China Contracts – Why Chinese Law is on your side
Updated: Jun 4, 2020
We all like to stay within our comfort zone and feel like we are minimising risks in business, however in China this frequently leads to foreign companies making key mistakes.
Mistake 1 - Home Law Home Jurisdiction.
Yes, it may be comforting to have a nicely drawn up contract referring to the law in your home country but far from protecting you this actually diminishes your ability to bring an enforceable action.
If you need to bring such an action appealing to your home court is of little use. Even if they agree to hear the case and find in your favour you will still need to go to the court in China to get it enforced - effectively a rehearing of the case.
This means it is both quicker and easier just to go to the Chinese court first time around.
Do not believe the myths that it is not possible for a foreign company to get justice in China, this is manifestly untrue and tends to be propagated by foreign companies who didn’t do the right things that would have allowed them to get a fair hearing and who are now feeling aggrieved.
If your contract refers to UK law, it is unenforceable in the People’s Republic (though it will help your partner if they ever want to bring action against you) and a Chinese court will throw it out. A UK court would not even try and hear a case under Chinese Law for the exact same reason – it doesn’t make any sense.
Even worse than the home jurisdiction mistake is referring to a third jurisdiction - Hong Kong is most common and people feel they are being clever with this. Ask yourself why would Hong Kong waste public money hearing a case that is nothing to do with it. Your contract might as well have referred to Switzerland, Timbuktu or Kathmandu.
So, though it feels comforting to refer to the familiar actually this works against your interests.
A fair contract will have clauses indicating that it is in the court (and under the relevant law) of the country in which any contractual breach took place that is relevant.
In practise it makes practical sense to include clauses around binding arbitration the decisions of which will be respected in courts worldwide.
In China the oldest arbitration body is the The China International Economic and Trade Arbitration Commission (CIETAC) an offshoot from the China Council for the Promotion of International Trade (CCPIT) it hears thousands of disputes each year between foreign and Chinese companies and has an excellent reputation for fairness.
Mistake(s) 2 – Language
Signing the contract in English also feels comforting and we have witnessed foreign execs very proudly saying that they persuaded their Chinese colleagues to sign up to a contract in English or in the case of a dual language contract inserted a clause indicating that the English language version takes precedence.
Both work exactly against your interests and in the interests of your partner.
If they ever needed to bring an action against you in your home country then the court will of course accept that it needs to consider the English language version of the contract and if that has primacy so much the better. Excellent for your partner then.
Now imagine them approaching the very same court with documents in Chinese that say that the Chinese version has primacy – not easy to see how the court should react. With the best will in the world all it could do is get the document translated and this introduces a late in the day risk of a lost in translation moment.
In the reverse situation the Chinese court will react in the same way.
Solution ensure that even if you start with a document in English make sure that you have a well translated Chinese version. We would recommend doing that translation yourself rather than leaving it to your partner who might change a key clause in the mandarin version that matters most to you. (for clarity you will need to specify which language has control for the purposes of arbitration though)
Lastly give it to a CHINESE lawyer not one from the trusted firm you have used for years unless they have an office in the People’s Republic (Hong Kong doesn’t count here) – ask that lawyer a simple question – do they believe they could enforce the Mandarin version of the contract in the Chinese courts ?
Mistake 3 - Ignoring Culture by committing mistakes 1 and 2
We have written a lot about Chinese business culture elsewhere but suffice to say here that asking a Chinese court to enforce a contract written in English or with English primacy referring to English law displays exactly the kind of arrogant hegemonic attitude that is likely to alienate Chinese judges from the start.
If however, you go to the Chinese court having taken the time to show suitable respect in your dealings with China then you are exactly the sort of company that China wishes to do business with and as such you can expect a fair hearing.