Pay careful attention to how you get paid, when you get paid, and in which currency. If you have agreed to be paid in Chinese Yuan, verify that you can convert profits to U.S. dollars. Use letters of credit or other financial instruments to protect yourself.
Simple negotiation with your partner is usually the best method of dispute resolution. It is the least expensive and it can preserve the working relationship of the parties involved. In fact, most business contracts in China include a clause stipulating that negotiation should be employed before other dispute settlement mechanisms are pursued. When a foreign firm experiences difficulty in directly negotiating a solution to a dispute with its Chinese partner, companies sometimes seek assistance from Chinese government officials who can encourage the Chinese party to honor the terms of the contract. Companies should specify a time limit for this process. Unfortunately, negotiations do not always lead to resolution.
The principle of mediation is that the 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 commercial disputes between foreign and Chinese parties. In both the arbitration and litigation contexts, mediation represents an early step in the resolution of the dispute. In arbitration before a Chinese arbitral tribunal or in litigation before the Chinese courts, parties are encouraged to participate in mediation with mediators selected by the arbitral panel or during an in court session, respectively. The less confrontational nature of mediation may also help preserve the commercial relationship.
1. Chinese Arbitration. Arbitration is the preferred method of dispute resolution in China, and approximately 90% of China-related disputes are resolved inside China. Since it is rare for the parties to agree on arbitration after the dispute has arisen, the underlying contract or separate agreement must expressly provide that disputes will be resolved through arbitration. In China, a valid arbitration agreement must reflect a clear intent to arbitrate and clearly identify the arbitration institute that will administer the case. If so, arbitration will be the only available binding means of dispute resolution available under the contract; otherwise, the dispute must be resolved by the courts.
The latest and perhaps most troubling concern about arbitration in China is a regulation (adopted in 2002) that limits the ability of foreign counsel to appear as party representatives/advocates. Historically, many foreign companies agreed to Chinese arbitration based in large part upon their ability to engage foreign counsel. However, under the regulations that became effective as of September 1, 2002, foreign lawyers are limited in their ability to appear as counsel in arbitration proceedings, though we have received anecdotal reports that foreign lawyers have been allowed to continue on as counsel in proceedings commenced prior to the enactment of the regulations.
Arbitration Commission (CIETAC) and the China Maritime Arbitration Commission (CMAC).
Local Commissions - In addition to CIETAC and CMAC, there are over 200 local arbitration commissions that have been established in most major cities, including Beijing, Shanghai, Guangzhou and Shenzhen. Originally designed to hear purely domestic disputes only, these commissions can now hear “foreign-related” disputes as well. The most active of these in “foreign-related” arbitration is the Beijing Arbitration Commission (BAC).
A final way to resolve a commercial dispute in China is through litigation in Chinese courts. In China, foreign individuals and companies have the same ability to bring action in court as Chinese citizens and companies. There are four levels of courts in China. Every major city has basic (county) courts and intermediate courts. Supervising these courts are the provincial high courts. The Supreme People's Court, located in Beijing, has appellate jurisdiction over all courts in China. Cases involving foreign interests can be filed in either the basic-level courts or intermediate courts, depending on their nature. Most observers agree that Chinese courts are not up to international standards. For instance, most judges have minimal or no legal training and observers have stated those poorly trained court officials are susceptible to corruption and regional protectionism. Also, courts are funded by local governments, undermining their independence.