Enforcing contracts in China: Time to rely on written agreements again

Contract law in China

Given China's notorious past of countless deals falling through due to lack of transparency and a legal system that has struggled to keep up with its rapid development, you'd be forgiven for thinking that enforcing contracts in China lags far behind the rest of the western world.

In reality, this is far from the truth. In fact, a data collection performed in June 2015 by The World Bank Group on enforcing contracts places China at no.7, well above 'more developed' countries the likes of Germany (12), France (14) and Luxembourg (17). This is certainly a testament to China's ongoing commitment to provide legal transparency to the foreign companies/individuals that conduct business here.

China has made huge strides in terms of contract law that have helped make written agreements more reliable than they were before, but the country is still struggling to get rid of its bad rap due to cases where problems occasionally stem from the original drawing up of the contract itself.

In this blog from Hongda let's take a look at the necessary measures that should be taken when enforcing contracts in China...

1) The contract should be written in Chinese

Ensuring that the contract is written in Chinese is an absolute necessity when doing business in China. For obvious reasons this helps to communicate the terms of a contract in your Chinese partners' native tongue, ensuring that they understand all of the stipulations of the intended agreement. The translation must be done by an individual with the necessary legal expertise and qualifications. The terms need to be communicated in an official, legal manner that other third-party translators may be unqualified to do.

By dictating the terms of the contract in English first, you will have peace of mind in knowing that everything you have communicated can be thoroughly understood. However, it is important to note that using English to draw up a contract that is translated into Chinese requires one to specify which language should be used if there is a breach of contract. The contract needs to have an official language, so for the sake of avoiding confusion, additional legal fees, and possibly more legal issues, it is advised to keep the official language as Chinese.

2) The contract should be localized

This deals with writing the contract in such a way that it is enforceable in a local Chinese court. A lot of foreign businesses draw up contract terms without taking China's legal system into consideration or ensuring that they are governed by Chinese law, giving them a much smaller chance of negotiating legal proceedings that lead to a favorable outcome. Drawing up contracts that are intended to be governed by overseas courts will help very little in a Chinese court. It is up to foreign businesses to ensure that local contracts can be applied to Chinese law, and this is especially important when entering into a joint venture in China with a local partner.

3) The contract terms should be very specific

When it comes down to the terms of a contract, there is nothing like being too specific. The only way that foreign businesses can truly protect their interests is to clearly outline their terms and expectations. This goes back to the point of translating the contract. It is of vital importance that the finer details of one's terms are translated in a way that ensures that both parties understand what they are liable for should there be a breach of contract.

Conclusion

The message here is that for Chinese contracts to be enforceable they need to be compliant with local Chinese law.

This means getting a qualified translator to thoroughly communicate the specifics of the terms to ensure that they have legal standing within China.

The myth that Chinese contracts are worth little more than the paper they are written on is a huge misconception about doing business in China. They just need to be written and communicated in a way that ensures they 'speak' your Chinese partners' language!

What is your experience with enforcing contracts in China? Do you have any horror or success stories to share with our community? Please let us know by adding a comment below this blog post!