Chinese law and Chinese courts are often excluded from the international commercial dispute resolution arena because of uncertainty occasioned by China's underdeveloped legal system including a lack of precedential authority of Chinese courts judicial decisions, fear of local participants' undue influence on judges and arbitrators, and broadly rumored corrupt courts. As a result, Western companies include in their contracts with Chinese companies provisions requiring litigation or arbitration in their home countries or in a third country, rather than in China. But, even the victorious litigant may have a "now what?" moment as it seeks to collect its award using Chinese courts or arbitration tribunals.
Chinese law provides that a foreign court judgment may be enforced in China only if China and the country of the court issuing the judgment are both parties to an international treaty concerning the reciprocal enforcement of court judgments or if there is de facto reciprocity between the two jurisdictions. Many international litigants find out to their dismay that China and the United States, and China and many European countries, are not parties to reciprocal international treaties and that de facto reciprocity does not exist between such countries and China. Establishing reciprocity in the absence of an international treaty has been virtually impossible. In fact, there is no reported case in which a foreign court judgment has been enforced in China on "reciprocity" grounds, in lieu of an international treaty.
"There are no time frames requiring the Chinese Supreme Court to act in the context of an enforcement petition ... "
In the absence of an international treaty, better-informed foreign companies seek to require dispute resolution by arbitration under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention. The New York Convention, to which China and many Western countries are signatories, together with Chinese law, enable foreign petitioners to have foreign arbitral awards enforced by Chinese Intermediate Courts with jurisdiction over the respondents. But arbitration too has its flaws. Chinese law gives the Chinese Intermediate Courts two months to make a decision on an enforcement petition, and if the Intermediate Court decides not to recognize and enforce the award, the case must be referred to the Chinese Supreme Court for review. Unfortunately, there are no time frames requiring the Chinese Supreme Court to act in the context of an enforcement petition, so if an arbitration award is taken up by the Supreme Court for review, it may languish in the Supreme Court indefinitely. Arbitration of a China-related dispute in a non-Chinese jurisdiction may present another impediment that is occasionally overlooked by practitioners. Arbitrators are not traditionally given the power of granting equitable relief, such as an injunction. Consequently, if equitable relief is necessary or desirable, an arbitration tribunal's exclusive jurisdiction over a dispute may frustrate a party's attempt to seek this irreplaceable form of remedy against a Chinese party. For this reason, if equitable relief is sought, Western counterparties are forced to seek dispute resolution in the Chinese courts with the attendant risks noted above.
In reaction to this legal and political maze, a "defense mechanism" was fashioned to shield Western litigants from the risks often imbedded in traditional dispute resolution clauses for cross-border deal.
But even well-crafted dispute resolution provision with a "defense mechanism" in place may be confounded in China. If an arbitration petition for economic reparation and a court proceeding for equitable relief are pending simultaneously in connection with a dispute of the same issues, a litigant may petition for a stay or consolidation. Therefore, any dispute resolution provision should also include a stipulation waiving each party's right to move, stay or consolidate parallel arbitration and court proceedings so as to ensure that all remedies remain available to the litigants.www.cozen.com
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