Negotiating a contract in China

The success of a negotiation with the Chinese does not depend on the signature of the contract. Philippe Vigoureux gives us sound advice to successfully negotiate a contract in China.

In China: contract or letter of intent?

All companies that have invested in China will tell you: the first contacts with the Chinese partner are essential... However, too often, foreigners have an obsession at the time of entering into a joint venture: succeed at all costs in signing a good contract with the Chinese. And this is where the problem lies. Should a contract be signed first?

The lesson from the field: the failure of the contract alone

I remember a major energy operator in France whose business unit decided to launch operations in China. The general manager contacted me one day and told me that things were not going well with the Chinese partner. However, his lawyers had drawn up complete contract texts, going into great detail, blocking all possible ways out... perfect from a legal point of view.

After reading these very detailed contracts, the Chinese understood that the French company did not want to work with them. For the Chinese, it was too complex, too detailed and it was blocking. So nothing was moving forward. The general manager then understood the cause: the absence of a letter of intent that defines a framework, a territory on which we can agree.

Today," continues the general manager, "I am obliged to make regular trips to China with my boss to demonstrate to our Chinese contacts that we want to do business with them, to make the relationship more flexible... and this is costing us a lot of money..."

For this contract, it was too late, but for the following projects this French company first signed a letter of intent before a classic contract.It took two years to change the method, to change the intellectual process!

The letter of intent and its content

You will have understood: in China, the letter of intent is a framework prior to the signing of a contract. But what exactly does this document consist of?

It is signed at a high level: for example between the CEOs of the two partner companies who have met and trust each other. It protects the contract, which is then managed by the operational staff.

Let's take an image... the letter of intent is a cloud formed by all the things that the two partner executives want to do together. You can say a cloud, because the content is quantified, but not too much. For example, we won't write that the return on investment will be 10%. But rather, we will say: together we will be the most profitable producers in the region. If the objective is not achieved, both partners can come back to each other and review the situation. But be careful, in the letter of intent, we never write that in case of conflict we will go to court. The letter is there to define how to settle disputes amicably. It is designed to prepare for the next step: the contract. It is therefore written with the support of lawyers.

The letter of intent and its protective moral value

In the letter of intent, there is friendship and trust. Once the letter is signed, it should be celebrated, as it is the high point of the relationship. Then, this letter will remain around the contract to wrap it.

Let's go back to the image of the cloud: the letter contains the contract, it allows for readjustments. For the Chinese, the signing of the contract is not the end of the story. A contract in China is renegotiated according to the circumstances. There is always a difficulty here or there. The Chinese partner may always want to rediscuss and push the limits of the contract, but he will never go beyond the letter of intent.

Why not? Because he does not want to lose face in front of the foreign partner. By signing the letter of intent, he has committed his honor. If the contract does not work, if it is a cause of permanent conflicts, there is always the excellent parachute that is the letter of intent, in which the partnership relationship can continue to live or cease by mutual agreement.

Change your mindset: friendship before contract

Compared to Europeans, the Chinese approach building a partnership very differently. Business in China is established on sincere relationships between physical persons. In Europe, the business relationship is established between legal entities on a legal basis.

• To make it simpler, let's look at the logical chain. In Europe, there is first the contract, then the logic of business law that applies and protects, and only afterwards, if everything works well, there is friendship.
  In China, it is the opposite: first there is friendship, then comes the logic which is not legal, it is a relational logic which must allow the emotional to pass, from the emotional desire to do business together, to the rational organization of the role of each. This will then allow the contract to be negotiated.

Any project in China that does not start with friendship and trust will encounter difficulties that will be very difficult to resolve.

To see the video version

Negotiating with the Chinese - The contract and the letter of intent