China Contract Templates: More Cons and Cons

China contract templatesI wrote last week on China contract templates in China Contract Templates: the Cons and the Cons. That post essentially stated that China contract templates range from worthless to dangerous. I put that post on Linkedin where it has received the following comments:

  • I could not agree more with your article. I suppose you should have also thrown in the often bragged about claim from business folks, that “hey, they signed our standard contract with no problems!” Great news! Maybe it is unenforceable against the Chinese party so of course they signed it!
  • Templates are easy to come by. They can cost you big, though, in the long run. I have seen a few such cases. Professional guidance is worth the investment!
  • Highlight: Going in-house as a ‘cost saving’ technique rather than because a team has any real China expertise can end up costing firms big time. It’s still surprising how many Western companies recognize China is a big step, but then figure they’ll learn as they go along without any major screw ups.
  • Been doing business in China for a very long-time. You are one of the few people I follow. This is because you consistently provide realistic quality advice. Everything you say about Liquidated Damages is 100% correct. Can’t emphasize this enough. However, it is very tough to get the Chinese side to sign and you must not capitulate on this term. This is coming from experience. I have been talked out of it a couple of times for various reasons and have been burned. Also, agree about diligence. If you are doing any long-term transaction requiring a significant amount of investment, you’d better make sure you know your Chinese partner. Figuring out the true ownership, power structure and financial condition of a Chinese entity can be very difficult. Thanks for the Great Read.

I also received an email from a lawyer friend who chided me for failing to provide specific real world examples of templates used to a company’s detriment. Great point. In Forum Selection Clauses. Do NOT Try These At Home, I talked about how my law firm had “made well over $100,000 the last couple of years fighting over badly written forum selection clauses in international contracts” and in all of those cases, the clients had drafted their own contracts using template provisions on forum selection. And as I stated in that post, “our clients (who consulted us for the first time only after they had signed these agreements and right before they were ready to sue on them) could easily have avoided the entire expense had they only done things right with their forum selection clauses in the first place.” The below are some of their mistakes dealing just with arbitration:

  1. One had a provision calling for arbitration before the Geneva Chamber of Commerce. Problem was that the Geneva Chamber of Commerce did not do international arbitration. In this case, our client had taken a contract my law firm had written for them and made a few changes and simply re-used it on another deal. The contract my firm had written had called for disputes to be resolved before the Arbitration Institute of the Stockholm Chamber of Commerce (at least I think that was what it said), which at that time (and today) was a very common forum for resolving disputes between Russian and American companies. So when my client went off and did an agreement with a Spanish company and the Spanish company refused to have the disputes handled in Stockholm, my client just switched “Geneva” for “Stockholm” and called it a day. Back then, the Geneva Chamber of Commerce did no arbitration. Zero. So when it came time for my client to pursue arbitration my firm’s arbitration lawyers had to conduct massive research to determine how even to commence arbitration before an arbitral body that did not exist. We ended up deciding to file with the Swiss Arbitration Association in Geneva, figuring we could argue that is what the parties meant and that arbitral body would want to keep the case. The opposing side vigorously contested our choice of forum and only many briefs and many dollars later did we prevail.
  2. A company once came to us with its “standard form contract” calling for all disputes arising out of the contract to be resolved by arbitration in the United States. This provision makes good sense sometimes and makes terrible sense other times and in the case they brought us, it made terrible sense and experienced international counsel would have instantly recognized why. Our client’s biggest risk would be non-payment by the company that was buying our client’s products. Korea is one of the best countries in the world to seize a defendant’s assets immediately upon filing your lawsuit, but we were concerned that we would not be able to do so in this instance, because the contract said all disputes needed to be resolved in the United States. When we tried to seize assets in Korea belonging to the opposing party, it made this argument to a Korean court. The Korean court did not buy it, at least not completely, as it allowed us to seize assets in Korea, but it also required us to post a much higher bond than usual for doing so. The other side made the same argument before the U.S. arbitrator, seeking damages from our client for having wrongfully seized its assets in Korea, rather than abiding by the contract that called for all disputes to be resolved via United States arbitration. We eventually prevailed there as well, by arguing that we were just seeking to protect any eventual arbitration award, not seeking to have anyone other than the US arbitrator rule on the merits. But we could have avoided all of this by explicitly putting into the contract the right to seize property as security, anywhere in the world.
  3. Then there is my all time favorite: the company that came to us with an arbitration clause that called for arbitration in South Carolina, in Chinese, under British law. When I talked about how much it would cost to get three Mandarin-speaking arbitrators to South Carolina (assuming the other side doesn’t argue for some other Chinese language) and the need to use two lawyers (one arbitrator and one lawyer fluent in Chinese) and the added costs of researching and arguing British law, they — wisely — chose not to pursue the case. When I asked them how they came up with such a provision they explain that they had taken it from one of their previous agreements. I didn’t say a word, but what I will say now is that a provision like this is a great way to discourage arbitration and sometimes that makes sense, but such a provision is a disaster if you are the one to sue. 

It is not just in arbitration provisions where disasters happen. Many years ago, I had a very large client that made vehicles and it at one point needed to engage in a large vehicle recall due to a defective part. The part had been provided to them by a small local supplier. The client sent me the contract between them and their supplier and it was incredibly unfavorable to me client; it essentially said that the small local supplier could not be held liable no matter how bad the product and my client would have to fund every bit of any recall. I asked my client why it had agreed to such a contract and they told me that they had used it because they thought it was very well written and it came straight from their largest and best and most professional part supplier. I said that the contract was exceedingly well-crafted and that was the problem: it was exceedingly well written to favor the part supplier and since my client was the part buyer, this should have been the last contract it should have ever used as a template for other suppliers. The recall cost my client millions of dollars and the company is no more.

I could go on and on….




This article was written by Dan Harris and published on China Law Blog. Original Post:      

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Dan Harris

Dan Harris is internationally regarded as a leading authority on legal matters related to doing business in China and in other emerging economies in Asia. Forbes Magazine, Business Week, Fortune Magazine, BBC News, The Wall Street Journal, The Washington Post, The Economist, CNBC, The New York Times, and many other major media players, have looked to him for his perspective on international law issues.