Forum Selection for Resolution of Foreign Investment Disputes in China
Fett, Rebecca, Dispute Resolution Journal
In the event of a conflict between parties to a joint venture in China, negotiation and mediation ordinarily offer the best hope for reaching a solution quickly without high costs. If these methods fail, a choice must be made between arbitration or litigation. This article discusses some of the factors investors must consider in making this choice.
Investing in China is a highrisk endeavor for non-Chinese entities. One of the major risks that must be faced is the possibility that a dispute will arise between the foreign investor and its Chinese partner. The method by which such disputes will be resolved is a critical issue, which should be considered and addressed contractually prior to investment. This article will evaluate the dispute resolution options available to foreign investors in China and challenge conventional assumptions as to the most favorable forum for resolving disputes.
As the most common vehicle for foreign investment in China is a joint venture,1 this discussion will be limited to disputes arising under joint venture contracts, which must be governed by Chinese law.2
Available Dispute Resolution Mechanisms
There are a number of possible mechanisms for resolving disputes arising under joint venture contracts between foreign companies and their Chinese partners. The first mechanism is negotiation, during which the parties discuss the dispute and try to reach an agreement on their own. The second mechanism, mediation, is a more formalized version of this process, in which a neutral third party provides assistance, encouraging the parties to compromise and reach a settlement.
The next alternative is arbitration, which generally involves the parties agreeing to submit disputes to a specified arbitration institution, where arbitrators appointed by the parties hear the dispute and issue a legally binding decision. Disputes in which one party is a foreign entity are regarded as foreign- related and can be submitted to an arbitration institution in China or another country.3
The last dispute resolution mechanism available to joint venturers is litigation. These disputes can only be litigated in Chinese courts.
In evaluating the available dispute resolution mechanisms, the foreign party should consider both procedural and substantive factors.
Relevant procedural factors are the time and cost involved in resolving disputes, the flexibility of the process, the degree of party control, whether information disclosed will be kept confidential by the participants, and whether that information can be introduced as evidence in a subsequent administrative or judicial proceeding. Further considerations are whether the process is adversarial or collaborative, and whether it promotes the preservation of business relationships.
Important substantive issues to consider include the expertise and experience of the decision- maker, whether the process is subject to local government influence or control, or is inherently protective of local interests over those of foreign parties. A further important factor to consider is the legal weight and enforceability of the outcome.
Negotiation should be the first approach adopted in attempting to resolve a dispute arising out of a joint venture investment in China. Chinese laws and regulations frequently promote negotiation as a preliminary method of settling disputes.4
The advantages of negotiation are many. First, negotiation is not costly; moreover, it is informal and non-adversarial and allows the parties to preserve their business relationship.5 Another advantage is that information disclosed during the negotiation will often remain confidential if the parties so agree. Furthermore, by negotiating the dispute will be immune from local protectionism, government influence, the application of ambiguous or conflicting laws and other uncertainties of the Chinese legal system.
Negotiation can be continued even after the parties decide to pursue formal mediation, arbitration, or litigation. …