The Basics of Arbitration in China

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Sept. 3 – Arbitration on contracts involving a Chinese party is a concern for international counsel and overseas-based lawyers. Chinese parties will usually insist upon the clause in contracts, which can be a good thing, as no one wants to see disputes end up in courts if there is another way to resolve matters.

Moreover, arbitration is advantageous regarding the possibility for the parties to choose a judicial body with trusted arbitrators. The dispute can be solved by a simplified procedure on which the parties have influence. The chosen arbitrators can be experts, a competence ordinary courts sometimes lack. Arbitration is also less time consuming than court procedures and cases are normally resolved within 6 to 9 months.

An arbitration award once issued is considered final. It becomes enforceable and stable; subject to recourse only by court action. Arbitration is not restricted to national jurisdictions and gives the parties the possibility to avoid the disadvantages and expenses of going abroad.

It also has the advantage of being confidential which avoids souring relations between two parties and helps maintain good business relations given that they both submitted to this type of dispute settlement voluntarily.

Not surprisingly, some overseas lawyers have a marked distrust for Chinese based arbitration and want to see cases resolved in overseas jurisdictions instead. It is difficult to obtain the Chinese side’s mandate for this but there are also legal difficulties. Following the Chinese law, contracts in certain industries that involve a Chinese party must be heard by a specific Chinese arbitration body experienced in the field.

There are no exceptions to the rule. Parting from Chinese jurisdiction will be equal to breaking the law and will have far more serious consequences for the rest of the contractual agreement.

Some overseas lawyers are afraid that Chinese arbitration cannot be trusted and lacks impartiality. That attitude, although historically correct, is already outmoded. In the past five years, China’s arbitration courts have been filling with both lawyers and industry experts familiar with the field, thus dramatically improving basic dispute resolution. Disputes will arise as a matter of business and China’s arbitration mechanism has been coping well.

That said, there is still the question of dealing contractually with standard arbitration clauses – where should the hearings be based and who should hear them?

The settlement of a dispute via arbitration between domestic parties must be held in China. Under Chinese law, foreign-invested enterprises, even wholly foreign-owned one, are considered domestic. Therefore a dispute between FIEs or between a FIE and a domestically invested Chinese company is a domestic one and has to be arbitrated in the country.

A foreign arbitration clause in a contract between such entities will be deemed invalid and the award unenforceable in China. The People’s Courts will still have jurisdiction over the dispute.

While foreign parties prefer to arbitrate abroad; a compromise might be arbitration in Hong Kong instead with its reliable reputation among foreign and Chinese investors. Another alternative could be the International Chamber of Commerce (ICC) or the Beijing Arbitration Commission (BAC).

The ICC will be able to assist as it is an organization recognized by Beijing with an affiliate office in the city. In addition, the ICC has an Arbitration Commission, which is governed by dispute mediation protocols laid down according to international law. This arrangement can satisfy both ways: Chinese parties wanting arbitration based in the country and the foreign parties wanting an impartial internationally recognized body out of reach from perceived political interference.

On the other hand, the BAC is a permanent organization providing a forum for arbitration of disputes associated with contractual and other property rights based on its Arbitration Rules. It is established in accordance with the Arbitration Law of the People’s Republic of China and accepts domestic and foreign-related disputes.

China is also a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards which requires the courts of the contracting states to give effect to agreements to arbitrate and accordingly recognize and enforce arbitration awards from other contracting states.

The convention applies awards which are not considered to be domestic ones in the state where recognition and enforcement is sought. Although enforcement in China is not easy, a refusal to enforce a foreign arbitral award by a lower court requires the confirmation by the Supreme People’s Court to be effective. As for the special administrative regions of Hong Kong and Macau, awards are enforceable under special bilateral agreements similar to the latter.

The common arbitration route for foreign investors seeking to solve a domestic dispute is through the China International Economic and Trade Arbitration Commission (CIETAC). The CIETAC has headquarters in the capital and sub-commissions in Shanghai and Shenzhen while also being officially affiliated with the Chinese government.

CIETAC offers domestic, foreign-related and international arbitration. It administrates a panel of more than 250 approved foreign arbitrators including arbitrators from Taiwan, Hong Kong and Macau. Majority of them are experienced in China and their respective fields. Arbitration may be conducted in Chinese, English, or another language, although it might be difficult to convince a Chinese party to agree to conduct the process in another language other than Chinese.