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International business is fast-paced. It is easy for people to overlook the need for a written contract or choose to use a template. Let’s say you have a new buyer for your product, and you have already agreed on everything orally – you might be tempted to start shipping right away – but don’t forget the risks of not having things in writing! No matter your industry, it is best practice to always have a written contract tailor-made for your situation.
Four reasons you should have a tailor-made contract with your Chinese partner
- To Define What Has Been Agreed Upon
- To Avoid Misunderstandings
- To Give The Counterparty Incentives To Comply
- To Be Enforceable Against The Counterparty
1. To Define What Has Been Agreed Upon
Business prefers predictability instead of uncertainty. A tailor-made contract serves as the record of what has been agreed upon between the parties and is the first step to predictability.
When two businesspeople negotiate the terms of a transaction, there is usually more at stake than just the name of the product and the price. A tailor-made sales contract can accurately reflect the parties’ intentions and record their agreed-upon rights and obligations in relation to product quality, quantity, payment terms, shipment, warranty and insurance.
2. To Avoid Misunderstandings
Written contracts help avoid confusion! Accurate translation of written contracts helps avoid misunderstandings between parties speaking different languages.
Having a complete, clear, written, and enforceable contract, ideally in both your as well as their language (Chinese), will ensure that the Chinese firm you are engaged in business with will truly understand its rights and obligations.
For example, timelines – such as payment deadlines – should be backed up by penalties for late payment, otherwise, there may be little incentive for the buyer to make sure payment is processed on time.
If the buyer knows this, they may negotiate a more realistic payment schedule for themselves, rather than face the prospect of financial penalties.
This achieves clarity and realism on dates and that is always a good thing, especially in a cross-cultural context.
Add in all of the other provisions where something similar will happen and you can see how getting clear upfront with your Chinese counterparty can be so important.
3. To Give The Counterparty Incentives To Comply
The goal of having a formal and well-written contract when exporting to China is to convince your Chinese counterparty that it will be better off for it to comply with rather than violate the contract.
A clear and well-written contract means that the Chinese company you are dealing with knows precisely what it must do in order to comply and is certain that its failure to comply could mean that it will be subject to a lawsuit – which takes money and resources to defend against, and which it may very well lose.
Your clearly-written contract gives the Chinese company an incentive or a reason to comply with it, all else equal. Imagine that the company likely also has other contractual relationships with foreign companies – you are also competing in a sense against these suppliers in the event that the Chinese company is unable to timely comply with its contractual obligations with all of them.
If you have a better-written and clearer contract than the other suppliers, then there will be a strong incentive for the Chinese company to give you priority in fulfilling its obligations to you first.
4. To Be Enforceable Against The Counterparty
Making sure your contract can actually be enforced is another reason to have a tailor-made written contract.
If your contract is well-designed, it will cover misunderstandings and give the other party incentives to comply. Preventing a relationship from having to go to litigation in the first place is truly the hallmark of a well-written contract.
It is also necessary to make sure that the person signing the contract for the other company has the authority to do so – if not, the contract might not have a binding effect on or be enforceable against the counterparty.
Business owners often overlook the importance of a tailor-made governing law and forum selection clause. In international transactions specifically, these clauses dictate where legal actions shall be brought forward and decided when contractual disputes arise. This should be a decision based on an experienced lawyer’s analysis of the situation. Otherwise, it may be deemed as invalid by a court.
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Ms. Sylvia Zhang is a business lawyer and CPA in Beijing with almost 20 years of experience advising many international companies in their China-related investments, transactions, compliance and regulatory challenges and daily operational legal issues under Chinese law.
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