Contractual Advice – Inserting Dispute Resolution Clauses into Business Agreements
Dispute resolution clauses form an essential element of a business agreement. In the event of a dispute, the validity, enforceability and meaning of each article of the agreement rests upon the court or arbitration body appointed by the dispute resolution clause. Careful consideration should therefore be given to the dispute resolution clause when drafting an agreement. This article focuses on China-related agreements and discusses special considerations when drafting dispute resolution clauses and the impact of recent developments in Chinese civil procedure law.
Special Considerations When Drafting Dispute Resolution Clauses of a China-related Agreement
First, consider the benefits and limitations of selecting arbitration as a mechanism for resolving disputes.
Our observation is that when entering into an agreement with a PRC company, most foreign companies prefer to select overseas arbitration for resolving their disputes. This preference could be due to the non-transparency of the PRC court system, the potential political influence and regional protectionism, all of which are reasonable concerns. However, overseas arbitration has its limitations in solving a problem inside China. For example, if an overseas arbitration is chosen, it is impossible for a party under the agreement to lodge any legal action, or seek any injunction prior to completion of the overseas arbitration proceedings. Assuming the overseas arbitration takes one year or even longer to run, this means the injured party will have no access to any immediate or timely judicial remedies. We have seen in some cases, due to the lack of any timely judicial remedies, foreign companies have had to make big compromises even though they have strong legal prospects.
Accordingly, Chinese arbitration bodies, including CIETAC (China International Economic and Trade) might be an alternative, because PRC courts can enforce an interim arbitration order issued by the domestic arbitration body. That is, a party can request a property preservation award from the arbitral panel immediately after the case is filed, and then request the court to enforce the interim award. However, in practice, we note that the courts are reluctant to enforce such intermediate orders issued by CIETAC.
Second, it is important to decide whether the dispute resolution clause should cover all disputes that may arise in connection with the agreement or only certain types of dispute.
In most agreements, we have seen parties using formal language to set out the arbitration clause. For example “Any controversy or claim arising out of or relating to this contract, or the breach therefore shall be settled by arbitration….” Considering the issue discussed above, it may be advisable to split disputes into two categories, some for arbitration and the rest for the court litigation. This allows us to exclude from the arbitration all potential disputes which may be better to leave to local courts. Suggested wording includes the phrase “without prejudice to the arbitration, the parties agree to submit the following issues to the competent court…” Such a clause which includes both arbitration and litigation methodology is called a “mixed clause”.
In addition, to avoid any doubt, it is suggested that adding a phrase like “regardless of the nature of the disputes” ensures that the opposing party will not use “tort” as a claim to avoid the arbitration. In some cases, we note that PRC courts have allowed the PRC Company’s claims based on tort law, even though the parties had agreed to resolve the disputes by arbitration.
Impact of Developments in PRC Civil Procedure Law
The Draft Amendments of PRC Civil Procedure Law (“Amendments”) were published on 31 October 2011 and have yet to be finally confirmed by the National People Congress. The Amendments will have a significant impact on China-related disputes, including the application of the dispute resolution clause.
Amongst other things, after the Amendments become effective, pre-arbitration injunctions will be available under the PRC regime. This means that even if there is an arbitration clause, parties will be able to seek urgent judicial remedies before the arbitration commences unless the parties expressly waive their rights in the dispute resolution clause. This amendment is well recognised as arbitration-friendly progress, allowing the potential applicant in arbitration proceedings to enjoy pre-action judicial remedies similar to a plaintiff under a court litigation procedure. The right to a pre-arbitration injunction, however, only applies to domestic arbitrations, not foreign arbitrations.
First, it is advisable to consider using a “mixed clause” to gain the advantage of timely juridical remedies.
Second, it is important to clearly stipulate the arbitration institution and place in the dispute resolution clause. Otherwise, the court may determine that the clause is not valid because of the uncertainty of the contents of the clause.
Third, if selecting PRC courts, do select courts in the developed areas, like Beijing, Shanghai, Zhejiang and Guangdong. It is best to avoid selecting a court in the northwest or northeast areas.
Peng Shen is an associate of Baker McKenzie LLP's Dispute Resolution Group. Peng can be contacted on + 86 01 6535 3932 or by email email@example.com.