Friday, June 26, 2009


by Alexandra Damsker

You are coasting along, manufacturing products in China, beginning product development there, as well as opening up your European and Asian markets when - something goes disastrously awry. Despite the best of intentions between you and your Chinese suppliers, a shipment is missed, a major contract term goes unfulfilled, and negotiations are getting you nowhere. “But I have a contract!” you say? As our friends at have explained so well, Chinese contract law is far from clear(see, for example,, discussing the Explanations of Contract Law released by the PRC Supreme Court, effective May 13, 2009).

What are your options? Well, as in the US, you have the courts, mediation, and arbitration.

The benefit of the court system is that all decisions, including mediation and arbitration,are subject to the ruling of the courts. In that respect, if you start with the courts, youare more likely to get a final ruling. However, as Chinese law is based on Civil Law rather than common law, there is no system of stare decisis (“like cases are determined alike”)-therefore, there is little to no predictability in ruling. Determinations can only besurmised by hints from the Supreme Court, and most would wish just a bit more to on which to base the outcome of their business. Without the principle of predictability to buoy up one sideʼs argument - and thus speed up negotiations and settlement – the odds that a dispute will end up in the fickle and byzantine Chinese court system is discouragingly high.

Mediation is an alternative, and may work better for those who merely need assistance negotiating the relationship or one or two issues. As a less adversarial and often cheaper process, disputes can be resolved quicker and with relationships more likely to remain intact. However, mediations are non-binding, and issues may end up in the courts and/or arbitration in the end - with additional costs, delay, and possible antagonism. If, however, you merely require “lubrication” in your relationship to restart your negotiations, “conciliation centers,” as they are know, are not uncommon, and your legal counsel can refer you to a good source of knowledgeable, independent mediators.

Arbitration, on the other hand, is legally binding, and is gaining prestige and steam in both the PRC and Hong Kong. Local disputes in the PRC usually go through the China International Economic and Trade Arbitration Commission and China Maritime Arbitration Commission. However, most disputes with any international aspect, including those involving US companies, go through Hong Kong which, unlike the PRC, is subject to principles of common law, and, along with Singapore, is the main venue of arbitration in the region. The primary arbitration center is the Hong Kong International Arbitration Center (HKIAC), which announced that it resolved 605 disputes in 2008,compared to 448 in 2007 and 394 in 2006. The increase is no doubt due, in part, to the declining economy, as the decreased cost and increased speed both serve to facilitate the speed and profitability of business. Arbitration is expanding as a method of dispute resolution, and will be discussed further in our next blog entry.

So, what to do? Regardless of which path you choose - make sure you clearly indicate your chosen venue (litigation, mediation, arbitration) and body IN YOUR CONTRACTS. This cannot be overstated - an ounce of forethought will keep you from pounds of medication for your ulcers and heart...and isn’t that what good lawyers are for? Good health comes with good counsel - so keep your counsel informed of events in your company, and let them protect you. The attorneys at the USA China Law Group have years of experience in keeping you protected, so contact us at your earliest opportunity.

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