Protecting Your Interests in China with Proper Contracts

Jari Vepsäläinen

Jari Vepsäläinen| MIF hina Excellence -sarjae

The Chinese have much broader philosophical and cultural heritage than we usually in the West, which is based on ancient Chinese wisdom and teachings. However, many of these philosophies are not developed for modern business management and contract formats. In China, different geographical areas and different generations think differently about business negotiation, cooperation and the value of contracts. Moreover, still in modern China, there is a huge connection between the communist party and business that often remain unmarked by Westerners.

Simply applying Western legal dogmas in China, does not take you anywhere. It is necessary to add Chinese cultural knowledge to make things work in China.

The role of contracts

In the past, some foreign companies might have had an impression that signing contracts with Chinese companies was just a formality. Chinese businessmen didn’t take contracts seriously and relied on their relationship with government officials to resolve disputes. It didn’t make sense to spend much effort to have a well-written contract.

Nowadays, Chinese courts or administrative authorities resolve commercial disputes generally fairly and a well-written contract can definitely help. Also Chinese business people have found themselves that they need written contracts to make business work in China.

In the court rooms

You must note that Chinese is the official language in Chinese courts. In the event any disputes ends up in a Chinese court you will be required to produce all material in Chinese language and to engage own translators to provide Chinese translation for each and every documentation with evidentiary value written in foreign languages. One important point of translation: both parties often disagree with the translator, which makes the legal proceedings more time consuming and expensive.

At best, with careful planning and execution, tremendous savings can be achieved, but at worst, improperly planned and executed China operations can wreck the whole company’s business totally. To guard your company proper contracts and contract management is an integral part of doing business in China.

Proper contract system

When doing business in China the choice of law, the freedom of contract & place of dispute settlement principally exists but all these must be clearly spelled in the underlying contractual structures. Special care must be exercised in Chinese language contracts or translations. Often the English name of Chinese companies is not the official name and to have a correct Chinese party in your contract is utmost important.

Western companies must have proper corporate, contract and legal structures in China for their intended actions, such as purchasing, domestic sales option, importing & exporting operations with e.g., local Chinese elements and Hong Kong inputs. These structures are needed in place prior to commencing business to be able to have proper business licenses, permits, qualifications and official approvals for taxation planning structures.

Master Contract System is used when dealing with longer term partners. The use of Master Contracts in contract structure gives details of the contractual relationship and business arrangement, specific issues for damages and dispute settlement & plans for business expansion and for the road ahead.

Master Contract System Example:

  • Cooperation Agreement / Signed First on TOP Level
  • Master Contract / Managerial Level
  • Purchase Order / every day business management
  • Annexes and Specification under Purchase Order

Taking into account number of risks involved, companies must ensure that before entering into business dealings in China all corporate documentation and contract management, intellectual property assets and IPR protection issues are properly documented, registered and protected. This is vital in order to have legal protection over any possible infringements in the future.

Jari Vepsäläisen, Kiina-kouluttajamme, johdolla Fintrade-Mercer kirjoittaa blogissamme sopimuksien merkityksen muutoksesta nyky-Kiinassa ja sen vaikutuksesta yrityksen sopimuksien hallintaan. Tekstissä on myös asiaa sopimuksien puolustamisesta kiinalaisissa tuomioistuimissa.

Katso ajankohtaiset Kiina-koulutuksemme China Excellence -sarjasta

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