Alternative Dispute Resolution (ADR) in China
As anyone who has ever had an experience with Chinese courts can attest to, they can be difficult.
Chinese culture is not the same as in the US, we all know that, but that does not mean that by learning a few words in Mandarin and showing off your Panda House chopstick skills, you will be able to simply overcome those differences.
There are specific measures and methods that you can use to protect your investments and your business in China, playing it safe and understanding the rules that govern China is a great start.
Arbitration can be a very effective tool in basically replacing litigation in China, while litigation has taken on a fairly negative connotation in China; Arbitration has avoided this label for some reason or another.
Arbitration is generally considered more efficient than litigation in many ways, it is usually cheaper and faster, but there are also other benefits.
Basically you are hiring a private judge or panel of judges to solve your dispute. As China’s court system is still in its infancy, there are many tendencies that Westerns find different, confusing or even downright disturbing; including but not limited to the competency of the courts, fairness of local judges and the amount of independence courts actually have.
Arbitration can offer a solution as it is structured to be neutral, more flexible, the results of arbitration are confidential and if you structure the agreement correctly an award is more easily enforced.
Most arbitration clauses between Chinese and foreign companies will agree to arbitrate in either Hong Kong or Singapore, as both of these locations have established themselves and dependable, mature legal systems and are usually the only seats that are trusted by both sides.
While arbitration is very effective when done properly but there are potential pitfalls; here are some to be especially careful about;
• The choice of court o In order for the agreement to arbitrate to be effective, all parties must have agreed in writing to their choice of court, this is often referred to as a choice of court clause.
o From my discussions with scholars and practitioners, this choice of court clause should be included in the party’s commercial contract, as this will save time in the event of a disagreement of any jurisdictional issue.
o Things to be aware of when selecting a court;
• The national and local courts may have a supervisory role or allow for appeals against the award.
• The freedom of choice as to whom the arbitrators of the dispute may be limited by local practice or laws
• The enforcement of the award may be complex depending on the nationality of the award, the safest method is to select a country that had ratified the New York Convention, most noticeably absent from the treaty is Taiwan.
• Defining what is and is not arbitrable in the contract
o This point deals in particular with anticipation of what problems may arise between the two parties
o Art. 17 of the PRC Arbitration Law specifically states that the arbitration agreement will be null and void if the dispute that is sent to arbitration is non-arbitrable
o Disputes that are arbitral include;
• Contractual disputes, most disputes involving property rights (Art. 2 PRC Arbitration Law)
o Disputes that are not arbitrable;
• Labor disputes, administrative disputes, definition of intellectual property rights and most disputes involving family law
• Defining what language the arbitration will be done in
• Defining the actual arbitrator
o Most arbitration institutions offer a single arbitrator or a panel of three arbitrators
o Three arbitrators means paying for all three but it also will more likely result in a stronger and more skilled arbitration experience. Arbitration clauses are a wonderful way to protect yourself, but they must be structured perfectly or they will end up being useless. Remember to stay on the balls of your feet and keep your head on a swivel, it’s the only way to thrive in China.
Here are some helpful links to some of the larger Arbitration and Mediation institutions.
– International Chamber of Commerce
- Hong Kong International Arbitration Center
- China International Economic and Trade Arbitration Commission
Southern Perspective Shenzhen is a boutique consulting firm that specializes in combining manufacturing and the legal system in China. The majority of our time is spent in factories negotiating for legal protection of foreign companies engaged in supply chain activities in China. With combined experience of over a decade in Guangdong province, China’s hot bed for high tech innovation, we have the on the ground skills and knowledge combined with the high level educational standards of one of the top legal education centers for Chinese business law at the Chinese University of Hong Kong.
Matthew Kowalak