Why contracts are useful in China

China’s legal system is unreliable and favors local companies against foreigners. True.

Foreign courts’ decisions are not enforced by Chinese courts, so litigation needs to take place in China. True.

But then is it a waste of time to draft a contract and get it signed by your suppliers? No, it is not.

Dan Harris wrote a long and thoughtful article about it (see Chinese Contracts. Because They Really Do Make A Huge Difference.) He explains the value of a legally-binding contract:

Any contract that makes your Chinese counter-party think twice about messing with you has at least some value. My law firm is constantly settling cases with Chinese companies based on well-written contracts. Chinese company clearly owes our client a million dollars per a well written contract and we settle for $650,000. Had it been in the United States, we might not have taken less than $850,000. But had there been no contract, my firm would not have even taken the case and settlement would likely have been for nothing at all or something really nominal.

Having a well written contract does not mean you will always win your lawsuit if you are forced to sue on it. But it does mean you will have some leverage if things go wrong and it does mean you will at least have a chance. Having no contract means no chance.

If you have any interest in this subject, I recommend that you read this article in full. Dan gives several examples and is quite convincing.

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