In March I’m going to Beijing and Shanghai to give public (here) and in-house “Drafting Clearer Contracts” seminars. [Updated 22 February 2016: I’m going back in March 2016; for more information, go here.] I’ve never been to mainland China, so it makes sense that I should prepare.
I figured that in addition to learning how to get from the airport to my hotel and learning how to say, in Mandarin, “I’m a clueless interloper, please excuse my screw-ups,” I should make sure I understand the role that English-language contracts play in Chinese commercial life. And I knew immediately whom I should contact—the guys behind China Law Blog, long a landmark on the blawgosphere. So below is my exchange with Steve Dickinson, with Dan Harris helping behind the scenes.
Q: What proportion of contracts between Chinese companies (or government agencies) and non-Chinese companies are in English? If the contracts are in English, is it mandatory that the parties enter into a Chinese-language version too? If so, which controls?
A: Chinese law provides that the parties are free to choose the language of their contract. If the contract is in two languages, the parties are free to choose which language will control. If the contract is in Chinese and in English and the parties do not specifically choose a governing language, a Chinese court or arbitration panel will take the Chinese version as controlling. If the contract is in English, then the court or arbitration panel will appoint a translator to do the translation. These translators are often not very good, which causes many problems in litigation/arbitration, since the case gets sidetracked in disputes about translation.
Contracts involving a foreign party in China are almost always done in a dual-language format, with English almost always the other language. For example, every contract between Russian and Chinese parties I have ever seen is dual-language, Chinese and English.
The tradition in such contracts is to provide for the English-language version to control, for the law to be that of the foreign party country, and for litigation to be in some location outside China. These provisions seldom make sense but they are common in contracts between private parties and when the Chinese party is a State Owned Enterprise not controlled from Beijing. However, Beijing controlled SOEs normally will require the reverse: The Chinese language and law controls and disputes will be resolved in China, either in the courts or through the China International Economic and Trade Arbitration Commission (CIETAC).
Q: How do Chinese lawyers and businesspeople respond to the traditional (in other words, dysfunctional) prose you find it most English-language contracts? Have they adopted it by osmosis?
A: Chinese lawyers and businesspeople usually reject traditional U.S. contract language outright. The Chinese use simple contract language. Often, U.S. companies insist on using U.S.-style common-law contracts. The Chinese side never reads the English; they have the document translated into Chinese and they work with the Chinese. When litigation occurs in China, the Chinese court will often say, “This contract is just a translation of a standard U.S. contract. Obviously, the Chinese side did not understand any of it. Therefore, we are going to ignore the key provisions on which you are relying and we are not going to enforce them.” Many banks and investment funds have learned this to their detriment. For example, many foreign-drafted futures contracts have been thrown out in China because the courts concluded that the Chinese party simply did not understand the contract. The result is that the Chinese companies got a free ride, which is not a trivial issue.
It is a much deeper issue than language. Chinese courts, Chinese lawyers, and Chinese business people are not going to agree to legal provisions that have no meaning under Chinese law. If you expect to litigate in China, your document must be in accord with Chinese law. If you expect to be able to enforce your contract in China, you must have a contract that is in accord with Chinese law. Much bad U.S. contract writing involves using ten words to express one concept and drafting provisions so as to address every single possible contingency. For China, only the concept is important. Another motivation for bad U.S. contract writing is to try to draft around case law or statute. China does not care about cases or U.S. statutes. Chinese courts and arbitrators do not allow drafting around the provisions of black letter Chinese law and they do not allow for results that they think are either unfair or in bad faith. Thus, the real issue is not so much bad U.S. drafting methods. The real issue is how the Chinese court views the motivation behind the contract.
I should also add that Chinese lawyers have major problems interpreting U.S. and British common law contracts. Their standard approach is to guess at the meaning and then mistranslate and then work with the mistranslation, leading to disaster on all counts.
Q: Do Chinese lawyers draft contracts in English, or mostly just review them?
A: I have never met a Chinese lawyer who drafts in English. However, many of the large law firms hire English-speaking lawyers to do the English language translation of documents originally drafted in Chinese. Often these lawyers are Chinese nationals who have gone to law school in the U.S. or England. It is important to understand this. The Chinese lawyers do all their drafting in Chinese. This means they draft in accordance with Chinese law and legal principles. It is therefore impossible for them to draft in the common-law drafting style. It is therefore critical to distinguish between the issue of language and the issue of legal system.
Q: Do you see English-language drafts prepared by non-Chinese lawyers that contain provisions that make no sense in China?
We see it every day. Frankly, the Chinese do not care. They know that such provisions are meaningless in China and they also know that a confusing, badly written common-law contract is virtually unenforceable in China. They therefore usually sign without comment, since they know that the foreign side has simply caused problems for themselves. For example, often a U.S.-drafted contract will contain several pages disclaiming liability for a warranty. U.S. warranty law is broad; Chinese warranty law is narrow. U.S. warranty damages are high; Chinese warranty damages are low. Under Chinese law, you cannot contract around your basic warranty obligation. Thus, the whole exercise has no meaning under Chinese law and any such provision will not be enforced in China. So the result is at best an ambiguous contract and at worst it results in an unenforceable contract. In Japan, a domestic company will normally object to the provisions. In China, the Chinese side will often just sign since they know that they are dealing with a company that knows nothing about China and that the provisions are meaningless in China.
Q: What are some other hot-button provisions?
A: The main fight we have been having lately is that the Chinese side will seek to have a force majeure provision absolve them from any liability for payment if the Chinese government makes payment impossible. This is a legal issue, not a language issue.
And the Chinese HATE contracts that start with a long list of complex definitions. They simply will stop reading and never get to the substance. Or they will ignore the complex definitions because they know that Chinese courts and arbitration panels will also ignore them.
Q: Well, I’m glad that the Chinese market appears to value clear and uncluttered drafting. Thank you, Steve!
A: My pleasure.
13 thoughts on “Using English-Language Contracts in China: My Q&A with China Law Blog”
Isn’t there an old Chinese saying that even on a fool’s errand, it is possible to have many fine lunches and dinners? May it be so.
Somehow this slipped by me. Sounds altogether too sensible.
Ken, I should be very interested to hear more of your thoughts on bilingual Eng-Chi drafting (feel free to email me at firstname.lastname@example.org). Dan and Steve are the streetfighters of China law so their experience is both broader and deeper than mine (10 years, PE M&A at Paul, Weiss in China); that said I’ll share a couple of points they didn’t raise and elaborate on a couple they did – Fact and Opinion duly marked for your readers:
(X) Fact: By and large, clients in China deeply resent every six-minute period spent by lawyers. This is what drives the desire for simpler contracts. On one occasion in practice I had to create a 3 page SPA. I crammed as many protections for my client as I could manage into a bastardised 10-page version of my usual and thought I had done rather well. I was – quite politely – told that it was very nice and could I please get it down to 3 pages. Helpfully, the client suggested shrinking the text and increasing the margins, which I duly did, and you can be sure I kept a detailed record of the protections the client was losing – which, let’s face it, isn’t a great use of lawyer time if you scale it up over all possible transactions.
(X) Opinion: Clients don’t like spending on lawyers because the Chinese legal system isn’t yet robust enough to deliver consistent litigation results nationwide (it is already starting to in the major cities, and I believe that the current administration recognises the issue and is attempting to address it by promoting leading cases). So the rationale to spend your money on better lawyers rather than on accumulating relevant influence is not yet persuasive to smart, hard-nosed people.
(X) Fact: Most of the contracts I saw (that is, that I either negotiated myself or reviewed in a Series n investment) during my time in China seemed to have followed this model:
– Drafted in English under the normal (that is, insane) law firm time pressures
– Translated into Chinese within 24 hours
– Negotiated in Mandarin
– Revised in English based on the results of the negotiation
– Re-translated into Chinese by someone who wasn’t at the negotiations based on a redline of the changes
– Reviewed for consistency by the bilingual lawyer who actually was at the negotiations (as a rule at around 3am)
– Opened for negotiations the next day at 9am
…and so on until signing.
The final signed version was always ok and free of error, but it wasn’t optimal – it isn’t possible for it to have been – under those conditions. Anything that goes towards better contract drafting in these circumstances is to be welcomed with open arms, a very friendly smile and a beverage of its choice.
(X) Opinion: My experience is typical and the process I just outlined describes most of the contracts signed by large international and Chinese firms in mainland China.
(X) Opinion: Most bilingual contracts for China deals drafted by law firms that are not advised on at great expense by top 10 global or local firms (in which category I would include contracts that are drafted solely by junior staff at law firms and, due to fee caps, are not adequately reviewed by senior staff) are woeful at best, and a substantial minority would if judged by rigorous standards be negligent at worst.
(X) Opinion: Most contracts drafted *without* the input of a lawyer in China don’t have the value of a good roll of Andrex and could be put to better use – or would at least do less damage – as firelighters.
(X) Opinion: AWrightBurkeMPhil is onto something with his idea about the term sheet. IMO what’s needed for deal documents generally is a baseline bilingual draft that has three characteristics:
– it’s generally acceptable to both parties to a transaction (buyer/seller; borrower/lender etc)
– there are no differences between the two versions about anything anyone would reasonably expect to be expensive (that is, the notice clauses might not tie up perfectly but an amount of money that A pays B isn’t described as a downpayment in one language and a forfeitable loan in the other)
– the rules of interpretation have been tied off properly so that it doesn’t work differently depending on which party’s home dispute resolution forum gets chosen.
Law firms and departments can then customise based on that. It’s not that radical a concept; ISDA, BVCA and other groups have prepared similar things. The difficulty is finding someone who has the time and inclination to prepare the baseline version in both languages and then actually maintain it.
(I should also say that I’ve been lurking this blog for around a decade now but this is, as far as I can recall, my first actual post).
With this one post, you’ve met your ten-year commenting quota!
Your notion of two-language models makes sense, but it might be that there are too many kinds of transactions, with too much customization, to make that sort of initiative possible. After all, no one has gotten around to creating an authoritative set of model commercial contracts in English.
I think we’re not that far away. My guess is that we will see convergence for boilerplate first; there’s really no social utility in having three dozen different models for things like entire agreement, no partnership and excluding 3rd party rights clauses, and it’s not that often that a client is thrilled to pay a lawyer to tinker with them.
So while I agree that we won’t see a uniform commercial contract any time soon, I think that for some high-volume contracts the market will ultimately converge around some of the contracts drafted and maintained by third party providers like ourselves (that is, Practical Law), and even the highly bespoke contracts will continue to incorporate ‘neutral’ boilerplate. There’s no particular reason this shouldn’t happen in Asia as is already happening in the UK and U.S.
Is Taiwan the same as China in this general issue? Is Hong Kong different now?