Wikborg Rein newsletter: Contractual rights in China

Read or download the latest newsletter from our Shanghai office regarding contractual rights in China.

You have a contract, yes – but may your contractual rights be enforced in China?

Business today is no longer sealed with a handshake, and the strength of your commercial position normally depends on the contractual rights you negotiate, and – if these are not honored – your ability to effectively enforce these rights.

Companies invest significant efforts in negotiating and securing commercially-favorable contracts, but these contracts are only as good as your counterparty’s willingness to perform. The dispute resolution mechanism is all too often ignored and ends up as a neglected clause at the end of the contract. The moment a problem arises, however, all eyes turn to the dispute resolution clause. It is the mechanism for resolving a contractual dispute and will govern how and where this happens. Parties often fail to realize the importance of this clause until they are faced with a potential claim.

There are a variety of dispute resolution mechanisms available, including modern forms as mediation, arbitration and the utilization of binding expert opinions. The two main mechanisms are (i) trial in a country’s courts of law; and (ii) dispute resolution by an arbitration tribunal.

We are all familiar with resolving disputes in a courtroom before a judge. Many fail to realize, however, that a judgment issued by a Norwegian court is unenforceable almost anywhere outside the European Union. Should your opponent be domiciled in the U.S., Singapore or China, for example, you must start the process all over again. This can quickly become extremely expensive and time-consuming.
An arbitration award, however, can typically be enforced in most foreign jurisdictions. China, Norway, Singapore, the U.S. and approximately 140 other countries are signatories to the New York Convention of 1958, which provides that these member countries are under an international obligation to enforce arbitration awards rendered in another member country. Arbitration is a private form of dispute resolution whereby the parties appoint a panel of arbitrators (normally three) and authorize them to render a final and binding decision concerning the dispute. In practice, the unique enforceability of arbitration awards makes arbitration the only truly effective dispute resolution mechanism in international business. While costs associated with international arbitration can sometimes exceed those of an ordinary trial, and a losing party typically cannot appeal an unfavorable award, commercial parties around the world still overwhelmingly favor international arbitration simply because of its enforceability.

A number of issues should be kept in mind when drafting an arbitration and choice-of-law clause. Great care should be taken in choosing the location and arbitration venue. Different venues follow different arbitration rules, and these can affect cost and quality of the process. London, Singapore and Hong Kong, for example, are common, well-respected arbitration venues. The choice of law is also important, because the arbitration tribunal will interpret the terms of your contract through the lens of a particular country’s law – and some countries’ laws will undoubtedly be more favorable to you than others. Some arbitration clauses also require an escalation provision whereby the parties’ senior decision makers must first meet, or the parties must first attend mediation, before they may then go to arbitration or initiate litigation. It is wise to involve legal counsel in each of these steps.

Many jurisdictions have strict criteria for an arbitration clause to be valid. In China, for example, an arbitration clause that fails to specify a particular arbitration venue (a so-called ad hoc arbitration clause) is invalid and will not be enforced. You may then face the spectre of litigation in a Chinese court against a Chinese party. It is crucial, therefore, that an experienced legal professional review these provisions before contracts are signed.

With their growing power and confidence, many Chinese companies today insist that foreigners accept contracts governed by Chinese law with dispute resolution within China. This need not be worrying. China International Economic and Trade Arbitration Commission – CIETAC – either in Shanghai or Beijing, is by far the preferred choice. Please do not hesitate to contact us for further information on how to navigate these issues.

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