Buying from China? Here’s Why You Need a China Purchase Contract.
It is easy to overlook the value of a detailed purchase contract. However, we always encourage businesses to have one drafted before committing to a supplier. A good purchase contract offers a wide range of benefits, including and beyond significant protection for the buyer.
Why Do Some Businesses Overlook the Need for a Purchase Contract?
Despite the importance that means to have a purchase contract, not all the companies take it as an option because of some of the following reasons.
Cost of an Attorney
Drawing up a contract requires working with an attorney. Specifically, an attorney who specializes in Chinese law, and can provide you with a contract in both English and Chinese. This is not an insignificant cost. However, it is an essential step. Even if your supplier speaks fluent English, contracts in China are much more likely to be enforceable when they are written in Chinese. Similarly, Chinese law can differ substantially from the laws in Britain, Australia etc. This means that for the contract to be enforceable, it will need to be drafted specifically for China.
Increased Supplier Costs
Here is something that takes many businesses by surprise. Sometimes, when you ask your supplier to sign a purchase contract, they increase their prices! Why? Because before you signed a contract you, the buyer, absorbed most of the risk. A good contract will force your supplier to make certain assurances, so that if they make a mistake they pay the price for it. This makes things riskier for the supplier, so they may increase their prices to reflect that.
Don’t let this deter you from insisting upon a contract. Although it isn’t fun to see your costs increase, having a contract is likely to save you money in the long run.
Fear of Unenforceability
There can be a perception among western businesses that Chinese contracts are not worth the paper they are written on. There are several reasons for this. One is that many businesses will try to enforce a contract in their home country, not understanding that Chinese courts will simply ignore judgements from outside of China. If you do this, you are right to fear that your contract has little enforceability. However, a contract drafted in Chinese, by an attorney in Chinese law, and enforced in China does offer significant protection.
Another reason is that carrying out a lawsuit in China is a long and expensive affair. As a result, some business owners feel that it is not worthwhile except for huge contracts. However, it is rare for disputes to go all the way to court. Often, just having a contract in place is enough to draw your supplier into resolution talks. Don’t forget, lawsuits are a hassle for both sides.
Benefits of Drawing up a Purchase Contract
Drawing up a purchase contract has benefits for you and your company long before it is even signed by your supplier. Here are some examples.
Forces You to Define Your Product Specifications
A good contract will go into detail about the specifications you expect from your end product. This includes packaging, technical specifications, and more.
Drawing up a purchase contract forces you to figure out exactly what you are looking for on all of these fronts.
Facilitates Communication Between Departments
Drafting a contract forces you to consider more than just product specifications. It also forces you to formalize your timeline, budget, order quantity and other logistics. You would be surprised how many businesses make it to the stage of drawing up a contract, and realise that it is the first document they have which brings together all of this key information.
In this sense, a contract is invaluable. Once your plan is written down, it is much easier for different departments to work cohesively.
Makes It Easy To Get Quotes From Other Suppliers
Once you have a detailed document outlining product specs, quantities, and timelines it is much easier to obtain accurate quotes from other suppliers, who will know exactly what they are agreeing to. This means that you can shop around for the best price.
As always, be careful though if the price seems too good to be true.
Benefits of Having a Purchase Contract
Having your supplier sign a purchase contract comes with a range of benefits, including and beyond the legal protection of your cash.
Legal Protection for Your Business
A contract is your first line of defence against dodgy suppliers. Lawsuits against Chinese suppliers are a last resort, due to the time and expense involved. However, the mere threat of being taken to court is enough to deter most suppliers from trying to scam you.
Keeps Expectations Clear
Having a purchase contract is useful even when dealing with honest suppliers. We’ve seen far too many businesses lose out because of a miscommunication across language barriers.
Having a detailed agreement in writing limits the risk of misunderstandings.
Price Stability
In the global marketplace, the cost of goods and resources can fluctuate for all sorts of reasons, including natural disasters, international conflicts, and man-made crises. This is a big problem for businesses, especially those that survive on tight profit margins. Having a purchase contract allows you to lock-in pricing, protecting you from sudden surges. It also allows you to budget confidently. You will not need to divert money from other areas of the business to accommodate sudden changes in supply cost.
Conclusion
A detailed purchase contract, drafted by an attorney, is a great way to protect your business when ordering from a Chinese supplier. It is also an incredibly useful document to have on hand, bringing together essential information on product specifications, timelines and more.
Still not sure how to proceed? Here at Easy Imex, we’ve helped countless businesses with supplier contracting. Get in touch today and find