A brief introduction to dispute resolution in China

An increasing number of Chinese companies are doing business with foreign companies in today's market. How should Chinese companies control the risks in such international transactions or investments? How can they avoid disputes arising from these deals? How should they resolve them? These are the main issues that all the parties may be confronted with.

How to control risks in advance?

To control risks beforehand, Chinese companies should carry out their due diligence investigation carefully, for example, by:

• verifying the foreign counterparty's goodwill; or
• acquiring its credit information by inquiring into its record at the State Administration for Commerce and Industry, State Administration of Taxation, the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) and the China Court Enforcement Information System;
• asking the counterparty to provide bank's guarantee or credits certificate; and
• confirming through the State Intellectual Property Office (SIPO) whether the counterparty is involved in any intellectual property (IP) issues.

Where essential, a fact-finding tour should be launched to find out whether the counterparty really exists as a legal entity or has a physical office and certain staff members. Of course, the contents of due diligence investigation shall vary with the needs of the agreement.

When concluding a contract, the choice of seat and applicable law cannot be generalised. As to the choice of seat, it should be China for better protection of the Chinese company. By virtue of the convenience in obtaining and producing evidence, China is more suitable as it could also save time and costs. As for the choice of applicable law, the parties should compare different laws and pick out a system that has rigorous rules concerning any disputes that may arise out of the transaction. When choosing applicable law, it is better to choose a fair one that can protect the parties' interests.

The decision to choose arbitration or litigation should be based on an analysis of the whole facts, with the enforcement of the resolutions being emphasised. In cases where a bank provides a guarantee for the counterparty, a party can choose either litigation or arbitration. However, in other cases, our advice is to choose arbitration for two reasons. First of all, the New York Convention can ensure the enforcement of arbitral awards in 156 countries, including China and the US, while there are risks in trying to have court judgments enforced in foreign countries. And in China, arbitration can support requests for lawyers' fees, while this may be withheld in courts' judgements without the parties' agreement beforehand.

Of course if parties want to choose arbitration, an arbitration agreement should be signed and/or agreed before the application of arbitration.

What should be done once a dispute arises?

When disputes arise, the first thing is to gather and perpetuate the evidence in time, especially if the case concerns tortuous disputes. It may require photography and notarial certification issued by the public security organs. One thing worth mentioning is that the evidence obtained should conform to the requirements of the institutions for future resolution. For instance, Chinese national courts all require notarial certification issued by certain government organs. The second thing is to take measures to remedy the loss and to prevent it getting larger. The third thing is to send letters to the counterparty, attaching materials concerning the facts of damage and asking for assistance to resolve the problems.

However, as the saying goes, the most reasonable judgment may not be the best one. For considerations of long-term relationship, negotiations can be the best choice for both sides, not only for their effectiveness. However, when negotiations do not work, there leaves no choice but to file a lawsuit or start an arbitration.

Important differences in procedural rules in PRC v elsewhere

From the perspective of litigation

China follows the inquisitorial system of civil law, where the judges are at the centre of a case. At present, the judicial target is to "prioritise mediation to keep social harmony". However, as Chinese judicial reform is deepening, the "mediation-centred system" will gradually turn into a "trial-centred" one. Meanwhile, Chinese judges are also enhancing their abilities in holding trials and rendering judgments.

For example, the significant difference between Chinese rules and American rules lies in their contents. Chinese legislation relating to evidence not only follows the model of civil law system, but also carries on its common practices, which mainly focuses on the competence of evidence and its probative force. As to the competence of evidence, it requires the evidence to be relevant, objective and legitimate. Meanwhile, although there is preparation process before the first hearing, parties do not have the obligations to fully discover its evidence to the counterparty, and no unique proceeding is established for discovery. The preparations before the first hearing are led by the judge. The judge will investigate in the facts, collect essential evidence and ascertain the main dispute focuses and trialling objects. In America, the parties may need to acquire "leave to appeal" before appealing to a higher judicial authority. However, in China, the people's courts adopt the system whereby the second instance is the last instance, with appeals and petitions allowed. And petition can be regarded as another form of third instance. The parties can appeal to a higher court without any permission needed.

From the perspective of arbitration

Arbitration Law of the People's Republic of China does not allow ad hoc arbitration, meaning the awards rendered by an ad hoc arbitral tribunal based in China cannot be enforced here.

The administrative power for the proceedings between arbitration commissions in China and foreign arbitration institutions are different. Chinese arbitration commission are taking a hard hand on the arbitration procedures.

In China, parties are not allowed to contact the arbitrators.

Of course, all those differences originate the different legal systems between China and the US. In the US, cases with similar facts can acquire similar judgments, and precedents work as the bases for later judgments. However, in China, by virtue of the fast development of the economy, cases with similar facts in different periods may have difference consequences. For example, in cases relating to housing demolition and relocation, the rights of tenants used to be protected; however, things have changed and now the owner's rights tend to be protected.

What if there are cross-border government inquiries (e.g. antitrust)

Take sales transactions between a US company and a Chinese one as an example.

First of all, the premise is that the US Department of Justice and China's National Development and Reform Commission (NDRC) carry out their investigations separately based on different national laws. However, when the NDRC makes administrative penalties, to mitigate the penalties, it always takes into consideration the overlap of penalties made by different governments about the same facts.

Under the Chinese Anti-monopoly Law, the basic sequence of practices are:

1. To examine the roles of the foreign company and Chinese company in pricing products, that is to say which party had the dominant rights in this pricing process. If the Chinese company did not have dominant rights in pricing products, the NDRC will mainly focus on the investigation of the foreign company. However, if the two companies both had some rights in pricing the products, the NDRC will inquire into the two companies.
2. To ascertain the relevant market for the products and the scope of the market.
3. Based on the ascertained relevant market, to examine whether the inquired company, which is the foreign company, has a dominant role in the market.
4. If the NDRC makes investigations into certain companies, it will always follow one of the routines, including: 1) if finding that the foreign company has the dominant role in the market, the NDRC will then inquire into whether the foreign company has abused its dominant role in the market to pricing the products unreasonably; 2) if finding that the foreign company does not have the dominant role, the NDRC will then examine whether the upstream company (the foreign company) and the downstream company (Chinese company) have any kind of vertical collusion in pricing products unreasonably. The methods of collusion include setting up the lowest price and maintaining the price on resale.
5. To ascertain whether the price is reasonable, the NDRC will usually acquire the average pricing information, the costs for the disputing products and the margin of profits to decide.

The Chinese company can respond to any investigation in these ways:

1. To take the initiative by cooperating with the investigations carried out by the NDRC and submit evidence for negotiations when pricing products to demonstrate the foreign company's dominant role in the pricing process.
2. To take the initiative by submitting the sales evidence in Chinese market, including the sales amount, unit price and sales channel and so on.

One thing worth mentioning is that in markets nowadays, many Chinese companies, when conducting business negotiations or causing disputes with foreign companies, would initiate a report to the NDRC or start an anti-monopoly litigation in a national court to increase their bargain power.

What should be done when a resolution is reached?

China has four main ways to make up for the loss:

• to file a Declaration of Creditor's Rights with the court which accepts the counterparty's application for bankruptcy;
• to conclude a settlement agreement with the counterparty;
• to ask the shareholder(s) who has failed to fulfil or to fulfil the obligation of capital contribution fully to assume supplementary compensation liability; and
• to involve qualified shareholders who do not appear in the liquidation process in a tortuous suit.

As for the court's judgements, the people's courts adopt the system whereby the second instance is the last instance, with appeals and petitions allowed. A petition can be regarded as another form of third instance.

As for arbitral tribunal's awards, a party can apply for setting aside the award or non-enforcement of the award.

This article in English is edited and revised by Cui Lin of Dentons.

Jiangtao Ma 马江涛
		Senior partner Beijing Dentons Law Offices (Beijing office) Direct: +86 10 5813 7151 Email: jiangtao.ma@dentons.cn Mr Ma Jiangtao is a senior partner of Beijing Dentons Law Offices. He has over 20 years’ practicing experience and his expansive expertise include civil and commercial litigations, international arbitrations, real estate law, investment law, corporate law, administrative litigations, etc. With over decades of practicing experience, Mr Ma has offered legal services to numerous clients, involving enterprises directly under Central Government, large state-owned companies, leading private enterprises, well-known joint venture companies as well as multinational companies. Mr Ma has offered legal services and acted as a leading counsel in numerous significant litigations and arbitrations and he is also the permanent/special legal advisor for several big enterprises. Mr Ma also specialises in providing legal advice concerning commercial transactions and real estate investment activities. As a well-recognised authority in these areas, Mr Ma maintains long-term relationships with numerous clients. Mr Ma is also recognised as an Asialaw Leading Lawyer 2016.

John Zou 邹志强
		Senior partner Beijing Dentons Law Offices (Shanghai office) Direct: +86 21 2028 3286 Mobile: +86 136 0196 1328 Email: john.zou@dentons.cn Mr John Zou has received great academic achievement and rich practice experience. He received his B.E. degree at Shanghai Jiao Tong University in 1994, and LL.M. at East China University of Political Science and Law in 2002. Later in 2014, he obtained the EMBA degree at China Europe International Business School (CEIBS). Before he started out as a professional lawyer in 1999, he had committed with a governmental authority in Shanghai for 5 years. Mr Zou formerly headed as the managing director and director at Dentons Shanghai Office during 2010-2014. He is currently a senior partner and the member of the managing committee of Dentons Shanghai Office and Dentons China advisory committee. Furthermore, he has been appointed as an arbitrator of Shanghai International Arbitration Center (SHIAC); a graduate advisor and distinguished professor at East China University of Political Science and Law; and an independent director of Shanghai Kaikai Industrial Corporation Limited (SH600272), etc. He is specialised in litigation, arbitration and mediation. He has advised numerous domestic and multi-national entities, including but not limited to, Philips (China), Siemens (China), Continental Automotive (China), HP (China), Roche (China), China Electronics Corporation (CEC), Ping An Insurance (Group), Cinda Securities, New World China Land, Sino-Ocean Land, and China Metallurgical Group Corporation (MCC), etc.