Quick Question Tuesday, Part 3. Are Contracts Really Enforceable In China?

Are Contracts Really Enforceable in China?

As lawyers, we spend a lot of time fielding good, bad, weird, interesting, deep, superficial, and all types of other questions from people. We're generally expected to be oracle-level wizards, a lot like people are treating AI now. In this series, we'll share some of these questions that people ask us, along with our answers. For longtime China Law Blog readers, this "Quick Question" reboot will feel familiar.

Trading Purchase Orders for a Real China Contract

Question. We have been buying from various Chinese manufacturers for many years. We have been using two page purchase orders. They are basically the general product information on the front side and about 15 short sentences on the back side that encapsulate the ways we have been burned in the past. So we are really making our own contract on the back side slowly over time. I think we are finally at the point where we need a real China contract, but will that really be enforceable in China?

Short Answer. Lawyers have a really hard time giving absolute answers, but this one is almost uniformly yes. The "it depends" answer follows below.

Contracts are Enforceable in China

The Contract Law of the People's Republic of China served faithfully for about 20 years. But starting January 1, 2021, the Civil Code took center stage and continues to uphold and evolve the principles that underpin contract law in China.

Contract Enforcement Fundamentals

Here's a breakdown of what you need to know about contract enforcement in China:

1. Legal Framework.

   The Civil Code now provides the comprehensive contract framework, outlining everything from their formation and performance to modification and termination. Its broad approach ensures that the rights and responsibilities of all parties are clearly defined and protected.

2. Contract Formation.

   To be enforceable, contracts in China must meet several criteria, which will feel familiar even to Western readers: mutual consent, a lawful purpose, and a clear agreement on key terms. While oral contracts are valid, written agreements are strongly preferred for their clarity and ease of enforcement. And in today's technology-enabled world, it is almost impossible to have a purely verbal agreement with no supporting text, WhatsApp, or WeChat messages, emails, or memos.

3. Dispute Resolution.

   When disputes arise, the options include negotiation, mediation, arbitration, and litigation. Arbitration is particularly favored for its efficiency and the high regard Chinese courts have for arbitral awards.

4. Enforcement.

   Enforcing a contract in China involves navigating the Civil Code and relevant regulations. The process can be intricate, often requiring the filing of a claim, securing a judgment, and then executing that judgment.

5. International Contracts.

   For cross-border agreements, it's crucial to consider both Chinese regulations and international conventions. China's adherence to treaties like the United Nations New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards plays a significant role in international contract enforcement.

6. Potential Enforcement Issues.

   China has several sectors where foreign involvement or investment is either prohibited or restricted. These restrictions are outlined in the Negative List and other regulatory frameworks. Here are some key sectors where you may run into trouble getting your contract enforced in China, depending on who you are doing business with:
   • Media and Publishing
   • Telecommunications
   • Financial Services
   • Education
   • Potential Military Application (Dual Use Items)
   • Public Utilities and Infrastructure
   • Agriculture and Rural Areas
   • Healthcare

Conclusion

In summary, contracts really are enforceable in China, thanks to the comprehensive framework provided by the Civil Code. This legal structure ensures that contracts are taken seriously by parties and fact finders (judges and arbitrators). This provides a clear pathway for dispute resolution and enforcement.

But, it is crucial to recognize that while enforcement is generally reliable, there are specific sectors where foreign involvement is heavily scrutinized, which can and does complicate enforcement. For those engaging in business with Chinese counterparts, having a well-drafted, written contract is essential. It not only facilitates clarity and protection but also aligns with China's legal expectations. As always, navigating these complexities may benefit from China legal expertise to ensure that all aspects of the contract are enforceable and that any sector-specific regulations are addressed.

For more reading, see:

China Contracts: Make Them Enforceable or Don't Bother

Three Rules for China Contracts

Choosing the Jurisdiction for Your China Contract Disputes

A Guide to Dispute Resolution Clauses in International Contracts

Quick Question Tuesday, Part 3. Are Contracts Really Enforceable In China?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.