Doing business in China: Contracts | Helpdesk

12/24/2013 9:10:00 AM

We received the following question from a Club China: “I am closing a deal with a Chinese manufacturer. In Europe I usually work with extensive sales contracts, but I have been told that this is not common in China. One business contact even told me that contracts do not fit with Chinese business practices. What is your opinion?”

Our expert Peter Pronk answers:

“In China it is very common to sign agreements between parties. It all depends on the party you work with. We would always to advise you to have a contract based on Chinese law. In case you have a dispute you have no legal grounds or means to discuss this outside China. We strongly advise you to let a Chinese lawyer assist you with preparing the contract. The lawyer can also assist you with the contract negotiation since for exporting products outside China specific clauses are required in the contract. You can share all commercial issues with your Chinese Lawyer so he can add them to the contract. When disputes arise, he can advise you which arbitration method would fit you the best in China.”

Our expert Gerard van Swieten answers:

“Contracts are part commitment, part intention. Contracts and the relationship between two business partners complement and influence each other. This is no different in Chinese business practices. Many Chinese parties are very careful and only enter into contracts when they truly want to be committed. The idea that Chinese people do not usually follow contracts and that everything needs to be renegotiated on the basis of the relationship, is too simplistic. The reality  is complex. 

Contract Vs. Relationship 

In Europe, the signing of a contract often indicates the ‘conclusion’ of a business deal. In contrast, when doing business in China, the signing of a contract indicates the beginning of the business relationship; it anticipates rather than defines the resulting relationship. Contractual terms are expected to be superseded, or at least modified, by relational and surrounding circumstances. Parties are therefore expected to make mutual adjustments and accommodations in response to the events that occur. For example, a Chinese seller will require a higher price than the fixed amount stipulated in the contract when their production costs increase. In the view of the Western counterparty, this constitutes a breach of contract. However, the Chinese party may think this comes from the principle of fairness.

How would a Chinese party respond? 

Does this mean you have to accept suggested changes? It does not. Chinese parties do also not accept changes automatically. Just be mindful that changes may arise. When changes arise, try to determine the true intention of your counterparty. Thereafter, determine whether the relationship is worth the concession or an alternative. If you want to cooperate for a longer period of time, you need to be willing to make some concessions at times. If you just want to sell and move on, that is fine, but don’t expect a relationship of mutual trust to arise.

The Position of Contract Vs. Relationship under Chinese Law 

Chinese Contract Law is in line with international standards. The parties have to perform their respective obligations as agreed, and cannot unilaterally modify or terminate the contract. Any party that breaches its obligation is liable to compensate the resulting damages. The “business relationship” as such is not defined under Chinese law and it cannot be enforced in a court proceeding or used as grounds to invalidate a contract. In Chinese civil procedure practice, only written contracts can be enforced, not oral statements or promises.

The Contract Law does address the impact of an unforeseeable ‘material change of circumstances’. A party that finds a contract clearly unfair in view of the changed circumstances can appeal to a Chinese court for amendment or termination. Commercial risks are specifically excluded as a ground of this request. In practice, Chinese courts award these requests restrictively. Dutch courts also apply the standards of reasonableness and fairness to contract terms.

What Does This Mean for Your Contracts in China? 

Both contract and relationship are important for doing business in China. The contract safeguards you legal position, the relationship accommodates new circumstances. During a court procedure the contract is determining unless the parties actually had a different cooperation that evidence by purchase orders, shipments, investment etc. Therefore, it is important to have a written contract that states each party’s rights and obligations clearly. If you really want to keep a party as strategic partner/ friend, it is necessary to stay informed on his/her situation and on occasion to make some concessions for his/her benefit.”

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