Whenever I am asked to review a contract between a US company and a China company, I nearly always go straight to the dispute resolution clause.

Much of the time when I am asked to review such a contract, it is by someone who did not use our law firm to draft the contract and is now asking us to review their contract because something has gone wrong.  I review the dispute resolution clause first to see if there is even any point in determining the strength or the weakness of the US company’s claims against the Chinese company. If the contract calls for litigation in the United States, before a US Court and the Chinese company has no assets in the United States, the quality of the case just went way down.

The reason is that China does not enforce US court judgments. So what this means is that if your contract requires that all disputes between you and your Chinese counter-party must be resolved in a US court, you will be required to sue the Chinese company in a US court.  But since China will not enforce any judgment that you receive from the US court, your winning in the US court will likely be meaningless.  Getting a US judgment against a Chinese company with assets only in China is of no use.  Getting a US judgment against a Chinese company that has assets in the United States or in some other country that will enforce a US judgment (Korea and Canada spring immediately to mind) might have some value.

Way back in 2006, in Enforcing Foreign Judgments In China — Let’s Sue Twice, we wrote about how a typical phone call goes when someone calls us for help enforcing their US judgment in China:

Caller:  I have a two million dollar judgment against Chinese company X in China, can you help me enforce it?

Me:  Is it a default judgment here in the United States?

Caller:  Yes.

Me:  Chinese courts do not enforce United States’ judgments and they don’t give any credence whatsoever to United States default judgments. Did you discuss this possibility with your U.S. lawyer before you sued here in the United States?

Caller:  [long silence] …. Yes.  He told me getting a judgment here couldn’t hurt?

Me:  Did your lawyer charge you to get it?

Caller:  Yeah.  I had to pay him and I had to pay all sorts of people to get that company served in China.

Me:  Sorry.

So much of the time in your China contracts, it will make sense to draft a dispute resolution clause with your Chinese counter-party that calls for disputes to be resolved by a Chinese court (or sometimes by arbitration in China or outside of China).  More lawyers are catching on to this and we are seeing fewer contracts that call for US court jurisdiction.  But we are now starting to see contracts that are getting too specific about the Chinese court in which disputes will be resolved.

And that itself can be problematic.

The reason for our concern about overly specific Chinese court jurisdiction provisions is that the Chinese courts tend to ignore any attempt by contracting parties to dictate where a matter will be litigated. Instead, Chinese courts typically determine the proper jurisdiction for a dispute based on the nature of the claim, the amount of the claim, the location of the parties, and the location of the witnesses to the dispute.

If your choice of Chinese court jurisdiction is wrong, the Chinese court will — at best — ignore it. But at worst, your mistake could raise questions about the validity of Chinese Court jurisdiction or create other confusions.  The whole reason for putting in a dispute resolution clause is to avoid the expense, the time, and the uncertainty of where and how to resolve any disputes.  There is therefore no reason to add language that appears to increase certainty, but which in practice will have exactly the opposite effect.

For more on positioning yourself to be able to collect from a Chinese company in litigation/arbitration, check out the following: