According to China’s Law on the Laws Applicable to Foreign-related Civil Relations, the Law on International Economic Contracts, and an interpretation 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. Therefore:

• If an EU SME sells to a Chinese company in China, it is recommended to use Chinese law and China as competent jurisdiction;
• If an EU SME buys from a Chinese company in China, it is recommended to use the law and jurisdiction of the EU SME’s home country.

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