Dispute resolution options in the commercial world generally divide between litigation and arbitration. International arbitration involves an arbitration procedure between companies originating from two different countries, which includes a middle ground and operates differently in the legal process applicable in the countries of the plaintiff parties.

Foreign companies operating in China can include the international arbitration clause in their commercial contracts with other businesses. So if a dispute arises over the settlement, they have to arbitrate rather than pursue traditional court cases. Both parties can also use arbitration to resolve a dispute at any trade stage, known as a "contract of application." An application agreement is an arbitration agreement signed after a dispute has arisen. 

Recognition and Enforcement of Arbitration Agreements

In order to overcome the crisis of confidence and the difference in priorities between states and foreign companies, the need to establish general principles at the international level on the arbitration mechanism to be used in settlement of disputes has emerged. In order to meet this need and to facilitate the recognition and enforcement of foreign arbitral awards, bilateral and multilateral international agreements have been signed between countries on various dates. The "New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards" was signed in 1958, which is the most comprehensive application area of ​​international conventions regulating the recognition and enforcement of foreign arbitral awards. 

Article II of the New York Convention deals with the performance of arbitration agreement provisions. The NY contract also sets the maximum terms for a valid arbitration agreement. In this way, the courts in a country that has accepted the NY convention cannot decide against the legal obligations resulting from the arbitration. Accordingly, the arbitral awards are also binding in accordance with the third article of the NY Convention. 

Are Arbitration Binding in China?

China signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1987. The New York Convention is the primary legal basis for arbitration parties to enforce foreign arbitration awards in China. 

According to the valid arbitration practices in China, commercial arbitration is divided into international and domestic arbitration. Both international and domestic arbitration clauses are final and binding on the parties. Still, the implementation of international arbitration awards in China is often problematic. The reimbursement of rights acquired by a foreign company from a Chinese company due to international sanctions will be limited to the tangible overseas assets of the Chinese company unless it is subject to legal sanctions in mainland China. 

On the other hand, the decision of one of the arbitration bodies located in China will be more binding. Objection to the decision rendered by the local arbitration will only be valid if unlawful acts that will affect the case's outcome are detected. The party objecting to the judgment may apply to the court to initiate proceedings for the judgment's annulment or the judgment's annulment when faced with the enforcement proceedings. 

In China, CIETAC (China International Economic and Trade Arbitration Commission) is the major player in arbitration matters. The rules applied by CIETAC in the field of international commercial arbitration have shaped the rules and practice of Chinese arbitration. CIETAC's file load on international arbitration is greater than that of the International Chamber of Commerce International Arbitration Court. 

Chinese courts are of the opinion that an arbitration agreement between companies operating in China to submit a dispute arising from a commercial dispute in China to foreign arbitration is invalid. The main contradiction at this point is that Chinese courts accept companies established in China with foreign investment as domestic elements. Still, many companies add international arbitration options to their commercial contracts. 

Advantages and Disadvantages of Arbitration Before the Courts 

In terms of foreign companies operating in China, the choice to be made between courts and international arbitration should be made by evaluating all data that may affect the result. The character of the current or potential conflict, the substantive law to be applied, the nationality of the parties, the jurisdiction of the courts, and the region where the goods are located, are some of the factors to be considered while making a selection. 

In order to resolve disputes arising from international trade, it may be preferable to go to arbitration instead of a court or vice versa. The advantages and disadvantages of arbitration and courts are discussed below. 

a) Foreign companies operating in China may not agree on which country to apply to a court in the legal settlement of a dispute with another foreign company or a Chinese company. The parties may think that the lawsuit to be held in the other party's country will cause disadvantage or inequality for them. In this case, going to arbitration is the most logical option. 

b) Courts naturally demand that hearings be held in the language of the country they belong to and that all evidence and documents be submitted to the court with translation. In this case, one of the parties may be advantaged over the other party by making his case in his own language. International arbitration cases are often heard in English. From the perspective of a foreign company operating in China, the company already conducts business in China, is able to defend in Chinese, and is expected to be familiar with Chinese commercial laws. Therefore, this condition does not have a language problem as much as the situation of foreign companies that come into conflict overseas. 

c) Sometimes, the arbitration process occurs in a country where the defendant has no assets. The 1958 New York Convention provides binding on the "Recognition and Enforcement of Foreign Arbitral Awards." 168 countries, including China, have signed this convention. However, many countries, including China, have signed this agreement with some reservations. In practice, obtaining compensation, for example, from a company with no assets in the country where the arbitration decision was taken is difficult. As a result of a commercial lawsuit to be heard in the local Chinese court, it can be moved to the highest court at most. The final decision is final, and it is faster and easier for both parties to apply the sanction resulting from the court to the other party. 

d) Court results are open to the press. In some cases, businesses may want to keep their disputes confidential. The arbitration process takes place between companies, and the public is not involved in this process. If the parties wish to, they can also add a clause to the contract to ensure confidentiality. 

e) Although the states are doing the necessary work to overcome the bottlenecks in the courts and make the courts more effective, it still takes a long time for the courts to make decisions in many countries, including China. On the other hand, appeals are usually made against the judges' decisions in the courts, which causes an additional cost and prolongation of the time. Arbitration allows parties to have more control over the way hearings are handled compared to court hearings. Arbitration is a very flexible mechanism. If both parties are results-oriented, they can make changes in the process at optimal costs. 

f) The process may be prolonged by bringing the results of the court to the higher court. Still, in this way, sometimes there is an opportunity to overcome erroneous decisions, late evidence, and other problems. The outcome of the arbitration is final, and there is no chance of compensation for errors. 

g) Court processes are generally more costly. The longer the legal process, the greater the financial burden that the parties must bear. However, sometimes the arbitration process can be more expensive depending on the industry, the costs of the arbitrator, and the arbitration negotiations process. In non-binding arbitrations, the final decision is not binding, so the party that loses the arbitration process may take the matter to court, making the process more costly. 

h) Arbitrators making arbitration awards, like judges in court, may not act in accordance with a book of laws and clear rules. This situation causes foreign companies and many companies to reevaluate the pros and cons when choosing court and arbitration processes in China, as in other countries. Despite the positive regulations regarding arbitration in recent years, it may be more logical to try the court process, that is, to prefer a legal process in mainland China, instead of arbitration, especially against a Chinese company that does not have any material assets outside of China, rather than international arbitration processes. 

How Does the Chinese Judicial System Work?

Both sides of the case can appeal against a decision made by the Chinese judiciary. For example, as a foreign company, you had a commercial dispute with another foreign company or a Chinese company, and you are not satisfied with the case's outcome in the Chinese court. It can appeal to a higher court within the period determined by the court. The second-degree examination and the decision made as a result are final and binding. The decision taken as a result of these two cases is implemented in accordance with the law. 

Is China Arbitration Friendly?

By 2021, some of the Chinese courts argued that there was no legal basis for the enforcement of arbitral awards. On the other hand, the impartiality of local courts in cases involving foreign companies was sometimes viewed with suspicion by foreign companies. On the other hand, local arbitrators in China did not inspire confidence that international arbitration parties choose China as an arbitration place. 

In 2021, the Chinese justice ministry published a draft amendment to the Arbitration Law and a draft interpretation. Briefly, the draft amendment supports the progressive judicial practice, introduces new rules that eliminate the arbitration regime's shortcomings, and creates an arbitration-friendly environment. Some of the free zones in China host arbitration-related studies as pilot zones. On the other hand, China continues to make legal arrangements not only for foreign companies located in China but also to transform itself into the first jurisdiction to resolve cross-border disputes.

Engage a legal advisor to help you efficiently review your business contracts with distributor, suppliers, and other partners to make sure you are legally protected. 

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