China is Australia's biggest trading partner with bilateral trade in 2011-2012 estimated to have been worth approximately A$127.8 billion, but the opportunities for Australian businesses are still growing.

In July 2012, China's 12th Five-Year Plan on Foreign Investment Utilization and Outbound Investment was released and directed that outbound investment be expanded in a range of industries, with the Chinese Ministry of Commerce estimating that outbound investment from China will reach US$150 billion per annum by 2015, reflecting a 17% increase annually since 2011. Further, in August 2012 the Chinese National Development and Reform Commission has released Draft Rules for China's Outbound Investments Administrative Measures for Approval of Outbound Investment Projects (Draft for Consultation) which proposed reducing a number of regulatory requirements in an effort to encourage increased outbound foreign investment. While these measures have not yet been adopted or promulgated, they reflect the increasing support from the Chinese government for outbound investment.

In August 2012, the Federal Government released the Australia in the Asian Century White Paper setting ambitious targets for Australia to build its capabilities and connections in Asia by 2025 and in April 2013, direct two-way trade between the renminbi (RMB) and the Australian dollar commenced which has, and will continue to, reduce currency conversion costs and promote economic relationships between China and Australia.

With this policy backdrop, the recent fall in the Australian dollar has only made Australia and Australian businesses more attractive partners for Chinese businesses and investors. Further, it is now well understood in China that Australia offers a wealth of valuable primary production targets which would satisfy the growing need for China to supplement its farming and water resources in order to prevent a future food shortage.

While all of these factors make an Australia-China transaction seem like an attractive prospect, cross-cultural and cross-border business poses a unique set of challenges. In order to give your proposed transaction the best opportunities for success, there are a range of considerations to bear in mind before signing on the dotted line.

Language Barriers

As a general rule, the language of a contract should be taken on its ordinary meaning unless it is expressly stated otherwise, or an alternative meaning is apparent from the context. This poses a specific problem when one party to the contract does not speak English fluently (if the contract is in English), as the nuance of each party's interpretation of a clause may differ. Although a Court will consider what a reasonable person would understand, this will not assist you in resolving any day-to-day minor disagreements as to interpretation.

Similarly, it is not uncommon for a contract to be translated and for parties to sign both versions of the contract. However, the translation is unlikely to be a perfect translation and to import all the nuances of the original document, and therefore the translated document may not reflect a correct translation of the parties' agreement.

This is particularly challenging in respect of English / Chinese bilingual contracts because of the very different history and development of both languages and legal systems. On the one hand, English has developed very precise language with words generally having a clearly understood meaning and the common law legal system has developed principles for the interpretation of contract, which generally prevent parties from having regard to anything other than the language of the contract itself. On the other hand, Chinese is an ancient language in which the meaning of words can vary depending upon the context in which they are read or spoken. Additionally, the Chinese legal system is relatively new, and so the legal system has developed in the context of the language, rather than the language evolving with the law. Accordingly a Chinese written contract will often not aim to be conclusive or definitive; it can sometimes instead be intended as the starting point for further discussion if there is any future dispute between the parties. For these reasons, the negotiation of the contract, and the spirit in which an agreement is struck, can be as, or more, important than the contract itself.

Some tips:

  • Ensure that critical terms, even if understood between the parties, are clearly defined in simple language.
  • If necessary, spell out alternative circumstances rather than allowing for their interpretation by implication
  • Ensure that the parties agree, and an express term is included in a contract which provides that in the event of a discrepancy between translated versions of an agreement, that a specific version (usually the English version) is to take precedence.

FX Risk

The risk of a contract where the price is not in the same currency as the cost-base of the goods or services in question is that currency fluctuations may result in your business being forced to deliver goods or services at a loss. It is therefore important to consider who should bear exchange risk, or how this risk can be best mitigated. While often these issues will depend on which party has the stronger negotiating position, it is possible to limit FX risk.

Some tips:

  • Consider whether both parties can agree to lock in the FX rate for the life of the contract, giving both parties certainty as to their costs and profits.
  • Provide a mechanism that allows the contract to be suspended or terminated if the FX rate exceeds certain agreed thresholds.
  • Consider taking steps to mitigate your business' exposure to currency fluctuations by buying options or implementing a currency swap agreement.

Due Diligence

When contracting in Australia, there are a number of protections both in the Corporations Act 2001 (Cth) and the common law which enable you to assume that the person signing a contract is in fact authorised to do so. These details can often be easily checked by searches on an appropriate register. It will be more difficult to rely on this for foreign partners, and certainly more difficult to confirm that they are authorised to sign on behalf of the company.

Further, confirming that your new business partner is in fact solvent and capable of meeting their obligations under the contract can be quite challenging when working across international borders, and enforcement of warranties and indemnities can be tricky.

Some tips:

Ask for a copy of the relevant business licence or certificate which should identify the company's legal representative.

If the contract is not being signed by a legal representative ensure that you are provided with a letter of authorisation from the company for the person who is to sign the agreement, and sight a copy of their passport or other identification to verify their identity.

Consider whether seeking an irrevocable letter of credit from a known and recognised bank either in China or Australia to ensure that your business has some security for amounts owing under the agreement.

Consider undertaking local due diligence or seeking references from other businesses in Australia (or elsewhere) with which your counterpart has done business in the past.

Dispute resolution and choice of law

When a dispute arises, there are a number of questions that will need to be considered including:

Which law will apply (Chinese or Australian)?

Which court or tribunal should hear the dispute?

Can any judgment or decision be practically enforced against your business partner?

Often parties assume that a choice of law or choice of jurisdiction clause is all that is required to protect them from these risks, but such a clause may be of little practical assistance. For example, if your counterpart's assets are all in China, there is little value in bringing proceedings against them in Australia. However, if Australian law applies to the contract, there may be a number of difficulties in bringing proceedings in the Chinese Courts as the state of relevant Australian law would first need to be proved to the court, before the Court could proceed to apply it.

Further, if the issue is only minor, the prospect of litigation is likely to be unappealing as it would compromise the continuing commercial relationship between both parties. One option is to spell out informal and formal processes to resolve a dispute, such as a face-to-face meeting between senior executives, mediation or negotiation, or even arbitration. These can be cost-effective and may provide a way to preserve both parties' reputation, thereby enabling the commercial relationship to continue despite minor issues.

Some tips:

  • Consider establishing a formal process that must be followed prior to initiating court proceedings unless the breach of contract is egregious.
  • Remain sensitive to the need to preserve both individual's and the company's dignity and reputation as perceived slights can act as a barrier to commercial negotiations.
  • Consider providing for the referral of a dispute to an appropriate international commercial arbitrator such as the International Chamber of Commerce or the International Centre for Dispute Resolution. Ensure that you are familiar with their rules before doing so as these can vary from jurisdiction to jurisdiction.
  • Make provision for the equal allocation of costs for dispute resolution procedures.
  • Provide for the contract to continue to operate while a dispute is being resolved, unless the breach relates to a material term (payment, actual provision of goods or services, etc).

Regulatory barriers

Although a centralised economy, China has a number of different tiers of government and regulation and numerous approvals may be required at each level of government in order to proceed with the agreement.

For example outbound investment by a Chinese business could potentially require approvals from the National Development and Reform Commission, the Ministry of Commerce, the State Administration of Foreign Exchange and potentially others depending on the investor, target investment or industry. Similarly, if your business is proposing to export an Australian product to China, you will need to comply with any relevant China Guobiao Standards (GB Standards) and may need approvals from local and national government departments such as the China Inspection and Quarantine authorities, the Certification and Accreditation Administration, the China Quality Certification Centre or the Administration of Quality Supervision, Inspection and Quarantine.

Not all regulatory barriers will be foreign, however. Foreign acquisitions of Australian assets must comply with the Foreign Acquisitions and Takeovers Act 1975 (Cth) and the Australian Government also restricts foreign investment or involvement in certain industries, asset classes and businesses, typically in industries such as media or telecommunications. As an example of this, the federal government prohibited Huawei from supplying the new National Broadband Network due to security concerns raised by ASIO. In addition, there is likely to be greater scrutiny of foreign investment in agricultural land and Australian agribusiness in future, following recent recommendations by the Senate Standing Committee on Rural and Regional Affairs and Transport which recommended reducing the thresholds for approval by the Foreign Investment Review Board for acquisitions in agricultural land and agribusiness.

Some tips:

  • Consider who should most appropriately arrange the relevant approvals and certifications – while it may be easier for your business partner to bear this obligation, some approvals may be issued to the party making the application and there may be advantages for your business to have the approval in its own name.
  • Ensure that you are aware of all of the necessary approvals and certifications required before entering into the contract.
  • Ensure that your goods, when bound for China, are accompanied by all the necessary supporting documents, and that you retain a copy.
  • Consider seeking a warranty or indemnity from the other party which confirms their compliance with relevant laws and that they have obtained all necessary approvals.

Conclusion

With growing numbers of Australian's looking to China for new opportunities and growth, there will be an increasing need to balance protecting traditional legal interests against the need for 'practical' solutions to the challenges of cross-border transactions. This may involve non-contractual solutions and may require greater commercial flexibility in contract than has perhaps been seen in the past.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.