what we think

By Fabian Knopf

When structuring cross-border agreements with counterparties in the Chinese mainland, it can be tempting to choose a familiar legal framework — particularly U.S., English or an EU governing law — combined with a neutral and reputable arbitral seat like Hong Kong (which is part of China, but retains its own legal system under the One Country, Two Systems principle). On paper, this combination seems like a reasonable compromise between parties in and outside the Chinese mainland. In practice, it introduces significant risks that can undermine the ability of the party outside of China to seek remedies in a dispute. Here is why we do not recommend this approach, and what companies outside of China should consider instead.

The Enforcement Problem

The most important question in any dispute resolution clause is not which law governs the contract — it is where you can actually collect. If your counterparty is a company in the Chinese mainland, its assets are almost certainly there as well. If so, that is where enforcement ultimately will need to happen.

Hong Kong arbitral awards are generally enforceable in the Chinese mainland, but the process requires recognition by a court in the Chinese mainland. Where that award has been rendered on the basis of a foreign governing law, the Chinese mainland court faces an additional analytical burden: it must evaluate a Hong Kong award that applies a foreign legal system that is unlikely to be very familiar with. This adds a further layer of complexity and uncertainty. From a practical risk standpoint, any structure that complicates enforcement is best avoided.

The Cost and Complexity of a Foreign Law Dispute

Choosing a foreign i.e., non-Chinese mainland, law as the governing law does not just affect enforcement — it materially changes the economics and logistics of the arbitration itself. If the tribunal is seated in Hong Kong but must apply U.S. law, then both parties will likely need to retain U.S. counsel to provide expert evidence on U.S. law, briefing the tribunal on matters that would be straightforward in a domestic U.S. proceeding but require substantial explanation in a cross-border context.

The result is higher costs, longer proceedings, and greater unpredictability — all of which work against the party seeking to enforce its rights. Disputes are already expensive; introducing a foreign law element amplifies that expense potentially without a commensurate benefit.

Interim Relief: A Critical and Often Overlooked Consideration

Another, often underappreciated risk in choosing arbitration outside of the Chinese mainland for China-related contracts is the question of interim measures. If a dispute arises and you need to act quickly to preserve assets e.g., by freezing bank accounts or preventing dissipation of funds, your ability to obtain those measures in the Chinese mainland depends heavily on your dispute resolution structure.

In principle, interim asset preservation measures in China are more readily available in connection with arbitration or court proceedings in the Chinese mainland. A Hong Kong arbitration seated under foreign governing law offers will at the very least delay practical access to asset preservation tools in the Chinese mainland. In a payment dispute, where time is often of the essence, this gap can be the difference between recovering what you are owed and finding that assets have already been moved.

The Bottom Line

The central commercial risk in most transactions with companies Chinese mainland is payment, and due enforcement there. A dispute resolution clause should be designed to address that risk directly — not to create familiarity or comfort for the foreign party at the cost of practical enforceability.

U.S. governing law may appear advantageous in isolation. It is familiar, well-developed, and predictable. But in the context of a contract where enforcement will ultimately play out in Chinese mainland courts, it adds cost, complexity, and friction without meaningfully improving one's legal position. A more prudent approach is to adopt a governing law and arbitral structure that supports enforcement and interim relief— typically Chinese mainland law with arbitration in Chinese mainland, or at minimum a structure that does not complicate Chinese mainland recognition proceedings.

When drafting dispute resolution clauses for cross-border transactions with counterparties in the Chinese mainland, the guiding principle should be: design for where you will need to enforce, not for where you feel most comfortable.

R&P China Lawyers is a full-service law firm with a strong commercial and contracts practice closely integrated with our dispute resolution team. Our lawyers have extensive experience advising international companies on cross-border contract structuring, governing law selection, and enforcement strategy in China. If you would like to discuss how to structure your dispute resolution clause for maximum enforceability on the Chinese mainland, please contact Mr. Fabian Knopf (knopf@rplawyers.com) or your usual contact at R&P China Lawyers.