China Contracts - Dispute Resolution Options
In China, emphasis is placed on the law and a functional legal system to further economic development. Therefore, there are many dispute resolution choices for contractual disputes in order to create a business-friendly environment, including market-friendly regulations and institutions capable of enforcing the regulations effectively and efficiently.
This creates a business environment favourable to both foreign and domestic investors, further attracting China to international business and relations, thereby increasing its economic presence.
As with economic and governance reforms, China has adopted a pragmatic approach in attempting to meet broad goals of justice and efficiency while maintaining sociopolitical stability and rapid economic growth. The result has been continuous experimentation leading to the creation of new mechanisms and the reform of existing mechanisms, including dispute resolution mechanisms of negotiation, mediation, arbitration and litigation.
Under Article 1 of the Judicial Interpretations on Choice of Law for Foreign-Related Civil Relationships (the “Interpretations”), parties to foreign-related transactions are generally free to select a preferred dispute resolution forum and law to govern their contracts provided their choice is consistent with People’s Republic of China (PRC) laws. A transaction is foreign-related if any one or more of the following elements is present:
• at least one of the parties is foreign;
• at least one of the parties habitually resides outside of China;
• the subject matter of the transaction is located outside of China;
• the legal fact that leads to the establishment, change, or termination of the transaction occurs outside of China; or
• other circumstances under which the transaction may be deemed foreign-related.
With respect to the choice of court agreements, parties to a foreign-related transaction are generally free to agree to submit their disputes to a Chinese or foreign court, subject to a few exceptions:
• the place where the defendant is domiciled;
• the place where the contract was signed or performed;
• the place where the plaintiff is domiciled;
• the place where the subject matter of the transaction is located; or
• any other place actually connected to the dispute.
If one of the above places is located outside China, the parties may select a foreign court to resolve their disputes. If they agree that the foreign court has exclusive jurisdiction, a PRC court will not have jurisdiction over their disputes, as long as the disputed matter does not involve the following issues in China:
1. protection of labor rights;
2..food and public sanitary safety;
4. financial safety, such as foreign exchange restriction;
5. anti-monopoly and antidumping; and
6. other circumstances that should be considered as applying the mandatory regulation (Article 4, 10 of the Interpretations).
In the absence of such an agreement, it may be that both the Chinese and foreign court have jurisdiction.
Further, dispute resolution is provided for under Article 128 of Contract Law of the People’s Republic of China, which states the parties may resolve a contractual dispute through settlement or mediation. Where the parties do not wish to, or are unable to, resolve such dispute through settlement or mediation, the dispute may be submitted to the relevant arbitration institution for arbitration in accordance with the arbitration agreement between the parties. Parties to foreign related contract may apply to a Chinese arbitration institution or other arbitration institution for arbitration. Where the parties did not conclude an arbitration agreement, or the arbitration agreement is invalid, either party may bring a suit to the People's Court. The parties shall perform any judgment, arbitral award or mediation agreement which has taken legal effect; if a party refuses to perform, the other party may apply to the People's Court for enforcement.
Similarly, Article 271 of the Civil Procedure Law of the People’s Republic of China provides that parties to a dispute arising from foreign economic trade, transportation or maritime activities, shall not bring an action in the people’s court if they have agreed in writing to submit the dispute for arbitration to an arbitral institution in the PRC handling cases involving foreign elements, or to any other arbitral institution. Therefore, in cases where parties have agreed to resolve their disputes by Chinese or foreign arbitration, a PRC court may not have jurisdiction.
Unlike foreign-related transactions, parties to domestic transactions are required to resolve their disputes in China. Under Article 34 of the Civil Procedure Law of the People’s Republic of China, parties to a domestic transaction are allowed to agree to submit their disputes to a court having an actual connection to the transaction. This includes a court in the place where:
1. the defendant is domiciled;
2. the contract was signed or performed;
3. the plaintiff is domiciled;
4. where the subject matter of the transaction is located; or
5. any other place actually connected to the dispute.
Article 128 of the Contract Law of the People’s Republic of China is also applicable to domestic transactions, and in August 2012, it was decided by the Supreme Court that there was no legal basis for parties to a domestic transaction to submit their disputes to offshore arbitration. Therefore, where parties to a domestic transaction have failed to include a choice of court or arbitration agreement in their contract, Chinese law on choice of forum will apply.
Negotiations are considered to be the most efficient means of dispute resolution. Majority of commercial contracts in China have a standard clause stipulating that negotiation should be pursued before other dispute settlement mechanisms are used. Australian companies tend to place a significant emphasis upon the legal rights and obligations of parties to a commercial dispute. In China however, a greater emphasis is placed on preserving the business relationship or using personal connections to assist in resolving disputes. Therefore, it is important to identify beforehand the values of each party, and work towards a peaceful settlement. In general, negotiations are the least expensive and can preserve the working relationship of the parties involved.
Mediation is commonly conducted as part of, but prior to, arbitration or litigation. In both arbitration and litigation, parties are encouraged to participate in mediation with mediators selected by the arbitral panel or during an in-court session. The rationale of mediation is that parties may present their proposals to the mediator who suggests a solution based on those proposals. Mediation is by definition non-binding and has achieved great success as a means of settling international commercial disputes between foreign and Chinese partners.
Today, there are various types of mediation: mediation by People’s Mediation Committees; specialised mediation such as labour mediation; informal and formal commercial mediation; judicial mediation; and mediation during arbitration. However, the popularity of mediation can decrease due to:
1. it being perceived as inconsistent with the rule of law as mediators often lack legal training;
2. the increased professionalization of judges and lawyers, and the streamlining of the litigation process, making litigation more attractive;
3. the low enforcement rate.
Furthermore, an issue with mediation is the lack of attendance by foreign parties. Therefore, Shanghai recently launched the first online pre-litigation mediation platform to be used by a district court in response to the increasing number of civil cases involving a foreign party. Specifically, the online platform was created for foreign firms finding it hard to attend mediations, in which disputes can be settled outside the courtrooms through online video chat software to discuss matters and reach an agreement.Therefore, with the introduction of the online video chat software used in mediation cases, China has demonstrated its advanced capabilities in providing a more convenient, efficient and less costly method in performing mediations.
In China, the Arbitration Law of the People’s Republic of China governs arbitration. Arbitral bodies in the PRC comprise the following:
1. China International Economic and Trade Arbitration Commission (CIETAC), also known as the Court of Arbitration of the China Chamber of International Commerce, and China Maritime Arbitration Commission (CMAC); and
2. Local arbitration commissions established under the Arbitration Law in large and medium sized cities throughout China.
CIETAC is one of the busiest arbitration centres in the world, with its caseload rising dramatically in just 20 years from a mere 37 cases in 1985 to over 900 cases per year today. CIETAC has continually responded to criticisms and market demands by amending its rules – six times since 1988 – and by revealing two general trends in its revisions:
1. convergence with international best practice; and
2. more autonomy and flexibility for parties.
Arbitration is an effective dispute resolution mechanism in China, with attractive features including the ability to choose local and foreign arbitrators and the transparency of its proceedings and rules. It also an advantage over litigation in China in that the rulings are final, whereas court rulings are subject to appeal and can therefore continue for a lengthy period of time.
In choosing an arbitral body, the arbitration of commercial disputes involving a Chinese party and a foreign party can occur both onshore within China and offshore in another country. The two issues that are important for the parties to decide are: which rules should govern arbitration; and the seat of arbitration. Onshore arbitration can only be conducted using mainland Chinese Arbitration Commissions, such as CIETAC. Offshore arbitration is also available; using arbitral bodies such as the Hong Kong International Arbitration Commission (HKIAC), which is a popular choice for arbitration in Asia and serves as a useful ‘middle-ground’ location for arbitration between China and foreign parties. The HKIAC is widely accepted in China and arbitrators are experienced with China-related disputes. The Singapore International Arbitration Centre (SIAC) is another well-established location for arbitration in Asia, while the Australian Centre for International Commercial Arbitration (ACICA) is seeking to establish Australia as a competitive location for international arbitration in Asia.
China acceded to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) in 1987. Under the Convention, arbitral awards rendered in other signatory countries are recognised and enforceable in China. Likewise, arbitral awards by Chinese arbitration bodies are enforceable in other countries signatory to the New York Convention. Therefore, enforcement of arbitral awards is relatively straightforward. For example, in Brambill Limited v. ZhangjiagangHuafeng Heavy-duty Equipment Manufacturing Co., Ltd, a ruling from the Suzhou Intermediate Court provided companies should expect Chinese courts to enforce offshore arbitral awards. In this case, Brambill filed an enforcement action in the Suzhou Intermediate Court to enforce an ICC (Hong Kong) award in relation to a dispute over a sales contract, under the Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the HKSAR. Although Zhangjiagang Huafengwas served with Brambill’s pleadings, informed of its right to file an answer, appoint an arbitrator, give views on the location and language of the arbitration, the Chinese company failed to respond and further opposed enforcement of the award issued by the tribunal on the grounds the arbitration clause was unclear. Therefore, the Suzhou Court ruled Zhangjiagang Huafeng should have raised the issue of the invalidity of the arbitration agreement during the arbitral proceedings or applied to set aside the ICC award in Hong Kong. According to the Suzhou court, there were no public policy reasons to refuse enforcement of the ICC award, and so the Suzhou court ruled to enforce the award.
Furthermore, the agreement to arbitrate before resorting to litigation is an important one; therefore most arbitral bodies hold such agreements in the highest record. For example, in Ever Judger Holding Company Limited v Kroman Celik Sanayi Anonim Sirketi, unreported, HCCT6/2015, 17 April 2015, the Hong Kong Court of First Instance granted for the first time an anti-suit injunction under the Arbitration Ordinance to restrain foreign court proceedings in breach of an arbitration agreement. Therefore, a pro-arbitration stance is taken internationally, with an emphasis on the principle that parties should generally be held to their contract in relation to the agreement to arbitrate. Also, Gong Ben Hai v HKIAC is yet another example of an enthusiastic judicial support for arbitration in Hong Kong, with the Hong Kong Court of First Instance dismissing a claim brought against the HKIAC by a party to an HKIAC administered arbitration. The Court emphasised arbitral institutions such as the HKIAC are immune to claims arising from the honest performance of their administrative functions. These decisions demonstrate how highly regarded arbitration is valued as part of the legal landscape, and the fundamental role arbitral bodies play in ensure it remains so.
In China, foreign individuals and companies have the same ability to bring action in court as Chinese citizens and companies. China’s court system is established by reference to administrative regions and organised at four levels:
1. the District People’s Courts (for city districts, counties and small cities);
2. the Intermediate People’s Courts (medium and large cities and autonomous prefectures);
3. the High People’s Courts (for each of the 22 provinces, five autonomous regions, four municipalities directly under the control of the Central Government); and
4. the Supreme People’s Court situated in Beijing.
The final alternative in dispute resolution mechanisms is litigation. However, there are several issues with this mechanism, including the courts having limited judicial review power due to their lack of power in relation to reviewing abstract acts, and the limits a party can encounter such as only being allowed to challenge specific acts that infringe their legitimate rights and interests, leaving other important rights excluded. Therefore, most parties are advised to settle their disputes well before the litigation stage in order to promote efficiency, effectiveness, and overall satisfaction.
In China, dispute settlement mechanisms such as negotiation, mediation, arbitration and litigation are up to international standard, and are highly used in commercial reality. This is an important feature of China’s legal landscape due to its growing authority, and it contributes to furthering China’s economic interests and international presence.
ABOUT THE AUTHOR: Fei Dang and Joyce Chng
Fei Dang and Joyce Chng are Associated in the MMLC Group.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.