The Challenge of Keeping a Global Standard for Company Contracts

Welcome everyone to another edition of my China Tech Law Newsletter.?Today I want to share some common back and forth I’ve seen over the years between headquarters of a company and their local (China) teams on maintaining a company’s standards for terms in contract negotiations.?

Companies, especially big companies, have a perpetual dilemma on contract principles.?They are a global company.?Global companies need global policies with minimal if no variation from the policy for specific countries or regions.?We’re talking about both compliance policies with regard to employees, as well as policies for deal terms with customers.?This is both the strength (one global, presumably high, standard) and weakness of a multinational company.?

On the one hand, local (sales) employees will complain about the company not being agile to adapt to local market conditions.?Winning the battle to get that perfect contract, but losing the war to get the best customers. On the other hand, as a global company, once you make an exception for one region (remember employees talk to each other), you open the door to inevitably the exception becoming the rule.

One classic example is for a company negotiating liability terms in a contract.?Do you cap indemnification claims, for example??By how much??One times the contract price, two times the contract price??The dreaded uncapped liability? From a local team's perspective, the likelihood of a case ever occurring is somewhere between microscopic and infinitesimal and in the meantime, hey Mr. Legal Department, you are standing in the way of me closing this deal I’ve been working on for a year now!?You know our competitor is not so strict on this term (note of course, if the Legal Department got a dollar for every time we heard this, we’d all be rich).

Yes, the likelihood of an infringement is small.?But when an infringement does occur, this is "bet the company" kind of risk we are talking about multiplied across the whole customer base, and many companies go so far as to say in publicly-filed disclosure documents that they cap liability like this with companies to avoid this risk. Okay okay but can we give an exception just this time??Its just a run of the mill, mid-sized deal.?

Well again, if we give an exception this time, how can we say no to the next mid-sized or larger deal that comes in??Make an exception for one, make an exception for all.

We might argue, hey the deal is priced to the customer based on capped liability.?That's our standard business model. Uncap the liability and the price would have to change (no, this never sits well with the sales team, and if this is ever brought up in negotiations with the customer present, its like throwing a loaded grenade into the discussions - suddenly everything is back on the table for negotiation!).?

Despite the theory that the risk should be priced in to the contract ahead of time if we know we're going to have to give in on liability terms, this rarely happens in practice. Price is negotiated first, then "legal terms".

To be fair also from the customer’s perspective, capping liability is in many ways pushing risk that has nothing to do with the customer, onto the customer.?Its our infringement of someone else's IP after all, not theirs.?Yet we are putting the liability burden on the customer?? This is unfair right? To which the most convenient response to the customer is simply – tell me in good faith you don’t do the same thing with your customers....

As much as I give sales teams a hard time here, I have to say its entirely understandable where they are coming from.?These men and women have had to fight tooth and nail to get a deal to the finish line and legal issues preventing a closing must be incredibly frustrating and demoralizing.?

Despite all this, in my experience, there is a stereotype that if left to their own devices, a Chinese sales team would be perfectly willing to take as many “legal” risks as possible in order to get the deal closed.?Perhaps out of some suggestion that the legal enforcement is not as strong in China anyway, or that contracts in written form are secondary to the power of trust in relationships.?

On the contrary, I have found that if anything there is more respect from Chinese sales teams for the process and legal terms because there is a deference to the fact that China’s corporate compliance setting is still catching up (and catching up fast, btw!) to a global company with global standards level.?And to the extent there are gaps between the compliance standing of a local company versus a global one, what drives a lot of people to work at global companies is precisely because of the high global standards these companies operate under whether in matters of customer management, vendor management, or treatment of employees and employee policies.??And that is one of the things I've come to enjoy and appreciate most working in China.

Okay, that's it for this week. Thank you everyone for reading to the end, be sure to subscribe here if you haven't already. And see you back in 14 days!