Arbitration / arbitration proceedings in China

Principles of enforcement in China:

In general, contracts that were concluded with partners from the People’s Republic of China basically include a declaration concerning arbitration.

Such a declaration is recommended primarily for reasons of enforceability, which is to be applied in case of an argument.

However, it is to note, that since the end of the 80s there were some problems concerning enforcement with the PR of China, due to the fact that the People’s Courts at the middle level, which are primarily entrusted with execution of enforcement, occasionally make extensive use of their right to check the fulfilment of all requirements before permitting enforcement.
This does not only apply for foreign enforcement orders, but also for the execution of arbitral awards pronounced by Chinese courts of arbitration. Occasionally, in the past this process of examination did partly cause some substantial delays.

Standard agreement and CIETAC:

The Chinese arbitration organisation specified in the standard supply contract is better known under the abbreviation CIETAC.
It is subordinate to the jurisdiction of the Chinese Council for the Promotion of International Trade (CCPIT) and it is the arbitration organisation that will be typically suggested by the Chinese side to ask for settling a disagreement.

After the rules for arbitration, employed by CIETAC, were changed on June 1st 1994, the parties are now free to negotiate at which of the three seats of CIETAC (central seat in Beijing, subcommission departments in Shenzhen and Shanghai) their case shall be dealt with. 

However, independently from the fact that the arbitral regulations have changed, the arbitration proceedings now do not any longer need to take regularly place in Beijing, because for the foreign party the attendance at such hearings is still connected with enormous waste of time and energy.
According to CIETAC’s regulations it is not necessary to negotiate solely in China. In exceptional cases, there is also the possibility to negotiate at another location, provided the chairman of the board of CIETAC has given his prior consent to do so.

Length of arbitral proceedings:

The length of arbitration proceedings needed by the CIETAC is however only very difficult to calculate in advance. 

Although in the arbitration rules a clear time limit of 45 days after end of the negotiations is set, at which the court has to pronounce an arbitral award, it is nevertheless quite usual to plan ahead for several further negations, so that envisaging a duration of several years might be quite realistic.

In addition to the regulations mentioned above, the new arbitration rules also allow for accelerated proceedings. These accelerated procedures can be applied by mutual consent in case of arbitration complaints concerning an amount in dispute of  less than 500.000 RMB (i.e. 50.000 Euro). 

This is to be applied provided one of the parties has put forward a request for such an accelerated procedure, and the other party has given its consent in writing.

Accelerated proceedings are usually chaired by a single arbitrator. Basically, the case will be decided according to the files or right after the hearing.

The deadlines that were set during the arbitration proceedings can however also be subject for extension, decided by the CIATAC.

Furthermore it is to note that, according to the rules set by CIETAC, the election of an arbitrator during the proceedings is by no means free. In contrary, the parties will rather receive a list of selected arbitrators handed out by CIETAC’s secretariat. The parties have then, within a relatively short period of time (20 days), either to select an arbitrator from the list or to delegate the decision concerning the nomination to the chairman of CIETAC.

What concerns CIETAC’s decisions: these are considered in most but not all cases as being decisions that are well-balanced and essentially correct.

Altogether, it might be helpful, to contact, by mutual consent, alternatively another arbitration court, for example the German Institution for Arbitration, named here on second place, and in Germany better known as DIS (Deutsche Institution für Schiedsgerichtsbarkeit), or another of the more known international arbitration courts, as for example ICC-arbitral jurisdiction.  

In practise, it has been shown that selecting international arbitration courts is often but not always possible to agree within contracts with Chinese costumers.

However, in case one of the named arbitration organisations will eventually be selected, the parties should not forget trying to agree upon a location where arbitration should take place.

One has to note furthermore that in cases of smaller amounts in dispute, some of the employed rules, for example ICC-rules, do only allow nomination of a single arbitrator (see art.2. paragraph 5 ICC-Rules).

If the parties wish to employ a three-person arbitration court, even with smaller amounts in dispute, then such a regulation is basically possible, but it would have to be expressly agreed upon in the contract beforehand.
It is important not to forget to agree in beforehand upon the language that shall be used during arbitration proceedings; - this is a matter that remains usually left out in individual contracts.

Since for foreign contracting parties negotiations in Chinese language do usually mean a certain disadvantage, the standard agreement suggests expressly that the arbitration proceedings are to be held in English.

Regulations for the application of law

The clause on hand i.e. the standard agreement does not contain a statement about the law that shall be applied. This is a little bit regrettable, but the Chinese parties were however not willing, even after long negotiations about this point, to accept the application of so-called neutral law, as for example Swiss or Swedish law.

This corresponds to practical experiences, in that in negotiations on concrete agreements it is extremely difficult to agree upon determining specific law as applicable law.

That means in relation to the standard sale contract, that for sale contracts in general one has  to apply the UN-WKG (= Viennese convention about purchase rights) as an obligatory basis.

Accordingly, the standard sale contract was designed with regard to the legal requirements laid out by the UN-WKG, because these requirements contain regulations concerning legal liability and guarantee that both differ from the regulations laid out by the German BGB.

However, it is to note, that, as the name clearly indicates, the UN-WKG is solely about purchase rights, and this might not offer any helpful solution for regulations lying outside of ordinary sale contracts.  

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