Skip to content

China: How Secure Are Your Contracts?

May 30, 2011

In my last blog, I wrote about the contracting practices that sometimes undermine relationships with Chinese business. I promised also to report on the main focus of the Practical Law Company / IACCM seminar – which focused more on the rule of law.

Firstly, our experts explained that the core of Chinese law was borrowed from Japan, which had in turn been influenced by Germany. So at heart there is a civil law base, supplemented by a mix of other imports (e.g. US securities law) and local regulation. In summary, the meeting was told, there is a relatively robust body of law providing a base for contracts, but:

  • some laws and regulations have not been kept adequately updated and are no longer ‘fit for purpose’
  • in some situations, the issues at hand are not adequately addressed by the underlying laws and the courts exercise discretionary powers
  • the quality of judges is variable and some do not understand the relevant laws

In combination, these factors have led to concerns over the quality of the underlying legal system.

Following from this is the question of enforcement. The experts confirmed the need to understand both the law and the politics, especially for any major investment. It is critical to ensure necessary licenses or permissions and wise to ensure specific knowledge and approval by relevant government authorities. Even then, legal outcomes have a degree of unpredictability. The written law is not always followed and so it is important to look for patterns in discrepancies. To some extent, laws have been drafted in ways that allow discretion.

This led to the topic of governing law, which must be used in some circumstances (e.g. joint ventures). Overall, the expert panel suggested there are no great reasons to fear Chinese law and they also pointed to the alternative of arbitration (mediation is not common). The growth of trade – and the consequential frequency of dispu.tes – has led to growing experience and precedent, which together will increase the predictability of outcomes.

For more detailed – and regular – briefings on Chinese law and contracting, I recommend


Leave a Comment

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: