Doing business in China can be an overwhelming but gratifying experience. However, one of the most difficult barriers for foreign professionals is the language. When the time comes to sign a contract, understanding that the Chinese language takes precedence over any other language in a contractual dispute is crucial.
Many international companies are not aware that in China, the local language takes precedence over any other one, unless the Chinese language portion of the contract specifically states that some other language controls.
If a contract is in both Chinese and English and the Chinese portion of the contract says the Chinese language controls and the English language version says English controls, the Chinese language version will prevail. Even if the Chinese language version is silent as to which version controls, the Chinese language version will take precedence.
In some cases, Chinese companies take advantage of this benefit and purposely leave the Chinese language portion silent regarding the official contract language. In other instances, they put in the English language portion of the contract that English (or both languages) control, but at the same time knowingly state in the Chinese portion that the Chinese language controls.
It is important to know exactly what the contract says in both languages and not only in the portion of your native tongue. This goes for any type of contract in multiple languages.
Having two languages with equal weight is usually the worst “solution” because it does increase the room for interpretation and delay if there is ever a dispute.
If there is a litigation on a contract that says two languages control, both sides will fight over what each language says, and what it means. It will be as if one is litigating over three contracts.
The best, and cheapest, option is to make sure the wording is clear before signing a contract rather than to pay lawyers to fight about it later.
Contracts with Chinese manufacturers, distributors, suppliers, and other commercial agreements in China are more likely to be effective if written in both English and Chinese.
However, the foreign party signing a bilingual contract must fully understand the Chinese words of the contract.
It is essential to understand the scope of the contract in both the English and Chinese versions of the agreement to avoid problems raised after the contract has been signed.
A bilingual contract as a legal document used in China must have an accurate legal translation. While you might lack Chinese language skills, there should be no reason why you should settle for anything less than perfect translation in a bilingual contract.
There must be careful consideration given to the implications of specifying one governing language in a bilingual contract. Often, foreign companies assume that it makes no difference which language governs because the meaning of both language versions in the contract portions is the same.
Unless you specify which language version shall prevail, the Chinese language version will prevail in Chinese courts.
When the Chinese text defines that the English text prevails (over the Chinese) or the Chinese text does not say anything about it while the English text points out that it is the English text that controls the contract, the English text wins. If both the contract's written language is Chinese and English, and both languages state that they shall prevail, the Chinese language takes precedence in China.
There have been numerous examples of extensive contradictions between the English and Chinese texts in bilingual contracts. Often, the Chinese text of the prevailing language clause may contain an opposite regulation, which states that in the event of any discrepancies between the English and Chinese versions, one should apply the Chinese text and not the English one.
At the same time, while the clauses about which version should prevail in both English and Chinese may be identical, the Chinese contract text might explicitly state that it is the Chinese text that shall prevail in the event of a conflict between the two languages.
Unfortunately, in many contracts used in China, the Chinese text contains rights or obligations that are not mentioned in the English version.
This is a considerable risk for foreign companies in China, as the Chinese language portion could benefit the Chinese company more than the English section. You might end up with contracts containing an English portion that is "falsely" favourable to you as the foreign company and a Chinese company that seeks to put you in a trap as you assume that the English version will prevail.
While there might be costs associated with preparing a high-quality bilingual contract in China, it is worth it to invest in an agreement that you know will be enforceable the way you want it.
It is your company’s responsibility to understand all the details in the Chinese text used in the contract. When negotiating contracts with Chinese companies, you should draft the contracts in Chinese and then have them translate it into English.
You must be sure that you understand exactly what is written in the Chinese language portion of the contract to ensure that your contract can be enforced in China.
To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at email@example.com.
DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.