Dispute Resolution in China

There are three ways of resolving commercial disputes in China: mediation, litigation and arbitration.

Mediation is largely an informal way of dispute resolution, where an impartial third party encourages the disputing parties to reach an amicable settlement. It can be conducted by a court (“judicial mediation”) or outside any court (“non-judicial mediation”). The terms of a settlement agreement will be binding upon the parties, like any other contract. However, if a party breaches the terms of such settlement agreement, the non-breaching party will still need to go to the courts to seek enforcement. In other words, settlement agreements remain subject to the good will of the parties and are not directly enforceable (as opposed to court decisions and/or arbitral awards).

Arbitration is a legal process under which the dispute is heard by an arbitrator or a panel of arbitrators (rather than by the national courts), according to the procedural rules and the law chosen by the parties. Arbitration must rely on a valid agreement between the parties (most of the times, an arbitration clause is included contractually). Its main advantages are: flexibility, celerity and confidentiality. However, arbitration can be expensive and if conducted abroad, and arbitral awards are not directly enforceable (i.e. if a party refuses to enforce the award, the non-branching party shall go to the courts to seek enforcement).

  • Off-shore Arbitration is often preferred by foreign investors to solve their dispute with a Chinese party. Off-shore arbitration can only apply to foreign-related disputes. Under PRC law, a dispute is considered foreign-related if one of the following conditions is met: (i) at least one party is foreign, (ii) the subject matter of the contract is wholly or partly outside China, or (iii) the rights and obligations arising from the contract are created, modified or extinguished outside China. Most foreign awards are enforced pursuant to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), which has been ratified by more than 145 countries, including China. Besides, awards made in Hong Kong are enforceable in China pursuant to the Agreement Concerning Mutual Enforcement of Arbitral Awards between Mainland and the Hong Kong Special Administrative Region (the “REJA”), which makes Hong Kong an attractive seat for China-related arbitration. Similar bilateral special arrangements have been concluded with Macau and Taiwan.
  • On-shore Arbitration refers to arbitration proceedings held in mainland China (exclusion made of Hong Kong, Macau and Taiwan). Under PRC law, all arbitration proceedings held in China shall be administered by a national arbitration institution. Ad-hoc arbitration is therefore not a suitable option. The main arbitration institutions include the China International Economic and Trade Arbitration Commission (“CIETAC”), Shanghai International Arbitration Centre (“SHIAC”), and Beijing Arbitration Commission (“BAC”). In practice, enforcement of foreign-related awards (made onshore) is easier and faster than enforcement of foreign awards (made offshore). Despite a spontaneous preference for offshore procedures, foreigners should therefore consider onshore arbitration as an effective way to solve China-related disputes. 

There are four levels of courts in China: the basic people’s court (district or county level), the intermediate people’s court (municipal level), the high people’s court (provincial level), and the Supreme Court (national level). Most cases fall under the jurisdiction of the basic people’s court, but when involving complex foreign elements or if the disputed amount is so high that it materially impacts the region, the case can be directly heard by an intermediate people’s court. Territorially, courts are competent where the defendant resides, or where the contract is performed, or where the infringement takes places. A three-judge panel usually hears foreign-related cases. The documents and the hearing shall be in Chinese, meaning that all evidences in a foreign language shall first be translated by the parties (at their own expenses).
If the technicity of the case as well as confidentiality matters can encourage choosing arbitration, foreigners should not neglect domestic litigation for simple cases involving reasonable amounts. Indeed, the immediate enforceability of judgments made by Chinese courts can act as a persuasive threat against the Chinese party.

November 2015

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