This article was initially published by China Law & Practice on the Edition of May/June 2016 and authored by Jianwei (Jerry) Fang and Yimei Qiao of Global Law Office.
The importance of carefully crafted contracts when conducting business cannot be stressed enough. Foreign parties are usually advised to opt for offshore arbitration while negotiating the dispute resolution forum and governing law. And while this is often the safest choice, PRC litigation can, in fact, be better suited to certain cases, especially as the Chinese legal system continues to develop and modernize.
PRC laws on dispute resolution
Under the PRC Civil Procedure Law (CPL) and PRC Arbitration Law, parties to transactions are generally free to select a preferred dispute resolution mechanism (such as litigation or arbitration) and governing law in their contract. They may agree to submit their disputes to a Chinese court as long as it has an actual connection to the deal (e.g., the court is located where the defendant is domiciled or where the contract was signed or performed). Parties may therefore choose a preferable court in a more developed region with an actual connection, such as Beijing, Shanghai, Guangdong, Zhejiang and Jiangsu.
Similarly, disputes can also be submitted to a domestic or foreign arbitration institution per the arbitration clause. While disputes arising from a purely domestic transaction cannot be submitted for foreign arbitrations, parties to transactions involving a foreign element can also arbitrate outside China, such as in the International Chamber of Commerce (ICC) International Court of Arbitration, Singapore International Arbitration Center (SIAC), Hong Kong International Arbitration Centre (HKIAC) and the Arbitration Institute of the Stockholm Chamber of Commerce (SCC). It is worth noting that foreign-invested enterprises (i.e. wholly foreign-owned enterprises, Sino-foreign joint ventures and Sino-foreign co-operative joint ventures) are considered under PRC law to be Chinese entities. Their contracts with other Chinese parties are therefore not considered foreign-related transactions, despite their ultimate foreign ownership.
Reconsidering practices
In practice, international investors often select offshore arbitration due to concerns over partiality of Chinese courts. There is ageneral perception that Chinese litigationis more complex, unpredictable and time-consuming, and that an offshore arbitration tribunal would be more efficient, transparent and fair when dealing with foreign interests. As China is a signatory to the New York Convention, an arbitration award rendered by a foreign institution can be enforced in China or any jurisdiction where the defendant's assets are located, which gives arbitration a strong advantage over PRC litigation.
Although these views generally hold well for complex transactions, Chinese litigation has also proved to be an effective solution, particularly with domestic parties that do not have a significant footprint or assets overseas. Firstly, China’s judicial reform has made it much easier to file cases with the courts. Secondly, the level of professionalism of judges has increased substantially in the last three decades. And, thirdly, the courts have become much more efficient, fair and transparent.
Judicial reform
The ongoing judicial reform is designed to increase the efficiency and autonomy (from local government influence) of judges and courts. For instance, a number of measures were designed and implemented to improve judicial justice and credibility, including litigation reform to prioritize trials, letting judges assume lifelong responsibility for cases they handle and holding them accountable for any miscarriages of justice, as well as improving jury and public supervisor system.
Civil Procedure Law and SPC interpretation
The amended CPL, which took effect on January 1, 2013, brought more efficiency to proceedings in order to better protect parties’ interests. It extended preliminary injunctions, which made applying for preservation of evidence and assets for both litigation and arbitration less burdensome. Besides extending the scope of the Conservatory Measures, courts have generally become much more willing to issue preservation orders. The amended CPL also made it easier to preserve the defendant’s assets for enforcing a final judgment.
The Supreme People's Court (SPC) has also been very active. It published the Interpretation on the Application of the PRC Civil Procedure Law, which came into effect on February 4, 2015. This provided much clarity to a number of issues and the specific rules that courts, litigants and other related parties are required to comply with.
On April 14, 2016, the SPC revised the Court Rules of the People’s Courts, which took effect on May 1. These were initially promulgated on a trial basis in 1979 and last revised in 1993. The update will greatly increase the protection of parties’ rights and the transparency of litigation and court activities.
Litigation as a valid option
In light of the continued development of the PRC legal system and improving judicial climate, parties may want to consider PRC litigation at a preferable venue for less complex cases, especially if a successful proceeding depends on an injunctive relief order by Chinese courts, as well as an ultimate enforcement in China.
