Litigation or Arbitration, Which is the Best Choice?
Choosing a dispute resolution forum when drafting contracts with Chinese companies or dealing with contract disputes with your business partner in China could be difficult. As a law firm specialised in dispute resolution area, the most frequent questions we have been asked are: which dispute resolution forum should I choose - litigation or arbitration? Is it possible to add an additional defendant in arbitration? Would Chinese courts rule in favour of the Chinese party in a foreign-related business dispute?
We need to take several considerations into account: the amount of business transactions, your counterparty’s company size, the duration of your counterparty company existence, time and cost to pursue litigation or arbitration.
Please refer to the below chart for further details.
Transaction size: Small =1 million RMB; Medium = 1 million RMB to $1 million USD; Large=higher than $1 million USD
Company size: Small = less than 50 employees; Medium = 50-200 employees; Large= more than 200 employees or China state-owned enterprises.
Duration of Company Existence: Short = established less than 5 years; Long= established more than 10 years.
Generally, if both parties agree ‘arbitration’ as a written dispute resolution forum clause in the contract, the case should be submitted to arbitration. It means that contracting parties could not simply choose litigation.
Article 5 of the PRC Arbitration Law provides that where there is a valid arbitration agreement, the case has to be submitted to arbitration and the court should not hear the matter (see also Article 124(2) of the Law of Civil Procedure of the PRC).
However, pursuant to Article 26 of the Arbitration Law, if one party initiates court proceedings without informing the court of the existence of the arbitration agreement and the other party does not raise any objection prior to the first hearing, the other party will be deemed to have waived its right under the arbitration agreement and the court shall continue to try the case.
China acceded to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) in 1987. Under the Convention, arbitral awards rendered in other signatory countries are recognised and enforceable in China. Likewise, arbitral awards by Chinese arbitration institutions are enforceable in other countries signatory to the New York Convention.
You may prefer litigation over arbitration if the counterparty’s company is relatively in small size and relatively new on the market.
As if the counterparty’s company is small and financially insolvent, they may not be willing to enforce the arbitration award.
In addition, the costs of arbitration might be considered disproportionate in some lower value cases. In contrast, the courts can enforce judgment compulsorily and freeze the defendant’s assets by application (where arbitration needs to take an additional step to apply for asset preservation to the court).
Last, courts can add defendants to a lawsuit, but not to an arbitration.
However, if the counterparty is large state-owned enterprises, you may consider arbitration in Hong Kong or overseas. Although the process is time-consuming and costly, it is worth to get a more just outcome.
Main Advantage: apply for asset preservation; add additional defendant; sometimes quicker process than arbitration in China; lower cost
Cost: relatively lower
Asset Preservation: Yes
Add defendant: Yes
Enforcement of judgements: enforce judgment compulsorily
Appointment of judge: by court
Arbitration in China Mainland
Main Advantage: common arbitration clause in the contract for disputes in China; free to choose arbitrators by parties; more flexible than litigation
Cost: depends on each case; generally higher than litigation
Asset Preservation: need to make additional application to the court
Add defendant: No
Enforcement of awards: effective domestics arbitration awards can be used as documentary basis for court enforcement; might be difficult to enforce if counterparty’s company is small and financially insolvent;
Appointment of arbitrator: by parties
Arbitration in Hong Kong or Overseas
Main Advantage: suitable for international high-profile case (especially if defendants are large state-owned enterprises); arbitrators are more independent
Cost: High. The cost of arbitration varies greatly, depending on the size and complexity of the claim and defence. Arbitrators in Hong Kong rates normally range from HK$5,000 to HK$6,000.
Add defendant: No
Enforcement of awards: awards enforceable in other countries signatory to the New York Convention; foreign-related arbitration awards need to be recognized by Chinese court before applying for enforcement.
The Supreme People’s Court of China promulgated a notice for implementing the Agreement with effect from 1 February 2000. Pursuant to the notice, there are only limited grounds for refusing to enforce a Hong Kong award, which mirror the grounds for refusal in the New York Convention. The most controversial of these is that an award will not be enforced if the enforcement would be contrary to the social and public interests of Mainland China. If the losing party is a state-owned company, such a defence may be raised. However, a defendant could just as easily raise the defence of state immunity in court, so it is a problem that may have to be faced in litigation, as well as arbitration.
Appointment of arbitrator: by parties
We hope you can find your preferred dispute resolution forum that best suits your situation in this simple guide.
Larry Zhou, Partner
Landing Law Offices China
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