China Contract Jurisdiction and Being Too Clever By Half

China employment law

Our China lawyers see a lot of contracts with China companies written by lawyers outside our law firm. We mostly see these contracts when someone writes us to see if they have a viable lawsuit against their Chinese counter-party. Unfortunately, it is the rare instance where their contract has set up the foreign company (usually an American or European company) for a good lawsuit. Truth be told, very few law firms know how to write good contracts for China and pretty much no non-lawyers do.

Typically, the most obvious and easily spotted flaw is in the jurisdiction clause we seen some doozies on that front. Over the years, our China attorneys have dealt with the following, the facts of which have been modified so as to negate any possibility of anyone recognizing the specific matter:

1. Tokyo Jurisdiction. A French company comes to us after learning its Chinese manufacturer has started producing for itself and selling (very successfully) the company’s newest version of its core product. I read the contract to state that any future iterations of the core product would belong to the Chinese company and I mentioned this to the potential client. The potential client then told me that when it had complained to its Chinese manufacturer about IP theft, the Chinese manufacturer cited to the same provision and said the product now belonged to them. Ugh.

To make matters worse, the contract called for all disputes to be resolved in “Tokyo Superior Court.” I asked the potential client how the heck it was decided Tokyo Superior Court would be the venue for any disputes and the potential client explained it as follows:

The Chinese company asked for disputes to be resolved by arbitration in Beijing and my lawyer said that we wouldn’t stand a chance there and so we refused. The Chinese company then proposed Singapore or Hong Kong arbitration and my lawyer countered with Tokyo Superior Court because it was the opposite [both with respect to the type of forum — arbitration versus court — and the location] as what the other side wanted.

Ugh. I then explained how there is absolutely no way a Tokyo court will hear a case involving a French and Chinese company and a product made in China. I did not even bother to mention that there is no such thing as the Tokyo Superior Court or that even if the French company sued the Chinese company in Tokyo, got its case heard in Tokyo (which will never ever happen) and then won in Tokyo, no court in China would ever enforce the judgment. Ugh. The French company might be able to convince a Chinese court to take the case, but I doubt it, simply because China very much tends to enforce contracts no matter how silly they may be and I would guess most Chinese courts would toss the case for not having been filed in Tokyo as per the contract. So in other words, this bad provision made it impossible for the French company to sue the Chinese company anywhere in the world.

2. Toronto Jurisdiction. This is one of my favorites. I got an angry email from someone that essentially said as follows:

I read your blog regularly and carefully and you were wrong about Canada and that makes me wonder what else you have been wrong about. I read one of your posts where you talked about how you like to propose Canada for disputes because Chinese companies often will agree to that. Well the Chinese company we work with did agree to that but when it came time for us to actually sue them there, all of the Canadian lawyers told us that we couldn’t.

Future communications revealed that this company had — based on my having extolled the virtues of proposing Canada for arbitrations — believed it could list the Toronto courts as the jurisdiction for disputes between its US-based company and its Chinese counterpart. Just as would have been true in the Tokyo instance above, there is no way a Toronto court will hear a dispute between two foreign companies on a matter that has no relevance to Canada. Fortunately, the Canadian lawyers to whom this company went realized that and chose not to waste the US company’s time and money pursuing litigation there. I had to point out that we constantly emphasize that dispute resolution provisions are fact and situation specific and there is a big difference between what can be done in arbitration and what can be done in a foreign country’s courts. I didn’t — but I should have — point out the disclaimer here on our website:

The China Law Blog is for educational purposes and to give a general information and a general understanding of Chinese law. It is not intended to provide specific legal advice. By using this blog you understand there is no attorney client relationship between you and our law firm. You should not use the China Law Blog as a substitute for competent legal advice from a licensed attorney.

Ugh.

3. Split Jurisdiction.  We get this one fairly often. The contract provides that the Chinese company must sue the United States company in a U.S. court and the U.S. company must sue the Chinese company in a Chinese court. The thinking behind this is logical but its execution is so flawed that we avoid these provisions like the plague.

These provisions initially seem to make sense because this sort of split jurisdiction appears to greatly favor the U.S. company. If the Chinese company seeks monetary damages from the American company, it must go through the trouble of suing the American company in a U.S. court where the U.S. company will get a fair trial. And on the flip side, the American company can sue the Chinese company in a Chinese court, which is (90+ percent of the time, anyway) exactly where the U.S. company should want to be. For why this is the case, check out China Enforces United States Judgment: This Changes Pretty Much Nothing.

But there is a giant flaw to the above analysis. Chinese courts are known to use these sort of split jurisdiction provisions to deny jurisdiction in China. This is not black letter law. This is just what actually happens on the ground in China so if you really want jurisdiction in China, your agreement should  be 1) be governed by Chinese law, 2) be written in Chinese and 3) provide for exclusive jurisdiction in China.

But once again there is no clear answer as to what might be best for any given company’s specific situation. To properly evaluate whether you go with Chinese law in a Chinese Court (which is what we almost always end up choosing to do), you need to consider your most important concerns. Is it more important you have an effective remedy against the Chinese company with which you are contracting or is it more important you make it as difficult as possible for the Chinese side to sue you? If your primary goal is to be able to enforce your contract against a Chinese company, you probably should provide for exclusive jurisdiction in China and Chinese law should apply and the contract should be in Chinese. But if your primary goal is to prevent the Chinese side from suing, you should provide for exclusive jurisdiction in the United States. But if you do this, you must realize that because China does not enforce U.S. judgments, the U.S. agreement will  be useless as a means of enforcement against the Chinese party. It is these preferences that should help decide the best jurisdiction provision for your contract. In any event, the split jurisdiction approach generally does not work.

4. Geneva Chamber of Commerce Arbitration. A very good existing client of ours came to us with a contract calling for arbitration before the “Arbitration Institute of the Geneva Chamber of Commerce.” Problem was the Geneva Chamber of Commerce does not have an Arbitration Institute nor does the Chamber handle international arbitration. In this case, our client had taken a contract my law firm had written for them and made a few changes and simply re-used it on another deal. The contract my firm had written had called for disputes to be resolved before the Arbitration Institute of the Stockholm Chamber of Commerce, which is a very common forum for resolving disputes between Russian and American companies. So when my client went off and did an agreement with a Spanish company and the Spanish company refused to have the disputes handled in Stockholm, my client just switched “Geneva” for “Stockholm” and called it a day. Back then, the Geneva Chamber of Commerce did no arbitration. Zero. So when it came time for my client to pursue arbitration my firm’s arbitration lawyers had to conduct massive research to determine how even to commence arbitration before an arbitral body that did not exist. We ended up deciding to file with the Swiss Arbitration Association in Geneva, figuring we could argue that is what the parties intended and that arbitral body would want to keep the case. The opposing side vigorously contested our choice of forum and only many briefs and many dollars later did we prevail.

5. South Carolina Arbitration in Chinese Under British Law. Yes you read it right and if you are not stunned by this, you should read it again. This is my all time favorite. U.S. company comes to us with an arbitration clause mandating arbitration in South Carolina, in Chinese, under British law. When I talked about how much it would cost to get three Mandarin-speaking arbitrators to South Carolina (assuming the other side doesn’t argue for some other Chinese language) and the need to use two lawyers (one who is experienced with arbitration and another who is fluent in Chinese) and the added costs of researching and arguing British law, the U.S. company — wisely — chose not to pursue the case. When I asked the company how they came up with such a provision they explained they had taken it from one of their previous agreements. I didn’t say a word, but what I will say now is that a provision like this is a great way to discourage arbitration and sometimes that  can make sense, but such a provision is a disaster if you are the one that needs to sue.

Bottom Line: Jurisdiction clauses in international contracts are complicated and important and there is no one size fits all.

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