One of the costs of conducting foreign business is the resolution of international disputes. With its adversarial nature, associated costs and delays, litigation is often a second-best option for any disputes that arise. Arbitration of disputes over Chinese international contracts, however, has generally been discouraged due to weaknesses in China’s arbitration rules.
The Arbitration Act, for instance, contains special provisions for international arbitration, including one for denying enforcement to a foreign-related award where it violates, or exceeds, any of the contractual clauses on arbitration (Article 260, Civil Procedure Law). This has led to difficulties in drafting contracts and choosing which method to resolve the disputes that inevitably arise. Recent trends, however, suggest the attractiveness of arbitration may be increasing due to a conscious effort by the Chinese government and judiciary.
1. Recognition
Chinese courts have traditionally refused to enforce any award, unless it was arbitrated by a Chinese institution, for example the The China International Economic and Trade Arbitration Commission. However, thanks to petitions from the Hong Kong Secretary of Justice, Hong Kong arbitrations are now enforceable in mainland China.
The benefit here is that Hong Kong, as a common law jurisdiction is neutral and appealing to foreigners, whilst Chinese parties see it as a known and culturally-relevant location. Along with the increased attractiveness of Hong Kong arbitration, there is an increased availability as well: the International Chamber of Commerce, for instance, has recently set up an international court of arbitration in Hong Kong.
2. Judicial weight
From August, 2009 any agreement achieved through international arbitration carries the same weight in law as decisions handed down by Chinese courts. This regulation from Supreme People’s Court is a significant incentive for parties considering arbitration, suggesting China is beginning to relax its restrictive stance on foreign arbitration.
3. Neutrality
The principle benefit of arbitration is that of neutrality. Before the changes outlined above, though, foreign arbitration was largely impossible due to the above restrictions, and a general unwillingness by Chinese companies to agree to foreign arbitration. Arbitrations held within China, however, must be conducted according to Chinese laws. In respect of neutrality, Article 15, Arbitration Law provides that,
“The arbitrator shall be independent, impartial and uphold the principle of confidentiality in conducting the arbitration.”
It would therefore appear that any question of neutrality being undermined has been largely negated.
As long as the contracts between parties are clear and straight forward, a suitably drafted clause guarantees the language, location, and the applicable law should there be a dispute. With the high uncertainties of international contractual issues, the risk of leaving a conflict to a foreign legal system is too high to ignore.
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