How to Get The Supplier to Respect The Contract?
Do you have the right terms in place in your China contracts? Perhaps you are wondering if the supplier will respect the contract? In this blog post I will share some tips based 20 year's of experience, living in China, getting suppliers to respect my contracts.
Tips and Best Practices: Get the Chinese Supplier to Respect the Contract
The 50 page "watertight" contract that your lawyer back home created for you based on your country's laws may not be suitable for doing business in China. It might not even get read, let alone understood by the Chinese supplier. You may need to break the key terms and conditions down into easy to understand points. Think of it as a "memo of understanding" and it get the core parts down to four pages or less. Make sure the supplier really understands the core conditions of your proposed partnership. Once you are literally on the same page, then move on to a formal, bilingual contract. And when I talk about a contract being bilingual, I don't suggest you have to different documents, one in English and one in Chinese. The wording will eventually get messed up and not be the same. A better way is:
- Do the translations sentence by sentence or paragraph by paragraph. But not page by page. And avoid have an English version separate from the Chinese version. Your goal is to have one bilingual document and only one revision to control.
- When it comes to adding the signature ("Chop") in China, don't just send the document to the supplier via email and say "sign this". At signing time, it is your last chance to confirm they actually understand what they are signing. So, meeting in person, do a skype call or video call and go through each of the important line items one by one.
- Leverage the "power of face" by conducting the final review and signature in the presence of the supplier's key staff because if the factory boss knowingly breaks the terms of contract he's going to lose a lot of face in front of his team. It is one thing to break a contract when you didn't understand what you were signing. It's a totally different act to knowingly violate contractual terms that have been agreed in front of a group.
More Tips for Signing Contracts with Chinese Suppliers
I like to make a signing ceremony something special, for example I like to announce that I'm buying lunch and drinks that day. I ask the supplier to bring a couple of their key employees to the meal and let's do the signing ceremony together. Then we go over each the points one by one as a group. If the general manager cheats me or breaks the terms of the contract that were explained in such easy terms for everybody to understand, his employees are going to know that he's a cheat as well. At the end of the day, it is actually this worry about losing face that sometimes has more influence over the supplier than their fear of lawyers.
Next, let’s address a FAQ: Do penalty clauses in the contract motivate Chinese suppliers?
Do Penalty Clauses in the China Supplier Contract Help the Buyer?
Do penalty clauses in supplier contracts actually work? Yes, if you set them up right!
If the penalty amount isn't realistic the judge in Asia will rule it out. So you can't say something like "I'm buying ten thousand dollars’ worth of earrings and if the supplier doesn't gets the quality right they have to refund me two hundred thousand dollars."
The judge is going to say that's not realistic, and they may even toss out whole sections of the contract that are not "reasonable" regardless if the supplier signed those very same clauses.
The good news is that penalty clauses work if they're reasonable. So, if you're buying ten thousand dollars’ worth of earrings, your contract might say you get a "two percent discount for every 48 hours that the product is late on delivery". Let's say that the contract is signed and the seller misses the target date and you go to court in China. The China judges like these kind of cases because the pre-agreed penalty clause makes the judge's job easy. Because the penalty was pre-agreed, you just need to prove the Chinese supplier's non conformance with the delivery date, then the judge will have an easy time setting the compensation because it was pre-agreed. However, getting the money out of the supplier who has lost the court case... that's another topic for another blog post as hopefully they're still in business and have real assets!
If you take just a few things away from today's blog post, they should be as follows:
- A simple, easy to understand contract is better than a complex contract that never gets read let alone respected.
- Incorporate a reasonable penalty clause.
For more information, you may want to click on this link to learn how realistic clauses helps you to get support from the Chinese court.
ABL Blog: Sr. Editor and Primary Content Creator: Michael J. Bellamy
Originally from Upstate New York, Mike moved to Asia in 1993 and is a China business advisor to both Fortune 500 companies and small businesses. Recognized as an expert on doing business in China, he has been interviewed by WSJ, CNBC, FT & Bloomberg.
A featured presenter on China issues at seminars, trade shows and corporate events across the globe.
Learn more about Mike and AsiaBridge Law at
https://www.asiabridgelaw.com/business-advisory-services/
Mike is the author of “The Essential Reference Guide to China Sourcing”
(available on Amazon).