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Business in China: Contracts Subject to Cultural Interpretation

You may have heard horror stories about contracts not being honored by Chinese partners. Has this scared you off of doing business in China? Don’t let it.

Let’s start with the obvious: contracts are a problem everywhere in the world. Even in the U.S., breach of contract is notoriously difficult to sue for. There’s just something that makes human beings nervous about putting commitments in writing.

That said, is there anything to the claim that “the Chinese don’t value contracts like Americans do”? Per usual, the answer is yes and no. We’ve covered the ‘no’; now to the ‘yes.’

It’s true that the legal document known in English as a “contract” is seen differently in China than it is in the U.S. To a “typical” American a contract is a set of legal obligations. If you don’t fulfill them, you can be sued. The contract serves the ultimate purpose of getting something done, regardless of who the parties are and what feelings they might have. Only the task at hand matters.

The contract is a way of saying: “We all know what there is to be done. Here is a breakdown of who’s responsible for what. We know we may want to change things, but we know we can’t, because this is what has to be done, and since we’re all strangers here we’re not really sure we can trust the other guys, and we need a guarantee that they’ll uphold their end of the bargain.”

The last piece is the key to the whole deal. And it’s perfectly fine in American culture. But not in Chinese culture, which is much more focused on relationships, and on maintaining good feelings towards those we work with. A Chinese “translation” of the above statement would go something like:

“We all know what there is to be done. Here is a breakdown of who’s responsible for what. We also know that this is an agreement among people, and as we get things done together we want to be sure we don’t ruin any relationships. So if we run into trouble we may have to reconsider what we write down here. These are guidelines; what’s more important is that we work together when there are problems and make sure that relationships stay intact.”

One crucial thing to see about this is that it has nothing to do with what we call “honesty.” Nothing whatsoever. Both views of the contract are perfectly “honest” in their own ways. But because of all the cultural baggage Americans bring along with our views of contracts, it’s very easy to go from “my Chinese counterparts want to rework the contract” to “the Chinese are dishonest.”

Will your business have to deal with cultural differences when it comes to contracts and their enforcement? Most likely. But it doesn’t have to go down the familiar and unproductive road of finger-pointing and crying foul.

Know what you’re dealing with. Expect it and understand it. If you do you’ve got a leg way up on your competition. While they’re busy complaining, you’re working things out and moving forward, solidifying your partnerships, and laying a foundation for future business in China.

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