In English and Chinese, there are several terms that are used to describe the law that is applied to interpret a contract and to resolve any questions concerning the rights and obligations of the parties under the contract, including the remedies available in the case of breach. This column will look at the following three terms and consider whether there are any differences between them:
- Governing law
- Applicable law
- Proper law
Happily, for lawyers and others who draft and negotiate contracts in English and Chinese, it appears that the way each of these terms is used in English and Chinese is broadly the same.
This column will also consider the situation that arises when the parties to a contract do not make provision for the law that should be used to interpret a contract, and the principles of private international law that apply in common law jurisdictions and in China. Although this is a complex area of law, there are a few fundamental principles that guide lawyers and courts in determining which law should be used in this situation. It must be borne in mind, however, that different jurisdictions adopt different approaches in resolving this question.
Governing law
This is the term that is most commonly used in contracts, as seen in the following simple governing law clause:
管辖法
本协议受 [英格兰] 之法律管辖，并依其进行解释。
Governing Law
This agreement is governed by and construed in accordance with the laws of England.
The phrase “governed by” is a reference to the law that is used to determine the substantive issues concerning the contract, including its formation, validity and enforceability. For example, if a contract is governed by English law, the doctrine of consideration will be applicable in determining whether the contract is enforceable.
The phrase “construed in accordance with” is essentially a subset of the first phrase and is therefore not strictly necessary. It refers to the law that is used to interpret the terms in the contract. For example, if the contract includes an obligation to use best efforts, the meaning of the phrase “best efforts” – and whether the party subject to the obligation has performed the obligation – will be determined in accordance with English law (see China Business Law Journal volume 2 issue 7, page 113: Best efforts or reasonable efforts?).
The interpretation of a contract can be problematic when the contract is executed in a language that is different from the language of the governing law. This is because of the different nuances between languages and the different ways in which concepts are expressed and understood (see China Business Law Journal volume 1 issue 9, page 89: Language clauses and the challenges they present).
Applicable law
In English, the term “applicable law” is often used in the same way as “governing law”; namely, to describe the law that is applicable to the substantive issues concerning a contract. In Chinese, the phrase 所适用的法律 usually appears as part of the sentence construction in legislative and judicial provisions. For example, article 145 of the PRC General Principles of Civil Law provides as follows:
第一百四十五条
涉外合同的当事人可以选择处理合同争议所适用的法律，法律另有规定的除外。
涉外合同的当事人没有选择的，适用与合同有最密切联系的国家的法律。
Article 145
The parties to a contract involving foreign interests may choose the law applicable to settlement of their contractual disputes, except as otherwise stipulated by law.
If the parties to a contract involving foreign interests have not made a choice, the law of the country to which the contract is most closely connected shall be applied.
Article 126 of the PRC Contract Law contains the same provision, confirming that the parties to a contract are generally free to choose the governing law of the contract. However, it contains a restriction as follows:
在中华人民共和国境内履行的中外合资经营企业合同、中外合作经营企业合同、中外合作勘探开发自然资源合同，适用中华人民共和国法律。
For contracts to be performed in the territory of the People’s Republic of China on Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures and on Chinese-foreign co-operation in exploring and developing natural resources, the laws of the People’s Republic of China shall apply.
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Andrew Godwin
A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at law.asia.
