When analyzing a jurisdiction from a business perspective, it makes sense to dedicate enough time to the arbitration dimension as well rather than simply refer to court-related solutions. As pretty much anyone who has been at least somewhat involved with any court system can confirm, this solution is oftentimes not only a bureaucratic nightmare but also a time-consuming solution, let’s not even mention the legal fees which pile up every step of the way.
As such, for commercial disputes as well as other dispute types which are less relevant to ChinaFund.com readers, arbitration appears to be an appealing option.
As pretty much always, the answer is… well, it depends. There are indeed jurisdictions (primarily Western) ones which have streamlined the process to such an extend that while not necessarily a pleasurable endeavor, the arbitration process is quite smooth and efficient. Legislators end up pleased with the fact that a matter was resolved in a more amicable and hassle-free manner rather than clogging up the courts and the two parties are content with the compromise in question as well.
What about China?
Unfortunately, at this stage at least, few aspects pertaining to bureaucracy are let’s say straightforward by Western standards. Furthermore, we will be referring to mainland China exclusively and limit ourselves to mentioning that when it comes to the Special Administrative Regions Hong Kong and Macau as well as Taiwan, there are bilateral treaties that govern the process, with many stipulations being at parity with the New York Convention, ratified by the People’s Republic of China back in 1987.
Moving on to the national law dimension, it is governed by the so-called Arbitration Law of the People’s Republic of China, which for the most part is in line with the United Nations Commission on International Trade Law (UNCITRAL) Model Law. However, there are a few significant differences: the prohibition of ad hoc arbitration (even if issues pertaining to Free Trade Zones of the People’s Republic of China tend to be eliminated from this equation), the fact that arbitration by foreign bodies tends to be discouraged unless clear jurisdiction is established due to there being enough foreign elements involved in the dispute and so on.
At this point in time, roughly 200 entities are responsible with handling the arbitration process and while they are technically allowed to handle international arbitration cases, over ¾ of them do not. The most robust (from a caseload perspective) bodies are the CIETAC, BAC, SHIAC and SCIA.
Again, it is worth pointing out that China tends to discourage foreign arbitration entities due to them not being properly registered with domestic authorities (as stipulated in articles 10 through 15 of China’s Arbitration Law). As of 2013, however, there is legal precedent with respect to allowing foreign entities, with foreign institutions such as the ICC now having offices in mainland China as well. Unfortunately, practically speaking, these entities tend to be limited as to what can be actually achieved.
Finally, we do not yet have a de facto arbitration court in China but as of 2018, the process of establishing the International Commercial Courts was set into motion, in an effort to put together a dispute resolution framework at Western standards which revolves around a logically and especially bureaucratically coherent mechanism, from mediation to arbitration and ultimately litigation.
Therefore, as a bit of a conclusion, it has become clear that China is interested in eliminating as much bureaucratic red tape from the equation as realistically possible, but it remains to be seen how effective the system in question will actually prove to be. For now, we need to understand that the arbitration process can be quite cumbersome, especially when referring to lower level courts associated with let’s say rural regions, which are anything but familiar with what one considers a sound arbitration mechanism in the West.
As mentioned on multiple occasions, stereotypes which stopped being relevant abound in China. In other words, despite tremendous progress being made in China, many foreign observers remain blissfully unaware of them and thereby stuck in the past in terms of perception.
Is the same principle valid with respect to arbitration?
While progress has indeed be made and we have valid reasons to believe the de-bureaucratization process will continue when it comes to the overall arbitration framework, it is still only more or less educated speculation at this point. Significant difficulties currently exist and while there is nothing wrong with being hopeful when looking toward the future, remaining realistic and understanding the limitations of the present is paramount.
And, to be brutally honest, limitations currently abound in China when it comes to arbitration. Whether we are referring to less than prepared lower level courts of the sub-optimality of the process as a whole, arbitration still represents an extremely frustrating endeavor in China and as an investor who is interested in gaining exposure to Chinese assets and meaningfully “getting” China, this variable needs to be properly understood.
For more information pertaining to the implications of this reality as far as your business interests in China are concerned, the ChinaFund.com team is at your disposal. We can be reached through the Contact section of ChinaFund.com, are only one message away and looking forward to helping you and/or your organization gain much-needed clarity.