By Liu Xiangwen and Xu Xianhong King & Wood Mallesons’ Dispute Resolution Group
International commercial disputes have an extensive scope, involving matters such as international sale of goods, mergers and acquisitions, private equity investments, and construction. The so-called international commercial dispute resolution cases dealt with by Chinese lawyers means those related to China and foreign countries, the main factors of which occurred either in China or in other countries. Due to the main characteristic of cross-border issues, international commercial dispute resolution is distinguished from domestic dispute resolution.
In the past, the parties in international commercial activities paid less attention when choosing options for dispute resolution, which were indicated by the fact that there were often no dispute resolution clauses in their contracts, or even where there were such provisions, they were poorly drafted. This situation has improved substantially according to recent cases we have dealt with.
I．Options Available in International Dispute Resolution
Generally speaking, no countries impose compulsory restrictions on dispute resolution options, except under clearly stipulated circumstances. In China, there are no specific restrictions on options for international commercial dispute resolution, except that divorce and family law disputes and administrative law disputes are excluded from arbitration[i].
In practice, parties in international commercial activities might choose to litigate in a court in China or in a foreign country or to apply for arbitration in China or in a foreign country. The ultimate choice will be influenced by various factors including the parties’ personal preferences, the legal culture and judicial circumstances of the country they reside in, and relative bargaining positions.
Among the options mentioned above, international disputes litigated or arbitrated in China are highly involved by Chinese local attorneys. Since arbitration is highly flexible, it is not rare to see Chinese attorneys represent clients in arbitrations held in other countries. At the same time, Chinese attorneys usually need to cooperate with local attorneys when they represent clients in litigation occurring in foreign countries.
II．Factors Need to be Considered When Choosing Options for International Commercial Dispute Resolution
As mentioned above, the parties will make different choices based on different factors. In the following paragraphs, we will analyze these options from the perspective of practice.
First, Are the Parties Free to Choose between Litigation and Arbitration?
In principle, parties can reach an agreement on whether to litigate or arbitrate the disputes, because litigation and arbitration are both recognized by Chinese law as options for international commercial dispute resolution.
According to Article 3 of the PRC Civil Procedure Law （”Civil Procedure Law”）[ii] and Article 2 of the Arbitration Law of the PRC（”Arbitration Law”）[iii], provisions of the law apply to civil lawsuits between citizens, between legal persons and between other organizations, as well as among them, filed because of property and personal relationships, and are handled by the People’s Court; contractual disputes between citizens of equal status, legal persons and other economic organizations and disputes arising from properly rights may be arbitrated.
When drafting dispute resolution provisions, both parties might first consider the advantages and disadvantages of both litigation and arbitration. On the one hand, from a purely technical prospective, there is no answer to which one is better. On the other hand, taking into account the backgrounds of the parties and their attitudes towards Chinese judicial circumstances into consideration, the parties, especially foreign parties, would probably prefer to choose arbitration as the method of dispute resolution.
The parties should make it clear and unambiguous in the contract whether they have chosen litigation or arbitration as the way to resolve potential disputes. They should try to avoid leaving both options available in the contract in order to prevent unnecessary costs.
For example, the parties in a case reached the following dispute resolution clause in their contract: “all the disputes occurred or will occur from this contract, should be arbitrated by…arbitration commission, or litigated in the People’s Court of ….” According to Chinese law, this arbitration clause is invalid; if one party chooses to arbitrate the dispute while the other objects within the period provided by law, they cannot resolve the dispute through arbitration.[iv]
Second, What is the Reference Factor in Choosing between Litigation and Arbitration?
When conducting litigation or arbitration in China, the concerned parties should follow the Civil Procedure Law and the Arbitration Law. In deciding cases, the Chinese courts follow the two-instance trial system while the single ruling system is applied in arbitration. Whether the concerned parties receive a litigation judgment or arbitration award, they will need to apply to the court for compulsory enforcement if the party fails to perform voluntarily.
In practice, in order to ensure the chosen option is feasible, the parties should choose the court with jurisdiction over the disputes, or the validity of the arbitration clause.
According to the Civil Procedure Law, the parties are entitled to choose a court with actual connections to the disputes in the written agreement. The concerned parties could choose either the People’s Court in China or courts in foreign countries. If they choose to litigate the dispute in the People’s Court in China, they should follow the provisions of the Civil Procedure Law in the jurisdiction by forum level and on exclusive jurisdiction. If they choose to litigate the dispute in a court in a foreign country, they should also follow the Civil Procedure Law of the place where the forum is located accordingly.
When the concerned parties choose to arbitrate the dispute, they may freely choose from several Chinese arbitration institutions, e.g. the China International Economic and Trade Arbitration Commission, Beijing Arbitration Commission or a foreign arbitration institution, e.g. Hong Kong International Arbitration Center, Singapore International Arbitration Center, International Chamber of Commerce, Stockholm International Chamber of Commerce Arbitration Center and London Court of International Arbitration. If they choose to arbitrate the dispute in China, according to Article 16 of the Arbitration Law, the following contents shall be included in an arbitration agreement: (1) the expression of the parties’ wish to submit to arbitration; (2) the matters to be arbitrated; and (3) the Arbitration Commission selected by the parties. Unlike choosing to litigate disputes in China, there is no requirement on jurisdiction by forum level or on exclusive jurisdiction. Thus, parties may choose the Arbitration Commission which is most convenient, based on the particular facts.
We noticed from recent cases that parties usually chose to arbitrate the dispute in a foreign arbitration institution when they are drafting Sino-foreign equity joint ventures or investment contracts, which was probably the result of insistence by the parties from other countries. Comparing through the cases we have worked on, we find that on one hand, to arbitrate the dispute in a foreign arbitration institute has the benefit of more efficiency and neutrality, on the other hand, it may be not the best choice for a foreign party. Compared to arbitration in China, offshore arbitration has inconveniences such as preservation of property and evidence, lengthy time frames, other litigation costs and enforcement issues.
Awards made in foreign arbitration institutions will be recognized and enforced according to the New York Convention on Recognition and Enforcement of Foreign Arbitration Awards (the “New York Convention”)[v]. However, there is no specific provision to support the recognition and enforcement of property and evidence preservation from a procedural aspect in the New York Convention and PRC Laws. As a result, the decisions made by foreign arbitration institutions to preserve property and evidence cannot be recognized and enforced in China, which will create a potential risk that the other parties could hide or destroy evidence or hide or transfer their property in China.
Since arbitration in a foreign country will apply the procedural law of where the forum is located and the concerned parties in common law countries will try to protect themselves from every procedural perspective, the parties will have to advance strong arguments on procedural matters. In addition, experts of Chinese law are hired to prepare legal opinions and be questioned as they submit their arguments. After the arbitration award, there will be a delay before the award is recognized and enforced in Chinese court. Both make arbitration in a foreign country highly time consuming. Furthermore, the fees paid to the arbitration commission, witnesses, foreign law experts and attorneys (both Chinese attorneys and foreign attorneys in cooperation) also make the arbitration in a foreign country costly for the client.
In contrast, arbitration in China does not have the shortfalls mentioned above. In addition, Chinese arbitration institutions such as China International Economic and Trade Arbitration Commission have a well-educated, highly professional and multi-lingual panel of arbitrators, and are capable of dealing with complicated international commercial disputes. Besides, to arbitrate disputes in China would help the parties avoid the risk in evidence and property preservation, enforce the arbitration awards and control litigation costs.
Parties of international commercial activities should choose the proper option to resolve potential disputes as the case may be. If the subject matter of the potential disputes and/or the principal property of the counterparty are located in China, we tend to recommend our clients to choose litigation or arbitration in China.
(This article was originally written in Chinese, the English version is a translation)
[i] Article 3 of the Arbitration Law of the PRC provides: the following disputes cannot be put to arbitration: (1) dispute arising from marriage, adoption, guardianship, bringing up of children and inheritance; (2) Disputes that have been stipulated by law to be settled by administrative organs.
[ii] The PRC Civil Procedure Law was adopted at the 4th Session of the 7th National People’s Congress on April 9, 1991 and amended in accordance with the Decision of the 30th session of the Standing Committee of the National People’s Congress on Amending the Civil Procedure Law of the People’s Republic of China on October 28, 2007.
[iii] The Arbitration Law of the PRC was adopted at the 8th Session of the Standing Committee of the National People’s Congress on August 31, and became effective as of September 1, 1995.
[iv] Article 7 of the Interpretation of the Supreme People’s Court concerning Some Issues on Application of the Arbitration Law of the People’s Republic of China provides:“ where concerned parties agree that they may either apply to a arbitration organ for arbitration or bring a lawsuit to the people’s court for settlement of disputes, the arbitration agreement shall become invalid, unless after one party applies to the arbitration organ for arbitration, the other party fails to propose any objection within the period in Paragraph 2, Article 20 of the Arbitration Law.”
[v] The New York Conventionwas adopted by a United Nationslomatic conference on 10 June 1958 and entered into force on 7 June 1959. The Convention requires courts of contracting states to give effect to private agreements to arbitrate and to recognize and enforce arbitration awards made in other contracting states. dip