Investing in China: Look before you leap

A large percentage of the world’s goods are manufactured and imported from China. Behind each of these items, there are one or more contracts with Chinese parties or involving China – from simple sale and purchase contracts to complex contracts creating multi-billion dollar Sino-foreign equity joint ventures.

Notwithstanding the rise of China as an economic power, however, little is known about Chinese law and, in particular, about Chinese contract law. This article hopes to give the reader an introduction to some of the key features (and differences) of Chinese contract law.

The People’s Republic of China is a civil law country, which means that statutes, regulations and interpretations of statutes form the body of Chinese laws. Unlike England, Chinese court judgments (no matter whether it is the Supreme Court or the lower courts) do not form part of the law and are not binding on subsequent courts.

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One has to be mindful of the differences that are unique to China. Two major differences are:

First, not all China-related contracts automatically take effect upon fulfilling the contract formation rules in the common law world (that is, having ticked the boxes of having an intention to create legal relation, offer-acceptance and consideration). Certain types of contracts require government approval to gain validity.

Two important categories of such contracts are the joint-venture contract and the equity transfer contract for a foreign investment enterprise. These types of contracts are heavily regulated by the Chinese government because it enables the government to exercise a degree of control over foreign investment. When I advise foreign clients entering into such contracts, I always ask them to think of the PRC government as the invisible third party to the contract.

Secondly, in line with other civil law countries, Chinese contract law contains both general principles that apply to all contracts (in PRC Contract Law Articles 1 to 129) as well as specific rules established for specific types of contracts (in PRC Contract Law Articles 130 to 428).

The list of specific contracts range from contracts for supply and use of electricity, to loan agreements, to warehousing agreements and agency agreements. This categorisation of different types of contracts is very different from the common law tradition and it can be a pitfall if one only considers the general contractual principles but fails to take into account specific principles that may be relevant. For example, while general contractual principles may allow parties to agree the term of a contract, a specific provision on leases mandates that any lease agreement which exceeds 20 years is invalid (PRC Contract Law Article 214).

The code does not specify any language requirement for China-related contracts, but for contracts which require government approval, a Chinese translation must be provided for approval or filing purposes. Where two languages are drafted, it is advisable to specify the language that takes precedence in such circumstances.

In terms of execution of contracts, like many other jurisdictions, Chinese contract law does not specify a particular form of execution that is valid. However, the practice in China is still very much that parties will be expected to execute a contract by affixing the company seal (or company chop). The person with the strongest authority to enter into contracts on behalf of a Chinese company is the legal representative of that company (a company officer that is unique to Chinese companies). Ideally, therefore, you would have a contract that is executed with both the company seal and the legal representative’s signature.