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?

As I am always saying, I love it when my blog posts come pre-written.  Today I was cc’ed on an email from my co-blogger, Steve Dickinson. Steve’s email was to another lawyer in our firm who had proposed writing a contract that would give our client the choice of suing its Chinese counter-party in either the United States or China.

In his response, Steve explained that though this sounds good in theory, it is too risky in practice for China contracts.  Steve then goes on to give a short dissertation on the factors that typically go into choosing jurisdiction, choice of law, and official language of the contract:

On jurisdiction, I used to do what you suggest.

However, after Chinese courts started holding that this kind of split jurisdiction means that there is in fact no jurisdiction in China, I stopped doing that. If you really want jurisdiction in China, the agreement should  be 1) be governed by Chinese law, 2) be written in Chinese and 3) provide for exclusive jurisdiction in China. Note that none of this is black letter law. This is just what actually happens on the ground in China. It is for this reason that I provide for all three of these in all cases where I really want the right to sue in China.

To properly evaluate whether you want to go with Chinese law in a Chinese Court (which is what we nearly always end up choosing to do), you need to consider the client’s concerns.  Does it want to have an effective remedy against the other side, or does our client want to make it as difficult as possible for the other side to sue it?  Once our client’s concerns are clear, then you can draft the enforcement section.

If our client’s goal is to enforce this contract against a Chinese company, you have to to provide for exclusive jurisdiction in China and Chinese law should apply and the contract should be in Chinese  But if our client’s goal is to prevent the Chinese side from suing you should provide for exclusive jurisdiction in the United States. But if you do this, you must inform the client that because China does not enforce U.S. judgments, the U.S. agreement will  be useless as a means of enforcement against the Chinese party. You will need to be clear with the client on this and make sure that the client understands this and signs off on this.

In any event, the split approach will not work. You have to pick your jurisdiction and governing law and go from there.

Arbitration is supposed to resolve this issue, however, it does not work so well for China since the Chinese courts as a practical matter are not good at enforcing foreign arbitration awards.

This is all a very difficult and must be considered carefully. There is no simple answer. A hard choice has to be made. The first thing I look at when someone shows me an agreement is its jurisdiction provision. In most cases, the US lawyer has screwed up and made it impossible for the US company to enforce the contract and that stops things right there. We must avoid that result if the client in fact wants to enforce in China. If, however, this is that rare instance where the client is only concerned about preventing a lawsuit, a US jurisdiction clause with a US choice of law provision would be fine. In that case, a Chinese version is not required, but I still recommend it because at least then the Chinese counter-party will be able to understand it fully and that alone is important for making sure that it and our client are on the same page before they start doing business with each other.

Wow.  What do you think?