China – Contract Negotiations

The Italian Court of Cassation, United Sections (judgement no. 24244 of 27 November 2015), recently issued a judgement on the applicability of article 5 no. 1 of the Brussels I Regulation on the jurisdiction, recognition and enforcement of judgements in civil and commercial matters, now corresponding to article 7 no. 1 of the Regulation 1215/2012 (Brussels I bis).

The above-referenced provision sets a special forum in matters relating to a contract, providing for the competence of the courts located in the place of performance of the obligation in question. According to letter b) of this provision, in case of the sale of goods, the place of performance of the obligation in question shall be the place in a Member State where, under the contract, the goods were delivered or should have been delivered.

In the case brought before the Court of Cassation, an Italian company – while objecting the claim of a French company regarding the conclusion of some sale agreements that the latter stated to have entered into with the first one – asked for a declaratory judgement stating the inexistence of any contractual obligation between the parties, and, alternatively, for a declaration that the alleged agreements were null and void.

First of all, the Court of Cassation asserted the applicability of article 5, letter b) of the Brussels I Regulation to the case de quo.

Albeit recognizing that the abovementioned provision seems to refer only to actions addressed to the performance of a contract and not to actions regarding the dissolution of a contractual obligation, the Italian Supreme Court has considered that also claims aiming at ascertaining the inexistence, invalidity or ineffectiveness of an agreement concern matters relating to a contract. More precisely, the Supreme Court has held that such claims involve an initial, actual or alleged, voluntary assumption of an obligation, of which they tend, in several ways, to default. In the light of this assumption and considering that the delivery of the goods was supposed to take place in France (according to the contractual documents evidenced during the proceedings), the Court of Cassation has found that Italian Courts were lacking jurisdiction over the case, thus confirming the judgement previously issued by the Court of Appeal.

The judgement of the Italian United Sections is important because it has definitively confirmed, consistently with the European uniform trend, that the place of delivery is the only autonomous linking factor to be applied to all claims grounded on contracts for the sale of goods and not only to claims based on the non-performance of the delivery obligation itself.

The author of this article is Silvia Petruzzino.

When considering pre-contractual negotiations in China some words need to said about culture differences, skills to use in the negotiation process, and, drafting techniques.

All of those points are relevant in any negotiation with a foreign counterpart, but they are even more valid and important when dealing with China.

First of all, it is fundamental to get acquainted with Chinese culture before starting a negotiation, especially if the counterpart (as is often the case) is not well versed in international trade and has had very few occasions to deal with foreign businessmen and counsels.

Keep in mind that actual down-to-the-table business only comes into the picture once a personal relationship has been established and the fundamental elements of trust and respect have been set.

Those who believe that an important contract can be closed with a 2 day rush visit to China or, even worse, at a distance without a personal introduction, are very far away from the real picture of things.

It generally takes several lunches, dinners and quite a few drinks together to break the ice and prepare the ground for real business talks, and it may take several trips back and forth from China before a contract can be closed: so when applying for the visa, you should consider a multi-entry.

Of course now we are in the era of internet and it very common that agreements are entered into digitally, by means of an exchange of proposal and acceptance on the web: it is not by chance that, more often than not, such long distance contacts lead to fraud and contractual breaches.

Expect long negotiations, and if a contract is eventually signed, don’t relax and don’t overestimate its value.

In western countries we tend to see the signed document as the final phase of contractual negotiations, as the bible of the future relationship.

In China contracts are often considered as nothing but the first milestone, very far from rules carved into stone: the warning is that in most cases the contract will be regarded more like a letter of intent than like a binding agreement.

So expect the Chinese side to use a great deal of flexibility, and be ready to re-negotiate or, better yet, have in place from the start in your contract appropriate rules and mechanisms to adapt to the frequent changes that may happen.

When you finally make it to the meeting room, first of all, be sure that there is a good translator around: quite often your counterpart will not speak English and will rely on a translator and it can seriously harm the flow of discussion if the person appointed for this task is not familiar with the needed terminology.

Secondly, it goes without saying that it is important to be patient and not lose your temper, especially taking into consideration that the way in which negotiations unfold may be very different from your experience.

While we are used to a linear flow of discussion, so that the parties move from one clause to the next and so on and so forth, the Chinese attitude, in most cases, is holistic.

They tend consider the agreement as a whole: it is not uncommon to re-discuss in the morning clauses that had been agreed upon the day before, without any explanation whatsoever.

A yes may mean no, and a no may mean yes: you will never know, and that is something to be always kept in mind.

The bottom line is not very different from what should be expected in all negotiations: the aim is to find a balanced agreement, that all parties find beneficial.

To start negotiating with a draft contract that is clearly unbalanced in favor of your client will not only complicate your negotiations, but may jeopardize them from the start.