Contract law interpretation to help foreign companies

Within mainland China, the choice of jurisdiction can be vital – the quality of the courts can vary significantly from province to province. And as in any other country, businesses in China will not want their opposite number to have a home advantage if a dispute should arise. Until now, to make sure that jurisdiction is created in a neutral place, lawyers would advise their clients to travel to that place to sign the contracts.

“Under the new law, there is not such a strong need to physically go to that city,” said Xiang Wang, Beijing managing partner of Orrick Herrington & Sutcliffe. “The Court intended to have parties use the freedom to create jurisdiction as to where they want to litigate.”

The Court's new interpretation will lead to widespread forum shopping, which is already a common practice in the US, he said.

“In the current economic situation, the Supreme People's Court has made doing business in China easier. Companies should take advantage of that system.”

There are other aspects of the interpretation which may help foreign companies, not least that it does not treat them any differently from domestic parties. Article 8 provides that if a contract needs approval or registration to be effective and one party fails to carry out the required approval or registration procedures, that party will be held liable for the failure.
The other party can then carry out the procedure on its own, and the breaching party will have to bear any costs and expenses.

Some joint-venture contracts between foreign and Chinese parties require PRC government approval before they become effective. As long as it is made clear that the Chinese party will be responsible for approval matters, Article 8 will provide more protection to a foreign party, said Alan Wang, although he also cautioned that the foreign investment approval process may cause difficulties here.

“It is doubtful in such circumstances whether the foreign party would in fact be in a position to directly submit the joint-venture contract to the relevant authorities for approval,” he said.

The latest interpretation has been long anticipated by lawyers in China – it is only the second that the Supreme People's Court has issued since the Contract Law was promulgated in March 1999. Lawyers say the interpretation fills in many details which were previously missing, and should help deal with the kinds of contractual issues which many companies are facing under the present tough economic conditions.

Many commercial contract disputes have turned on whether a particular practice could be characterised as a “trade usage or practice”, a term which is mentioned in Article 61 of the underlying Contract Law as a principle which can be used to supplement an effective contract.

Article 7 of the Interpretation for the first time defines this term, and clarifies that the party raising the issue has the burden of proof.

“These additional legal rules are consistent with rules in other major legal systems, and give greater guidance to the courts,” said Susan Finder of Winston & Strawn in Hong Kong.

Some items in the Interpretation have clearly been included to redress the balance between companies and less affluent members of the population.
Article 5, for example, makes it clear that a thumb- or handprint is a valid way of sealing a contract – as valid as a chop or signature. PT