Introduction
Foreign investment and international trade have been booming in China for the past few decades. An important aspect of this growth has been the establishment of formal agreements, often known as contracts, between entities from China and those from foreign countries. By their very nature, contracts establish expectations, define terms, conditions, and responsibilities, and create a binding relationship between the parties involved.
However, it is crucial to understand that drafting a legally binding and enforceable contract for operations in China requires specific expertise and understanding of Chinese laws, regulations, and legal frameworks. This article will explore why contracts drafted by foreign lawyers often find themselves unenforceable in China and provide insights into why focusing on these crucial aspects is essential when doing business in the country.
Importance of Written Contracts in China
Written contracts are indispensable when conducting business in China. With China’s legal system evolving and becoming increasingly sophisticated, parties involved in a business relationship must clearly define their rights, obligations, and duties. The Chinese legal system places significant emphasis on written contracts, and contracts serve as concrete evidence of the agreement between the parties and are the primary basis for settling legal disputes.
Furthermore, some business arrangements in China require written contracts by law, making it all the more necessary to draft detailed, comprehensive, and legally sound agreements.
Why Contracts Need to Comply with Chinese Law and Language
One of the most critical elements that contribute to the enforceability of contracts in China is the use of Chinese law as the governing law and the Chinese language as the governing language. This may seem counterintuitive or challenging to foreign businesses that are comfortable with contracts based on their native laws and languages, but there are practical reasons behind this requirement.
For one, Chinese courts tend to favor contracts governed by Chinese law because they are better equipped to interpret and apply their own laws than those of other countries. Having Chinese law as the governing law also helps avoid issues related to conflict of laws. In a legal dispute, this can significantly streamline proceedings and lead to a faster resolution.
Moreover, being the governing language of contracts, Chinese is critical because it prevents misunderstandings and misinterpretations of contract terms. Although many Chinese legal professionals are proficient in English, Chinese courts still prefer to interpret contracts written in Chinese. A well-translated Chinese contract is more likely to be enforced than an English or poorly translated one.
The Issue with Contracts Drafted by Foreign Lawyers
Despite emphasizing Chinese law and language for contracts, many foreign lawyers draft contracts that do not comply with these requirements, resulting in their unenforceability. This usually stems from a lack of understanding or unfamiliarity with Chinese legal concepts, systems, and language nuances.
While well-versed in their domestic law, many foreign lawyers may not be fully aware of the intricacies of Chinese law. This gap in knowledge can lead to drafting contracts that do not conform to Chinese legal requirements or contracts that may even be illegal under Chinese law. This makes the contract unenforceable and puts the parties at risk of legal penalties.
Moreover, linguistic differences can lead to misinterpretations or ambiguities in the contract, particularly if foreign lawyers are not proficient in Chinese. Without an accurate translation, it is possible that the contract’s terms may be understood differently by Chinese courts, leading to unfavorable outcomes for one or both parties.
Exclusive Jurisdiction and Its Implications
Another pitfall foreign lawyers often fall into when drafting contracts is assigning exclusive jurisdiction to courts in their countries. While this may seem like a reasonable step to ensure familiarity and control over the legal proceedings, it can be a significant hindrance in enforcing the contract in China.
Chinese courts rarely enforce foreign court judgments. This stems from the principle of sovereignty, where each country has the ultimate authority within its borders, including its judicial decisions. Therefore, even if a foreign court has made a ruling based on the contract, it might be challenging to enforce this ruling in China. For this reason, contracts that assign exclusive jurisdiction to foreign courts can often be rendered unenforceable in China.
Conclusion
Like any other country, doing business in China requires a sound understanding of its legal system, regulations, and cultural nuances. When it comes to drafting contracts for operations in China, it is essential to use Chinese law as the governing law and the Chinese language as the governing language. Otherwise, contracts drafted by foreign lawyers can often violate these factors, rendering them unenforceable in China.
It is also important to note that Chinese courts rarely enforce foreign court judgments. Therefore, designating a foreign court as the exclusive jurisdiction might result in a contract that is practically unenforceable in China. Foreign businesses are advised to consult with experienced Chinese legal professionals to avoid these pitfalls when drafting contracts for their Chinese operations. With the right guidance, they can successfully navigate the complexities of the Chinese legal landscape and create contracts that protect their interests and are enforceable under Chinese law.
Frequently Asked Questions about Foreign-Drafted Contracts in China
1. Why are written contracts essential for doing business in China?
Written contracts are critical in China due to the country’s legal system, which greatly emphasizes written agreements. They are the primary basis for settling legal disputes and, in some cases, are required by law for specific business arrangements.
2. Why must contracts in China comply with Chinese law and language?
Contracts must comply with Chinese law and language to ensure their enforceability. Chinese courts are better equipped to interpret and apply their own laws than those of other countries. Also, using Chinese as the governing language prevents misinterpretations and misunderstandings of contract terms.
3. Why are contracts drafted by foreign lawyers often unenforceable in China?
Contracts drafted by foreign lawyers often fail to comply with Chinese law and language requirements. This could stem from a lack of understanding or unfamiliarity with Chinese legal concepts, systems, and language nuances. Additionally, some foreign lawyers designate foreign courts as having exclusive jurisdiction over contract disputes, but Chinese courts rarely enforce foreign court judgments.
4. Can a foreign court’s decision be enforced in China?
In general, Chinese courts rarely enforce foreign court judgments. This is due to the principle of sovereignty, which gives each country ultimate authority within its borders, including its judicial decisions.
5. What should foreign businesses do to ensure their contracts are enforceable in China?
Foreign businesses should consult with experienced Chinese legal professionals when drafting contracts for their operations in China. This can help them navigate the complexities of the Chinese legal landscape and create contracts that are enforceable under Chinese law.
Contact us if you need legal help in China, like drafting contracts that follow Chinese law, background investigation of Chinese companies, protecting patents, trademarks, and verification of contracts to the law in China, etc.
If you require our assistance or have further questions about our services, please do not hesitate to contact our Customer Relationship Manager, Jan Erik Christensen, at janerik@ncbhub.com. We look forward to hearing from you and helping your business succeed in China.
