I was recently asked the following questions regarding how to draft an enforcable China contract.
Is it true that contracts with Chinese companies must be in both English and in Chinese, with the Chinese company name necessarily in Chinese? I have been told that if we do not do this, the Chinese company can deny its English name to avoid participating in an arbitration. Is this true? How can we make a contract foolproof without making a Chinese contract? If we draft the contract in just English will it be enforcable?
1. Beware the bad dual language contract
Because international contracts usually are between parties from different countries, they commonly are written in two or more languages. Nearly all of the contracts we draft for our Western clients doing business in China are in English and Chinese (though maybe ten percent of the time, we do them in Chinese and German, Chinese and Spanish or Chinese and French). This duality of language can, if not handled properly, pose big problems.
When we draft a contract in both English and Chinese (or German and Chinese or Spanish and Chinese or French and Chinese), we always call for the contract to specify one official language to control if there is a dispute. We do not advise drafting a contract that is silent on the official language, nor do we advise drafting contracts that call for both English and Chinese to apply. Having two official languages pretty much doubles the chances for ambiguity and attorney time (and fees) that will be incurred in fighting over the meaning of the two contracts. It is expensive enough litigating on one contract; there is no benefit to litigating on two.
Indeed, truly dual language contracts arguably triple the time and costs of any dispute because they essentially are three contracts. One is the English version. Two is the Chinese version. And three is a combination of the two. Our firm has arbitrated and litigated cases with dual langauge contracts and in those cases we would pick and choose the language or combination of languages best for our client. Needless to say, the other side would do the same. Now just imagine the translation and legal issues involved with this, not to mention the costs.
So the question for us comes down to whether English or Chinese should be the official language of the contract and the answer to that question usually requires we first decide where we would most like to see any disputes resolved. If we go for arbitration in English (and if the Chinese manufacturer actually agrees to this, which is quite rare and getting rarer), then we almost certainly will want English as the official language. But if we decide the Chinese courts will be the best place to resolve conflicts, then we want Chinese to be the official language.
There is, though, no law or requirement that mandates all contracts with Chinese companies be in both English and Chinese. Indeed, it is possible — though almost certainly a really bad idea if the contract will ever be put to a legal test in China — for the contract to be in nothing but a foreign language other than English. See also Using English-Language Contracts in China.
2. On the importance of using the correct Chinese company name
But what about company names? The only official company name for China purposes is the Chinese company’s Chinese language name and this is true for WFOEs and Joint Ventures as well, as those are both Chinese companies. If you are going to form a China WFOE, you must come up with a Chinese name for your WFOE and that Chinese name will become your one and only official name.
But must you put the Chinese name on your contracts with Chinese company? No, this is not absolutely required, but it is certainly a best practice to do so. We have actually heard of a Chinese company claiming it was not them who signed a particular contract using the English language version of their name (when they did actually sign it) and it is common for scammers masquerading as a Chinese company to use only the English version of the company name. Our law firm has always used the Chinese language version of a Chinese company’s name, even on purely English language contracts because it creates clarity. We also typically put in the address and business license number of the company as well. We also always check the name against official Chinese government records.
3. On the importance of getting your China contract chopped/sealed
The bigger issue regarding contracts with Chinese companies is often whether the contract is sealed or not. See What’s the Deal With China Chops/Seals for PPE and Other Deals? on how Chinese companies are notorious for trying to get out of contracts they had not sealed/chopped.
For written contracts in China to be effective and enforceable in a Chinese court, one of the following must be true:
The company’s legal representative signed it. Chinese law provides that a company’s legal representative has apparent authority to bind the company. This means that even if that representative lacked actual authority to bind the company (maybe because the board of directors or the shareholders never gave the representative the authority to contract with you), the legal representative’s signature binds the company. There is, however an exception to this and that is when you know that the legal representative lacks the authority to bind the company.
The contract is appropriately sealed. An appropriate seal (oftentimes called a chop) is applied to the contract. It does not matter who applies the seal, so long as it is the right seal. This means it must be sealed either with a contract seal that sets forth the name of the company or, as is more common, with the company seal. Each Chinese company has only one company seal (no copies).
Because Chinese companies do sometimes try to get out of their contracts by claiming they never actually signed them or that they were signed without the proper authority, if your contract is important enough, you should consider doing all of the following to minimize the likelihood of your Chinese counter-party company trying to wiggle out of your contract:
- A signature from the company’s legal representative, after you have first confirmed from the company’s business license who exactly is the company’s legal representative.
- A resolution from the company’s board explicitly approving the contract and authorizing the legal representative to sign it.
- The affixation to the contract of the company seal or the company’s contract seal.
4. How to draft an enforceable China contract
If you want to greatly increase your chances of being able to enforce your contract with your Chinese counter-party company, you should do the below. You should do a lot more than this, both within and outside your contract, but I am limiting this post to just those things directly and nearly always necessary for enforcing a Chinese contract and its terms)
- Have a written contract.
- Have the written contract set out how disputes will be resolved and, more importantly, set forth the right forum for those disputes;
- Have Chinese be the official language of your contract if it is going to be enforced in China, which usually (but not always) makes sense;
- Have the written contract set out in excruciating detail what the Chinese company must do to comply with the contract;
- Set out the damages the Chinese company must pay if it fails to comply with the contract;
- Make sure the Chinese company signs and seals your contract.
Lastly — and I mention this because the number of these contracts just keeps skyrocketing — avoid using a scammer to draft your China contract. See China Contract Drafting Scams: From Bad to Much Worse.
There is no way to make make any contract foolproof because there will always be risks in any deal, but doing the above will greatly increase your odds.