Which jurisdiction should I agree to in contracts with Chinese companies?
When formulating contracts in the field of international trade, one is faced with various decisions. One of the most important is the choice of jurisdiction. This applies in particular to business with foreign partners whose legal systems differ significantly from one’s own – for example, China. A contract with a Chinese company can open up enormous business opportunities, but it also brings a number of legal challenges. A key question that often arises in such cross-border agreements is: “Which jurisdiction should I specify in my contract?”
This decision is much more than a mere formality. It has implications for the enforceability of your contract and ultimately affects the success of your international business relationships. In this article, we explore the legal basis and options you should consider when choosing the jurisdiction for contracts with Chinese companies.
No German-Chinese enforcement treaty
In international law, the principle applies that states are not automatically obliged to recognize foreign court judgments. It is within the sovereignty of each state to decide independently whether and under what conditions it will recognize and enforce foreign judgments in its territory. Such decisions are usually regulated by bilateral treaties. Unfortunately, such an enforcement treaty between Germany and China does not yet exist.
Parties to the dispute cannot therefore invoke a specific contractual provision for the enforcement of the judgments of the other state. However, judgments of foreign courts could still be enforced in both China and Germany if a so-called guarantee of reciprocity were provided.
Solution based on a “guarantee of reciprocity”?
According to § 328 I No. 5 Zivilprozessordnung (ZPO), German courts are able to recognize a foreign judgment if reciprocity is guaranteed. Behind this somewhat cumbersome wording, the following rule of thumb is hidden: “reciprocity” is given if it is not much more difficult in the country in which the judgment was handed down to recognize and enforce a German judgment than it would be in Germany to recognize and enforce a similar judgment from that country.
In order to assess whether reciprocity is guaranteed between Germany and China, it is necessary to look at the case law of the two countries. Specifically, at the case law on the recognition of judgments of the other state. However, the results here are rather poor. In Germany, there are only two judgments (KG Berlin 2006 and LG Saarbrücken 2021), which also contradict each other in their outcome. On the Chinese side, there is also only one case in which the People’s Court in Wuhan has recognized a German judgment. These sporadic decisions therefore do not yet provide a basis for mutual recognition in terms of ensuring reciprocity.
Go-To: Arbitration clauses
Since sufficient security in international economic and legal transactions would otherwise not be guaranteed, there is, of course, still a way to establish a legal basis for cooperation: the addition of an arbitration clause to the contract.
Arbitration is a legal institution that resolves disputes outside of state courts. These are private courts that only convene if the parties to a dispute have agreed to do so. This agreement is called an arbitration agreement and is usually set out in a contract between the parties in dispute. The decisions made by the arbitral tribunals are called arbitral awards. These are usually binding on the parties and can also be recognized by national courts as enforceable. The “New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards” also provides legal certainty here. Both Germany and China have signed this convention and are thus obliged to recognize the rulings of the arbitration institutions accordingly.
There are several arbitration courts worldwide. The ICC International Chamber of Commerce is one of the most well-known European courts. In Germany, the German Institution of Arbitration (DIS) is particularly prominent. In China, CIETAC, SHIAC or BJAC are the most commonly used. Most of these institutions also offer pre-formulated model clauses on their websites, which companies can use as templates for their respective contracts.
Conclusion
In summary, it can be said that the choice of jurisdiction plays a decisive role in contracts with Chinese companies. In view of the fact that there is no enforcement agreement between Germany and China and that “reciprocity” is not guaranteed, the route via arbitration courts appears to be the most practical solution for settling disputes. By integrating a well-considered arbitration clause into their contracts, German companies can establish a clear and efficient mechanism for resolving disputes. This not only offers the advantage of neutral and specialized decision-making, but also increases the likelihood that the judgments can be recognized and enforced in both Germany and China.
Ultimately, successful trade between German and Chinese companies requires not only economic skill but also a deep understanding of the legal framework that governs their trade relations. Consulting with experienced lawyers is highly recommended here, since problems with the recognition of these arbitral awards regularly arise, especially in China. LLP Law|Patent is happy to assist you here and navigate you through the legal pitfalls of international contract law.
Arno Lohmanns | Rechtsanwalt
Herr Rechtsanwalt Arno Lohmanns ist Ihr Ansprechpartner für alle Fragen der internationalen Vertragsgestaltung, des IT- und des Technologierechts. Mit über 25 Jahren Berufserfahrung in international tätigen Kanzleien und Industrieunternehmen findet er für Sie zielsicher maßgeschneiderte vertragliche Lösungen in deutscher und englischer Sprache, nicht nur auf Basis deutschen Rechts, sondern auch auf Basis zahlreicher anderer nationaler Rechtsordnungen. Arno Lohmanns versteht Ihr Geschäftsmodell und die kaufmännischen Zusammenhänge, begleitet Sie bei Ihren geschäftlichen Unternehmungen in anderen Rechtsordnungen und steht Ihnen als kompetenter Verhandlungspartner zur Seite, insbesondere in allen grenzüberschreitenden Situationen.
