A Brief Analysis on the Mistaken Mind-set in Conducting a Contract

As the globalization intensifies, international economy and trade are also increasingly frequent; however, how to control the risks within the expected range has become an issue of common concern among the enterprises engage in international trade. As a legal document, commercial contract which regulates the rights and obligations of both sides has played an increasingly important role. Thus, signing a complete and operable commercial contract is a necessary means to reduce the risks in international trade.

However, seeing from the living examples, many foreign companies think little of commercial contracts at all, and such situation usually occurs to small and medium-sized foreign enterprises. On one hand, the company doesn't provide or verify the legal department concerned in the commercial contract; on the other hand, the negotiations on the contractual contents still need a lot of time and efforts. Therefore, in order to save expenses and improve efficiency, companies often neglect to review the contract contents, only to sign a cooperation intention, or else the contract terms lack of maneuverability, and some even don not sign any file at all. Such phenomena result in the mistaken mind-set of the foreign companies when trade with Chinese companies. Specifically, there are several forms as follows:

1. The amounts bided in the contract is small, even the disputes will not bring about huge loss to the company, so there is no need to sign a contract with precise content or favorable operability.

2. The foreign enterprise and the Chinese enterprise keep good long-term business relations. Based on mutual trust, it seems unnecessary to sign the contract.

3. Foreign companies ignore the necessity of contract, and thus just focus on price, delivery time and place, number or such basal elements.

4. Foreign companies believe that the legal system in China is incomplete, so it is difficult to implement effectively even sign a complete contract. So, they do not wish to focus on the design and negotiation of the contract contents, so the contracts they sign are extremely rough.

Just the above mistaken mindsets lead to frequent disputes due to the insufficient constraints of the other side. Once the dispute occurs, foreign company would be especially passive in affixing the responsibility of default. For example, if both sides have not regulated the acceptance time and criteria, once there is quality problem, for they lack direct contract as their basis in the process of affixing the responsibilities of the other side, only to seek proofs in business practices or legal provisions will greatly increases the risks in litigation and arbitration. Another example, some foreign companies would pay in full even they haven't received the goods, and if they find the goods with flaws, claiming for refund of compensation would be difficult for lacking the binding force of contract. In such situation, foreign enterprises have to turn to lawyers (powerful contract is necessary even when seek support from lawyer), so some will just give up eventually.

Signing a complete contract during the business negotiations may not cause such helpless and embarrassing situation when dispute occurs, and just because of this, the foreign companies should adjust their mindset positively, regarding the signing of a complete contract as a necessary condition. So what is a complete contact alike? It is can be evaluated in the following ways:

1.It should be with specific terms and time for payment. The payer must assure to pay the money after the buyer performs his respective obligations, in case of "losing both person and person". And the payee must make clear of the time the money is paid, and regulates the responsibility of breach of contract, for example, claim for penal sum for overdue payment in case the payer defaults in contract payment.

2.If the contract is for the sale of goods, the acceptance time and criteria should be determined in the contract to ensure the quality of the goods.

3.It should have clear and operable default clauses, once either side defaults, the other side can rapidly affix the responsibility of delinquent party. For example, nail down the default amounts, compensation standard, and the breach situations rather than a brief "the defaulting party shall be liable for responsibility" as the breach of contract terms.

In addition, the issues such as the venue and the applicable law should also be determined in order to solve the dispute efficiently.

Foreign companies had better get wise to local economic environment, and the business information of the other side via business consulting organization before sign the contract. Meanwhile, the company can also consult the local law firm to learn the legal status, the special regulations related in foreign affairs, and the terms of the contract which are the most suitable for the country's legal status, etc. This will not only make business negotiation smooth, and also propitious to sign a commercial contract which can insure you gain twice the result with half the effort in future cooperation.