Written contracts are vital to doing business in China. The Chinese legal system has undergone massive improvement due to which a properly prepared Chinese contract by a Chinese lawyer can now provide solutions to various problems including breach in contract. The Chinese business folk have also realized the importance of a properly drawn agreement to conduct business in their country. They have also realized the advantages regarding the same making the improvements tangible. Earlier people used to rely on parties to resolve disputes but now with an improved legal system, both the Chinese manufacturer and the foreign business party can depend on the judiciary.
The fact however is that a contract is valid as long as it can be enforced by law. Foreign companies generally insist on incorporating certain provisions in their contract. However, this is not important in the Chinese business as well as legal context. They do not make the contracts enforceable. The point of being enforceable is extremely important in China and any Chinese law firm will stress on a kind of contract that can be made enforceable in the country. Foreign business counterparts generally in their want of proper guidance end up with an agreement that much to the amusement of Chinese manufacturers are not binding and absolute legally.
Making a contract effectively enforceable in China has 3 fundamental rules:
- Enforcement is done through litigation in Chinese court
- Chinese law governs the litigation
- Chinese language is used in the court and for documents
Generally, the contract drafted by the US party contains provisions according to the US law from the homeland. In such a contract, the language in which the contract is drafted is English and the enforcement can be done in English court outside the Chinese context. In fact, the provisions can only be enforced in the state court of the home state for the US party.
Why this Situation is a Disaster?
This kind of agreement is not valid because it flouts the basic rule of preparing a contract enforceable under Chinese law. Hence, discussing about the other 2 rules is not even necessary. The Chinese court will never enforce US court judgements. Therefore, any kind of judgement obtained at the US court remains invalid in the Chinese court and judiciary. Moreover, if the Chinese organization does not have any asset in US, the judgement is rendered worthless.
There are some attorneys who have spotted this issue and they argue that China is a signatory to the New York Convention on the Enforcement of Arbitral Awards and hence will provide for arbitration in the court of law. According to them, the Chinese courts shoudl take into account US Arbitration Awards; in fact, they are obliged to do so. However, in reality it does not hold true. US Arbitration Awards are totally worthless in Chinese context. There are quite a few reasons for this. They are:
- China belongs to a group of Asian nations which have strong cultural aversions to enforce any foreign arbitration. The courts thus find various reasons for not enforcing foreign enforcing awards. This is practically true for local court cases; sometimes there is a chance of prevailing on appeal. However, the biggest problem with this is that the process is uncertain and hence takes long time. The Chinese court has another way of not issuing any ruling at all just to avoid foreign arbitration.
- The Chinese party may not participate in the entire process in order to avoid the verdict altogether. This might make the award a default award. Chinese courts do not recognize default awards and hence the chance of enforcing a foreign default from an arbitration tribunal is very low.
- Precisely, Chinese courts usually do not heed orders from foreign arbitrators. Many arbitration concerns company management or or intellectual property disputes. These issues require some kind of injunctive relief. The Chinese perceive such orders as an insult to their sovereignty and hence they ignore such orders by an unwritten rule.
This practically means that China is a modern country with a reasonably well developed legal system. Receiving any kind of favor from the court should be done through the legal system only and not resorted the legal system of other countries. This is especially true for arbitration from foreign courts. Though some foreign organizations stick to rule number one, they often flout the second and third rule and use English as the court language. They argue that Chinese law allows for the foreign companies to choose their law as well as choose the language to sue the Chinese organization. Of course the law must be related to the business or the transaction made between the parties. The reason being that Chinese civil law drafters believe in party autonomy which empowers business parties to take decision pertaining to the business. However, the the real world such decisions make even a written document unenforceable.
Chinese effective litigation entails fats and decisive action especially in terms of property seizure and pre-judgement relief. Now employing Chinese arbitration instead of litigation is preferable due to the delay in the entire litigation process because of foreign law and language. In case of governing law, the Chinese court will always require the foreign party to prove that this is the relevant foreign law. Now proving law is expensive and time consuming. Same delay is applied to foreign language because the court will appoint an incompetent translator to translate the document drafted in foreign language. This only adds to the existing complication.
This creates number of disadvantages for the prosecutor which can be turned into advantages for the defendant. The delay becomes limitless and hence it is always better to opt for arbitration instead of litigation in China ground.