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The basics of contract law tends not to vary all that much from country to country. For example, as far as I know, it is the law of every country in the world that if you agree to pay someone for a product and that someone gives you the product on time and in perfectly fine condition, you owe for that product and your failure to pay for it will constitute a breach of contract.?
And, generally, people are pretty free to contract for what they want. For example, if I am in the watch business and I want to sell ten watches worth a total of $6,000 for $5,000, just about every country in the world will allow me to do so.
But there are limits to freedom of contract and some of them are fairly obvious to lawyers and others are not. Right after I explain China's labor laws to my clients, and the need to have a written contract, I am often asked whether they can put in the contract that U.S. law will apply to the employment relationship. I then explain how there is no way any Chinese court would ever find that valid, just as no U.S. court would ever allow someone to pay a U.S. domestic worker USD$1.20 an hour because Chinese law applies to their contract. Without exception, the client has always "gotten" this. ?
Clients sometimes ask me to draft a contract that will work for the entire world, most commonly by companies that sell their products worldwide. I tell them that we can draft such a contract relatively inexpensively, but that it likely will not be the best contract possible for each individual country to which it is selling its products. I then ask them to give me the sales figures for all countries to which they sell. Typically, less than a half dozen countries dominate sales and then I suggest that instead of my firm just drafting a contract for the entire world, that we draft one for the entire world and for the two or three countries to which the client has the greatest number of sales.
They like that idea and then ask about cost. I tell them that it will be y dollars for the entire world contract and then y dollars times 1.5 (I am making up this multiplier here because it varies depending on the nature of the contract, but 1.5 is probably pretty close) for each individual country. The client's response is always, "wait a second, how can it be so much cheaper to draft a contract for the entire world than to draft a contract for just one country?"
My answer is that drafting a contract for the entire world simply involves our drafting the "perfect" country without regard for tailoring it for any given country. We put provisions in that contract that may or not be enforceable in the Sudan, but we do not spend even one second checking on its enforceability in the Sudan. We just put it in there, assuming it will work. So for instance, we might say any claims arising from the sale of the product must be resolved in a New York State Court under New York law and it is quite possible the Sudan's laws say that all claims arising from product sales into Sudan must be resolved in a Sudan court under Sudan law. And then, it is quite possible that the Sudan has a law that says that a buyer need not pay for a product that is not delivered within 20 days of being ordered, unless the parties have expressly agreed in a separately signed writing that it will be otherwise.
An "entire world" contract is always going to be a compromise, but for a company that sells USD$5,000 worth of product into 130 countries around the world, that sort of compromise is going to make sense. When we do a contract tailored to an individual country, we then have to research the laws of that particular country and make sure the contract is in full compliance with all of them. This sort of research and contract tailoring takes time and hence the higher fees.?
Not that long ago, my firm did a contract the other day between a U.S. and a foreign company (country intentionally not mentioned) where our client was selling a multi-million dollar product. The contract called for U.S. law to apply and under U.S. law, if you are going to disclaim certain warranties, you must do so clearly and explicitly. (It actually called for application of the laws of a particular U.S. state, but because on this issue the states are pretty much in accord I am going to speak as though we are dealing with the U.S. as a whole). ?In practice, this means that the disclaimer provisions are in ALL CAPS and usually in a larger font than the rest of the document and oftentimes in bold as well. In other words, you want to do everything you can so that the other party cannot claim to a U.S. court some day that they did not see it. ?
We then sent a draft of the contract to our client for its review. It came back with a few minor changes, but the disclaimer provisions were taken down to the normal sized non-bolded font, with ALL CAPS deleted. The explanation by our client was that the last thing it wanted to do was to highlight that it was pretty much selling this product "AS IS." ?We explained how if we did not highlight this provision we faced a real risk of it someday being deemed of no effect and the client eventually agreed to it in ALL CAPS and in bold, but in the same font size as the rest of the contract. ?I mention this because this is a classic example of a country specific provision and also because it is not all that different from what China is now going to be requiring. ??
I thought of all this today after reading a just published article by the McDermott, Will & Emery law firm, entitled, "Chinese Government Publishes New Measures on Illegal Contractual Acts: Standard Contractual Clauses May Cause Administrative Liability." The article is on how China will soon be fining companies that include certain certain fairly common provisions in their consumer contracts. McDermott starts out appropriately bluntly:
The State Administration for Industry and Commerce (SAIC) of China recently published new Measures for the Supervision and Punishment of Illegal Contractual Acts, which impose an immediate compliance risk in contracting with consumers using standard contractual clauses. Business operators that use such clauses may be subject to an administrative penalty after 13 November 2010. All businesses that entered into fine-print contracts with consumers must therefore have such contracts cleansed immediately or face an administrative fine by the Chinese government.
"According to the Contract Law of China, standard contractual clauses are clauses that are formulated in advance by a party for the purpose of repeated usage and that are not a result of consultation with the other party in the making of the contract." In the United States, contracts containing these sorts of clauses are typically called adhesion contracts, boilerplate contracts or take it or leave it contracts. An example would be the contract you get when you rent a car. These are the contracts hardly anybody even bothers to read.
According to McDermott, China's Contract Law "explicitly requires the party dictating the standard clauses to call, in a reasonable manner, the other party’s attention to the exemptible and restrictive clauses regarding its liability and to give explanations of such clauses at the other’s request." China's existing Contract Law prohibits a party from using standard clauses to evade its own liability "in personal injuries, losses to property to the other party by intention or gross negligence, and other behaviours causing harm to a third party, society or the State" and "if the party dictating the standard clauses exempts itself from liability, imposes heavier liability on the other party, or precludes the other party from its main rights, such clauses are deemed invalid." The new measures will mean impose "administrative punishments" for such provisions.
For classic examples of contracts that include disclaimers for personal injury or injury to property, think ski resorts and coat checks. ?
The new measures forbid businesses from seeking to contractually "opt out of its liabilities" for the following:?
- Causing personal injuries to consumers
- Causing losses to property to the other party by intention or due to gross negligence
- Warranties on goods and services the business operator shall assume by law
- Breaches of contract
- Other liabilities that a business operator shall assume
The new measures also prohibit businesses from imposing a "contract-breaching penalty or compensation" that "exceeds the amount allowed by law or what is reasonable" and from shifting "operational risks" to consumers that "should be borne by the business operator." The measures also preclude businesses from preventing consumers from eliminating the consumer's right to engage in the following:?
- Changing or eliminating a contract in accordance with law
- Claiming a contract-breaching penalty
- Claiming damages
- Interpreting a standard contractual clause
- Suing in a dispute related to a standard contractual clause
- Exercising other rights consumers should have according to law?
Violating the new Measures can subject a business to fines of up to RMB 30,000 (approximately US$ 4,500). ?
McDermott notes how the "law is not clear about what constitutes an operational risk," leaving "great room for interpretation" and for risk. ?
China, where the consumer is now king. ?What do you think?
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