Most companies buying in China don’t take the precaution to write a contract with their suppliers. Even when large sums are at stake. The common perception is that going to a Chinese court is a long and expensive process, for a highly unpredictable result.
But are Chinese courts’ judgments truly unpredictable? Or do they follow a logic on their own?

The China Law Blog just wrote a very interesting post entitled China Sex, Mistresses, And Improper Payments, And What They Mean For Your China Business Litigation. It points to a really weird Chinese court judgment … that is, weird by Western standards.

The facts: a mistress was condemned to reimburse the cash given to her by her (married) lover… because the court estimated the property of that cash had been “improperly acquired”. Why improperly? Because, according to Chinese law, “the owners of common property have the rights to and the responsibility for this property… while property is commonly held, one party may not make a decision for the property without authorization”. In other words, the husband was not allowed to give that cash to anybody, since it also belongs to his wife.

In a European or American court, the husband would be considered responsible for it (but not necessarily condemned). The mistress would not have to reimburse any of these gifts.

So, what motivated that court decision? According to Dan Harris, from the China Law Blog:

Chinese courts tend to give large account to what is “fair,” not just to what the law says. This means that if a Chinese company is late on a contract because its own supplier was late in delivering it a necessary component part, the Chinese court may very well excuse the delay. This means that if the price of a necessary component part jumps precipitously, a Chinese court might very well excuse the Chinese supplier for substituting in a cheaper part. Many times, Westerners ascribe Chinese court rulings to corruption, when they very well might have been due to equity.

I also read, in other articles, that a Chinese supplier, when accused of shipping substandard quality (whether a contract has been signed or not), can argue that the price was too low to respect his commitment. And this type of defense is actually effective in Chinese courts!

The takeaway, in my view, is this:

• Enforceable contracts are advised when large sums are at stake (even if you don’t go to court, it gives you leverage against your supplier in case things turn bad).
• To do this, you should definitely consult with a specialist of China law (who will know how Chinese courts get to their conclusions)… Not the usual lawyer that takes care of your business back home.
• Instead of giving a few large orders, try to reduce risks by giving smaller orders, to several suppliers if possible. And inspect product quality as early as possible, to detect issues and have time to react to them.
• Tie payments to quality confirmation… And, generally speaking, keep as much leverage as possible to keep your suppliers in line.