At one point or another companies wanting to do business in China will enter into a contract. Yet, there are differences of approach between UK law and Chinese law as to what it means to enter into a contract and how far the terms of the contract are ‘binding’ on those who sign up to them.

In very brief terms, here are some distinctions between the way we do things and the way the Chinese do.

Basic principles
The basic principles of Chinese contract law are codified in the 'PRC Contract Law' and are equality, freedom to enter into a contract without duress or interference, fairness and good faith.

In the UK, the basic principles are ‘freedom of contract’ and ‘binding force’. Although neither set of basic principles is completely alien to the other, the relative value placed on them in China and the UK is different.

Freedom
Freedom of contract means that parties to a contract can agree any terms they wish. The courts always try to give effect to the terms that the parties have agreed. Where there is doubt as to these terms, the court will look to find what the parties intended – it will not impose its own view or rewrite a contract.

Binding force
The principle of binding force underpins that of freedom of contract. In the UK, the general rule is that when you enter into a contract, you are bound to comply with its terms even if you consider them unfair.

In China, however, although parties are also generally free to contract on whatever terms they wish and their agreement is binding, they are also subject to the more fundamental principles of fairness and good faith.

Fairness and good faith
Under Chinese law, courts or arbitration institutions have the power to modify or revoke a contract which was obviously unfair at the time it was made. In addition, parties must ensure that they act in good faith from negotiation of the contract to its termination. They should also take account of social, moral and commercial norms, balance their interests with the other side and co-operate with them.

Relationships
Chinese business people appear to consider a contract merely as a starting point for developing a relationship. In other words, a set of terms to be adapted to cope with changing circumstances, rather than a rigid, binding agreement. This philosophy is reflected in basic principles of Chinese law and may find sympathy with judges or arbitrators.

These are really only starting points. Negotiating terms of contracts and entering into them raise many more questions. In all likelihood you are going to need the services of a professional law firm.

For further details contact John MacKenzie at Pinsent Masons. email john.mackenzie@pinsentmasons.com, tel 0131 225 0019