China Enforces Good Contracts
A Chinese factory once refused to return custom molds that belonged to one of our clients. Our Chinese litigation counsel sued and obtained a freeze on the factory's bank accounts within about five days, and the factory returned the molds the next day. That happened because our client's contract identified the molds, established who owned them, required their return, and gave us a damages claim a Chinese court could work with.
People still tell me that China doesn't enforce contracts. I don't buy it. China's courts enforce plenty of ordinary commercial contracts, and they can be remarkably effective at it. Protecting cutting-edge semiconductor technology from theft is another matter, but if you are seeking to enforce a run-of-the-mill manufacturing agreement, distribution agreement, or service contract, there is no reason to assume China's courts will not help you. The question is whether your contract lets them, and that depends on whether it was written with China in mind, something a surprising number of foreign companies and their lawyers fail to do.
Our China business lawyers regularly see contracts drafted by others. Sometimes a client wants us to review and revise a contract before signing it. Other times the parties are already fighting, and the client wants to know whether the contract is worth enforcing. In both cases, I look first for five things that tell me whether the contract can be enforced in China.
The Five Keys to a China Contract That Works
1. China Dispute Resolution
Your contract with a Chinese company should generally provide for disputes to be resolved in China, either in a Chinese court or before an appropriate China-based arbitral body. The right choice depends on the nature of your contract, where the other party has assets, and what you will need the court or arbitrators to do if something goes wrong. Foreign lawyers routinely write contracts calling for disputes to be resolved in their home courts, and American lawyers are particularly fond of requiring litigation in the state where their client is located. I understand the appeal, but what good is a California judgment against a Chinese factory that has no assets in
Chinese courts have recognized and enforced U.S. commercial judgments, but the process remains difficult, expensive, and uncertain. You first have to win your lawsuit in the United States and then pursue a separate recognition and enforcement proceeding in China. That second proceeding brings its own legal fees, procedural requirements, and risks. For a relatively small manufacturing dispute, the cost of enforcing the American judgment can exceed what the claim is worth. This is why we generally want our clients to have a way to bring their claims directly in China when the Chinese company has its assets there. See Enforcing U.S. Judgments in China: What Judgment Creditors Need to Know.
One of the biggest advantages of litigating in China is the ability to seek pre-judgment preservation of assets. Chinese courts can freeze bank accounts and other assets before a final judgment, and sometimes even before a lawsuit is filed. That is how our client got its molds back, and in the right case a freeze can get a Chinese company to resolve a dispute very quickly. The court must approve the application, and the applicant generally must provide security, so you cannot simply demand that a Chinese company's bank accounts be frozen because you allege a contract breach.
Arbitration does not necessarily mean giving up these protections. China's revised Arbitration Law, which took effect on March 1, 2026, provides for court-assisted preservation measures in qualifying arbitrations, including certain urgent applications before arbitration begins, and some Hong Kong arbitrations qualify for interim relief from mainland Chinese courts under a separate arrangement. An arbitration provision calling for proceedings in New York or London, however, does not automatically provide access to those same protections. We want to know what our client will need if the relationship falls apart, and then make sure the contract gives it a practical way to get it. See China Dispute Resolution Clauses for more on choosing between litigation and arbitration.
2. Chinese as the Official Language
If your contract is going to be enforced in a Chinese court, we generally want Chinese to be its controlling language. Chinese law does not prohibit English-language contracts, but making English the controlling language can make enforcement more expensive and much slower. Worse, Chinese courts sometimes simply refuse to take on cases involving English-language contracts, and those cases just sit. The law does not call for this. Some judges are simply uncomfortable with foreign-language contracts and have more leeway than they should to let these cases languish. Fortunately, we see this happening less frequently every year. But while a case sits, it does nothing to freeze the other side's bank accounts or get your molds back. See Silly Rabbit, Only the Chinese Language Matters in Your China Contract for an example of what happens when the English and Chinese versions of a contract say different things.
Foreign companies also tend to overlook what happens to an English-language contract once a Chinese court does take the case. The contract has to be translated into Chinese, the court may use its own translator, and the parties can end up arguing over whether that translation accurately reflects what they agreed to. The judge is then left to choose between competing translations of a language the judge probably does not speak, and an opposing lawyer can raise objection after objection along the way, turning what should be a straightforward contract dispute into a drawn-out fight over what the contract actually says. We have seen these fights consume considerable time and money.
One of our international dispute lawyers is always telling our clients that if they use English as the controlling language of their China contracts, they risk getting into a lawsuit where they will not know exactly what their contract says until they hear back from the court's translators. Of course, if your contract is going to be in Chinese, your lawyer must fully understand the Chinese in it and be capable of accurately translating it into English for you. A Chinese-language contract prepared by someone who does not understand Chinese is not much of an improvement.
3. China Law as the Applicable Law
Chinese law should generally govern your contract if you expect to enforce it in a Chinese court. If your contract is in Chinese and your disputes will go before a Chinese judge, this only makes sense. China allows the parties to many international contracts to choose foreign law, and Chinese courts can apply that law. Choosing foreign law does not automatically make your China contract unenforceable, but it can make enforcement more expensive and difficult without giving you anything useful in return.
A Seattle company once came to us after about a dozen of its employees in China sued it. The company's Seattle lawyer had drafted their employment agreements in English and made them subject to Washington State law. When I asked why, he told me that China "has no real law." I pointed out that a Chinese company could not hire employees in Seattle, pay them a dollar an hour, and avoid Washington's employment laws simply by stating in the contract that Chinese law applied. The client understood the point immediately, and we worked to settle the employee claims as quickly as we could.
Employment contracts are an especially clear example of why choosing the wrong law can be disastrous. Under China's conflict-of-laws rules, employment contracts are generally governed by the law of the place where the employee works. Choosing Washington law did not make China's employment protections disappear. Commercial contracts often allow considerably more flexibility in choosing governing law, but even then, the choice needs to make sense for the transaction and the place where the contract will be enforced.
Take a contract that calls for New York law but requires litigation in China. The Chinese court must establish what the relevant New York law says before it can apply it, and China's Supreme People's Court has rules governing how that is done, including rules that took effect in January 2024. Parties who have chosen foreign law are required to provide that law, and the court has procedures for determining its content, including the use of legal experts and other sources. These procedures have improved, but they do not eliminate the time and expense. A clever defense attorney can devise all sorts of objections to statements about foreign law, just as that attorney can challenge the translation of a foreign-language contract. Even if the court ultimately rejects those objections, they cost money and delay resolution.
We have seen contracts calling for British law to apply to an arbitration in Geneva that is to be conducted in Chinese. Yes, we really have. And there is no such thing as British law. England and Wales, Scotland, and Northern Ireland have separate legal systems. I assume the drafter meant English law, but I would not want my client's contract to depend on that assumption.
4. Explicit Contract Damages
You usually should have a provision calling for contract damages, and a properly drafted one can be a heavy hammer against your Chinese counterpart. Your contract might, for example, set a specific amount of damages if the manufacturer fails to return your molds, delivers products late, uses your intellectual property without authorization, or sells your products to your customers behind your back. The amount must be defensible under Chinese law. Chinese courts can adjust agreed damages that are excessive, so inserting an enormous number into your contract is not going to do you much good.
A good damages provision also helps when you ask a court for asset preservation. Specifying damages for particular breaches can make it easier to establish the amount of your claim when you ask a court to freeze the other party's assets. The court still decides whether to grant that application, but the damages provision gives you one more way to put pressure on a Chinese company that is not complying with its contract. For more on this, see China Contract Damages Done Right.
5. The Correct Chinese Company Name
Make certain the Chinese name of your contracting party is 100% accurate and matches its official registered company name. This sounds simple, but we regularly see contracts that identify Chinese companies incorrectly. You also need to be certain you are contracting with the company that will actually perform the contract. A beautifully drafted manufacturing agreement with a Hong Kong trading company will not do you much good if the factory making your products is a separate mainland Chinese company that never agreed to be bound by it.
And while you are at it, have your Chinese counterpart properly execute the contract, generally including its official company chop. The chop is not a universal legal requirement for every enforceable contract, but it is an important way to establish that the Chinese company itself authorized the agreement. See China Company Chops: The Basics and The Essential Checklist for Signing Contracts with Chinese Companies.
Payment and Termination Terms
The five keys tell us a great deal about whether a contract can be enforced in China, but an enforceable contract can still be a terrible business deal, so we also look closely at the business terms. Two of the first things I check are payment and termination. Payment terms are critical for obvious reasons, since many (probably most) contract disputes involve money. Does the contract address how payments are determined and when and how they are to be made? Does it state the currency of payment, and does it address currency risk when that risk matters? Our international litigation team has handled cases where companies lost huge sums because their contracts did not adequately protect them against exchange-rate changes.
Then I look at termination. I've seen contracts that make the foreign company wait about a year to get out and then allow the Chinese company to use the foreign company's intellectual property and even sell the foreign company's products to its customers. Not a good idea. I've also seen contracts with no termination date and no provisions even for allowing termination. Do you really want XYZ China Company to be your exclusive China distributor forever, no matter how terrible it is at selling your products or services? And when the contract does end, who pays for what, and who owns the customer relationships, inventory, trademarks, and other assets? For more on distribution contracts in particular, see China Distribution Agreements: How to Avoid a Bad Deal.
What Happens When Your Chinese Distributor Registers Your Trademark?
An American company once came to us after its Chinese distributor began selling its own products under the American company's brand. The distribution agreement expressly prohibited that conduct, so the client assumed it had a straightforward breach-of-contract claim. Unfortunately, the agreement required litigation in the United States under U.S. law, and the distributor had registered the American company's brand as its own Chinese trademark. What the American company thought would be a relatively simple contract enforcement matter had become a much more expensive dispute involving both its contract and its trademark rights.
This did not necessarily leave the American company without a legal remedy. Chinese trademark law provides grounds to challenge certain bad-faith registrations by distributors and other business partners. But pursuing those remedies takes time and money, and the outcome depends on the facts, the evidence, and the timing. A much better approach is to register your China trademarks in your own company's name before appointing a distributor. Your distribution agreement should also prohibit the distributor from registering your marks, their Chinese-language versions, or confusingly similar marks. The agreement needs a dispute-resolution provision and remedies that make sense in China, where the distributor operates and where you will likely need relief. For more on these issues, see China Trademarks and Your Chinese Distributor and China Trademark Registration: The Complete Guide for Foreign Companies.
How We Turn an Existing Contract into a China Contract
The first thing I do when given a contract to review is spend a couple of minutes skimming it to see whether it is workable, by which I mean whether we can revise it or whether it is so flawed that it would be faster and cheaper to scrap it and start over. Some of the contracts we see are simply badly written, and others practically scream fraud. But about half the time, the contracts we see will, with changes, work, and it makes no sense to throw out a reasonably well-written agreement if we can make it work in China without starting over.
The below is an amalgamation of emails we typically write to clients who want us to "China-fy" an existing international distribution contract:
We've looked at your standard international distribution contract, and it's definitely workable. It will be faster and easier for us to modify your existing agreement than to start over and draft a new one.
There are several provisions we should remove or change because they will not work as intended under Chinese law. The warranty disclaimer and the consequential-damages exclusion are two examples. We should also discuss the mandatory insurance requirement and the mutual indemnity provision, neither of which makes much sense for this particular deal.
The confidential information provisions need a close look. Many standard American and European NDAs focus on preventing disclosure of confidential information but do little to prevent the Chinese company from using that information to manufacture competing products or sell directly to your customers. We also need to address disclosures to affiliates and subcontractors. Where appropriate, we should replace or supplement the existing provisions with China NNN protections covering non-disclosure, non-use, and non-circumvention. Those protections need to be drafted for your actual products, intellectual property, and business relationships.
The entire contract also needs to be made China-centric, particularly its dispute resolution, governing law, and language provisions. I would also recommend removing the requirement that the parties engage in discussions and then mediation before filing a lawsuit. That sounds good in theory, but requiring multiple rounds of negotiation and mediation before going to court often just increases attorneys' fees and delays resolution.
Finally, there are inconsistencies that need fixing. One section of your contract lists the shipping terms as FOB, while another says EXW. Those are two very different shipping terms, and we need to establish which one applies before anyone signs this agreement.
Clients will often say something like, "We knew the contract probably wouldn't work in China, but we figured something was better than nothing." Not true. A bad contract can commit you to a court where enforcing your rights is prohibitively expensive, give the Chinese company rights you never intended to give it, or convince you that your intellectual property is protected when it isn't. We've seen companies lose enormous amounts of money because they relied on contracts that did not work for China. I would much rather fix those problems before a client signs than have to explain (after the relationship has fallen apart) why winning a lawsuit will not get the client's money back. See China Manufacturing Contracts: Why Your Draft Does Not Work.
