Dispute Resolution in the People's Republic of China

Raymond Yu
6th June, 1996.



Table of Content



Introduction
Dispute Resolution Mechanisms Available
Evaluation of the Different Dispute Resolution Mechanisms
A Recommendation: The Preferable Option
Conclusion
Bibliography

Introduction

After the open door policy, the People's Republic of China (PRC) has become one of the world major trading countries and the target of numerous foreign investments. One problem with such foreign trading and investing activites is that disputes are bound to arise. Fortunately, foreign investors caught in such disputes have at their disposal many dispute resolution mechanisms. The question that arises is which approach is preferable? Or, how best to resolve dispute in the PRC?

It is submitted that the preferable way to resolve dispute in the PRC is through friendly negotiation. This is not to say that other options should not be used; these other options have their place in resolving dispute, but handling dispute by an informal and friendly mean is a better approach in the PRC.

The first part of this paper briefly outlines the different options available to the foreign investors facing a dispute. These alternative mechanisms are then evaluated in the second part. In the third part the above-mentioned submission will be further elucidated.

Dispute Resolution Mechanisms Available

The Options

In the PRC, foreign investor can resolve dispute in four different ways:
(a) Negotiation- Friendly consultation;
(b) Mediation or Conciliation;
(c) Arbitration;
(d) Litigation.
The first option is to initiate friendly consultation with the other party in an endeavour to settle the problem in a friendly manner, having regards to the principle of "equity, understanding and mutual benefit" . This can be done through the exchange of letters, telexes, and visits. No external party is involved.

Another option is mediation. Under the current Civil Procedure Law (CPL), the parties are free to choose whether they want to enter into mediation. Under mediation, a third party is introduced. This person acts an intermediary. This person does not suggest settlements; his role is only to seek facts and presents them to the parties. A slight variation is the use of a conciliator who attempt to reach a settlement acceptable to both parties. The conciliator can make recommendation(s), but it is non-binding. This latter approach tends to overlap with the more formal arbitration process. Thus, sometimes arbitrators can act as conciliators at the parties' request.

Foreign investors who are unaccustomed, or uncomfortable, with these informal approaches to dispute resolution can resort to the more `formal' and familiar arbitration process. Technically, arbitration is only possible where the parties' agreement contains an arbitration clause, or where they later agree to arbitrate the dispute. In practice arbitration clause is very common in contract with foreign investors. Arbitration is handle by two institutions (both established by and operate under the China Council for the Promotion of International Trade (CCPIT)):
(i) China International Economic and Trade Arbitration Commission (CIETAC);
(ii) China Maritime Arbitration Commission (CMAC)- deals with foreign shipping and use of foreign vessels.
A recent development is the use of "joint conciliation". Under this approach, the Chinese party seek help from the Chinse arbitration body, and the foreign party seek help from the arbitration body of its own country. The arbitration bodies of both parties then meet on equal term to mediate the dispute jointly.

As a last resort a foreign investor can seek litigation. But where the parties have agreed to submit to arbitration in the original contract, or any subsequent written agreement, the court will not entertain any suit. Where this is the case, court will only intervene to enforce the decision of the arbitration.

Which Option to Choose?

It is not possible to say that any one approach is necessarily better than the other. The choice depends on the characteristic of each approach and whether it is suitable in the circumstances of the disputing parties.

However, in making the decision, it is worthwhile to note that it was, and still is, the tradition of Chinese to deal with problem by discussing it. Parties tried to solve problems without: (i) recourse to external agencies, (ii) characterising it as a conflict, (iii) overt confrontation, (iv) assigning culpability. Thus, standard form contract typically provides for dispute resolution through first friendly negotiation, and only when it fails, resort to mediation and arbitration.

The preference for friendly dispute resolution makes the use of combination of methods relatively common. That is, the process of friendly negotiation surfaces in all four options. The "Chinese do not view the various methods of dispute resolution as discrete, separable functions." At any stage parties are freed, and indeed encouraged, to resolve their differences in a friendly manner. For example, parties can still enter into mediation where they have previously agreed to arbitration under CIETAC. Here, either the secretariat of CIETAC presides over the mediation before the arbitration tribunal is formed, or after the tribunal is formed, the tribunal may preside over the conciliation. Even during litigation, judges can, and do, encourage the parties to mediate. By contrast, the adversary nature of most Western dispute resolution tends to emphasise conflict, turning it into a contest with the goal of winning. It is wise to remember that this type of mentality would not go far in the PRC.

Evaluation of the Different Dispute Resolution Mechanisms

This part examines the three alternatives of mediation or reconciliation, arbitration, and litigation. The more informal approach of friendly negotiation overlaps somewhat with mediation in terms of its characteristic; it is canvassed in the next section.

Mediation and Reconciliation

Mediation has a very strong tradition in China as the predominant means of resolving civil dispute. For centuries it was an integral aspect of neighbourhood life. Even now, more than 70% of civil dispute in the PRC are settled through mediation.

Like friendly negotiation, mediation is based upon the shared premise of peaceful and friendly settlement of differences. This is consistent with the Chinese cultural background. Interpersonal relationship in China is different to the Western culture. It is strongly affected by Confucian teaching, and in the last few decades by the doctrine of socialism:

"Chinese society is based on collectivism with a strong emphasis on self-help, self-protection and mutual aid...[emphasis added] The good of the community is considered to be of more importance that of the individual..."

Mediation is even "systematically propagandized" when the Communist Party first came into power. Under the current CPL there are many provisions on mediation, reflecting the importance of mediation in the mind of the Chinese: "Mediation is both part of the legal system and part of the general practice." So much so that mediation during judicial proceeding is not unusual. That conciliation is encouraged in the PRC is further evinced by the establishment in 1987 of the "Beijing Conciliation Centre" by FETAC (the predecessor of CIETAC), and the establishment of "Beijing-Hamburg Conciliation Centre" by the Federal republic of Germany. A bilateral cooperation agreement was signed between these two bodies to promote parties to include a conciliation clause in their contract.

So what is the implication for the foreign investors? The fact that friendly resolution is deeply etched into the Chinese psyche, by historical, cultural, and political factors, gives it a distinct advantage. Common sense would suggest that it is far better to use an approach that is familiar and favoured by the Chinese party than to use one that is repugnant to them: the foreign investors have a better chance of getting a more favourable outcome. Also mediation is often a superior approach because the law in China is significantly underdevelop compared to Western nations. Thus, mediation, in not having to rely as much on legal rules or statutes, is more beneficial to the foreign investors. By avoiding the formal law, mediation can resolve dispute in accordance with "commercial and other expeditious criteria". Consequently, dispute gets settle quickly, with minimum of cost, and, best of all, in a friendly manner.

However, there are two reservations. First, it is not an approach that should be adopted by the unprepared party. The very fact that it is an approach familiar to the Chinese could also be detrimental to the unfamiliar foreign investors. That is, the manner in which mediation is conducted in the PRC may not be what the foreign investor expects at home. Although the principle of impartiality and neutrality is stressed, the tendency of Chinese mediators to make "explicit and direct judgments and openly use a mixture of persuasion and coercion" may be distasteful to the foreign investors. It has been said that mediation works best in a small group situation where the parties know each other and have "a mutual interest in sustaining an ongoing relationship", and where the mediator has some authority (in terms of respect and status) over both parties.

Second, it should be appreciated that mediation is not a single process. It involves continuous dispute resolution between two conflicting parties presided by an intermediary whose role is to encourage compromise. While it is a highly civilised and courteous approach, the problem is that it could be time consuming. Thus, for urgent matters, this approach may not be workable. Furthermore, for matter that require binding enforcement this is perhaps not the ideal approach.

Arbitration

Arbitration plays an important role in the PRC in resolving disputes with foreign investors. Friendly negotiation and mediation, though superior, may not be appropriate in some circumstances. Anyhow, the foreign investors may feel more comfortable with a familiar system. Apart from litigation, which has its own problems, arbitration is perhaps the closest dispute resolution mechanism they can find that are similar to the approach they are used to.

It perhaps fair to say that foreign investors would feel right at home and find the arbitration system in the PRC little different to the one they are used to. Over the years, modifications have been made to the arbitration system to align it with international standards. Since the adoption of the final Civil Procedure Law in 1991, and the Arbitration Law in 1994, the practice in the PRC conforms with international standard and practice. The hallmarks of arbitration that foreign investors expect from its home country are also present in China: economy, speed, confidentiality and expertise of the arbitrators.

The foreign investor's confidence in the arbitration system in the PRC is evinced by the fact that CIETAC is now one of the largest commercial arbitration centre in the world. CIETAC has a headquarters in Beijing, and two sub-commissions in Shanghai and Shenzhen Special Economic Zone. The following positive aspects can be noted:
(i) Parties have the right to select arbitrators and location of the arbitration- which could be in China or in other countries (of course, as a practical matter, the Chinese prefers arbitration to be within the PRC).
(ii) Foreigners are permitted to serve as arbitrators. These arbitrators are now typically drawn from members of the legal profession. Thus, their level of legal expertise can be assured. The ability to choose and the availability of non-nationals to arbitrate the dispute is very comforting because an arbitrator's legal and cultural background will inevitably influence the way he decides the dispute. A common law lawyer presenting the case in front of a civil law arbitrator may be at a disadvantage. This is not because the arbitrator is bias, but that his background necessarily suggests that he is more incline to understand and be persuaded by the civil law case.
(iii) Arbitrators with interests in the dispute are obliged to excuse himself, or, be removed by the parties both before hearing or during the hearing. This minimises potential conflict of interest.
(iv) Arbitration is conducted in an independent and impartial manner. The arbitrators worked to protect the legal rights and interests of the parties and promote international economic development. Chinese and foreigners are treated as equal before the law.
(v) Reasons are given for the award.
(vi) As the PRC is a signatory of the Convention on Recognition and Enforcement of Foreign Arbitral Awards of 1958 (New York Convention), the awards of CIETAC are recognised and enforceable in other signatories nations in the world. Likewise, Chinese court will enforce the awards of foreign arbitration bodies.
Overall, it seems that the PRC have "instituted basic mechanisms to avail both Chinese and foreign businesses the benefits of modern arbitration which currently are available in other nations." The skills and objectivity evident in the arbitration process have earned the confidence of many foreign investors. Despite this, the following points should be kept in mind.

Enforcement Issues.

On paper and in theory mechanisms exist for a party to enforce the arbitration decision through the courts. Procedurally this is relatively simple although it could be time-consuming. However, in practice, there are many obstacles. The germaine problem is that "CIETAC is making promise the courts do not keep", because of the following factors:
(i) Regional Protectionism- there is a strong tendency in the PRC that the Courts protect local economic interests. The consequence is the local Chinese court often refused to take action against the non-performing party. And often there is little that the other party can do about it. Not even the higher court seems to have much sway on the local court.
(ii) Lack of Co-ordination between CIETAC and the Courts. The problem is that, so far as CIETAC is concern, once arbitration is over its task is complete and it is the court problem in enforcing the award.
(iii) Lack of Resources. Chinese courts are often under-funded, particularly in their enforcement division. It is so bad that the party requesting enforcement is requested to cover cost for travel and associated expenses of its officials. Not only does this add to the cost of the foreign party who may or may not even be able to get the award enforce, the payment of such expense could even constitute `corruption' in the foreigner's home country.
(iv) Recently the enactment of the CPL and the Arbitration Law have compounded the problem. Whereas previously the courts have no legal basis to refuse enforcement, there are now specified rights to avoid an enforcement of the awards under the new CPL. Under the new Arbitration Law, the courts even have power to set aside the award under the four specified situations!

Property Preservation Measure/ Interim Protective Measures

Under Chinese law the Arbitral body has no power to grant any interim protective measures. They can only be granted by the Courts. This by itself presents no major problem in majority of cases, but the convenience and speed of getting interim protection are particularly important and indeed crucial when dealing with trade secrets or intellectual property.

Moreover, as such property preservation question is to be determined by the Chinese Intermediate Court that is located in the place of domicile of the party whose property is subject to the preservation measures or where the party is located, problem could arise. The local protectionism phenomenon could well prevent the granting of any interim preservation order.

Independence/ Political Influence

It is may be true the CIETAC is a self-regulating organisation, govern by its own Articles of Association and Ethical Rules. However, as it operates under the auspice of CCPIT some concern is raised. Despite the independent status of the CCPIT it is nonetheless supervise by the Ministry of Foreign Trade. Thus, there are fears that it could be influenced by the Chinese government. The implication is that in cases involving sensitive political issues, or involving state run enterprise (not uncommon), external pressure could be exerted on the arbitrators.

Finality of decision

The award given by the arbitration is final. There is no right of appeal under CIETAC. Ideally, there should be sufficient review available to discourage the making of arbitrary awards but not so extensive as to undermine the benefits of arbitration. Consequently, the possibility that the award is arbitrary exists.

Litigation

Litigation is not a preferable course of action in the PRC, especially when the above-mentioned avenues have not yet been exhausted. It must be emphasised that traditionally civil litigation is never a significant element in the Chinese legal system. The emphasis on social harmony and fulfilment of moral obligations tend to discourage civil litigation in favour of conciliation and mediation carried out informally. As mentioned previous, even if parties choose litigation, the parties are still actively encouraged to resolve their difference through mediation or conciliation.

Although, in general, Chinese are adverse to litigation, there is nothing stopping parties to go to court. In fact, in recent time, increasingly, people are turning to the courts for remedies. And courts tend to be more active in civil and economic dispute.

Structures are definitely being put in place to make litigation viable in the PRC. Indeed, on the surface, the procedures and format of trail would not be unfamiliar to a foreign lawyer; but appearance can be deceptive. Foreign investors in choosing the option of litigation should be aware of the potential downside inherent in litigation in the PRC.

Judicial Competence

The current court system in the PRC is arguably not well equip to serve the ends of justice particularly as understood by the foreign investors. A fundamental problem is the lack of people with adequate basic knowledge of the law. There is a severe shortage of well-qualified legal personnel in the PRC. Judges often had little training; when the court system was first established, the position of judges are often filled by the rank and file of party members, administrative arm of the government and military attaches. But these very people are more often than not ignorant of the law and legal matters.

It is only in 1983 that legal knowledge is required. While judicial officers may need to sit an exam for promotional purpose, it is not purely an examination of the law alone: a demonstrated knowledge with Marxist doctrine as well as court procedures and law of evidence is required. The presence of such ideology raises obvious problem when adjudicating cases; making the task on the foreign investors more difficult, if not totally unfavourable or prejudicial.

Moreover, considering that courts in the PRC operate in a manner and style that is less formal and involve simpler procedures then the Western system, protection mechanisms that ensure a `fair' trail may not be present. This is attributable to the relatively short history of the system, but significantly there is hidden policy agenda to align the administration of justice with the ideal of the `mass line'.

Judicial Independence and Corruption

The notion of judicial independence is highly dubious in the PRC. It is certainly not the type of independence accustomed to Western foreign investors. There are two dimensions to this: (i) there is no clear-cut distinction between the arms of government, and (ii) corruption is present in the system.

Historically, in both imperial and modern communist China, judicial independence is an unknown animal. Despite the hint of judicial independence in the constitution, it seems it is not put into practice, at least not in a way accustomed to the foreign investors. Judicial independence in the Western sense is grounded upon the notion of liberalism- which sees law as neutral and above everything- and instigated by historical power struggles in the Western world. By contrast, under the Marxism-Leninism the law is an instrument of class rule that help the communist party leadership in the construction of the ideal society; thus, judges' fidelity to the law must not subvert their loyalty to the party leadership. This fundamental ideological difference explains the nature of judicial independence in the PRC, and suggests that there is not likely to be any change while the present political climate persists.

In the PRC, it is not uncommon that lower court judges will seek instruction from higher court judges first- the practice of `first decide, then try'. Alternatively, the higher court judges may issue instructions or guidelines themselves. Consequently, any `appeal' to higher court is nugatory. Coincidentally, it is interesting to note that the penal of judges on a trial or appellate court is nothing more than for show in that often the Chief Justice's view prevails. This type of behaviour is not surprising as there is a tendency to view the court as another part of the administrative hierarchy:

"The practice in recent years is apparently that the courts still receive instructions from relevant party authorities regarding cases which are regarded as `important', `difficult' or politically sensitive, sometimes because the courts seek such instructions themselves in order to avoid any suspicion that they are not obeying the fundamental principle of party leadership, and sometimes because the party authorities seek to intervene in matters they consider crucial."

Moreover, because of the lack of formal demarcation between the arms of government, the courts are susceptible to political influence. The need to hire Chinese attorney under CPL complicates the problem. While this may be favourable in some respect (eg. ability to speak Chinese), the `loyalty' of the attorney could be doubted given that Chinese attorney is a state officer and that often the political party is in some way related to the business venture. Conflict of interest is inherent. This raises doubt as to whether a fair trial is possible.

To compound the problem, corruptions do exist in the PRC. Corruption among Party leaders and family are not uncommon. Given their influence on the judicial system, the foreign party could be at a real disadvantage. Recent attempt to promote the rule of law seems to have little effect, as evinced by the number of bribery and corruption that is still occurring.

Even judges are highly susceptible to corruption. Judges have no special status. They are known to be subjected to personal attack by intruders, vandalism on their property, etc. Also, because of their insecure tenure, they are reluctant to interfere with local party or government official for fear they will be transferred or removed. This tendency to `protect' the local impedes effective enforcement, making it difficult, if not impossible, to enforce judgement from another province.

Enforcement Problem

This leads to the next problem. In the PRC it is often not easy to enforce the law because of regional protectionism and lack of resources. In 1985-86 20% of economic cases failed to be enforced and in 1987-88 it is at 30%- 40%. Enforcement problem is particularly acute where the decision is directed towards other state organisation. Thus we have comment like: "The People's Court, like ourselves, is a state organisation guided by the Party... cannot force its opinion on other government organisations." True that the constitution said that the People's Court makes its decisions independently, without interference from the administrative organs or the leadership personnel, but it appears that this is not something that is appreciated or understood in the PRC.

Other Concerns

Other minor concerns should be noted:
(i) It is an inquisitorial system. In litigation, the litigants are to provide evidence to support his or her allegations. The courts also investigate the matter and collect evidence itself.
(ii) CPL only permits one appeal to a higher court. By starting at a lower level, the possibility of local protectionism and the use of "back doors" techniques (corruption) could be a problem.
(iii) Deficient standards and procedures in Chinese litigation. eg. the CPL set no standards regarding exercise of trial court jurisdiction; no standard for the admission of evidence; no standard of burden of proof; no need to publish opinion on decision.

A Recommendation: The Preferable Option

By now it should be clear that the preferable option in tackling disputes in the PRC is to utilise friendly negotiation. The objective is to resolve dispute in the most informal, private and friendly manner. Such an approach to dispute resolution is even gaining international prominence:

"China's new and flexible method of seeking amicable and friendly settlements on the basis of mutual understanding, fairness, and justice is the cause of its worldwide recognition."

The foreign investors need to appreciate that this is an approach that is favoured by the Chinese counterpart. This is due to the Chinese peculiar attitude toward the law. The legal history of China have established a very negative and adverse view on litigation. The system is viewed as being harsh and unjust. Importantly, the Confucian concept of "li" permeate Chinese thinking; it stipulates that people's behaviour is dictated by ethics and a desire to seek universal "peace and harmony". Under this view, morality triumph; law and litigation is seen as unnecessary and an improper mean to regulate conduct. Chinese tend to emphasise compromise, or "jang": by yielding or giving way on certain points the party hope to encourage a compromise solution.

The fundamental benefit of this approach is that it preserves the relationship between the Chinese and foreign party. Relationship is paramount in doing business in the PRC. Chinese treasures the concept of "old friend", which basically connotes a loyal and trusting relationship between the parties. This could have significant implication to long term trade with the Chinese partners. The "preservation of a relationship is more important than a `victory'." By resolving their differences in private rather than dragging them through a public forum this approach save the `face' of the Chinese party. This contributes towards the creation of a long lasting relationship, opening the door to future business ventures.

Ultimately, it is better to solve problems early and prevent them from escalating into disputes. Prevention is better than the cure. This notion lies at the heart of the friendly negotiation. It is a continuous process, where the parties exchange their views and arrive at a mutual settlement. It is part of the same process that the parties begin when they first started to negotiate the business deal. The party is continuously talking, negotiating such that the "dispute" is not really a dispute in the sense that it is nothing more than mere difference in opinions, or, slight misunderstanding. By maintaining this continuous dialogue any differences or problems can be settled in the most amiable manner and with the least harm to the mutual relationship.

Conclusion

Consistent with the cultural and political preference in the PRC, the ideal means to handle dispute involving foreign investors, or anyone for that matter, is to carry out friendly negotiation. This informal approach tends to keep dispute from blowing out of proportion. Settling disputes or misunderstandings in private, has the additional advantage of saving the Chinese party's `face'. Effectively, the process strengthens the relationship between the parties, and thereby paving the way for future business deals.




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Modified on: Tuesday, 1st October, 1996. Copyright © 1996 Raymond Yu.