Judicial Proceedings and Arbitration

With rapidly growing commercial relations, the number of disputes with Chinese business partners has also increased.

When you enter into contracts with Chinese business partners, you should be aware of dispute settlement options. Commercial disputes between two Chinese parties (e.g., a Chinese subsidiary of the foreign investor and an unrelated Chinese party) are handled by a Chinese court or arbitral institution. Although the skills and reputation of Chinese courts have improved, using a Chinese arbitral institution is still often a better choice. We suggest using an arbitral institution with international experience, such as the China International Economic Arbitration Commission (“CIETAC”) or a qualified arbitration commission that is based in Shanghai or Shenzhen. These proceedings are usually faster and more efficient, and the arbitrators there have relevant expertise. In contrast, you should exercise caution using Chinese courts in smaller towns or remote provinces, which do not have a reputation for impartiality.

The situation is different for international contracts where one party is foreign or where there is another foreign element. In this case, you always have the choice between courts of law (in China or in the home country) and an international or Chinese arbitral institution.

Weighing against the use of an international judicial forum is the fact that foreign judgments are rarely enforced.

Three conditions must be met in order to have foreign judgments enforced in China:

  • Internationally competent court 
  • No violation of Chinese public order 
  • Reciprocity 

Because reciprocity is not established between many other countries and China, there is little hope that a foreign court judgment will be enforced in China.

Thus, what remains are arbitration proceedings, either before a national or international arbitration body. Arbitration is generally faster, because it is not subject to appeal, and less expensive.

Because China is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, its courts are required to enforce a foreign arbitral award without subjecting it to a substantive examination.

The parties may indicate an arbitral institutions in the China or elsewhere, and should document this in the contract. Proceedings follow the agreed rules of arbitration. Non-PRC citizens may be accredited as arbitrators at a Chinese arbitral institution.

Arbitration is only compulsory if the parties have agreed to a valid arbitration clause, and arbitrations in China are subject to conditions described in detail below.

Matters subject to arbitration

Arbitration may be agreed for all disputes arising from contracts and property relations between private parties, with the exception of family and estate law (e.g., marriage, adoption, guardianship and inheritance) as well as employment disputes subject to specialized arbitral bodies.

Unambiguous arbitral institution

An arbitration clause may be invalid if it does not clearly indicate an arbitral commission. The location of the arbitration proceedings is not sufficient; it must name the arbitral commission. For contracts with foreign elements, the parties may either choose a Chinese arbitral commission (e.g., China International Economic and Trade Arbitration Commission, Hong Kong International Arbitration Centre) or an international arbitral commission (e.g., International Court of Arbitration of the International Chamber of Commerce, Arbitration Institute of the Stockholm Chamber of Commerce).

The arbitrators

According to the Chinese Arbitration Act, the arbitral tribunal may consist of one or three arbitrators. For the first alternative, the sole arbitrator is jointly appointed by both parties. For the second alternative, each party appoints an arbitrator and the third arbitrator - the chairman - can be appointed jointly by the two parties. The parties may also instruct the arbitral commission to choose the arbitrator. In order to ensure the impartiality and competence of the arbitral tribunal, the parties should agree in the contract on the number of arbitrators as well as the mechanism for selecting the chairman. Other aspects such as the location and language of the arbitration proceedings should also be agreed in the arbitration clause.

Although an invalid arbitration clause can force a dispute to legal proceedings before a court, as long as the case has not yet been filed, proper revision of the clause will allow the parties to arbitrate.