Questions & answers

How can we mitigate the risk so the terms of the acquisition or investment agreement will not be enforceable in China?

We are a U.S. developer working with a Chinese institutional investor for a senior living project in Florida. They will be contributing a significant sum of about $150 million and we are working out contract details. We have been warned by a fellow developer, who signed with a Chinese investment group last year, and got mixed up with a contract that was structured in a way so certain terms were enforceable in China.


Answers
  • Sha He

    Berwin Leighton Paisner LLP Beijing Representative Office
    January 31, 2018

    Thank you for the question. Enforceability in two senses. Very likely any agreement you will enter into with the Chinese investor would be governed by the US law and be brought up to the US court or any arbitration center in the States if there is any dispute. It is true that the US court decision or arbitrational award is no way easy to be enforced by Chinese court but the good signs have shown that a US court decision made by a Los Angeles Federal Court has been enforced by a Chinese court based on reciprocal principles. Singaporean court decision has been enforced as well. It is a case-by-case situation. In another sense making the contractual arrangement workable in Chinese legal context. For example, China has very stringent outbound investment currency control at the moment, it has to be ascertained that the Chinese investor has enough of fund overseas already or can obtain credits from foreign banks when making the acquisition. No language like subject to the approval by Chinese authorities on the deal. If any onshore asset in China to be offered to any creditors as a collateral for any loans, that is not realistic as the land/housing authority practically will refuse to register foreign entities' security right against the Chinese asset.

  • Sheri Chromow

    SPC Advisors, LLC
    February 05, 2018

    My qualifications are in the US. I can say that your concern is a common one and well-founded. I know Americans who have been doing business in China for years. It would make sense for you to contact one of them.

  • Erex Chen

    MYLINK Law Office
    January 31, 2018

    Dear Sir, Thanks for your message. Basically, we suggest a proper dispute settlement clause shall be added and reviewed by both Chinese lawyer and US lawyer, so that we make sure that the Chinese court will not have any jurisdiction over the dispute settlement between two parties.

  • January 23, 2018

    I have lived in China for the last 11 years and have 25 years of experience doing business here, first a lawyer and then an investment banker. I have found that it is the structuring of the deal that is critical, not the legal provisions. That is, whatever the courts and laws used, you must still enforce the agreement where the Chinese side has assets. Most Chinese developers have limited assets in the U.S., so even if you get a court judgment in the U.S. against Chinese parties with no assets in the U.S., you would still need to go to China to enforce the judgment. There are steps you can take to enhance your ability to enforce contractual provisions, but I find it better to structure the deal so that you have constant leverage on the Chinese partner to timely perform its obligations. You should also keep in mind that last year the Chinese government imposed significant restraints on the ability of Chinese to invest in a number of opportunities overseas, including real estate development projects.

  • Daniel Levine

    Special Counsel, Covington & Burling LLP
    January 23, 2018

    Thanks for your question. Are you asking how you can “prevent” the terms of the agreement from being enforceable in China? Or rather how you can make the Agreement enforceable in China? Developers are usually interested in the second question because they want to make sure they can force the Chinese party to do what it has agreed to do.