In this article, I will look at the following three challenges that arise in relation to contracts that are written in two or more languages:
- the challenge of dealing with two language versions generally;
- the challenge of dealing with two language versions where a discrepancy exists between each version; and
- the challenge of dealing with two language versions where the prevailing version is unclear or does not make sense.
The first challenge
It has become common in China-related transactions for contracts to be prepared in both Chinese and English. In some cases, the requirement for contracts to be in Chinese is mandated by PRC law. For example, article 7 of the PRC Sino-foreign Equity Joint Venture Law Implementing Regulations provides that the joint venture documents that are prepared for approval purposes must be in Chinese. These documents include the joint venture contract and the articles of association.
Article 7 further provides that some of these documents may concurrently be written in a foreign language, in which case the two language versions will have equal effect.
The concept of equal effect is easy enough to accept from a legal perspective. If two language versions are signed by the parties in relation to the same contract, logic would normally require each version to have equal legal effect. The alternative would be where only one language version has legal effect and the other language version was prepared solely for reference purposes.
The concept of equal effect is more difficult to accept from a language perspective. After all, true equivalence between two or more languages is very difficult – if not impossible – to achieve. This is the case even where there is no mistranslation and each version is a faithful reflection of the other.
The reason for this is that each language has its own history, culture and linguistic connotations and is likely to be interpreted in its own unique way. Equivalence may be possible in the case of nouns that refer to tangible things. However, nouns that refer to intangible things, adjectives that are used to describe them and adverbs to describe how rights should be exercised or how obligations should be performed are more problematic. Obvious examples are provisions that require each party to use its “best endeavours” or to “act reasonably”.
In addition, it is important to bear in mind that from a legal perspective (as distinct from a language perspective), the language of a contract will inevitably be interpreted in accordance with its governing law.
PRC law provides that certain contracts, including joint venture contracts, must be governed by PRC law. Where a joint venture contract is signed in both English and Chinese, it seems unrealistic to expect that the meaning of words in English could be determined by references to concepts under PRC law that are expressed in Chinese. As a result, the Chinese version would have the natural advantage in circumstances where the contract is governed by Chinese law.
For example, a provision that imposes an obligation on the parties to “undertake negotiations in good faith to resolve any disputes arising under or in connection with this contract” will ultimately be interpreted by reference to the concept of “good faith” as that term is expressed in the Chinese language under PRC law.
Where disputes under a contract are submitted to a PRC court, the Chinese version will also have a natural advantage, for the reason that a PRC court will inevitably pay more attention to the Chinese version of the contract than the English version, since Chinese is the official language of the court.
The second challenge
What about the situation where the parties sign two language versions, which have equal effect, but certain words or provisions in the contract have been incorrectly translated from one language to the other: in other words, a discrepancy exists between the two versions?
To deal with this challenge, it has become customary in cross-border transactions to include language clauses in contracts to provide that one language will prevail over the other in the case of a discrepancy. A typical example is: This Agreement is written in English and Chinese. Both versions will be of equal effect and be binding on the parties, provided that the English version will prevail in the event of any discrepancy between the two language versions.
Lawyers will usually recommend to their clients that one version prevail in the event of a discrepancy because of the inherent risk of mistranslation.
The decision as to which language should prevail is often subject to heavy negotiations between the parties. It usually depends on the language version in which the contract was primarily drafted and negotiated, and also on the parties’ respective bargaining power. It is very rare for two language versions to be simultaneously drafted and negotiated. Invariably, one language version ends up being a translation of the other version and ends up being less readable and less fluent as a result.
Where no agreement is reached as to which language should prevail, and the contract simply provides that both language versions will have equal effect, the question arises as to how any discrepancy between the two should be resolved. Logic suggests that a court or other tribunal would have to give equal attention to each language version in order to glean the intention of the parties and make a decision as to how the relevant provision should be interpreted.
In any event, the governing law of the contract may itself contain specific provisions as to how any discrepancy between the language versions of a contract should be resolved.
Article 125 of the PRC Contract Law provides as follows:
In case of any dispute between the parties concerning the construction of a contract term, the true meaning thereof shall be determined according to the words and sentences used in the contract, the relevant provisions and the purpose of the contract, and in accordance with the relevant usage and the principle of good faith.
Where a contract was executed in two or more languages and it provides that all versions are equally authentic, the words and sentences in each version are construed to have the same meaning. In case of any discrepancy in the words or sentences used in the different language versions, they shall be interpreted in light of the purpose of the contract.
Article 125 does not expressly exclude the situation where the parties have agreed on which language version should prevail in the event of a discrepancy. Instead, it simply provides that any discrepancy should be resolved in light of the purpose of the contract. The term “purpose” embraces the parties’ intentions and objectives in entering into the contract.
An important question that arises in this regard is whether the second paragraph of article 125 might override an agreement between the parties as to which language version should prevail in the event of a discrepancy. At the very least, this provision suggests that where one language prevails, a PRC court may have regard to the other language version to determine the purpose of the contract.
The third challenge
Even where one language version prevails in the case of a discrepancy, problems may still arise where the prevailing language version is unclear and a dispute arises between the parties as to how that version should be interpreted.
If a joint venture contract provides that the English version will prevail in the event of a discrepancy and a dispute arises between the parties in relation to the interpretation of the English version, a PRC court will need to call expert evidence as to how the English version should be interpreted, since English is not the official language of the court.
As noted above, it is possible that the uncertainty will be resolved by reference to the other language version, particularly where the other language version is clearly expressed and can be clearly understood.
It is also possible that a court will have reference to the other language version, even where it was not formally signed by the parties.
This was the situation that arose in a Canadian dispute involving two telecommunications companies, Rogers Communications and Aliant. In this case, the Canadian Radio-television and Telecommunications Commission was required to interpret a termination clause in an agreement between the two companies. The dispute turned on the effect of a comma in the termination clause and whether each party had the right to terminate the contact during the initial contract period of five years. Because the terminating party was able to save a substantial amount of money by terminating during the initial contract period, the case came to be referred to in the popular media as the “million dollar comma” case.
For our purposes, the interesting fact about this case was that the parties had signed the English version only. However, a French translation had been provided for approval purposes. In addition, both language versions were considered to be equally authoritative from a regulatory perspective.
Unlike the English version, the clear meaning of the French version was that the contract could not be terminated during the initial contract period.
In its decision, the commission stated that it was appropriate to refer to the unsigned French version, since it had only one possible interpretation, and that interpretation was consistent with one of the two possible interpretations of the English version.
The decision in this case indicates that where the prevailing language version is unclear and is subject to two or more interpretations, a court or tribunal is likely to resolve a dispute by reference to the other language version (even where it is not signed). This is particularly likely where the other language version was prepared for approval purposes and each version is considered to be equally authoritative from a legal and regulatory perspective.
Andrew Godwin is currently a member of a World Bank team that is advising a central bank in Asia on potential reforms to its mandate. He previously practised as a foreign lawyer in Shanghai (1996-2006) before returning to his alma mater, Melbourne Law School in Australia, to teach and research law (2006-2021). Andrew is currently Principal Fellow (Honorary) at the Asian Law Centre, Melbourne Law School, and a consultant to various organisations, including Linklaters, the Australian Law Reform Commission and the World Bank.
