China Contract Dispute Resolution Clauses: Choose Certainty

Chinese Law and China Contract Drafting

When my law firm’s China lawyers draft a contract involving a Chinese company, we usually use the following simple and clear dispute resolution provision:

  1. The contract is governed by Chinese law.
  2. The Chinese language version controls.
  3. Disputes will be resolved in China.

On the third point, we work with our client to choose either litigation before a specific court in China (it has to be one with jurisdiction) or arbitration in China. We point out that the client must pick one method: litigation or arbitration, but not both.

The Pitfalls of Flexible Dispute Resolution Clauses

In discussing a dispute resolution clause, clients often propose a flexible dispute resolution provision such as the following:

  • The plaintiff in any future dispute has the option to choose arbitration or litigation. Once the plaintiff chooses, the defendant must comply.
  • Litigation or arbitration will occur in the defendant’s home location; the Chinese party must be sued in China and the U.S. party must be sued in the United States.

Up to around ten years ago, most non-Chinese entities were reluctant to allow themselves to be sued in China. As a result, many contracts from that era included such “flexible” dispute resolution provisions. But with the growth of relatively sophisticated court litigation and arbitration in China, it became clear that a flexible approach is usually ill-advised. In many cases, foreign companies that used such provisions found themselves with no remedy of any kind. In other cases, working through the “flexible” but complicated issues resulted in substantial delay and greatly increased legal costs, which is exactly what the Chinese side intended — I know this because many Chinese lawyer friends told me that this was their strategy.

The Benefits of a Single Dispute Resolution Method

For the reasons mentioned above, the China lawyers at my law firm write our China contracts to provide only one method of dispute resolution, with just one forum for that process. We favor certainty over flexibility. When the time to pursue dispute resolution arises, we want to be able to move quickly, decisively, and as inexpensively as possible.

Chinese Arbitration Law and Its Implications

China’s Arbitration Law requires agreements to arbitrate to include, among other things, the parties’ intent to arbitrate and the arbitration institution where they will arbitrate. Chinese courts may deem a dispute resolution provision invalid if it does not clearly specify the parties’ intent to arbitrate and the specific arbitration institution.”

If the dispute resolution provision gives the plaintiff a choice of the dispute resolution method, there is substantial risk a Chinese court will deem that provision to be fatally vague. For example, pursuant to Article 7 of the Interpretation of the Supreme People’s Court Concerning Several Issues on the Application of the PRC Arbitration Law (最高人民法院关于适用《中华人民共和国仲裁法》若干问题的解释), an optional provision like this will mean that the agreement to arbitrate is invalid.(第七条当事人约定争议可以向仲裁机构申请仲裁也可以向人民法院起诉的,仲裁协议无效).

The Consequences of Invalid Dispute Resolutions

If a party applies to arbitrate with the arbitration institution to arbitrate the matter, and the respondent does not object before the first arbitration hearing, then the arbitration may proceed. (第七条但一方向仲裁机构申请仲裁,另一方未在仲裁法第二十条第二款规定期间内提出异议的除外) This does not often happen in the real world because Chinese lawyers — like lawyers pretty much everywhere — are masters of delay. Once the Chinese defendant/respondent has retained legal counsel, it becomes likely that they will object to arbitration on the grounds that the arbitration agreement is invalid.

Ten years ago, this result often meant that the foreign plaintiff was simply denied a remedy. The situation in this regard has improved. PRC courts now often take the reasonable position that even though the arbitration agreement is considered invalid, the foreign company plaintiff still has access to the court. However, this result usually comes only after substantial cost and delay, which places the plaintiff in a weak position at the start of litigation.

Final Thoughts: The Importance of Clarity in Dispute Resolution

Most experienced Chinese litigators agree with my law firm’s position that flexible dispute provisions are a bad idea because the very reason to have a dispute resolution provision is to clarify what will happen should a dispute arise. Choosing a dispute resolution provision that is not clear defeats the purpose of drafting such a provision.

We also do not like provisions — which are common throughout Asia — prohibiting any lawsuit unless and until the parties have spent 30 days “amicably” trying to resolve their dispute and then mediated their dispute. Nine times out of ten, this sort of provision only drives up costs and increases delay for the non-Chinese company.

If your Chinese counterparty breaches your contract, it will usually not be in your best interest to immediately resort to prolonged “amicable” negotiation and mediation before litigation. These processes can be time-consuming and are often ineffective, frequently serving as tactics by Chinese companies to create delays. Consequently, our China lawyers usually advise against including “friendly resolution” clauses in contracts, especially since there’s nothing to prevent both parties from mutually agreeing to these sort of “friendly” resolution processes after a breach.