Doing business in China can be rewarding, given the nation’s booming economy and vast consumer market. However, disputes are inevitable in any business setting, and when conflicts arise between foreign businesses and Chinese entities, the question often surfaces: Where should the arbitration take place?
It might seem like a safer bet for businesses contracting with Chinese factories or companies to opt for arbitration outside China, thinking that foreign jurisdictions might be more neutral or familiar. Yet, there are compelling reasons to choose China as the venue for arbitration. Here are three reasons why:
1. Cost-Effective Investigation and Evidence Collection
Dispute resolution is a complex and often expensive process, especially in international settings. One of the primary factors influencing the cost is the investigation and evidence-collection phase. If the dispute revolves around a Chinese factory’s operations, much of the necessary evidence, witnesses, and documentation would be in China.
Engaging Chinese lawyers in this process is crucial because of their understanding of local practices, language, and legal intricacies. If the arbitration is conducted outside China, businesses would have to bear the cost of these Chinese lawyers and the fees of lawyers in the foreign jurisdiction to handle the arbitration process there. This duplication of expenses can strain the finances of the foreign business and can stretch the arbitration process, making it both costlier and lengthier.
2. Ease of Enforcing Arbitral Awards
After winning an arbitration case, one main goal is to ensure the award is honored. If a Chinese factory or company doesn’t honor the arbitral award given in China, it is relatively straightforward to apply to the Chinese courts for recognition and enforcement. China is a signatory to the New York Convention, which promotes recognizing and enforcing foreign arbitral awards. However, enforcing an award from a Chinese arbitration institution is much more streamlined within China than trying to enforce it outside.
In contrast, if the arbitration occurs outside China and the Chinese entity refuses to comply with the award, the foreign business might face multiple legal hurdles and potentially lengthy processes to enforce that decision.
3. Challenges for Chinese Factories in Enforcing Foreign Awards
Conversely, if a foreign business loses the arbitration in China and decides not to honor the award, it presents challenges for the Chinese entity. If the foreign business has no assets in China, it would be difficult for the Chinese factory to enforce the award in the foreign business’s home country. It serves as a buffer and might deter the Chinese counterpart’s frivolous claims or unjust demands.
In conclusion, while having reservations about arbitrating disputes in China is natural, considering the legal, logistical, and financial advantages can lead to a more informed decision. For businesses aiming to maintain long-term, fruitful relations with Chinese entities, choosing China as the arbitration venue can be both pragmatic and beneficial.
FAQs: Contracts in China and Arbitration
Q1. Why would it be more cost-effective to conduct arbitration in China?
Answer: If the dispute revolves around a Chinese factory, the evidence, witnesses, and documentation are likely based in China. Hiring Chinese lawyers who are familiar with local practices, language, and legal nuances is essential. Arbitrating outside of China would mean bearing the costs for both Chinese lawyers and foreign lawyers, duplicating expenses.
Q2. What is the New York Convention, and how does it relate to Chinese arbitration?
Answer: The New York Convention, formally known as the “Convention on the Recognition and Enforcement of Foreign Arbitral Awards,” is an international treaty that promotes the recognition and enforcement of arbitral awards across signatory countries. China is a signatory, which means that, in theory, arbitral awards from China should be enforceable in other signatory countries and vice versa. However, enforcing a Chinese arbitral award is generally more straightforward within China itself.
Q3. Can a Chinese factory still enforce an arbitral award if a foreign company has no assets in China?
Answer: It would be difficult. If the foreign company does not honor the arbitral award and has no assets in China, the Chinese entity would face challenges in enforcing the award in the foreign company’s home country.
Q4. Are there trusted arbitration institutions in China?
Answer: Yes, China has several reputable arbitration institutions. The Shanghai Arbitration Commission (SHAC) and the China International Economic and Trade Arbitration Commission (CIETAC) are two of the most prominent and are recognized internationally.
Q5. If the arbitration is held outside of China, can the foreign business still use Chinese lawyers for the process?
Answer: Foreign businesses can engage Chinese lawyers for investigations and evidence collection even if the arbitration is held outside China. However, they may also need to hire lawyers in the jurisdiction where the arbitration is taking place, leading to additional costs.
Q6. How long does the arbitration process usually take in China?
Answer: The duration varies based on the complexity of the case, the arbitration institution, and the specifics outlined in the contract. On average, though, arbitration in China might take anywhere from several months to over a year.
Q7. Is the arbitration decision in China final?
Answer: In most cases, the arbitral decision is binding and final. It is not subject to appeal unless very specific circumstances exist, such as procedural irregularities or issues related to the public interest.