Dispute Resolution in China

If you are doing business in China, chances are you may encounter a dispute sooner or later. Or if you have a dispute with your Chinese partner you have business agreement with, and theagreement require the dispute to be resolved in China, you will like to know some basic characteristics about the Chinese legal system.

Chinese Court System

China is a civil law country. A case in China is tried by a judge or a three-judge panel. Judges will decide cases based on the code of law, not the case law precedence. The Supreme Court of China issues the interpretations of law on some important issues that the lower courts encountered, but still, there is a lot of room left for judges’ discretion.

Judges from different courts could have different interpretations of the law, and even different judges from the same court may hold different views. Because there is no requirement to follow the precedence, the result of litigation in China is usually more unpredictable than in a common law country such as the United States.

Choose a proper forum

Being a stranger of the Chinese court system, many foreigners tend to choose a familiar forum to resolve the disputes. For example, they like to put such terms in the contract: “New York court will have exclusive jurisdiction over any dispute arising from or in relation to this contract.”

The problem is, you may obtain a more predictable and favorable judgment, but enforcing a foreign judgment in China is very difficult and almost impossible in some cases.

If you want a relatively predictable and enforceable verdict, you may consider arbitration as an alternative forum to resolve the disputes.

All Chinese courts will recognize the arbitration in Hong Kong.  Hong Kong is a common law region, and arbitrators are very familiar with both Chinese law and its applications to foreigners who come from a common law country like USA.

Chinese courts routinely  honor an arbitration decree by an  arbitration institution   in Hong Kong.  In order to choose arbitration, you must put an arbitration clause in your contract.

Rule of Thumb - Choose a proper local counsel

Unlike US attorneys who can only practice law in the states where they are admitted, a Chinese attorney can practice law nationwide.

For litigation cases in China, it is preferable to choose a local lawyer who is familiar with the local procedural rules as well as the local judicial interpretations on substantive issues.

Prevent a dispute in advance

Dispute resolution in China can be complicated and frustrating in some cases. However, there are ways to prevent a dispute from happening. The following are some of the common types of disputes you are likely to encounter when you run your business in China:

IP dispute

Most foreign companies have owned trademarks or patents before entering into China market. Before they conduct any serious business in China, the first thing they should do is to register their trademarks or patents with the Trademark Office or the Patent office in China.

There may be similar or identical trademarks or patents already existing in China. Some disputes arise from the registration process due to pre-existing trademarks or patents. Other disputes arise from trademark and patent infringement activities. If you have not registered your trademarks or patents, your IP rights is vulnerable to infringement and reverse engineering.  IP disputes may also arise from licensing or distribution agreements, or work products created by employees during the employment.

Shareholder Dispute

This is another common type of dispute when you set up a business entity in China with one or more Chinese partners, such as a joint venture or joint cooperative entity.

The rights and obligations of a shareholder in China are usually defined by laws and regulations, joint venture contracts, and articles of association.

The local approval authorities in China usually require the joint venture contracts and articles of association to be in conformity with an official template. In many cases, the official template is written in general terms and does not reflect the detailed arrangement among the shareholders.

You need an experienced lawyer to advise you which parts of the official format is mandatory and which parts can be modified to suit your specific needs. Any ambiguity in the shareholder agreements or articles of association can trigger future disputes among the shareholders, especially considering the language and cultural differences among shareholders.