Australia: Contracting with a Chinese counterparty? Answers to your top three concerns

Transacting with Chinese counterparties has never been more common, but there are some recurring issues that often concern clients. We look at the top three questions that pop up most frequently.

1. DO I NEED TO USE PRC LAW TO GOVERN ANY OF MY AGREEMENTS?

The good news is that you are generally free to choose the governing law of your agreements. PRC law recognises the choice of foreign law to govern agreements with Chinese counterparties.

There are, however, two key conditions. Firstly, you must have a 'foreign element' in the transaction. This is easy to satisfy if your corporation is incorporated in Australia.

Secondly, you cannot apply foreign law to certain matters that require the mandatory application of PRC law. Examples include onshore security, real estate or any onshore joint venture contract with a Chinese counterparty.

2. COURTS OR ARBITRATION – WHICH ONE SHOULD I USE?

It's always preferable to match the court with the governing law – it alleviates the expensive and time consuming requirement to have expert evidence adduced.

Notwithstanding that, we face a difficult hurdle using our courts in Australia (as well as other jurisdictions like England). The PRC courts will not generally recognise the decisions of foreign courts like those of Australia. However, if your counterparty has assets in Australia and the ability to enforce in the PRC is not critical, it may still be preferable to submit to the Australian courts to maximise recovery against those assets in the event of litigation. PRC courts will, however, recognise Hong Kong court judgments.

Hong Kong courts look ideal for us to use – being common law, they closely follow English law. Hong Kong has close cultural and political ties with the mainland, so it's easier to have Chinese counterparties agree to submit to the jurisdiction of those courts. To top it off, Hong Kong court decisions are directly enforceable in the PRC.

Sounds perfect? Not quite. Firstly, immunity is an issue when using Hong Kong courts – we'll look at this below. Secondly, Chinese counterparties, in particular state owned enterprises, are reluctant to have their disputes heard in public.

Thirdly, notwithstanding that Hong Kong court judgments are enforceable in the PRC, there are traps for the unwary. Firstly, it is important that the agreement provides for exclusive jurisdiction for the Hong Kong courts – otherwise it won't be directly enforceable in the PRC. Secondly, it only applies to commercial contract disputes and for monetary judgments.

Finally, as mentioned above, having your counterparty appear before a Hong Kong court runs the risk that they will claim immunity and therefore leave you with very few alternative remedies.

This leaves arbitration as the preferred alternative. As a bonus, while PRC courts do not recognise judgments of many foreign courts, they are signatories to the New York Convention, so arbitration decisions from any Convention country, such as Australia, will be enforceable directly in the PRC in accordance with the Convention.

Although 'one country two systems' applies in Hong Kong, the New York Convention doesn't. But we do have special PRC enforcements arrangements available in Hong Kong under the Arbitration Ordinance.

3. I'M DEALING WITH A STATE OWNED ENTERPRISE. IS SOVEREIGN IMMUNITY A RISK?

First, a quick refresher. In Australian courts (as with English courts), 'restrictive immunity' applies by way of statute. This means that foreign states cannot claim immunity for, among other things, typical commercial agreements.

'Absolute immunity' exists where foreign states are free to claim immunity for commercial transactions.

'Crown immunity' relates to a government being sued in its own courts and 'sovereign immunity' is for a foreign state being sued in the courts of another state.

In Hong Kong, things are a little more complicated due to some recent decisions and its status as a special administrative region of the PRC.

The Congo case determined that absolute immunity applies in Hong Kong (which may also possibly apply to arbitration involving a foreign state).

The Hua Tian Long decision held that the mainland government can exercise absolute crown immunity (as it isn't a separate foreign state for immunity purposes) when the counterparty before the court is, in fact, an instrumentality of the mainland government.

The good news is that it is becoming increasing unlikely that your counterparty for a commercial transaction will raise immunity. For state owned enterprises, if your counterparty is not established by the State-owned Assets Supervision Committee (such entities are unlikely to be entitled to claim immunity), you will need to conduct some due diligence on the ownership, management and day-to-day control of your counterparty.

The less discretion and control that the directors and officers have, the higher the risk that your counterparty is found to be an instrumentality of the mainland government.

SO WHAT IS THE END RESULT?

Go with whatever governing law suits your transaction. Use arbitration where possible (especially if confidentiality is critical for your counterparty), which can be conducted in Australia and then enforced directly in the PRC under the New York Convention. If you must use courts, Hong Kong courts and Hong Kong governing law are preferred, but make sure you do your due diligence on your counterparty for any potential immunity issues.

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.

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