DISPUTE RESOLUTION - CONTRACTS WITH CHINESE SUPPLIERS

Written contracts are entered into to add certainty to commercial agreements.  Naturally, it is important that a contract be enforceable otherwise all you have is another lawyer of uncertainty.  When it comes to contracts with Chinese companies, the enforceability of the contract may come down to one clause.

Contracts often have a clause setting out how disputes will be resolved.  The temptation of Australian companies will be to nominate an Australian Court for dispute resolution.  This makes sense.  The system will be predictable, apply Australian law and be convenient.

However, there is a catch.  A Chinese Court is unlikely to enforce a judgement of an Australian Court.  You may ask why a Chinese Court would need to enforce an Australian judgement.  This would occur where a Chinese company ignores an Australian judgement and the plaintiff wishes to have a Court enforce the judgement.  Enforcing a judgment realistically needs to be undertaken in the jurisdiction where the defendant has assets.

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There are solutions to this problem. The most common is to nominate that disputes will be resolved by binding arbitration.  While Chinese Courts will on most occasions not enforce a foreign court order, they will enforce arbitration awards, even where made outside of China.

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Another option is to specify that the disputes will be resolved by Chinese Courts.  Not all Australian companies will be comfortable submitting to Chinese Courts.  Proceedings will not be in English and outcomes may be less predictable.  However, there will be some disputes where Chinese Court proceeding are more cost effective than international arbitration.

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Another option is to consider a neutral jurisdiction that will be recognised by both Australian and Chinese courts.  Hong Kong is a good example.  This option will work best where the contract has some connection with Hong Kong.

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If you fail to properly consider jurisdiction issues, you will basically be relying on voluntary compliance by the Chinese company.  This may well occur, but it will make you wonder why you bothered with a written contract in the first place.

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Some other issues to consider when contracting with Chinese companies are:

• Always undertake appropriate dull diligence on the contracting Chinese company – at the very least you should review the business license

• Make sure that the Chinese company is correctly identified by listing its name and address in both English and Chinese characters

• Ensure the contract is signed by either the registered legal representative, or someone who clearly has authority to sign the contract  

• Have the contract sealed (stamped) by the Chinese company. The presumption is that an unsealed contract is unenforceable