Resolving Disputes through Arbitration

You’ve probably heard that enforcing contracts in China is difficult. Westerners have the perception that the Chinese courts are protectionist and unsophisticated. True? It really depends on where you’re going to court. The court system is getting better, but a number of smaller cities’ courts have judges who are ex-army officers with little or no legal training. Therefore, you can be taking your chances in court. So are contracts unenforceable as a practical matter? Nope!

Almost every contract you enter into in China or with a Chinese company should select binding arbitration for dispute resolution. Arbitration is like a private court system. A tribunal of arbitrators — almost always licensed attorneys — hears cases. Typically, arbitration is faster and less expensive than litigation. This section explains the arbitration process.

Understanding arbitration clauses

To select binding arbitration, include a binding arbitration clause in the governing contract. At a minimum, an arbitration clause should specify the following:

✓	Arbitration body (see the next section)
✓	Place of arbitration
✓	Arbitration language
✓	That the arbitration is binding
✓	The number of tribunal members and the selection process
✓	Procedural rules
✓	That the award may be enforced in any court of competent jurisdiction
✓	Governing law of the contract, which we discuss later in “The rulebook: Determining governing law” (this point doesn’t have to be in the arbitration clause itself but often is)

If you go to the Web sites of various arbitration tribunals, they often have model arbitration clauses. You should always consult with a lawyer before dropping one of those clauses into your contract, though. You usually want to make sure you have some control over the arbitrator selection process or at least state that the parties must mutually agree to the arbitrators. You can specify the selection process in the arbitration agreement. (For small disputes, the arbitration procedures are somewhat different. Make sure your clause reflects the proper procedures.)

In a couple of well-known cases, the Chinese courts took a very formalistic approach to whether an arbitration clause was valid, ruling that they were invalid because of such technicalities as a slight error in the name of the arbitration body. Ask your attorney whether his or her arbitration clauses have previously been enforced.

If you and the other party have a series of contracts (either directly or through affiliated companies, such as parents or subsidiaries), make sure the arbitration clauses in all the contracts are substantially the same. A given issue can directly or indirectly involve more than one contract. If different contracts mention different forums, then where to arbitrate the issue may be unclear.

Surveying arbitration bodies

China has a number of arbitration bodies. The oldest is the China International Economic and Trade Arbitration Commission (CIETAC, www.cietac.org.cn/index_english.asp). CIETAC and many of these other arbitration bodies are generally considered to be impartial and competent. In fact, CIETAC is the world’s busiest arbitration body. Opting for arbitration at the Hong Kong International Arbitration Centre (HKIAC, www.hkiac.org) or the Singapore International Arbitration Centre (SIAC) is also common.

Chinese companies used to be more willing to go to Hong Kong, Singapore, or elsewhere for arbitration. Although agreeing to foreign arbitration still happens, Chinese companies often prefer not to leave China — particularly for smaller matters. That’s usually fine, though, because CIETAC and many other Chinese arbitration bodies are good forums.

Assuming you choose a decent arbitration panel, electing arbitration should ensure that you have an impartial and competent body hearing the dispute. It should also mean that the process is transparent and easier than litigation.

The rulebook: Determining governing law

An arbitration clause isn’t worth much unless you choose a governing law for the underlying agreement. In certain situations, contracts must be governed by Chinese law. However, in many circumstances, the parties can opt for any other governing law.

Failing to choose a governing law is a bad idea. Even if the Chinese courts accept that Chinese law prevails, courts in another country that may be involved in the contract (that is, the country of incorporation for one of the parties) may also think that their law applies. All parties can waste a lot of time and money figuring out which law applies. Chinese law isn’t the default.

Decide on the governing law at the outset, which can affect how the contract is drafted. The governing law decision should also be tied to the arbitration forum. Try to get a sense of whether the forum you’re choosing has a good selection of arbitrators who’re familiar with the governing law. For example, finding arbitrators in China who’re familiar with Hong Kong or New York law usually isn’t too hard. But finding arbitrators familiar with Polish law can be a challenge.

Enforcing the rulings

Say you win your arbitration, and the tribunal has issued an award in your favor for US$1 million. Assuming that the counterparty didn’t bring its checkbook to the arbitration and hasn’t exactly invited you over to collect, what do you do?

The collection process is basically the same in almost any country: You go to a court that has jurisdiction over the defendant (usually a court where the company is headquartered or has assets) and apply to the court to enforce the judgment. The court then orders the losing party to pay the money. If the party refuses, the court eventually orders assets to be seized and sold.

You may be wondering, “If Chinese courts are protectionist, what are the chances that I can enforce my arbitration award?” Good question. Under Chinese law, a court almost always must enforce an arbitration award for monetary damages. If a court refuses to enforce an award, it must justify itself to the Supreme People’s Court. Courts rarely refuse to enforce awards.

Courts don’t have to enforce arbitration awards when they find a defect in the arbitration agreement (or clause) or when the arbitration procedure was unfair. The former problem is more common.

You may note that we’re discussing monetary damages. In many legal systems, courts and arbitration panels can also order a party to perform a contract (“specific performance”) or to stop doing something (“enjoining” that party or issuing an “injunction”). Although Chinese courts can issue these types of judgments, the enforcement of nonmonetary awards from arbitration is much less clear.

If you want to have nonmonetary judgments available to you, confer with a lawyer to decide whether to avoid arbitration entirely or to carve out certain types of disputes from the arbitration clause so they have to be heard in court.

Note: If you lose the arbitration and have to pay the Chinese party, your attorney will advise you when to pay and make an official record.