Investing In China: Arbitrating Your Disputes

Arbitration is the most popular commercial dispute resolution method in China. An arbitration agreement, whether before or after a dispute arises, is a necessary prerequisite to any form of arbitration. If this option is chosen it is best to include a carefully drafted arbitration clause in the contract, because a sloppily drafted clause might end up in the People’s Courts - first to decide whether or not it is binding, and if it is not, to decide the underlying dispute.

Foreign Arbitration

Arbitration between domestic parties must be held in China. Since Foreign Invested Enterprises (even if wholly foreign-owned), are considered to be Chinese companies because they are established under Chinese law, a dispute between FIEs or between an FIE and a domestically invested Chinese company is considered a domestic dispute and thus must be arbitrated in China (probably not including Hong Kong - current law is unclear on this point). If you put a foreign abritration clause into a contract between your FIE and another Chinese domestic entity, not only will any foreign arbitral award be unenforceable in China, but also the entire clause will be considered unenforceable and thus the People’s Courts will have jurisdiction over any dispute.

Foreign parties often prefer to arbitrate abroad. Hong Kong has a good reputation with both Chinese and foreign investors and is probably the best compromise, but other alternatives include the the Singapore International Arbitration Centre, the International Chamber of Commerce, the Stockholm Chamber of Commerce, and the London Court of International Arbitration.

The China International Economic and Trade Arbitration Commission (CIETAC)

CIETAC is the most commonly used aritration organization in China, at least for foreign investors. It is affiliated with the Chinese government, with headquarters in Beijing and sub-commissions in Shenzhen and Shanghai. Officially it is the busiest arbitral organization in the world, but this is largely due to the fact that it often deals with matters that would be sent to court in other countries.

CIETAC has endured withering criticism from foreign investors charging lack of neutrality and other sins, and it has responded by introducing some important recent reforms designed to harmonize it with international standards. The panel of approved CIETAC arbitrators now includes over 250 arbitrators who are either of foreign nationality or from Hong Kong, Macau or Taiwan. Many of these arbitrators are ‘old China hands’, quite experienced in China and well-versed in their fields.

CIETAC was designed for speed and convenience, and like the People’s Courts it relies more on documentary evidence than witness testimony. Although reforms have brought an increasing emphasis on cross-examination of witnesses, it is still noticeably influenced by China’s tradionally non-adversarial, inquisitorial justice system . Nevertheless the parties temselves have significant freedom to agree on the presentation of evidence.

Members of foreign law firms are generally allowed to represent parties in CIETAC Arbitration, and arbitration may be conducted in Chinese, English, or another language. In practice, however, it is difficult to convnce a Chinese party to agree to arbitrate in any language except Chinese.

Awards - Foreign-related arbitral awards, whether issued by CIETAC or another Chinese arbitration organization, are considered final and thus the substance of the ruling cannot be challenged in Chinese courts – challenge is limited to narrow bases such as formal defects or fundamental procedural irregularities (corruption, bias, etc.).

As is the case in any form of nonconsensual dispute resolution in China, expect difficulties in enforcement.

Enforcement of Foreign Arbitral Awards

China is signatory to the New York Conventionon, which requires recognition and enforcement of foreign arbitral awards (with certain exceptions such as major procedural irregularities). Again, enforcement in China is difficult in practice. Encouragingly, however, refusal to enforce a foreign arbitral award by a lower court requires confirmation by the Supreme People’s Court in order to be effective. But enforcement is not the end of the road – local protectionism may make actual execution of the award difficult, especially when tracing and seizure of assets is involved.

Hong Kong and Macau arbitral awards are enforceable in mainland China under bilateral arrangements, and these arrangements are broadly similar to the terms of the New York Convention.