During the negotiation of a joint venture or cooperative venture, all agreements and contracts should be in English and Chinese in order to facilitate smooth negotiations. According to China's Foreign Economic Contract Law, it is permissible to sign contracts in Chinese or English or both and to choose either language as the governing language should disputes arise.
The contracts necessary to set up any type of business operation in China, whether it be an equity joint venture, a cooperative venture, or a wholly foreign owned enterprise are all subject to jurisdiction within China and use Chinese law as the governing law. Ancillary contracts such as technology transfer contracts, trademark contracts, distribution contracts, and supply and offtake contracts are not required to use Chinese law as the governing law and in most cases use United States law was the governing law in cases where the joint venture is with an American company.
Contracts relating to the establishment of foreign invested enterprises should include a timetable and provisions for the capital contribution by the parties involved. When the joint venture contract stipulates that capital investment is to be made by installments, the first payment by the parties involved must be paid within three months from the date of issue of the joint venture business license and must constitute at least fifteen percent of the respective capital contribution of each party. In absence of a timetable, both parties must make full contributions within six months from the date of issue of the business license.
Disputes involving the partners of a joint venture or a cooperative venture can be resolved by consultation and conciliation between the two parties, through arbitration, or through judicial proceedings. It is common practice to choose consultation and conciliation as the preferred resolution method but to attach a clause that limits the duration so that the Chinese cannot use this method to draw a dispute out indefinitely. In cases where a dispute is unable to resolved within the time limit the case is moved into arbitration or judicial proceedings.
Effective January 1, 1993, China acceded to the Convention for the Settlement of Investment Disputes Between States and Nationals of Other States, permitting foreign companies to seek arbitration of a dispute by the International Enter for Settlement of Investment Disputes providing that both parties consent in writing to arbitration.
Arbitration is usually the preferred method for the resolution of any disputes which cannot be resolved through consultation and conciliation in China. The location of arbitration for all contracts including those governed by Chinese law is not required to be in China. The China International Economic and Trade Arbitration Commission of the China Council for the Promotion of International Trade specializes in arbitration matters but in cases where the Chinese partner will agree, disputes can be resolved in the foreign party's home location or another location considered neutral by both parties such as Hawaii or Europe. A clause stipulating that any disputes that arise involving a contract be settled through arbitration along with the location of arbitration is usually included in all contracts signed in China
Arbitration does not completely relieve the foreign parties from threat of judicial proceedings in China. There have been cases where fraud charges were brought against foreign companies in Chinese court regarding the terms of a joint venture contract. The Chinese courts have ruled that these cases are admissible since they do not concern dispute resolution but rather involve fraud and in some cases the foreign party has been fined or has had privileges guaranteed in the joint venture contract revoked.
