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China Contract Myths And Realities

Posted in Legal News

Just received a long email from a lawyer friend of mine at a well known international law firm, in response to our post the other day on Myths About China Law And Business.  This lawyer wishes to remain anonymous, but here is what he had to say:

Your post on China legal myths is great. You list as a China myth “don’t do a contract with the Chinese because they will not comply anyway.” Your response deals with an entirely different issue. The statement quoted is not really a myth. It is simply a nonsense statement that does not make sense. It is EXACTLY in the case where you think that a party will not comply that you enter into a binding written contract. If you were sure that the Chinese side will comply then you would not need to bother with a contract of any kind.

The issue that is not nonsense deals with a different statement: “Don’t do a contract with a Chinese party because the courts will not enforce the contract.” That is a logical statement. The question then becomes an empirical one: is the statement true or not? My experience shows that the Chinese courts will enforce a contract written in Chinese between parties of relatively equal status that is governed by Chinese law and enforceable by litigation or arbitration in China. You and I have discussed this many times and I know that you agree with me on this.  Of course there are many who say we are not right about this but those people always seem to rely on anecdotes concerning contracts that we fully agree will NOT be enforced in China.

You and I fully agree that the following types of contracts will NOT be enforced in China:

  • Contracts that by their terms are subject to foreign law and foreign jurisdiction.
  • Contracts solely in the English language.
  • Long, complicated, common law style contracts, even when they are translated into Chinese.
  • Contracts where the Chinese company has special status because it is a military company or is owned by a powerful official or is a locally very powerful SOE [State Owned Entity].

In my experience, contracts with small to medium private Chinese companies are enforced by Chinese courts.  As noted, almost always when people refer to their own problems in enforcing contracts in China, the contract falls into one of the above categories.

Maybe you could write a blog post on this.

I just did. What do you think?