Archives: Contract

One of my favorite “trix” employed against American companies doing business in China is the dual language contract, where the English language version is silent on which language controls.  We often see this from companies that come to us for the first time with a contractual problem.

Dual language contracts can be incredibly dangerous.  If you have a contract in both English and in Chinese, which language controls?  Well, if both of the languages say that one language controls, that one language will control.  So for example, if both the English language and the Chinese language versions say that the Chinese language version controls, then the Chinese language version will in fact control. Similarly, if both versions say that the English language version controls, then the English language version will control.  These are the easy and safe examples.

It is everything else that so often gets American and British and Canadian and Australian companies in huge trouble.

If you have an English language contract and a Chinese language contract that are both silent as to which version controls, the Chinese language version will control in a Chinese court and in a Chinese arbitration.  So what this means is that if your English language contract says that a product must be strong enough to withstand 500 pounds of pressure and your Chinese language contract says that the product need only be strong enough to withstand 300 pounds of pressure and neither contract version says which controls, the Chinese version will control and the product need only be strong enough to withstand 300 pounds of pressure.

And here’s the thing: Chinese companies just love using a contract with an English version that is more favorable to the foreign company than the Chinese version and then relying on the English speaking company to assume that the English language version will control.  I mean, English is the world’s language for business, right?

But what if the English language version explicitly states that it will control? You should be okay with that, right?  Not necessarily.  If the Chinese language version also explicitly states that it will control, the Chinese language version will control.  If the Chinese language version is silent, then the English language contract controls.

As we noted in China OEM Agreements. Why Ours Are In Chinese. Flat Out, our China lawyers usually draft our clients’ contracts in Chinese, with an English language translation. That way at least our clients know what they are really signing.

Bottom Line: No matter what your English language contract says, it behooves you to know exactly what your Chinese language contract says as well.

A long time ago (before we even started this blog, I believe) one of our summer associates, Ben Kostrzewa, compiled a Chinese-English translation of fifty common legal words. I have had that list on my computer ever since and I just come across it again and figured I would run it on here so others might take advantage of it. Not even sure why this list was compiled but it appears to have been aimed at least as much to assist the Chinese lawyers with whom we work as to assist our clients doing business in China.

At this point I have my doubts that I would choose all fifty of these words for such a list, but since the translations are accurate and since they have already been compiled, we are going with it.

If you notice any inaccuracies, please let us know my commenting below. Similarly, if you want to add to the list, please do so.

诉讼-Sue, Litigate

机构-Agency

上诉-Appeal

法案-Bill

案件/案例-Case

民法-Civil

控诉-Complaint/Charge

宪法-Constitution

合同-Contract

证明有罪/定罪-Conviction

有限公司-Corporation

法庭-Court

债权人-Creditor

犯人-Criminal

债户-Debtor

契-Deed

被告人-Defendant

义务-Duty

产业-Estate

证据-Evidence

行政-Executive

联邦制-Federal/Federalism

理由-Grounds

判决-Judgment

司法-Judicial

陪审团-Jury

法律-Law

责任/义务-Liability

制定/通过 法律-Legislate

抵押-Mortgage

动议-Motion

过失-Negligence

可转让的-Negotiable

文书-Instrument

意见-Opinion (Not Judge’s Decision)

当事人-Party

原告/申诉人-Plaintiff

辩护-Plead/Pleading

财产-Property

管理/调整-Regulate

权利-Right

证券-Security (bond, stock)

判决-Sentence

法律-Statute

证据Testimony

产权书-Title

侵权行为-Tort

托拉斯-Trust

认定-Verdict

遗嘱-Will

见证/证人-Witness

A member of our China Law Blog Group on Linkedin left the following comment (modified slightly) regarding Chinese company names, prompting this post:

Recently I happened to meet with a Chinese lawyer in Qingdao who told me about how the Province [Shangdong] registers the Chinese name of a company. The companies are registered only with Chinese names. Let’s say for a contract with an Indian or a US company they do use just the English name. He says it is compulsory to have the contract in English and in Chinese also. Otherwise the Chinese company simply can deny its English name to avoid participating in the arbitration. Is this true? How we can make a contract foolproof without making a Chinese contract?

Great questions.

Let me start out by saying that we are of the view that in most cases it makes sense to have your contract with a Chinese company be in Chinese.  We explain why we take this position in China OEM Agreements. Why Ours Are In Chinese. Flat Out:

Because international contracts are so often between parties from different countries, they commonly are written in two or more languages. Nearly all of the contracts we draft for our Western clients doing business in China are in English and Chinese (though about ten percent of the time, we also translate them into German, Spanish, Korean, or French as well). This duality of language can, if not handled properly, pose big problems.

When we do a contract in both English and Chinese, we always call for the contract to specify ONE official language to control if there is a dispute. We do not advise drafting a contract that is silent on the official language, nor do we advise drafting contracts that call for both English and Chinese to apply. Having two official languages pretty much doubles the chances for ambiguity and pretty much doubles the attorney time (and fees) that will be incurred in fighting over the meaning of the two contracts. It is expensive enough litigating on one contract; there is no benefit litigating on two.

So the question for us comes down to whether English or Chinese should be the official language of the contract and the answer to that question requires we first decide where we would most like to see disputes resolved. If we go for arbitration in English (and if the Chinese manufacturer actually agrees to this, which is quite rare), then we almost certainly will want English as the official language. But if we decide the Chinese courts will be the best place to resolve conflicts, then we want Chinese to be the official language.

But, having said this, it is not true (as many seem to believe) that English language contracts will be deemed invalid by Chinese courts or arbitral bodies.

But what about company names?  The only official company name is the Chinese language version and this is true as well for WFOEs in China and Joint Ventures as well.  If you are going to form a China WFOE, you must come up with a Chinese name for your WFOE and that Chinese name will become your one and only official name.

But must one put the Chinese name on any contract with a Chinese company?  No, this is not required, but it is certainly smart to do so. I have actually never heard of a Chinese company claiming it is not them who signed a particular contract using the English language version of their name, but it absolutely does not surprise me to hear that happens.  Our firm has always used the Chinese language version of a Chinese company’s name, even on the English language version of our contracts and we do so for clarity. We also typically put in the address of the company as well and sometimes its license number as well.

I can certainly imagine a Chinese company seeking to get out of a contract by claiming that it never signed one because the contract at issue does not contain its Chinese language name. But at the same time, I also think that someone facing such a claim ought to — in most instances — be able to prevail against it by marshaling evidence to show that it was indeed the Chinese company that signed the contract. This will be particularly easy if the Chinese company has a well-known and often used English language name or if the English language name is a direct translation of a unique Chinese language name.

I actually think the bigger issue regarding contracts with Chinese companies is whether the contract is sealed or not.  In How To Write A Chinese Contract That Works, we wrote on how Chinese companies were notorious for trying to get out of contracts they had not sealed/chopped:

For written contracts in China to be effective, one of the following must be true:

  1. The company’s legal representative signed it. Chinese law provides that a company’s legal representative has apparent authority to bind the company. This means that even if that representative lacks the actual authority to bind the company (maybe because the board of directors or the shareholders never gave the representative the authority to contract with you), the legal representative’s signature will bind the company. There is, however an exception to this and that is when you know that the legal representative lacks the authority to bind the company.
  2. The contract is appropriately sealed.  An appropriate seal (oftentimes called a chop) is applied to the contract. It does not matter who applies the seal, so long as it is the right seal. This means it must be sealed either with a contract seal that sets forth the name of the company or, as is more commonly done, with the Company Seal. Each Chinese company has only one company seal (no copies).

Chinese companies are notorious for trying to get out of contracts by claiming they never actually signed them or that they were signed without the proper authority and so if your contract is big enough and important enough, you should consider doing all of the following to minimize even further the likelihood of the Chinese company seeking to get out of your contract:

  1. A signature from the company’s legal representative. Of course, you must first confirm from the company’s business license who exactly is the company’s legal representative.
  2. A resolution from the company’s board explicitly approving the contract and authorizing the legal representative to sign it.
  3. The affixation to the contract of the company seal or the company’s contract seal.

In that same post, we set out the basics of what it takes to write a good Chinese contract:

If you want to greatly increase your chances of being able to enforce your contract with your Chinese counter-party, you should do the following (you should do a lot more than this, both within and outside your contract, but I am limiting this post to just those things directly related to being able to enforce the contract and its terms)

  1. Have a written contract (see this, this and this);
  2. Have that written contract be in Chinese;
  3. Have that written contract set out clearly how disputes are to be resolved and, even more importantly, pick the right forum for those disputes;
  4. Have that written contract set out in excruciating detail what the Chinese company must do to be in compliance with the contract;
  5. Set out the liquidated damages the Chinese company must pay if it fails to comply with the contract;
  6. Make sure the Chinese company signs AND seals your contract.

It is impossible to make any contract foolproof in that there will always be risks in any deal, but doing the above will increase your odds.

What do you think?

 

 

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Renaud Anjoran left the following interesting question on the China Law Blog LinkedIn Group this morning:

What is the value of the Chinese Court System?   I have been reading Dan and Steve’s China Law Blog for a while. They keep asserting the value of legally binding contracts, and note how good Chinese courts are at enforcing them. The World Bank rankings also support this view.

On the other hand, I regularly read about how useless the Chinese court system is. For example, in his latest book, Andrew Hupert writes:

“Bringing suit in China is generally considered a terrible option. It is at best a last resort.”

“A Chinese businessman, when confronted with a rigid set of rules and a counter-party he does not feel a connection with, will immediately start figuring out a way to game the system. When you give him a thick contract document, he sees an instruction manual, and that fixed corporate structure is really the set of rules to a game he plans on winning.”

“The court system offers incomplete remedies at best and has been known to be quite harmful to foreign interests.”

Opinions? Who is right?

My short answer is that both sides are right. My longer answer is that only my side is correct.

Let me explain.

Andrew Hupert says that “bringing suit in China is a terrible option.  It is at best a last resort.”  I 100% agree with Andrew on this.  As anyone who has been involved in litigation anywhere in the world will tell you, it is a horrible thing. It is expensive, time consuming, and imperfect. Litigation signifies the end of discussion between parties and, as such, it should only be undertaken after all other avenues have been exhausted. As I am constantly telling clients, “if you have to sue, you have already lost. You can win the litigation, but even so, you will have lost.”

I also completely agree with the quote about how “the court system offers incomplete remedies at best and has been known to be quite harmful to foreign interests.”  Again though, this quote holds just as true for the United States and anywhere else as it does for China. Litigation virtually never brings anyone a complete remedy.  If you are owed $250,000 and you sue and the court awards you $250,000 and the other side pays you in fairly prompt order, you still have not achieved a complete remedy.  What about the time you spent trying to settle the case before suing? What about what you might have done with the $250,000 had you received it sooner? What about your attorneys’ fees in dealing with the problem? What about all the time you and your employees had to spend on the case?  Litigation is not a complete remedy, which just underscores point number 1 on how it should always be a last resort.

As for foreigners doing poorly in Chinese courts, that too is true.  Again though, if you are Citibank, would you rather be a defendant in a court in Manhattan, New York City or Manhattan, Kansas?

But so what?  So what if litigation is horrible and time consuming and fraught with risk and not always fair?  What does that have to do with contracts in China?  Shockingly little. Renaud, everyone tells me that no matter what you do, you will always have quality problems with your Chinese factory.  Should I take that to mean that quality control is a waste of time?  Of course not.  Contracts are no different.

There is huge value in having a contract with your Chinese counterpart.  Way back in 2006, in a post entitled, China’s Courts Are Fair, we explained why corruption and unfairness and run of the mill judicial imperfections are overrated and no reason to just give up on contracts:

Every time I tout the fairness of China’s courts, however, I still feel called upon to make clear I am not a naif.  I fully realize that Chinese courts virtually never rule against the government when central government policy is at issue.  And, when I am talking about fairness, I am completely ignoring criminal and political cases.  I also recognize that even though China’s courts are controlled from Beijing, the chances of getting a fair trial are much greater in prosperous commercial cities like Shanghai, Tianjin, or Qingdao, than they are in a small city in Anhui Province.  I know too that a foreign company prevailing against a powerful local company in a Chinese court is always going to be less likely than if all parties are of the same strata.

So China’s courts are not always fair.

But, they are fair way more often than credited by the western media and I am absolutely convinced (as are all of the Chinese lawyers with whom we work) that they are fair often enough to make it as ill-advised to do business in China without written contracts or Intellectual Property (IP) protections as to do business that way in the West.

Even if China’s courts are fair only 60% of the time, this is enough to cause the rational Chinese businessperson to make decisions based on legal ramifications.

There is a commonality to judicial corruption worldwide.  Corrupting a judge is expensive.  The greater the amount at issue in the case, the more the judge will charge for a favorable decision.  The more publicly visible the case, the more the judge will charge.  The more the judge has to trample the law to reach the decision for which he or she is being paid, the bigger the bribe will need to be.  Local, trial court judges (who are most likely to know the lawyers and/or the parties) are more likely to be corrupt than appellate court judges.  Supreme Court Judges are the least likely to be corrupt.

All of this means that even in the most corrupt legal systems, the better your contract, the more it will cost your opponent to prevail and the better your chances will be as you climb each step of the court system and the more it will cost to change that.  When I tell clients this, their reaction is usually, something like, “great, all this means is that my opponent will need to pay the judges half a million dollars to beat me, rather than only $10,000. That still doesn’t help me.”

Oh yes it does.

If the other side is going to need to spend $500,000 to beat you, they should be willing to settle with you for even more than that.  They should be willing to pay you more than a judge because settling with you has a greater certainty of finality and outcome and because it has a much greater certainty of their not getting arrested for bribery.  If you have no contract or a lousy contract, the other side may be unwilling to pay you anything, figuring a small judicial bonus is all it will take to assure legal victory or that you will choose not to sue at all.

Chinese courts generally fairly resolve commercial disputes and they are continuing to improve.  China’s courts already are sufficiently fair that Chinese businesses for the most part do consider the legal ramifications of their actions and act accordingly.

Bottom Line:  There is no justification for failing to take legal precautions there (such as written contracts and IP protection) when doing business in or with China that you do when doing business in the West.  Those who justify their failure to do things by the legal book in China because “the courts don’t enforce the law there anyway” are both empirically wrong and foolish.

Even if you never intend to sue anyone in China, it makes sense to have a good contract, preferably in Chinese.  There are three main reasons to have a good contract, and suing and winning on it is only one of them.  Another reason is to make sure you and your Chinese counter-party are on the same page.  We actually wrote about this very topic just a few weeks ago, in Chinese Manufacturing. Delivery Date? What Delivery Date?

One of the most common problems we see between American companies and their Chinese manufacturers is “late” delivery.  I put late in quotes because many times I think the problem is not so much that the Chinese manufacturer was late, but rather that the contract and the American buyer were unclear on the actual delivery date requirements.

Let me explain.

When we draft an OEM Agreement (a/k/a Manufacturing Agreement or Supplier Agreement), we are always very careful regarding delivery times.  Most of the time, our clients come to us with a term sheet or an oral agreement with their Chinese manufacturer dictating something like 30 days for delivery.  We like strictly tying the Chinese manufacturer to the “agreed-upon” delivery time and we usually do that with a liquidated damages provision tied to late delivery.  Just by way of example, we might put into the OEM Agreement a provision saying something along the lines of delivery shall be within 30 days and for every day beyond thirty the Chinese manufacturer shall be required to pay US Company 1% of the purchase order price within ten days.

Perhaps more than any other contract provision, we tend to get blow-back on the delivery time provision from the Chinese manufacturer. Oftentimes when faced with the reality of having to pay a set amount for late delivery, the Chinese manufacturer gets really serious about delivery times and tells us that they simply cannot promise delivery within the previously “agreed” time frame.  Our client usually realizes it is better to get real agreement (even if longer than originally anticipated) before ordering, rather than getting late delivery after ordering.

The other, somewhat related issue we face on delivery times is that when our client comes to us and says it has agreed with its Chinese manufacturer to a 30 day delivery schedule, we then have to figure out 30 days from what.  We typically go with 30 days from the issuance of the purchase order, but oftentimes the Chinese company pushes for it to be 30 days from its receipt of payment or 30 days from its receiving proof of payment.

Bottom Line:  Certainty is important with respect to delivery dates and, without a doubt, the best way to achieve that certainty is a written contract, in Chinese (so that there is no doubt the manufacturer understands what is on the paper) clearing setting forth the delivery date.

The third reason to have a good contract is to put a little scare into your Chinese counter-party.  I call this the “bike-lock theory of Chinese contracts” and I wrote about this too way back in 2006, in China OEM the Smart Way:

The best solution for this is to prevent it from happening in the first place and the best way to do that is to choose the right supplier and use a good OEM contract.  When we draft OEM contracts for our clients, we always put in a provision precluding the Chinese manufacturer from subcontracting out production. Without exception, the Chinese manufacturers have agreed to this provision and, again without exception (at least as far as we know), they have always abided by it.  The reason for this is simple.  The manufacturer may have twenty some companies for whom it produces goods, but probably less than half of them forbid subcontracting.  When the Chinese manufacturer is so busy as to require subcontracting, it makes sense for it to first subcontract out work for those foreign companies for whom it is NOT prohibited by contract from doing so.  I am always analogizing this to bike locks.  Even the best bike lock cannot prevent all thefts, but its efficacy comes from the fact that bike thieves generally find it easier to steal a bike with a poor quality lock or none at all than one that is difficult to break.

Any contract that makes your Chinese counter-party think twice about messing with you has at least some value.  My law firm is constantly settling cases with Chinese companies based on well-written contracts.  Chinese company clearly owes our client a million dollars per a well written contract and we settle for $650,000.  Had it been in the United States, we might not have taken less than $850,000.  But had there been no contract, my firm would not have even taken the case and settlement would likely have been for nothing at all or something really nominal.

Having a well written contract does not mean you will always win your lawsuit if you are forced to sue on it. But it does mean you will have some leverage if things go wrong and it does mean you will at least have a chance. Having no contract means no chance. Hey, it’s your choice.

Ain’t no way am I gonna back down on this one.  Who’s with me? Renaud?

Nearly a year ago, we wrote about the importance of including “seal confirmation” in your China due diligence:

One of our recurring themes is the need for due diligence when working on any business matters in China. Most foreign companies think of due diligence only when they are planning to make an investment. Most companies are not aware that due diligence is required whenever you do any kind of business with a Chinese company. If you do not already know the Chinese company with which you will be conducting business, you must confirm that the company really does exist and that you are dealing with the actual company and not an impostor.

I want to share a conversation I had yesterday with some young Chinese lawyers who work for the one of the largest and best law firms in Shandong province. I was discussing with them the question of whether or not the company seal on a particular document was valid or not. It seemed like a simple matter. The resulting conversation was not so simple.

When asked how they go about confirming the validity of a seal, the lawyers told me that “you have to go the town where the company is located.” Once there, you then have to determine if the seal is registered. Often the seal is not registered as registration of seals is not mandatory in China. Then you inspect various documents filed with the local authorities to determine if the same seal was used on those documents. If the seal is registered, or if the same seal was used on all company documents filed with the local authorities, you know that the seal is valid.

Even this is not enough. Even though the seal is valid, you still have to determine if the seal is being used in an authorized manner. Just on the surface, there are two possible issues. First, an impostor may have created a fake company seal. Second, someone within the company may be using the seal in an unauthorized manner. The only way to resolve these issues is to actually visit the company at its headquarters and to ask: is the person who stamped this document employed at your company? If the answer to this is yes, you then must ask whether the person is authorized to do this particular business.

An affirmative answer to both these questions is the only way you can be assured that the signature and the seal on your document are valid and will effectively bind the company. There is no other way to do it: a visit to the relevant  government office and to the company office is required. There is no service available to do the work. You have to hire a Chinese licensed attorney to do it. A Chinese attorney is normally required because local governments rarely open their files to a private person and they certainly will not open their files to a foreigner.

My first response to all of this was to say that this is far too expensive a procedure for normal commercial transactions. The Chinese lawyers looked at me with a mixture of amusement and contempt. They said that they understand my response since it is typical of their North American and European clients. They further stated that they are amazed at the naivete of their foreign clients on the need for basic due diligence in commercial transactions. One lawyer looked at me and said: “What do you think we do all day at this law firm. Most of our young lawyers and legal assistants are primarily engaged in basic due diligence about potential business partners of our Chinese clients. We travel to the local offices and we charge for the expense. Our Chinese clients willingly pay the fee because they know the risk is too great to act in any other way. We constantly see foreign companies enter into contracts without doing any such investigation and it continues to surprise us. You say that our form of due diligence is too expensive. We say that being cheated is far more expensive. Given that the chance of being cheated in China is extremely high, it makes no sense to us to take the risk. Our Chinese clients would never enter into an important contract without a personal investigation of the other side and we find it very strange that these foreign clients who know even less about China will willingly take a risk that virtually no Chinese company would take.”

It makes sense to take seriously what these young Chinese lawyers are saying. Let me give you just one example of what can go wrong in China. Say you are dealing with a large and well established Chinese company. There is no question that this company exists and that it makes the product that you wish to purchase. Now ask yourself this: are you really dealing with that big company? Or are you dealing with an impostor? How do you know?

It is easy in China to fake company seals, business cards, bank accounts and even a website. The unsuspecting foreigner makes a deal with the impostor and sends funds to the bank account. Product never arrives. The foreigner contacts the well established Chinese company and that company truthfully responds by saying “we have never heard of you.” It turns out the foreigner had been dealing with a fake, virtual company the entire time. This happens all the the time in China. Trust me when I tell you we see instances of this at least once a month.

One of the services we are constantly providing for our clients is what I call the “first pass review” of a company seal. In this review, one of our China lawyers who is fluent in Chinese and very experienced with Chinese contracts will review a seal for our client. This review consists of pretty much nothing more than looking at it to determine whether it may be fake or not. If this review cannot determine that the seal is fake, we then suggest our client conduct a more thorough review to confirm that it is real. This is because our first pass review is good at spotting obvious fakes, but it certainly is not good at making sure that a seal is real or that the seal really did come from the company it represents or that it really was authorized by the right company. But as a gratis first pass, it does have its benefits. Shockingly often in fact.

Let me explain.

As stated in the post above, at least once a month we come across an instance where there is something very wrong with the seal/Chinese company with whom our client is thinking of entering into a  deal. My favorites are when we detect that the seal is a fake, which has been happening more often in the last six months than in the past — it is amazing how direct and quick a correlation we see between a declining economy and a rising incidence of fraud. Just last week, I was cc’ed on some emails between two of our lawyers doing a first pass review of an alleged company seal. The email exchange was as follows:

First email:  Attached please find one of our OEM agreements, signed and stamped by the Chinese side. Please note the following that seem out of whack to me:

1. The seal is in blue and not red ink
2. The seal is rectangular and not circular
3. The seal is almost illegible — does that matter?
4. The signature is the Chinese manufacturer representative’s English name

Also, the client tells me that he signed it and scanned it to them for their signature, but they sent back a copy with their signature but without his, and asked him to sign the copy they had signed. Is that normal?

Second email:  None of this is normal or legally binding. The seal should be circular, the ink should be red, and the company name should be entirely in Chinese. The seal should also always be completely legible.  And why is the manufacturer signing with his English name?  A lot is not right here and you should so instruct the client.

Aww snap. You didn’t know?

The Legal Insight Blog has a long and comprehensive post, entitled, “Overview of Doing Business in China” [link no longer exists]. And that is exactly what it is. Written by King & Wood, one of China’s leading law firms, the post sets out the basics of China’s systems as they relate to business and it does so very clearly and succinctly.

The post is broken out into the following sections:

  1. Governmental Structure
  2. Legal System
  3. Establishing a Business Vehicle in China
  4. Operating in China

It really does provide only the most cursury information, but it does a great job of doing so and it can serve as a great first source for you. Just by way of example, I pull the following from it on dispute resolution in China:

 

4.9 Dispute Resolution

As an increasing number of foreign investors penetrate the Chinese market, commercial disputes are expanding quickly both in number and in scale.  China has made significant progress in increasing the integrity and reliability of its courts.  The formal processes available for resolving such disputes in China have, in recent years, become increasingly similar to those elsewhere in the world.

If a dispute cannot be settled through negotiation between the parties, the case must be submitted for litigation or arbitration.  Under PRC law, it is permitted for the parties to choose for binding arbitration to resolve their disputes and the courts will generally enforce arbitration judgment without inquiry into the merits.  It is worthy noting that arbitration is only possible if the parties expressly agree to arbitrate. In practice, the arbitration is favored by many foreign investors in China.

(a) Litigation

The PRC courts consist of four (4) layers: the People’s Court (at the district or county level), the Intermediate People’s Courts (at the municipal level), the High People’s Courts (at provincial level), and the Supreme People’s Court (at the national level).  The level of the competent court should be generally subject to the nature and size of the disputes.  In most cases, disputes with a foreign connection may be initially in the Intermediate People’s Courts.

Court judgments may be appealed once, but the judgment of the second instance is final and binding upon the parties immediately.  Under the PRC Contract Law, it is permitted to select a foreign law to govern the contract with a foreign connection and to provide for exclusive jurisdiction in foreign courts.  In fact, it may be difficult for Chinese courts to enforce a judgment made by a foreign court, but Hong Kong’s judgments are exceptions.

(b) Arbitration

In comparison to litigation, the arbitration seems much quicker, more efficient and more reliable, thus major foreign investors would like to include an exclusive arbitration clause in their contracts.

Under PRC law, an express clause clearly indicating the parties’ selection of binding arbitration is enforceable, which should be in writing and contain a clear statement of the parties’ intention to submit the dispute to arbitration, the scope of disputes subject to arbitration, and the specific arbitral commission to resolve the dispute.  In addition, it is possible for the parties to reach an arbitration agreement after a dispute arises, but in most cases an arbitration clause is included from the outset in the operative contracts.

The China International Economic and Trade Arbitration Commission (the “CIETAC“) is one of the most frequently selected arbitration forums when the arbitration will be held within the PRC.  Foreign investors sometimes do not agree to arbitration in PRC, including arbitration at CIETAC, because they believe that Chinese parties will have a home advantage, meanwhile, Chinese parties concomitantly often object to arbitration aboard.  Therefore, Hong Kong seems as acceptable compromise to both parties.  Of course, to select a third country’s jurisdiction for arbitration is also common in practice.  Since China is a party to the United Nations Convention of Recognition and Enforcement of Foreign Arbitral Awards, it is generally possible to obtain the enforcement of an arbitration award issued by a panel in any member country.

I encourage anyone new to doing business in or with China to check it out.

 

The official language of China is Chinese.  If you sign a contract written in Chinese it is a valid contract whether you understand Chinese or not.

Rule Number One for doing business in China: do not sign a contract in Chinese unless you know exactly what it says as you will be bound by that contract.

This recent article in Xinhuanet bears this out.  Seems some Americans (is it just me or does it always seem to be Americans who get themselves into these situations?) are of the view that contracts in China should either be in English or, if they in Chinese, should not apply to them even when signed.

The Xinhua article highlights William Arrington, an American who found out “the hard way” that a Chinese apartment lease contract he signed actually applied to him even though he did not understand it “at all” beyond the numbers:

It was fine at first, because his Chinese roommate explained the contract to him. But when the roommate left, the troubles started.

When the housing management company came to collect maintenance fees, Arrington argued: “Isn’t that included in the monthly rent”

“No, the contract says clearly that the maintenance fees are not included in the rent,” he was told.

The article goes on to talk about “James Baquet, a teacher with Shenzhen Polytechnic, [who] had an experience similar to Arrington’s, although he was luckier because his landlord spoke English:”

“My landlord is a lawyer who speaks good English, and he explains the contract terms to me. I had to rely on him, although I did not know if I should trust him,” said Baquet. So he signed the contract, but added a line below his name: I CANNOT READ CHINESE.

Rule Number Two for doing business in China:  the last person you want to be your translator on a contract is the person with whom you are contracting.  If you do not know Chinese, bring on someone you trust completely to translate for you.  Better yet, hire a China lawyer fluent in both English and Chinese.

Mr. Arrington proposes a fail-safe solution to prevent someone else from falling prey to the legal problems that befell him:

Arrington suggested that the government make it a rule requiring all contracts involving foreigners be bilingual.

I am not aware of any country in the world with such a requirement and until such a law is enacted in China you should just follow the basic rules set forth above.

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