Dispute prevention and avoidance
There are endless opportunities for entrepreneurs and SMEs looking to do business in China, but like any new venture, there are risks. While many foreign-owned businesses in China are able to operate without major hiccups, there is always the possibility of a dispute with individuals, companies, or in rare cases, even the government.
Settling a dispute in a foreign country can be tricky; you will likely have a smaller network, newer relationships, and an unfamiliar legal system to navigate, putting you at a disadvantage. The situation can be even more difficult to traverse if you hope to maintain a working relationship with the other party after the dispute is resolved.
While it’s possible to resolve disputes amicably (which we’ll cover in the next article of the dispute resolution series), usually the best plan of action is to avoid them altogether. Here are some techniques for dispute prevention and avoidance:
Before you get started
Adjust your mindset
Beyond cultural differences, Chinese businesses operate differently than their Western counterparts – this goes for the way business people speak, think, interact, and the way they treat their clients and partners. It is essential that you pay attention to these differences, as they will not simply disappear in time. Attempts to understand, prepare for, and embrace both cultural and professional differences are often looked upon favorably.
While Western business people often focus on the transaction at hand, Chinese business people aim to forge long-term relationships that require nurturing and maintenance. Iberchina, a reference website on Chinese issues, outlines the do’s and don’t of building business relationships in China.
Do your due diligence
Make sure to carry out a thorough due diligence review of any potential Chinese partner. It’s very important to know your partner when doing business in China, so this process can help you assess the people who will be directly involved in your investment. It will also help you gather relevant general information (financial, legal, market data, etc.) on your potential partner to verify their experience and dependability. While helpful, do not exclusively rely on information provided by your Chinese partner — collect information from independent sources, too.
Conduct risk analysis
Like any new business venture, it’s imperative that you conduct a proper risk analysis before you dive in. Be realistic about how much risk you are willing to accept and make sure to use reliable sources. Go beyond your regular news media sources or your immediate partners to evaluate the risk from all angles.
Make certain your project is economically viable
While grants, subsidies, and other windfalls can help supplement a business model, any new project should be economically viable on its own terms. Profitability of a project or the sale of goods and services should be based on sound economic criteria rather than loose projections or expected returns. Do not rely on the promise of subsidies, special considerations, or non market related sources of income to generate a profit.
To avoid future conflicts, it is critical to establish goals with your partner to ensure that the outcomes are actually achievable. You should both have a clear understanding from the beginning and revisit from time to time to make sure you and your partner are on the same page. This applies to any important issues, specific goals, values, roles, and responsibilities that each party brings to the table.
During contract negotiations
Set clear terms and conditions
One of the most important considerations during contract negotiations is ensuring that the terms and conditions of all contractual documents are clear and unambiguous. The terms and conditions of any contract should fully describe how the contract is to be executed. This means that all contracts should clearly define all major terms and conditions without any room for different interpretations. This applies to:
- Payment clauses
- Dispute resolution
- Responsibilities and obligations of all parties
- Legal title transfer
- Delivery terms
- Performance standards
- And beyond
Establish language guidelines
While Chinese Law permits the use of foreign language in contracts, in the event of a dispute, all evidence must be submitted to the court in the Chinese language. To avoid any issues, it is highly recommended that all contracts are bilingual with English as the prevailing language whenever legally permissible as a matter of Chinese law. If there is no governing language, a Chinese court or arbitration panel will establish Chinese as the prevailing language.
Additionally, if there is no Chinese version of a contract during a dispute, the contract must be translated by a state-appointed translator. With the help of a translator to draft a Chinese language version of your contract, you can avoid mistranslation of the English language contract if a dispute were to arise. In any case, foreign parties should always ensure that the Chinese version of the contract matches the English or other language version.
For added security, it is also advisable to include a clause that in the event of any disagreement as to how the contract is to be interpreted, the English version will prevail. However, there are exceptions in certain situations (e.g. joint venture documents to be submitted to or filed with the Chinese government authorities) where the Chinese law requires the governing language to be Chinese.
Secure your finances
In the event that your partner is insolvent or unable to fulfil their financial obligations to you, it is often ineffective to file legal action against them. Therefore, it is advisable to seek legal counsel for help mitigating any potential risks of credit unworthiness. Additional security measures such as letters of credit, bank guarantees (although many Chinese banks either do not issue or are unfamiliar with such guarantees, or Chinese partners may refuse to provide them) and other financial instruments, are advisable.
Avoid entering into agreements that are not legally permitted
There are many cases of Western companies entering into agreements with Chinese partners with promises from local officials that central government rules will not be enforced in the provinces. While this is sometimes true, problems may arise when these rules are suddenly applied, leaving the company with little recourse. This is why you must ensure that each investment has a solid legal basis and that contracts are legally binding and enforceable.
Understand the difference between agreement and contract
Different cultures view the purpose of negotiation differently. A good example of this is the contrasting views of what a contract represents. The goal of most Western negotiations is to walk away with a binding, written contract that contains the terms of the agreement. In China, however, the contract is often seen as a framework that guides the relationship between the parties, laying the foundations for the business relationship. This can lead to disagreements as non-Chinese may have difficulty in accepting what appears to be a process of perpetual negotiation.
After you’ve signed a contract
Visit China if you can
If you are serious about doing business in China, it is extremely valuable for you to actually go and visit. Finding a trustworthy partner in the country can be much more difficult if you are unable to meet face-to-face. This shows that you are serious and committed, and personal meetings will definitely help build trust, a prerequisite for a long-term relationship in China.
Hire reliable local management
If your investment involves setting up an office in China, you should hire a local manager who is trustworthy and willing to cooperate with the parent company. The best candidates for these local hires are usually people with overseas study or working experience and with solid experience on the ground.
This can help you avoid situations where the local manager refuses to follow the parent company’s guidelines or disappears with confidential company information and official stamps. Beyond local management, hiring a legal expert with experience in China can help you navigate the legal system, vet potential local managers, and gauge legitimacy of potential partners.
To help avoid going to court over a dispute, build in practical communication mechanisms to identify and solve problems before major disputes arise. In addition, ensure that you have more than one person on your team who can speak Chinese. This can help to eliminate blind spots and provide a more accurate reading of the situation. Relying on a single communication channel can be detrimental to negotiations, especially if there are personal interests or conflicts of interest involved.
Search for problems before they materialize
Spend time at the beginning of your project to examine what you will do if things go wrong, and try to anticipate possible problem areas. If you can’t find any, you are not looking hard enough. Additionally, set milestones in the project for performance and have an exit strategy for each stage of the project, even if you don’t plan on using it.
Disputes with business partners or clients can slow down your operation, cause complications, or cost a great deal of money if they are not handled properly. In our next post, we will explore dispute resolution options, but it’s always a good idea to take measures to prevent them from arising in the first place.
If you’re looking to learn more about dispute resolution in China, consider joining our free webinar on June 18th or register for a free Trustiics account to start working with some of the top English-speaking lawyers in China.