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How do you write a one billion Euro contract for China on six pages?

Published: 15 Jan 2014 Average Rating: unrated Print
 
This article appeared in Contracting Excellence magazine on 15 Jan 2014 view edition
 

Author: Cynthia C. Hollingsworth, FIEx, Director Global Contracts Management

The Chinese cultural traditions of Guanxi å...³ç³» (relationships) mean that trust and harmony between the individuals are more important than the paper of the contract, and you may need to condense a high-value contract to no more than 6 pages.  How do you prepare for this?

By Cynthia C. Hollinsworth FIEx, Director Global Contracts Management, Unify: Recently elected a Fellow of the Institute of Export

Nowhere else can you find more growth than in China but you must understand the Chinese culture and commit to it if you expect to succeed in business relationships. I discovered this when I first started visiting China to negotiate contracts. I quickly realized how the unique character of the Chinese is built on a very strong sense of pride in their ancient history and I needed to adapt my negotiating style to their culture. 

The Chinese military general and philosopher Sun Tzu said, “The general who wins the battle makes many calculations in his temple before the battle is fought”.

I quickly learned that if you want to succeed in China, you have to make many calculations and do your homework before your embark on your journey.  If you are planning to negotiate a contract in China, the following points will help you plan your journey.

Learn the principles of Chinese culture and differences between the East and the West

  • Guanxi (relationships). Pronounced: gwanjee   å…³ç³»

You need good Guanxi to be successful. It runs very deep in Chinese culture and is all about personal relationships developed through family, school, university and the workplace.  It provides a framework for reciprocal favours, mutual respect and trust. 

Guanxi is one reason contracts in China are generally much shorter than in the West because, to the Chinese, the contract is less about the paper on which it is written and more about the cultural traditions of trust, respect and harmony in relationships.    Unlike in the West, the Chinese do not expect to have to refer to the contract during execution: they rely on Guanxi.

  • Mianzi (face). Pronounced: me-inn-jee  面子    

By maintaining Mianzi (face), you maintain honour, reputation, loyalty, dignity and respect with family, friends, society and the workplace.  The Chinese are acutely sensitive to gaining and maintaining face and it is vital that you do not underestimate its importance in contract negotiations.  Be prepared to make some concessions, because this will give face to the negotiator and help you win the deal. 

  • Concept of time
    • Confucius, the 6th century BCE philosopher said "A little impatience ruins a great plan.”  You need to pace yourself in negotiations.  Any signs of impatience during negotiations may kill the deal.  Doing business in China is more like a marathon than a sprint, so make sure you arrive well rested, allowing some time to recover from jetlag, as you need to be prepared for long days of meetings.
    • The Chinese value time differently than people in the West.  What has happened in the past is important and is a basis for the future. 
    • The Chinese use time to cultivate and build relationships, so accepting a dinner invitation from your Chinese customer is an important component of your visit.

Checklist for limiting length of contract

Based on my personal experience, I've developed this checklist.  It may help you limit the length of your contract to satisfy your client's needs and still provide a basis for collaboration and protection to both parties.

  • Clearly defined scope – we know from IACCM's analysis of the top 10 weaknesses in the contracting process and from IACCM's top 10 negotiated terms how important this is, and it is equally important in China.
  • Price and payment terms – clearly define your payment terms, and be prepared for your Chinese client insisting on 5 to 10% retention to be paid after equipment/service is commissioned. Also consider using a documentary, irrevocable letter of credit as the payment instrument.  The letter of credit should be confirmed by an independent, first class bank in the West, which is not a branch of the Chinese issuing bank.  It should be issued in accordance with the Uniform Customs and Practice for Documentary Credits – UCP 600, published by the International Chamber of Commerce. 
  • Taxes and duties – be sure to state what is included in your prices and which party is responsible for payment.
  • Governance – since relationships in China are built on deep cultural values, provide a framework for collaboration, e.g. communications, reporting, change management.
  • Force majeure clause  – you might consider using the International Chamber of Commerce model clause which can be downloaded for free at: ICC FREE MODEL - FORCE MAJEURE CLAUSE.
  • Intellectual Property issues – while protecting your Intellectual Property Rights (“IPR”) in the contract, don't forget to register your trademarks, patent, design and copyright. (UK SME's can obtain free advice from an EU-funded project, the China SME IPR Helpdesk via CHINA IPR SME HELP DESK).
  • Ethics and anti-bribery – you might want to consider using the International Chamber of Commerce model clause which can be downloaded for free at: ICC ANTI-CORRUPTION CLAUSE FREE and beware of scams.  They exist all over the world and China is no exception.
  • Compliance with laws and regulations – normal requirement
  • Limitation of liability and exclusion of financial losses – essential
  • Termination – although this is an emotional topic because early termination means an end to the business relationship, include provisions for termination due to persistent breach, non-payment, bankruptcy.
  • Governing law – you may have to accept Chinese law – but a useful compromise is Hong Kong or Singapore law, both of which have their roots in English common law.
  • Arbitration clause – propose arbitration either through CIETAC – (China International Economic & Trade Arbitration Commission) or preferably the International Chamber of Commerce with a neutral venue for arbitration such as Hong Kong or Singapore.  Bear in mind however that the Chinese will always prefer to resolve any dispute through consultation and mediation.  The International Chamber of Commerce has published a special supplement to the ICC International Court of Arbitration Bulletin – ICC Publication no. 609 “International Commercial Arbitration in Asia”.
  • Language for litigation and arbitration – expect the contract to be in Chinese if the contract is governed by Chinese law.

It is unlikely that you will be able to use your own standard contract template, but to some extent this will depend on the bargaining power of the parties. Some companies are becoming more westernised so it is a good idea to test the water by presenting a term sheetcovering key commercial and legal points.

Because of the Guanxi, the contract symbolizes a desire to do business, so allow for the fact that negotiation may continue even after the contract has been signed, and you may need to make concessions in the future.

You can find growth in China that you will not find anywhere else in the world, but your commitment and understanding of the Chinese cultural and ethical values and China's history, will contribute to your success.

NOTE:  The opinions in this article are the author's own and do not represent the views of Unify.

ABOUT THE AUTHOR

Since 2010 Cynthia has been Director Global Contracts Management for Unify (formerly Siemens Enterprise Communications). She has over 20 years' experience in international trade and negotiating contracts covering Europe, North America, Middle East and Asia.  She is also fluent in French and German and was recently elected a Fellow of the Institute of Export which reflects her powerful track record and contribution to both the Institute and international trade (www.export.org.uk)  While living in the USA, Cynthia was appointed Lead Subject Matter Expert for the NASBITE (North American Small Business International Trade Educators) Certificated Global Business Professional Exam (www.nasbite.org) and led the development of the trade finance domain. Cynthia is an active member of IACCM in Europe.

TO CONTACT THE AUTHOR, please mail your question to Info IACCM or connect using the IACCM Member Search (login required).

 
 
 

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