Drafting China Dispute Resolution Clauses that Work

China Dispute Resolution Clauses

The dispute resolution clause in your international contract can dictate the ease, cost, and effectiveness of resolving disagreements. This post addresses a specific case where my law firm’s China lawyers were tasked with reviewing a China supplier contract for a client, and in doing so, shed light on dispute resolution clauses.

A new client sent our international manufacturing team a contract with one of their China suppliers. They wanted us to review that contract (which had been drafted by a Chinese lawyer based in Shenzhen).

Chinese Lawyers and Potential Conflicts

Our client had heard about how Chinese lawyers sometimes work in cahoots with the Chinese company on the other side of the deal, and not with their foreign client. See China Contract Drafting Scams: From Bad to Much Worse. In particular, the client was having doubts about their contract because it called for disputes to be resolved by arbitration in Shenzhen and they knew of other “experienced, major companies that write into their contracts that all disputes must come to courts in the United States.”

No One-Size-Fits All Dispute Resolution Solution

I am posting our interaction to emphasize how there is no one-size-fits-all solution when drafting a dispute resolution clause for a China manufacturing contract.

A China Contract Analysis

Our response to them was as follows:

When dealing with Chinese companies, resolving disputes through US litigation is typically not the best way to go. This is because China generally does not enforce US court decisions. This makes litigating in the US ineffective in most cases involving Chinese entities. See China Enforces United States Judgment: This Changes Pretty Much Nothing. This article is from 2017, but little has changed since then.

It’s a common practice among US lawyers to prefer disputes be resolved in their home jurisdiction. For example, if our client is based in Los Angeles and the other party is in New York, we’d favor Los Angeles for resolution. However, this approach doesn’t usually apply to Chinese disputes because of the enforcement issue mentioned.

Your current contract stipulates English as the official language and specifies arbitration in Shenzhen, also in English. This setup is acceptable. However, we usually prefer using Chinese as the official language, and litigation in China, which is usually faster, cheaper, and better than arbitration, though this depends on many factors.

But if you choose to have us re-do your contract to be exactly how we like it, we will need to revise it quite a bit and then you would essentially have to renegotiate it with your existing supplier, and we do not think it worth it to you for just this one relatively small contract. However, for future contracts with new Chinese suppliers, it will likely make sense to have those be China-centric contracts, with Chinese as their official language and calling for disputes to be resolved in a Chinese court.

Though your current contract isn’t perfect in our view, it doesn’t contain glaring flaws that warrant an immediate overhaul. If there were serious concerns, we’d explicitly advise a revision. The choice on what to do with your existing contract  is yours.

What are you seeing out there?