Best practices for dispute resolution in China
While there are many dispute prevention tactics that can help you avoid conflict while doing business in China, it’s important to know what to do if a dispute arises. For the second post in our dispute resolution series, we’ll be covering the best practices for dispute resolution in China.
Whether your goal is to resolve the situation quickly so that you can resume operations or to settle every detail so that you can maintain a working relationship with the other party, you should consider the following.
Step 1: Negotiation
Before you draft legal demand letters and develop your litigation strategy, you might want to start by negotiating with your partner. Simple negotiation is often the best method of dispute resolution as it is the least expensive and it can help you preserve the working relationship between you and the other party. Many business contracts in China even include a clause stating that negotiation should be attempted before pursuing other dispute settlement mechanisms. “Harmony generates fortune” is something emphasized by the traditional Chinese culture and business people often want to escalate the discussion on a dispute to the senior levels of corporate executives all the way up to the CEOs before resorting to a third party (including arbitration or litigation).
But unfortunately, negotiating does not always lead to resolution. With that said, foreign companies sometimes seek assistance from Chinese government officials when facing difficulty negotiating a solution with Chinese partners. In this situation, government officials may be able to encourage the Chinese party to honor the terms of the contract. However, it’s important to specify a time period for this process, otherwise it may drag on and delay resolution.
Step 2. Legal Demand Letter
If negotiating with your partner doesn’t work, the next step is to issue a demand letter, which is often written by an attorney. This letter outlines your intent, such as a demand for restitution, compensation, or performance. While not legally required, this step serves as a warning letter and demonstrates that you are serious about moving forward with arbitration or litigation if necessary.
Failing to respond to a demand letter may constitute an admission by silence, so these letters are often met with a denial letter stating the basis for rejecting your claim. This information can be useful as it may be a good indication of the defences that they plan to use in court.
Step 3. Mediation
If the legal demand letter fails to resolve the dispute, mediation is the last option before moving forward with arbitration and litigation. Mediation is a dispute resolution tactic in which both parties present their proposals to a neutral, third-party mediator. Based on the proposals, the mediator will suggest a solution.
The less confrontational nature of mediation can also help the parties preserve their commercial relationship. It is both efficient and effective, which makes it a popular dispute resolution option that is even encouraged by courts and tribunals.
Step 4. Arbitration & Litigation
If all else fails, your last option is to resort to formal arbitration or litigation. These options are generally more expensive and time-consuming than the previous three, but they are effective. In either case, you will want to hire a lawyer with experience doing business in China and proper qualification to represent you in the relevant jurisdiction.
Arbitration is essentially a more formal version of mediation and is generally the preferred method of dispute resolution in China. In this situation, one or more third-party arbitrators who constitute the arbitration panel will hear both parties’ proposals, then review contracts and agreements. Based on this information, the arbitrator(s) will make the final decision on how to solve the dispute. As China is a part of the New York Convention, arbitration awards are generally binding and enforceable in China even in international arbitration, as long as the arbitration occurs pursuant to the arbitration clause in the original contract.
In China, arbitration offers many advantages over litigation. One main advantage of arbitration is the finality of the rulings, although enforcement of an arbitral award still requires a court hearing. Court judgments can be appealed, which could lead to cases dragging on for years, delaying resolution. Additionally, arbitration panels generally consist of a panel of experts as opposed to judges who may not have direct knowledge or experience with cases like yours.
The last step in dispute resolution is litigation in court, where both parties submit briefs and evidence and the dispute is ultimately settled by a judge. Trial in China generally takes place within six months of filing, but can be extended with approval from the president of the court or the approval of its superior court. The process is much more time consuming and expensive than the previous options, and the decision may be subject to appeal.
Beyond the drawbacks listed above, some judges in China, in particular in low-level regional courts, have minimal or no formal legal training and may not have experience with your specific type of dispute. They also tend to apply the law strictly, without regard for context or intent of the parties. Finally, courts can sometimes be influenced by local governments, which could limit their independence and/or lead to an unfavorable outcome.
In certain areas, however, litigation may be a better method. For example, litigation provides the plaintiff with a more effective way of freezing the counterparty’s assets for future enforcement purposes. In intellectual property infringement and maritime disputes, parties often choose litigation over arbitration because nowadays judges in those specialized courts are much more experienced with sector expertise by international standards. Foreign parties have reported positive experience with China’s new Intellectual Property Courts since their formation in 2014, with foreign companies having won 70% of the cases. All of this to say that litigation can be an effective strategy, but it is essential that you have an experienced lawyer who is well-versed in dispute resolution.
Business disputes in China can be complicated, but with the right approach, can be resolved quickly and fairly for all parties involved. These best practices for dispute resolution are a great start, but it’s important to work with an experienced legal professional that can help you navigate China’s legal system along with contract clauses, local jurisdictions, and other legal details that you may not be aware of.
If you have existing legal needs, sign up for a free Trustiics account to connect with top-rated legal professionals in China; or book a free call to get you started. If you’re interested in learning more, you can explore the slides and videos of our latest webinar on dispute resolution (sign-in required).