China Contract Templates for $99 Each

Now that I have your attention.

Neither our law firm nor any good law firm of which I am aware ever sells China contract templates. There are many reasons for this but foremost is usually that templates virtually never work for China and they often can be more harmful than having no contract at all.

And yet, our China lawyers are constantly getting asked for “templates” for even relatively complicated China deals. We have been asked for joint venture template agreements and our response to that is how can we even provide you with such a template unless and until you know what the terms of that agreement will be? I mean, we have done joint venture agreements where our client has contributed twenty million dollars to the joint venture and all they really wanted out of it is guaranteed product pricing for the next 15 years and we have done joint venture deals where our client has provided no money — just technology and equipment and in return gets 60 percent ownership of the joint venture and control over just about everything it does. Do you really think we have a template that covers every contingency?

Your lawyer’s value is oftentimes more in figuring out what a contract should say than in actually drafting it and the former usually takes as much or more time than the latter. Our China Manufacturing Agreements and our China Licensing Agreements are a great example of this and we get the “template question” a lot on both of these. We are also often asked by potential and actual clients whether it would save them money to have their in-house lawyer or their less-expensive local domestic lawyer draft such an agreement first and then have my firm’s China lawyers use that draft contract as our template. My answer to that question is usually something like the following:

We have drafted hundreds of China licensing agreements and manufacturing agreements and we don’t use any of them as a “template.” What we do is to first gather up the facts from our clients and figure out which of our many contracts — if any — we should use as a model in creating what will essentially be a new contract for you. Most of the time we end up pulling sections from multiple contracts for a new, highly customized contract. Our agreements have been specifically drafted for use in China and that means they are dual-language agreements with Chinese as the official language. We usually (but NOT always) draft them under Chinese law and we make sure to draft every provision to benefit you as a foreign company that is licensing its products or services in China or having its products manufactured in China. Our existing contracts are as close to ready as you can find and it, therefore, does not make sense for you to pay another lawyer who knows nothing about Chinese law to create a brand new English language contract which will not make sense for China. Not only would the money you pay that lawyer go to waste, but my law firm’s fees would increase because instead of our starting with our own Chinese and English contracts as models, we would be starting with an English language contract that will not be close to what makes sense for what you are looking to do in China. We would have to revise nearly every provision in the contract you give us to make it China-appropriate and it would likely take us twice as much time to do that than for us to just use our own previously drafted contracts as the foundation for yours. It is not helpful to us to have a common law contract [China is a civil law system] based on a highly idealized and impractical American/European practice that has no applicability or use in China.

China employment documents provide another good example of where templates fall short. We are often asked to draft China employment contracts for China WFOEs and China Joint Ventures. Our first response is to ask the potential client whether their Chinese entity already has a set of Rules and Regulations (sometimes called employer manual or employee handbook). If the answer to that question is yes, our lawyers will use those Rules to determine what should go into the employment contracts.

If the client does not have any Rules and Regulations our response is to say that we cannot draft the employment contracts standing alone; we need to draft both the employment contracts and a set of Rules and Regulations (and sometimes more). Our reasoning on this is three-fold. One, nearly all locales in China now require employers to have Rules and Regulations, especially those locales with more than a handful of foreign companies. Two, having an employment contract without any Rules and Regulations is like having a car without an engine; it just doesn’t work. Without such Rules and Regulations you can not discipline or terminate your employees and you are at great risk of your employment policies and decisions being fodder for employee-employer disputes. The third reason is both more personal and selfish: we do not want our law firm’s name associated with an imminent disaster. This third reason is also why good law firms do not sell templates.

After we explain the need for Employer Rules and Regulations, the client will sometimes request that we just use our “model Rules and  Regulations to keep costs down.” Again, we have to explain to them why we have no such model and why such a model can never work. Our typical response is something like the following:

Your Employer Rules and Regulations need to match what you are doing in China and where you are doing it. This means that for us to provide you with Rules and Regulations that will work we must gather up all sorts of facts before we can even start. If you are a factory in Qingdao, we cannot even use the Rules and Regulations we did for an accounting firm in Qingdao two months ago? Nor can we use the Rules and Regulations we did for a factory in Suzhou three months before. We cannot even use the Rules and Regulations we did for a factory in Yantai six days ago because even though Yantai and Qingdao are in the same province, their employment laws and practices do not align. And that factory in Yantai was really tough on its employees and I understand that it is important to you to be viewed as a great employer.

A China employer’s Rules and Regulations vary depending on the type of company, the type of employees, the goals of the company, and, most importantly, its location. Just by way of an example, the overtime rules are going to vary greatly for a CEO as compared to factory workers and those rules are also going to vary greatly as between Chengdu and Suzhou. We have many Rules and Regulations serve as appropriate starting points (usually in combination) but before we have any idea which of our many existing Rules and Regulations we can use to save time in drafting yours, we first need to know a lot more about you. We also must always make sure everything in the Rules and Regulations we provide to you is up to date and since the relevant laws and regulations constantly change in China, this itself is never automatic. After we have done all this we can start drafting your customized Rules and Regulations in both English and Chinese.

Oh, and one more thing. It is critical that both the English and the Chinese be well-written and clear because both languages will be important down the road. The Chinese is important because that is the official language and the language on which the courts and administrative bodies will rely. The English is also important, however, because your HR people will likely be using the English language portion in making their employee decisions.

I recently explained to an incredibly insistent emailer why we would not sell him any of our existing China contracts for him to use as a template:

We have never sold a China contract as a template and we never will. First off, it would be a huge disservice to you because we have literally hundreds of contracts for everything we do and unless you were to first retain us as your lawyers, we would not have any basis for determining which of these contracts makes sense for you even as a starting point. Our making that determination is itself providing you with legal advice and to do that we would first need to run a conflict check and then onboard you as a client and then work with you in determining the appropriate model contract. And here’s another thing: around half the time when a company thinks it needs a particular contract for what it is doing in China, it actually needs an entirely different one, and we only discover that after gathering up all the relevant facts. So take your case. You say that you need a distribution agreement but what you may actually need is a reseller agreement. And for us to even know that, we need a lot more information.

Second, whichever of our contracts we end up giving you will not be right for what you are doing and whatever changes you make to it will only make it even less right. There is a lot more to doing a deal with a Chinese company than simply sending it a contract and getting it to sign it. You first need to do at least basic due diligence to make sure the company you have been negotiating with is the same company signing your agreement and to make sure you have the company’s name and address correctly. This is often far more complicated than people think. At least 30 percent of the time the contracting party is actually a Hong Kong or a Taiwan entity and in those cases, a PRC contract does not even make sense. I am not going to sell you a contract that has a 30% chance of being for the wrong country! At least another 30 percent of the time we find irregularities in the company information and we need to investigate further to clarify. And then there are the times we determine there is actually no company at all and the Chinese “company” was actually a complete fraud. See China Fraud Season Starts Early This Year.

And what will you do when (not if) the Chinese company says it agrees with 12 of the 17 provisions you propose in your contract, but it wants you to make specific changes to the other five? You not only will not know how to make those changes (remember the official version of this contract is in Chinese), you likely also will not know whether it makes legal or even business sense for you to do so. Your changing one “small” provision could even render the entire contract unenforceable.

Just by way of one example: the contract damages provision is a critically important element of nearly all China contracts. It is often the key provision for ensuring that your Chinese counter-party abides by your agreement. See The Effective China Contract: Liquidated Damages for why this is the case. And yet we never know what to fill in as the amount of contract damages until the very last minute because that amount must be determined on a case to case basis, using all sorts of factors in making the determination. How will you fill in that amount when you do not even know the factors to use in determining it? And even if you had a list of those factors how would you know how to apply them? We could spend a few hours trying to teach you the factors and how to apply them, but in the end, your choice of an amount could never be nearly as good as ours because ours is based on decades of experience and thousands of China contracts. See China Contract Damages: More Art Than Science. A bad decision on this alone would weaken or even nullify the value of your even having a contract.

So no, we won’t sell you one of our contracts as some sort of template. The last thing we want is our law firm’s name associated with something we know cannot work.

Another lawyer in my firm once wrote the following email to a client to explain why we could not just pull a template off the shelf for them to give to their in-house counsel to use in drafting the contract needed:

We don’t use “templates” for our agreements. After a lot of analysis, IF we find what the foreign buyer is trying to do fits into a pattern from a previous transaction we have done, we will, of course, use an agreement from a previous transaction as a model for the current transaction. But even in the most basic transactions, what we do is to customize it for the current transaction.

In drafting pretty much any contract for China there are literally dozens of variables that can be combined in a nearly infinite number of configurations. So the final contract from one transaction may have no application to any other transaction. This is why providing a contract from a past transaction will have no benefit to the Western side and would likely only harm it.

And then there is the issue of dealing with the Chinese counter-party’s response. Did the Chinese side change the Chinese and not the English, as they so often do? Did the Chinese side redline in a way that the changes to the Chinese portion are even apparent? More importantly, are the Chinese side’s changes normal technical changes that are part of normal business practice (45 days to deliver a product instead of 30 days) or are their changes destructive to the whole approach, such as: “no, you do not own the technology, we do.” Or, “no, we won’t provide any warranty at all.” Or, “no, we own the molds, not you.” It takes a deep understanding of Chinese law and Chinese business to deal with these sorts things.

In drafting our contracts, we do usually pull some language from other contracts, such as confidential information language. However, the core agreement is almost always unique to the specific client before us and when we do use prior language, we nearly always revise it to customize it for the specific client and the specific transaction.

From having written thousands of China agreements, we know there are certain issues that need to be resolved pretty much every time. So we work with our clients to identify those issues and then we work with them on how they want to deal with those issues and then we put the agreement together to achieve the goals our client has told us it has. Of course, for some of these components, we use as a base some of the language that has worked in the past in China. This is the benefit of working with us: we know what works and we know what fails. But the resulting contract in each case is unique.

So in that sense, there is no template. There is just decades of experience in drafting agreements for doing business in China or for doing business with China. This is why whenever someone asks me to send them a “template” agreement I tell them I cannot because I have no way to know which of the nearly infinite number of alternatives they should follow. How will they pick and choose from a dozen options for a relatively simple provision? What is unique about their situation? Will the most common solution we have used in the past even make sense for them? Does it make sense for their industry? Their business? Their product? Their location? What if the law has changed? What if the law changes two days after we start drafting?

I usually propose to each client three options for every important issue and I usually come up with those three from about a dozen possible. Let’s suppose there are ten important issues in their contract — this is probably a fairly typical number. Each selection of an option affects all of the other options, often in ways we have previously encountered. Before the client answers the questions, we don’t know even what structure to use. After they answer the questions, the agreement that meets all their needs does not exist.

Our approach to China contracts is based on three supports: 1) Decades of China experience, 2) A deep understanding of the Chinese civil law system and the Chinese court system, 3) A deep understanding of how contracts actually work in China. If your in-house lawyer combines all three of these, you do not need us for your contract.

Now you know….

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.