Contracts with China-Based Partners: Law, Jurisdiction and Arbitration

Why These Clauses Matter

Cross-border contracts create immediate questions. If a dispute arises, which country's courts will hear it? Which country's laws will apply? Will a judgment from one country be enforceable in the other?

Malaysian SMEs contracting with Chinese partners—whether for manufacturing, supply of goods, or investment—cannot assume that Malaysian courts will have jurisdiction or that Malaysian law will apply. The contract itself must address these issues clearly.

Choice of Governing Law

The governing law clause determines which country's legal system will be used to interpret the contract and resolve disputes about its terms. Under the conflict-of-laws principles applied by Malaysian courts, parties may generally choose the law that governs their agreement, and an express choice is usually respected.

Options for Malaysian Businesses

You may propose that Malaysian law governs the contract. This gives you the advantage of familiarity with the legal framework. However, your Chinese counterpart may resist this and insist on Chinese law.

In some negotiations, parties agree on a neutral governing law—often English law or the law of Hong Kong SAR—as a compromise. This can work, but you should understand that you will then need advice on that foreign legal system if disputes arise.

If no governing law is specified, courts or arbitrators will determine the applicable law based on connecting factors such as the place of performance or the location of the parties. This creates uncertainty and should be avoided.

Jurisdiction and the Problem of Enforcement

A jurisdiction clause specifies which country's courts will hear disputes. However, choosing Malaysian courts does not always give a practical solution.

Enforcement Challenges

Malaysia and China do not have a bilateral treaty for the reciprocal enforcement of court judgments. The Reciprocal Enforcement of Foreign Judgments Act 1958 applies only to countries listed in its schedule, and China is not among them.

This means that if you obtain a judgment from a Malaysian court against a Chinese company, you cannot simply register it in China for enforcement. You would need to commence fresh proceedings in a Chinese court, which may or may not recognise the Malaysian judgment. The reverse is also true: a Chinese court judgment is not directly enforceable in Malaysia under the 1958 Act.

For this reason, arbitration is often more practical for cross-border disputes with Chinese parties.

Arbitration: A More Enforceable Option

Both Malaysia and China are signatories to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This means that an arbitration award made in one country can generally be enforced in the other, subject to limited grounds of refusal.

Choosing an Arbitration Institution

Common choices for Malaysia-China contracts include:

• Asian International Arbitration Centre (AIAC) in Kuala Lumpur, which administers arbitrations under its own rules and is familiar to Malaysian businesses.
• China International Economic and Trade Arbitration Commission (CIETAC), a well-established institution in China that handles a large volume of international commercial disputes.
• Hong Kong International Arbitration Centre (HKIAC), often seen as a neutral venue acceptable to both Malaysian and Chinese parties.

The arbitration clause should specify the institution, the seat of arbitration, the number of arbitrators, and the language of proceedings. Under the Arbitration Act 2005, arbitrations seated in Malaysia are subject to that Act's provisions regarding procedure, interim measures and challenges to awards.

Drafting the Arbitration Clause

A poorly drafted arbitration clause can create problems. The clause should clearly state that disputes shall be finally resolved by arbitration, identify the institution and its rules, and specify the seat. Ambiguous wording—such as clauses that refer to both arbitration and court litigation—can lead to preliminary disputes about whether arbitration is even required.

Language of the Contract

Contracts with Chinese partners are often prepared in both English and Chinese. If both language versions are signed, the contract should state which version prevails in the event of inconsistency.

Without a prevailing language clause, disputes may arise about the correct interpretation of terms where the English and Chinese texts differ. This is a common and avoidable problem.

Payment Security

Malaysian SMEs—particularly those buying goods from Chinese manufacturers—should consider payment mechanisms that provide security if goods are not delivered or do not conform to specifications.

Letters of Credit

A documentary letter of credit issued by a bank can provide assurance that payment will only be made when specified documents (such as bills of lading or inspection certificates) are presented. This shifts some risk away from the buyer.

Retention and Milestone Payments

Structuring payments in stages—such as a deposit, a payment on shipment, and a final payment after inspection—gives the buyer leverage if problems arise. The contract should clearly set out the conditions for each payment.

Evidence of Performance

If a dispute arises, you will need evidence of what was agreed and whether obligations were performed. This is particularly important in cross-border transactions where communications may occur over messaging applications and informal channels.

Practical steps include:

• Ensuring that all variations or amendments to the contract are recorded in writing and signed by both parties.
• Retaining copies of all correspondence, shipping documents, inspection reports and payment records.
• Using independent inspection services, particularly for goods manufactured in China, and ensuring inspection reports are issued before shipment.

Evidence of the parties' communications and conduct may be relevant if a dispute arises, subject to the rules in the Evidence Act 1950 on proving the terms of a written contract (sections 91 and 92). Clear records make it easier to establish your position in any dispute.

Practical Considerations for Malaysian SMEs

Negotiating these clauses requires understanding your own priorities. If your Chinese counterpart is a large manufacturer with significant bargaining power, you may have limited ability to insist on Malaysian law and Malaysian arbitration. However, you should still ensure that the chosen forum and law are acceptable and that you understand the practical implications.

Before signing, have the contract reviewed by a lawyer who can advise on the dispute resolution provisions and identify any terms that may be problematic. This is particularly important for contracts involving significant sums or long-term supply arrangements.

Common questions

Can I sue a Chinese company in a Malaysian court?

You may be able to, depending on jurisdiction grounds, but enforcing a Malaysian court judgment in China is difficult because there is no bilateral enforcement treaty between the two countries.

Is arbitration better than court litigation for China contracts?

Often yes. Both Malaysia and China are parties to the New York Convention, so arbitration awards are generally enforceable in both countries, unlike court judgments.

What happens if the English and Chinese versions of my contract say different things?

Disputes may arise over the correct interpretation. Your contract should include a clause stating which language version prevails in case of inconsistency.

Should I pay my Chinese supplier in full before shipment?

This is risky. Consider using letters of credit or milestone payments tied to delivery and inspection to protect your position if goods are not delivered or are defective.

What is the seat of arbitration and why does it matter?

The seat determines which country's arbitration law governs the proceedings and where challenges to the award may be brought. It affects procedural rights and enforcement.