As a foreign business entity or individual, when entering into an agreement with a Chinese business entity or individual, the first choice to be made should be choosing the applicable law for the pending agreement. In accordance with the Contract Law of the People’s Republic of China, the parties of an agreement involving foreign factors can choose the applicable law for the agreement. It means unlike a domestic agreement automatically governed by Contract Law of the PRC, a foreign-factor-related agreement does not have a clear applicable law, unless both parties can later on reach a mutual understanding, or a court or arbitration commission with jurisdiction makes a ruling on such issue. It further means when both parties have different interpretations on certain term of such agreement, the dispute could get further complicated because there is no clear applicable law for the agreement.
As a matter of fact, choosing the applicable law from the very beginning not only can avoid unnecessary disputes, but also can allow one party to make terms benefitting themselves at the best in accordance with the law chose in the agreement. A lot of things can go wrong when performing a contract, we need to eliminate as many uncertainties as possible before executing an agreement. Among all the uncertainties, the applicable law is the most fundamental one. One term could be valid in accordance with this law and invalid according to the same law from another jurisdiction. Therefore before entering an agreement with a foreign company or individual, consult with your lawyer to make sure you are on the right track before it is too late.