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Crash Course: Chinese “contract-less” Contracts vs. Western Contract Culture

There is a stark difference between Chinese business practices and Western business practices regarding contracts.  This is not a superficial difference, nor a mere matter of outward custom.  Rather, the presence of contracts in Western business – and minimal role of contracts in the Chinese context – reveals a deep divide in thinking about obligations, property rights, respect, social hierarchies, and relationships. There are two senses of the word “contract-less” in this blog: first, it refers to the lack of contracts and second, to the varying, sometimes minimal, importance of contracts.

Regardless of your industry, it’s folly to ignore this difference.  Modern China is becoming increasingly relevant to the international exchange of goods and currency, to technological and medical advancement, and to immigration. Immigration makes foreigners our coworkers, employees, business partners, investors, and bosses.  It’s plausible that Western businesses may need to adapt to Chinese business practices (and visa versa).

Of course, there’s a risk in dealing with “contract-less” business cultures; stories of “dirty” business practices warrant fears. How can risk be managed and what guarantees are available that terms are met?

Although contracts seem to provide the greatest security, there is also security in the alternative – IF you understand how to navigate relationships.  In this post, I’ll introduce Chinese “contract-less” contracts, introduce key terms, compare the pros and cons with Western business contract culture, and explain how a novice can begin to cultivate business relationships. I’ve also included some in-depth discussion to help you avoid common pitfalls. 

What are Contracts in the West (and Why Do they Matter)?

Western business practices have rested on signed, enforceable contracts at least as far back as the 12th century and can be traced even further back to ancient Rome.  In Western countries, a signed contract marks the beginning of a positive business relationship.  A willingness to sign a contract is an indication of trustworthiness. It’s strange: how can a signature on a piece of paper carry such moral importance?  The fact that a contract immediately introduces trust is a confounding idea, especially when the two (or more) parties are total strangers. 

The reason for increased trust becomes clear as we bring into view the legal system that supports such contracts. Common law, which arose during the Middle Ages in England, is a complex legal system that resolved disputes and officially recognized the weight of written promises.  Thus, there is a long historical legacy of exchange agreements and legal expectation that courts will enforce them.

The philosophical history of dispute resolution and widespread access to arbitration dates even further to Ancient Greece.  Discussions of justice included accounts of acceptable dispute resolution. Since then, notable philosophers such as John Locke (1632 – 1704) and J.S. Mill (1806 – 1873) contributed to the widespread acceptance of property rights.  Immanuel Kant (1724–1804) contributed to the legal definition of personhood (which influenced definitions of legal entities) and endorsed an ethical system based on reciprocal respect for human rationality, agency, rights, and obligations.

In summary, the West views contracts as short-term exchange agreements between legally defined entities.  Contracts are limited to a specific time period and material exchange – a single occurrence of a contract does not indicate any obligation to continue doing business.  The risk of default in a system of one-off exchange agreements is always high, therefore reinforcing the need to maintain the business culture of legally enforceable contracts.

As the next section discusses, Chinese business practices evolved from radically different legal and philosophical contexts.

The History of Chinese Contract-less Contracts

Chinese business practices are result oriented.  This is not to say that Western business practices are not.  But while Western businesses tend to operate according to procedure and traditions based on ideals and concepts, Chinese business practices operate according to the goal of producing outcomes.  For example, only 50% of legal fees in China come from billable hours – 50% of legal fees are from contingency (i.e. “success fee”) and capped fee services (for completion of specific work). Meanwhile, legal fees in the West are hourly billings. While alternatives to billable hours are becoming increasingly common in the West, billable hours still account for the bulk of legal fees.

Why is this difference important?  It’s a sign that the most valuable thing about a person is not the information or processes she knows, but what result she can offer.  Realistically, the ability to offer results relies on knowing how to get other people to do what you need them to do.

一个关系多一条路

(Duō yī gé guānxì duō yītiáo lù)

“To add a relationship is to add another road.”

How did people in China get others to do what needed to be done? Until recently, China did not have an accessible legal system – it was effectively absent. Even when transactional costs were high, there was no stable and neutral third party to enforce agreements.  In the absence of a legal system to strongarm other people into doing what is required, smart businesspeople depended on relationships of favor exchange and mutual benefit.  In the context of a strong relationship, verbal agreements were sufficient to guarantee the satisfaction of desired terms. The trust is in the relationship, not the contract. In other words, the contract is not the contract; the relationship is the contract.

The philosophical history of China reveals why this system is possible. The sage-philosopher Confucius, whose teachings on correct behavior are integrated into all facets of Chinese life and language, wrote:

 “What the rules of propriety value is that of reciprocity. If I give a gift and nothing comes in return, that is contrary to propriety; if the thing comes to me, and I give nothing in return, which also is contrary to propriety…. Worthy bestowers of kindness will not expect gratitude, while grateful receivers of grace will certainly make a return…. All sources and roots of disaster and disorder come from failure in returning grace.” Confucius, 礼记 (The Book of Rites)

The voluntary exchange of favors is the backbone of society.  Pay close attention to the final sentence of the passage: All sources and roots of disaster and disorder come from failure in returning grace. This is a strong warning to those who fail to participate correctly in a system of favor exchange: your result will be disaster. This cultural fact influences unconscious perception and interpretation of action and motivations; actions are assessed for their indication of reciprocity or selfishness.

History aside, what about today’s generation of Chinese?

China now has modern legal structures, an increasingly visible culture of written agreements, and formal dispute resolution procedures.  Chinese companies are flexible and willing to accommodate Western businesses’ demands for legally enforceable contracts. Still, it’s impossible to suggest that the current generation of Chinese does not subscribe to contract-less business culture.

China’s history from ancient times into the twentieth century is a collage of small and large political upheavals, droughts and blights, and culture highs and lows.  The steady urban image of China in 2020 is misleading. Until the mid-1980’s, the majority of Chinese people lived in rural settings. Even in the early 1980’s, just 20% of the population lived in cities.

A change in government policy resulted in a massive wave of migration from countryside to city, and it is a period that most Chinese businesspersons and their families can still remember.  The Chinese government allowed domestic migration to places of economic opportunity (i.e. factories in cities), but assistance was minimal. Access to hospitals, education, and social assistance was limited, and because of this fact survival in a new city was a personal responsibility.

For someone moving alone to work in a city factory, one’s age, skills, and education mattered less than making advantageous connections with distant relatives, potential employers, and loyal friends. The present generation has firsthand experience of the survival importance of “多一个关系多一条路” (each relationship provides another path).

The point: mutually advantageous relationships are still a way of life in China.  Chinese people aspire for their relationships to serve as psychological contracts.  As relationships ‘per se’, these contracts are not limited to economic exchange, but serve for long-term creation of ease in potentially any aspect of life. To this day, most Chinese maintain a preference for relationships over contracts.

Sources:

Billable Hours: https://www.thelawyer.com/what-are-billable-hours/

Chinese billable hours: https://www.vantageasia.com/2019-chinese-law-firms-billing-rates/

Terms to Know

Guanxi (关系): refers to a valuable social system of networks and relationships

Renqing (人情): ritual reciprocity such as giving gifts and meals in order to build up guanxi

Mianzi (面子): literally means “face” but refers to social standing

He (): translates as harmony and implies peace, correct timing of action, flow, and balance

For a business perspective of Guanxi

For an explanation of Mianzi

For more on He

Notable Pros and Cons of Contract-less Culture

Pros:

  1.  Mutual interest in the relationship – if they’re talking to you, then they consider that there is a relationship worth having
  2. Mutual benefit guarantees mutual dependency and tacit understanding that your actions will consider and reflect the other parties’ interests
  3. Long-term payoff of dependability due to buildup of trust and loyalty
  4. A desire to maintain a relationship allows both parties flexibility on terms and will allow them to avoid severe hardship (if terms become impossible for either side)

Cons:

  1. Time consuming relationship management; diligence is required in communication and exchanges
  2. Verbal contracts are rarely enforceable
  3. Corruption of ethical boundaries; a “grey area” separates relationship-building activities from outright bribery
  4. Risk of inconvenient reciprocal obligations (you cannot control when or what partners ask of you)

A Beginner’s Guide to Contract-less Business

If you’re doing business in China, your Chinese counterparts will likely take for granted that you require a sealed/signed contract in English and Chinese.  Even when you’re assured a contract, it’s better to practice relationship-building as this will yield greater stability and economic benefits in the future. Unlike the West, revisiting a contract is normal – terms are subject to renegotiation, especially if a particular term become unreasonable due to unforeseen forces. By managing your relationships, you prepare for this process.

Take time to “get in with” your acquaintances. Socialize and get to know your clients or partners before bringing up business.  Don’t try to do both on the same occasion; you risk that the interaction will be interpreted as shallow, short-sighted gain-seeking.

“Face to face,” conversations trump phone calls, and phone calls trump email.  Relationships are more efficiently cultivated the more personal the exchange. Reserve e-communication for information exchange.

“Know thyself.” Mutual benefit (not altrusim nor selfishness) is the name of the game.  For that to be possible, you must identify your strategic strengths and limitations.  Also, don’t forget to be clear with yourself about what you came for and keep your target in mind.

“Sit tight.” Don’t expect terms and timelines to govern when and how things get done.  If the relationship is in place and desired outcome has been stated, instead practice patience and friendly communication. 

“Everything happens in due course.” When relationships are in place, your requests will be attended to according to the correct (i.e. harmonious) timing. Be diligent and aware of your relationship – the health of the relationship is the divining rod that will alert you to upcoming problems.

“Don’t burn bridges.” Despite the accessibility of legal dispute resolution in China, legal action is the last resort. The threat of legal action indicates that a relationship has been deemed irreparable.  

Grasping the Deeper Meaning

Moving beyond superficial Chinese business etiquette requires an experiential understanding of the importance of relationships. You can hasten your experiential understanding by contemplating the following introspective questions.

If you’re having trouble understanding how to build relationships with Chinese acquaintances, examine your own strongest, most important relationships.  One key to a strong relationship is trust. What specific actions most strengthened your closest relationships over time?  What specific behaviors did your friend/family member do to indicate that you can trust him/her?  Now brainstorm how you can translate these specific actions into actions appropriate in a business context.

If you’re having trouble understanding why Chinese might prefer time-consuming, contract-less obligations over contracts, ask yourself a few questions.  Compare the differences in how you respond to spontaneous “just because” gifts and the gifts prompted by an occasion such as Christmas.  Regardless of culture, spontaneous gifts and favors signal stability, genuine connection, and long-term investment in the relationship. For Chinese people lacking contract culture, these are stronger indications of willingness than a signature on a dotted line.

I believe that when in doubt, reach out.  It’s always appropriate to express an altruistic and genuine wish for someone’s health and happiness.  Do not hesitate to send best wishes on special holidays or send messages during a difficult event to show emotional support.

A Warning:

Don’t mistake relationships as a substitute for hard work and competence.  Maintaining your relationship requires maintaining your personal reputation (mianzi). Underperforming members of a group can be excluded, especially if they diminish harmony, fail to reciprocate advantage, or fail to meet increasingly higher performance standards. The relationship is only one criterion by which agreements are decided. It’s naïve to believe that relationships are necessarily the deciding factor.

Analyzing your Position (A Checklist)

Wondering if you’re ready to start negotiating or discussing serious matters? Analyze your position and it will help reveal what your Chinese acquaintance is thinking.

  • Did you meet the other party face-to-face (or at least a phone call)?
  • Do you feel like you have gathered enough visible and specific evidence about their character, abilities, and strengths?
  • Do you feel confident yet that there are both mutual interest and mutual benefit?
  • Be honest: Do you have strong skills, or did you appear weak or immature compared to your acquaintances?
  • Did the meeting take place in a social setting, e.g. over a meal or drinks?
  • Did you signal a desire to maintain personal contact, e.g. paying for the meal, giving a quality gift, sending a follow-up thank you email?

Further Resources

Keep in mind that this is merely a summary comparison of Chinese relationships vs. Western contracts. The advice is intended as encouragement to stretch your social skills in order to create and maintain personal and business relationships with Chinese acquaintances.  Remember that the Chinese business environment is full of nuances and spheres of specific social rules; it’s important not to over-simplify. The following resource is an in depth look at Chinese ethics, which can be applied to business.

The Stanford Encyclopedia of Philosophy entry on Chinese ethics: https://plato.stanford.edu/entries/ethics-chinese/

For a Western version of business relationship-building, a.k.a. “the fine art of getting along with people in business and social contracts” (page 15), an excellent resource is Dale Carnegie’s book, How To Win Friends and Influence People. https://images.kw.com/docs/2/1/2/212345/1285134779158_htwfaip.pdf

Summary

The point of this blog post was to alert you to an opportunity to extend your business skills beyond local borders and give an overview of one major difference between Chinese and Western business culture.  Foreign-culture novices should use this information, advice, and checklist to build relationship awareness.  Relationship awareness and diligence are skills that improve with practice.

 ChineseSimilarityWestern
Type of ContractRelationalImportance of trustworthinessTransactional
Focus on stability in the…Long-term Short-term
Continuity?Future agreements One-off agreements
Threat of legal action is…Infrequent Frequent
Priority is to serve…Individual & social goals Individual goals
Mechanism of action relies on…Empathy, psychology Recognition of property rights
Moral philosophyVirtue ethics Deontology

Do you prefer contracts or relationships?

If you have a specific question, cross-cultural experience, or unique perspective, please comment below!

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