Contracting with China: How international arbitration can ensure you get what you pay for04 March 2015
The Hunter has close and important business ties with China, and with negotiations for a China Australia free trade agreement finalised in November last year, trading opportunities are likely to expand even further.
Hunter businesses contracting with their Chinese counterparts may face a number of legal and cultural barriers to resolving commercial disputes in China. International arbitration may be used as an alternative to enforce contractual rights and avoid many of the pitfalls of the Chinese legal system.
Barriers to resolving commercial disputes in Chinese courts
China's judicial system is very different to our own. Although it has developed in recent years, it has relatively little experience dealing with commercial litigation and is sometimes seen as unpredictable and lacking independence. The United States Government's export.gov website advises:
"Most observers agree that Chinese courts are not up to international standards. For instance, most judges have minimal or no legal training and observers have stated those poorly trained court officials are susceptible to corruption and regional protectionism. Also, courts are funded by local governments, undermining their independence."
Commercial litigation may also be culturally offensive to Chinese business partners, leading to a breakdown in the commercial relationship. Commercial litigation in China runs contrary to many traditional Chinese values, such as maintaining harmony, honour and reputation.
Language barriers are also likely to be an issue for Australian businesses, and may place them at a disadvantage compared to their Chinese counterparts. It is therefore recommended that Australian parties contracting with Chinese individuals or companies choose alternative means of resolving commercial disputes.
Parties can avoid many of the pitfalls of the Chinese legal system by entering into an appropriate international arbitration agreement. Arbitration is a private method of dispute resolution in which the parties submit their dispute for resolution by a third party whose decision is binding. It is an alternative to court-based litigation and the parties may agree on the procedure to be followed.
Importantly for commercial disputes between parties of different nationalities, the parties may choose to hold the arbitration in a neutral jurisdiction and subject to pre-agreed rules, meaning that neither side gains a "home ground" advantage. Depending on the rules chosen by the parties, arbitral proceedings may be kept confidential, heard by an arbitrator with expert knowledge in the subject matter of the contract or relevant industry and may provide a quicker and more cost-effective resolution than traditional litigation.
Once an award has been made, it is generally a relatively simple matter (compared with litigation) to enforce it in the home jurisdiction of the losing party or another jurisdiction in which they hold assets, provided that the relevant country is a signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (the New York Convention).
China became a signatory to the New York Convention in 1987. A party seeking to enforce an arbitral award in China must file the award and arbitration agreement with the Intermediate People's Courts, which will ordinarily enforce the award (unless there are certain exceptional circumstances).
Drafting international arbitration agreements
The New York Convention requires contracting States to recognise "an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration".
Typically, an arbitration agreement is just a clause in the substantive commercial contract, although it is also possible to enter into a separate side agreement. The parties may choose a model clause drafted by an arbitral institution or enter into an agreement tailored to their particular needs.
Whichever approach is taken, parties will need to make a number of important decisions to ensure that the agreement is appropriate for their circumstances, including:
- the number of arbitrators and whether they are to have any specific qualifications
- the "seat" (i.e. legal location) of the arbitration. It is recommended that Australians contracting with China choose a seat in a neutral, mature and reliable jurisdiction. Singapore and London are popular choices and have mature arbitration laws governing matters such as the jurisdiction, powers and duties of the arbitral tribunal and the supervisory powers of the court, and
- the rules governing the arbitral proceedings. Parties may draft their own rules or rely on the rules of an established arbitration institution such as the Singapore International Arbitration Centre or London Court of International Arbitration.
Hunter businesses contracting with China should consider including an international arbitration agreement in their commercial contracts. An appropriately drafted agreement may help to avoid many of the pitfalls of litigating in China, and ensure that disputes are resolved in a predictable, fair, quick and cost-effective manner.
 United States Government Export.gov/China/doingbizinchina/riskmanagement/eg_cn_028283.asp [accessed 19/02/1985]