Chinese Parties to International Licensing Deals Should Consider How Terms Translate

Licensing deals are still relatively new in China compared to the United States and Europe. Tom Duley and Ruchun Ji explain why this means Chinese parties need to be careful about the history of terms and the choice of governing law and arbitration venue when negotiating contracts.

In the United States and Europe, licensing and collaboration deals have been a staple of the life sciences business environment for the past 20–30 years. China, however, is still at an earlier stage of experience when it comes to putting such deals together.

Chinese innovators and companies may not realize the depth of case law behind the terms used in U.S. and European licensing contracts. Though contract terms may be brief, each carries the weight of many examples behind it, and it is this case law that may determine the outcome of a dispute should any conflicts arise over the collaboration.

The relatively short history of licensing deals and collaboration transactions in China means that Chinese terms may not always carry the weight of the case law behind them. This effect is compounded by the fact that China is similar to many EU countries in having a civil law system, rather than the common law system of the United States or the United Kingdom. In other words, cases in China do not have the effect of a precedent as they do in the Anglo-American system.

If a contract provision or term is simply translated into Chinese, problems may arise, as this translation may not necessarily align with the intentions of the parties.

To avoid such problems, parties need to take into account how any provisions in an English drafted document may be interpreted under Chinese law in terms of market practice. For example, the term “Commercially Reasonable Efforts” carries with it a wealth of case law which could be cited should a dispute arise.

We are increasingly seeing parties from the EU choosing Swiss law or the law of England and Wales as the governing law of a contract, and some Chinese parties are also following this route. However, even if a contract is governed by Chinese law, it is important to be aware that if it is written in English, and if a dispute arises, an arbitration tribunal may look at and be swayed by the relevant English or U.S. law cases, if the U.S. party requests that the tribunal consider these.

The venue chosen as the seat of arbitration in the contract will also impact how the contract provisions will be interpreted should a dispute arise. A tribunal seated in a particular country might be minded to interpret a term in a way that is influenced by the legal system of that country, even though the governing law of the contract is a foreign law.

For this reason, there can be benefits to having alignment on the law governing a licensing contract and the choice of venue for dispute resolution. In addition to avoiding additional costs and expenses – if for example, contract disputes are heard in Hong Kong, but the governing law of the contract is German – aligning contract law with the arbitration venue can help to avoid too many interpretations of the law and expert opinions about what a provision means in a specific jurisdiction.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.