Contracts Aren’t Always Your Best Tool
Apr 2, 08 Posted in GeneralLast week I helped a U.S. client prepare for his first negotiation in China. He had dealt with a few other Asian countries before but was clearly much more comfortable with the American style of doing business. After almost two hours, he looked at me and summarized some of the frustration he must have felt in this question: “You mean I can’t rely on a contract as a way to force them to do what they say they’ll do?”
Correct. I was glad he had gotten the point.
This is actually a source of deep frustration for many Westerners dealing with countries like China: the concept of relying on a legal document as the primary bond between the business partners is foreign to people from China, Nigeria, Saudi Arabia, Bolivia, and many other places in the world where people tend to focus a lot on relationships when doing business. Don’t get me wrong: all of them are smart enough to understand the purpose and principal intentions around closing contracts. What many of them don’t get is how someone could use a contract as an implicit threat “against” a partner they are doing business with. In their view, a contract serves to document what both sides agreed to; whether that agreement is still held up may be subject to frequent discussions between the parties, who are both expected to remain flexible to change contracts if required to keep the business attractive for both sides. If you ever try to enforce a contract with a business partner in these countries through legal action, you may get “your way” in court but are very likely to find yourself isolated in the business community of that country, where every potential new partner may now be reluctant to do business with you and your company. For that reason alone, it is always wise to look for better ways to enforce contract compliance when dealing with relationship-oriented people than to threaten legal action.
6 Responses to “Contracts Aren’t Always Your Best Tool”
By David Crawford on Apr 28, 08
The concept of a contract being more of working document rather than a legal threat is not “foreign” to Americans it is just becoming less common than it used to be due to the prevalence of attorneys in normal everyday business transactions. It is likely the result of our ever increasing litigious society, however, I think it is an extreme over correction and if US executives were to focus on trusting their instincts and crafting incentives that make sense for all that are involved then lawyers become obsolete for everyday business deals.
Many “older” Americans involved in small business still operate on a hand shake and honor rather than working out a complicated contract with their lawyers. I am in no way discounting the legal profession but lawyers typically look at every conceivable way that things could go bad rather than focusing on why two parties would be best served to operate in the best interest of each other. The mere act of bringing up these negative scenarios can be offensive and turn a deal into war rather than a working partnership.
I think having attorneys involved in business transactions muddies the waters of a business deal mainly because it allows an executive to be detached from the emotional side of the deal by claiming the lawyers are responsible for the lack of trust. In my opinion this way of doing business is pure laziness or incompetence by an executive because they have decided to let attorney’s protect them from the ramifications of a poorly designed deal.
My father, grandfather, wife, and uncle are all attorneys. When discussing business with them the topic frequently migrates toward legal issues and they are always worried about enforcement of contracts and how legal fees figure into a decision to litigate. They are always focused on one question: How are you going to get them to do what you want them to do? For a smart business person there is an easy answer to this question. They will do what I want them to do because it is in their best interest to do what I want them to do otherwise I don’t do the deal.
By Lothar on Apr 28, 08
Great comment - I wholeheartedly agree with the conclusion that the best way to enforce the deal is to structure it in a way that keeps it the partner’s best interest to do what they say they will do.
There is no doubt in my mind that legal professionals play an important and valuable role in domestic and international business. The danger lies in anybody involved in deal-making, whether they have a business, legal, or other background, ignoring the fundamentals of why and how people/companies do business together.
By john on May 2, 08
When you compare the numbers of attorneys across countries sometimes the differences are huge — 250 attorneys per 100,000 in the US versus only 8 in China! In many countries around the world people don’t have an intricate and well-developed legal system on which they can depend. Particularly in relationship-orieted cultures business execuvites will focus on strong personal relationships and mutual friends to help iron out disputes. Thus, much time will be INVESTED in creating such relationships before much “business” (at least in the traditional sense) gets done.
By cristian ibarra on May 10, 08
Business in China as stated is very relationship based and people-oriented. Contract formation in China, unlike the United States is a starting point to the actual negotiation. China’s legal system has no strong foundation since it is evolving as the country grows. There procedures and processes to protect company rights are not fully functioning systems but rather unstable and unpredictable entities. As a result of this situation business deals at best are very risky. Dealing with business partners must be very social it cannot be left up to the contract. In order to make sure that problems do not arise one must maintain constant communication. Also, since China has a societal tendency to save face one must engage in lengthy conversations to make sure that the deal is going smoothly. Lastly, it is very important to occasionally meet face-to-face since Chinese citizens are members of a culture that require personal one-to-one commitment.
American business on the other hand is built upon the foundation that contracts will uphold the agreement reached by two parties in the case of a dispute. Lawyers of course are hired to help reach the best deal for their client. Is it the lawyer’s fault that the legislator has enacted countless laws in the area of business or that our legal system is more stable than third world countries, I think not. People who say that lawyers just bring more litigation do not understand that this problem has arose not from the lawyer’s personal desire to bring frivolous or meritless lawsuits but rather from our long history of enacting laws that further protect are citizens from getting “screwed.” Lawyers are just like doctors in many respects they protect their client/patient from dying, or in the case of the lawyer protecting their client from financial ruin. In the last 20 years lawyers have taken the biggest fall in regard to professions society view as prestigious. Does the public not think that doctors don’t run up the bill with extra tests just to make sure that patients are well enough to leave the hospital? Lawyers in many respects do the same thing they run up the bill in extra research to make certain that their clients will end up in the best position. Just because in most cases medical insurance companies take the hit with the medical costs of the patients while clients of the lawyers have to pay the full amount, lawyers are viewed as greedy. I think its time that society should regain their trust in lawyers again because at the end of the day they are just a product of their environment.
By Rafael Barajas on May 12, 08
I have worked for two companies that have done business in China. One had a much larger “by the book and corporate” way of doing business and the other was a relationship based “mom and pop” trading agent, both in the fashion industry. The large corporation seemed to run into problems getting what they wanted from their written contracts even though it was a multi-million dollar firm with the capability to find several suppliers. There was a sense of a nonchalant attitude to the crass approach this large company took with meeting contract specifications and the Chinese’s factories’ compliance. On the other hand, the small mom and pop Chinese agent had worked for over 25 years in the fashion industry, dating back to the Bugle Boy clothing brand era. He had started in the Chinese factory lines and worked himself up to the point of being sent to the U.S. to oversee Bugle Boy operations. Overtime he moved from company to company in the U.S., particularly with the action-sports industry, and built many relationships and contacts. While I worked for him I saw many contracts being written for finished product minimums, fabric minimums, color minimums, design standards, and delivery dates be changed even though the contracts specifically stated that such violations would result in penalties. Never were they enacted. Most of the time violations were enforced by a code of conduct that appeared to be more in-line with unwritten law, cultural norms, and a company or business owner’s reputation than threats. To me this seemed very unprofessional but it was just the way things work. When I first started I was very assertive with my approach and didn’t understand why I was being reprimanded when I was. There was an unwritten back-and-forth formal way of negotiating that needs to take place before an actual solution takes place. As an agent, it appeared that our contract were more like a mask for our customers so that we can covered our bases should a problem arise. In the end our best interest was for our customer and we made sure to let the factories know. But there was a strong sense of preserving this way of doing business between my Chinese boss and the Chinese companies. So at every opportunity, we defended the factories as much as possible.
Even though it seemed unprofessional to me at the time, I look back and realize that the relationship based way of doing business was much more flexible to doing business. When issues would arise we would still promise quality but relay that certain modifications would have to be done. Some customers complied to the changes others did not. However, at the large corporation longer lead-times were factored into production to set up for the inflexible nature of production and all the red tape needing deliberation should a problem arise.
By Alec Alessi on May 15, 08
I worked in the legal field for 5 years and for 3 of those years I helped draft and enforce contracts. To say that people in America use contracts as a way to force the contractee to do as the contracts states without thinking of the reciprocation’s is wrong.
Many times business have to think about how their image is looked upon in the outside world. If a construction company is being sued due to lack of payments to its subs, does not mean that the subs are going to be quick to sue the construction company. They have to think about competition and future work duties that may be needing in the future. Especially in industries that are highly competitive. If these subs sue the main company, the one that hires them, they may be over looked in the future to do business with.
So to say that in America dose not think of relationships and would rather enforce the contract though force is a gross oversight on the argument. I think that Americans use contracts more as a crutch to fall back on when times get tough with the contractee.