This entry today is about how to limit (trade) disputes with your Chinese counterparts simply paying more attention to the drafting of your agreements.
A very illustrative document by the WTO describing how this organization and trading system offer a range of benefits and “fair trade” can help in establishing also good relationships among States and stressing that The system allows disputes to be handled constructively is available at the following web-site:
http://www.wto.org/english/res_e/doload_e/10b_e.pdf
, in any case parties to a commercial agreement should take some precautions in order to limit the araise of a dispute.
Some Simple Rules:
While conducting business in China, foreign companies occasionally find themselves embroiled in disputes with Chinese individuals or companies. However, good planning can help avoid disputes especially if the foreign entrepreneur wishing to do business with his/her Chinese counterpart take into consideration the following simple precautions:
(a) When entering a contract it is of great importance to have clear contract terms. In order to do this make sure you specify exact terms of payment and performance standards, create time lines and include dispute resolution clauses. Furthermore, pay careful attention to details such as formally signing documents and initialing pages of contracts. Also be sure that the Chinese version of the contract is consistent with the English version. As always, do not attempt to enter into an agreement without sound legal advice.
(b) Make sure you get paid. Remember a contract with an insolvent partner or customer is worthless. The bottom line is to pay careful attention to how, when and in what currency you get paid. If you have agreed to be paid in Chinese Yuan, it is important to verify that you can convert profits to Euro or US dollars. It is a good idea to use letters of credit or other financial instruments to protect yourself.
(c) Make sure you know your business counterpart. In China, a business relationship is more than just business. As a result, while it is important to so “due diligence,” it is equally important to establish good
guanxi
(remember this represents a sort of goodwill and it must be cultivated, read:
http://blawg.lehmanlaw.com/wordpress/?p=1673
) again the following entry: ) with your Chinese counterpart. A partner should be carefully chosen only after a careful examination of experience and dependability. It is important to always check the reliability of the data your partner or customers provide from independent sources.
(d) Engage in thorough risk analysis. You need to be realistic about how much risk you are willing to accept in your business venture. When making choices about risk, you need to go deeper than news media and sources provided by Chinese partners. Simply said, you need variety of reliable sources to make an accurate assessment of risk.
(e) Try to limit your investment exposure. Always set performance goals for investment projects. Also, have an escape strategy for each stage of the project, even if you do not plan to use it. Remember that projects and sales in China require constant attention, so never assume they will run themselves. This is also the reason why it is so important to retain key personnel (i.e., Staff) when running a business in China.
(f) In China it is always important to try to search for problems before they materialize
.
In addition to creating
pro forma
balance sheets, spend some time at the beginning of a project to examine how you will react to problems. Try to anticipate possible problem areas and create a strategy to deal with these potential problems.
(g) Be prepared to use negotiation and the other ADR. Simple negotiation with your partner is usually the best method of dispute resolution because it is the least expensive, and it can preserve the working relationship of the parties involved. Another option to consider is to seek assistance from Chinese government officials who can encourage the Chinese party to honor the terms of the contract. Companies should specify a time limit for this process. Unfortunately, negotiations do not always lead to resolution.
(h) While arbitration is a preferred method, unless the parties can agree on arbitration after the dispute has arisen, which often is very difficult, the underlying contract or separate agreement must indicate that disputes will be resolved through arbitration. Agreements to arbitrate usually specify a choice of an arbitration body, which may be located in China or abroad, and a choice of law to govern the dispute. There are two Chinese government-sponsored arbitration bodies for handling cases involving at least one foreign party: China International Economic and Trade Arbitration Commission (CIETAC) and, for maritime disputes, China Maritime Arbitration Commission (CMAC) (
http://www.cietac.org/index.cms
). Contracts involving foreign companies doing business in China often provide for CIETAC arbitration. CIETAC distinguishes between two kinds of dispute resolution, foreign-related and domestic. For a dispute to be classified as foreign-related, one of the companies must be a foreign entity without a major production facility or investment in China.
These suggestions are to be taken into consideration every time a foreign entrepreneur is entering a contract with a Chinese counterpart.
As the CIETAC represents one of the most important organizations devoted to the solution of commercial disputes, next entry will be dedicated to the explanation of its functions in order to complete the exposition of this important topic.
Cristiano Rizzi
(I did not mentioned before, however, some of my entries are extracted from my work titled M&A and Takeovers in China, so if some of you is interested in having the complete work, please visit:
http://www.kluwerlaw.com/Catalogue/titleinfo.htm?ProdID=9041140484
).