As China continues to battle the COVID-19 pandemic, various geopolitical and economic headwinds are creating increasing levels of uncertainty for business in the country, which are expected to result in a growth of disputes. Among others, parties may no longer be able to fulfill or be willing to perform their existing contract obligations due to business disruptions or economic difficulties.
Dispute resolution practices in China, in turn, are also changing, such as the emergence of mediation as an alternative dispute resolution (ADR) method as well as online dispute resolution (ODR) – in both litigation and arbitration.
In this article, we investigate dispute resolution in China and track the latest developments.
Common dispute resolution methods in China
Dispute resolution in China includes three primary system:
- Arbitration; and
Mediation and arbitration are the most used forms of ADR.
Meanwhile, some dispute resolution may involve a cross-interaction of these three systems, such as judicial enforcement of arbitration and mediation combined with arbitration or litigation.
Court litigation is a common dispute resolution method in China that is handled by Chinese courts.
With a legal system that is based on civil law system (similar to the German and French systems), the litigation process in China is generally an inquisitorial one, during which the judge takes dominant roles in the trial and are actively involved in fact finding by questioning the parties. However, this process is turning to be more adversarial in recent years.
Civil procedures are mostly governed by the Civil Code of People’s Republic of China (the Civil Code), effective from January 1, 2021, and the Civil Procedure Law of the People’s Republic of China (the Civil Procedure Law), last amended in 2021.
Under the Civil Code, the general limitation period regarding applying to a court for protection of civil rights (including commercial) is three years, unless it is otherwise stipulated by other laws. For example, the limitation period for bringing a suit or applying for arbitration regarding disputes over contracts for international sale of goods and contracts for technology import and export is four years.
The limitation period counts from the date when a claimant knows or should have known that their rights have been infringed upon and who the obligor is. But theoretically, it is possible that the claimant does not know the infringement and obligor for a long time (that is, the facts giving rise to their claim). Thus, the law also stipulates the longest period before which a person can bring a case to the court. This longest period—20 years—counts from the date of infringement, irrespective of whether the claimant knew about the infringement at that time.
The limitation period can be suspended by certain circumstances out of the party’s control such as force majeure, but only if the circumstance happens during the last six months of the limitation period. The limitation period shall expire after six months from the date on which the causes of suspension of the limitation period are eliminated.
A limitation period shall be interrupted under certain circumstances, such as when the claimant claims for the fulfillment of obligations by the obligor, or files a lawsuit or applies for arbitration. The limitation period shall recommence from the time when the interruption or the relevant procedure is terminated.
The length of the limitation period can only be stipulated by law, and private parties cannot change the length of the limitation period by mutual agreement.
The court will not take the initiative to apply the provisions on the limitation period, but when the limitation of action expires, the obligor may raise a plea of not fulfilling his or her obligations. Businesses are generally advised not to take the chance but to actively protect their rights within the limitation period.
Court structure and jurisdiction
In China, there are four levels of courts:
- The basic-level people’s courts;
- The intermediate people’s courts;
- The high people’s courts; and
- The Supreme People’s Court.
Besides, China has multiple specialized courts, including the military courts, the maritime courts, the railway transportation courts, the forest courts, the land reclamation courts, the petroleum courts, the intellectual property courts, and the finance courts. The specialized courts are at the intermediate people’s court level.
Most civil cases of the first stance must be brought to the basic-level people’s court. However, some civil and commercial cases of the first stance could be brought to the intermediate people’s court or even the high people’s court, where the object of the action reaches certain threshold, or the dispute has significant socio-economic effect.
The specific standards determining which level of the people’s court can exercise their jurisdiction of first instance in civil cases have been released by the Supreme People’s Court.
According to the latest rules, the intermediate people’s court shall have jurisdiction as a court of first instance over civil cases whose subject matter is more than RMB 500 million (US$72 million) if: a) both parties have their domicile in the administrative jurisdiction of the court at the provincial level, or b) both parties do not have their domicile in the administrative jurisdiction of the court at the provincial level. If one party’s domicile is in the administrative jurisdiction of the court at the provincial level, this threshold will be lowered to RMB 100 million (US$14 million). For example, Shanghai is a provincial level administrative jurisdiction. If both parties’ domicile is in Shanghai or neither of the two parties’ domicile is in Shanghai, then they will apply for the RMB 500 million-threshold. If one of the party’s domicile is in Shanghai, then it shall apply for the RMB 100 million-threshold.
Besides the level of the courts, the Civil Procedure Law also stipulates rules to decide which court the case should be brought to regarding the territorial location. Generally, the civil case should be brought to the court at the location of domicile (for individual and organization defendant) or the habitual residence (for individual defendant) of the defendant, unless it is otherwise stipulated, for example:
- For contract dispute, the court at the location of defendant’s domicile or place of performance of contract shall have jurisdiction.
- For insurance contract dispute, the court at the location of the defendant’s domicile or the insurance subject matter shall have jurisdiction.
- For a lawsuit regarding a dispute over incorporation of company, confirmation of shareholder qualification, profit distribution, dissolution, etc., the court at the company’s domicile shall have jurisdiction.
- For tort disputes, the court at the place of occurrence of tortious act or the defendant’s domicile shall have jurisdiction.
Moreover, the parties of a contract dispute or other property rights dispute may agree in writing on the selection of the court at the location of the defendant’s domicile, place of performance of contract, place of execution of contract, address of the plaintiff, location of the subject matter, or other venue that has an actual connection with the dispute – to be the court that has jurisdiction. But such selection should still respect the rules regarding which level of court or which specialized court shall have jurisdiction.
The plaintiff can only file with one court for the resolution of the dispute, even if two or more courts have jurisdiction. Where the plaintiff files with more than one court, the court that registers the case first shall have jurisdiction.
With the pleading written and preliminary evidence prepared, the plaintiff can file the case with the court that has jurisdiction. The court will file the case within seven days if it meets the filing conditions. If not, the court will rule to reject or dismiss the suit. If the parties refuse to accept the two rulings, they can appeal within 10 days. The court will serve a copy of the pleading on the defendant within five days after the case is accepted.
Generally, the court will first organize a mediation procedure before the hearing. If the mediation is successful, the mediation documents that are signed by the judge, the court clerk, and the relevant parties, and affixed with the court seal, shall have the same effect as the judgment. To be noted, the medication is not just limited to the pre-hearing process. Rather, the court will encourage the parties to mediate at multiple stages of the litigation process. That said, mediation is still based on the parties’ mutual agreement and cannot be coerced.
If mediation fails, the proceedings shall continue. The defendant shall file a reply within 15 days of receiving the copy of the pleading. Many defendants do not file a reply. Failure of a defendant to submit a pleading shall not affect trial of the lawsuit by the people’s court.
For complicated cases that apply general procedures, the court will notify the parties to exchange evidence. For simple cases that apply summary procedures, the parties can go to court directly with the original evidence.
The trial is divided into several stages, such as court investigation, court debate, and parties’ statements. Before the end of the court debate, the parties may change their claims.
After the end of the trial, the judge will make a judgment within a specified period. The parties can appeal within 15 days after receiving the judgment letter. Should no appeal be filed, the judgment becomes effective, and the losing party shall perform the legal obligations stipulated in the judgment. If the losing party fails to perform said obligations, the winning party can apply to the court for enforcement.
For cases that apply general procedures, the trial shall be completed within six months, from the date of the establishment of the case to the date the judgement is made. Where there is a need for extension of time under special circumstances, upon the approval of the president of the court, an extension of time of six months may be granted; where there is a need for further extension of time, the approval of the higher-level court is required.
For cases applying summary procedures, the trial shall generally be completed within three months. Where it is necessary to extend the time limit under special circumstances, it may be extended by one month upon approval of the president of the court.
Under the Civil Procedure Law, there are special rules for litigation that is foreign-related, which covers jurisdiction, the formality of the documents, the trial process, the service process, and the time limit.
For example, where a foreign party (foreigners, stateless persons, and foreign enterprises and organizations) without residence in China entrusts a lawyer or any other person in China to participate in proceedings or mails or entrusts submission of the power of attorney from regions outside China, the power of attorney shall be effective upon notarization by a notary organization in that country and authentication by the embassy or consulate of the China in that country, or performance of authentication formalities stipulated in the relevant treaty concluded between the China and the country.
A litigation is foreign-related if the transaction satisfies one or more of the below conditions:
- At least one of the parties is foreign.
- At least one of the parties habitually resides outside China.
- The subject matter of the transaction is located outside China.
- The legal fact that leads to the establishment, change, or termination of the transaction occurs outside of China.
- Other circumstances under which the transaction can be deemed foreign-related.
Arbitration is a private process where disputing parties agree that one or several individuals can make a binding decision about the dispute after receiving evidence and hearing arguments. In an arbitration, the arbitrator looks into the legal rights and wrongs of a dispute and makes a decision. Once the arbitrator has arrived at a decision, it is binding on parties, whether they agree with it or not. This is how arbitration is different from non-judicial mediation.
Arbitration is very much like the way a court case is decided by a judge, except that the process does not take place in a court room, and it is not open to the public.
Arbitration in China is regulated by the Civil Code and the Arbitration Law of the People’s Republic of China (the Arbitration Law), which was last updated in 2017. Some special type arbitrations, such as labor arbitration, are regulated differently.
According to the Arbitration Law, only contractual disputes and disputes concerning property rights and obligations can be subject to arbitration.
For parties who wish to commence an arbitration to resolve their disputes, there must be a valid arbitration agreement in place. This could be a clause in the main contract, or a separate agreement made prior to or after the dispute happens. Among others, an arbitration agreement should set out the expression of an application for arbitration, items for arbitration, and the chosen arbitration commission. It must be made in writing.
Where there is a valid arbitration agreement, the court shall not accept the case if only one party applies to the court for litigation. Where one party files for a suit to be heard before the court without declaring the existence of the arbitration agreement and following acceptance of the case by the People’s Court, and the other party provides the arbitration agreement prior to the beginning of the hearing – the court shall dismiss the case. Where the other party fails to provide the opposing opinion prior to the beginning of the hearing by the court, the arbitration agreement shall be regarded as having been forfeited and the court shall continue the hearing.
Arbitration awards shall be final. Where an arbitration award has been made and a party reapplies for arbitration or requests a hearing before the people’s court upon the same matter, the arbitration commission or people’s court shall not deal with the matter. The party concerned shall implement the award. Where one party does not implement the award, the other party may apply to a people’s court for enforcement.
A party can also apply for the cancellation of an arbitration award within six months of its receipt of the arbitration award document. Where the people’s court has, in accordance with the law, ordered an arbitration award to be dismissed or not carried out, the disputing parties may apply for arbitration if they have reached a further arbitration agreement, or apply to have the case heard before a people’s court.
As of September 2021, there have been over 270 arbitration institutions operating across China. Among them, the China International Economic and Trade Arbitration Commission (CIETAC), the Beijing Arbitration Commission (BAC), and the Shenzhen Court of International Arbitration (SCIA) are major arbitration institutions. In 2021 alone, over 415,000 disputes were filed for arbitration, with the total subject matter amounting to RMB 859.3 billion (US$123.8 billion).
Mediation is a voluntary, confidential, and private dispute resolution process in which a neutral person, the mediator, helps the parties to reach their own negotiated settlement agreement. The mediator has no power to impose a settlement, other than the power of persuasion. A successful mediation results in an agreement signed by the parties.
Despite being widely supported and recognized as having the potential to resolve disputes in a quick, cheap, and confidential way, mediation remains under-utilized as compared to arbitration. This situation may change in the future as preferences for speedy dispute resolution are likely to grow.
On the other hand, as mentioned, mediation combined with litigation or arbitration is encouraged. The mediation agreement agreed by the parties and confirmed by the court or arbitration tribunal is legally binding.
Litigation vs. arbitration
As two of the major dispute resolution methods, litigation and arbitration have their own advantages and disadvantages.
Generally, the disputing parties may prefer arbitration based on the below considerations:
- Arbitration award is comparatively easier to be implemented outside of China. China is a party to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). As of September 6, 2022, the number of contracting states to the New York Convention has reached 170, covering almost all countries and regions with relatively active international commercial activities. Under the New York Convention, arbitral awards made in States Parties may be mutually recognized and enforced in the court of those contracting states. Therefore, arbitral awards made in China may be enforced not only in China but also in other contracting parties to the New York Convention. In contrast, whether a court decision of one country can be recognized and enforced in another country often depends on the existence of bilateral judicial assistance treaties between the two countries and the laws of the country of enforcement, which makes the recognition and enforcement of court decisions in foreign countries more difficult than arbitral awards.
- Arbitration procedures are more flexible than litigation. The core spirit of arbitration is the autonomy of the will of the parties. The parties may not only decide on the arbitration institution, the place of arbitration, the language of arbitration, and the law applicable to the arbitration procedure, but also design procedures that meet their special needs in terms of the court hearing, the submission of evidence, and the statement of opinions according to the specific circumstances and characteristics of the dispute. They can choose the arbitrators they trust from the arbitration roster. In contrast, litigation needs to follow established rules regarding jurisdiction, proceeding procedures, and applicable laws, etc. There is very little room for adjustment.
- Arbitration is more confidential. Unlike during litigation, the arbitration procedure, evidence documents, case hearing, and the arbitration award are not open to the public. The confidentiality of arbitration is conducive to the parties to protect their business secrets, and to enable the parties to peacefully resolve disputes within a specified scope, thereby leaving room for future cooperation.
- Arbitration is more time efficient. As mentioned, the arbitration award is final. Although it is possible that the court may order an arbitration award to be dismissed or not be carried out, the grounds for the court’s decision to revoke or withhold recognition and enforcement are very limited. The reasons for revoking or denying recognition and enforcement in foreign-related arbitration are usually limited to procedural issues.
- In some cases, arbitration is more cost efficient, especially when the disputed amount of the case is very big. For example, when the disputed amount of the case is over RMB 18 million (US$2.59 million), the court fee is much higher than the arbitration fee of the BAC.
On the other hand, the disputing parties may prefer litigation based on the following considerations:
- It is difficult for arbitration to investigate and collect evidence. In litigation and arbitration, the party bearing the burden of proof shall provide evidence on its own behalf, otherwise it shall bear the adverse consequences. However, some evidence is not in the party’s own hands. In litigation, the parties can apply for the court to investigate and collect evidence, but in arbitration, it is difficult for the parties to apply for the arbitration commission to investigate and collect evidence. Even if the arbitration commission is willing to do so, the unit being investigated could be less cooperative.
- Arbitration cannot list the third party not agreed upon in the arbitration agreement as a party to the case. In some cases, it is necessary to list third parties outside the contract as the parties to the case to participate in the court hearing, which is conducive to finding out the facts of the case. However, the parties to the arbitration must have reached a valid arbitration agreement to be the parties to the case. Therefore, there are often cases in which third parties are unable to participate in arbitration due to the lack of an arbitration agreement, leading to adverse results. In contrast, in court proceedings, the court will add defendants or a third person to find out the facts of the case.
- It is difficult for parties to secure a remedy if they are not satisfied by the arbitration results. As mentioned, the arbitration award is final and only in limited conditions, the court can dismiss or not carry out the arbitration award. In contrast, in litigation, parties that are not happy with the judgement of the first stance can appeal to the higher level of court.
- In some cases, arbitration could be more expensive than litigation. For example, for a case with a target amount of RMB 1 million (US$140,000), the court fee is RMB 13,800 (US$1,983), while the arbitration fee is around RMB 40,000 (US$5,748); these vary as per different arbitration institutions.
Latest developments: Online dispute resolution (ODR)
China has been exploring online dispute resolution since 2017, when the Hangzhou Internet Court was established to deal with internet-related cases through an online case administration system.
With the COVID-19 pandemic continuously affecting the mobility of disputed parties, the court, as well as the arbitration tribunal, litigation and arbitration are now being encouraged by the Ministry of Justice (MOJ) and the Supreme People’s Court (SPC) to go digital.
Arbitration institutions and courts have thus expedited their processes to enhance the capability of conducting the litigation or arbitration online.
Meanwhile, the SPC has released several documents to regulation online litigation. In 2019, the SPC issued the Chinese Court and Internet Judiciary, outlining China’s strategy to develop online mediation and internet courts. On June 17, 2021, the SPC released the Rules on Online Litigation of the People’s Court of China, which explains the applicable scope and conditions of online litigation and provides detail guidelines on each process. Moreover, the Civil Procedure Law that that was amended in 2021 clearly stipulated that civil litigation can be conducted online and online litigation activities have the same legal effect as offline litigation activities.
Analysts believe this digitalization trend in dispute resolution will continue in the next couple of years and that artificial intelligence (AI) technology could also be applied to the dispute resolution process. For example, in 2022, the Shanghai No. 2 Intermediate People’s Court won the first “Innovation Award for People’s Court Reform”, an award organized by the Supreme People’s Court, for its attempt to apply AI technology to ‘intelligent interactive court trials’ to improve the efficiency of court investigations. Such innovative explorations are expected to be applied in more instances in China’s judicial system in the coming future.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at email@example.com. Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.