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China Contracts And Choice Of Law. Dance With The One That Brung Ya.

Posted in Basics of China Business Law, Legal News

Yesterday, at lunch, a couple of lawyers and I were discussing choice of law provisions.  I know that makes us geeks, but what can I say?  The discussion started when I talked of how I had been receiving an increasing number of “draft contracts” that called for applying “China and US law” to any dispute.  I told of how I had recently taken it upon myself to ask the client what that meant and of how no client could tell me.  Frankly, these provisions make no sense at all.  What does it even mean to apply two country’s laws at the same time?  What if there is a conflict between the two laws?  Is the court supposed to just pick one or try to merge them into one?  The bottom line is that putting this sort of choice of law provision in your China contract will only increase ambiguity and with it your costs.

We then talked of how we are seeing another recent trend, which is to provide that if the American company sues the Chinese company, it can sue in a US Court with US law applying, but if the Chinese company sues the American company, it can sue in a Chinese Court with Chinese law applying.  These provisions sometimes make sense, but if the Chinese company does not have assets in the United States, there usually is no point in suing there.  See Suing Chinese Companies In US Courts. The Pros And The Cons.  The other issue with this sort of choice of law provision is that it makes drafting the contract more complicated and expensive because the lawyer doing the drafting most figure out the laws of two countries (not just one) and then draft accordingly.

We then discussed our pet peeve: the contract that calls for disputes to be resolved in a Chinese Court but then calls for application of US law, or vice-versa.  The subset of this is arbitration in China in Chinese, under US Law or the opposite.  These sort of choice of law provision generate uncertainty and added costs.  Is a Chinese Court really going to enforce US law?  What US law?  US Federal law or the law of the US State with the most contacts or the law of the US State from where the US company has its head office or the law of the US State where it is incorporated?  And how will the Chinese Court familiarize itself with US Law?  And if it were to apply it, what would it even look like?  We have heard of Chinese Courts literally throwing cases out because they provide for application of US Law.

We recommend dancing with the one that brung ya.  By that we mean that if your dispute is going to be resolved in a Chinese Court or before a China-based arbitral body, it will almost always make sense for you to go with Chinese law in your contract.  And the converse is true if your disputes will be in a US Court or before a US arbitral body.

Any questions?