Many of our clients are entering into agreements with parties in China. In most cases, the choice of forum for disputes that may arise under a contract is a source of concern. While we generally draft agreements to provide for arbitration in the U.S., or as an alternative in Singapore or Hong Kong, in some instances the Chinese party will insist that disputes be resolved in China. Since this trend is increasing, we will summarize the arbitration and litigation procedures in China, many of which have become more acceptable to U.S. parties over the past decade. In this article, we describe the following procedures:

Commercial arbitration;
Mediation: Including civil, judicial, administrative and conciliation;
Commercial litigation; and
Administrative reconsideration or administrative litigation for disputes involving the central or local government.

Commercial arbitration
Commercial arbitration is by far the most popular and efficient method of alternative dispute resolution in China, both for foreign and domestic enterprises. There are several reasons for this preference:

Speed and cost: Arbitration tends to be the most efficient and expeditious form of dispute resolution. Hearings are typically completed within one or two days, which also reduces legal fees.
Impartial: Though China has made great progress to modernize its laws and institutions, many foreigners and locals are not yet confident they will receive a fair hearing through the country’s courts. Arbitration bodies, however, are independent of China’s court systems and are rooted in international law. Resolution-seekers are thus more assured of impartial rulings through arbitration. The decisions of arbitration bodies are also equally authoritative and binding.
Cross-jurisdictional: Because commerce is often conducted across multiple regions and borders, complications will often arise when attempting to resolve a dispute that is not confined to a single jurisdiction.
Arbitration bodies, however, are not limited geographically in their legal jurisdiction and can represent foreign-related, domestic-related, and mixed foreign and domestic cases. Thus, arbitration avoids the limitations of a single-jurisdictional resolution.

Arbitration cases are usually heard by a panel made up of three arbitrators, with one arbitrator acting as chair. Each party is given the right to select an arbitrator of their choice. However, the third arbitrator is selected by the arbitration organization. The disputing parties present their cases and arguments before the panel. After due consideration, the panel then makes a final and binding resolution decision. Because China is a signatory of the 1958 UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards, all decisions in foreign-related arbitrations are enforceable internationally.

The arbitration law governs all arbitration rules and procedures, and established local arbitration bodies in various Chinese cities.

However, the most widely used and recognized body, the China International and Economic Trade Arbitration Commission (CIETAC), is an independent international institution. CIETAC has a well established presence in China, with sub-commissions in Beijing, Shanghai, and Shenzhen, as well as offices in Dalian, Chongqing, Chengdu, Fuzhou and Changsha. CIETAC handles the largest number of annual arbitration cases worldwide, taking on both international and domestic contractual and non-contractual disputes. The organization maintains a list of over 500 qualified arbitrators, many of whom are foreigners.

Commercial mediation
Mediation attempts to assist two parties towards reaching an amicable settlement of a dispute by involving a third party. There are currently four types of mediation practices in China: civil mediation, judicial mediation, administrative mediation and conciliation mediation.
Civil mediation takes places outside the courts through the People’s Mediation Committees, an autonomous grassroots non-governmental organization of citizens with the mission of resolving civil disputes through mediation. The organization’s mediation work is assisted by the judicial assistants of the government and courts at the township level. Although mediators are volunteer citizens, they must have satisfactory knowledge of the legal issues and policies concerning the dispute. They must also be impartial.

Judicial mediation is conducted through a court of law and is used to resolve a civil or economic dispute. It can also be used to handle minor criminal cases. The consent of both parties is required for such proceedings. Mediations can be conducted by a sole judge or by a panel with the court inviting relevant individuals or entities to assist the process. If a mediation agreement is reached, the court generates a mediation document that is signed by all parties and sealed by the judge and clerks. Once signed, the agreement becomes legally binding.
Administrative mediation is conducted outside the court but by grassroots or government departments instead of citizens. Grassroots governments such as townships usually mediate ordinary civil disputes while government departments mediate more specific and complex civil, economic and labor disputes. This type of mediation is often preferred and effective for settling disputes between state-owned entities.
Conciliation mediation is a form of mediation that focuses more on seeking concessions from both sides as the chosen method of reaching a resolution. The Conciliation Centers of the China Council for the Promotion of International Trade (CCPIT) have established permanent institutions in China to provide conciliation services for disputes. The CCPIT, in particular, is a useful vehicle for resolving disputes arising from international commercial and maritime transactions where the parties involved are from two different countries. The CCPIT has signed many cooperation agreements with various international bodies, including the Beijing-Hamburg Conciliation Center, the American Arbitration Association, the International Federation of Commercial Arbitration Institutes and the London Court of International Arbitration. The agreements with these bodies use international law as the guiding force behind the rules and procedures.

Commercial litigation
Commercial litigation attempts to resolve a dispute by litigating in the people’s court and is governed by the Civil Procedure Law, as well as international treaties. This process differs from administrative litigation because it seeks resolution of disputes that are non-administrative in nature.
There are four court levels in China. The District People’s Court is the lowest level court usually established at the county level. The Intermediate People’s Court is usually established in larger city districts and autonomous prefectures and supersedes the District People’s Court. The Higher People’s Court is established at the provincial level and is the court immediately under the Supreme People’s Court, the highest court in China.
Some of the important litigation aspects in Chinese courts include the following:

Parties involved in litigation may be represented by themselves or by other representatives (such as PRC lawyers).
An individual or enterprise has the right to request a closed court or even a case conducted in camera if business or trade secrets are involved.
Appeals can be made to a higher court leading up to the Supreme People’s Court.
The losing party bears the court fees but does not typically owe the prevailing party for expenses and legal fees unless otherwise stipulated prior to commencement of the trial.

Administrative reconsideration

Administrative reconsideration is a form of alternative dispute resolution provided by the government and outlined in the Administrative Reconsideration Law, which became effective in 1999. The law protects the rights and interests of citizens or enterprises by providing a vehicle to prevent or correct illegal or improper administrative decisions and actions. If a person or organization is dissatisfied with a specific administrative act, an application can be filed with the legal affairs office of the administrative organization for administrative reconsideration. This office has the responsibility of reviewing the application, the legality of the act in question, rendering a decision and proposing for the disposition of acts that violate the law to the appropriate state authorities.
After the application is received, the respondent responsible for the specific administrative act must reply in writing, defending the specific act by providing evidence, grounds or any other relevant material. Failure to respond will result in automatic nullification of the administrative act. However, if the respondent replies, the office will examine the case. A decision will be rendered in favor of the applicant if the office deems any of the following elements to have occurred:

Respondent replied with ambiguous or inadequate evidence to support its specific act;
Grounds for the specific act are erroneous;
Respondent violated a legal procedure;
Respondent engaged in excessive authority and abuse of power; or
The specific administrative act is obviously inappropriate.

The law also stipulates that any member of administrative reconsideration found to have engaged in bribery or misfeasance will be punished with a warning, demerit, heavy demerit record, demotion or discharge depending on the severity of the offense.

Administrative litigation

If a citizen or organization does not wish to pursue administrative reconsideration or, having pursued it is dissatisfied with the decision, administrative litigation with the appropriate People’s Court is an alternative approach. The Administrative Procedure Law, which came into effect in 1990, governs the administrative procedures for litigation. Some of the highlights concerning the law include the following:
Defendant has the burden of proof for the specific administrative decision or action it has taken;
If plaintiff has previously pursued administrative reconsideration, he or she must file an application for litigation within 15 days of receipt of the administrative reconsideration’s decision;
If plaintiff is pursuing litigation with the People’s Court directly, the statute of limitations is three months from the date of occurrence of the administrative act;
If a party believes a member of a judicial panel has a personal interest in a case, the party can demand the withdrawal of such person from the judicial panel; and
Elements for establishing the guilt of the defendant are virtually the same as the elements stipulated in the Administrative Reconsideration Law.
As can be seen from this summary, China’s dispute resolution and litigation rules have changed over the past 10 years. Not surprisingly, many U.S. companies are less concerned about being subject to dispute resolution in China.

By Robert Brown