The relevance of contracts and the importance of trust is a key point when doing business in Asia; because, you guess it, again Westerners and Asian have a different view on them.
By contract we understand a written document, signed by two, maybe more, parties, with binding effects between them. The contract reflects an agreement, regulate through clauses its implementation and, even, indicate which relevant jurisdiction can solve any dispute between parties.
By trust and in our context, we understand a non-written agreement between parties, based on friendship, respect, past experiences, convenience, even a handshake. It is less specific than the contract in terms of regulations, price, expected return and way of managing disagreement.
Both in the West and in Asia contracts and trust are a component of business. The difference is that in the West contracts are more important and in Asia trust is more important.
So which is the best approach for western corporations when doing business in Asia? Before answering to that question, let’s see the major reasons behind the West giving more importance to contracts and the East to trust.
Contracts prevail in the West because:
- Culture and History. Europe has been the cradle of all the major legal frameworks: Roman Latin Law, Continental Law and Common Law. Besides, the most influential country in the last century, the United States, has made of attorneys, contracts and litigation part of their daily business life. Unfortunately I must say.
- Western executives always try, whether they realize or not, to protect themselves. Not their corporation, but themselves. And what’s best than a contract to be covered!
Trust prevail in Asia again because:
- Culture and traditional values. Trust, honor, family protection and some other similar values are deep inside the Chinese people, and the Japanese, and the Arabs, and the Thai and … you name it. For them a contract is something known but brought over by Europeans at the time of the colonization.
- The ways owners, executives and, in general everyone, is assessed is different than the ways in the West, it is based on non written rules and it is very close to what the Chinese call “face”. The things you do and how the others relate to you, give you face or make you lose face. What is for sure is that a written, signed document is not going to give you any face and, most probably you are not going to loose face either specifically because of the contract.
I do believe and advice Western corporations to put Trust before Contracts. It is not only because “when in Rome do as Romans” which could be strong enough reason. It is also because the legal history and executives protecting themselves should not play a key role in the way a good corporation acts. A contract should be signed, indeed, but the reasons are: because is a good practice, it gives more clarity and regulate what if all goes the wrong way. Also because executives should be in a position to respond to their shareholders and a contract is basic to that purpose.
Once again, my advice is to follow an approach that, I’ve experienced, work for both parties:
- Spend as time as necessary to build trust. You can accelerate this building trust process by bringing a person (a consultant, an executive from another company) who has a relation of trust with your counter part. This will not create instant trust, but the required span of time will be significantly reduced.
- Do not push for a contract, even a draft, at an early stage. You will only create discomfort
- Identify clearly what is important for you and for the other party and make sure to discuss it and reach agreements. No need to write a draft contract at the same time you discuss, right?
- Once, and only once, trust is built and all the key areas have been discussed and agreed, ask your Asian counter part to formalize the agreements in a contract.
- You have now your contract and, most importantly in Asia, you have built trust and this will be, believe me, what will make the deal successful. Not a contract. Not in Asia.