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A business contract is pointless if it cannot be enforced. Therefore, it is essential that any contract be drafted with enforceable elements and thoroughly reviewed.
Here are four considerations for a contract to be enforceable when doing business in China:
1. The governing language
While businesses can decide to use English or other foreign languages in their contractual dealings, however, the Chinese language is still, by law, the official and the default language of the Chinese court system. This means for a contract to be enforceable in China, it should have a Chinese language version which is often the governing language of a contract governed by Chinese law.
In this light, having a China-based lawyer who is both fluent in English and familiar with Chinese law and the Chinese legal system is crucial. It is highly recommended that the lawyer help review and confirm the consistency between the Chinese language version and the English language version of a contract.
2. the governing law
Under China’s legal system, Chinese law is the governing law – meaning, in the context of a business contract with a Chinese company, that the contract should be governed by Chinese law to be enforceable unless there are “foreign-related elements”. It is extremely important that any contract that uses foreign law are reviewed by an experienced Chinese lawyer given these clauses may be deemed invalid or unenforceable by a Chinese court if it finds no “foreign-related” element in the contract.
3. Arbitration Venues
As many business owners appreciate, Hong Kong arbitration may be a good option for resolving a contract dispute in China. This is because Hong Kong has a well-established and internationally recognized arbitration regime. Hong Kong is also a common choice for international parties due to its proximity to Mainland China and its reputation for impartiality and independence.
In some cases, Mainland Chinese courts may provide a more efficient and effective means of resolving the dispute, especially where the assets or witnesses are located within China. Courts can also issue orders for defendants to stop doing things like infringing upon IP rights or preventing a company from getting rid of its assets before a judgement is decided – these resorts become less available in commercial arbitrations.
4. Check the counterparty
Even if you did everything right, your good contract is not enforceable if the counterparty is a scam, a pure shell company set up by its controlling shareholder, or if the party is bankrupt. This might seem obvious. However, through past working experiences as a lawyer, it is not uncommon to see that companies are structured in ways that hide their true assets and liabilities. This becomes important when enforcing a judgment against them or holding them liable. It matters little what remedies the contract provides if the defendant has insufficient immediate assets with which to compensate the plaintiff.
It is important to seek the advice of a local lawyer familiar with the legal system in China, who can provide guidance on the best method for resolving your dispute and help ensure that your rights are protected.