How To Enforce Contracts With Chinese Manufacturers [Podcast Ep17]

 

Welcome to this week’s podcast episode and I’m really excited because for the first time, I’m actually recording with a guest face-to-face and it’s going to be a real conversation.

Joining me is Yaron Remen. He’s my business partner and has been a mentor to me for the last 20 years.

To give you a little background, Yaron is a serial entrepreneur. He’s SOLD 9 multimillion dollar businesses.

He was the founder of the 3rd largest online retailer in Australia called oo.com.au. And he’s got a real string of successes behind him.

So we’re very lucky to have him talking to us today.

Yaron’s real specialty is starting up businesses, scaling them up big, and then selling them.

So if you’ve got any questions, things you want to ask, please leave comments below.

We’ll make sure we bring Yaron back for more conversations to address some of the topics you want to discuss.

For this conversation, however, I’ve asked Yuron to explain a very sensitive issue:

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Why Do We Even Bother With Contracts In China?

Companies who start to do business in China are concerned with enforcing trademark contracts and protecting themselves from any legal issues that may occur down the line.

But the reality is this:

Many of them DO NOT have the means to enforce them.

And even if they do, it’s costly and time-consuming.

So why bother?

“If you go back 20 years or 25 years I think there was certainly a big problem,” says Yaron, “even 15 years ago. It was very difficult to enforce contracts.

“I can say that the last few years I’ve noticed a shift in the market in China. And I have experienced a few situations with Chinese, or Mainland Chinese, lawyers who are becoming quite good at enforcing contracts.

“I think the perception of China being difficult to enforce contracts in, is not a fair perception.”

Yaron says the key is to have a Chinese lawyer rather than a Western lawyer pursue a factory.

“If you’ve engaged in a legal contract and find yourself in a situation where you need to enforce a clause in the contract that’s detrimental to you, I would always recommend you use a mainland Chinese lawyer who understands factories.”

Now, none of this means a thing if you don’t have the means to enforce the contract.

However, there’s a delicate balance of your relationship with the manufacturer versus the contractual obligations you’ve agreed on.

“I think that applies to every contract in any country,” says Yaron. “It costs a lot of money. We know that. And legal fees are endless. They can go on forever.

“However there’s a certain advantage of having a contract versus not having one, for a few reasons. Firstly, everything is in writing. So everybody understands what their obligations are.

“And you’ll find often when you remind the factory of its obligations – ‘in clause 2.1.a it says that you’re not allowed to sell to my competitor’ – and they’ve signed that, most times they’ll say, ‘well, okay,’ and you try and work it out.”

It doesn’t always work like that but there is a kind of moral obligation at play.

Plus there’s always the “threat” of legal action.

The Best Solution And How To Get Factories To Take You Seriously

“Most factories might not take you seriously initially. But if you start getting some traction with your product and your volumes are good, and it’s becoming worthwhile for you to engage a lawyer, you’ll find most factories will take you very seriously.

“But I do have to say the best solution is always to resolve it with the factory before you get to that stage.”

In resolving disputes with the factories Yaron finds the manufacturer’s moral compass and sense of business ethics plays a significant role.

“I think like anywhere in the world you find decent people, decent factories, decent owners of factories, and you’ll find some not-so-decent.

“There’s a certain element of luck because it’s very hard to tell when you start doing business. Everybody’s always putting their best foot forward when they’re negotiating. And that may change later or might not.

“I find as long as the factory has a good understanding of what the agreement is, and has a good feeling they’re going to get more and more business, you have good grounds to negotiate some kind of resolution. If they feel there’s not a lot of business coming sometimes it becomes a bit tricky.”

The “Good Old Days” Of Doing Business In China

During the conversation, I recalled a hilarious story that happened to Yaron back in the early days of doing business with the Chinese.

I’m sure at the time it must have been frustrating. But it’s a good laugh talking about it now.

“It felt like a big deal at the time. Well, it was a big deal. The short version is we were negotiating a contract with a supplier out of Guanzhou, at a factory there. We got some extent exclusive rights from that factory to sell that product (David: they were DVD players) in Europe.

“We were, at that time, doing businesses in Scandinavia and we were trying to get into the German and English markets. We had already placed a lot of orders from the factory for Australia and South Africa.

“I sat with the chairman and his team. And his English wasn’t great, so we have a translator and we hammered out a contract between us with some big minimums, giving our company exclusivity for their products in Europe.

“We shook hands and we toasted after we signed the contract, and he said, right, it’s time to go celebrate. We’re going to go for dinner. And we got into the car, a few of us. And as we’re driving out of the factory, I noticed the warehouse loading a container about 50-100 meters from me.

“I looked closer and I could see the brand on the boxes was a brand that I remembered a competitor of mine selling in the UK.

“So the question I asked was, ‘What’s going on? I see you’re shipping stuff from the UK. We just signed a contract!’ And he started laughing said, ‘Oh yes, we sell to the UK, we sell to Germany, we sell everywhere.

“So I tried to, through the translator in the car, say, ‘well, can you please explain to him we just signed a contract?’ He said, ‘Oh no, that’s just the contract. We will sell to them and we’ll sell to you and come and have dinner.’

“So I think that explains, those days were a little bit different. Of course, it can still happen.”

Back in those days, the factories would sign the contract just to get the orders without any regard for the terms in the contract. I asked Yaron if he thinks that’s changed now.

“Yes. I definitely think it’s changed,” he says. “Things have gotten clearer. I think the understanding of an obligation is more clear.”

“BUT I have seen, in recent years, quite a few incidents where the intention of the factory is to deceive. And that’s why we have checks and balances when it comes to do factories.”

How To Remove The Possibility of “Misunderstanding” Contracts

When getting contracts signed, you want to make sure the manufacturer is actually reading the document in full before signing.

If they sign the contract too quickly just to move on to the next stage, that can be a bad sign.

You want to see them taking their time and actually discussing the points in the contract.

Understand the difference in priorities here:

• The main aim of factories in China is to get more orders and more business.
• The main aim of somebody starting a business is protecting their interests.

“What I would recommend is have a contract made and if it’s in English, add in a sentence in Chinese – have it translated – saying ‘I hereby confirm that I have read this contract and I’ve had it translated for me into Chinese.’”

This is a crucial point because there are a lot of translation differences. And going from one language to another, there can be misunderstandings.

“Sometimes there are misunderstanding but sometimes it’s only an excuse to say there was a misunderstanding. And that’s why the signing of the extra clause in Chinese, while it may not protect you legally, will eliminate that excuse because they signed it in their language.

“So I always recommend that, though it’s obviously not a guarantee.”

True, there’s never a guarantee.

What it comes down to is removing doubts. You’re removing misunderstandings and trying to be as risk-free as possible.

“I never like to use the word risk-free in China because there’s no such thing. But ‘removing as many obstacles as you can by protecting yourself.’”

The final point Yaron mentioned is to reiterate that if you’re planning on investing a large amount of money in China, to get a mainland Chinese lawyer who understands the law.

This way the contract, from the start, will be written in a way that it can be enforced in China.

Conclusion

To summarize Yaron’s advice:

1. Invest in a mainland Chinese lawyer so the contract is written in a way that it can be enforced in China.
2. Like anywhere else in the world you’ll find decent business owners and not-so-decent, so be prudent.
3. Include a clause in your contract, in Chinese, that says “I confirm that I have had this contract translated for me in Chinese and that I have read it in full and agree to all its terms.”

Like I mentioned earlier, if you have any questions about contracts or doing business in China in general, leave your comments below.

Yaron and I would be happy to record episodes on whatever topics you want to learn about.