Navigating the Legal Labyrinth: Governing Law in China's Foreign-Invested Contracts
For over a decade and a half, my team at Jiaxi and I have been in the trenches with foreign investors, guiding them through the intricate maze of establishing and operating businesses in China. If I had to pinpoint one recurring theme that causes more late-night discussions and boardroom debates than any other, it would be the seemingly simple clause buried in contracts: "Governing Law." The choice of governing law for foreign-related contracts of Foreign-Invested Enterprises (FIEs) is far from a mere technicality; it is a foundational strategic decision that dictates the entire dispute resolution landscape, defines the rights and obligations of parties, and ultimately, can determine the success or failure of a venture. This article draws from my 12 years of advisory experience and 14 years in registration and processing to dissect this critical topic, moving beyond textbook theory to the practical realities faced by investment professionals on the ground.
核心原则：意思自治与强制性规定
At the heart of the matter lies the principle of party autonomy, enshrined in Article 126 of the PRC Contract Law (now Book III of the Civil Code). Parties to a foreign-related contract are generally free to choose the law governing their contractual relationship. This freedom is, however, not absolute. It operates within a cage of mandatory provisions and public policy considerations of the PRC. The most critical exception is for Sino-foreign Equity Joint Venture (EJV) Contracts, Cooperative Joint Venture (CJV) Contracts, and contracts for Sino-foreign cooperative exploration and development of natural resources, which must be governed by PRC law. This is non-negotiable. I recall a European client in 2018 who, advised by their international counsel, insisted on a Swiss law clause in their draft JV contract framework. Our firm had to firmly, and repeatedly, explain that such a clause would render the entire contract unapprovable by the Ministry of Commerce (MOFCOM). The subsequent re-drafting and delay cost them nearly three months. This underscores that understanding the boundary between permissible choice and mandatory application is the first and most crucial step.
Beyond these specific contract types, the principle of autonomy is robust. Parties can choose a foreign law, international conventions, or even general principles of law. However, the chosen law cannot contravene the mandatory provisions of Chinese law or harm the public interest of the PRC. In practice, this means that even if a contract is governed by, say, English law, a Chinese court or arbitration tribunal may refuse to apply a provision of English law if it is found to violate a fundamental Chinese legal principle, such as those concerning foreign exchange control, national security, or environmental protection. This creates a layer of uncertainty that must be managed, not ignored.
Furthermore, the "foreign-related" element of the contract must be genuine. This typically involves factors such as one or both parties being foreign, the subject matter being located abroad, or the legal facts establishing, changing, or terminating the contractual relationship occurring outside China. Regulators and courts are increasingly scrutinizing contracts to ensure that the foreign-related element is substantive and not fabricated merely to evade the application of mandatory Chinese law—a practice sometimes referred to as "regulatory arbitrage," which carries significant risks of the contract being deemed invalid.
实务权衡：选择外国法的利弊
Many foreign investors instinctively prefer the law of a common law jurisdiction, such as English or New York law, for its perceived predictability, developed precedent, and familiarity to their international counsel. This choice can be advantageous for complex, high-value commercial transactions like cross-border financing, international technology licensing, or sophisticated share purchase agreements. The detailed doctrines of contract interpretation and a rich body of case law can provide comfort. I advised a U.S.-based private equity fund on its acquisition of a stake in a Chinese tech company, where the main share purchase agreement was governed by New York law. This was acceptable because the contract was between two offshore entities (the fund's Cayman holding company and the founders' BVI vehicle), and the underlying asset was the FIE in China. The structure successfully isolated the core transactional documents from direct PRC law governance, providing the investor with a familiar legal framework.
However, the drawbacks are significant. The primary challenge is enforcement and proof of foreign law. If a dispute is brought before a Chinese court or arbitration tribunal (which is often the case, as assets or counterparties are in China), the party relying on the foreign law bears the burden of proving its content. This involves submitting official legal texts, authoritative legal texts, and expert opinions, which is costly, time-consuming, and subject to the court's discretion in adoption. In a 2015 arbitration I was involved with (as a factual witness for the FIE), the foreign party's reliance on a nuanced point of German law collapsed because the expert opinion provided was deemed insufficiently authoritative by the tribunal, which then applied PRC law by default under conflict-of-laws rules.
Moreover, choosing a foreign law may create dissonance with the operational realities of the FIE. Day-to-day operations, employment, land use, and administrative approvals are all deeply embedded in the Chinese legal ecosystem. A contract governed by foreign law that attempts to regulate these areas may be impractical or unenforceable against third parties or regulators in China. It can create a sort of legal schizophrenia for the enterprise.
稳妥之选：适用中国法的深层价值
Opting for PRC law as the governing law, where permitted, is often the more pragmatic and strategic choice for contracts directly tied to the FIE's operations within China. This includes supply agreements with local vendors, sales contracts in the domestic market, certain loan agreements with Chinese banks, and importantly, the FIE's articles of association. The most compelling advantage is predictability in enforcement. Chinese courts and arbitrators are naturally more adept at applying their own law, leading to more efficient proceedings and more predictable outcomes.
Another profound, yet often overlooked, benefit is alignment with the regulatory mindset. When you choose PRC law, you are not just selecting a set of black-letter rules; you are opting into a legal system that includes its administrative regulations, local decrees, and, critically, the unwritten policy orientations of the regulators. This alignment can be invaluable during negotiations with Chinese partners, in dealings with government authorities, and when seeking approvals. It signals respect for the local legal environment and a long-term commitment. I've seen joint venture negotiations proceed much more smoothly once the foreign party conceded on applying PRC law to the JV contract, as it built immediate trust with the Chinese counterpart.
Furthermore, the continuous modernization of China's Civil Code and commercial laws has significantly enhanced their sophistication and compatibility with international commercial practices. Areas such as contract formation, liability for breach, and creditor rights are now codified with greater clarity. Choosing PRC law is no longer a leap into the unknown but a decision backed by an increasingly robust and transparent legal framework.
争议解决地：与准据法的联动
The choice of governing law is intrinsically linked to, but legally separate from, the choice of dispute resolution forum. This is a point of frequent confusion. Parties can choose PRC law to govern the contract but stipulate arbitration in Singapore under the SIAC rules. Conversely, they can choose English law but agree to litigation in the Shanghai Maritime Court. The combination, however, carries different risks. The golden rule is to avoid the mismatch of a foreign law with a Chinese litigation forum. Asking a Chinese judge to apply a complex foreign law in a domestic trial is a recipe for procedural delays and unpredictable application.
The most common and effective combination for FIEs is PRC law coupled with arbitration in China before a reputable internationalized institution like the China International Economic and Trade Arbitration Commission (CIETAC) or the Shanghai International Arbitration Center (SHIAC). These institutions have modern arbitration rules, allow for a high degree of party autonomy in procedure, and increasingly have panels of arbitrators with international experience and language capabilities. This combination provides the enforceability advantage of a PRC award (under the New York Convention, it is treated as a domestic award, simplifying enforcement within China) while benefiting from a relatively neutral and professional procedural framework.
For contracts with a truly offshore focus, a combination of a respected neutral foreign law (e.g., English law) and arbitration in a major hub like Hong Kong, Singapore, or London remains a strong option. The key is to ensure that the chosen forum has a proven track record of enforcing awards against assets in the relevant jurisdictions, which for many FIEs, will ultimately be within China.
文本细节：法律选择条款的起草
The devil is truly in the details. A poorly drafted governing law clause can nullify all strategic planning. The clause must be unambiguous. Vague statements like "the laws of a jurisdiction acceptable to both parties" or "principles of international law" are invitations for dispute. The clause should explicitly state: "This Agreement shall be governed by, and construed in accordance with, the substantive laws of [e.g., the People's Republic of China], without regard to its conflict of laws principles." The exclusion of conflict-of-laws rules is important to prevent renvoi (where the conflict rules of the chosen law point to another jurisdiction's law).
It is also prudent to include a separability clause, stating that if any provision is found invalid under the governing law, it will not affect the validity of the remaining provisions. Given the potential for certain Chinese mandatory rules to override chosen law, this clause helps preserve the overall contract. Furthermore, for complex agreements, consider carving out specific issues to be governed by a different law. For instance, the creation and perfection of a security interest over assets located in China will almost invariably be subject to PRC law, regardless of the governing law of the main loan agreement. A well-drafted contract will acknowledge this explicitly.
My personal reflection from countless document reviews is that many standard international templates are woefully inadequate for the China context. They either pay lip service to the governing law clause or treat it as a boilerplate item. In our work, we treat this clause as a centerpiece of the contract's risk architecture, drafting it with precision and ensuring the client fully understands its implications in the context of the entire deal structure.
动态评估：法律环境的变迁
The legal landscape in China is not static. The promulgation of the Civil Code, updates to the Foreign Investment Law, and evolving judicial interpretations mean that the calculus for choosing governing law must be dynamic. A choice that was optimal five years ago may be sub-optimal today. For example, the strengthening of foreign investor protection under the Foreign Investment Law and the improved transparency in judicial proceedings have made PRC law a more attractive option than before.
Staying abreast of these changes requires not just reading legal updates but understanding their practical enforcement. This is where having trusted local advisors embedded in the system is invaluable. We regularly analyze newly published guiding cases from the Supreme People's Court to gauge judicial trends on how conflicts between party autonomy and public policy are being resolved. For instance, recent cases show a tightening of the definition of "public policy," which provides slightly more predictable boundaries for the application of chosen foreign law.
Therefore, a periodic review of key contracts' governing law and dispute resolution clauses should be part of every FIE's corporate governance routine. This is not about constant change, but about ensuring that the original strategic alignment of the clause with the business's risk profile and operational reality remains valid.
结论与前瞻
In summary, the choice of governing law for an FIE's foreign-related contracts is a multidimensional strategic decision, balancing legal predictability, enforceability, commercial relationships, and long-term operational reality. The mandatory application of PRC law to key investment contracts is a fixed star. Beyond that, the trend I observe is a growing sophistication among foreign investors. The blind preference for a familiar foreign law is giving way to a more nuanced analysis, where PRC law is increasingly seen not as a forced compromise, but as a viable and often superior option for contracts deeply connected to the China market.
Looking ahead, as China further integrates into the global legal community and its arbitration institutions continue to gain international credibility, the combination of PRC substantive law with arbitration in China will likely become the default for a wider range of commercial contracts. The future will belong to those who can navigate the dual systems not by rigidly imposing one upon the other, but by intelligently weaving them together to create the most robust and enforceable framework for their specific business. The goal is not to win a hypothetical legal argument in a foreign court, but to secure a smooth and profitable operation on the ground in China. That, in my experience, is the ultimate benchmark for success.
Jiaxi Tax & Financial Consulting's Perspective
At Jiaxi, our perspective is forged at the intersection of legal theory and administrative practice. We view the governing law clause not in isolation, but as the keystone in the arch of an FIE's contractual ecosystem. Our 14 years of hands-on registration and processing work have taught us that a contract, no matter how brilliantly negotiated, is only as good as its acceptability to the authorities and its enforceability in the local context. We have seen too many "perfect" offshore agreements stumble at the MOFCOM window or become dead letters in a local court. Therefore, our advice is always grounded in a "China-enforcement-first" mentality. We advocate for a clear hierarchy: first, identify where PRC law is mandatory and build compliance there; second, for discretionary choices, rigorously weigh the pros and cons of foreign law against the tangible benefit of seamless integration with the FIE's daily regulatory life. We believe the most elegant solution is often the simplest: for core operational contracts in China, PRC law paired with a modern arbitration clause provides the most robust shield and the most practical sword. Our role is to guide investors through this calculus, ensuring their legal framework is both sophisticated in design and bulletproof in execution.
