I find that a surprising number of lawyers outside of China are not familiar with some key considerations in drafting dispute resolution clauses in contracts involving Chinese parties. The notes below may be helpful to those with less experience in dealing with contracts between Chinese parties and US, UK, or European parties.
Dispute Resolution Mechanism
Favoring the perceived home court advantage, I see American lawyers inserting local US courts as having exclusive jurisdiction over any dispute and often having the Chinese party consent to jurisdiction in the USA. In those circumstances, you may get a judgment, but enforcement is not assured. To the contrary, China has yet to ratify the Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters (Hague Judgments Convention), and so a Chinese court is not bound to honor a US court judgment. There have been anecdotal instances where a court in China or in the US has allowed recognition of a foreign court judgment, but this has been based on judicial reciprocity. As there is currently no treaty for the recognition and enforcement of foreign judgments, Article 281 of the Chinese Civil Procedural Law (CPL) rarely comes into play. Article 281 allows for enforcement based on an international treaty or reciprocity. The trend toward enforcing judgments on a reciprocal basis may be headed in the opposite direction. A decision from the Supreme Court of New York recently refused enforcement stating the Chinese judgment “was rendered under a system which does not provide impartial tribunals or procedures compatible with the requirements of due process of law.” Shanghai Yongrun Investment Management Co. v Kashi Galaxy Venture Capital Co., 2021 NY Slip Op 31459 (U). If that is the attitude of US judges toward judgments from the Chinese judiciary, reciprocity will be less likely to be an option in the future.
Tip: Do not use a US court for dispute resolution in the dispute resolution clause of your contract.
Arbitration for Dispute Resolution
Tip: Arbitration is your best and most enforceable option for dispute resolution with Chinese parties.
China is a signatory of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and China’s Supreme People’s Court has taken steps over the years to encourage recognition of foreign arbitral awards. For cost reasons or the fact that the parties involved are considered domestic Chinese companies (e.g., a China subsidiary of a US company is a Chinese party), you may need to consider a Chinese arbitral institution on the Mainland. However, the practice will be foreign to common law lawyers, and it may be difficult for foreigners to fully participate given the legal, cultural and language differences. Chinese arbitrations reflect a civil law practice, meaning that 1) each party submits documentary evidence in support of its case; 2) there is no discovery from the counterparty
unless a limited order is issued by the tribunal for production; 3) there is limited or no witness testimony or cross examination; and 4) the parties will have only a few non-consecutive hearing days to present their case. For larger cases, an offshore venue may be desirable but obviously that depends heavily on the nature of the anticipated dispute.
Where do you go outside of China?
Where to Arbitrate
In recent years, Hong Kong is being challenged as a neutral venue because of certain PRC regulatory initiatives. In fact, to date, the Hong Kong judiciary has remained independent, and we have not seen an adverse effect on the rendering or recognition and enforcement of arbitral awards in Hong Kong. When considering Hong Kong, many parties and counsel do not know about the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region (IMA). Under the IMA, a party in arbitration seated in Hong Kong can obtain interim measures on the Mainland for preservation of assets, evidence, or conduct. Depending on the parties and the nature of the contract, this is a useful tool not available in arbitrations before arbitral institutions outside of Hong Kong. Similarly, Hong Kong arbitral awards are enforceable in the Mainland pursuant to the Arrangement Concerning Mutual Enforcement of Arbitral Awards Between the Mainland and the Hong Kong Special Administrative Region” (the “Arrangement”) and the Supplemental Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong Special Administrative Region (the “Supplemental Arrangement”). These Arrangements allow for asset preservation post- award and further allow parties to seek to enforce in China and Hong Kong courts simultaneously.
While you may be reticent about arbitrating in Hong Kong, you should not deprive your client of interim measures or enforcement options if the breach of your contract would be aided by these measures.
Tip: Don’t rule out Hong Kong before you consider what relief you may need in the event of breach.
Governing Law
Certain types of contracts may mandate the application of PRC law. PRC law has developed substantially over the past forty years, and foreign parties should not be afraid to accept PRC law as the governing law. However, PRC contract law, while in many ways mirroring contract law in foreign jurisdictions, allows for more equity in deciding cases. Most non-PRC lawyers are more comfortable with the law derived in common law jurisdictions because the law is further explained and interpreted through binding precedential case law. The PRC is a civil code jurisdiction. The PRC courts take notice and consideration of prior judgments on the same topic but are not bound by precedent.
Tip: If the issues that may be disputed in your contract require significant legal interpretation, then an arbitral tribunal may be better guided by the law of a common law jurisdiction that allows for extensive judicial interpretation of the legal concepts at play. Consider the nature of the future dispute and then decide how that law may apply. Go so far as to research how the dispute would be resolved under the law you are considering.
Conclusion: Think through the dispute that will most likely arise under your contract and assess how it will be adjudicated under the governing law, whether you may need interim relief, and how you would obtain enforcement of an award. You should then tailor your governing law and dispute resolution clause to best serve your client in the event of breach.