Resolving commercial disputes
What can the Australian Government do?
The Australian Government is often called upon to provide assistance to Australian companies involved in commercial disputes. Very often there is little that it can do to assist.
The Australian Government can provide companies with assistance such as navigating China's legal system, providing referral lists of local law firms and arbitrators, sharing basic information on potentially applicable trade agreements and providing advice on relevant Chinese business practices. However, the Australian Government is not in a position to provide Australian companies or individuals with legal advice. Neither can it interfere in Chinese legal processes and law enforcement - including in relation to the return of property stolen in China; or the refund of deposits or payments for goods and services rendered in China.
The Australian Government is only able to intervene in commercial disputes in very limited circumstances – generally where Australian businesses have been discriminated against or treated unfairly by local authorities and all legal avenues have been exhausted.
Options for resolving a dispute
Preparation is the key to successfully resolving commercial disputes. You need to be aware of what options are available if they arise and which one best suits your commercial needs. There are no specific restrictions on the manner in which international commercial disputes ought to be resolved in China. Generally speaking, however, it is best to start low-key and slowly escalate the problem if necessary. Typically this means starting with negotiation, moving to mediation, and as a final step, arbitration or litigation.
Clarifying the problem
Can you confidently outline the problem area/s? Have you eliminated language and other areas of misunderstanding? Can you demonstrate to a third party clear examples of where the problem is impacting on the business?
Direct negotiation between parties
Under most circumstances negotiation is the most efficient means of dispute resolution. In fact, the majority of commercial contracts in China have a standard clause stipulating that negotiation should be pursued before other dispute settlement mechanisms are used. This is also the expectation within Chinese business culture more generally, and failure to adequately follow this may be interpreted as a lack of courtesy or goodwill, or a lack of cultural sensitivity.
Australian companies tend to place a significant emphasis upon the legal rights and obligations of parties to a commercial dispute. Breach of contract generally results in termination of the contract and damages for any losses incurred. In China however, a greater emphasis is placed on preserving business relationships or using personal connections to assist in resolving disputes. This different emphasis can frustrate Australian companies, leading to the escalation of a dispute. This is particularly the case when a focus on the preservation of contractual relationships includes an expectation that rights and obligations should be renegotiated or fulfillment periods extended.
Alternatively, a lack of familiarity with - and in some cases doubts as to the effectiveness of - formal processes in China has led many foreign investors in China to resolve disputes by negotiation more readily than in their home markets. This can be to their disadvantage. In some instances, Australian companies and individuals have found themselves under pressure to renegotiate the terms of a commercial agreement – sometimes through harassment, bullying or threats to personal safety. Consequently, you should be prepared to advance a commercial dispute to more formal means of dispute resolution – such as arbitration or litigation – should negotiations fail.
Mediation
Mediation is an effective step in the resolution of the dispute and is usually conducted as part of, but prior to, arbitration or litigation. In both arbitration and litigation, parties are encouraged to participate in mediation with mediators selected by the arbitral panel or during an in-court session. The rationale of mediation is that parties may present their proposals to the mediator who suggests a solution based on those proposals. Mediation is by definition non-binding and has achieved great success as a means of settling international commercial disputes between foreign and Chinese parties.
Arbitration
In many instances, international arbitration is an effective – though perhaps underutilised – dispute resolution mechanism in China. There are a number of attractive features of arbitration – including the ability to choose local and foreign arbitrators and the transparency of its proceedings and rules – which have made it an increasingly prevalent feature of China’s legal landscape. Arbitration also offers an advantage over litigation in China because of the finality of the rulings. Court rulings are subject to appeal, which means litigation may continue for a lengthy period of time.
Australian companies need to be aware, however, that not all disputes can be arbitrated in China – for example, intellectual property disputes. Australian businesses should therefore seek professional legal advice as to whether arbitration best suits their particular circumstances.
Choosing an Arbitral Body
The arbitration of commercial disputes involving Australian and Chinese parties can occur both onshore within China, and offshore in another country. The two issues that are important for the parties to decide are: which rules should govern arbitration; and the seat (venue) of arbitration.
There are a number of important differences between onshore and offshore arbitration in China-related disputes. Onshore arbitration can only be conducted using mainland Chinese Arbitration Commissions, such as the China International Economic and Trade Arbitration Commission (CIETAC), and for the arbitration agreement to be valid, the institution must be specified. No foreign institution is able to administer arbitration in China. Finally, ad hoc arbitrations are not permitted in China and arbitral awards that are rendered in ad hoc arbitrations conducted within China are not enforceable. This means that it is very important for Australian companies to ensure that commercial contracts include provisions to refer commercial disputes to arbitration if they wish to have arbitration as a dispute resolution option.
Currently there are two Chinese government-sponsored arbitration bodies for handling cases involving at least one foreign party: the Beijing-based China International Economic and Trade Arbitration Commission (CIETAC) and, for maritime disputes, the China Maritime Arbitration Commission (CMAC).
There have recently been reports of issues between CIETAC headquarters in Beijing and its former Shanghai and South-China (Shenzhen) sub-commissions. Australian companies considering nominating CIETAC as their preferred location should therefore seek legal advice before proceeding.
Australian companies should be aware that when drafting up a contract, they also can specify an arbitration body outside China. China acceded to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) in 1987. Under the Convention, arbitral awards rendered in other signatory countries are recognised and enforceable in China. By the same token, arbitral awards by Chinese arbitration bodies are enforceable in other countries signatory to the New York Convention.
The Hong Kong International Arbitration Commission (HKIAC) is a popular choice for arbitration in Asia and serves as a useful ‘middle-ground’ location for arbitration between China and foreign parties. The HKIAC is widely accepted in China and arbitrators are experienced with China-related disputes. The Singapore International Arbitration Centre (SIAC) is another well-established location for arbitration in Asia, while the Australian Centre for International Commercial Arbitration (ACICA) is seeking to establish Australia as a competitive location for international arbitration in Asia. The International Chamber of Commerce’s International Court of Arbitration also provides a broad remit of arbitration services around the world.
Deciding upon which arbitration body best suits your commercial needs is complicated, and requires the balancing of many considerations. Australian companies should seek legal advice when deciding which body to elect as their preferred location for arbitration. The decision of which arbitral body is best suited to resolve a dispute will depend on a combination of convenience, cost and the facts of the particular case.
While the Australian Government supports the use of arbitration as a preferred method of commercial dispute resolution with Chinese companies, it does not endorse one arbitration body over another – whether onshore or offshore.
Enforcement
In China, government administrative authorities play a key role in the enforcement of regulations. These authorities have wide-ranging powers in dealing with commercial disputes. The enforcement of awards is less problematic than commonly thought – particularly in urban areas. This is due to a number of factors including China being a party to the New York Convention, its arrangements with Hong Kong and Macau relating to the enforcement of arbitral awards and the so-called ‘reporting system’ which is an effective aid to securing enforcement. The legislative structure for enforcement of both foreign-related and foreign arbitral awards in China is now pro-arbitration, and the grounds for refusing enforcement of these awards is in line with international practice.
Litigation
There has been an increase in commercial litigation in China in recent years, and the quality of Chinese court litigation is improving. However, the service does remain variable across the country and many foreign parties prefer arbitration as a method of dispute resolution.
If you are considering litigating in China, you should contact a Chinese lawyer. Foreign lawyers and law firms cannot litigate in China and court proceedings are mandatorily conducted in Chinese – just as Australia restricts the practice of foreign lawyers and conducts court proceedings in English.
Commercial disputes involving the Chinese Government
When an Australian company has a dispute with the Chinese Government, a Chinese state-owned enterprise, or a government-subsidised project, the most effective initial step is to endeavour to resolve the issue directly with the Chinese entity involved before resorting to any external party’s (such as the Australian Government) intervention. The Australian company should explain its situation to the Chinese entity, and offer to work with it to resolve the problem amicably. In most cases the Chinese Government is fully aware of the importance of foreign investment in China, and would also prefer an amicable settlement.