China Dispute Resolution Clauses. Choose Certainty Over Flexiblity.

When my firm’s China lawyers draft a contract concerning China, we nearly always use a simple and clear dispute resolution provision:

1. The contract is governed by Chinese law.
2. Chinese language controls.
3. Disputes will be resolved in China.

On the third point, we work with our client to choose either litigation in the PRC courts or arbitration in China. We point out that the client must pick one method: litigation or arbitration, but not both. What is known in logic as the exclusive or.

In discussing the dispute resolution clause, clients often propose a flexible dispute resolution provision such as the following:

• Plaintiff has the option to choose arbitration or litigation. Once plaintiff chooses, defendant must comply.
• Litigation or arbitration will occur in defendant’s home location; the Chinese party must be sued in China and the U.S. party must be sued in the United States.

In the 80s and 90s, most U.S. entities were reluctant to allow themselves to be sued in China. As a result, many contracts from that era included such “flexible” dispute resolution provisions. However, with the growth of sophisticated court litigation and arbitration in China in the post 2000 era, it quickly became clear that such a flexible approach is a mistake. In many cases, U.S. parties using such provisions have found themselves with no remedy of any kind. In other cases, working through the issues has resulted in substantial delay.

It is for these reasons that we write our China contracts to provide for one (and only one) method of dispute resolution and one forum for that process. We reject flexibility in favor of certainty. When the time to pursue dispute resolution arises, we want to be able to move quickly and decisively. In addition, during contract negotiation we do not want to waste time on these issues when the legal and practical best practice is already clear.

PRC Arbitration Law requires that the agreement to arbitrate must include, among other things, the parties’ intent to arbitrate and the arbitration institution where they will arbitrate. A dispute resolution provision is likely to be viewed as invalid if it lacks either of the above. If the dispute resolution provision gives the plaintiff a choice of the dispute resolution method, there is substantial risk that the provision will be held to be fatally vague. For example, pursuant to Article 7 of the Interpretation of the Supreme People’s Court Concerning Several Issues on the Application of the PRC Arbitration Law (最高人民法院关于适用《中华人民共和国仲裁法》若干问题的解释), an optional provision like this will mean that the agreement to arbitrate is invalid.(第七条当事人约定争议可以向仲裁机构申请仲裁也可以向人民法院起诉的，仲裁协议无效).

Of course, this rule only comes into effect if the respondent objects. If a party submits an application with the arbitration institution to arbitrate the matter, and the respondent does not object before the first arbitration hearing, then the arbitration may proceed. (第七条但一方向仲裁机构申请仲裁，另一方未在仲裁法第二十条第二款规定期间内提出异议的除外) This may not happen often in the real world. Chinese lawyers are masters of delay. Once the defendant/respondent has lawyered up, it become almost a certainty that it will object to arbitration on the grounds that the arbitration agreement is invalid.

In the early 2000 era, this result often meant that the plaintiff was simply denied a remedy. The situation in this regard has improved. Most recently, PRC courts have taken the reasonable position that even though the arbitration agreement is considered invalid, the plaintiff will still have access to the court. However, this result comes after substantial delay, which places the plaintiff in a weak position at the start of litigation.

Given this result, most experienced Chinese litigators agree with our position that a flexible dispute provision like this is almost meaningless because the very reason to have a dispute resolution provision is to clarify what will happen should any dispute arise. Choosing a dispute resolution provision that is not clear defeats the purpose of drafting such a provision.

The approach that provides that the place of dispute resolution as the location of the defendant is legal and enforceable in both China and the U.S, but it is impractical. The first issue concerns governing law and language. It is not very practical to litigate a Chinese language/Chinese law contract in a U.S. court. Chinese parties have become quite sophisticated and they are aware of this issue. For this reason, Chinese parties typically refuse to accept such a provision which then results in a lot of fruitless and costly discussion over a provision that made no practical sense from the beginning.

We also do not like the provision that prohibits an actual lawsuit unless and until the parties have spent 30 days “amicably” trying to resolve their dispute and then mediated their dispute.  Nine times out of ten this sort of provision only drives up costs and increases delay.  If your Chinese counter-party has breached your contract with it, do you really want to be required to have to spend 30 days trying to work it out and then another 6-8 months seeking agreement by mediation?  No, you don’t, especially since you can always propose such actions after the breach in the rare case that it would make sense for you to do so.