracts Indicator (part of the Doing Business Report) published by The World Bank, in which China scored 5th in the ranking (1st is the best). The Enforcing Contracts Indicator measures the time and cost for resolving a commercial dispute through a local first-instance court, and the quality of judicial processes index, evaluating whether each economy has adopted a series of good practices that promote quality and efficiency in the court system.

The following benchmark table will give you some ideas why China is ranked 5th:

Obviously, the general perception is questionable. Indeed, most of the cross-border disputes may be caused by cultural differences. A contract between two trading partners is not just the most important evidence in a dispute resolution, it is also an instrument for better collaboration in a deal.

The following tips will help you create a more practical Chinese contract for use:

• Have a master contract. If you plan to purchase in series from a Chinese supplier using automatically generated purchase orders and invoices by your computer system, sign and seal a master contract before the purchases take place.
  On the contrary, if you sell in series to a Chinese customers, sign and seal a contract with the specification of validity period and termination clauses (under voluntary and involuntary conditions).
• Explicitly list out each party’s responsibilities: Don’t assume what your partner will get your expectations. Your Chinese partner may also assume what you will do in their culture. Most misunderstanding is caused by assumptions under one’s culture. Hence, you should always list out each party’s responsibilities clearly.
• Do a “Know Your Customer” Check. Depending on the financial commitment in a contract, you can adjust the depth of check. The most important point is: to check before you sign. At least you should know if the one signing your contract is the authorized person to sign on behalf of your partner’s company. A credit report or a quick check in AIC’s registration enquiry website will help.
  ​Please note that the AIC website is assessable but may be difficult for users outside China to use.
• Write the contract in Chinese and your language. Chinese courts accept contracts written in foreign languages but they have to be translated by an authorized body, such as a certified notary public, before it is presented to courts. Due to the language difference, in an after‑the‑signature translation, the wordings may not be representing the original meaning. As a result, such translated contracts are on a basis unknown to the plaintiff.
  Even you specify which language used in a contract is the controlling language, always assume that the Chinese version will be the “influencing language” because it will dominantly influence the Chinese legal people involved in the process.
• Go with the Chinese courts. Foreign partners often specify, in their contracts, to go with the law and courts of their home country. Chinese courts will not enforce judgments issued by foreign jurisdictions. It is highly recommended that foreign businesses specify Chinese law and Chinese courts as governing their contracts with their Chinese trading partners.
• Sign and Seal. A document affixed with an official company seal carries the binding commitment of the company’s legal representative. See the in-depth discussion of this topic in the Chapter of “i Cultural Insight 8: Company Seals”.

Traditionally, Chinese do not like to go to court. If your Chinese partner is a businessperson, and not a cheater, a well written contract with the Chinese culture in mind will significantly reduce the chance of disputes.

This Credit Insight is an extract from the book Happy Customers Faster Cash, China Edition and on sale at Amazon.

More companies sell on credit to their customers in China. This book shares with you, using statistical data, the true picture of payment behavior in China. It also contains lots of cultural insights for you to better understand the business environment in China. A chapter is dedicated to discuss various aspects of China company credit reports.