A Practical Guide for North American SMEs to Avoid Contract Disputes with Chinese Companies
In the current business environment, trust between Chinese companies and Western businesses has decreased. There are more risks in the Chinese economy. As a result, contract disputes occur more often than before. It is crucial for North American small businesses to be more cautious. How to avoid contract disputes should become part of the regular proactive measures. Remember these 5 practical tips, and you can easily minimize the risk of contract disputes with Chinese companies.
1. Have a Written Contract
It is essential to have a written contract in place when doing business in international sales. A tailor-made contract plays a vital role in ensuring that both parties have a clear understanding of the business terms. This is especially true when a transaction involves parties speaking different languages and from different cultural backgrounds. Unfortunately, written contracts are often overlooked, and people rely on email exchanges as evidence of what has been agreed upon. However, email exchanges are not legally binding and can lead to misunderstandings. Having a written contract is the first step to avoiding disputes down the road.
2. Have a Bilingual Contract
“Lost in translation” often causes misunderstandings and disputes. It is important to have a bilingual contract when an international SME trades with a Chinese company. Having a bilingual contract would help confirm the other party agrees with you on the same terms.
In addition, it’s crucial to have a lawyer review the consistency between the two language versions to ensure that both versions accurately reflect the same intended meaning. If a dispute ends up in a Chinese court, a bilingual contract with identical two versions would substantially reduce the disadvantage faced by an international SME.
3. Choose the Appropriate Governing Law
One of the first things to consider when entering into a contract with a Chinese company is the governing law. The chosen governing law will be used to interpret the terms of the contract and resolve any disputes that arise. It’s important to make a choice at the time of the contract, as it can significantly impact the outcome of a contract dispute.
Both sides often prefer the law of their home jurisdictions as the governing law. As a compromise, international parties often accept Hong Kong law given its origin in British law. If the law of the PRC is chosen, it’s critical to consult a China-qualified lawyer to understand any major implications.
4. Choose the Appropriate Method of Dispute Resolution
Another important consideration is the method of dispute resolution. This includes the process how to resolve any disputes that arise. It’s also advisable to make a choice at the time of the contract.
For North American small businesses, it’s generally advisable to choose international arbitration over litigation. Arbitration is generally faster and less expensive than litigation, and the decision of the arbitrator is binding on both parties.
5. Choose the Appropriate Venue
In addition to choosing the appropriate method of dispute resolution, it’s important to choose the appropriate venue. This refers to the location where contract parties choose to resolve the disputes in the future. For arbitration, the venue is typically specified in the contract.
While there are several options available, such as Singapore, London and mainland China, business executives, in-house counsel, and lawyers often deem Hong Kong as the most popular venue for international arbitration involving Chinese parties.
The Hong Kong International Arbitration Centre is an independent, internationally recognized arbitration institution that provides a neutral venue for resolving disputes between Chinese and foreign parties. Hong Kong’s status as a Special Administrative Region of China means that it has a separate legal system from mainland China, while it has advantages and one of them is, relatively speaking, the easier enforcement of its arbitration awards in China.
In addition, enforcing a Hong Kong arbitration award in China is generally easier than enforcing a foreign arbitration award. Under the “Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong Special Administrative Region,” which came into effect in 2000, Hong Kong arbitration awards are generally recognized and enforced in mainland China. This arrangement provides a streamlined process for enforcing Hong Kong arbitration awards in mainland China, which can save time and costs for North American small businesses in case of a dispute.
In conclusion, doing business with Chinese companies can be rewarding, but it can also be complex and challenging. By taking the above-mentioned simple actions, SMEs can at least easily avoid many unnecessary contract disputes. Check out the services on Trustiics, small businesses can protect their rights and interests and efficiently solve legal problems in China.