Why Setting Jurisdiction in China Is Critical When Contracting with Chinese Companies

When entering contracts with Chinese companies, selecting the jurisdiction for dispute resolution is not merely a procedural detail—it is a pivotal decision that directly affects enforceability, efficiency, and legal strategy. Given that Chinese companies often have the majority of their assets within China, choosing Chinese jurisdiction offers a range of advantages that foreign courts cannot provide. This article delves into the reasons why setting jurisdiction in China is essential and provides practical insights for drafting contracts that maximize enforceability and legal security.

1. Enforceability: Judgments Are More Likely to Be Enforced in China

One of the most compelling reasons to choose Chinese jurisdiction is the enforceability of judgments. Chinese courts are far more likely to enforce judgments made within their jurisdiction than those issued by foreign courts.

Limited Recognition of Foreign Judgments

China’s legal framework has minimal reciprocity agreements with other countries, meaning that judgments from foreign courts are rarely recognized or enforced. Even when reciprocal treaties exist, enforcement is not guaranteed and often involves a lengthy, complex process.

For example, a favorable judgment obtained in a foreign court might be practically useless if the Chinese company’s assets are located in China. Without a mechanism for enforcing the judgment within the country, foreign companies may face significant challenges in recovering damages or compelling compliance.

Choosing Chinese Jurisdiction Enhances Enforceability

By specifying Chinese jurisdiction in the contract, foreign companies ensure that any judgment can be enforced directly against the Chinese company’s domestic assets. This eliminates the barriers posed by the lack of reciprocity and significantly increases the likelihood of achieving a tangible outcome in legal disputes.

2. Asset Access: Direct Enforcement Against Domestic Assets

If a Chinese company’s assets are primarily located within China, choosing Chinese jurisdiction is critical for effective enforcement. Foreign judgments, even if enforceable, often require additional proceedings to identify and seize assets.

Asset Preservation Mechanisms in China

Chinese courts provide powerful tools for securing assets during litigation, including:

• Asset Preservation Orders: Plaintiffs can apply to freeze the defendant’s assets to prevent their dissipation during litigation.
• Injunctions: These ensure that disputed assets remain available for potential enforcement.

These mechanisms are only accessible within the Chinese legal system. Without jurisdiction in China, foreign companies miss the opportunity to leverage these tools, leaving them vulnerable to asset manipulation or loss during legal proceedings.

3. Legal Familiarity: Leveraging Chinese Expertise

Chinese courts are best equipped to adjudicate disputes involving local companies. They operate within a legal system that is familiar to the Chinese company, using Chinese laws, procedures, and language.

Advantages of Local Expertise

1. Judicial Familiarity: Chinese judges understand local business practices, legal standards, and cultural nuances, leading to more predictable outcomes.
2. Avoiding Proving Foreign Law: Litigating in foreign courts often requires proving Chinese law, a process that is time-consuming, costly, and prone to misinterpretation. By choosing Chinese jurisdiction, foreign companies eliminate this complexity.
3. Language Precision: Chinese courts operate in Mandarin, ensuring that legal arguments and documents are reviewed in their original linguistic and cultural context, reducing the risk of misinterpretation.

These factors make Chinese courts uniquely positioned to handle disputes involving local parties, providing a legal environment that is both efficient and aligned with the realities of doing business in China.

4. Efficiency: Avoiding Costly Legal Delays

Litigating in China offers a streamlined process compared to pursuing disputes in foreign jurisdictions.

Avoiding the Need to Prove Foreign Law

When foreign judgments are presented in Chinese courts for recognition or enforcement, the process often requires proving the validity of foreign law. This involves complex translations, expert testimony, and significant delays. By setting jurisdiction in China, foreign companies bypass this step, saving both time and resources.

Faster Resolution

Chinese courts are familiar with handling domestic disputes, which allows for a faster resolution process compared to foreign jurisdictions that may need to navigate unfamiliar Chinese legal concepts or procedures.

5. Deterrence: Discouraging Breaches of Contract

Specifying Chinese jurisdiction in contracts serves as a deterrent against breaches by Chinese companies.

Fear of Local Legal Consequences

Chinese companies are more likely to comply with contract terms when they know disputes will be resolved in their own jurisdiction, where they cannot rely on the challenges foreign companies face in enforcing judgments. The prospect of facing legal action in Chinese courts with enforceable outcomes creates a powerful incentive for adherence to contract obligations.

6. Improved Litigation Strategy: Maximizing Success as the Plaintiff

In many contractual disputes, foreign companies are more likely to be the plaintiff, initiating legal action against Chinese companies for breaches.

Advantages of Being the Plaintiff in Chinese Courts

1. Control Over the Forum: Setting jurisdiction in China ensures that the plaintiff can bring the case to a court with authority over the defendant and their assets.
2. Access to Local Legal Remedies: Plaintiffs can leverage asset preservation orders and other mechanisms to secure their claims during litigation.

By having the dispute resolved in Chinese courts, foreign companies can take proactive steps to protect their interests and achieve favorable outcomes.

7. Language Barriers: Avoiding Translation Issues

Contracts drafted in foreign languages often face interpretation challenges in Chinese courts.

Risks of Translation Errors

When disputes arise, foreign-language contracts must be translated into Mandarin for use in Chinese courts. Poor translations or ambiguities can lead to significant misinterpretations, undermining the enforceability of key contract terms.

Advantages of Using Chinese Jurisdiction

By drafting contracts in both English and Mandarin and specifying jurisdiction in China, foreign companies can ensure that the Chinese version of the contract aligns with local legal standards, reducing the risk of misinterpretation.

8. Reciprocity Issues: Overcoming Limitations of Foreign Judgments

China’s lack of reciprocity agreements with many countries means that foreign judgments are rarely recognized or enforced.

Why This Matters

Even if a foreign court issues a favorable judgment, it may hold no legal weight in China. This leaves foreign companies without any practical means of enforcing their rights or recovering damages.

How Chinese Jurisdiction Solves This Problem

By setting jurisdiction in China, foreign companies avoid the hurdles of seeking recognition for foreign judgments and gain direct access to enforcement mechanisms within the country.

9. Best Practices for Drafting Contracts with Chinese Companies

To fully benefit from Chinese jurisdiction, contracts should be carefully drafted to include:

1. Exclusive Jurisdiction in China

Clearly state that all disputes will be resolved exclusively in Chinese courts. This ensures enforceability and access to local legal remedies.

2. Governing Law as Chinese Law

Specify that the contract is governed by Chinese law to avoid disputes over applicable laws and streamline the litigation process.

3. Bilingual Contracts

Include a legally verified Chinese version of the contract to prevent misinterpretation and ensure compliance with local legal standards.

4. Arbitration as a Supplement

For added flexibility, consider including an arbitration clause specifying a reputable institution such as the Shanghai International Arbitration Center (SHIAC). This provides an additional pathway for resolving disputes efficiently.

Conclusion

Setting jurisdiction in China is not just a legal technicality—it is a strategic necessity when contracting with Chinese companies. By choosing Chinese jurisdiction, foreign companies gain enforceability of judgments, access to domestic assets, and the ability to leverage local legal expertise and mechanisms. This approach also deters breaches, simplifies litigation, and ensures that disputes are resolved in a framework aligned with the realities of doing business in China.

By carefully drafting contracts that specify Chinese jurisdiction, governing law, and arbitration options, foreign companies can protect their interests, minimize risks, and maximize the enforceability of their agreements. When dealing with Chinese companies, there is no substitute for the practicality and security offered by the Chinese legal system.

FAQ: Setting Jurisdiction in China for Contracts with Chinese Companies

1. Why is setting jurisdiction in China important when dealing with Chinese companies?

Setting jurisdiction in China ensures that disputes are resolved within the Chinese legal system, where judgments are more likely to be enforceable against Chinese companies. This is particularly crucial if the Chinese company’s assets are primarily located in China, as foreign judgments are rarely recognized or enforced due to limited reciprocity agreements.

2. What are the benefits of specifying Chinese jurisdiction in contracts?

• Enforceability: Judgments issued by Chinese courts can be directly enforced against assets located in China.
• Asset Access: Chinese courts provide tools like asset preservation orders, allowing plaintiffs to freeze the defendant’s assets.
• Legal Familiarity: Chinese courts are experienced with local laws, customs, and practices, leading to more predictable outcomes.
• Efficiency: Litigating in China avoids the lengthy and costly process of proving foreign law in Chinese courts.
• Deterrence: Specifying Chinese jurisdiction deters breaches, as local consequences are more immediate and impactful for Chinese companies.

3. Why don’t Chinese courts enforce judgments from foreign courts?

Chinese courts generally do not enforce foreign court judgments due to a lack of reciprocity agreements with most countries. Even when such agreements exist, enforcement is not guaranteed and often involves a complex and time-consuming process.

4. How does setting jurisdiction in China improve asset access?

Chinese jurisdiction allows foreign companies to use local legal tools, such as asset preservation orders, to freeze a defendant’s assets before or during litigation. This ensures that resources remain available for enforcement if the plaintiff wins the case.

5. What are the risks of choosing foreign jurisdictions for dispute resolution?

If a contract specifies a foreign court for dispute resolution:

• The judgment may not be enforceable in China, especially if the Chinese company’s assets are domestic.
• Proving foreign law in Chinese courts (for judgment recognition) can be complex, expensive, and prone to delays.
• Enforcing foreign judgments often involves separate legal proceedings in China, reducing efficiency.

6. Should I include arbitration in contracts with Chinese companies?

Yes, arbitration can be an excellent alternative or supplement to litigation. Reputable institutions like the Shanghai International Arbitration Center (SHIAC) provide efficient, neutral, and internationally recognized dispute resolution. Arbitration awards are enforceable in China under the New York Convention, which covers over 170 member countries.

7. Why is governing the contract under Chinese law beneficial?

• Legal Compatibility: Ensures the contract aligns with Chinese legal standards, reducing potential conflicts over applicable laws.
• Predictable Outcomes: Chinese courts are more familiar with their domestic laws, leading to clearer and more consistent judgments.
• Streamlined Process: Avoids time-consuming disputes over which country’s laws apply.

8. What are the risks of language barriers in contracts?

Contracts drafted solely in foreign languages may face interpretation challenges in Chinese courts. Misinterpretations due to translation errors can undermine key terms and reduce enforceability. Including a legally verified Chinese version of the contract eliminates these risks and ensures compliance with local standards.

9. How does specifying Chinese jurisdiction deter breaches of contract?

Chinese companies are more likely to honor contract terms when they know disputes will be resolved in Chinese courts, where judgments are enforceable and legal consequences are immediate. This reduces the likelihood of breaches and fosters greater contractual compliance.

10. What should I include in a contract to maximize enforceability in China?

1. Exclusive Jurisdiction Clause: Specify that all disputes will be resolved in Chinese courts or through arbitration in China.
2. Governing Law Clause: State that the contract is governed by Chinese law to ensure compatibility with local legal standards.
3. Bilingual Contract: Include a legally verified Chinese version to avoid misinterpretation and ensure compliance.
4. Arbitration Clause: Consider specifying a reputable arbitration institution like SHIAC for efficient dispute resolution.

11. How do I engage local legal expertise for contracts in China?

Work with Chinese legal professionals who specialize in contract law and dispute resolution. They can help draft enforceable contracts, navigate the legal system, and ensure compliance with Chinese laws and regulations.

12. What happens if I don’t set jurisdiction in China?

Without Chinese jurisdiction, you risk:

• Non-Enforceable Judgments: Foreign judgments may hold no legal weight in China.
• Limited Asset Access: You cannot leverage local legal tools like asset preservation orders.
• Increased Costs and Delays: Pursuing recognition of foreign judgments in Chinese courts is expensive and time-consuming.

13. Is setting jurisdiction in China necessary for all contracts with Chinese companies?

While setting jurisdiction in China is recommended for most contracts, it is particularly crucial if:

• The Chinese company’s assets are located in China.
• The foreign company is likely to initiate legal action as the plaintiff.
• The contract involves significant financial or operational commitments.

14. Can I combine Chinese jurisdiction with arbitration?

Yes, combining Chinese jurisdiction for litigation and arbitration clauses offers flexibility. For example:

• Use arbitration (e.g., SHIAC) as the primary dispute resolution mechanism for neutrality and enforceability.
• Specify Chinese courts for issues not covered by arbitration or for interim measures like asset preservation orders.

15. What are the key takeaways for foreign companies?

• Set Jurisdiction in China: Ensures enforceability of judgments and access to local legal remedies.
• Draft Clear Contracts: Include jurisdiction and governing law clauses tailored to the Chinese legal system.
• Engage Legal Experts: Work with professionals familiar with Chinese law and business practices.

By following these guidelines, foreign companies can significantly enhance their chances of successful contract enforcement and dispute resolution when dealing with Chinese counterparts.

Contact us if you need help with drafting of contracts that follows Chinese laws and are enforceable in China, background investigation of Chinese companies, protecting patents, trademarks, verification of contracts to the law in China, or help with other legal challenges that you have in China.

If you require our assistance or have further questions about our services, please do not hesitate to contact our Customer Relationship Managers Jan Erik Christensen, at janerik@ncbhub.com .