According to China’s Law on the Laws Applicable to Foreign-related Civil Relations, the Law on International Economic Contracts, and interpretations of the Supreme People’s Court, the two parties of a contract may choose in autonomy the laws applicable, provided that there is a clear foreign-related element in the relation between the two parties (which is always the case for contracts involving SMEs based in Europe); and that the application of foreign laws will not damage the social and public interests of China.

It is noteworthy that the Chinese judicial system has improved significantly in recent years for commercial and IP dispute resolution. EU SMEs therefore should not have any prejudices against the choice of Chinese law in their business contracts. In addition, choosing Chinese law might be more effective in enforcing one’s right in case of commercial disputes with Chinese companies, such as credit collection or compensation. If a Chinese company does have assets abroad, choosing the law of the foreign country could also be an option; but if it has no assets abroad (such as in the case of Chinese suppliers selling via online B2B e-commerce platforms), choosing Chinese law might be more advisable.

Finally, it must be noted that contracts between two domestic parties in China cannot choose foreign law as governing law. Affiliates of European companies operating as legal entities in mainland China are considered domestic entities and therefore cannot choose foreign law.