Keep trouble away with comprehensive contracts and negotiations

January 24, 2011 | BY

Janice Qu

Vendors threaten court action

Foreign companies with independent vendors on their premises should ensure all contracts, including termination clauses, are comprehensive and seek vendor feedback before making significant decisions that will affect business.

In early January, the vendors at the Carrefour Foshan store threatened to sue the company if they weren't compensated fairly for a sudden closing on January 1. It is not clear from media reports whether
the French supermarket chain had provided advanced notice of the shut
down.

According to Simon Fang, a senior partner at Win & King Partners, Chinese contract law allows the vendors two rights if their contracts are vague: prompt notice within a reasonable time frame and reasonable compensation.

“The law requires that the compensation shall be equivalent to the loss suffered by the vendors,” he said. “Even though there might exist liquidated damage clauses in their contracts, the court is entitled to change it based on the specific case damages.”

To avoid a similar predicament, foreign companies must ensure all contracts are comprehensive, allowing very little room for vagaries. Prior to the termination, companies should provide written notification to vendors as early as
possible.

The Shanghai-based lawyer also advises avoiding closing actions during prime business seasons and seeking feedback from the counterpart parties before taking any action.

“The most important thing is that both parties should respect each other and treat each other equally,” said Fang. He reiterates that Chinese business culture shuns litigation and would prefer negotiations.

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