Four China Business Mistakes to Avoid Before You Sign, Ship, or Sue
Lawyers sometimes call our China team after their clients have committed to a transaction or taken a dispute to court. They want help with what they see as the next routine step. Instead, we find a problem created much earlier, usually because someone assumed doing business in China would work much as it does at home. The four mistakes highlighted below all involve mainland China. Business owners need to understand them as well as their lawyers do, because the business ultimately pays for getting them wrong.
1. Treating Required Formalities as Paperwork You Can Fix Later
Years ago, a U.S. lawyer contacted us about forming a wholly foreign-owned enterprise, or WFOE, for his client in China. After we discussed the registered capital requirements, he asked whether factory equipment could count toward the client's capital contribution. We explained that it could if properly structured. He was relieved. His client had already bought $5 million in equipment and shipped it to China.
That was the problem. The purchases had not been structured as capital contributions to the new company, so the equipment could not simply be treated as registered capital after the fact. The lawyer complained that China was putting form over substance and that his client could not afford another $5 million. That transaction fell under China's old foreign-investment rules. China's current Company Law is more flexible, but the underlying lesson has not changed. Equipment and other non-cash property can be contributed as capital, but the contribution must satisfy China's legal requirements, including valuation and transfer of ownership to the company. Equipment does not become registered capital merely because everyone intended it to.
Before ordering equipment for a new Chinese company, decide who will buy it, who will own it, how it will enter China, and how it will become the company's property. The lawyers and the people handling payment, customs, and importation should all be working from the same plan. As we explain in The Documents Are the International Deal, records that do not reflect the transaction the parties actually intended tend to cause problems long after everyone has forgotten why they were prepared that way.
2. Relying on Vague Product Quality Terms
A lawyer tells us that a Chinese manufacturer delivered goods that plainly violate the contract. We ask to see the quality specifications and find little more than a promise to supply products of "reasonably good quality." The buyer regards the defects as obvious. The factory disagrees about what it promised to make. A laptop-bag dispute we handled shows how far that disagreement can go. Our client had received a couple of million dollars' worth of bags whose handles were not strong enough to hold a laptop. The factory's response was essentially this: your client ordered the $3 bags. Bags strong enough to carry a laptop cost $5.
The factory had a weak legal position. The United Nations Convention on Contracts for the International Sale of Goods, or CISG, generally governs a sale between a U.S. buyer and a Chinese seller unless the parties exclude it. Among other things, the CISG requires goods to be fit for the purposes for which goods of that description are ordinarily used. A laptop bag that cannot carry a laptop has an obvious problem under that standard. But having the better argument is not the same thing as avoiding the dispute. Vague specifications force the buyer to prove what the factory promised before it can prove that the goods fell short, and that fight costs time and money.
For a laptop bag, the contract should specify how much weight the handle must withstand and how that requirement will be tested. The buyer's product team needs to supply those requirements, and the lawyer needs to put them into the agreement. If an approved sample will establish the quality standard, identify and preserve that sample so it remains useful evidence if the parties later disagree. The contract also should establish when and how the buyer will inspect the goods, what happens when they fail inspection, and who pays for replacement goods and freight. Payment terms should work with the inspection procedure rather than against it, and the agreement should address defects that appear only after shipment or use. Our discussion of China Manufacturing Contracts: Why Your Draft Does Not Work explains why a generic warranty provision is no substitute for terms built around the product you are actually buying.
3. Choosing a Court Without Planning How You Will Collect
A U.S. lawyer once contacted us after obtaining a $2 million default judgment against a Chinese company in federal court in Boston. She had drafted the contract selecting that court, filed the lawsuit, and won. She now wanted our help getting the judgment recognized and enforced in China, preferably on a contingency fee. The lawsuit was over. The collection problem was just beginning.
Chinese courts can recognize U.S. judgments on the basis of reciprocity, but recognition requires a separate proceeding in China and is not automatic. A default judgment puts particular importance on the service record. The applicant needs to establish that the defendant was lawfully summoned and had a fair opportunity to defend itself. Our guide to Enforcing U.S. Judgments in China explains the recognition requirements in more detail. This is also why we virtually always serve Chinese defendants through the Hague Convention when the Convention applies and eventual enforcement in China matters, even when a U.S. court might permit a faster method. Proper Hague service gives the judgment creditor a far stronger record on notice and service when it later goes before a Chinese court.
The lawyer's fallback was to sue again in China. That created another problem: the exclusive Boston forum clause she had drafted gave the Chinese company grounds to argue that the Chinese case should be dismissed. The collection analysis belongs at the beginning, when the dispute-resolution clause is being drafted. Start by identifying the Chinese company that will actually sign the contract and determining where that company's assets are. Do not assume a parent company, sister company, or affiliated factory will cover its debts.
For contracts with Chinese manufacturers, that analysis often points us toward a Chinese court because it generally offers a more direct path to the manufacturer's assets. But forum selection is not an ideological choice between American courts, Chinese courts, and arbitration. It is a collection decision. A judgment that costs more to enforce than the defendant can pay is a bad investment no matter how satisfying it was to win.
4. Assuming an English Contract Means an English Arbitration
Lawyers sometimes call us for advice about an approaching arbitration in China, often before the China International Economic and Trade Arbitration Commission, better known as CIETAC. We ask whether the arbitration clause specifies English and whether their legal team can handle a Chinese-language proceeding. That question has produced some long silences. The assumption usually is that an English-language contract means an English-language arbitration. It does not with respect to China, though it generally does with respect to most of Latin America.
Under Article 84 of CIETAC's 2024 Arbitration Rules, the parties' agreement on language controls. If they do not agree, Chinese is the default. CIETAC can designate another language after considering the circumstances, including the language of the contract, and the tribunal can revisit that decision after it is formed. An English-language contract therefore helps, but it does not decide the issue. If the parties want English, the arbitration clause should say so: "The language of arbitration shall be English."
A provision making the English version of a bilingual contract controlling does something different. It tells the parties which text governs if the two versions conflict. It does not select the language of the arbitration. Nor should the parties casually choose two arbitration languages. CIETAC's rules expressly permit it to charge additional reasonable costs when the parties agree to use two or more languages. The choice also should reflect the dispute the parties are likely to have. An English-language arbitration involving Chinese accounting records, factory documents, employees, and witnesses still requires substantial translation and interpretation. Your lawyers need to be able to work effectively with that evidence. Those costs belong in the discussion when the contract is drafted, not a few weeks before the hearing.
Before choosing CIETAC at all, ask whether arbitration actually improves your position. For many manufacturing contracts, we prefer a properly chosen Chinese court because litigation there is generally less expensive and puts the dispute directly into the judicial system that can freeze and execute against the manufacturer's China assets. The right answer depends on the counterparty, the assets, and the dispute you are likely to have—not on a reflexive assumption that international contracts should contain arbitration clauses.
Get China Advice Before You Commit
Your regular lawyer does not need to know every detail of Chinese law. The lawyer does need to recognize when a transaction calls for China-specific advice and bring that advice in while the proposed arrangement can still be changed. Give China counsel the commercial background, not merely the draft documents. Explain what has already been signed, ordered, shipped, paid for, or promised. A lawyer reviewing the paperwork without those facts is reviewing only part of the transaction.
The common thread in all four examples is timing. The equipment contribution, quality standard, collection strategy, and arbitration language were manageable questions when the deal was being structured; they only became expensive legal problems after the parties committed themselves.
