What to expect from the courts when things go bad

Background
When a sourcing project gets to a certain size, it often makes sense to set up a permanent presence on-the-ground in China to help manage the supply chain.  This series of blog posts covers some of the key areas of consideration when it comes to setting up in China.

Dispute Resolution

China has made significant progress in increasing the integrity and reliability of its courts. Nevertheless, there continue to be significant obstacles to litigating in Chinese courts. Foreign investors continue almost universally to prefer alternative courses of action than to carry out dispute resolution in China. As explained in detail below, PRC law permits the parties to elect for binding arbitration to resolve their disputes and the courts will generally enforce arbitration judgments without inquiring into the merits.

 

Litigation

The PRC judiciary consists of four layers: the People’s Courts (at the district or county level), Intermediate People’s Courts (at the municipal level), High People’s Courts (at the provincial level), and the Supreme People’s Court (at the national level).

The nature and size of the dispute generally determines in which level of the hierarchy to file suit in the first instance. In most cases, foreign involved disputes may be brought initially in the Intermediate People’s Courts. With some exceptions, PRC litigation is open to the public. When the dispute involves confidential commercial information, it may sometimes be possible to arrange for closed hearings at the discretion of the presiding judges.

All court proceedings must be conducted in Chinese, although foreign parties may request that an interpreter be provided, at their own expense. For foreign involved contracts, PRC contract law under some circumstances permits the parties to select a foreign law to apply to the contract and to provide for exclusive jurisdiction in foreign courts. However, it is generally very difficult to enforce foreign court judgments in the PRC.

Hong Kong judgments may be the exception to this rule. In 2008, China and Hong Kong implemented a special reciprocal arrangement for enforcing money judgments in commercial disputes. Hong Kong maintains a common law legal system and relatively sophisticated courts. If jurisdiction can be obtained, litigation in Hong Kong may now be a viable dispute resolution option for foreign parties doing business in China.

Arbitration

The vast majority of foreign investors operating in China include exclusive arbitration clauses in their contracts. Chinese law generally requires the courts to enforce the decisions of arbitral panels without further inquiry on the merits. Arbitration is generally considered quicker, more efficient, and more reliable than litigation in China’s courts.

Under Chinese law, an express clause clearly indicating the parties’ selection of binding arbitration is enforceable. The clause must be in writing and must contain a clear statement of the parties intention to submit the dispute to arbitration, the scope of disputes subject to arbitration, and the specific arbitral commission to resolve the dispute.

It is possible for the parties to reach an arbitration agreement after a dispute arises, but in most cases an arbitration clause is included from the outset in the operative contracts.

The China International Economic and Trade Arbitration Commission (CIETAC) is one of the most frequently selected arbitration forums when the arbitration will be held within mainland China. CIETAC was established expressly to handle commercial disputes involving foreign parties. CIETAC’s own arbitration rules will apply by default, but it is possible to agree to another set of arbitration rules as long as such rules do not conflict with any mandatory provision of PRC law. CIETAC is based in Beijing, and has branches in Shanghai and Shenzhen.

Foreign parties sometimes object to onshore arbitration, including arbitration at CIETAC, because they

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