Legal Translation Services for Dispute Resolution in China
In prior blog posts about Chinese legal translation services we have discussed the importance of including a dispute resolution clause in a contract, particularly when dealing with a Chinese business. In this post we continue on this topic, first examining the steps one can take to avoid disputes, before delving into the ‘worse case’ scenario of taking legal action for the enforcement of contractual obligations in China.
Start with a Dispute Avoidance Strategy
In Chinese contract law there are two available enforcement mechanisms. The first relates to the structural and operational factors established by the contact and extra-contractual consideration (such as operational safeguards and mechanisms providing for practical protections necessary to assure performance). The second category comprises of more conventional enforcement mechanisms, including traditional dispute-resolution devices (alternative dispute resolution, litigation) and related considerations (choice of law, procedures, forum).
The majority of enforcement challenges occurring under Chinese law happen within the framework of this second category. Although as China builds a business-friendly environment characterized by predictable legal enforcement of contractual rights, the establishment of effective and predictable enforcement mechanisms represents a relatively new endeavor in the country. As a result, businesses operating in China may be less than certain that their contractual agreements will be supported by effective legal enforcement.
With this in mind, it can be said that some of the most effective contract enforcement techniques focus on incorporating sound dispute avoidance strategies that are embodied in the scope, structure and operation of the contractual relationship. Thus, many successful businesses with operations and/or relations with China work to scope and structure their contractual arrangements to avoid or, at the very least, minimize the likelihood of disputes and all but eliminate high-risk situations. This is because, no matter how sophisticated and established a dispute resolution environment is, actual dispute resolution procedures (i.e., litigation) are typically costly and non-productive.
In other words, the key to enforcing a contract in China tends to be to draft a contract that avoids the need to enforce it by utilizing various proactive approaches and strategies geared to avoiding problems in the first place. Examples of such strategies include:
- Payment schedules tied to actual delivery and acceptance by the buyer
- Strategic scoping of the sourcing agreement to ensure that the customer retains control of the overall production/performance process (i.e., limit sourcing to discrete components or phases or utilize multi-supplier arrangements)
- Careful due diligence in supplier selection and monitoring (i.e., to ensure that the supplier is motivated to preserve and protect its reputation and the integrity of its operation)
- Effective customer-side audit and other quality controls, including inspection and reporting
- Effective and legitimate utilization of business incentives (i.e., retention or expansion of business)
Utilizing such proactive strategies as the measures listed above and making them part of a business’ best practices are particularly important in China, where the options and mechanisms of dispute resolution may be less developed and certain.
Legal Action: For Worse Case Scenarios
All litigation, regardless of jurisdiction, is generally inefficient, costly, and time-consuming. Not only does all of this apply to litigating in China, on top of these drawbacks the Chinese system is plagued by inexperience and inconsistency. This is why arbitration is now the predominant formal mechanism for contract resolutions in China. Thus, if all dispute avoidance strategies fail and one must turn towards taking legal action to enforce contractual obligations, one is advised to opt for arbitration over litigation.
There are three types of officially recognized arbitration methods in China: domestic, foreign-related and foreign. All these three types requires professional legal translation and legal interpreting services. The first two describe proceedings that are conducted and enforced in China under Chinese law. Foreign arbitration, on the other hand, refers to arbitration that occurs outside of China but the results of which are enforceable within China.
The ‘foreign-related’ option can be of interest to companies operating within China as it offers participating parties broad options. To qualify, a dispute must satisfy several specific elements, including:
- One or both parties in the dispute are foreign persons or are organizations that are domiciled in a foreign country
- The subject matter of the dispute is located in a foreign country
- The facts that establish, change or terminate the contract between the parties occur outside of China
However, it must be noticed that both foreign-invested enterprises and wholly foreign owned enterprises are considered Chinese persons as they are Chinese-formed entities. This designation as being domestic can have significant consequences on dispute resolution matters. For example, the People’s Court may deny enforcement of a domestic arbitral award if it determines there is insufficient evidence to enforce or that the Chinese law was erroneously applied. On the other hand, neither of these defenses is available to deny enforcement in a foreign-related arbitration or in a foreign arbitration, meaning there is far less certainty regarding judicial enforcement in the case of Chinese domestic arbitrations – a consideration that may effectively defeat the entire objective of arbitration.