Why the clause outweighs the merits
In a dispute between a U.S. company and a Chinese company, the party with the better contract claim does not necessarily recover. The party that can obtain a decision in a forum whose judgments or awards are enforceable where the other side's assets are located does. A U.S. court judgment against a company whose only assets are in Guangdong may be difficult to enforce without analyzing the applicable recognition rules; an arbitral award from Hong Kong against the same company may be eligible for enforcement in mainland China under the Mainland–Hong Kong reciprocal enforcement arrangements. The dispute-resolution clause is where this is decided, and it should be drafted after answering one question: if this relationship fails, where will the money be?
Governing law
Parties are generally free to choose the law that governs their contract, and U.S. parties usually prefer the law of New York, Delaware or their home state, while Chinese parties often prefer PRC law. Two points are routinely missed. First, a contract for the sale of goods between parties in the United States and China is governed by the United Nations Convention on Contracts for the International Sale of Goods by default, because both countries are contracting states; if the parties want purely domestic law, the contract must exclude the Convention expressly. Second, the governing law does not decide where the case is heard or whether the result is enforceable; it decides only which rules apply. A New York law clause with no forum clause leaves the forum to be fought over later.
Court or arbitration
Litigation in a U.S. court offers familiar procedure, broad discovery and interim remedies, and makes sense when the counterparty has assets or business in the United States. Enforcing a U.S. judgment in China depends on reciprocity, which Chinese courts have recognized in more cases in recent years but which remains case-by-case and slow. Arbitration offers a neutral forum, confidentiality, a decision-maker chosen for expertise and, above all, an award enforceable in more than 170 countries including China and the United States. Its costs are real: institutional fees, limited appeal, and narrower discovery. The better forum depends on the other party’s assets, the type of dispute and the recognition and enforcement rules in the relevant jurisdiction.
Drafting the arbitration clause
A workable clause names an institution and its rules, a seat, a language, the number of arbitrators and the method of appointment. Hong Kong, Singapore, CIETAC in Beijing or Shanghai, and the ICC are the institutions most often chosen for U.S.–China contracts; Hong Kong has the added advantage of an arrangement with the mainland under which parties to institutional arbitration seated in Hong Kong can apply to mainland courts for interim measures such as asset preservation. The validity of arbitration provisions under applicable mainland Chinese law, including provisions on institutions and ad hoc arbitration, requires careful review in light of the current rules. Clauses that give one party alone the option to litigate instead have also been treated with suspicion. Use the institution's model clause and change it only with a reason.
If the parties choose a court
A forum-selection clause should say whether the chosen court is exclusive, waive objections to jurisdiction and venue, and—because serving a defendant in China through the Hague Service Convention can take months—appoint an agent in the United States to receive service on behalf of the Chinese party, or provide for service by a specified courier or electronic method where permitted. A jury-trial waiver, an attorneys'-fees provision and a consent to enforcement of any judgment in other jurisdictions are standard additions. The clause should also state the language of proceedings and which language version of the contract controls, because a bilingual contract with two versions and no precedence clause is a dispute waiting to happen.
Housekeeping that decides cases
Confirm the counterparty's exact legal name and registration number in both languages and that the person signing has authority; many enforcement actions fail because the named party is a trading company rather than the factory, or a Hong Kong holding entity rather than the operating company. Require a company chop as well as a signature on the Chinese side. State how notices are delivered and when they are deemed received. Keep the signed original and the negotiated drafts. And review the clause when the relationship changes—a new product line, a new affiliate, a move from distributor to joint venture—because the clause that fit the first purchase order may not fit the business three years later.
References
How Lumen Law & Co. can help
Good dispute-resolution provisions should be informed by the actual transaction and where a future judgment or award may need to be enforced.
- Review governing law and dispute mechanisms in light of the parties and relevant assets.
- Draft or review jurisdiction, arbitration, seat, language, and notice or service clauses.
- Evaluate negotiation, arbitration, litigation, and cross-border enforcement options in an existing dispute.