The Chinese Portion of Your Contract is What Matters
One of the most common trix employed by Chinese companies against American and European companies is fooling the
American/European company into believing that the English version of their contract actually matters.
My law firm’s China lawyers often see this from companies that come to us for the first time with a contractual problem.
An American company recently approached us with what they thought was a straightforward distribution contract they had with a Chinese partner. The American company wanted our views on suing their Chinese distributer for having violated the contracts exclusivity provision that prohibited the distributer from selling competitors’ products.
My law firm’s lawyers reviewed the contract and informed the client that it had no case because the Chinese portion of the contract made clear that the Chinese company could freely sell products from other companies. The American company then told us that the Chinese company had assured them that the English language portion of the contract was all that mattered, and the English language version explicitly prohibited such sales.
We had to tell them that the English language portion of the contract was silent on what would be the controlling language of the agreement, but the Chinese language portion of the contract was quite clear on this, and it said that the Chinese language of the contract would control. And because the Chinese language portion explicitly allowed for the Chinese distributer to sell competitors’ products, the American company had no case.
This sort of dual language legerdemain is incredibly common for China.
This is a prime example of the challenges posed by dual-language contracts in China, particularly when the English version paints a seemingly favorable picture, but the Chinese language counterpart tells a different story. There are even plenty of “how-to” business books in China, written in Mandarin, advising such tactics. One such book explicitly suggests gaining the foreign company’s trust, feigning offense if the foreign company mentions getting its own lawyer to review the contract, and delaying introducing the Chinese language portion of the contract until the very last minute. This book even goes on to say that when the foreign company asks why a Chinese language portion is even necessary, the Chinese company should lie and say that it is merely to make it easy for its own employees to read the contract.
This tactic relies on the assumption that the foreign company will prioritize the English version and fail to scrutinize the Chinese portion, which is exactly what our China lawyers to often see happen. This way, the book says, the Chinese language provisions will prevail in a Chinese court, rendering the English language portion of the contract “meaningless.”
The book has it right and it is your job to avoid getting taken.
The Pitfalls of Dual Language Contracts
Dual language contracts can be a recipe for disaster. If you have a contract in both English and Chinese, which language controls? If both the English and Chinese versions state that the Chinese language version controls, then the Chinese version will indeed control. Similarly, if both versions say the English language version controls, then the English version will control. These are the straightforward scenarios.
The Risks When the Controlling Language is Unclear
It’s the ambiguity that often trips up foreign companies. If you have an English language contract and a Chinese language contract that are both silent on which version controls, or if the English language version states it controls but the Chinese language version says the Chinese version controls, the Chinese language version will control in a Chinese court and in a Chinese arbitration. This means that if your English language contract says a product must be strong enough to withstand 500 pounds of pressure and your Chinese language contract says the product need only withstand 300 pounds of pressure, the Chinese version will take precedence and the product need only be strong enough to withstand 300 pounds of pressure.
Chinese companies know the value of tricking their foreign counterparty on the contract language and so they seek contracts with an English version that is more favorable to the foreign company than the Chinese version, and then they rely on the assumption that the English-speaking company believes the English language version controls.
The saddest consequence we see from this trick is when a foreign company invests significant time and resources into a seemingly beneficial agreement with its Chinese counterparty, only to discover that the Chinese language version contradicts their key expectations.
Conflicting Language Problems
But what if the English language version explicitly states it will control? You should be okay with that, right? Not necessarily. If the Chinese language version also explicitly states it will control, the Chinese language version will prevail. If the Chinese language version is silent, then the English language contract controls.
The Usual Solution
Our China lawyers typically draft our clients’ contracts with Chinese as the official language, and with a high-quality English language translation. That way, at least our clients know exactly what they are signing in both languages. This makes sense most of the time, but there can be situations where English might be the designated controlling language, particularly if it aligns with industry standards, or if it makes sense to have disputes resolved outside China or at an English language arbitration. See Choosing the Jurisdiction for Your China Contract Disputes.
The Bottom Line
No matter what the English language portion of your contract says, it’s essential that you understand the Chinese language portion as well. And whatever you do, do not trust your Chinese counterparty or its lawyer to explain the Chinese version to you. Use a trusted and experienced China-knowledgeable lawyer to ensure that you are getting an accurate and unbiased interpretation of your contract.
By understanding the potential pitfalls of dual-language contracts and taking the necessary precautions, you can protect your business interests and avoid costly misunderstandings when entering into agreements in China.
