The One Clause that Makes Contracts with Chinese Suppliers Unenforceable


The One Clause that Makes Contracts with Chinese Suppliers Unenforceable

If business dealings were predictable and everything went perfectly, we wouldn’t need contracts. Often a contract is signed and buried in a drawer, only to be seen again if the parties are in dispute. When that time comes, your contract is worthless if it is not enforceable.

Too often we are seeing that one clause results in contracts that effectively cannot be enforced against Chinese companies. The clause in question is the choice of forum for resolving disputes.

Once negotiation fails, your only way to enforce a contract is to obtain an enforceable judgment in your favour. If a judgment is ignored by the other party, you need to utilise court processes to enforce the order. We are seeing that many contracts with Chinese suppliers are drafted in a manner whereby a Chinese Court will not enforce them.

Parties to a contract can nominate how disputes will be resolved. This may be by arbitration or by a nominated court.  If a court is nominated, it is common for a party to nominate the court of their home country as having exclusive jurisdiction to hear disputes. This is understandable given that party is familiar with their own legal system and it will be more convenient for them to litigate in the country in which they are based.

The problem is that Chinese courts will not enforce court judgments of most other countries. There is little point having an Australian court judgment against a Chinese company if it cannot be enforced where the Chinese company is based. If all the assets of the Chinese company are based in China, you will need a Chinese court to recognise the Australian court judgment before you can get your hands on some money. The result can be that you have a judgment in your favour, but it is worthless. The flip side is, if the Chinese supplier wants to sue you, it will be able to do so in your home jurisdiction where all your assets are located.

Three solutions should be considered: 

  1. Require that all disputes be resolved via binding arbitration – Chinese courts will enforce most arbitral awards (include awards made by arbitrators based outside of China). 
  2. Specify that disputes must be submitted to Chinese courts. Whether you adopt this approach will depend on how you view your chances as a foreign company in the Chinese legal system – there will definitely be disputes that are better resolved in Chinese court rather than by arbitration.  
  3. Nominate a jurisdiction that both Chinese courts and Australian courts will recognise –  the most likely option will be Hong Kong but be careful to ensure Hong Kong jurisdiction is properly enlivened and you obtain a judgment that will be enforceable in China.

It is too easy to ignore this issue in the belief that you will never have to sue the other party. If that is the case, why bother with a contract at all? It is hard to move away from litigating in your home country, but failing to do so will make your contract very hard to enforce against your Chinese supplier.

Additional tips for contracting with Chinese companies:  

  • Ensure the Chinese company is identified by its registered Chinese name (in Chinese and English). 
  • Ensure the registered Chinese address of the Chinese company (in Chinese and English) is recorded on the contract. 
  • Ensure the contract is signed by either the registered legal representative, or someone who clearly has authority to sign the contract.  
  • Have the contract sealed by the Chinese company. The presumption is that an unsealed contract is unenforceable.