There are three principal ways to resolve a commercial dispute:negotiation,arbitration.
Whilst it is impossible to always avoid disputes, good planning is essential when considering investing in mainland China. Contract terms should be clear, with specified timelines and adequate exit strategies where appropriate.
Parties should ensure that they agree how to resolve a dispute at the earliest possible stage by including specific dispute resolution clauses. Failure to do so could lead to unnecessary time and costs being exhausted in selecting a suitable process before the dispute itself is determined.
Negotiation
Negotiation is the simplest and usually the best method of dispute resolution. As with any jurisdiction, negotiation is the least expensive process and can help maintain the working relationship of the parties involved.
The perceived uncertainty in the legal system of mainland China has meant that negotiation has traditionally been a popular choice for foreign investors. Mediation is also popular as parties are often encouraged to pursue this route before formal adjudication. A signed mediation agreement approved by a court or arbitral tribunal in mainland China is enforceable as it were a judgment of a court andthus enforcement proceedings are not necessary.
Arbitration
Arbitration is widely employed by foreign investors due to increased certainty surrounding the process and the private nature of the hearings. Arbitration is only available if the parties include a clear
and unambiguous arbitration clause or have entered into a separate arbitration agreement after the dispute arose. The parties will usually need to decide between referring the dispute to a foreign arbitration commission or to the China International Economic and Trade Arbitration Commission (“CIETAC”). Foreign investors often prefer to commence arbitration outside mainland China. As mainland China is a party to the New York Convention, there is a legal basis for enforcing foreign arbitration awards.
The arbitral award rendered by a foreign arbitration organisation (e.g., the Hong Kong International Arbitration Centre) will be recognised and enforced by the courts in mainland China if the arbitration agreement contains foreign element. Having a foreign party as one of the signing parties is considered as constituting “foreign element”. CIETAC was established primarily with the intention of arbitrating foreign-related disputes, although its jurisdiction has now
grown to include commercial disputes generally. CIETAC has a panel of arbitrators, but the parties to an arbitration may select arbitrators outside that panel by mutual agreement. A CIETAC award is usually final and can only give rise to a right to appeal in very limited circumstances.
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