China Contracts That Work

By Dan Harris

There are three rules for making contracts enforceable in China:

• Make the jurisdiction a China court.
• Make the governing law Chinese law.
• Make the governing language Chinese.

American companies routinely insist on contract provisions that effectively render their contracts unenforceable in China. By their own efforts, they make their contracts worthless, much to the amusement of the Chinese side of the transaction.

Calling for U.S. court jurisdiction is almost always a disaster because Chinese courts will not enforce U.S. court judgments. If, as is usually the case, the Chinese party has no assets in the United States, the U.S. judgment is effectively worthless. For more on this, check out the following:

• Chinese Companies Can Say, “So Sue Me.”
• Why Suing Chinese Companies In The US Is Usually A Waste Of Time.
• How To Sue A Chinese Company. Part III. Litigation Strategies And Enforcing Judgments.

Some American attorneys provide for U.S. arbitration in their contracts as a way of getting around China courts’ unwillingness to enforce U.S. court judgments. These attorneys argue that since China is a signatory to the New York Convention on the Enforcement of Arbitral Awards, Chinese courts are obligated to enforce U.S. arbitration awards. The problem with this argument is that it just is not true on the ground in China, where the courts often ignore U.S. arbitration awards, due to the following:

• China has strong cultural aversions to enforcing foreign arbitration awards, and China’s courts will find any reason they can to avoid enforcing foreign arbitration awards. This is especially true at the local court level. In certain types of cases, there is some chance of prevailing on appeal, but this is uncertain and the time delay can be long. Oftentimes, rather than issue a ruling saying that it will not enforce the foreign arbitration award, the Chinese court will simply issue no ruling at all, letting the case sit for years.

• In many cases, the Chinese party will not participate in the foreign arbitration process, making any arbitration award a default award. Chinese courts (like courts everywhere) are averse to enforcing default awards, and the likelihood that they will enforce a default award from a foreign arbitration tribunal is very low. Many Chinese lawyers know this and they advice their clients not to participate in overseas arbitrations.

• 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 view it is an affront to Chinese sovereignty to be told what to do by a foreign arbitrator and they often will ignore such orders from an arbitrator.

Though my firm’s China lawyers are more often seeing contracts that follow rule one by providing for litigation in China, those contracts far too often violate rules two and three. American lawyers will make their American client’s home state the governing law and English as the governing language because they are uncomfortable with Chinese law and language. They will justify these choices by noting that Chinese law generally allows contracting parties to choose their governing law and language.

China’s laws do technically allow for contracting parties to make their own decisions regarding a contract’s governing language and law, but in the practical world of Chinese litigation, having an English language contract or a contract calling for foreign law is nearly always going to be a mistake.

If you are going to litigate before a Chinese court under a foreign law, the court will require the parties to prove what the foreign law is on any issue important for a decision. Proving the law on these points is time-consuming and expensive. And in the end, the Chinese court’s decision-making will likely be infused with Chinese law in any event.

When confronted with a foreign language contract, Chinese courts usually will engage their own translator. Often this translator is barely competent. On important points of translation, both parties will often disagree with the translator, leaving the judge having to choose between three competing translations of a language he or she probably does not know. Sometimes though, Chinese courts will simply refuse to take on cases with English language contracts or foreign choices of law. Those cases just sit and sit.

Effective litigation in China often requires quick and decisive action. Chinese litigation procedure allows for preliminary seizure of assets and other pre-judgment relief that can be remarkably effective in quickly resolving issues. Contracts that provide for foreign law or a foreign language usually lead to endless delays and render pre-judgment relief impossible.

Written contracts can work in Chinese courts, but to work best they should be in Chinese and they should call for Chinese law.

What do you think?