China Contract Law Services for Foreign Companies

The Civil Code framework — what changed in 2021

China's Civil Code, which came into force on 1 January 2021, consolidated and replaced the Contract Law (1999), the General Principles of Civil Law, and several other statutes into a single unified code. For foreign companies, the key practical changes include:

• Expanded good faith obligation. The Civil Code strengthens the duty of good faith across the full lifecycle of a contract — not just during performance but during pre-contractual negotiations and post-termination obligations.
• Statutory right to demand security. Where one party has reasonable grounds to believe the other cannot perform, they may now demand an assurance of performance and suspend their own obligations in the interim.
• Revised rules on standard form contracts. Clauses in standard terms that unreasonably exclude or limit the other party's rights must be brought to their attention; otherwise they are unenforceable.
• Force majeure codified. Article 590 now provides a statutory basis for relief from contractual obligations caused by force majeure, including notification obligations and consequences of partial vs complete non-performance.
• Liability for breach. The Civil Code preserves China's strict liability approach to breach — a party in breach is liable for damages even without fault, unless they can establish a statutory defence.

Foreign companies that drafted their China contracts under the old Contract Law should have them reviewed. The Civil Code introduced material changes that affect whether certain provisions remain enforceable and whether new protections are available to you that were not under the prior regime.

Language, governing law, and the bilingual contract problem

The single most common and expensive contracting mistake made by foreign companies in China is treating the English version of a contract as authoritative. It is not — at least not in a Chinese court or arbitration panel.

Language

Chinese courts and arbitration panels conduct proceedings entirely in Mandarin. An English-only contract must be translated before it can be used in proceedings, and that translation can be — and frequently is — contested by the other party. Best practice is to use a bilingual contract with the Chinese version designated as the controlling language. Where this is not possible (for example, in international transactions governed by English law), the Chinese-language version should at minimum be reviewed by a China-qualified lawyer for enforceability.

Governing law

Parties to international commercial contracts generally have freedom to choose the governing law. The most common choices for China-related contracts are:

For purely domestic China contracts — supplier agreements, employment contracts, licences — PRC law is almost always the right choice. Chinese courts will not apply foreign law to domestic matters, and specifying a foreign governing law in a domestic China contract may render the dispute resolution clause inoperable.

The bilingual contract problem

Many foreign companies sign contracts that have an English version and a Chinese version with a clause stating "both versions are equally authentic." This is the worst of both worlds: when the versions differ — which they almost always do in translation — the ambiguity must be resolved by a court or arbitrator, typically in a way that disadvantages the foreign party. The solution is to designate one version as controlling and have a qualified bilingual lawyer verify that the other version accurately reflects it.

Essential clauses in every China contract

The following clauses require particular attention when drafting or reviewing a contract governed by PRC law. Clauses that work in common law jurisdictions frequently do not translate — legally or literally — into the Chinese law context.

1. Scope of obligations. Chinese courts interpret contracts narrowly. Implied terms are rarely read in. Every obligation must be stated explicitly — including obligations that parties in Western jurisdictions regard as obvious, such as maintaining confidentiality or complying with applicable law.
2. Payment terms and currency. Specify currency, payment method, and exchange rate mechanism. Cross-border RMB payments are subject to SAFE regulations; USD settlements from a foreign-invested entity require the FDI capital account. Ambiguity here is a frequent source of dispute.
3. Liability cap and exclusion clauses. Under the Civil Code, clauses that unreasonably limit or exclude liability — particularly in standard form contracts — must be specifically highlighted to be enforceable. Caps should be expressed as a multiple of the contract value or a fixed sum, not as a vague limitation.
4. Force majeure clause. The Civil Code's force majeure provision (Article 590) sets a high threshold. A well-drafted contract should specify what events constitute force majeure, notification obligations (typically 15 days), evidence requirements, and the right to terminate if force majeure persists beyond a defined period.
5. Termination and consequences. China's Civil Code gives courts considerable discretion to adjust or void termination clauses if they consider the result inequitable. Termination rights should be carefully drafted with clear trigger events, notice periods, and specified consequences — including whether deposits, advance payments, or penalties survive termination.
6. Penalty clauses (违约金). Chinese law permits liquidated damages clauses but gives courts the power to adjust them — upward or downward — if they are found to be significantly above or below actual loss. Draft penalty clauses with reference to estimated actual loss, not as punitive sums.
7. Intellectual property ownership. In the absence of an explicit clause, IP created under a contract in China may default to the creator — not the commissioning party — under the Civil Code. Any contract involving creation of software, designs, content, or other IP must include an explicit assignment or work-for-hire provision.
8. Governing law and dispute resolution. These clauses are discussed in detail in sections 8 and 9 below. They must be consistent with each other and with the nature of the contract.

Supplier and distribution agreements

China-specific supplier and distribution agreements present a distinct set of drafting challenges that standard Western commercial contracts do not address.

Supplier agreements

Key issues in China supplier contracts include: product specification and quality standards (express specification is essential — implied fitness for purpose claims are difficult to pursue), inspection and acceptance procedures, defect liability periods and remedies, tooling and mould ownership (a frequent source of disputes when changing suppliers), and restrictions on sub-contracting.

Foreign companies should also address anti-bribery and compliance obligations explicitly — Chinese law has strengthened its anti-commercial bribery provisions, and a supplier contract that is silent on these issues can create compliance exposure for both parties.

Distribution agreements

China distribution agreements must address: exclusivity scope and territory (Chinese courts have held that exclusivity clauses applying to all of China are void in certain circumstances), minimum purchase obligations and consequences of non-achievement, brand guidelines and IP licence scope, termination rights and the distributor's post-termination obligations, and handling of grey market or parallel import issues.

China does not have specific distributor protection legislation equivalent to the EU Commercial Agents Directive, but courts have developed a body of case law on what constitutes fair termination of long-standing distribution relationships. Careful drafting of termination provisions is essential.

Employment contracts under the Labour Contract Law

Employment contracts in China are governed by the Labour Contract Law (2008, amended 2012), not the Civil Code. They are not commercial contracts — they are a distinct category with mandatory requirements, mandatory terms, and mandatory consequences for non-compliance that override contractual agreement between the parties.

Mandatory requirements include:

• Written contracts must be issued within 30 days of the employment relationship commencing. If no written contract exists after one month, the employee is entitled to double pay for each month without a contract (up to 11 months); after one year without a contract, the relationship is deemed to be an open-ended (permanent) employment.
• Probation periods are strictly regulated by contract duration — a fixed-term contract of one to three years permits a maximum probation period of two months; longer contracts up to six months; open-ended contracts up to six months.
• Non-compete clauses are only enforceable for senior management, senior technical personnel, and others with access to trade secrets — and only if monthly compensation is paid during the restriction period after termination.
• Employee handbooks and HR policies must be issued and formally acknowledged; in many cities they must be filed with the local labour bureau.

Employment contracts in China should always be drafted by or reviewed by a lawyer with specific experience in Chinese labour law. General commercial lawyers frequently miss the mandatory provisions that override standard contract principles.

Technology licensing and IP assignment agreements

Technology transferred into or out of China is subject to a distinct regulatory layer that does not apply to ordinary commercial contracts. Foreign companies licensing technology into China — or transferring know-how to a Chinese joint venture partner — must navigate the following:

Technology Import and Export Regulations

China's Regulations on Administration of Technology Import and Export (TIER) classify technology transfer as "freely exportable," "restricted," or "prohibited." Restricted technology transfers require government approval. Even for freely exportable technology, the TIER imposes specific terms on the licensor, including a statutory warranty that the technology does not infringe third-party IP rights and that the licensor bears liability for IP disputes during the licence period. These provisions cannot be contracted out of — they apply as a matter of PRC law regardless of what the licence agreement says.

MOFCOM filing

Technology import contracts above certain value thresholds must be filed with MOFCOM. Failure to file does not necessarily invalidate the contract but may affect the licensee's ability to make outward royalty payments through official banking channels.

Drafting considerations

Technology licensing agreements for the China market should address: scope of licensed technology and permitted use, sublicensing rights, improvements (who owns improvements made by the licensee, and does the licensor get a licence back), royalty rate and payment mechanism through the capital account, audit rights, confidentiality obligations that survive termination, and the consequences of the licensor's IP being found to infringe a third party.

Joint venture and shareholder agreements

Joint venture contracts in China are among the most complex commercial agreements in the China market. They operate under both the Civil Code and the Foreign Investment Law, and must address the tension between what the foreign party wants — control, exit rights, and protection of its IP — and what Chinese law and the Chinese party will accept.

Key provisions that require particular care in China JV agreements include:

• Board composition and voting thresholds. Chinese company law permits certain matters to be reserved for unanimous board approval. The list of reserved matters must be negotiated carefully — too narrow and the foreign party loses control; too broad and the JV becomes deadlocked.
• Deadlock mechanisms. Chinese courts are reluctant to order the compulsory winding-up of a JV on deadlock grounds alone. Contractual mechanisms — a buy-sell (shotgun) clause, a right of first refusal, or a mediation-then-arbitration escalation — are essential.
• IP contributed to the JV. Technology and IP contributed to a Chinese JV should be licensed, not assigned. Once assigned to a Chinese entity, retrieving the IP on termination of the JV relationship is legally complex and practically difficult.
• Profit distribution. RMB profits of a Chinese entity can only be repatriated after tax, after covering statutory reserves, and through the designated banking channels. The JV agreement should specify distribution timing, currency, and the process for seeking board approval of annual distributions.
• Exit provisions. Pre-agreed exit rights — including put options, drag-along rights, and tag-along rights — are enforceable under Chinese law but must be carefully structured to be consistent with company law requirements on equity transfers.

Dispute resolution clauses — courts, CIETAC, and HKIAC

The dispute resolution clause is the most important clause in any China contract. A poorly drafted dispute resolution clause — or no clause at all — can mean years of litigation in an inconvenient forum, or an award that cannot be enforced against the other party's assets.

For most contracts with Chinese domestic parties, CIETAC or PRC courts are the most practical choice. For JVs, M&A transactions, and technology licences involving a Hong Kong holding structure, HKIAC is the standard recommendation. Whatever forum is chosen, the clause must specify: the institution, the seat, the number of arbitrators, the language of proceedings, and the governing law — and these must all be mutually consistent.

Enforcing contracts in China — what actually works

A contract that is technically valid under Chinese law is not automatically enforceable in practice. The gap between legal rights and practical enforcement is one of the most persistent challenges for foreign companies in China. The following factors determine how enforceable a contract actually is:

Evidence standards in Chinese courts

Chinese civil procedure requires that evidence be in Chinese or translated into Chinese by a certified translator. Electronic evidence — emails, WeChat messages, screenshots — is increasingly admissible but must be properly authenticated, typically through a notarisation process. Foreign companies frequently lose Chinese litigation not because their legal position is wrong but because they cannot prove it to the required evidentiary standard.

Asset tracing and preservation orders

Chinese courts can grant pre-judgment asset preservation orders (财产保全) that freeze the defendant's bank accounts, property, and equity interests. These orders are powerful and can be obtained relatively quickly — sometimes within days. However, the applicant must provide security (typically a cash deposit) and must have a valid underlying claim. Including asset preservation as a first step in your enforcement strategy is often more effective than pursuing a judgment against a defendant who has moved assets offshore.

Enforcement of foreign judgments

China does not have a general treaty obligation to recognise foreign court judgments. In the absence of a bilateral treaty with the relevant country (China has such treaties with a small number of civil law jurisdictions), foreign judgments are generally not directly enforceable in China. The practical implications: if your only assets are in China and your contract specifies a foreign court as the forum, you may win the case and be unable to enforce the award. Arbitration awards under the NY Convention remain the most reliably enforceable mechanism for foreign parties with Chinese counterparties.

Practical enforcement tips

• Include personal guarantee provisions from the Chinese company's ultimate beneficial owner wherever possible — particularly for smaller counterparties where corporate assets may be thin.
• Retain copies of all signed contracts, delivery records, payment receipts, and correspondence in Chinese, and store them in a format that can be notarised.
• Consider registering security interests in Chinese assets through the Credit Reference Centre's moveable property pledge registry where relevant.
• Act quickly — Chinese limitation periods are generally three years from when the claimant knew or should have known of their right, but certain claims have shorter periods.