Contacts Override Contracts in Doing Business in China?

An oft quoted truism of deal-making in China is the real negotiation starts when the contract is signed.

The problem for deal-makers or project managers is then how to reconcile this lack of attachment to the rule of law, or the avoidance of legal basis to resolve potential conflict? This is made worse if circumstances change, and the innately pragmatic Chinese are predisposed to ignore the provisions of a contract that is no longer practical.

Such behavior is founded on over two millennia of history and human conditioning via Confucian emphasis on Harmony, and the focus on maintaining harmonious relationships as the foundation of a unified society. The contrast is thence stark – whilst western companies approach contract negotiations to optimize a deal and rely on legalese to dictate the partnership, Chinese counterparts view it as the beginning of a long term relationship.

To effectively seal and sustain deals, the establishment of real and personal relationships is vital. The Chinese feel that since commercial cooperation is give-and-take, the enterprise can only resolve differences and ultimately succeed if there is trust and confidence between the parties – feelings engendered only with frequent and meaningful contact.

Whilst the nuts and bolts of contract law is still necessary, even in China, to govern commercial relationships, personal relationships are often the only guarantees we have in pursuing business objectives, and these relationships must be continuously nurtured. This can be done in a variety of ways, depending on the partnership structure, individual personalities, leverage, resources, etc, and reviewed in context of the size and aspiration of the deal. It is also best to consult experienced China deal-makers on how best to execute.

By all means, and it’s certainly in one’s interest, to focus on getting the contract detail right – and by extension, you can certainly argue this complies to Confucian emphasis on correct ritual in maintaining order and stability – however, businesses must also plan to spend time and effort on deepening the affiliations if a long term partnership is desired.

Hard wiring this soft issue of relationships into your project or business plan goes a long way to mitigating future risks and excessive value leakage.

Tim Lai is the founder and managing director of DaLu Venture Solutions and works with clients to optimize value in their Chinese Foreign partnerships across the lifecycle phases of Joint Venture (JV) development and management.