This post offers hands-on advice for crafting arbitration clauses in contracts with Chinese entities
Chinese firms, particularly State-Owned Enterprises (SOEs) where the government holds substantial control, typically resist signing contracts unless they provide for disputes to be resolved within China. Depending on the circumstances, seeking resolution in a Chinese court might be favorable, while in other cases, arbitration within China might be a more suitable choice.
When evaluating whether to opt for arbitration or litigation in China, our legal team typically considers the following factors:
- The type of disputes likely to arise.
- The necessity of preserving evidence.
- The potential need for injunctive relief.
- The caliber of the court preferred by the Chinese party or the court likely to adjudicate the case.
- The power or influence wielded by the Chinese counterparty.
Drafting an Arbitration Clause for China
When crafting arbitration clauses for China-based contracts, the lawyers at my law firm typically recommend the following steps:
1. Opt for CIETAC (China International Economic and Trade Arbitration Commission) or BAC (Beijing Arbitration Commission) arbitration. These commissions are among the most respected and internationally recognized in China, and Chinese firms rarely object to these choices.
2. Set the arbitration to be in either Beijing or Shanghai. These cities boast some of the most experienced arbitration commissions and arbitrators. While Chinese firms may initially resist this suggestion, they usually acquiesce without much struggle.
3. Specify English as the language for arbitration. If the contract doesn’t designate a language other than Chinese, the arbitration will proceed in Chinese. While this point often faces opposition from Chinese firms, it’s usually not a deal-breaker.
4. Ensure that at least one of the arbitrators is not a Chinese national. Interestingly, this suggestion typically doesn’t meet much resistance from Chinese companies. It’s often possible to have all three arbitrators hail from countries outside China.
Selecting the Law and Language for Your Arbitration
It’s crucial to clearly outline in your contract the governing law and language to be used during arbitration. If left unspecified, the arbitration tribunal will likely apply the law of the arbitration seat. Similarly, the tribunal will determine the arbitration language if it’s not predefined.
By clearly specifying the governing law and language in your arbitration clause, you prevent any potential ambiguity or disputes down the line. Make sure to choose a language that both you and your legal counsel are proficient in.
Typically, it’s prudent to align the law and language of the arbitration with the country where the arbitration is set to occur to keep costs at bay. However, if your strategy is to escalate arbitration costs to dissuade either party from pursuing arbitration, opt for divergent location, language, and law—this will necessitate the involvement of multiple lawyers. We once drafted (and the other side agreed) on a contract stipulating arbitration in Korea, conducted in Russian, under New Jersey law, figuring this would require a veritable ton of lawyers and arbitrators because no single person could handle all three languages.
While there are additional factors to consider when drafting a China arbitration clause, addressing the above four points should enable you to craft an arbitration clause that will mitigate your risks and steer clear of unwarranted disputes. The decision between opting for arbitration or litigation, along with other choices within the arbitration procedure, is impactful and warrants careful consideration. By adopting the pragmatic steps outlined above, you’ll be better positioned to navigate China’s complex legal terrain, ensuring your interests are protected to the fullest extent possible.