Can I include an English governing law clause in a China contract?

Quick Answer

Yes, but with significant limitations. Under the PRC Law on the Application of Laws to Foreign-Related Civil Relations (2011, “Application of Laws Act”) and the Contract Book of the Civil Code, parties to a “foreign-related” (涉外) contract may choose governing law other than PRC law. However, this right is restricted for contracts that must be performed within China’s territory, and PRC mandatory rules cannot be excluded. Moreover, for certain contract types — including Sino-foreign equity joint venture contracts, Sino-foreign cooperative joint venture contracts, and contracts for the exploration of natural resources in China — only PRC law may apply. English governing law clauses in purely domestic contracts (i.e., between two Chinese entities without a foreign element) are invalid. Even when an English governing law clause is valid, PRC courts will apply Chinese procedural law and may reclassify the selected foreign law as a “fact” that must be proved by expert evidence.

Detailed Answer

1. The Legal Framework for Choice of Governing Law

The PRC legal system permits party autonomy in choice of law, subject to specific limits. The primary legal instruments governing choice of law in Chinese contracts are:

• PRC Law on the Application of Laws to Foreign-Related Civil Relations (2011) — The cornerstone statute. Article 3 provides: “Parties may explicitly choose the law applicable to their foreign-related civil relation.”
• Supreme People’s Court Interpretation I on the Application of Laws Act (2012) — Provides detailed guidance on what constitutes a “foreign-related” civil relation and the limits on party autonomy.
• Supreme People’s Court Interpretation II on the Application of Laws Act (2024) — Further elaborates on the proof of foreign law and mandatory rules.
• PRC Civil Code, Book 3 (Contracts), Article 467 — Confirms that the rules of the Application of Laws Act govern choice of law in foreign-related contracts.
• PRC Foreign Investment Law (2020) — Contains transitional provisions relating to foreign-invested enterprise contracts.

2. When Is a Contract “Foreign-Related”?

The threshold question is whether the contract is “foreign-related” (涉外). Under Article 1 of the Supreme People’s Court Interpretation I (2012), a civil relation is considered foreign-related if any of the following exist:

1. At least one party is a foreign national, foreign legal person, or stateless person — A company incorporated in Hong Kong, Macau, or Taiwan is also treated as foreign for choice-of-law purposes.
2. The subject matter of the civil relation is located in a foreign country — For example, a contract for the sale of goods located outside China, or for the construction of a building outside China.
3. The legal fact that creates, changes, or terminates the civil relation occurs in a foreign country — For example, acceptance of a contract by an offeree located outside China, or the execution of a contract outside China.
4. Other circumstances that may be recognized as foreign-related — A catch-all provision. In practice, the Supreme People’s Court has applied this to: contracts involving foreign exchange control, contracts where the performance involves both China and a foreign jurisdiction, and contracts where the economic effect extends beyond China.

Important distinction: A wholly foreign-owned enterprise (WFOE) incorporated under PRC law is a Chinese legal person. A contract between a WFOE and another Chinese party (even if the WFOE is ultimately owned by a foreign parent) is generally NOT “foreign-related” and therefore CANNOT choose English law as the governing law. The WFOE’s foreign ownership alone does not create a foreign element for choice-of-law purposes.

3. Mandatory Application of PRC Law (Three Exceptions)

Even when a contract is foreign-related, PRC law MUST be applied to certain types of contracts. The Application of Laws Act and related regulations list the following categories:

Category 1: Foreign Investment Contracts

Under Article 4 of the Application of Laws Act and Article 3 of the Supreme People’s Court Interpretation I, contracts that MUST be governed exclusively by PRC law include:

• Sino-foreign equity joint venture contracts (中外合资经营企业合同)
• Sino-foreign cooperative joint venture contracts (中外合作经营企业合同)
• Contracts for the exploration and development of natural resources in China (中外合作勘探开发自然资源合同)
• Contracts for the transfer of equity in Sino-foreign joint ventures (as confirmed by the Supreme People’s Court)

Note: With the enactment of the Foreign Investment Law (2020) and the abolition of the separate joint venture laws, some legal scholars argue that these restrictions have been relaxed for new foreign investments. However, the Supreme People’s Court has not issued a definitive ruling, and most practitioners continue to assume these restrictions apply. The safe approach is to assume PRC law must govern these types of contracts until clear judicial guidance is issued to the contrary.

Category 2: Contracts Affecting PRC Public Interest

Under Article 5 of the Application of Laws Act, if the application of foreign law would violate PRC public policy (社会公共利益), that foreign law shall not be applied. This is a narrow exception — the Supreme People’s Court has stated it should be “strictly construed” — but it creates uncertainty for governing law clauses in sensitive sectors.

Category 3: PRC Mandatory Rules (直接适用的法)

Under Article 4 of the Application of Laws Act, certain mandatory provisions of PRC law apply directly, regardless of the governing law chosen by the parties. These include:

• PRC labor law — employment contracts performed in China are subject to PRC minimum wage, working hours, social insurance, and termination rules, even if governed by English law.
• PRC anti-trust and anti-monopoly rules — competition law applies to conduct affecting the Chinese market.
• PRC foreign exchange controls — SAFE rules on cross-border guarantees, foreign debt registration, and capital account transactions.
• PRC environmental protection rules — environmental obligations arising from operations in China.
• PRC product safety standards — consumer protection rules.

These mandatory rules operate as a floor: if the chosen foreign law offers LESS protection than PRC mandatory law, the PRC mandatory rules prevail. If the foreign law offers MORE protection, it may apply insofar as it does not conflict with the mandatory rules.

4. Formalities and Proof of English Law in PRC Courts

If you validly choose English law and a dispute arises in a PRC court, the following procedural challenges apply:

1. Foreign law as “fact” — Under Chinese procedural law, foreign law is treated as a matter of fact that must be proved by expert evidence. The party relying on English law bears the burden of proving its content.
2. Expert evidence requirements — You must submit an expert opinion from a qualified English law practitioner (usually a barrister or solicitor with recognized expertise). The expert opinion must: (a) state the relevant provisions of English law, (b) explain how they apply to the facts of the case, and (c) be certified by a notary public in England and legalized/apostilled for use in China.
3. Court’s power to determine foreign law — Under Article 10 of the Application of Laws Act, if the parties fail to provide the content of foreign law within a reasonable time, or if the content cannot be ascertained, PRC law applies by default.
4. No binding precedent — PRC courts are not bound by English case law doctrine of precedent. While the court may consider English case law as part of the expert evidence, it is not obliged to follow it.
5. Translation costs — All expert opinions and supporting materials must be submitted in Chinese (or with certified Chinese translations). This adds significant time and cost.

5. English Governing Law and Arbitration

For most foreign companies, the practical solution is to combine an English governing law clause with an international arbitration clause (e.g., at the Singapore International Arbitration Centre — SIAC, Hong Kong International Arbitration Centre — HKIAC, or the London Court of International Arbitration — LCIA). The key advantages are:

• Arbitral tribunals are NOT bound by PRC procedural rules — They apply the procedural rules chosen by the parties (e.g., UNCITRAL Rules, ICC Rules) and give full effect to English governing law clauses without treating English law as a “fact” requiring expert proof.
• New York Convention enforcement — China is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). An arbitral award rendered under English law can be enforced in Chinese courts under the Convention, subject to limited grounds for refusal (mainly public policy).
• Greater predictability — English law contract principles (e.g., implied terms, fiduciary duties, liquidated damages rules) are well understood by international arbitrators and are applied consistently.

Caveat: Even with arbitration, PRC mandatory rules (as described in Category 3 above) still apply. An arbitral tribunal sitting in Singapore and applying English law must still consider PRC mandatory employment, competition, and foreign exchange rules to the extent they affect the subject matter of the dispute.

6. Practical Examples

7. Drafting Considerations for an English Governing Law Clause

If you decide to include an English governing law clause in a foreign-related contract, consider the following:

• Be explicit — Use clear language: “This contract shall be governed by and construed in accordance with the laws of England and Wales.” Avoid “as if the contract were performed in England” or similar hedging language.
• Include an arbitration clause — As discussed, this dramatically increases the likelihood that the governing law clause will be given effect. A sample clause: “Any dispute arising out of or in connection with this contract shall be finally settled by arbitration administered by the Singapore International Arbitration Centre (SIAC) in Singapore in accordance with the Arbitration Rules of the Singapore International Arbitration Centre.”
• Acknowledge PRC mandatory rules — Include an express acknowledgement that PRC mandatory rules apply to matters of social insurance, labor, foreign exchange, and environmental compliance. This demonstrates that the parties understood the scope of the governing law clause and reduces the risk of a public policy challenge.
• Specify the language of the contract — State that the English version prevails in case of conflict with the Chinese translation. However, PRC courts may still apply the contra proferentem rule and give weight to the Chinese version if the English version was prepared by the foreign party.
• Consider the enforcement jurisdiction — If the contract is to be performed in China and the parties anticipate enforcement in China, an English governing law clause adds complexity and cost to the enforcement proceedings. In some cases, it may be more efficient to accept PRC law and focus on drafting a detailed contract with clear, specific terms.

8. The “No-Proof” Alternative: Hong Kong Law

An increasingly popular alternative to English law is Hong Kong law. Under the Arrangement on Mutual Recognition of Civil and Commercial Judgments between the Mainland and Hong Kong (2019, effective 2024), judgments from Hong Kong courts are more readily enforceable in mainland China. For PRC courts, Hong Kong law is still foreign law requiring expert proof, but the legal systems are better understood by PRC judges due to the frequency of cross-border transactions. Additionally, English law and Hong Kong law share the common law tradition and many substantive rules are similar.

9. Recent Developments (2024–2025)

Two recent developments merit attention:

• Supreme People’s Court Interpretation II on Application of Laws Act (2024) — Clarified that the burden of proving foreign law shifts to the court if the party has made a “reasonable effort” to provide expert evidence but the court still considers it insufficient. This is a pro-choice-of-law development that may reduce the risk of defaulting to PRC law due to evidentiary failures.
• Shanghai Free Trade Zone Pilot (2025) — The Shanghai FTZ introduced a pilot program allowing parties in the zone to choose foreign governing law for certain business-to-business contracts, even if the contract is not strictly foreign-related, provided both parties are commercial enterprises. If expanded nationally, this could significantly broaden the scope for English governing law clauses.