Header graphic for print
China Law Blog China Law for Business

If You Could Have Only Two Clauses in Your China Contract, What Would They Be? Part II.

Posted in Basics of China Business Law, Legal News

In our first post in this two part series, we wrote about the importance of choosing the right language for a U.S. company contract with China. In this post, we talk about why the jurisdiction and forum for any disputes is so critical and how (generally) to go about choosing that.

In choosing the jurisdiction and forum for your disputes, the first thing you must consider is that Chinese courts do not enforce U.S. judgments.  In other words, you cannot take a U.S. Court judgment to China and expect to enforce it there. What this means in real life is that because few Chinese companies have assets outside of China, this inability to enforce your U.S. judgment in China will almost certainly mean that you will never collect a penny from the Chinese company against which you secured your U.S. court judgment. For more on the value (or lack thereof) of suing a Chinese company in a U.S. court, check out the following:

Some attorneys have figured out this issue on court judgments and will provide for arbitration in the United States or some third country like Hong Kong, Singapore or Canada. These attorneys argue that China is a signatory to the New York Convention on the Enforcement of Arbitral Awards and that the Chinese courts are obligated to force US arbitration awards. However, on the ground this is not always true. The fact is that US arbitration awards can be of dubious value in China. There are several reasons for this:

  • China has a strong cultural aversions to enforcing foreign arbitration awards. The courts will therefore find any reason they can to avoid enforcing a foreign arbitration award. This is especially true at the local court level. In certain types of cases there is some chance of prevailing on appeal. This is uncertain and the time delay can be so long that the whole process makes little sense. Oftentimes, rather than issue a ruling saying that they will not enforce the foreign arbitration award, the Chinese court will simply issue no ruling at all.
  • In many cases, the Chinese party will not participate in the foreign arbitration process, making any arbitration award a default award. Chinese courts are averse to enforcing default awards and the likelihood that they will enforce a foreign default from an arbitration tribunal is very low.
  • Chinese courts do not generally take orders from foreign arbitrators. Many arbitrations concern intellectual property or company management disputes that require some form of injunctive relief. Chinese courts apparently view it is an affront to Chinese sovereignty to be told what to do by a foreign arbitrator and they invariably ignore such orders from an arbitrator.

So if the United States courts and foreign (non-China) arbitration do not make sense, what’s left? China’s own courts.

Yes, China’s courts are far from perfect. They are more unpredictable than American courts and they certainly do sometimes favor the “home team.” But in most cases, if you want to secure and collect a monetary award against a Chinese company, China’s courts will be your best bet. And it bears mentioning that the World Bank recently ranked China 19th worldwide in contract enforcement.

And if you are going to be resolving your case in a Chinese court, you will want the language of your contract to be in Chinese. If your contract is in English the Chinese court will translate it into Chinese itself.  This effectively means that you will not know the exact contract on which you are suing until after the court comes back to you with the Chinese version. Certainly it makes better sense to have your lawyers dictate what your contract says as opposed to some Chinese court. But lately our China lawyers have been hearing that a number of Chinese courts will not enforce English language contracts at all. There is no Chinese law against enforcing foreign language contracts, but various Chinese courts have taken it upon themselves to hold English language contracts void. One China attorney told us that “English language contracts are only admissible only IF the court so chooses. They also have the right to dictate how and who translates the contract.” We heard from someone else who had his English language contract rejected by a court in Chengdu as “invalid.”

If you are going to be suing on your contract in a Chinese court with a Chinese language contract, you should go all in and have Chinese law apply. Though Chinese law provides that contracting parties are free to choose the law to govern their contract so long as that law has some relation to the transaction, choosing a foreign law will nearly always be a bad idea.

Effective litigation in China requires quick and decisive action. In particular, Chinese litigation procedure allows for preliminary seizure of assets and other pre-judgment relief that can be remarkably effective in quickly resolving issues (this is why even though Chinese arbitration can be effective, you should think long and hard before just agreeing to it). But if your contract provides for foreign law, you will be setting yourself up for delay.

The Chinese court will require the parties to prove what the foreign law is on any issue that is important for a decision. Proving the law on these points will likely be time consuming and expensive. As you can imagine, a clever defense attorney in this situation can devise an almost infinite number of objections to any statement of foreign law. Usually, the judge is not motivated to end these disputes, so the potential for delay is almost limitless. Even if the court gets to the point of making a decision, any chance of making use of preliminary relief is lost.

To repeat. In most (but certainly not all) instances, you will want a Chinese language contract, under Chinese law, with disputes to be resolved by a Chinese Court. Note very carefully, however, that I have said in most instances; each of these issues (language, law, venue) should be determined on a case by case basis.

  • shah8

    That part where some Chinese courts aren’t respecting English language contracts gives me pause. Is it trending up? The main reason is that I would suspect that a “slippery slope” scenario where Chinese courts do not respect non-credentialed-by-a-Chinese-Authority expert or evidence could be a realistic one. Is there a reason to think that the Chinese only contract aspect is for reasonably genuine procedural reasons?

  • jon88

    Does it make sense to have 2 identical agreements signed but one subject to the law and jurisdiction of the PRC and the other subject to the law and jurisdiction of the country in which the Investor is more comfortable with?