Your China Manufacturing Agreement Should Be in Chinese
This post explains why having your China manufacturing contract should always be in Chinese.
The Importance of Language in China Manufacturing Contracts
International contracts involve parties from different countries and are typically written in two languages. Most of the contracts we draft for our clients doing business in China are in English and Chinese, though we are increasingly drafting them in Spanish and Chinese. Every few years, we do a contract in three languages.
But all the contracts we draft—manufacturing contracts or otherwise—have only one official language. The official language is the language that the parties to the contract, and the court or arbitral body are instructed to look at should any dispute arise. To repeat, we never draft a contract in which “both languages” are the official language of the contract because that is virtually always a very bad idea.
Why Designating One Official Language is So Important
When we draft a contract in both English and Chinese, we specify ONE official language to control in case of a dispute. We do not advise drafting contracts that are silent on the official language, nor do we recommend contracts that call for both English and Chinese to apply.
Having two official languages doubles (at least) the chances for ambiguity and it increases legal costs. A contract with two official languages is really a contract with three official languages. An English and Chinese language contract that describes both English and Chinese as official languages must also include the third interpretation that can be made by looking at and combining the two languages.
Having a truly dual-language contract will greatly increase your costs if there is ever a dispute. Having two official languages pretty much doubles the chances for ambiguity and pretty much doubles the attorney time (and fees) that will be incurred in fighting over the meaning of the two contracts. It will also require that your attorneys in that dispute and the arbitrators/judges as well, will need to be fluent in both languages. Oftentimes, this means that even on the smallest cases, you will need two attorneys—one for each language.
If you are going to be in a Chinese court, you want your contract to be in Chinese. The reason for this is simple: if your contract is in English, the Chinese courts will use their own translator to translate it. Translations can be easily manipulated (even bought off), and it is virtually always better to have your contract translated by your own law firm in advance. This ensures you know exactly what your contract says before you sign it, rather than relying on an unknown translator only after you have sued on it.
Preventing Misunderstandings
But even if you never have a dispute regarding your contract, it always makes sense to have a dual-language contract with one official language, and it is always important that both versions of the contract are well crafted and say the same thing.
A well-crafted dual language contract greatly increases the odds that both parties to the contract understand what it says, and have willingly agreed to what it says because they believe that they can fulfill its terms. My law firm’s China manufacturing lawyers are convinced that most problems between foreign companies and their Chinese manufacturers stem from a lack of clarity regarding the manufacturing terms. Providing your Chinese manufacturer with a carefully crafted Chinese language agreement goes a long way toward preventing future problems.
How Jurisdiction and Venue Influence the Official Contract Language
The question we have when drafting a China manufacturering contract is whether English or Chinese should be the official language of the contract, and the answer to that question requires we first decide the best place for our client to have its disputes resolved. If we choose to have all disputes arbitrated in New York or in London, we invariably will want English to be the contract’s official language. But if we decide that a Beijing court is the best place for our client to resolve any conflicts it might have with its Chinese counterparty, we will want Chinese to be the official language of the contract.
China Courts Are Usually the Best Place for Manufacturing Disputes
1. The Chinese Manufacturer Provides Bad Product
The best way to deal with disputes involving a Chinese company providing bad product is usually to seek to work it out with the Chinese manufacturer. If that proves impossible AND there is enough at stake to warrant suing, litigation or arbitration in China will likely be the best course of action. Litigation outside China against a China-based manufacturer usually does not make sense because most Chinese companies do not have assets outside China and getting foreign judgments enforced in China is both difficult and expensive.
You have a great product and you have taken it to China for manufacturing there. You are currently selling in just a few countries, but your plans call for you to eventually sell into China, India, and maybe even Africa someday. All of a sudden, you learn that your Chinese manufacturer is not making just the 100,000 units you ordered but is instead making 500,000 units and shipping the extra 400,000 to India, Africa, and the rest of Asia, where it is selling them for half what you charge.
If your agreement calls for arbitration in Hong Kong or New York, or even Beijing . . . good luck. What you need, and what you need fast in these situations, is a court order requiring the Chinese manufacturer to stop making your product, and the fastest way to get this is through a Chinese court.
Pretty much the only way you are going to get that badly needed court order at all quickly is from a Chinese court. If you did everything right with your contract, it would l have liquidated damages provisions that will also allow you to secure a judgment relatively quickly from a Chinese court for damages and will — in the meantime — give the Chinese court a strong basis for freezing the assets of the Chinese manufacturer before you secure your judgment. See China Contract Damages Done Right. The threat of this seizure is often enough to convince the Chinese manufacturer to cease and desist from manufacturing and selling your product, without need for the court order.
If your manufacturing contract calls for arbitration and you sue in a Chinese court to get an injunction to stop your manufacturer from improperly manufacturing and selling your product, you likely will not succeed. The Chinese manufacturer will show the court your arbitration clause and request it decline the case in favor of resolving the dispute in arbitration. Once you are in arbitration, you pretty much will not be able to get an injunction or an asset freeze.
It is possible to write your manufacturing contract to call for arbitration with a Chinese court “carve out” for injunctive relief or an asset freeze, but many Chinese courts do not to enforce these sorts of provisions.
2. The Chinese Manufacturer Continues to Manufacture Your Product in Violation of the Manufacturing Agreement
If your agreement calls for arbitration in Hong Kong or New York, or even Beijing, it will be challenging to get a court order to stop the Chinese manufacturer from making your product. The fastest way to get this is through a Chinese court. If your manufacturing contract calls for arbitration and you sue in a Chinese court to get an injunction, you likely will not succeed. The Chinese manufacturer will show the court your arbitration clause and request it decline the case in favor of resolving the dispute in arbitration.
3. The Chinese Manufacturer Steals Your IP
Intellectual property theft is a serious concern for most companies that source their products from China. The key to protecting your IP is to have a contract in Chinese that clearly delineates the ownership and use of your intellectual property. Without this, you may find that your manufacturer is producing knock-offs or using your designs without authorization. If your manufacturer starts using your intellectual property, monetary damages will often not suffice to make you whole. Immediate action is often needed to stop the infringement.
Having a well-drafted contract in Chinese allows you to go directly to a Chinese court to seek an injunction to halt the unauthorized use of your IP or to seek contract damages that the Chinese manufacturer will not want to pay. In many cases, the threat of legal action and the potential for asset seizures are enough to compel the Chinese manufacturer to comply with your demands. Most importantly, having these things in your China manufacturing agreement increases the odds of you never having any problem with your Chinese manufacturer.
4. The Chinese Manufacturer Refuses to Return Your Molds
This often happens when the foreign company terminates its relationship with its Chinese supplier. The key here is to have a contract in Chinese that makes clear that the mold belongs to you and that there will be legal consequences if the Chinese manufacturer fails to return them. Damages are not enough; you need the molds immediately because without them you cannot manufacture your products.
This often happens when the foreign company terminates its relationship with its Chinese supplier. Not surprisingly, the key here is to have a contract in Chinese that makes clear that the mold belongs to you and that there will be hell to pay (in legal terms) if the Chinese manufacturer fails to quickly return those to you.
But if your manufacturer does not return your molds, damages are usually not what is needed; you need the molds immediately because without them you cannot manufacture your products. Again, the best positioned foreign company is the one with a contract in Chinese who can go to a Chinese court for an injunction mandating its manufacturer return the molds, or at least a large enough asset freeze to convince the Chinese manufacturer to back down. See Protecting Your Molds and Tooling When Manufacturing Overseas.
In addition to guiding clients on language choice, another area where my law firm differs is in our pricing model for China manufacturing contracts.
Conclusion
Choosing between English and Chinese for a contract’s governing language goes beyond linguistics—it’s a matter of strategy. To maximize clarity and ensure enforceability, your China manufacturing contracts should be tailored to the nuances of the Chinese legal system. Its chosen language, jurisdiction, and dispute resolution mechanism will influence the outcomes of any potential conflicts. A China-centered contract that ensures clarity and compliance is the best approach.
