Trade with China – Arbitrage in China

It is not easy to avoid conflicts in business. It gets even more complicated when both parties come from different countries and represent different cultures and traditions. That’s the case with doing business in China. Sometimes the court passes the judgment and resolves the matter, but it takes a lot of time and money, hence the growing popularity of mediation and arbitrage in China.

Arbitrage in China

Let’s analyze the following case: company X outsourced the production of its new product to China. The initial shipment was in order, but after some time, the product’s quality deteriorated, and the Chinese supplier turned a deaf ear to company X’s complaints. Company X lawyers quickly analyzed the contract, which included an arbitration clause, sounding very much like “Any dispute, controversy or claim arising out of shall be resolved by arbitration.” But the problem arises here: in terms of Chinese law (to be precise, Article 18 of the Arbitrage Law), this clause is invalid. Without clearly stating an arbitrage institution, we have no choice but to go to a Chinese court, which is a costly and inefficient way of asserting our rights.

Years ago, Chinese contractors often agreed to European arbitrage; many have chosen arbitration by the Stockholm Chamber of Commerce. Contract attorneys always persuaded their Western clients not to agree to arbitrage in China, mostly because of the related risks (Chinese language proceedings, fear of unfair treatment) and costs. Nowadays, it is rather unlikely – Chinese business people no longer want to participate in arbitration procedures outside their country. Paradoxically, it has several positive sides: as we know, foreign arbitrary institution settlement comes into effect only when the Chinese court issues a declaration of enforceability. There have been several cases where People’s Courts in China refused to enforce the judgment, and the foreign investor was left with nothing. On the other hand, when we get a favorable decision from an arbitrary Chinese institution, it will come into force almost automatically.

Arbitrage procedures in China

There are several differences between the arbitrage procedures in China and other countries. We already mentioned the requirement to clearly select and specify an arbitration commission to administer our potential disputes. China’s arbitration law does not allow for popular and valuable ad hoc arbitration. In the arbitration process, the emphasis is placed on mediation and reaching a compromise, in the spirit of the Chinese 双赢 (“double-win” or rather “both sides win”) idea. Only when the mediation doesn’t reach its aim does the arbitrator take the final decision. If we decide to put our case before the arbitrage court in China, we should know that according to Article 67 of the Arbitrage Law, we can choose foreigners to perform the functions of arbitrators and experts.

There are over 270 arbitration institutions in China. The oldest and most prestigious is CIETAC (China International Economic and Trade Arbitration Commission), established in 1956. The arbitrators are chosen from a list prepared by CIETAC, and the quality of arbitration is high.

There was a breakup between CIETAC and its sub-commissions. Shanghai people decided to become an independent entity, so they changed the rules of arbitration and took the name of SCIETAC (South China International Economic and Trade Arbitration Commission). In Shenzhen, there is SCIA (Shenzhen Court of International Arbitration). In the commercial contract, we should specify that our case will be handled by the central commission of CIETAC in Beijing or other institutions, such as BAC (Beijing Arbitrary Commission).

If we decide on arbitrage outside China, two Asian institutions seem to be obvious choices: SIAC (Singapore International Arbitration Centre) and HKIAC (Hong Kong International Arbitration Centre). SIAC procedures are pretty similar to those used in Western Europe arbitrage courts; those in HKIAC are more like rules of ad hoc arbitrage (f.e. the leading arbitrator is elected by two arbitrators, chosen by the parties).

No matter which institution we choose, we need to remember that proper preparation is the key to success. We need to gather evidence and present our arguments convincingly. The cost of arbitrage procedures is very low compared to the expenses we may face in case of an unfavorable outcome. Therefore we should not count every penny spent on Chinese legal services (which may be surprisingly expensive). And we should not lose the battle before it even started by drawing inappropriate contract terms.