This article originates from a talk given as part of the seminar organised by SCL on ‘China Law and Technology’ at Bird and Bird on
Background to the Legal System
From 1957 to 1978 the legal system of
The law is contained in legislation and decisions promulgated by the National People’s Congress and its standing committee. Administrative regulations are issued by the (central) State Council and by local people’s congresses. The Supreme People’s Court issues periodic interpretations which provide amendment or gloss to the legislation. There is no formal system of precedent in Chinese law but in practice lower courts will treat the decisions of the higher courts, in particular the Supreme Court, as persuasive.
A number of pieces of legislation are of relevance to the IT industry including the Contract Law 1999 (with a separate chapter 18 on technology contracts), the Patent Law 2000, the Joint Ventures and Foreign Funded Enterprise Law 2000, the Trademark and Copyright Laws 2001 and the Law relating to the Promulgation of Science and Technology 2002.
Two recent laws have considerable potential relevance to the industry. The first is the new Employment Contract law, effective from January 2008. The second is the new Anti-Monopoly Law, adopted August 2007. The latter in particular will affect large foreign IT companies which would be subject to the law insofar as their operations are perceived to affect competition in
Practical Tips on Avoiding Disputes
Good planning can help the avoidance of disputes. Tips include the following suggestions, derived from advice from lawyer colleagues in
(a) Ensure clear contract terms. These should specify exact terms of payment and performance standards and include specific dispute resolution clauses. It is of particular importance to make sure that the Chinese version of any contract is consistent with the English version. Linguistic differences can cause serious difficulties if a dispute arises. Do not attempt to enter into an agreement without sound legal advice.
(b) Choose a partner carefully and exercise due diligence as to experience and dependability verified from independent sources. Local partners are very important for overseas companies investing in
(c) Do not enter into agreements prohibited either by Chinese or WTO regulations (
(d) Do a thorough risk analysis based upon reliable sources. Limit exposure, setting milestones and planning an escape strategy for each stage of the project.
(e) Seek advice from lawyers well versed in
Dispute Resolution Options
If, despite these safeguards, a dispute arises there are five possible methods to resolve a commercial dispute in
(1) Negotiation
Simple negotiation is the best initial method of dispute resolution. It is the least expensive and it can preserve the working relationship of the parties involved. It is also the customary approach of Chinese businessmen. Most business contracts in
When a foreign company experiences difficulty in negotiating a solution with its Chinese partner, there can be mileage in seeking assistance from Chinese government officials, who can sometimes facilitate discussion and negotiation. When a foreign company has a dispute with the Chinese Government, a Chinese state-owned enterprise, or a government-subsidised project, the most effective initial step is to raise the issue with the entities involved, emphasising the importance of the foreign company’s investment in
(2) Conciliation and Mediation
In the event of failure in direct negotiation, conciliation has a long history in
Support for conciliation is to be found in the main legislative measures, for example the Civil Procedure Law of 1991, which at Article 9 provides that ‘In conducting civil proceedings the court shall, on the principle of voluntariness and legality, carry out conciliation.’
In arbitration before a Chinese arbitral tribunal (in particular during the course of a CIETAC arbitration: see below) or in litigation before the Chinese courts, parties are encouraged to participate in conciliation during the course of the proceedings.
Conciliation in
Conciliation in foreign-related commercial transactions in
Ad hoc conciliation involves independent conciliation designed by the parties to suit their relationship or their dispute; this provides the maximum scope for flexibility. Some Chinese/foreign business contracts provide for ad hoc conciliation as a means to attempt to resolve a dispute prior to reference to arbitration or adjudication by the courts. These may be subject to particular rules (eg UNCITRAL) or to procedures agreed by the parties. Any agreed settlement will be drawn up and signed and take effect as a private contract under Chinese law unless it forms part of an arbitration award; in the latter case it will be drawn up as a consent arbitration award and be unchallengeable in the courts.
Conciliation of disputes involving foreign interests may be conducted under the auspices of permanent conciliation centres set up by the China Chamber of International Commerce. The first centre was established in Beijing in 1987 – now over 40 such centres are spread throughout China. In 2000, over 3,000 cases involving foreign interests were conciliated by these centres – 80% were successfully concluded.
Finally, unlike conciliation under the China Chamber of International Commerce where the procedure is conducted entirely by Chinese conciliators, ‘joint conciliation’ involves the participation of both Chinese and foreign conciliators pursuant to bilateral arrangements with foreign arbitration/mediation institutions.
(3) Expert Determination
The parties may choose expert determination where their dispute raises technical issues. Their chosen expert will determine the dispute within an agreed timeframe. The difficulty with this process is that there has to be an effective enforcement mechanism. Unless the determination is incorporated within arbitration, a decision will again only be enforceable as a contract and the procedure appears to be little used.
(4) Litigation through the Courts
There are four levels of courts in China. Every major city has Basic Courts and, above these, Intermediate Courts. Supervising these courts are the provincial High Courts. The Supreme People’s Court, located in Beijing, has appellate jurisdiction over all courts in China.
Cases involving foreign interests can be filed in either the Basic Courts or the Intermediate Courts, depending on the nature of the case and the amount at stake.
Many observers consider that it is preferable for foreign parties to use arbitration rather than the courts to adjudicate on foreign-related commercial disputes. Part of this concern is historic in that judges have had non-legal backgrounds and formal training has been limited. This situation is now changing as extensive training is put in place and international exchange programmes are established. As an example, in March this year a delegation of judges from Hunan province visited London as part of a Supreme Court pilot scheme supported by the Judicial Appointments Commission of England and Wales.
(5) Arbitration
Perceived advantages of arbitration over the courts for the resolution of commercial disputes have stemmed from familiar considerations. Arbitrators can be chosen for their particular qualifications and experience in the subject matter of the dispute. The procedure is private and flexible and is likely to be more predictable than court procedure. Furthermore awards are generally not subject to appeal whereas court rulings may lead to what might involve a lengthy appeal process.
Much of China’s trade and investment legislation contains provision for dispute settlement by arbitration. Arbitration is governed principally by the Arbitration Law 1995 and the Civil Procedure Law 1991. Since it is rare for the parties to agree on arbitration after the dispute has arisen, a contract should expressly provide that disputes will be resolved through arbitration. To be valid, an arbitration agreement must reflect a clear intent to arbitrate and also clearly identify the arbitration institute to administer the case. The Arbitration Law addresses institutional arbitration only; there is no legislative provision for ad hoc arbitration and it is doubtful whether such arbitration is permitted in China.
Chinese arbitration institutions were traditionally divisible into those handling ‘foreign-related’ disputes and those handling purely domestic disputes. ‘Foreign-related’ disputes (according to a 1992 Supreme Court opinion) include those in which: (i) at least one party is a foreign person or entity, or (ii) the contract was formed, modified or terminated in a country other than China, or (iii) the subject matter of the dispute is in a foreign country. A foreign-invested enterprise (FIE) in China is not a foreign entity for these purposes and is considered to be a domestic entity.
The two arbitration institutions originally designated to hear ‘foreign-related’ disputes are the China International Economic and Trade Arbitration Commission (CIETAC) and the China Maritime Arbitration Commission (CMAC). CIETAC, whose jurisdiction has been expanded to include domestic disputes, is China’s best known arbitration body. It was established in 1956 as the arbitration institution dealing with international or foreign-related cases. It has its HQ in Beijing with sub-commissions in Shanghai and Shenzhen. According to rankings by the International Chamber of Commerce and the Stockholm Chamber of Commerce, CIETAC is one of the busiest arbitration institutions in the world based on the number of cases handled per year. Figures have most recently been: 2005 – 979 cases of which 427 were international; 2006 – 981 cases of which 442 were international; 2007 – 1,118 cases of which 429 were international.
CIETAC maintains a list of arbitrators including 793 Chinese and 232 foreign arbitrators. A revised list is due this May. CIETAC administers the arbitration proceedings under its Rules, most recently revised in May 2005. As an institution it has a wider role than other international institutions in relation for example to appointment of arbitrators, decisions on challenges and supervision of the process. The institution and not the arbitrators decide such matters as the existence and validity of an arbitration agreement and fix the dates for hearings. CIETAC has been moving gradually toward increased party autonomy. In particular, the revision of the Rules in May 2005 was intended to incorporate changes to bring them more into line with international practice. For example, the revisions enable the tribunal to exercise more flexibility over the proceedings; it can now adopt an inquisitorial or adversarial approach (unless otherwise agreed by the parties) and can allow cross-examination of witnesses.
In addition to CIETAC and CMAC, there are over 170 local arbitration commissions established in most of the major cities including Beijing, Shanghai, Guangzhou and Shenzhen. Originally designed to hear only domestic disputes, these commissions can now hear ‘foreign-related’ disputes as well. The most active of these in dealing with ‘foreign-related’ arbitration is the Beijing Arbitration Commission.
Procedure in a CIETAC Arbitration
A foreign party can expect a number of differences in procedure in Chinese arbitration to that with which we are familiar in the UK.
(a) Appointment of and challenge to arbitrators
Unless otherwise agreed the parties must choose the arbitrator from a limited list. Under the revised Article 21 (of the CIETAC Rules), it is now possible for the parties by agreement to appoint an arbitrator from outside the CIETAC panel but the appointment must still be approved by CIETAC in order to be valid. Any challenge to an arbitrator on the grounds of lack of impartiality or independence will be decided by the commission and must be raised no later than the first oral hearing if apparent, or within 15 days of a party becoming aware.
(b) Case management hearings
CIETAC practice diverges from that of some other international bodies in that it typically dispenses with pre-hearing meetings at which timetabling or identification of issues might be discussed. Directions are usually issued to the parties in writing.
(c) Disclosure/factual evidence
Although the Rules require the parties to produce relevant evidence, orders for disclosure of documents as understood in the UK are unusual and this is a fundamental difference.
Under Article 37, the tribunal may on its own initiative undertake inquisitorial investigations. This has been the more traditional approach in China. It is now possible for a tribunal to allow an adversarial approach but unclear how widely this flexibility will be used. Article 39 provides for the examination of witnesses by the parties and in my experience, in appropriate cases cross-examination is now allowed in CIETAC arbitrations, bringing the procedure more in line with international arbitration.
(d) Expert evidence
Article 38 provides for expert assistance to be given by an expert appointed by the tribunal itself. Party appointed experts are permissible. While tribunals will in appropriate cases allow this, a single tribunal-appointed expert is more common.
(e) Conciliation and arbitration
A traditional feature of Chinese arbitration, incorporated by Article 40, is the ability of the arbitrators to switch hats between their function as arbitrator and that of conciliator – and back again if conciliation is unsuccessful. It requires the consent of both parties for the tribunal to embark on conciliation. If the conciliation is successful then the agreement is incorporated in a consent award and is enforceable as such. However, if the conciliation does not work, the arbitrators may, without further authority, switch back to their function as arbitrators. This contrasts with the approach in common-law countries where lawyers are cautious about the prospect of arbitrators taking back with them to the decision-making process the knowledge of the parties and the dispute derived from conciliation.
(f) Length of hearing
The Rules impose a strict timetable for the reference, which can be varied or extended to suit the needs of the case. Under Article 42, awards (unless extended) are to be made within six months of the tribunal being constituted (four months in the case of domestic arbitrations). According to CIETAC statistics, in 2006, the average duration of a reference from start to finish was 150 days. In the same year, over 50% of cases concluded by CIETAC’s Shanghai branch were conducted through a fast-track procedure within three months.
Concern is sometimes expressed by foreign parties that insufficient time is allowed for oral hearings. Hearings tend to be short and informal, with most cases determined after a single oral hearing lasting no more than a day; the longest hearing of which I am aware for a CIETAC arbitration has been 10 days.
(g) Venue
Venue is normally restricted to the location of the relevant commission (eg Beijing, Shanghai and Shenzhen), but the parties can now agree to an alternative location and an agreement with the Hong Kong International Arbitration Centre has paved the way for hearings abroad where convenient.
(h) Costs
An arbitration fee is payable by the claimant in accordance with a schedule of arbitrator fees (on the CIETAC website). The normal approach to the incidence of payment of the arbitration fees would be that such costs follow the event but Article 46 of the Rules allows the tribunal discretion in allocating liability for the payment of the fees of the tribunal and also the parties’ legal and other costs.
(i) Recent developments in law and practice
By two judicial interpretations from the Supreme People’s Court in 2005 and 2006, arbitration law and practice was changed or clarified in a number of respects of interest to the arbitration enthusiast, including the following. The requirement for an arbitration agreement to be in writing was confirmed to cover an agreement by e-mail. An agreement covering ‘contractual disputes’ was confirmed to apply to all disputes arising under the contract including its existence, validity, interpretation, modification, assignment, performance, breach and termination. The Intermediate Court has jurisdiction to determine the validity of an arbitration agreement. An arbitration award incorporating an agreement following conciliation will not be subject to challenge by the courts.
Court Intervention in the Arbitral Process
Article 5 of the Arbitration Law provides that, if there is a valid arbitration agreement, the courts will stay any court proceedings commenced in breach of that agreement. The courts are further involved in the course of the arbitration process in relation to any challenge to the validity of the arbitration agreement and in relation to any application for interim remedies such as preservation of property with a view to later enforcement or preservation of evidence.
A challenge to an award may be made to the Intermediate Court at the location of the arbitration commission on a variety of grounds set out in Article 58 of the Arbitration Law, including: absence of valid agreement, absence of jurisdiction, improper constitution of the tribunal, forged evidence, evidence of partiality, bribes or other attempts to pervert the process. Otherwise the award is final and binding on the parties.
International Arbitration outside China
Although CIETAC is the most common institution of choice for Chinese parties, they are increasingly amenable to the use of foreign international arbitration institutions as their choice of dispute resolution. In particular it is common to find agreement to the International Chamber of Commerce, the Stockholm Chamber of Commerce, the Hong Kong International Arbitration Centre, the Singapore International Arbitration Centre, the London Court of International Arbitration and the American Arbitration Association.
Recent agreements with foreign institutions have made the use of foreign international arbitration more convenient to Chinese parties. In February this year, for example, CIETAC and HKIAC announced that they had signed a mutual co-operation agreement. The agreement will allow the two institutions to conduct arbitrations or examine witnesses at each other’s premises. In addition, the host institution will provide administrative support, including recommending arbitrators, exchanging secretariat members, and allowing for the joint administration of arbitrations.
Enforcement of Awards in China
One of the most frequently cited difficulties of arbitration in China has been enforcement of awards. This concern has been expressed both in relation to foreign-related arbitration awards made within China sought to be enforced under Article 260 of the Civil Procedure Law and the attempted enforcement of international arbitration awards made outside China under the New York Convention (to which China acceded in 1987). Enforcement has been easier to secure in major cities such as Beijing, Shanghai, and Guangzhouthan outside these larger commercial centres.
The enforcement procedure for a foreign-related arbitration award involves an application being made to the Intermediate Court either in the place of domicile of the party against whom enforcement is sought or the place where that party has assets. Applications are time limited (six months where the parties are legal persons and one year where a Chinese natural person is involved).
In response to international concern, the Supreme Court issued a series of judicial interpretations aimed at encouraging and facilitating arbitration and ensuring consistency in the approach to enforcement of awards. Two interpretations of 1995 and 1998 established a pre-reporting rule. By this rule, a court which opposes enforcement of a foreign-related arbitration award is required to seek permission from a higher court to support its refusal to enforce. If the higher court agrees with the lower court, the permission of the Supreme Court is required finally to support the refusal of enforcement of any such award.
Case reports have indicated that a firm stance is being taken by the Supreme Court against attempts by parties seeking to use grounds of public interest or regional interest and illegality to support the refusal of enforcement of such awards.
Conclusion
Law, practice and procedure is developing at a fast pace in China. The courts and arbitration institutions strive to improve their standards and their practices with the benefit of international cooperation. The underlying message to a foreign IT company seeking to do business in China at a time of great opportunity is to find reliable advisers within the country to guide them through the ever-changing landscape.
Adrian Hughes QC practises from 39 Essex Street chambers and is a foreign panel member of CIETAC and chairman of the China Law Council in London: adrian.hughes@39essex.com
