How Do the Chinese Courts Interpret Commercial Contracts?
Chinese judges like to see a formal contract with well-written terms signed by both parties. In the absence of a contract, the court may accept purchase orders, emails, and online chatting records as a written informal contract.
What about testimony? Generally speaking, Chinese judges do not accept or rely solely on testimony.
1. Chinese judges are more willing to understand the literal meaning of a written contract and don’t believe in the testimony
(1) Chinese judges expect you to submit a contract with perfect terms.
The contract can exactly tell them what goods you are dealing with, the quantity, the price, the specific dates of payment and delivery, and the specific amount of liquidated damages or compensation (or the formula used to calculate the amount).
The Chinese company has placed its seal on the contract. And the signatory of the foreign company has express authorization.
In this case, it is easy for Chinese judges to learn the complete picture and details of the transactions from the contract.
(2) In the alternative, Chinese judges accept simple orders, emails, and online chatting records.
Because they are deemed as written contracts under Chinese law. We can give them a non-rigorous label as ‘informal contracts’.
What’s more, these contracts are common. To get the transactions done faster, businessmen often start cooperation without a formal contract. If judges don’t accept such informal contracts, many cases will be turned away from the courts.
Although judges would accept informal contracts, it doesn’t mean that they are willing to do so. Because such contracts have the following characteristics:
i. Scattered terms.
The terms are scattered in different documents, emails, and chat records, and are sometimes inconsistent, which brings a time-consuming and labor-intensive task for judges because they have to take great efforts to put these terms together.
ii. Inadequate contract terms.
Businessmen often ignore many important terms, such as the period, liability for breach of contract, and dispute resolution, which requires judges to determine the default terms of businessmen in accordance with Chinese law or make their decision after speculating on the behavior of businessmen. As a challenge for judges who lack business knowledge and flexibility, it increases the uncertainty of dispute resolution.
iii. Questioned authenticity of contracts.
Since orders, emails, and online chatting records usually have not been signed and sealed by both parties, their authenticity easily gets questioned. Judges often require the plaintiff and the defendant to entrust expert witnesses to prove the authenticity, as they don’t want to make the judgment on their own. However, such identification makes it difficult to close the case.
(3) If there is only testimony without any text, judges will hardly accept testimony.
Chinese judges distrust testimony for their tendency to believe that witnesses are prone to lie. Of course, if the parties can correlate the witness’s testimony with some textual evidence, it is more likely for judges to believe in such evidence.
2. Chinese judges lack commercial knowledge, flexibility and time to understand transactions beyond the contract text
(1) Chinese judges lack adequate business knowledge
Most Chinese judges in the local courts are very young, usually between 30-40 years old. They have been admitted to the court since graduating from law school and have no other professional experiences, so they are not familiar with various commercial transactions.
So, they cannot easily understand the actual agreement through the hearing, and then make a ruling according to the agreement.
(2) Chinese judges lack sufficient flexibility
The Chinese courts usually supervise judges in a strict manner to prevent them from breaking the law in trial activities. This kind of supervision is sometimes so demanding that the judges have to be rigid when making judgments and dare not exercise their discretion.
(3) Chinese judges lack enough time
The litigation explosion has existed in China for over a decade, especially in economically developed regions, which are the most active areas of international trade in China at the same time.
Judges in these regions have long been overwhelmed by a caseload beyond their capacity.
The workload of Chinese judges is extremely heavy, which also causes them to not have enough energy to fully understand the parties’ transactions, and therefore choose to strictly interpret the contract, which is the most time-saving and least likely to be accused.
In conclusion, we suggest that you try to sign a well-written contract with your Chinese business partner at any time. If you have reached a new arrangement during the performance of the contract, please sign a formal supplementary agreement.
If you fail to do this, please at least take the trouble to confirm the details of the transactions in emails and online chatting records.
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