China: Contract Management – Avoiding the Horror Stories

Last Updated: 20 December 2011
Article by Matthew McKee

There are very many stories about doing business in China – some exceptionally successful, others diabolical failures. These include foreign companies entering into contracts with Chinese companies that do not exist or the joint venture partner who was a "friend" that appropriates all the assets; unknowingly the joint venture was setup in a way to leave the foreign company with no legal recourse.

Our experience is that what makes these disaster stories worse is that they are usually easily avoidable. Whilst some fear that the enforcement of legal rights in China is somewhat of a hopeless endeavour, our experience is that in reality obtaining a just result is very achievable.

Problems generally occur where, in order to minimise costs or in an attempt to get a deal done quickly in a foreign language, foreign parties fail to seek appropriate representation – too much reliance is placed on people that the foreign parties know. Local legal representation is appropriate but the right local is the key. An insufficient attention to Chinese legal requirements when drafting contracts, and during the period of its performance, is fatal. This is further compounded because of a failure, in most cases, to undertake any form of valuable and practical due diligence prior to entering into contractual relationships.

The war stories should not stop you from doing business with China. Rather, they should reinforce the need to get the basics rights. Our experience shows that simple measures can be adopted to prevent problems and to provide you with the best "fighting chance" should things go wrong down the track. Let's look at a couple of simple examples and solutions to the problem.

Practice Point 1 – Know who you are contracting with.

This may seem like a simple question but when doing business in a country where English is not the native language it is something that, all too often, is ignored. The English name of Chinese companies is not the official name and it is the Chinese name that is important.

The following example, the experience of one of our clients, is illustrative. We have removed client indentifiers and used generic names to maintain confidentiality.

Acme Aussie Pty Ltd ("AA") is introduced to a potential distributor in China that they know by the name of Beijing Pipes Co Ltd ("BP"). As the representatives of both sides can read and write English they decide there is no reason to have a Chinese language version contract. AA delivers the pipes but receives no payment from BP. After a period of a few months pass, AA decides to engage lawyers in China to recover the debt. The lawyers ask AA for the Chinese name of BP. AA is not able to provide this – they only know the English name. AA's lawyers indicate that there are no records of any companies with that name and accordingly cannot take any further action.

Whether the company ever existed or perhaps there is simply no record of the English name doesn't matter, the debt cannot be enforced. This problem can be avoided from the very beginning by obtaining a copy of the corporate documents of the company maintained by the relevant branch of the Administration for Industry and Commerce – China's official company registrar. This is a very routine search and can be undertaken for a minimal cost.

Practice Point 2 – Obtaining judgment in an Australian court may be worthless

When entering into a contract it is natural that a party will desire that any dispute arising out of the contract be heard before a court with which they are most familiar – a court in the party's home jurisdiction.

In most cases, such as where the Chinese party has no assets outside of China, such insistence is, from a practical perspective, rather pointless. If the Australian party was to sue the Chinese party in Australia, any judgment may ultimately prove fruitless. This is because Australian court judgments are not enforceable in China. Importantly, pursuant to Article 265 of the Civil Procedure Law of the People's Republic of China there are only two bases on which a foreign judgment can be enforced in China; if the country in which the judgment is made has a relevant mutual recognition treaty with China or the country recognises Chinese judgments.

Neither the existence of an international treaty nor reciprocity applies in the case of Australia. Accordingly, in such cases the foreign party would need to re-litigate the matter in China in accordance with Article 318 of the Opinions of the Supreme People's Court on Some Issues Concerning the Application of the Civil Procedure Law of the People's Republic of China. This effectively means that if you obtain a judgment against a Chinese client in an Australian court you will have no ability to enforce it against any assets located in China.

Practice Point 3 – Avoiding Chinese Courts

The consequence of Practice Point 2 does not mean that foreign parties need to rely upon the Chinese court system, as long as an appropriate arbitration clause has been included in the relevant contract.

Arbitration is an alternative form of dispute resolution where, rather than using the public court system, the parties' dispute is heard before a private arbitrator. Importantly, arbitration in China can only be made mandatory via a specified clause in the relevant contract. The parties have the right to choose the arbitral body, the arbitration rules applied and the arbitration location

An arbitration hearing is not open and the decisions/judgments are not made publicly available.

There are a number of advantages of arbitration over litigation where a Chinese party is involved – the single biggest advantage being that it is far easier, in accordance with the New York Convention, to enforce foreign arbitral awards in China than it is to enforce foreign court judgments.

Importantly, and as noted above, arbitration can only be made mandatory via a specified clause in the relevant contract. The clause needs to specify the arbitral body, the location of where the arbitration will be held, the language of the arbitration, the applicable procedural rules and any other relevant matters. It is extremely important that the arbitral body be stipulated, it is not sufficient to simply say that the arbitration "will be governed by the Rules of the Beijing Arbitration Commission". Article 4 of the Interpretation of the Supreme People's Court concerning some issues on the Application of the Arbitration Law of the People's Republic of China provides that:

"Where an agreement for arbitration only stipulates the arbitration rules applicable to the dispute, it shall be deemed that the arbitration institution is not stipulated."

Practice Point 4 – Be aware of limitation periods

Article 135 of the General Principles of the Civil Law of the People's Republic of China (the "General Principles") provides that:

Except as otherwise stipulated by law, the limitation of action regarding applications to a people's court for protection of civil rights shall be two years.

The limitation period generally commences when the person knows or should know that his rights have been infringed upon (section 137 of the General Principles). However, interestingly Article 140 the General Principles and Article 10 of the Provisions of the Supreme People's Court on Several Issues concerning the Application of Statute of Limitations during the Trial of Civil Cases provides that the limitation period will be suspended where "one party makes a claim", which includes making a claim by correspondence or data message, and the claim reaches or should have reached the opposite party. The result is that if a time limit is approaching, a party can extend the period by sending a demand to the other party.

Practice Point 5 – Proper documentation

Almost as important as the drafting of a contract, is the management of the correspondence and documentation between the parties. This is because of the unique evidentiary requirements in China. Whole cases can fall apart because of an inability to produce evidence that complies with China's technical evidentiary requirements. In understanding the evidentiary requirements in China, it is necessary to understand an integral feature of Chinese civil procedure – "case acceptance". In all legal proceedings in China, the first step that a plaintiff must undertake in respect of a case is this "case acceptance" procedure. This is where the plaintiff's claim, and supporting evidence, is reviewed by a judge to determine whether there is a sufficient case for legal proceedings to commence. This can be a relatively high standard, and surprisingly, is often when the substantial part of the work in relation to a plaintiff's case is undertaken.

Our experience is that it can take 6 months (although it is usually less) to get a case accepted, after initial instructions are received. If this seems long, it may take only another 3 months before the allocation of a hearing date!

All 5 practice points represent simple ways of reducing the risk of doing business in China.

Winners of the 2010 Lawyers Weekly e.law Asia Pacific Box Breaker of the Year Award and the 2009 NSW Exporter of the Year Award

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Blake, Cassels & Graydon LLP
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Blake, Cassels & Graydon LLP
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions