Dual Language China Contracts: What You Must Know
I cannot believe this is still happening, but it is. The “this” to which I am referring is foreign companies signing dual language contracts without knowing exactly what the Chinese language portion of their contract says. This is dangerous for the reasons given below.
The Pitfalls of Dual Language China Contracts
Many dual language Chinese-English contracts are silent on which language controls and foreign companies too often just assume the English language portion controls or that it does not matter because the meaning of both the English and the Chinese portions is the same. Wrong.
If both the English language and the Chinese language portions of a contract say that the Chinese language portion controls, the Chinese language portion will control. Similarly, if both the Chinese language and the English language portions say the English language portion controls, the English language portion will control.
It is everything else that so often causes problems.
China Court Realities
If both the English language and the Chinese language portions of your contract are silent as to which portion controls, the Chinese language portion will control in China courts and arbitrations. This means if the English language portion of your joint venture contract says you get 10 percent of the joint venture’s revenue, but the Chinese portion says you get 10 percent of the profits (which will be less than the revenues) you will have no legal basis for claiming anything more than 10 percent of the profits.
And if you are wondering why I’m talking about Chinese courts here it’s because the structure, ownership, management, and legalities related to a Chinese joint venture will virtually always be decided by a Chinese court.
China Contract Realities
Of the hundreds of dual language contracts proposed by Chinese companies and reviewed by one of my law firm’s China attorneys, we’ve never seen a single one where the Chinese portion was less favorable to the Chinese company than the English portion. But we’ve seen plenty where the Chinese portion was better for the Chinese company than the English portion. Chinese companies love using a contract with an English portion that is more favorable to the foreign company than the Chinese portion, and then relying on the foreign company to just assume the English language portion will control.
But what if the English language portion explicitly states that it controls? The Chinese language of any contract takes precedence over any other language, unless the Chinese language portion of the contract specifically states that some other language controls. So if a contract is in both Chinese and English and the Chinese portion of the contract says the Chinese language controls and the English language version says English controls, the Chinese language version will control. Even if the Chinese language version is silent as to which version controls, the Chinese language version will actually control.
Chinese companies know this and so they quite often put in the English language portion of the contract that English (or both languages) control, but at the same time knowingly put in the Chinese language portion that the Chinese language portion controls. The really smart ones leave the Chinese language portion silent regarding the official contract language. Then from there they write good things for themselves in the Chinese portion.
If you are going to have your contract in multiple languages, make sure you know for certain which language is going to control. This means making sure you know exactly what all of the contract says, whatever the language. And make sure you know exactly what both languages say.
Why Giving Equal Weight to Both Languages is a Terrible Idea
Having two languages with equal weight is pretty much always the worst “solution” because all that does is increase the room for interpretation and delay if there is ever a dispute. If you end up litigating on a contract that says two languages control, you are going to be fighting over what each language says and over what the two languages mean in combo. In other words, it will be like you are litigating over three contracts and trust me when I tell you that this will greatly increase your costs.
China Contracting Advice
As we noted in China Contracts: Make Them Enforceable Or Don’t Bother, it usually makes sense to draft your contracts with Chinese companies in Chinese with an English language translation. But this also means that if the contract will be litigated in China (as should usually be the case), it will be far cheaper and more sensible for you to get the meaning of both languages clear before you sign a contract and than have to pay your lawyers to fight about it later.