China Contract – Jurisdiction, Arbitration and applicable law

A crucial clause in international contracts is the one which deals with litigation.

My advice, since we have seen that negotiation can be pretty long, complicated, and, exhausting, is that such clauses should not be the last to be dealt with, often times late at night when parties are exhausted, but the among the first.

Generally parties argue at length on such clauses, because neither party is willing to give up on its national jurisdiction for different reasons, foremost of all the fear that foreign judges would not be impartial and treat with favor the local part.

This deadlock often leads to bad compromises, like choosing the judge of a third state or combining the jurisdiction of one state with the application of the law of the other, which is definitely not recommended.

There is no one-fits-all solution to offer here: the advice is that such clauses should be tailor made on a case by case basis, and that the choice of a state court or arbitration should be expressed taking into account where the final decision shall be enforced.

If we foresee that our client may seek payment of a price or claim damages for breach of contract, ‘where is the money’ or ‘where are the assets’ should be the driving factor, and the choice of jurisdiction should be made accordingly.

If there is no such concern, and litigation may be foreseen only or mostly in a defensive scenario, then the proximity to the money or assets is no more a priority, and other options can be evaluated: in that case, the choice of a Judge in a far away country can be the best option, as it is a strong deterrent for litigation.

When battling for a clause with domestic jurisdiction, however, one should keep in mind that the process of recognition of a foreign decision is generally a rather complicated and lengthy process, even if (as is the case of Italy and China), there is a bilateral treaty for mutual recognition of judicial decisions (but very few cases have been recognized and enforced in China thereafter); it should also be kept in mind that all documents filed with the application for recognition of the foreign decision need to be translated into mandarin, notarized and legalized, which in complex litigations can represent an unforeseen additional high cost.

In other cases, like in the USA, where there is no bilateral treaty in this field, to litigate abroad often means that the foreign decision will be almost useless, with the necessity to sue again in China to seek enforcement of the decision.

Arbitration can be a valid alternative, as China is a member of the New York Convention of 1958 and enforcement of an arbitral award is in most cases easier and faster than the process of recognition of a foreign court decision.