Mandarin to English Legal Translation Services
We’ve blogged about the importance of professional English to Chinese translation when doing business in China. As a general rule, it is always important when creating a contract with a business in China to not only obtain accurate legal Mandarin translations but also to include a well-crafted dispute resolution provision. However, this typically doesn’t mean the inclusion of an arbitration clause. When the question is whether it is better to arbitrate inside or outside of China, there are two schools of thought:
On the one hand, one answer says to avoid China as a place of arbitration and instead agree on a location outside of China. On the other hand, the other group says it is best to avoid the complications of arbitrating abroad, particularly as enforcement is easier if the arbitration is done in China.
But before one can make a decision, it is best to understand the law on arbitration in China. Under Chinese law (Art 242 PRC Civil Procedure Law; art. 128 Contract Law), only parties to a ‘foreign-related contract‘ may choose a foreign dispute resolution forum. All purely domestic contracts must have China as the location of their dispute resolution.
So what’s the difference?
As with many things, what is ‘foreign-related’ isn’t as straight forward as what many foreign companies assume. According to one case decision, a foreign-related case is one where:
One or both parties are of foreign nationality or stateless, or a company or organization is located in a foreign country;
- The legal facts that establish, alter or terminate the civil legal relationship between the parties occur in a foreign country; or
- The subject matter of the dispute is situated in a foreign country.
- Unless one of these three circumstances is present, the case will be qualified as domestic
However, even with this definition the issue is still far from clear. Although the definition seems broad, in practice it is very restrictive, with courts relying exclusively on first criteria (the nationality of the parties).
In summary, for a case to be considered foreign-related, at least one of the parties involved has to be of foreign nationality. Thus, foreign companies too often overlook the fact that their Chinese subsidiaries – including joint ventures or wholly owned entities – are considered Chinese entities under Chinese law. Thus, these disputes are considered domestic, meaning all arbitration must be conducted in China.
Not knowing this, many companies select a foreign place of arbitration and thus are in breach of Chinese law – although what the consequences of such are remain unclear. On the one hand, the clause could be found invalid as it is in breach of Chinese law. Yet this depends on the laws of other jurisdictions. Nonetheless, in such a scenario there is little chance of successfully enforcing the foreign arbitral award in China.
However, whether or not this means parties should refrain from entering into such arbitration agreements ultimately depends on the importance given to the issue of enforcement balanced against the reasons why the party wants to have the arbitration abroad.